II. DISCUSSION

PG&E claims the Decision is in error for two reasons. First, it alleges that the Disputed ISO Charges are DWR costs that cannot be allocated to PG&E. Second, it asserts that the Decision conflicts with and is preempted by the FERC's Orders. Most of the application's arguments hinge on PG&E's main assertion: DWR, and only DWR, bears legal responsibility for the Disputed ISO Charges. PG&E bases its assertion on the FERC's November 7 and March 27 Orders, which required the ISO to invoice DWR for all charges associated with DWR's role as the creditworthy buyer of the utilities' net short positions. As discussed below, PG&E's reliance on the FERC's orders for its assertion is misplaced, and provides no basis for finding error.

A. The Disputed ISO Charges Can Be Allocated to PG&E

PG&E raises a number of legal arguments why the Disputed ISO Charges should be considered DWR's costs. Most of these arguments are based on state law.

PG&E first asserts that the Disputed ISO Charges are "part of the costs DWR is incurring to meet the needs of utility customers." (Application, at p. 2.) However, whether or not the amounts billed to DWR merely because DWR is creditworthy should be treated the same as costs associated with DWR's purchase of the net short is the question at issue here, not a point that can be assumed. A review of the Disputed ISO Charges indicates that these charges are not related to DWR's procurement of the utilities' net short, but are related to PG&E's provision of electricity to its customers using PG&E's generation.⁴ PG&E cannot demonstrate that these costs are the same as DWR's energy costs by simply stating that DWR incurs them to meet the needs of utility customers.

In addition, this claim does not meet the standards for an application for rehearing. An application must "set forth specifically the . . . grounds on which the applicant considers the decision or order to be unlawful." An applicant may not seek judicial review on grounds not set forth in an application for rehearing. (Pub. Util. Code, § 1732.) This requirement gives the Commission an opportunity to review and correct its orders before they are challenged in court. PG&E's claims about the nature of the Disputed ISO Charges are not clear enough to allow the Commission to review its order and address any claim of error. Thus, we reject PG&E's claims on this basis.

Next, PG&E makes a number of claims that are based, in part, on its erroneous assumption that the Disputed ISO Charges are uniquely DWR's responsibility. The application claims that under AB 1X "the mechanism" to recover the Disputed ISO Charges is DWR's revenue requirement. (Application, at p. 2.) This claim would only be correct if the Disputed ISO Charges were, in fact, DWR's responsibility. AB 1X only governs costs that DWR properly incurs as part of its power purchase program, and does not address the recovery of other costs. (Water Code, § 80134, subd. (a)(2); D.02-02-051, at p. 29.) Further, AB 1X does not mandate that DWR's revenue requirement contain these specific costs. (Water Code, § 80110.) Nor does AB 1X make DWR the exclusive payer of all costs that can be characterized as having some relationship to DWR's program. The statute clearly contemplates that utilities remain obligated to serve customers in their service territories, and that DWR's main role is as a supplier of power. (Water Code, §§ 80002, 80002.5.)

Similarly, the application claims that DWR costs cannot be "shift[ed]" to PG&E. (Application, at p. 3.) Again, this claim is conclusory. The basis for the claim that it is improper to order the utilities to pay these costs is because the Disputed ISO Charges are uniquely DWR's responsibility. We do not need to reach this claim because the Decision does not do this. The Decision determines that the Disputed ISO Charges are the ultimate responsibility of the utilities and should be included in the utilities' URG revenue requirements. (Decision, at p. 22.)

The application also maintains that the Commission cannot include the Disputed ISO Charges in PG&E's 2002 revenue requirement because there is no independent legal requirement that PG&E assume responsibility for these costs. "The Commission has no authority . . . to compel a utility to assume liability for a cost for which it is not contractually or legally liable." (Application, at p. 3, fn. 3.) However, our authority is not as limited as PG&E suggests. The Commission is not required to include in a utility's revenue requirement only those costs that some other agency or legal requirement has already allocated to that utility. As the regulator of electric utility retail rates, the Commission has authority to establish what components will be included in a utility's rates. The Public Utilities Code gives the Commission specific powers to regulate utilities, and Section 701 gives the Commission power to "supervise and regulate" and to "do all things . . . necessary" in the exercise of its powers. Thus, we have discretion to determine that utilities should pay for items incidental to the provision of electricity in their service territories - whether or not a third party would be liable if the utility did not pay.

