1. Background

On November 18, 2011, Pacific Gas and Electric Company (PG&E) filed this application seeking authority to terminate power purchase agreements with two existing qualified facilities (QF): between JRW Associates, L.P., also known as the San Joaquin Cogeneration Project (San Joaquin) and Byron Power Partners, L.P. also known as Byron Power Partners Cogeneration Project (Byron Cogen). The sole and limited partner to JRW Associates, L.P. and Byron Power Partners, L.P. is an entity known as the Ridgewood Electric Power Trust III (the Trust). No protests to this application were filed.

In 1985, PG&E entered into a 30-year, Standard Offer1 2, power purchase agreement for energy and firm capacity2 with the Trust for a 10.75 megawatt (MW) natural gas-fired cogeneration facility, known as San Joaquin, near Atwater, California. The term of the agreement began on the facility's operational date of April 30, 1991, and expires on April 29, 2021. A copy of the power purchase agreement is included in a separate document filed with the application as Exhibit 1.A.

In July 2008, the project failed to meet its firm capacity requirement and was placed on probation. San Joaquin has not delivered power to PG&E under the power purchase agreement since September 2008. In July 2009, PG&E notified San Joaquin of the requirements needed to prevent de-rating of the facility's firm capacity and how to avoid minimum and early termination charges. San Joaquin did not resume operations. On February 8, 2010, PG&E notified San Joaquin that the facility's firm capacity level was de-rated to zero and a refund was due to PG&E because of early termination of the firm's capacity without the prescribed notice. San Joaquin terminated gas and electric service, and physically removed all connection to the PG&E grid. On June 2, 2011, the Trust transferred the ownership of the physical San Joaquin facility to Dole Packaged Foods, dissolved the thermal sale agreement and terminated the ground lease.3

On December 27, 2010, San Joaquin notified PG&E that it did not have sufficient funds to make any payments for damages. Due to contractual requirements, PG&E did not de-rate the facility until 2010 in order to give San Joaquin time and opportunity to correct its probationary status. On September 22, 2010, PG&E and San Joaquin entered into a tolling agreement suspending PG&E's right to collect damages while PG&E was simultaneously negotiating with a potential buyer that planned to convert the facility into a biogas facility. Negotiations failed. On December 27, 2010, counsel for San Joaquin notified PG&E that the Trust did not have adequate funds to pay the damages it owed to PG&E and was therefore terminating the tolling agreement and dissolving the limited partnership.

PG&E retained an outside consultant to perform an independent investigation as to the likelihood of recovering damages from San Joaquin. PG&E also began negotiations with San Joaquin. After a series of meetings, PG&E obtained a declaration from San Joaquin describing the corporate structure of San Joaquin under the Trust and describing the reasons San Joaquin was unable to commit to the full term of the contract. PG&E's consultant ultimately concluded that recovery was unlikely based on her review of the law, corporate organization documents of the Trust and partnerships and financial data.4

PG&E entered into settlement discussions with the Trust in an attempt to obtain damages for early termination. The parties successfully negotiated an agreement for a modest settlement.

On April 29, 1985, PG&E entered into a 30-year, Standard Offer 4, power purchase agreement for energy and firm capacity with the Trust (successor in interest to Fayette Manufacturing Corporation) for a 6.5 MW natural gas-fired cogeneration facility, Byron Cogen, in the Altamont Pass area near Tracy, California. The agreement commenced on May 12, 1990 and expires on May 11, 2020. Copies of the contracts are included in a separate document filed with the application as Exhibit 2.A.

In August 2008, the project failed to meet its firm capacity requirement and Byron Cogen was warned by PG&E that the facility would be placed on probation for failure to meet its firm capacity requirements. In July 2009, Byron Cogen again failed to meet its firm capacity requirements and PG&E notified Byron Cogen again that it risked being placed on probation. On March 10, 2010, PG&E notified Byron Cogen of the facility's current probation status and the actions needed to remedy this. Subsequently, PG&E learned that the facility had removed its gas and electric meters, casting doubt on the facilities operation status.

