II. Background

A. The Application

SDG&E filed this application on October 30, 1997 seeking approval of a settlement package totaling $5.095 million containing settlements with three bidders that SDG&E stated may be "winning bidders" in the Update auction, subject to the outcome of certain judicial and regulatory proceedings challenging the legality of the Update ("winning bidders"). The total capacity of the "winning bidders" in SDG&E's solicitation is 501.5 megawatts (MW) of effective capacity, and the three settling bidders represented 108 MW of that effective capacity.

SDG&E's settlement package did not contain settlements with all of the bidders the utility designated as "winning bidders." SDG&E did not settle with PG&E National Energy Group (PG&E NEG)¹ and Kenetech Windpower, Inc. (Kenetech) ² (nonsettling bidders), whose bids together represent 393.5 MW of effective capacity. SDG&E requested that the Commission approve the settlement package as reasonable and terminate SDG&E's Update solicitation because SDG&E had reached an impasse with PG&E NEG and Kenetech.

In December 1998, the Commission issued Decision (D.) 98-12-074 which approved the settlement package with respect to the three settling "winning bidders." We also deferred consideration of SDG&E's request to terminate its Update, and directed SDG&E and the nonsettling bidders to engage in further negotiation before we addressed the request, under the following rationale.

"Because of the passage of time since the July [1995] ACR issued, and the uncertainty which exists until this Commission acts on Edison's settlement package, we believe it may be beneficial to give SDG&E and the nonsettling bidders that SDG&E has designated as "winning bidders" additional time to discuss settlement before we address SDG&E's request to terminate its Update solicitation. We, therefore, direct these parties to resume settlement discussions, as set forth in this decision.

"SDG&E and certain nonsettling bidders described above should continue to use the guidelines set forth in the July ACR, as modified and clarified by this decision, when they resume negotiations. The Commission will judge any remaining settlements presented by SDG&E as reasonable at the time they are entered into, and not at the time the July ACR issued." (D.98-12-074 at p. 21.)

After issuance of D.98-12-074, SDG&E and the nonsettling bidders engaged in further negotiations, which to date have proven unsuccessful. SDG&E does not believe that the nonsettling bidders are entitled to any compensation as a result of their participation in the Update solicitation. The two nonsettling bidders disagree. In March 1999, PG&E NEG declared negotiations with SDG&E to be at an impasse and requested that the Commission impose binding arbitration to define and quantify PG&E NEG's alleged "bid reliance costs." In July 1999, SDG&E declared its settlement discussions with Kenetech were at an impasse. At the March 28, 2000, prehearing conference, the Assigned Commissioner and Administrative Law Judge (ALJ) unsuccessfully explored whether Commission-assisted mediation might help break the impasse. The ALJ also denied the nonsettling bidders' requests that the Commission order binding arbitration. On July 13, 2001, the ALJ requested further briefing on the following issue which this decision addresses:

Should the Commission grant SDG&E's request in this application to terminate the Update solicitation at this time? This question includes but is not limited to the following sub-issue: whether nonsettling Update bidders who were designated by SDG&E as "winning bidders" in the Update solicitation are entitled to any remuneration from SDG&E?

B. The Update

In order to set this application in context, we set forth a brief summary of the Update. In the late 1980s, the Commission reviewed the utilities' resource planning activities. On July 7, 1989, the Commission issued Order Instituting Investigation 89-07-004, which officially established the Update proceeding as the forum for reviewing the utilities' long-term resource plans during a designated planning period and addressing generic issues related to utility purchases of electricity from a broad class of nonutility energy producers called qualifying facilities or QFs. ³ (See D.92-04-045, 44 CPUC2d 6, 22.) For each utility, the Commission specified a certain amount of capacity and the benchmark prices for that capacity to be offered for possible deferral through QF bidding. This solicitation was known as the Final Standard Offer 4 (FSO4) auction process.

On August 11, 1993, SDG&E commenced its solicitation in the Update in compliance with our orders. On December 9, 1993, Southern California Edison Company (Edison) suspended its solicitation, informed the Commission of unanticipated bidding strategies, and reargued the wisdom of a number of policy implementation methods we had previously determined (e.g., second price auction, renewable set-aside.) On December 21, SDG&E filed a Petition for Modification of certain Update decisions, which raised issues similar to Edison. In June 1994, the Commission issued D.94-06-047, 55 CPUC2d 274, which modified portions of the FSO4 to address unanticipated bidding strategies and recommenced the solicitation schedule. The Commission later stayed D.94-06-047 on its own motion in D.94-10-039, 56 CPUC2d 620.

A number of parties, including SDG&E, filed applications for rehearing or petitions to modify the June 1994 decision. These pleadings culminated in D.94-12-051, 58 CPUC2d 300, in which the Commission denied, inter alia, SDG&E's application for rehearing of D.94-06-047, but granted a limited rehearing at the request of Flowind Corporation in order to review and determine the as-available wind bidders. The Commission also lifted the stay it issued in D.94-10-039, and required SDG&E to negotiate additional terms and to submit FSO4 contracts to the Commission for approval by advice letter filing. Under the then-applicable schedule, SDG&E was required to commence FSO4 contract negotiations with "winning bidders" after January 30, 1995, file contracts for Commission approval by May 28, 1995, and execute the FSO4 contracts by July 27, 1995.

