ALJ/MCK/hkr Date of Issuance 12/5/2008
Decision 08-12-011 December 4, 2008
BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
Application for Expedited and Ex Parte Approval of Termination of Standard Offer No. 2 Power Purchase Agreement Between Pacific Gas and Electric Company (U 39 E) and Sunnyside Cogeneration Partners, L.P. |
Application 08-07-028 (Filed July 17, 2008) |
DECISION APPROVING SETTLEMENT
REGARDING STANDARD OFFER NO. 2 POWER PURCHASE AGREEMENT
This decision approves a settlement between Pacific Gas and Electric Company (PG&E) and Sunnyside Cogeneration Partners, L.P. (Sunnyside) concerning a Standard Offer No. 2 power purchase agreement (PPA) that PG&E and Sunnyside's predecessor signed in 1985. Under the PPA, PG&E purchased firm capacity and energy from the qualifying facility owned by Sunnyside until differences arose between the parties as to whether PG&E could change the terms of dispatch applicable to Sunnyside.
The settlement we approve today will result in cancellation of the PPA, as well as the dismissal of lawsuits that PG&E and Sunnyside have brought against each other. The decision also authorizes PG&E to recover in rates the payment to be made to Sunnyside pursuant to the settlement agreement.
1. Background
On August 8, 1985, Pacific Gas and Electric Company (PG&E) and the predecessor of Sunnyside Cogeneration Partners, L.P. (Sunnyside), Grenco Associates, Inc. d/b/a Sunnyside Cogen (Grenco), entered into a power purchase agreement (PPA) for firm capacity and energy to be generated from Grenco's natural gas-fired facility (Facility) in Salinas, California. The agreement the parties used was a Commission-approved standard form qualifying facility (QF) contract that is commonly referred to as a Standard Offer No. 2 (SO2) contract. Under this PPA, Grenco committed to make available and deliver to PG&E a contract capacity of 5,500 kilowatts (kW) for a period of 30 years. In addition, Grenco elected the firm capacity payment option in SO2, which required the project to be dispatchable.1 In 1990, Sunnyside purchased the operational project from Grenco, and Grenco assigned its PPA to Sunnyside.2
According to the application, from 1991 (when the Facility began delivering firm capacity) until 2005, PG&E usually requested that Sunnyside deliver its full contract capacity 5 days per week, 13 hours per day (5x13). However, in late 2005, based on the high cost of gas and the low fixed energy price then applicable to Sunnyside's deliveries, PG&E notified Sunnyside that as of January 1, 2006, it would be dispatching the Facility to operate on a schedule of 7 days per week , 24 hours per day (7x24). (Application, p. 3.)
Sunnyside refused to comply with this new dispatch requirement, claiming that PG&E's previous course of performance (i.e., 5x13 dispatches) and the fixed energy price amendment3 limited PG&E's ability to dispatch the Facility, and that PG&E had waived the right to dispatch the Facility on other than a 5x13 basis. In addition, Sunnyside claimed that complying with the 7x24 dispatch requirement would cause it to violate operating and efficiency standards that would jeopardize its QF status under regulations promulgated by the Federal Energy Regulatory Commission (FERC). PG&E refused to modify its 7x24 dispatch demand, and Sunnyside thereupon ceased operations. PG&E then placed Sunnyside on a 15-month probationary period pursuant to the PPA for failing to meet its firm capacity performance obligations under the agreement. (Id.)
In May 2006, Sunnyside filed a breach-of-contract action against PG&E in the Superior Court in and for the City and County of San Francisco, which included allegations of waiver and bad-faith dealing. On March 31, 2007, the 15-month probationary period provided for in the PPA expired, with Sunnyside failing to cure the performance deficiencies described by PG&E. PG&E then derated Sunnyside's firm capacity amount to zero and sent a demand to Sunnyside seeking repayment of approximately $4.5 million in capacity overpayments, based on Sunnyside's failure to meet its 30-year commitment to deliver firm capacity. Sunnyside did not respond to PG&E's demand for repayment.
The application continues that on May 14, 2007, PG&E filed its own action in the Superior Court in and for the City and County of San Francisco; this action sought repayment of the capacity overpayments to Sunnyside. In February 2008, at PG&E's request, the Court consolidated both cases for all purposes, and in March 2008 set the consolidated matters for trial in September 2008. (Id.)
Settlement discussions between representatives of PG&E and Sunnyside had begun in April 2007, and these discussions continued during July and August of that year. Ultimately, on April 2, 2008, the parties reached a tentative settlement agreement with the assistance of Superior Court Judge Tomar Mason. The agreement was then finalized and ultimately executed on May 28, 2008. The settlement agreement provides that its effectiveness is contingent upon approval by the Commission. (Id. at 3-4.)
The basic terms of the Settlement Agreement are simple. PG&E will make a payment to Sunnyside, whereupon the 30-year PPA between PG&E and Sunnyside will terminate, Sunnyside's and PG&E's respective actions in the Superior Court will be dismissed, and the parties will grant each other a full mutual release of both known and unknown claims. (Id. at 4.) As explained in further detail below, PG&E has requested that the amount of its payment to Sunnyside be kept confidential, and we agree that such confidential treatment is appropriate.
1 The SO2 agreement between PG&E and Sunnyside defines "dispatchable" as follows:
"The Facility is operable and can be called upon at any time to increase its deliveries of capacity to any level up to the contract capacity." (Emphasis in original.)
2 The PPA is attached as Exhibit 2 to both the public and the confidential, non-public versions of the declaration of PG&E's counsel, Shari Hollis-Ross, in support of the application.
3 After PG&E filed for protection under Chapter 11 of the Bankruptcy Act in April 2001, the Commission approved a 5-year fixed energy price of 5.37 cents/kWh to replace the energy price terms based on short-run avoided cost that appeared in many standard QF contracts. (Decision (D.) 01-06-015, p. 4.) PG&E and Sunnyside entered into an amendment to their PPA providing for this fixed energy price in July 2001. (Application, p. 4.)
