7. Assignment of Proceeding

Michael R. Peevey is the assigned Commissioner, and A. Kirk McKenzie is the assigned Administrative Law Judge in this proceeding.

Findings of Fact

1. On August 8, 1985, PG&E and Sunnyside's predecessor, Grenco, entered into an SO2 PPA.

2. Under the terms of the PPA, Grenco was to provide PG&E with 5,500 kW of firm capacity and energy from its Facility in Salinas, California for a period of 30 years.

3. Under the SO2 firm capacity payment option that Grenco selected, its Facility was required to be "dispatchable," a defined term in the PPA.

4. In 1990, Grenco assigned the PPA to Sunnyside, and PG&E gave its consent to the assignment.

5. From 1991 until 2005, PG&E generally requested that Sunnyside deliver its full contract capacity on a 5x13 basis.

6. In late 2005, PG&E notified Sunnyside that it was changing the dispatch terms, and that Sunnyside would be required to deliver its full contract capacity on a 7x24 basis beginning on January 1, 2006.

7. Sunnyside refused to comply with PG&E's new dispatch requirement, arguing that based on PG&E's dispatch requests from 1991-2005 and the fixed energy price amendment the parties had executed in 2001, PG&E had waived the right to demand dispatch from Sunnyside's Facility on other than a 5x13 basis.

8. Sunnyside also argued that complying with PG&E's new 7x24 dispatch requirement would cause Sunnyside to violate operating and efficiency standards that would jeopardize its status as a QF under the applicable FERC regulations.

9. Rather than comply with PG&E's demand for 7x24 dispatch, Sunnyside ceased operations in January 2006.

10. After Sunnyside refused to comply with its new dispatch demands, PG&E placed Sunnyside on a 15-month probationary period pursuant to the terms of the PPA for failure to meet its firm capacity performance obligations.

11. In May 2006, Sunnyside filed an action against PG&E in the Superior Court in and for the City and County of San Francisco. The action alleged that for the reasons set forth in Findings of Fact 7 and 8, PG&E's demand that Sunnyside change the dispatch of its Facility from 5x13 to 7x24 constituted a breach of contract under the PPA, as well as a breach of the implied covenant of good faith and fair dealing.

12. On March 31, 2007, the 15-month probationary period ended without Sunnyside having cured its performance deficiencies. Shortly thereafter, PG&E sent Sunnyside a demand for repayment of approximately $4.5 million in firm capacity overpayments, based on Sunnyside's failure to complete its 30-year firm capacity commitment under the PPA.

13. After Sunnyside did not respond to PG&E's demand for repayment, PG&E filed an action on May 14, 2007 against Sunnyside in the Superior Court in and for the City and County of San Francisco seeking repayment of the capacity overpayments.

14. The parties commenced settlement discussions in April 2007, which continued into August 2007.

15. In February 2008, at PG&E's request, Sunnyside's action against PG&E and PG&E's action against Sunnyside were consolidated for all purposes including trial, and in March 2008 the Superior Court set the two matters for trial in September 2008.

16. In April 2008 the parties reached a tentative settlement of their dispute with the assistance of a Superior Court Judge. The parties signed the settlement agreement that is the subject of this application on May 28, 2008.

17. The settlement agreement between the parties calls for (a) PG&E to make a payment to Sunnyside, (b) Sunnyside and PG&E to dismiss their respective Superior Court actions against each other with prejudice, (c) Sunnyside and PG&E to give each other general releases of all claims they have or may have against each other, whether known or unknown, and (d) cancellation of the PPA between PG&E and Sunnyside.

18. Implementation of the above-described settlement agreement is contingent upon approval by the Commission.

19. PG&E has filed under seal a full copy of its application and the Settlement Agreement pursuant to Pub. Util. Code § 583. PG&E has also filed public, redacted versions of the settlement agreement and its application, both of which omit only the amount of the payment PG&E proposes to make to Sunnyside.

