5. Discussion: with One Condition, the Parties' Settlement is Reasonable and Should be Approved

We address, separately, the first two requirements of all-party settlements and then follow with a discussion of the remaining two requirements as part of a broader assessment of the legal and policy merits of the settlement consistent with Rule 12.1(d), including factors mentioned above (risks and expense of further litigation, whether negotiations were at arms-length, etc.). With a few minor exceptions (discussed below), we find that the settlement is reasonable in light of the record, consistent with law, and in the public interest. The problems we perceive can be corrected readily, and if the parties accept the condition we impose to mitigate those problems, the settlement should be approved.

5.1. All Active Parties Sponsor Settlement

The settlement is an uncontested, all-party settlement. The four active parties -- SDG&E, Rim Rock, DRA and TURN - all sponsor the settlement. While the two other parties, WPTF and IEP, are not settlement signatories, they have not opposed the settlement and in fact, have participated only minimally after obtaining party status. WPTF filed an initial protest and attended the PHC, but did not participate at all beyond that. IEP filed a response and attended the settlement conference.

5.2. Sponsoring Parties Fairly Represent Affected Interests

The four active parties fairly represent the affected interests. SDG&E and Rim Rock represent, respectively, the purchasing utility and RPS developer interests in the current PPA and in the amendments to the PPA which the settlement proposes. DRA and TURN represent the interests of utility consumers and ratepayers and both are well-situated to assess the myriad policy ramifications of the settlement on those interests.

5.3. If Conditioned, Settlement is Reasonable and Consistent with Law and the Public Interest

The last two inquiries under the all-party analysis examine whether any settlement terms contravene statutory provisions or prior Commission decisions and whether the settlement contains sufficient information to permit the Commission to discharge its future regulatory obligations. Of course, as the parties recognize, this examination must permit the Commission to conclude, affirmatively, that the requirements of Rule 12.1(d) have been met. The parties highlight multiple factors to support their case that the settlement meets all criteria necessary for approval and we review these additional arguments below.

First, as the parties point out, the settlement expeditiously resolves issues that were litigated vigorously at hearing and which most assuredly would have been litigated further. Approval of the settlement will relieve the parties from filing opening and reply briefs and from continuing to litigate what was, and what otherwise would continue to be, a highly contested proceeding. In this respect the settlement is consistent with Commission policy favoring settlements,¹² which is designed to support "many worthwhile goals, including reducing the expense of litigation, conserving scarce Commission resources, and allowing parties to reduce the risk that litigation will produce unacceptable results."¹³

Second, the parties assure us that settlement negotiations were conducted at arm's length and there is no evidence to suggest otherwise. Each party was represented by experienced counsel. Through the hearing stage, DRA and TURN, in opposition to the application, and SDG&E and Rim Rock, in support, aggressively advanced their respective positions via pleadings, prepared testimony and witness cross-examination. We are confident that this settlement is the product of arms-length negotiations.

Third, the parties assert that settlement agreement addresses all major issues raised in this proceeding and the substantial record developed permits the Commission to thoroughly assess the settlement's resolution of those issues. Each of the active parties engaged in detailed discovery, submitted expansive prepared testimony on behalf of their own witnesses (some ten persons, in total) and cross-examined opposing witnesses over five days' time. The settlement is indeed comprehensive. A few provisions concern us, but we discuss those below, together with a condition that mitigates our concern.

Fourth, the parties state that the settlement process was conducted in full compliance with Article 12 of the Rules, which governs settlements, and we are aware of no evidence to the contrary. The parties likewise contend that the settlement is consistent with statutory provisions and prior Commission decisions and that it has been drafted to provide the Commission with sufficient information to allow the discharge of all future obligations. Though these assertions are made in good faith, they are difficult to fully corroborate in a matter as complex as this one. The provisions that concern us raise potential legal issues the parties have not addressed, but if conditioned, these become "non-issues."

Substantively, the settlement undisputedly reflects and incorporates numerous and significant concessions made by each of the active parties not only to remove opposition to, but also to gain support for, this first-ever proposal for tax equity investment by a California regulated utility. Under the settlement, if approved, SDG&E and Rim Rock can proceed with an 189 MW amended PPA, which will provide SDG&E's ratepayers with a substantial amount of green attributes at a quantified price cap, but with lower downside risk to those same ratepayers. To reduce perceived ratepayer risk, the settlement not only reduces the size of SDG&E's purchase obligation but also reduces the project's ratepayer funding, both in terms of absolute dollars (a reduction from as much as $600 million to no more than $250 million) but also as a percentage of total investment. The settlement also imposes real risk on SDG&E shareholders, by requiring that they also make an equity investment and by subordinating repayment of their investment until after ratepayers' investment has been repaid. The settlement also ensures oversight at a critical implementation stage by establishing a process that enables DRA and TURN to review the Base Case Model, including the material inputs used to calculate the final green attributes price. Finally, the settlement establishes an alternative dispute resolution process to provide timely and speedy resolution, should disagreements arise among the parties in the future.

Thus, the settlement includes specific provisions designed to address DRA's and TURN's well-developed objections, while authorizing SDG&E and Rim Rock to proceed with a less expansive, less expensive (and less risky) plan for a tax equity investment in the project. We are concerned, however, with two parallel provisions that appear to delegate to the parties the ability to negotiate an increase in SDG&E's rate of return without setting any criteria for such a change and without requiring Commission review or approval of the change (Appendix 1, § 2(g)(ii) and (iii).¹⁴ As a matter of public policy, we decline to endorse these provisions. Therefore, we need not examine the extent to which we could delegate, lawfully, that ratemaking authority or how doing so might limit our regulatory options in the future. Consistent with Rule 12.4(c), we provide the parties with notice of an acceptable alternative: should all parties agree to an increase in SDG&E's rate of return, they must file a petition to modify today's decision, pursuant to Rule 16.4.

With this condition, we conclude that the settlement advances the public interest by carefully rebalancing the various stakeholder interests at issue. On the whole, we conclude that the settlement enables the SDG&E tax equity investment to advance the "creativity, innovation, and vigor in program execution" that the Commission has requested the electric utilities to pursue in seeking to achieve their RPS procurement strategies.¹⁵ The parties' careful drafting of the settlement and their generally thorough, detailed preparation of the joint motion requesting adoption of the settlement have hastened our review and significantly aided our timely assessment of the merits.

¹² See D.09-10-046 at 8-9 ("There is a strong public policy favoring the settlement of disputes to avoid costly and protracted litigation.") (citing D.88-12-083).

¹³ D.08-01-043 at 10 (citing D.05-03-022).

¹⁴ We read these provisions differently than § 2(g)(v) or § 3(c)(ii) in Appendix 1, for example. In the latter, timing changes are not criteria-free, but appear to rely much more directly upon the results produced by the Base Case Model.

¹⁵ D.09-06-018, Ordering Paragraph 5.