3. Discussion

As noted above, recent Commission decisions have identified five factors that are relevant in determining whether a proposed QF settlement meets the standards set forth in Rule 12.1(d).

With respect to the first of these factors-whether the settlement reflects the relative risks and costs of continued litigation-PG&E points out that the costs of trying the cases that it and Sunnyside have filed against each other (and then handling the almost-certain appeals) are likely to be in the range of $450,000 to $500,000. These costs are in addition to PG&E's exposure in the lawsuit brought by Sunnyside, which the application describes as follows:

"Sunnyside's lawsuit is based on PG&E's alleged breach of the PPA by requiring Sunnyside to provide energy on a 7x24 basis. Although PG&E believes it had the right to so dispatch Sunnyside under the PPA and has developed substantial evidence in support of its position, PG&E's dispatch instructions for January 2006 departed from almost 15 years of consistent 5x13 dispatches. Under such circumstances, even with language in the PPA that PG&E believes allows it to modify the dispatch, Sunnyside may have colorable claims of waiver or modification of the contract by performance, which could entitle it to recover lost profits for the remainder of the life of the PPA. Sunnyside's expert's primary lost profit models estimate those lost profits to be in the $4 million to $4.5 million range. As such, it is unclear what the outcome of a trial before a jury would be." (Application, pp. 8-9.)

In view of this possible exposure, we believe that the settlement terms the parties have agreed to-which include a payment from PG&E to Sunnyside-are reasonable.

We think the foregoing analysis of litigation risk also addresses the second factor mentioned in some of our QF settlement decisions; viz., whether "the settlement fairly and reasonably resolves the disputed issues and conserves public and private resources." (D.00-11-041 at 6.) The likely costs of trial and appeal, added to the risk that a jury might hold PG&E liable for Sunnyside's lost profits, make the amount PG&E has agreed to pay Sunnyside-an amount that we agree should be kept confidential-quite reasonable. Moreover, since the settlement agreement calls for dismissal of both lawsuits, plus mutual releases by both parties of all claims they may have against each other (whether known or unknown), the terms of the settlement will end the litigation between the parties and so help to conserve both public and private resources.

The analysis of litigation risk quoted above also addresses the third factor mentioned in the QF settlement decisions; viz., whether the settlement terms "fall clearly within the range of possible outcomes had the parties fully litigated the dispute." (Id.) The amount PG&E has agreed to pay Sunnyside is significantly less than the sum of (a) the costs of trial and appeal, plus (b) the lost profits of Sunnyside for which PG&E might be held liable. Moreover, although PG&E has filed an action against Sunnyside seeking the return of approximately $4.5 million in excess capacity payments, there is real doubt whether PG&E would be able to collect on any judgment in its favor. On this issue, the application states:

"Although PG&E believes that it would prevail with respect to its ability to pursue its affirmative claims and ultimately be awarded a judgment against Sunnyside, PG&E believes that ownership of the Sunnyside project is structured in such a way as to make recovery of any judgment against Sunnyside very difficult. Sunnyside is a limited partnership and the limited partner is owned by a trust that has, over time, distributed Sunnyside's profits to the trust's investors. Even were PG&E to obtain a significant judgment against Sunnyside, it could be faced with either a judgment-proof defendant or costly and challenging litigation against Sunnyside's limited partners and its parent on an alter ego or piercing the corporate veil liability theory. In addition, any recovery would be offset by the litigation costs incurred in defending against Sunnyside's claims." (Application, p. 9.)

In view of the possibility that PG&E might not be able to collect on any judgment it obtained that could offset its potential liability to Sunnyside, we believe the proposed settlement falls clearly within the range of outcomes that would be possible if the parties had continued to litigate their dispute.

The fourth set of factors mentioned above-whether the settlement negotiations were at arm's length and without collusion, whether parties were adequately represented, and how far the proceedings had progressed when the settlement was reached-is also satisfied here. The facts that (1) the first of the two lawsuits was filed in 2006, (2) the parties began settlement discussions in April 2007, (3) they did not reach a settlement until a year later, and (4) they needed the assistance of a Superior Court Judge to do so, are all strong evidence that this was a hotly-contested dispute and that the settlement involves no collusion. Similarly, it is evident that both sides were adequately represented, since, in addition to in-house counsel, PG&E and Sunnyside both retained experienced outside counsel to assist them in the discovery, motion practice and settlement negotiations that took place in the Superior Court actions.

There can also be little doubt that the dispute between the parties over what dispatch terms PG&E could impose on Sunnyside satisfies the fifth standard mentioned above for evaluating QF settlements; viz., whether the dispute between the parties involves a significant claim raising substantive issues of law and fact. As the application states:

"Sunnyside asserted claims for breach of contract, breach of the implied covenant of good faith and fair dealing and for declaratory relief. As discussed earlier, while PG&E believes it is in a position to mount a substantial defense to Sunnyside's claims, Sunnyside's lawsuit certainly raises substantial factual and legal issues to be decided independent of prior Commission decisions . . . [A]lthough the Commission has on occasion explained its policies concerning the standard offer PPAs, it has refrained from interpreting those contracts, instead leaving the issue of contract interpretation to the courts. See . . . D.93-11-019, 52 CPUC2d 87 (1993). Sunnyside's suit, therefore, raises substantive factual and legal questions for the court and a jury to decide, including whether PG&E had the right to dispatch the Sunnyside Facility on a 7x24 basis." (Application, p. 11.)

In view of all these factors favoring the instant settlement, it is also clear that the three tests set forth in Rule 12.1(d) for approval of a settlement have been met. First, the settlement "is reasonable in light of the whole record" because it will terminate the disputed PPA and dispose of two lawsuits, in one of which PG&E faces not-insignificant exposure. All of these actions will take place in exchange for a reasonable payment by PG&E to Sunnyside. Second, the parties have not identified any laws or prior Commission decisions with which the proposed settlement would be inconsistent. Third, the proposed settlement is in the public interest because it will dispose of costly litigation that has already lasted two years, thus freeing up the time of the courts, the Commission and the parties to pursue more worthwhile matters. Accordingly, we will grant PG&E's application and approve the settlement.

PG&E has requested that in addition to approving the settlement, we also authorize the company "to recover the settlement payment through the Energy Resource Recovery Account (`ERRA') or the Modified Transition Cost Balancing Account (`MTCBA'), as appropriate, as a cost of PG&E's energy procurement activities." (Application, p. 4.) Although we will grant PG&E's request, we consider recovery of the settlement payment to be more appropriate through the MTCBA. The reason for this is that the instant settlement relates to an SO2 contract that was signed and implemented before the beginning of the electric restructuring process in 1995 and 1996. Thus, the settlement is most reasonably characterized as being related to a stranded cost or a transition cost.