Discussion

Overview

PG&E seeks a Commission order waiving application of the following provisions of the Affiliate Transaction Rules to Fuelco:

· Rule III.B, to the extent it restricts transactions between a utility and its affiliate to tariffed services or services subject to competitive bidding;

· Rule III.B.1, to the extent it limits and conditions the information a utility may make available to its affiliate;

· Rules III.E and IV.B, to the extent they further restrict or condition information sharing between a utility and its affiliate;

· Rules V.C and E, to the extent they proscribe the sharing of plant, facilities, costs, equipment, personnel and information;

· Rule V.G, to the extent it proscribes the sharing of employees and officers; and

· Rule V.H.6, to the extent it applies to the pricing of services provided by Fuelco.

The settlement between PG&E and ORA consists of an agreement that Fuelco should be exempt from these provisions of the Affiliate Transaction Rules, subject to three material conditions:

· PG&E will report, in its annual Energy Resource Recovery Account (ERRA), and in the format laid out in Appendix A to the Settlement Agreement, on the activities and operating costs associated with the interaction between PG&E/PEFCO and Fuelco;

· PG&E ratepayers will receive 100 % of any net nuclear fuel cost savings generated by Fuelco for PG&E; and

· PG&E ratepayers will receive the PG&E/PEFCO share of any net proceeds on the sale or dissolution of Fuelco, except to the extent that PG&E/PEFCO has infused capital for which it has not sought cost recovery (if any).

Initially, ORA opposed all of the waivers except the waiver of Rule V.H.6. In its prepared testimony, however, ORA argued that if the Commission should determine to approve the other waivers,

it should require PG&E to report annually to the Commission and ORA about the activities and costs of Fuelco both for PG&E and non-Fuelco members and require PG&E to pass on to ratepayers any net savings from Fuelco's operations. If Fuelco is dissolved or sold in the future, ratepayers should receive the net gain on sale or [sic] dissolution. (Exhibit B.)

The Settlement Agreement incorporates all of ORA's proposed conditions. By executing the Settlement Agreement, ORA has removed its opposition to the requested Rule waivers. Thus, the Settlement Agreement essentially memorializes concurrence with PG&E's arguments that, vis a vis Fuelco, waivers of these Rules are not against the public interest, as long as the conditions listed above apply. Paragraph 3 of the Settlement Agreement reflects ORA's concurrence in these terms:

ORA withdraws its opposition to PG&E's request for waivers of the Affiliate Transaction Rules specified ... ORA believes that PG&E's use of Fuelco for nuclear fuel services may result in net savings for ratepayers.

Paragraph 1 of the Settlement Agreement memorializes the parties' agreement that the prepared testimony should be admitted as evidence in this proceeding. This prepared testimony constitutes the expert opinion of the PG&E and ORA witnesses at the time it was distributed and thereby further develops the record. By approving the Settlement Agreement, we confirm the ALJ's ruling that the prepared testimony should be received in evidence.

Purpose and Organization of Fuelco

In 2004, PG&E, through PEFCO, together with Union Electric Company (doing business as AmerenUE) and TXU Generation Company LP, formed Fuelco, a not-for-profit Delaware Limited Liability Company. Each of the founding members operates one or more nuclear reactors.

The Settlement Agreement states that Fuelco's "essential purpose" is to act on behalf of its member utilities to assist in the acquisition of nuclear fuels and related products and services. (Settlement Agreement, Recital B.) The Fuelco Agreement, itself, is Appendix A to the application.¹ Article IV, Section 1 of the Fuelco Agreement lists the five "general purposes and business objectives" Fuelco was formed to undertake: (a) assisting members in obtaining uranium, fabricated nuclear fuel and nuclear fuel components in a cost-effective manner and at competitive prices; (b) arranging financing for such purchases; (c) acting as a limited agent or broker for the individual Fuelco members in such transactions; (d) managing and optimizing the members' inventory and contracts for nuclear fuels and related products, as requested by each member; and (e) providing associated services such as contract administration; economic, fuel cost and amortization analysis; fuel inventory accountability support for fuel accounting and tax analysis; and market analysis and strategic development.

Elsewhere PG&E describes Fuelco as providing "a formal structure for pooling expertise, diversifying supply, formulating larger fuel opportunities to achieve more attractive pricing, and sharing administrative costs." (Supplemental Information, p. 3.) PG&E emphasizes that Fuelco was formed to do the work traditionally done by each utility's nuclear fuel procurement section. "The ultimate goal is to eliminate the need for members to have their own specialized staff with the potential to realize economies of scale." (Id., p. 7.)

