ALJ/MCK/sid Date of Issuance 12/19/2008
Decision 08-12-045 December 18, 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 Diamond Foods Inc. |
Application 08-07-029 (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 Diamond Foods Inc. (Diamond Foods) concerning a Standard Offer No. 2 power purchase agreement (PPA) that PG&E signed with the predecessor of Diamond Foods, Diamond Walnut Growers, Inc. (Diamond), in August 1984.1 Under the PPA, PG&E purchased firm capacity and energy from the qualifying facility owned by Diamond until Diamond Foods shut down the facility in November 2005, largely because of difficulties in meeting the emission requirements set by the local air quality board.
The settlement we approve today will result in cancellation of the PPA, as well as the dismissal of (1) a lawsuit that PG&E has brought against Diamond Foods, and (2) cross-claims that Diamond Foods has asserted against PG&E. The decision also authorizes PG&E to credit to rates the payments it will be receiving from Diamond Foods pursuant to the settlement agreement.
1. Background
On August 6, 1984, PG&E and Diamond entered into a PPA for firm capacity and energy to be generated at Diamond's facility, a cogeneration plant located in Stockton, California. The facility was to be powered by biomass in the form of walnut shells. 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, Diamond committed to make available and deliver to PG&E a contract capacity of 4,150 kilowatts (kW) for a period of 28 years, until August 2012.
According to the application, from 1984 until 2004 Diamond generally performed its obligations under the PPA in a manner that entitled it to full capacity payments. In order to earn the full capacity payments, Diamond was required to deliver its full contract capacity to PG&E five days per week, 13 hours per day, at a capacity factor of at least 80% (excluding maintenance outages). (Application, p. 2.)
Sometime in 2004, however, Diamond began to have difficulties in meeting the requirements for full capacity payments. In September 2004, for example, PG&E invoked provisions of the PPA that allowed it to place Diamond on probation for failure to deliver at Diamond's full contract capacity in August 2004.2 At the same time as the probation began, PG&E demanded that Diamond establish prior to November 2005 that it could reliably deliver at its contract commitment of 4,150 kW. When Diamond failed to do so, PG&E informed Diamond Foods that as of December 1, 2005, it would reduce the capacity commitment under the PPA to 3,601 kW, "the level at which the facility appear[ed] to be able to operate according to the facility metering data during the probationary period." (PG&E Complaint, p. 6.)
According to the PG&E Complaint, PG&E learned through a newspaper article on October 17, 2005 that Diamond Foods had closed the cogeneration plant in Stockton and terminated all its employees. (Id.) On November 21, 2005, PG&E sent Diamond Foods a letter demanding that it either generate energy sufficient to fulfill its commitments under the PPA, or PG&E would consider the PPA terminated as of December 1, 2005. (Application, p. 2.) PG&E's letter also demanded that if Diamond Foods would not be performing under the contract, Diamond Foods must also refund the capacity overpayments PG&E had made, since Diamond's performance under the PPA had lasted only 21 years instead of the 28 years originally contracted for. PG&E also withheld payment for energy deliveries in October and November 2005 totaling over $197,000. (PG&E Complaint, p. 7.)
When Diamond Foods failed to respond to PG&E's demand letter, the utility filed the PG&E Complaint in January 2006. In its answer, Diamond Foods alleged that the capacity overpayments sought by PG&E were an unlawful "penalty clause." In addition, Diamond Foods asserted cross-claims against PG&E based on the utility's withholding of the energy payments due for October and November 2005, as well as claims for breach of contract and breach of the implied covenant of good faith and fair dealing. Diamond Foods also sought an accounting with respect to the entire 21 years during which the cogeneration facility had operated, owing to unexplained charges that PG&E had occasionally imposed during the 21-year period.
Settlement discussions between PG&E and Diamond Foods began even before the filing of the PG&E Complaint and continued intermittently through April 2007, when the parties reached a tentative settlement. However, the terms of this settlement had to be renegotiated, and agreement on final terms was not reached until April 30, 2008. The settlement agreement was finally executed on June 19, 2008, and filing of the instant application followed approximately a month later.
The basic terms of the Settlement Agreement are simple. First, the parties agree that the PPA will be deemed terminated as of December 1, 2005. Second, PG&E will dismiss its lawsuit against Diamond Foods, and Diamond Foods will dismiss its cross-claims against PG&E; both dismissals will be with prejudice. Third, Diamond Foods and PG&E will release all claims they have against each other, whether known or unknown.
Finally, Diamond Foods will make certain payments to PG&E, which will be credited to PG&E's ratepayers through either the Energy Resource Recovery Account (ERRA) or the Modified Transition Cost Balancing Account (MTCBA). PG&E has moved that the amount of these payments be kept confidential, and for the reasons discussed in more detail below, we agree that such confidential treatment is appropriate.
1 On July 26, 2005, Diamond merged with and into Diamond Foods, and as a result the PPA was assigned to Diamond Foods by operation of law.
2 This allegation appears on pages 5-6 of the complaint that PG&E filed against Diamond Foods, Inc. in January 2006 in the Superior Court in and for the City and County of San Francisco (PG&E Complaint). The PG&E Complaint is attached as Exhibit 3 to the Declaration of Shari Hollis-Ross in support of the application.
