V. Comments on Alternate Proposed Decision

Pursuant to Rule 77.1, the proposed decision of the ALJ was mailed to the parties on September 24, 2002, and this proposed alternate decision was mailed to the parties on October 10, 2002. In accordance with Rules 77.5 and 77.6, comments to the proposed alternate decision were filed with the Commission's Docket Office by October 17, 2002, and no reply comments were permitted. Comments were submitted by SDG&E, the City of San Diego, ORA, UCAN and FEA.

A. Responses to Comments of the Parties

SDG&E's comments were supportive of the proposed alternate decision, and recommended a number of non-substantive changes to the body of the document, the findings of fact, the conclusions of law and the ordering paragraphs in order clarify the record. Most of these recommended changes have been incorporated herein.

FEA's comments simply reiterated its earlier comments in this matter to the effect that the Commission should only allocate a portion of the revenues from the intermediate term contracts to the AB 265 undercollection. For the reasons set forth in section IV.C.4 above, we decline to adopt FEA's recommendation.

The comments of the City of San Diego, ORA and UCAN raised a number of issues that essentially boil down to two main points: (1) the proposed alternate decision does not comply with the Commission's Rules of Practice and Procedure, specifically, the settlement procedures set forth in Rule 51 et seq. of those Rules; and (2) the June 14, 2002 settlement proposed by SDG&E that this alternate decision would adopt is illegal, unjustified and not in the public interest. For the reasons set forth below, we reject both of these lines of argument.

The Rule 51 argument that these parties raise is unpersuasive. SDG&E's June 14, 2002 proposed settlement agreement was presented to the Commission and the Commissioners as the defendants in federal litigation instituted by SDG&E. Such litigation is simply outside the ambit of the Commission's Rules of Practice and Procedure. Those Rules pertain to proceedings before the Commission to which the Commission is not a party and have no direct or implied applicability to a decision by the Commission to settle federal court litigation against it. As a result of, and in light of, the very thorough record developed in this proceeding, which is amply discussed above, we determine the terms of the proposed settlement to be reasonable and in the public interest, particularly in combination with the other ordering paragraphs of this alternate decision. Our determination to adopt the June 14, 2002 proposed settlement agreement in the federal litigation as part of this decision justifies the remainder of the decision that determines that no surcharge is necessary and that the AB 265 undercollection can be recovered through alternative means within two years. Thus, we are prudently and reasonably exercising our discretion to resolve this proceeding in a manner that concurrently eliminates outstanding litigation, resolves all issues pertaining to the intermediate term contracts, resolves the issues pertaining to the recovery of the AB 265 undercollection, and upholds the validity of prior Commission decisions.

Moreover, as has already been noted above, even though Rule 51 et seq. do not apply to a Commission determination to settle federal litigation against the Commission and the Commissioners, all the fundamental due process protections built into Rule 51 to insure adequate review of, and comment upon, a proposed settlement by interested parties have in fact been complied with many times over in this proceeding. The record in this proceeding, as well as the text of this decision, reflect the facts that parties received the settlement agreement well in advance of its consideration by the Commission; had an opportunity to, and did, comment on it in writing; had an opportunity to submit and did submit testimony on it; had an opportunity to and did cross-examine SDG&E witnesses on it; had an opportunity to and did addresses it in briefs and reply briefs, and had an opportunity to and did address it publicly in two public participation hearings held in San Diego and Carlsbad. In short, the proposed settlement agreement has been thoroughly and publicly aired. Consequently, the due process arguments that the City of San Diego and ORA raise in their comments ring hollow and do not provide a persuasive rationale for the Commission to decline to adopt the proposed settlement as part of its decision of this matter.

The City of San Diego, ORA and UCAN also argue that this decision, which adopts SDG&E's June 14, 2002 proposed settlement agreement, does not reflect the record in this proceeding and is contrary to the public interest and hence, is illegal. We disagree.

