7. Assignment of Proceeding

Michael R. Peevey is the assigned Commissioner, and A. Kirk McKenzie is the assigned Administrative Law Judge in this proceeding.

1. On August 6, 1984, PG&E and Diamond, the predecessor of Diamond Foods, entered into an SO2 PPA.

2. Under the terms of the PPA, Diamond was to provide PG&E with 4,150 kW of firm capacity and energy from its cogeneration facility in Stockton, California for a period of 28 years.

3. The fuel for Diamond's cogeneration facility was walnut shells, a by-product of Diamond's nut business.

4. Under the PPA, Diamond was required to deliver its full contract capacity to PG&E five days per week, 13 hours per day, at a capacity factor of at least 80% (excluding maintenance outages).

5. From 1984 until 2004, Diamond generally delivered capacity to PG&E pursuant to the PPA.

6. In September 2004, PG&E placed Diamond on probation pursuant to the terms of the PPA because of Diamond's failure to deliver its full contract capacity during August 1984.

7. At the same time PG&E placed Diamond on probation, PG&E gave Diamond notice that it would be required to demonstrate by November 2005 that Diamond could reliably deliver capacity at its contract commitment of 4,150 kW.

8. On July 26, 2005, Diamond merged with and into Diamond Foods, and as a result the PPA was assigned to Diamond Foods by operation of law.

9. When Diamond Foods failed to meet the November 2005 deadline, PG&E informed it that as of December 1, 2005, PG&E would reduce the capacity commitment and payments under the PPA to 3,601 kW, the level at which Diamond Food's cogeneration plan appeared to be able to operate reliably.

10. In late October 2005, PG&E learned through a newspaper article that Diamond Foods had closed its cogeneration facility and discharged the facility's employees.

11. On November 21, 2005, PG&E sent a letter to Diamond Foods demanding that it generate energy sufficient to fulfill its commitments under the PPA, or PG&E would deem the PPA terminated as of December 1, 2005.

12. PG&E's November 21, 2005 letter also demanded that if Diamond Foods would not be providing capacity at the full rate specified in the PPA, then Diamond Foods must return capacity overpayments representing the difference between the 21 years during which Diamond and Diamond Foods did provide capacity, and the 28-year period during which Diamond had agreed to provide capacity when it signed the PPA in 1984.

13. In addition to the demands in its November 21, 2005 letter, PG&E also withheld payments from Diamond Foods for the capacity and energy it had delivered to PG&E in September and October 2005.

14. After Diamond Foods did not respond to the November 21, 2005 letter, PG&E filed the PG&E Complaint in January 2006. In this complaint, PG&E sought the repayment of excess capacity payments totaling $1.35 million, based on the difference in capacity prices specified in the PPA for a QF that agreed to provide firm capacity for 28 years versus one that agreed to provide firm capacity for only 21 years.

15. In its answer to the PG&E Complaint, Diamond Foods alleged that PG&E had suffered no damage as a result of the shut-down of the Diamond Foods cogeneration facility, because PG&E had less expensive capacity available to it. Diamond Foods also asserted that PG&E's demand for the return of excess capacity payments amounted to an attempt to enforce an unlawful penalty clause.

16. At the same time it filed its answer, Diamond Foods also asserted cross-claims against PG&E seeking the payments that had been withheld for September and October 2005, as well as an accounting for the payments due from PG&E for the period from 1984 through 2005. Diamond Foods also asserted cross-claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment.

17. The parties commenced settlement negotiations in 2006 that continued into 2007 and resulted in a tentative settlement in April 2007.

18. The terms of the tentative settlement had to be renegotiated, and PG&E and Diamond Foods did not execute a final settlement until April 30, 2008.

19. The settlement calls for (a) termination of the PPA between the parties as of December 1, 2005, (b) payments by Diamond Foods to PG&E, (c) PG&E and Diamond Foods to give each other general releases of all claims they have or may have against each other, whether known or unknown, and (d) a dismissal with prejudice of the PG&E Complaint and of the cross-claims asserted by Diamond Foods against PG&E.