With a unanimous vote of the members, however, the Fuelco Agreement does permit certain additional undertakings. Article VIII, section 1(d) lists seven, including joint ventures or transactions with third parties outside the scope of the "purposes" enumerated above and purchases or sales of nuclear fuels on behalf of third parties.² In response to a data request on this point, PG&E responded:

Yes, Fuelco has already offered services to non-Members. The only significant instance has been an effort to develop a new source for a fuel product segment with very tight supply conditions. Fuelco recruited the participation of a non-member. The non-member has agreed to contribute to the out-of-pocket legal and travel costs of developing this fuel procurement opportunity. The participation of the non-member is reducing PG&E's pro-rata share of the fuel procurement opportunity development costs and is strengthening the attractiveness of the opportunity to the prospective supplier because Fuelco is bringing a larger total procurement volume to the transaction. As is the case with other Fuelco transactions, the participating utilities will be contracting directly for the supply. Fuelco will not take title to the nuclear fuel products. (Exhibit B, p. 7.)

PG&E distinguishes Fuelco from two existing entities, Utilities Service Alliance (USA) and Strategic Teaming and Resources Sharing (STARS) alliance. It describes USA as a "joint purchasing venture of utilities in the United States (currently twelve in number) for goods and services used in nuclear power production" such as permanent plant parts and specialized tools. (Supplemental Information, p. 6.) The members also share information such as advice on best practices. STARS alliance, composed of USA members that own and operate Westinghouse pressurized water reactors (including each of Fuelco's members), focuses on common operational and safety objectives. Fuelco is even more specifically focused. "Fuelco's members develop programs and processes that are specific to their nuclear fuel procurement strategies and risk profiles." (Id., p. 7.)

The Fuelco Agreement contemplates application to the United States Department of Justice for an anti-trust safe-harbor ruling but, at least as of February 28, 2005, when PG&E filed its Supplemental Information, that request had not been made.

Fuelco has a Board of Managers, composed of individuals appointed by Fuelco's members. The Board of Managers provides strategic and operational guidance to Fuelco and appoints its officers. At present, Fuelco is staffed by employees loaned by its members and each member pays the salary, administrative expenses and benefits of the personnel it loans. In the future, Fuelco may hire its own staff, in accordance with the Fuelco Agreement.

Rationale for Exemption and Anticipated Ratepayer Benefits

PG&E states that it wishes to increase its ownership in Fuelco above 4% in order to exercise greater control over Fuelco's operations. An ownership percentage of 5% or greater triggers application of the Affiliate Transaction Rules and PG&E asserts that compliance with some of the Rules "would render Fuelco's operations impracticable and in some cases impossible." (Application, p. 5.) Recital E of the Settlement Agreement concurs.

PG&E's rationale for the requested exemptions largely relies on the unique status of nuclear fuel and related materials given their weapons potential and on the extensive worldwide oversight that characterizes their production, sale and use. PG&E states that "[e]ffective fuel procurement - from purchasing uranium ore or performing quality control on delivered fuel assemblies - requires specialized skills, industry knowledge and contacts." (Supplemental Information, p. 3.)

PG&E's experience to date supports its contention that in addition to increased supply flexibility, Fuelco membership can yield cost savings. In 2004, Fuelco brokered five transactions for PG&E which garnered approximately $6.9 million in savings compared to market prices at the time. Four transactions were brokered at lower than the market price (one was higher). ORA adds that these net savings compared to market prices, when offset by PG&E's estimated share of 2005 operating costs ($536,000), yield net savings overall.

PG&E proposes that the net fuel cost savings generated by its Fuelco membership should flow to ratepayers. ORA's prepared testimony reports PG&E's response to a data request regarding implementation specifics:

Yes, if Fuelco generates net nuclear fuel costs savings for PG&E, those savings will be passed on to PG&E ratepayers in full. PG&E recovers its nuclear fuel expense through its ERRA account [Energy Resource Recovery Account] as the Diablo Canyon Power Plant generates electricity. Inventory financing costs are recovered as a forecast rate base item in PG&E's general rate case. Reductions in fuel expense will flow directly through ERRA cost recovery mechanisms as fuel is used to generate electricity. Changes in average inventory levels will be captured as part of the regular general rate case cycle. (Exhibit E, p. 5.)