This decision takes a comprehensive view of the equities involved in this proceeding. This decision also takes into consideration the complexities of the law pertaining to unconstitutional "takings" and dedication of private property to public use, the evidence of whether such dedication occurred, the substantial contributions SDG&E shareholders have already made toward reduction of the AB 265 undercollection, the outstanding state and federal litigation between SDG&E and the Commission addressing the legality of certain Commission decisions pertaining to the AB 265 undercollection, the Commission's obligation to interpret the language of AB 265 in a manner consistent with constitutional proscriptions, and the conditions under which a surcharge is necessary to eliminate the remaining AB 265 undercollection. Further, this decision correctly acknowledges the litigation risks involved in a "winner take all" outcome, and determines that the outcome most reasonable and in the public interest given all the complexities surrounding the intermediate term contracts, AB 265 and the AB 265 undercollection is the adoption of the terms of the June 14, 2002 proposed settlement agreement. That settlement agreement requires SDG&E shareholders to reduce the AB 265 undercollection by an additional $24 million and removes the cloud of litigation surrounding the legality of the Commission's actions in Decisions 01-01-061 and 01-05-035. In that vein, the settlement agreement ensures that the $175 million in profits that SDG&E has booked to the benefit of ratepayers since Commission adoption of D.01-01-061 will not be reversed and, further, that the Commission (and possibly SDG&E's ratepayers) will not be exposed to potential damages in the hundreds of millions of dollars.

It is simply incorrect for the City of San Diego, ORA and UCAN to contend that the outcome reached by this decision overlooks the evidentiary record of the proceeding. To the contrary, section III of this decision provides a detailed and thorough discussion of the evidence presented by the parties, in particular, evidence on the key factual question on which our decision turns, namely, whether the intermediate term contracts were "utility-owned or managed generation assets" within the meaning of P.U. Code §332.1(c), as the City of San Diego, ORA and UCAN contend, or shareholder assets exempt from the application of that statute, as SDG&E contends. All of the evidence adduced by the parties on this key point directly bears on, and contributes to the rationale for, our decision herein. As noted above, this evidence is conflicting. It is entirely within our discretion to weigh and rule on this conflicting factual evidence in a manner that results in a reasonable compromise rather than an all-or-nothing outcome.

We would also note that the amount of factual evidence relevant to deciding this key question already presented in this proceeding is sufficiently detailed and extensive that it is unlikely that any further hearings in this proceeding would adduce such additional factual evidence on this point as to alter our judgment, set forth in this decision, as to how this key question should be decided.

The City of San Diego, in particular, seems to think that it would be improper for this Commission to issue a decision in this matter approving the June 14, 2002 proposed settlement agreement without conducting a legal analysis as to why the intermediate term contracts are not covered by AB 265. In making this argument, the City of San Diego mischaracterizes a factual determination as a legal one. However, it is not necessary for us to explicate the legal rationale for our decision when the decision we are making is a factual one. We agree that if the intermediate term contracts were in fact "utility-owned or managed assets," AB 265 mandates that the profits from those contracts would be credited to reduce the AB 265 undercollection, but that is not the question to be decided here. What we have to decide is not why, but whether the intermediate term contracts are, as a matter of fact, "utility-owned or managed assets." As we have said above, this is not a question that the record evidence in this proceeding gives an easy, or an easily defensible, answer to. The City of San Diego is accordingly wrong is asserting that it would be legal error for us to issue this decision.

We must respond to one other point raised by both the City of San Diego and by ORA, namely, the implication that the adoption of the proposed June 14, 2002 settlement agreement is somehow not favorable to ratepayers. To the contrary, the ratepayers gain the lion's share of the benefit resulting from the adoption of the proposed settlement agreement. The undisputed evidence in the proceedings below is that during the period from June 2000 through December 2001 (in which AB 265 would have been applicable to SDG&E's revenues from the intermediate term contracts if those contracts were unquestionably ratepayer rather than shareholder assets), SDG&E accrued $305 million in profits from the sale of power associated with the intermediate term contracts. The proposed settlement allocates $199 million, slightly over 65% of that profit, to ratepayers, and $106 million, or slightly less than 35% of that profit, to shareholders. It is not credible to claim, as the City of San Diego and ORA appear to do, that such an allocation of profit as between ratepayers and shareholders is somehow unfair to ratepayers or not in the public interest. Given the conflicting nature of the evidence on the key factual question that is resolved via the settlement effectuating this allocation, and the resulting uncertainty and risk associated with a litigated outcome of the federal litigation between the Commission and SDG&E, such a claim is particularly misplaced.

Moreover, when the $100 million in reduced profits that SDG&E agreed to in the settlement of A.00-10-008 (which SDG&E, at least, considers to be related to its profits from the contracts) is deducted from this allocation, SDG&E is left, in its view, with only $6 million out of the total of $305 million of profits from the contracts from June 2000 through December 2001, a mere 2% of the total. Seen in this light, the deal for ratepayers resulting from our adoption of the June 14, 2002 proposed settlement agreement in this decision is a very good one, indeed.

