Background
In Decision (D.) 01-06-015 the Commission provided an opportunity for utilities to file voluntary qualifying facility (QF) contract amendments using three standard contract modifications1 that would be deemed reasonable by the Commission if made prior to July 15, 2001. This date was subsequently extended to July 31, 2001 by D.01-10-069. PG&E states that on July 20, 2001, PG&E and Gaylord, a QF, entered into the first amendment to the PPA that modified the energy price in accordance with the one year option in D.01-06-015. On August 22, 2001, PG&E and Gaylord entered into the second amendment to the PPA that changed the energy price to the five-year fixed price option under D.01-06-015. However, when the "safe harbor"2 date of July 31, 2001 was not extended by the Commission, the second amendment became a nullity.
On January 31, 2002, PG&E filed Application (A.) 02-01-041 for Commission approval of a Third Amendment to its PPA with Gaylord. PG&E and Gaylord entered into the Third Amendment and an Assumption Agreement on January 16, 2002.3 The Third Amendment, along with the first and second amendments, is included as an attachment to the application, while the Assumption Agreement is referenced in the application. PG&E states that the Assumption Agreement provides for the assumption of the PPA and an intrastate gas transportation service agreement by PG&E. Furthermore, PG&E states the Assumption Agreement, along with the Third Amendment, resolve certain litigation between Gaylord and PG&E. On February 11, 2002, PG&E made a Supplemental Filing in support of its application.
The Third Amendment modifies the energy price paid by PG&E to Gaylord and fixes it at 5.37 cents/kWh for a term of 3-1/2 years. PG&E states that if the Commission has not approved the Third Amendment by July 31, 2002, the energy price in the PPA will revert to the Commission's generic short-run avoided cost (SRAC) formula.
The California Cogeneration Council (CCC) filed a response in support of PG&E's application on February 20, 2002. The CCC's response elaborates on why the Third Amendment is reasonable and in the public interest, and provides information on how the Assumption Agreement schedule for the payment of debts owed to Gaylord by PG&E. No other parties have filed responses.
On April 15, 2002, the CCC and PG&E filed a Motion For Leave to File Supplemental Information regarding the application4. The supplemental information is similar to information requested by ruling in A.02-01-042, and consists of an evaluation by MRW & Associates (MRW), a third-party consultant. The MRW evaluation provides information regarding projected natural gas prices, gas price volatility, Gaylord's contribution to the reliability of the electric grid, and a discussion of the litigation between PG&E and Gaylord. MRW's evaluation estimates that as a result of the 3-1/2 year fixed energy price, ratepayers will pay approximately $3.0 million more under the Third Amendment5 than they would pay under current SRAC prices. However, the supplemental information filed by CCC and PG&E did not provide detailed information regarding the litigation issues between PG&E and Gaylord. Accordingly, on May 8, 2002, the Administrative Law Judge (ALJ) requested further information specifically relating to the potential costs of litigation and the assumptions used in litigation cost calculations.
PG&E responded to the May 8 ruling on May 24, 2002, stating that the settlement of litigation between Gaylord and PG&E is not contingent on the Commission's approval of the Third Amendment to the PPA.
1 The contract amendments allow (a) supplemental payments for one year to QFs demonstrating immediate need for such funds in order to continue operations, (b) fixed energy prices for five-years at 5.37 cents/kilowatt-hour (kWh), and (c) incentive payments to QFs for energy produced above normal operating levels. 2 Safe harbor refers to the date by which D.01-06-015 contract amendments are deemed reasonable. (D.01-10-069, Findings of Fact 3, p.14.) 3 D.01-10-069 provides utilities an opportunity to negotiate amendments after the safe harbor date (July 31, 2001) that could be approved by the Commission through the filing of a new application. 4 This motion was unopposed and was granted by ALJ ruling on May 8, 2002. 5 Calculated on a net present value (NPV) basis using a 10% discount rate over the 3-1/2 year term of the Third Amendment.