Paragraph 7 of the Settlement Agreement confirms that PG&E's ratepayers are to receive the full benefit of any net fuel cost savings Fuelco generates for PG&E. The Report required by the Settlement Agreement will provide the data necessary to ensure implementation of this result.³

Upon dissolution of Fuelco, PG&E proposes that ratepayers receive PG&E's share of the net proceeds. ORA's prepared testimony (Exhibit E, p. 6) reports PG&E's expansive response to an ORA data request on this topic. Paragraph 8 of the Settlement Agreement confirms that ratepayers are to receive net proceeds, should Fuelco be dissolved.

A Closer Look at the Rule Waivers Sought

Below, we summarize the purpose of each Rule for which PG&E seeks a waiver and the reasons PG&E advances for exempting Fuelco, based on problems or inefficiencies it claims each Rule would impose.

Rule III.B limits transactions between a utility and its affiliates to four categories. One category includes goods, property, products or services that the utility or its affiliate generally makes available to others through open, competitive bidding processes. PG&E seeks a waiver of the competitive bidding requirement and states that, given the nature of its interactions with Fuelco, the three other categories do not apply (i.e., tariffed products and services; joint purchases (per ruled V.D.); and corporate support (per Rule V.E.). PG&E argues that requiring public bidding could undermine the opportunity to structure lower-costs deals, given the differences between the markets for nuclear fuel and related products and for other energy commodities.

Rule III.B.1 requires that if a utility offers information (or supply, capacity, or services) to an affiliate, it must make the same offer to all other market participants, similarly situated. The concern here is sharing non-public information about PG&E's nuclear fuel supply needs with anyone other than the members of Fuelco, who are bound by the Fuelco Agreement to keep such information confidential. Not only is disclosure of such sensitive information problematic, but suppliers often require that details of their transactions be kept confidential, according to PG&E. Absent a waiver of this Rule, suppliers' confidentiality concerns could severely restrict PG&E's ability to use Fuelco effectively.

Rules III.E and IV.B both govern other aspects of information sharing. PG&E states that the provisions of Rule III.E. that cause concern for Fuelco are the prohibitions on providing leads to an affiliate, acquiring information for an affiliate, and sharing market analyses and other proprietary reports with an affiliate. Rule IV.B is problematic because it permits a utility to "make non-customer specific non-public information ... about the utility's ... electricity-related goods or services, available to the utility's affiliates only if the utility makes that information contemporaneously available to all other service providers on the same terms and conditions, and keeps the information open to public inspection." Rule IV.B. permits the sharing of proprietary information with an affiliate, but limits the affiliate's use of the information - use may be made "in conjunction with the permitted corporate support services, and is not permitted for any other use." These restrictions would significantly limit PG&E's ability to assist Fuelco in its core purpose, the discovery and development of opportunities for transactions in nuclear materials and services.

Rule V.C prohibits a utility from sharing office space and equipment, and information systems with an affiliate. Rule V.E. permits the sharing of personnel but only if this sharing is "priced, reported and conducted in accordance with the Separation and Information standards" and other applicable Commission requirements. However, the shared support "shall not allow or provide a means for the transfer of confidential information from the utility to the affiliate...." As noted previously, the Fuelco Agreement permits the members to loan employees to Fuelco until such time as the members agree to hire a separate staff. PG&E is sharing employees and office space with Fuelco at present and wishes to continue to be able to do so if it increases its membership share in Fuelco.⁴ If PG&E were not participating in Fuelco, it contends it would have to fill vacant nuclear fuel procurement positions to increase its standalone procurement capabilities.

Rule V.G prohibits a utility and its affiliate from employing the same individual at the same time. PG&E wishes to continue to have at least two employees (see footnote 2) work at least part of the time for Fuelco and thus, seeks an exemption from this rule. While, to the extent Fuelco hires its own employees, this issue likely would become moot with respect to some individuals, it would continue to apply -- and therefore prohibit -- any temporary loans once PG&E has increased its ownership share to 5% or greater. PG&E contemplates that such loans may be desirable from time to time.

Rule V.H.6 requires the pricing of transfers of services from an affiliate to a utility at the lower of fully loaded cost or fair market value. The Fuelco Agreement requires that payment for such service transfers meet the requirements of the Public Utility Holding Company Act (PUHCA), which PG&E characterizes as analogous to fully loaded cost. ORA does not oppose PG&E's request for a waiver from a more narrow interpretation of Rule V.H.6.