Only when the Commission evinces an "officious desire to run [a utility's] business," and that desire has "nothing to do with the `relationship of the utility to the customer'," or does not "affect the manner in which the utility provides the affected services," can a utility successfully assert that the Commission's orders are outside its authority. (General Tel. Co. v. Public Utilities Com. (1983) 34 Cal.3d 817, 827.) However, that is not the case here. (Id., distinguishing Pac. Tel. & Tel. Co. v. Public Utilities Com. (1950) 34 Cal.2d 882.) The Disputed ISO Charges are part of the provision of electric service to PG&E's customers. Thus, the only question here is whether they are part of the costs of providing electricity assumed by DWR or whether they are costs that remain with PG&E. By its terms, AB 1X did not absolve utilities of their responsibility to provide service to customers, and we acted within our discretion to include these charges in PG&E's revenue requirement.

In a similar vein, the application asserts that the Disputed ISO Charges must be borne by DWR because the FERC has ordered the ISO to send invoices to DWR. (Application, at p. 3.) As discussed in more detail below, this argument reads too much into the FERC's orders. The FERC's determination that the ISO must invoice DWR for the Disputed ISO Charges is not a determination that the utilities will not bear "ultimate" responsibility for paying those charges. Indeed, as noted above, the November 7 Order appears to avoid the question of whether DWR was ultimately responsible for these charges. The order simply relies on DWR's role as a Scheduling Coordinator to require payment; it does not adjudicate who is responsible for the debt. (97 FERC ¶ 61,151, at pp. 61,659-61,660.) Thus, contrary to PG&E's allegation, the Decision does not encourage DWR to "shirk" its responsibilities under the November 7 Order. Rather it deals with a different issue: who has ultimate responsibility for costs that DWR is immediately responsible for paying.

The application further claims that the Decision errs because it contradicts past decisions. According to PG&E, the Commission has already decided that utilities should not be "responsible for DWR's ISO costs." (Application, at p. 3.) The decisions the application refers to in support of this claim are not on point. In D.01-01-061, the Commission ordered utilities to set aside a portion of the money collected in rates to pay for power purchased by DWR. This decision implemented Section 200 of the Water Code, which was enacted under SB 7X. Later, following the enactment of AB 1X, D. 01-02-077 determined that any shortfall should be recovered through DWR's revenue requirement. The application mistakenly draws from these two decisions the conclusion that the Commission has ruled that utilities should not be responsible for the specific ISO charges at issue here. In fact, as the decision addressing the rehearing of D.01-01-061 points out, the Commission only addressed how costs should be handled under the two different statutes. (D.01-05-035, at p. 5.) D.01-01-061 properly addressed any shortfall created by Water Code 200 charges in light of the rate freeze then in effect, but AB 1X ensured that no shortfall would exist.

PG&E additionally argues that its customers, but not PG&E directly, are responsible for the Disputed ISO Charges because the costs in question are costs incurred by DWR "to provide power pursuant to AB 1x 1." (PG&E Application, at p. 4.) This argument is without merit, since the issue is not how the costs are to be recovered from customers (DWR's revenue requirement or utility retail rates), but rather who bears ultimate responsibility for Disputed ISO Charges. As discussed above, under AB 1X, DWR is only responsible for costs associated with procuring energy and energy-related services for the net short. All other costs are PG&E's responsibility. In this instance, the Commission concluded that the Disputed ISO Charges are not associated with DWR's provision of the utilities' net short. Thus, AB 1X is not applicable in this instance and our determination that these costs are ultimately the responsibility of the utilities does not demonstrate error. We do note, however, that the Decision does not clearly state that recovery of the Disputed ISO Costs is not governed by AB 1X. Accordingly, we modify the Decision, at page 16, to include this clarification.

