Settlement Agreement

The Settlement Agreement is the product of extensive and intensive mediation sessions, and the balancing of the Settling Parties' numerous interests. The resulting Principles regarding the Energy Auction Process and Products are intended to balance the various interests at stake, and to develop a fair and transparent process that was not unnecessarily lengthy or administratively burdensome.

In summary, the Settlement Agreement contains the following key Principles:

· A description of the selection and qualifications for an Independent Evaluator (IE) who will be used to oversee the energy auction (Section II).

· A description in detail of the pre-bid auction process, including the development of pro forma documents, soliciting stakeholder input, identifying auction timing and products, submission of counterparty information, and indicating whether the utility will participate in the auction process (Section III).

· An outline of provisions regarding the retention of a market valuation consultant to determine the value of the energy rights being auctioned. This valuation will be used to provide an independent assessment of the market value of the products offered in the energy auction (Section III.D).

· A description of two products that shall be included in the energy auction - a Back-to-Back Toll and a Residual Back-to-Back Toll with associated Day-Ahead Unit Contingent Call Options - and a third product, Novation, that may be offered if the utility elects to do so. The Principles also provide that Parties may propose additional products (Section IV).

· A description of the bid evaluation process including establishing a minimum bid price, the bid valuation process, and awarding the winning bids (Section V).

· An outline of the provisions regarding subsequent auctions if an auction fails and a review of the auction process (Sections VI and VII).

· A description of the allocation of RA benefits and net costs (Section VIII).

· A detailed description of the Settling Parties' Proposal that will be used to value the energy rights if an auction is unsuccessful or has not yet occurred (Section IV).

The parties began with rules concerning when a utility must elect the new CAM procedures for a new generation resource, which is at the time the utility files an application. Then the rules continue on to set forth how an IE is selected, that the IE should have qualifications similar to those identified in D.04-12-048, and that the costs associated with the IE are included as part of the Energy Auction PPA cost.

Section III addresses the Pre-Bid process and includes the timing of pre-bids and what is to be included in the initial Pre-Bid documents. Rules for soliciting stakeholder input are detailed. If a utility elects not to bid on the Back-to-Back Toll product, the utility is to select an independent third-party consultant to provide a market value assessment (MVA) of the products for each identified term. Section II also provides guidance on review of the bid evaluation process, submission of acceptable counter-party information, and specifics on the pre-bid documents for the Long Beach Generation PPA [D.07-01-041].

Section IV describes the energy auction products: (1) a Back-to-Back Toll and (2) a Residual Back-to-Back Toll with associated Day-Ahead Unit Contingent Call Options. Also, a utility may offer Novation of any other Commission-approved product. The major work of the Settling Parties appears to be on reaching an agreement on the description of these products and establishing all the parameters for the contingencies associated with each product, such as terms, size, scheduling coordinator and fuel manager, settlement activities, delivery points, payments, default, termination, and credit and collateral.

Section V addresses the bid valuation and award process, including establishing a minimum bid price (if required), establishing the MVA, establishing the minimum bid percentage, calculation and release of the minimum bid price, and bid valuation methodology for the successful bids.

Section VI sets forth rules if no bids are accepted and Section VII provides for an energy auction review process. Section VIII addresses the allocation of the RA benefits, including the recommendation that the CEC allocate the RA capacity. This is the section that we clarify by having the Commission's ED allocate the RA capacity pursuant to the peak load share of each LSE representing benefiting customers as we defined in D.06-07-029. This section also allocated the net costs to benefiting customers following the Energy Auction.

Section IX discusses the Settling Parties Proposal that is to be used to determine the net cost of a PPA when an Energy Auction PPA is operational, but the energy auction was unsuccessful for a number of reasons.