Background
In Decision (D.) 01-06-015 the Commission provided an opportunity for utilities to file voluntary qualifying facility (QF) contract amendments using three non-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 Oildale, 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 Oildale entered into a 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.) 02-01-042 for Commission approval of a Third Amendment to its PPA with Oildale. PG&E and Oildale entered into The Third Amendment and an Assumption Agreement on January 16, 2002.3 The Third Amendment, along with the first and second amendments are included as attachments 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 by both PG&E and Oildale. Furthermore, PG&E states the Assumption Agreement, along with the Third Amendment, resolves certain litigation between Oildale 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 Oildale and fixes it at 5.37cents/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 SRAC formula.
Oildale filed a response in support of PG&E's Application on February 20, 2002. Oildale's response elaborates on why it feels the Third Amendment is reasonable and in the public interest, and provides information on Oildale's inability to operate under the SRAC energy price formula thus leading to its declaration of bankruptcy. No other parties have filed responses.
On March 15, 2002 the assigned Administrative Law Judge (ALJ) issued a ruling requesting supplemental information regarding projected energy costs and providing PG&E an opportunity to submit any other additional information to justify the Application.
Oildale and PG&E filed a Joint Response to the March 15 ruling on April 3, 2002. The Joint Response consists of an evaluation by MRW & Associates, a third-party consultant, and provides information regarding projected natural gas prices, gas price volatility, stabilization of Oildale's operations as a QF and a discussion of the settlement of litigation between PG&E and Oildale. The Joint Response estimates that as a result of the 3-1/2 year fixed energy price, ratepayers will pay approximately $4.7 million more under the Third Amendment4 than they would pay under current short-run avoided cost (SRAC) prices. However, the Joint Response did not provide detailed information regarding the litigation issues between PG&E and Oildale. Accordingly, on May 7 the ALJ requested further information specifically relating to the potential costs of litigation and the assumptions used in litigation cost calculations.
On May 24, 2002, PG&E responded to the May 7 ruling with certain additional information on litigation and reiterated information provided in the Joint Response. However, PG&E did not provide its analysis of litigation risk stating that such information "could constitute a waiver of PG&E's attorney-client privilege and reveal attorney work product with respect to PG&E's potential strategy in the Oildale litigation."
On June 3, 2002, Oildale filed a reply to the ALJ's May 7 ruling. Oildale's reply offers that ratepayers are traditionally responsible for all prudently incurred costs of providing service, and would therefore bear any damages associated with Oildale's service to PG&E. Oildale also suggests that the 50% probability of liability is conservative and that the value of litigation may be greater than a 50% probability. Oildale states that it attempted to sell energy on the open market in the summer of 2001, but was opposed by PG&E and that this too represents potential litigation damages. Finally, Oildale expresses that if the Third Amendment is not timely approved, it will return to litigation and may seek alternative arrangements to sell energy.
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, Finding 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 Calculated on a net present value basis using a 10% discount rate over the 3-½ year term of the Third Amendment.