Settlement Criteria

The Settlement Agreement is an uncontested "all-party" settlement. In such cases, the Commission applies two complementary standards to evaluate the proposed agreement. The first standard, set forth in Rule 51.1(e) and applicable to both contested and uncontested agreements, requires that the "settlement is reasonable in light of the whole record, consistent with law, and in the public interest." The second standard, articulated in San Diego Gas & Electric, 46 CPUC 2d 538 (1992), applies to all-party settlements. As a precondition to approving such a settlement, the Commission must be satisfied that:

a. The proposed all-party settlement commands the unanimous sponsorship of all active parties to the proceeding.

b. The sponsoring parties are fairly representative of the affected interests.

c. No settlement term contravenes statutory provisions or prior Commission decisions.

d. Settlement documentation provides the Commission with sufficient information to permit it to discharge its future regulatory obligations with respect to the parties and their interests.

PG&E and ORA are the only parties to this proceeding and both are signatories to the Settlement Agreement. Each party actively participated in all aspects of the proceeding - discovery, development of prepared testimony, etc. Settlement discussions did not commence until both parties' positions were public. PG&E was represented by knowledgeable employees and by counsel. ORA, whose mandate is to represent ratepayer interests, likewise assigned knowledgeable staff and counsel. We conclude that the affected utility and ratepayers interests were fairly represented. Thus, the Settlement Agreement meets the first and second criteria of the all-party settlement guidelines.

With respect to the third criteria, the parties represent that no term of the Settlement Agreement contravenes any statutory provision or Commission decision. We are not aware of any conflict with our own decisions or other controlling law. However, to ensure that the Fuelco Agreement, itself, poses no conflict with established anti-trust law (which would affect the legality of the Settlement Agreement), Fuelco needs to obtain a safe harbor ruling from the Department of Justice and we urge it to do so expeditiously. Once the ruling has been issued, PG&E should provide a copy of it to the Director of the Commission's Energy Division. Thus, our determination that the Settlement Agreement is not contrary to law may need to be reexamined if the safe harbor ruling cannot be obtained.

As to the fourth criteria, our review indicates that the Settlement Agreement provides the detail necessary to implement its terms and most of the detail necessary to discharge our future regulatory responsibilities. The form created as Appendix A to the Settlement Agreement, which PG&E will file as part of its annual ERRA, will enable to the Commission to monitor the costs of the utility's participation in Fuelco, as well as the savings or losses that result from any transactions that Fuelco arranges for PG&E/PEFCO. Thus, the Commission will be able to monitor the net benefit to PG&E/PEFCO and ensure that ratepayers receive that benefit. Likewise, if Fuelco should prove ineffective or inefficient, the Commission will be able to take appropriate action. We remain concerned, however, that a report prepared consistent with Appendix A to the Settlement Agreement will not fully capture all activities undertaken by Fuelco members outside the scope of Fuelco's core purposes, the cost of such endeavors, and the net gain or loss to PG&E's ratepayers that may result. Above, we refer to Article VIII, section 1(d) of the Fuelco Agreement, which lists seven such, non-core activities. We believe the Settlement Agreement's Appendix A report should be expanded to identify any such activities and break out the costs of participation by PG&E/PEFCO in a consistent format, if doing so will adequately reflect the net impact on PG&E's ratepayers. If the activity does not lend itself to being reported in the same format, then at a minimum, PG&E should: identify and describe the activity; identify when the activity was undertaken; quantify the cost to its ratepayers and the associated ratemaking treatment; and quantify the benefits to its ratepayers and the associated ratemaking treatment.

Subject to these additional requirements, we conclude, on balance, that the Settlement Agreement is reasonable in light of the record developed in this proceeding, that it is not adverse to the public interest, and that it should be approved. Thus, the Settlement Agreement meets the conditions of Rule 51.1(e).

· Joint ventures or transaction with third parties outside the scope of Fuelco's general purposes; · Purchases/sales of nuclear fuel and products on behalf of third parties or speculative transactions that are not related to the members' needs; · Transactions that require Fuelco to take title to nuclear fuel; · Transactions for the benefit of Fuelco's own account; · Transactions that convey anything more than a de minimis portion of Fuelco's assets by deed, etc.; · Transactions for borrowing money/executing promissory notes which are secured by mortgage, etc.; and · Transactions that renew or extend such loans or notes.