PG&E also makes a policy argument that the Disputed ISO Charges do not need to be included in PG&E's revenue requirement because DWR may revise its own revenue requirement to recover these costs. (Application, at p. 4.) This argument does not demonstrate any legal error. In addition, there are a number of policy arguments that favor including these amounts in PG&E's revenue requirement. As the Decision points out, both SDG&E and Edison entered into letter agreements with DWR to reimburse DWR for certain ISO charges which have been paid by DWR. (Decision, at p. 15.) Based on these letter agreements, we exercised our discretion and determined that the Disputed ISO Charges were properly PG&E's ultimate responsibility. The "ISO charges assigned to PG&E are for the most part consistent with those assigned to Edison and SDG&E in their respective letter agreements with DWR." (Decision, at p. 15.) Furthermore, PG&E's current rate structure already recovers amounts for these charges and there is no policy reason to have DWR recover amounts for these same costs. If PG&E is collecting money from ratepayers for these items, PG&E should bear responsibility for them.

Finally, PG&E appears to imply that a "commingling" of revenues could occur as a result of the Decision. (Application, at p. 4, fn. 5.) Commingling of revenue raises certain bankruptcy concerns. PG&E collects payments from customers for electricity provided by both itself and DWR. If revenue from the sale of DWR's electricity is not properly segregated from revenue from the sale of PG&E's electricity, DWR's revenue might become subject to bankruptcy court jurisdiction. The application for rehearing suggests that ordering PG&E to pay DWR for ISO Charges that are determined to be PG&E's responsibility might create such a commingling. This is not the case. PG&E will not be collecting monies for the ISO charges on behalf of DWR. Rather PG&E will remit to DWR PG&E's own funds to reimburse DWR for ISO charges that DWR has paid on PG&E's behalf. Thus, monies collected by PG&E for the sale of DWR's power will remain segregated, according to the Commission's various orders, and are not

affected by this Decision.

B. The Decision Is Not Preempted by the FERC's Orders.

PG&E's assertions that the Decision is preempted is primarily based on its reading of the March 27 Order. According to PG&E, the March 27 Order amounts to a determination both that DWR is responsible for all charges invoiced by the ISO and that PG&E has no responsibility for any of these charges. (Application, at p. 5.) Thus, it maintains that the Commission "cannot compel PG&E to reimburse DWR."⁵ (Application, at p. 5) The application asserts that the Commission simply does not have this authority, "absent agreement between DWR and PG&E." (Application, at p. 5.)

PG&E overstates the March 27 Order by concluding that the FERC affirmatively decided that the Disputed ISO Costs should be paid by DWR and not by the utilities. Indeed, both the November 7 and March 27 Orders merely indicate that the ISO should bill DWR for the Disputed ISO Charges and that DWR should pay those bills. The FERC addressed what it perceived as the immediate problem with the functioning of the electricity market, the inability of the ISO to pay generators.⁶ Thus, the fact that the FERC ordered the ISO to send invoices to DWR is not dispositive of the question of who (DWR or the utilities) is ultimately liable for these costs. In fact, the March 27 Order specifically refuses make such a determination. Referring explicitly to the utilities' arguments that they "should not be retroactively liable for these DWR purchases," the FERC stated that: "since the May 11 Compliance Filing did not include any agreement between the ISO and DWR or any purchasing agreements with PG&E and SoCal Edison, it is beyond the scope of this proceeding for the Commission to determine if the non-creditworthy UDCs remain ultimately liable for the purchases DWR procured on their behalf and for which it is immediately responsible for paying." (98 FERC ¶ 61,355, at p. 62,426 (emphasis added).)⁷

Furthermore, the cases cited by PG&E are not on point, since they address situations where the FERC has explicitly ruled on an issue, and a state Commission has made a different determination. In Nantahala Power & Light v. Thornberg (1985) 476 U.S. 953, FERC required a public utility to calculate costs for wholesale ratemaking by assuming it received a 22.5% share of certain low-priced power. The state Commission, on the other hand, required the utility to set retail rates assuming that it received a 24.5% share of the low-priced power. The Court criticized the state Commission for acting "despite the fact" that FERC had adopted a different allocation, and for "nowhere tak[ing] into account FERC's allocation of the same power." (Nantahala, supra, 476 U.S. at pp. 960-961.)