Following issuance of D.94-12-051, SDG&E and Edison filed petitions for enforcement with the Federal Energy Regulatory Commission (FERC) that challenged the Commission's reinstatement of the solicitation and sought to enjoin the Commission from implementing its orders and to be relieved from having to enter into contracts with bidders designated as "winning bidders."

On February 23, 1995, FERC issued an Order on Petitions for Enforcement Action Pursuant to Section 210(h) of PURPA in Docket Nos. EL95-16-000 and EL95-19-000 (February 23 FERC Order).⁴ FERC ruled that this Commission's implementation of the Update violated PURPA and FERC's implementing regulations because this Commission did not consider all sources of electric capacity in setting avoided cost prices. The FERC concluded:

"Because the California Commission's procedure was unlawful under PURPA, Edison and SDG&E cannot lawfully be compelled to enter into contracts resulting from that procedure. At this juncture, there are no executed contracts. However, in order to avoid parties spending further time and resources in pursuing contracts that would be unlawful under PURPA, we believe it would be appropriate for the California Commission to stay its requirements directing Edison and San Diego to purchase pending the outcome of further administrative procedures in accordance with PURPA. We also encourage the utilities and QFs to reach a settlement that would be consistent with PURPA." (February 23 Order, 70 FERC ¶ 61,215 at 61,677-78.)

The February 23 FERC Order precipitated the filing of various motions to stay the Update. On March 7, 1995, the Assigned Commissioner issued an interim stay of the Update solicitation and called for comments on four alternative actions that the Commission might take. On March 16, the full Commission on its own motion extended the interim stay, "in order to permit additional time to assess the impact of the FERC order on the Update proceeding and to review the Commission's legal and policy options. A stay will also suspend the deadlines for the signing of contracts by the utilities and will avoid what may be the needless expenditure of time and resources by the parties and the Commission in order to resolve the rehearing issues in this proceeding." (D.95-03-019, 59 CPUC2d 52, 53.)

The Commission and numerous parties filed requests for rehearing and clarification of the February 23 FERC Order. FERC issued a notice stating its intent to treat these requests for rehearing as motions for reconsideration. FERC issued its Order on Requests for Reconsideration on June 2, 1995, upholding the February 23 FERC Order. (71 FERC ¶ 61,269.)

On July 5, 1995, the Assigned Commissioner issued an Assigned Commissioner's Ruling (July ACR) that memorialized the public discussion among Commissioners at the June 21, 1995 meeting, and stated that the Commission was unanimous in finding settlement the most appropriate next step in the Update proceeding, as long as ratepayer interests were advanced and protected by the settlements. (July ACR at p. 7.)⁵ The July ACR set forth criteria by which the Commission would evaluate settlements with bidders, and directed each utility to file a single application containing all the settlement agreements it wished the Commission to approve. (Id. at p. 11.)

Subsequent to the issuance of the ACR, Edison submitted a settlement with its "winning bidders" that the Commission approved in D.98-12-072, and SDG&E reached a settlement with some of its "winning bidders" that the Commission approved in D.98-12-074. In order to seek closure of this proceeding, the ALJ issued the July 13, 2001 ruling requesting comment on whether or not the Commission should terminate SDG&E's Update.

C. The Parties' Response to the ALJ's July 2001 Questions

SDG&E, PG&E NEG and Kenetech (jointly), as well as ORA, responded to the ALJ's ruling. SDG&E urges the Commission to (1) terminate its 1993 Update solicitation and (2) declare that PG&E NEG and Kenetech (the nonsettling bidders) are not entitled, either on legal or equitable grounds, to recover from SDG&E or its customers any bid development and reliance costs allegedly incurred in connection with the Update solicitation. SDG&E argues that the Commission should terminate the Update solicitation because FERC declared the solicitation invalid and the Commission should abide by this determination. SDG&E also argues that because the electric industry regulatory climate has changed dramatically since 1993, continuing the Update serves no public purpose and is not in the public interest.

According to SDG&E, Commission decisions as well as the request for bids (RFB) it issued in 1993 make clear that these nonsettling bidders are not entitled to any remuneration from SDG&E. SDG&E also argues that it has negotiated in good faith with PG&E NEG and Kenetech, and moves to strike a large portion of the bidders' opening brief, which SDG&E states violates Rule 51.9 and the parties' confidentiality agreements by disclosing to the Commission the alleged content of settlement negotiations.

ORA agrees with SDG&E that: (1) the bidders do not have a valid claim against SDG&E; (2) SDG&E is under no obligation to reach a settlement with the bidders; and (3) ratepayer interests are not advanced by settlement. ORA believes the Commission has authority to terminate the Update and urges it to do so.

PG&E NEG and Kenetech believe that no legal or equitable reason warrants the termination of SDG&E's Update solicitation at this time. If the Commission does so, PG&E NEG and Kenetech believe they would be wrongfully punished, arguing that they have complied with all relevant Commission Update-related decisions.

PG&E NEG and Kenetech state that the Commission cannot terminate SDG&E's Update solicitation because no settlements have been reached. These bidders argue that the Commission can only terminate SDG&E's solicitation upon making specific findings that: (1) SDG&E has complied fully with the July 1995 ACR and D.98-12-074; and (2) the failure to settle is directly attributable to PG&E NEG and Kenetech's unreasonable demands. PG&E NEG and Kenetech believe that the Commission should employ its resources to further facilitate a settlement of this matter, and urge that the Commission or a mediator review these bidders' costs for reasonableness. The bidders also believe the Commission should deny SDG&E's motion to strike, arguing that most of the settlement references made are either permissible broad generalities or public information.