Discussion

We begin our review by stating that PG&E's application is not a request to permit Gaylord's operation as a QF. Gaylord currently operates as a QF and under the amended contract receives supplemental payments above SRAC prices. Instead, this is an application that requests ratepayers to pay higher energy costs to improve market stability.

PG&E asserts that the Third Amendment and the Assumption Agreement constitute a settlement agreement that provides a fixed energy price, above projected SRAC energy prices, and other benefits to Gaylord, while providing benefits to PG&E by resolving Gaylord's claims against PG&E. Therefore, we review the application using the Commission's settlement rules as a standard of review. These rules are found in Rules 51 to 51.10 of the Commission's Rules of Practice and Procedure.⁶ The settlement rules provide in pertinent part that "the Commission will not approve a stipulation or settlement, whether contested or uncontested, unless the stipulation or settlement is reasonable in light of the whole record, consistent with law and in the public interest."

PG&E and Gaylord estimate that the additional $3.0 million in energy payments under the Third Amendment represents a 10% premium over maintaining current pricing in the PPA. The additional payments result from the differential between the higher energy costs at 5.37 cents/kWh and lower SRAC energy costs forecasts, estimated at 4 to 4.9 cents/kWh. PG&E and CCC argue that in return for these greater energy prices ratepayers receive an "insurance policy" through market stability by avoiding potentially higher SRAC energy prices as a result of potentially higher gas prices.⁷ PG&E and CCC also argue that approval of the application will improve the reliability of the local Bay Area electric grid and decrease the likelihood that Gaylord would cease operations as a QF.

While we believe market stability is valuable, under D.01-06-015 we previously approved amended contracts using fixed prices for PG&E QFs providing significant market stability. Although PG&E and CCC argue that gas prices might rise in the future, gas prices might also decline, causing energy at fixed prices to be even more costly than the estimated 10% premium.

With regard to the continued operation of Gaylord, we are concerned about the continued viability of QFs generally, QFs contribution to the electric grid, and the economic and energy system effects when QFs cease operations. Our concern has been expressed in numerous decisions including D.01-03-067 (p.34) where we ordered utilities to pay QFs on a going forward basis; D.01-06-015 (pp.4-5) where we provided non-standard amendment opportunities to QFs that were automatically deemed reasonable and in D.01-10-069 (p.11) where we provided an opportunity for utilities and QFs to continue to negotiate contract amendments after the safe harbor date and apply for our approval through the filing of an application. As noted by PG&E, Gaylord chose one of the options under D.01-06-015 and amended its contract so that Gaylord receives supplemental payments above SRAC prices. Although we have taken these actions to help bring stability to the electricity market, utility energy and capacity payments to QFs are defined by the Public Utility Regulatory Policies Act of 1978 (PURPA) and Pub. Util. Code § 390, and using these definitions each QF must determine whether it will operate based on its unique economic circumstances.

PG&E and CCC assert that the Third Amendment, along with the Assumption Agreement, will resolve substantial litigation claimed by Gaylord against PG&E⁸. PG&E and CCC calculate that the value of these claims is at least $15 million⁹ based on termination of the PG&E-Gaylord contract and future lost capacity and capacity bonus payments. PG&E and CCC also contend litigation costs may include other potential damages associated with Gaylord's inability to sell on the open market during the summer of 2001. PG&E and CCC then apply a 50 percent probability that Gaylord would prevail in its claims to conclude that the value of potential litigation ($7.5 million) substantially exceeds the $3.0 million premium that ratepayers would pay under the Third Amendment.

However, these simplified assumptions regarding litigation analysis are incomplete. It is not clear whether the analysis represents PG&E's actual litigation assumptions or how PG&E determined that Gaylord's damage claims are the responsibility of ratepayers. Therefore, in an effort to determine whether the potential litigation costs represent a reasonable estimate, the ALJ issued the May 8 ruling requesting specific information on these matters. The ALJ also required a response solely from PG&E and not as a joint response with CCC. In its response,¹⁰ PG&E states that while the proposed Third Amendment is part of an integrated settlement of litigation between Gaylord and PG&E, "the settlement of the Gaylord litigation is not contingent on the Commission's approval of the Third Amendment to Gaylord's PPA." This statement leads us to conclude that the approval of the Third Amendment is not directly related to litigation costs. Therefore, we must conclude that PG&E's litigation assumptions and estimate of potential litigation costs are irrelevant for purposes of comparison to the premium energy costs in the Third Amendment as provided in PG&E's April 15, 2002 response.

Furthermore, it is difficult to understand why PG&E or CCC did not submit the Assumption Agreement in the Application or responses to ALJ rulings. PG&E and CCC assert that this is a vital document in understanding the settlement agreement and resolving the litigation between PG&E and Gaylord. A review of the Third Amendment shows that its sole purpose is to define the increase in energy rates, while the Assumption Agreement apparently resolves litigation and other issues. When separated from the litigation assumptions, the premium energy payments are unreasonable, and therefore the Application is not in the public interest.

Since we cannot conclude whether the Application is in the public interest, we need not determine whether the Application meets the two other requirements of our settlement standards, that is, whether the settlement agreement is reasonable in light of the record and consistent with law. Under our settlement rules all three requirements must be met in order to approve a settlement. Absent PG&E's showing that the potential litigation costs and assumptions are reasonable and why litigation costs or damages should be borne by PG&E's ratepayers, there is no reason to consider this application. This application should be denied.

In Resolution ALJ 176-3083 dated March 6, 2002, the Commission preliminarily categorized this application as ratesetting, and preliminarily determined that hearings were necessary. No protests have been received. Given this status public hearing is not necessary and it is necessary to alter the preliminarily determination made in Resolution ALJ 176-3083 to determine that hearings are not necessary.