Similarly, in Public Utilities Com. of Cal. v. F.E.R.C. (D.C. Cir. 1998) 143 F.3d 610, 615, the FERC specifically considered the extent of its jurisdiction and held that the particular issue was, under the terms of the Natural Gas Act, within the FERC's jurisdiction, and outside the jurisdiction of the states. Thus, the CPUC tariff at issue in that case "was illegal precisely because the CPUC intruded into [the] FERC's jurisdiction over the interstate transportation of

natural gas." (143 F.3d at p. 617.)⁸ In Mass. Dept. Pub. Util. v. FERC (1st Cir. 1984) 729 F.2d 886, the state commission ordered a utility to take an action that FERC explicitly ruled was impermissible. Again the court based its ruling on the FERC's explicit determination that the state commission's order contravened the statute granting FERC authority.⁹

Unlike the situations in these cases, the FERC in this instance has not explicitly ruled that DWR has ultimate financial responsibility for the Disputed ISO Charges. Rather, it has simply ruled that DWR "is immediately responsible for paying" these charges.¹⁰ (98 FERC ¶ 61,355, at p. 62,426.) Accordingly, the FERC orders do not preempt the Decision.

PG&E also points out that the Disputed ISO charges involve more than just energy charges. (Application, at p. 6.) PG&E may be arguing that such charges are properly allocated to DWR, and that the FERC's allocation should not be disturbed. However, as discussed previously, the FERC's conclusions that DWR is to be invoiced these non-energy charges is based on its reading of the ISO tariff and Scheduling Coordinator Agreement. This Decision does not change the FERC's determination that the ISO is to invoice DWR for these charges; rather it determines whether DWR should be reimbursed for these charges, as they are ultimately the financial responsibility of the utilities. Thus, there is no conflict with FERC's orders and no preemption.

PG&E's assertion that the Commission has no authority to "compel" PG&E to reimburse DWR for DWR's expenses is based on its arguments that the Disputed ISO Charges are "DWR's FERC tariff obligations" and this Commission cannot require PG&E to reimburse the party who paid those charges. (Application, at p. 5.) This claim presupposes the conclusion that the FERC has asserted its jurisdiction and determined who should bear ultimate responsibility for the Disputed ISO Charges. However, this is not the case. As the March 27 Order makes clear, the FERC determined that DWR has an "immediate" responsibility to pay was based on DWR's responsibilities as a Scheduling Coordinator, but avoided determining which party had "ultimate" responsibility for these costs. Accordingly, the Commission has not been preempted by the FERC in this instance. Indeed, as caselaw suggests, the FERC could properly decide to defer jurisdiction to the Commission on this matter, especially since the issue of ultimate cost responsibility is part of the determination of utility retail rates, an area clearly within the Commission's jurisdiction. (See, e.g., New York v. F.E.R.C., supra, 535 U.S. __; discussion in footnote 8, supra.)

Finally, the application points out that the March 27 Order was issued two days after the Decision. (Application, at p. 5.) The application appears to suggest that the Decision must be altered because its only basis for ordering PG&E to refund the Disputed ISO Charges to DWR was that applications for rehearing of the November 7 Order remained outstanding. This is not the case. The March 27 Order serves to reaffirm the November 7 Order. Additionally, it clearly notes that "it is beyond the scope of this proceeding for the [FERC] to determine if the non-creditworthy UDCs remain ultimately liable" for the Disputed ISO Charges. (98 FERC ¶ 61,355, at p. 62,426.) Thus, the Decision is consistent with the FERC's March 27 Order.