20. Implementation of the above-described settlement agreement is contingent upon approval by the Commission.

21. PG&E has filed under seal a full copy of its application and the settlement agreement pursuant to Pub. Util. Code § 583. PG&E has also filed public, redacted versions of the settlement agreement and its application, both of which omit only the amount of the payments Diamond Food proposes to make to PG&E.

22. Notice of the filing of PG&E's application appeared in the Commission's Daily Calendar on July 25, 2008.

23. No protest to the application has been filed.

24. A hearing is not necessary.

25. PG&E has requested that it be allowed to pass on to ratepayers the payments it will be receiving from Diamond Foods through either the ERRA or the MTCBA, as appropriate.

1. In view of the costs of trying and handling an appeal in PG&E's action against Diamond Foods, plus the risk that a jury would not accept PG&E's theory of liability against Diamond Foods, the proposed settlement reasonably reflects the risks and costs of continued litigation.

2. In view of the risks summarized in COL 1, the proposed settlement fairly resolves the disputed issues between the parties, and will help to conserve public and private resources.

3. In view of the risks summarized in COL 1, the proposed settlement falls within the range of possible outcomes that would have resulted if PG&E and Diamond Foods had continued to litigate their dispute.

4. In view of the fact that PG&E's action against Diamond Foods has been pending for over two years, and that it has entailed extensive discovery and other pretrial practice as well as the involvement of outside counsel on both sides, it is clear that the parties' settlement negotiations have been at arms' length and without collusion, have involved effective representation on both sides, and have occurred after enough time has elapsed so that each party could make a realistic assessment of its odds of prevailing in the litigation.

5. The dispute between PG&E and Diamond Foods presents a colorable claim that raises substantive issues of both law and fact.

6. In view of COLs 1-5, the proposed settlement between PG&E and Diamond Foods is reasonable in light of the whole record, consistent with law, and in the public interest.

7. PG&E's application for an order approving the proposed settlement should be granted, subject to the conditions set forth in the following order.

8. PG&E should be allowed to recover and pass on to ratepayers through the MTCBA, the amount of the payments it will be receiving from Diamond Foods.

9. PG&E's motion to file under seal, pursuant to Pub. Util. Code § 583, (a) the full, unredacted version of its application, and (b) the full, unredacted version of the July 17, 2008 declaration of Shari Hollis-Ross (to which the full, unredacted version of the settlement agreement between the parties is attached as Exhibit 1), should be granted.

ORDER

IT IS ORDERED that:

1. The application of Pacific Gas and Electric Company (PG&E) for an order approving the Settlement Agreement between PG&E and Diamond Foods Inc. (Diamond Foods), which Settlement Agreement is attached as Exhibit 1 to the July 17, 2008 Declaration of Shari Hollis-Ross in support of the application, is granted.

2. The payments received by PG&E from Diamond Foods pursuant to the Settlement Agreement approved herein shall be credited by PG&E to ratepayers through the Modified Transition Cost Balancing Account, subject only to PG&E's prudent administration of the Settlement Agreement.

3. The July 17, 2008 motion of PG&E for leave to file confidential materials under seal is granted with respect to (a) the full, unredacted version of the application, and (b) the full, unredacted version of the July 17, 2008 declaration of Shari Hollis-Ross in support of the application, to which full, unredacted version of the Settlement Agreement is attached as Exhibit 1. The aforesaid materials are placed under seal for a period of two years from the effective date of this decision, through and including December 20, 2010, and during that period the material so protected shall not be made accessible or disclosed to anyone other than Commission staff except upon the further order or ruling of the Commission, the assigned Commissioner, the assigned Administrative Law Judge (ALJ), or the ALJ then designated as Law and Motion Judge. If PG&E believes that further protection of the aforesaid materials is needed after December 20, 2010, then PG&E may file a motion stating the justification for further withholding of these materials from public inspection, or for such other relief as the Commission's rules may then provide. Such a motion shall explain with specificity why the designated materials still need protection in light of the passage of time involved, and shall attach a clearly identified copy of the ordering paragraphs of this decision to the motion. Such a motion shall be filed at least 30 days before expiration of the protective order set forth in this paragraph.

4. Application 08-07-029 is closed.

This order is effective today.

Dated December 18, 2008, at San Francisco, California.

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