However, this proposition is fundamentally flawed. It both ignores the very clear evidentiary record developed on the ownership of the contracts as well as the intended and actual use of the contracts, and it refers to documents never entered into evidence and never addressed by any of the parties in hearings or in briefs. The argument also appears to assume that SDG&E's parent company, Sempra Energy, is an affiliate of SDG&E. It is not. (see, D.98-08-035, Appendix B, page 1).

(1) There was NEVER any affiliate transaction that took place related to the intermediate term contracts. The contracts are attached to the testimony of Mr. Reed (Ex. 101). Each of the contracts are signed by Mr. Reed as a representative of SDG&E. Contrary to the statement in the proposed new language in the ALJ's proposed decision to the effect that SDG&E "failed to list or disclose the use by Enova Corporation or Sempra, SDG&E's parent companies, of the intermediate term contracts for hedging purposes," the impetus for entering into the contracts came directly from, and entry into the contracts was directed by, SDG&E's Board of Directors. As reflected in the SDG&E Board of Director meeting minutes attached to the testimony of SDG&E witness Reed (Attachment D and F to Ex. 101), Mr. Reed was authorized to execute the contracts as an officer of SDG&E for the express purpose of hedging SDG&E shareholder price risks related to the implementation of AB 1890 (Ex. 101, pp. 11-14). Specifically,
Mr. Reed testified:

"...consistent with Board direction to more fully implement its shareholder price risk mitigation strategy, SDG&E negotiated purchases for power for the years 1998, 1999, 2000, and 2001. These bids had nothing to do with acquiring power to serve SDG&E's customers; under AB 1890 and the Commission's Preferred Policy Decision SDG&E was required to procure electric energy for its full service customers directly from the PX under the mandatory bid/buy. SDG&E's intent was simply to acquire power on the wholesale market at advantageous prices that would be resold through the PX at the market clearing price. The power sought by these bids was not intended to be used in the provision of SDG&E's utility services. The sole and only reason SDG&E negotiated purchases in October/November of 1996 for power for the years 1998 through 2001 was to mitigate price risk resulting from the frozen electric rates instituted by AB 1890." Ex. 101 at 13.

Moreover, during his cross-examination by the attorney for the City of San Diego, Mr. Reed was asked a number of questions about affiliate involvement in the contracts. Mr. Reed's responses (to the effect that SDG&E was the purchasing party, that neither Sempra nor Enova were counterparties to these contracts, that the contracts were never assigned to either Sempra or Enova, and that had any such assignment ever taken place, the Commission's affiliate transaction rules would have been complied with) were clear and never contradicted. See, Tr. 1034-1039.

Consequently, the facts on the record are quite clear that SDG&E entered into the intermediate term contracts in its own account, and not for the benefit of, or on behalf of, any affiliate. Moreover, SDG&E was providing neither goods nor services to any affiliate at any time during the course of its involvement in the contracts. Finally, SDG&E never assigned the contracts to anyone, be it an affiliate or otherwise. Thus, the Commission's affiliate transaction rules never came into play with respect to the intermediate term contracts.

(2) SDG&E has, and had at the time of entering into the intermediate term contracts, the legal authority to acquire assets for use by shareholders. The proposition that a regulated public utility may acquire an asset and not dedicate it to public service, and that such an asset is not subject to the jurisdiction of the Commission, has strong legal underpinnings.

For example, while recognizing that Pacific Telephone and Telegraph Company ("Pacific") was a public utility regulated by the Commission, the California Supreme Court stated that under its charter Pacific could also engage in activities of a non-utility nature, and whether those non-utility activities were within the regulatory scope of the Commission was a question of law and fact. In pertinent part, the California Supreme Court stated:

"Pacific is a private corporation engaged in the public utility telephone business within this state. As such its services, property and charges are subject to the recognized supervision of the commission. However, under its charter Pacific may also engage in activities of a non-utility nature. ... It is sometimes a question of mixed law and fact as to whether a particular activity is within the regulatory scope of the commission. Here we must look to the nature of the activity furnished under this tariff schedule as well as the question of dedication, to determine the jurisdictional issues presented."

Coml. Communications v. Public Util. Com. (1958) 50 Cal. 2d 512, 518.

