3. Discussion
As noted above, recent Commission decisions have identified five factors that are relevant in determining whether a proposed QF settlement meets the standards in Rule 12.1(d). In order to understand the application of those factors to this case, it is first helpful to understand the theory behind PG&E's lawsuit against Diamond Foods. The application describes it as follows:
"PG&E's capacity payments to Diamond were based on a contractual rate set forth in the PPA. Because Diamond committed to a 28-year term for delivery of its contract capacity and commenced deliveries in 1984, PG&E paid Diamond $135/kW-year for firm capacity pursuant to the PPA firm capacity price
schedule . . . This capacity payment price was higher than the price paid to facilities that elected shorter capacity delivery terms. The PPA provided, however, that if Diamond failed to complete its entire 28-year contract capacity delivery commitment, it would be required to refund a portion of the capacity payments with interest."Since Diamond only delivered firm capacity for 21 years, PG&E should have paid Diamond $125/kW-year for firm capacity[,] and the refund PG&E sought was based on the difference between the $135 and $125 prices, with interest, going back to PG&E's first firm capacity payment in September 1984." (Application, p. 4.)
In applying the first of the five factors for assessing a proposed QF settlement -- whether the settlement reflects the relative risks and costs of continued litigation- it is also important to understand the claims Diamond Foods has interposed against PG&E. Diamond Foods argues not only that the return of "excess" capacity payments would amount to enforcing an unlawful penalty clause, but also that PG&E suffered no damage as a result of the closure of the Diamond cogeneration plant. The basis for this argument is that at the time of closure, PG&E had less expensive sources of capacity available to it, including some that used renewable resources. (Id. at 5.) PG&E states that while it believes it would prevail over Diamond Foods at trial, "jury trials can be unpredictable," and that "the contract provisions at issue have never been tested before a civil court in active litigation." (Id. at 7.)
Since PG&E estimates the costs of litigating its case against Diamond Foods at $450,000 (which includes the costs of handling the likely appeal), and it is possible that a jury would reject PG&E's theory of liability, we agree with PG&E that the settlement is reasonable in light of the relative risks and costs of continued litigation.
We think that the foregoing risk analysis also addresses the second factor mentioned in some of our QF decisions; viz., whether "the settlement fairly and reasonably resolves the disputed issues and conserves public and private resources." (D.00-11-041 at 6.) The likely costs of trial and appeal, added to the risk that a jury might reject PG&E's capacity overpayment theory, make the amount that PG&E has agreed to accept from Diamond Foods quite reasonable. Moreover, since the settlement agreement calls for dismissal of both PG&E's lawsuit and the cross-claims, plus mutual releases by both parties of all claims they have against each other (whether known or unknown), the terms of the settlement will end the litigation between the parties and so help to conserve public and private resources.
The analysis of litigation risk set forth above also addresses the third factor mentioned in the QF settlement decisions; viz., whether the settlement terms "fall clearly within the range of possible outcomes had the parties fully litigated the dispute." (Id.) The amount that Diamond Foods has agreed to pay - which will be credited to PG&E's ratepayers -- is reasonable when compared with the costs of trial and appeal, plus the risk that PG&E might not prevail in a jury trial on its capacity overpayment theory.
The fourth group of factors mentioned in the QF cases-whether the settlement negotiations were at arm's length and without collusion, whether parties were adequately represented, and how far the proceedings had progressed when settlement was reached-is also satisfied here. The facts that (1) PG&E's lawsuit was filed in January 2006, (2) the parties began settlement discussions even before this lawsuit was filed, (3) a tentative settlement was not reached until April 2007, and (4) a final settlement was not agreed upon until April 2008, are all strong evidence that this was a hotly-contested dispute and that the settlement involves no collusion. Similarly, it is evident that both sides were adequately represented, since, in addition to their in-house counsel, PG&E and Diamond Foods both retained experienced and capable outside counsel to assist them in the discovery, motion practice and settlement negotiations that took place in connection with PG&E's Superior Court action.
There can also be little doubt that the dispute between the parties over how much, if any, compensation PG&E was entitled to for excess capacity payments satisfies the fifth standard described above for evaluating QF settlements; viz., whether the dispute between the parties involves a significant claim raising substantive issues of law and fact. As the application states:
"Diamond asserted claims for breach of contract, accounting, breach of good faith and fair dealing and unjust enrichment. As discussed earlier, while PG&E believes it is in a position to mount a substantial defense to Diamond's claims regarding the validity of the liquidation clause and market replacement of renewable power, Diamond's cross-claims certainly raise[ ] substantive factual and legal issues. There is no doubt that the Settlement Agreement is both reasonable and advantageous to PG&E and its ratepayers to be decided independent of prior Commission decisions . . . [A]lthough the Commission has on occasion explained its policies concerning the standard offer PPAs, it has refrained from interpreting those contracts, instead leaving the issue of contract interpretation to the courts. See . . . D.93-11-019, 52 CPUC2d 87 (1993). Diamond's suit, therefore, raises substantive factual and legal questions for the court and a jury to decide." (Application, p. 9.)
In view of all the factors favoring the instant settlement, it is also clear that the three tests set forth in Rule 12.1(d) for approval of a settlement have been met. First, the settlement "is reasonable in light of the whole record" because it will terminate the disputed PPA and dispose of PG&E's lawsuit and the cross-claims of Diamond Foods. As part of the settlement, PG&E's ratepayers will also be credited with the payments made by Diamond Foods.
Second, we are satisfied that the settlement is consistent with law, because neither we nor the parties have identified any laws or prior Commission decisions with which the proposed settlement would be inconsistent.
Third, the proposed settlement is in the public interest because it will dispose of costly litigation that has already lasted two years, thus freeing up the time of the courts, the Commission and the parties to pursue more worthwhile matters. Accordingly, we will grant PG&E's application and approve the settlement.
PG&E has requested that in addition to approving the settlement, we also authorize the company "to recover the settlement payment through the Energy Resource Recovery Account (`ERRA') or the Modified Transition Cost Balancing Account (`MTCBA'), as appropriate, as a cost of PG&E's energy procurement activities." (Application, p. 3.) Interpreting this as a request for authorization to credit ratepayers through the relevant accounts with the payments Diamond Foods will be making, we will grant PG&E's request. However, it should be noted that since the settlement here relates to an SO2 contract that was signed and went into effect before the electric restructuring process began in 1995 and 1996, a credit to ratepayers under the MTCBA is more appropriate, since a settlement relating to an early SO2 contract seems most reasonably characterized as a stranded cost or a transition cost.