On September 22, 2010, PG&E and Byron Cogen entered into a tolling agreement suspending PG&E's right to collect damages while PG&E was simultaneously negotiating with a potential buyer that planned to convert the facility into a biogas facility. On October 26, 2010, PG&E notified Byron that the facility was being de-rated after failing to cure its probationary status.5 Negotiations to convert the facility to a biogas facility ultimately failed. On December 27, 2010, counsel for the Trust notified PG&E that it did not have adequate funds to pay damages it owed to PG&E and was therefore terminating the tolling agreement and dissolving the limited partnership.

After a series of meetings and negotiations with Byron Cogen, PG&E obtained a declaration from Byron Cogen describing the corporate structure of Byron Cogen under the Trust and describing the reasons it was unable to commit to the full term of the contract. In addition, PG&E's outside consultant performed an independent investigation to evaluate the likelihood of recovery of damages from Byron Cogen.

PG&E entered into settlement discussions with the Trust in an attempt to obtain damages for early termination. The parties successfully negotiated an agreement for a modest settlement. As part of the settlement agreement, Byron Cogen waives its rights under its PURPA license.

PG&E and the Trust entered in the Settlement after negotiations with counsel for the Trust. During the negotiations, the Trust informed PG&E that the trust was insolvent and was therefore unable to pay its debt to PG&E. In addition, the Trust disclosed that it lacked assets should PG&E attempt to pursue judgments or liens to recover the debt. The Trust offered a modest amount to prevent litigation.

PG&E's independent consultant performed a thorough analysis and confirmed that recovery was unlikely. PG&E attempted to negotiate taking ownership of the facilities as a form of payment, but the Trust leases the land where the facilities reside from two different owners. PG&E's investigation of each facility found that both were in a dilapidated state with one facility having been vandalized and mined of copper. As a result, PG&E determined that all other options, plans and proposals for recovery of damages have been exhausted.

PG&E maintains that the terms of the Settlements are well within the range of terms that would be a reasonable resolution of the dispute. The Settlements contain a confidentiality clause, which bars all parties from disclosing the certain material terms of their agreements. Accordingly, the application's limited public disclosure of the terms and conditions of the Settlements are:6

· Upon payment of the settlement amount to PG&E, the Trust's San Joaquin and Byron Cogen power purchase agreements will be terminated;

· Upon termination of the power purchase agreements, PG&E has no obligation to purchase and San Joaquin and Byron Cogen have no obligation to provide electricity or capacity;

· Upon termination of the power purchase agreements, San Joaquin and Byron Cogen, for themselves and all of the successors and assigns of each respective facility, waive any and all rights they may have pursuant to PURPA; and

· San Joaquin, Byron Cogen, and PG&E release all known and unknown claims against each other under California Civil Code § 1542. San Joaquin and Byron Cogen shall pay PG&E the agreed-upon amount as reflected in the Settlements within 30 days after Commission approval of this Application becomes final and non-appealable.

PG&E will include the amounts recovered under the Settlements in the Energy Resource Recovery Account as a credit to its ratepayers.

1 In the 1980s, the Commission adopted guidelines and standards governing the prices, terms and conditions of utility purchases of electric power from QFs and approved four types of Standard Offer power purchase agreements. Each standard offer power purchase agreement had its own uniform terms and conditions and no security deposits from the QFs were required under these agreements.

2 Firm capacity is the amount of energy available for production or transmission, which can be (and in many cases must be) guaranteed to be available at a given time.

3 The transfer included the physical property without transferring liability from the PG&E power purchase agreement or the Public Utilities Regulatory Policies Act (PURPA) Licenses.

4 Exhibit 5.

5 PG&E waited until 2010 to de-rate the facility in order to give the QF ample time and opportunity to correct its probation status.

6 The terms presented are a summary of the terms and conditions of the public portions of the Settlement Agreements.

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