As was Pacific, SDG&E is a private corporation engaged in business as a public utility whose charter, specifically its articles of incorporation, allow it to engage in activities of a non-utility nature.17 Therefore, while SDG&E's primary business is unquestionably the provision of public utility service, SDG&E is not precluded, legally or otherwise, from pursuing objectives outside of its public utility obligations. Such activities include exercising its fiduciary responsibility to protect its shareholders from potential losses, such as stranded costs from the implementation of AB 1890. Assets acquired by SDG&E in the pursuit of that objective are not automatically under the jurisdiction of the Commission simply because SDG&E is a regulated public utility. As noted above, an asset acquired by a regulated public utility must be dedicated to public use before it can be subject to the jurisdiction and rate regulation of the Commission.

This legal tenet is also reflected in numerous Commission decisions. For example, in D.94-02-045 the Commission addressed the very common situation in which a utility acquired assets (real property) in 1963 that were not necessary or useful for the provision of utility service at that time. Much later, in 1990, the utility decided to use the property for a utility parking facility. Only upon that occurrence was the property considered (and acknowledged by the Commission) as dedicated to public use. The issue before the Commission was whether property dedicated to public service in 1990 should be added to rate base at its historical cost or at its 1990 fair market value. In the Matter of the Application of California Water Service Company, D.94-02-045; 1994 Cal. PUC LEXIS 78, *6, *7; 53 CPUC 2d 287, 290. Until the property was actually dedicated to utility service, neither was it subject to the rate regulation of the Commission nor were its costs included in rate base. In fact, the Commission acknowledged that until 1990 the property was clearly a shareholder asset and shareholders bore all risks the property would never be useful for utility purposes. Id. at *23, *24.

Another example, and possibly more analogous to the intermediate term contracts, is a case in which Southern California Edison Company ("SCE") was granted a Certificate of Public Convenience and Necessity to construct a 100 megawatt coal gasification combined cycle demonstration project. SCE was a part owner and the primary operator of the project. One of the questions before the Commission was whether the project was dedicated to public use, thereby making the project a public utility subject to the Commission's jurisdiction. The Commission determined that since the primary purpose of the project was to ascertain the commercial feasibility of the coal gasification process and not to provide electricity to SCE's ratepayers, the project facilities were not dedicated to the public use. The pertinent portion of the Commission's analysis is as follows:

"Edison pursuant to contracts negotiated with each participant will purchase all coal that is processed into gas and will own all the electricity generated by the combined-cycle unit. Gas or electricity produced by the Project is not directly available for sale to any other party. Furthermore, the primary purpose of the Project is to demonstrate the commercial feasibility of a coal gasification-combined cycle facility. The Project will not be constructed as a generating resource to provide gas or electricity to the public but as an experimental facility to allow the participants to test different types of coal at a gasification-combined cycle plant.

"For the foregoing reasons, we find that although this Project falls within the literal language of Section 216, the Project is not a public utility as long as the participants do not dedicate the Project facilities to public use. Such a finding, however, also precludes Edison's request that its $25 million capital contribution be included in rate base. Both the staff and Company witnesses agreed that nonpublic utility property is not properly included in rate base." Southern California Edison, D.92115, 4 CPUC 2d 195, 210, 211.

Like the SCE coal gasification facility, SDG&E's acquisition and use of the intermediate term contracts had nothing to do with SDG&E's provision of utility service to its customers. As the Commission recognized in the preceding decisions, a prerequisite for utility assets to be "subject to public utility regulation by this Commission" is dedication to public use. Under the guidance of the various California Supreme Court decisions, which this Commission has cited approvingly numerous times, dedication can only be found if the facts demonstrate that there was an unequivocal intent that the asset be intended to serve the public.

Consequently, SDG&E had the legal right to enter into the intermediate term contracts with the intent to use them to hedge shareholder price risk under AB 1890 and violated no statute or Commission decision in so doing.

(3) There is no evidentiary or record support for the proposed new language, and it therefore cannot be included in any Commission decision. The proposed additional language refers to, and relies upon, various Affiliate Transaction Reports submitted by SDG&E to the Commission over a five-year period. These reports were never addressed by any party in testimony, were not entered into evidence or even marked as an exhibit for reference purposes, and were not addressed or discussed even tangentially in any party's brief. In short, there is nothing in the record supporting any of the statements made concerning these reports. Because there is nothing in the record regarding these reports, SDG&E has never had the ability to address the references to these reports now proposed to be added to the ALJ's proposed decision. Thus, as a fundamental matter of fairness and due process, the allusion to this outside-the-record material in the proposed new language is improper and should not be included in any Commission decision in this case.

17 The first page of SDG&E's Articles of Incorporation states:

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