20. Notice of the filing of PG&E's application appeared in the Commission's Daily Calendar on July 25, 2008.

21. No protest to the application has been filed.

22. A hearing is not necessary.

23. PG&E has requested that it be allowed to recover the amount of its payment to Sunnyside in rates as a cost of its energy procurement activities, through either the ERRA or the MTCBA, as appropriate.

Conclusions of Law

1. In view of the costs of trying and handling appeals in Sunnyside's action against PG&E and PG&E's action against Sunnyside, plus PG&E's exposure in the event Sunnyside prevails in its breach of contract action against PG&E, the proposed settlement reasonably reflects the risks and costs of continued litigation.

2. In view of the risks summarized in Conclusion of Law (COL) 1, the proposed settlement fairly resolves the issues disputed between the parties, and will help to conserve public and private resources.

3. In view of the risks summarized in COL 1, plus the likelihood that PG&E would have great difficulty in collecting any judgment in its favor in the action it has brought against Sunnyside, the proposed settlement falls within the range of possible outcomes that would have resulted if PG&E and Sunnyside had continued to litigate their dispute.

4. In view of the fact that PG&E's and Sunnyside's respective actions against each other have each been pending for over 18 months, and have entailed extensive discovery and motion practice as well as the involvement of outside counsel on both sides, it is clear that the parties' settlement negotiations have been at arm's length and without collusion, have involved effective representation on both sides, and have occurred after enough time has elapsed so that each party could make a realistic assessment of its odds of prevailing in the litigation.

5. The dispute between PG&E and Sunnyside presents a colorable claim that raises substantive issues of both law and fact.

6. In view of COLs 1-5, the proposed settlement between PG&E and Sunnyside is reasonable in light of the whole record, consistent with law, and in the public interest.

7. PG&E's application for an order approving the proposed settlement should be granted, subject to the conditions set forth in the following order.

8. PG&E should be allowed to recover the amount of its payment to Sunnyside through the MTCBA.

9. PG&E's motion to file under seal, pursuant to Pub. Util. Code § 583, (a) the full, unredacted version of its application, and (b) the full, unredacted version of the July 17, 2008 declaration of Shari Hollis-Ross in support of the application, to which the full, unredacted version of the Settlement Agreement is attached as Exhibit 1, should be granted.

ORDER

IT IS ORDERED that:

1. The application of Pacific Gas and Electric Company (PG&E) for an order approving the Settlement Agreement between PG&E and Sunnyside Cogeneration Partners, L.P. (Sunnyside), which Settlement Agreement is attached as Exhibit 1 to the July 17, 2008 Declaration of Shari Hollis-Ross in support of the application, is granted.

2. The payment to be made by PG&E to Sunnyside pursuant to the Settlement Agreement approved herein may be recovered by PG&E in rates through the Modified Transition Cost Balancing Account, subject only to PG&E's prudent administration of the Settlement Agreement.

3. The July 17, 2008 motion of PG&E for leave to file confidential materials under seal is granted with respect to the full, unredacted version of the application and the full, unredacted version of the July 17, 2008 declaration of Shari Hollis-Ross in support of the application, to which the full, unredacted version of the Settlement Agreement is attached as Exhibit 1. The aforesaid materials are placed under seal for a period of two years from the effective date of this decision, through and including December 6, 2010, and during that period the material so protected shall not be made accessible or disclosed to anyone other than Commission staff except upon the further order or ruling of the Commission, the assigned Commissioner, the assigned Administrative Law Judge (ALJ), or the ALJ then designated as Law and Motion Judge. If PG&E believes that further protection of the aforesaid materials is needed after December 6, 2010, then PG&E may file a motion stating the justification for further withholding of these materials from public inspection, or for such other relief as the Commission's rules may then provide. Such a motion shall explain with specificity why the designated materials still need protection in light of the passage of time involved, and shall attach a clearly identified copy of the ordering paragraphs of this decision to the motion. Such a motion shall be filed at least 30 days before expiration of the protective order set forth in this paragraph.

4. Application 08-07-028 is closed.

This order is effective today.

Dated December 4, 2008, at San Francisco, California.

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