Decision 02-09-023 September 5, 2002

Before The Public Utilities Commission Of The State Of California

Application of Southern California Edison Company (U 338-E) for Authority to Institute a Rate Stabilization Plan with a Rate Increase and End of Rate Freeze Tariffs.	Application 00-11-038
Emergency Application of Pacific Gas and Electric Company (U 39 E) to Adopt a Rate Stabilization Plan.	Application 00-11-056
Petition of The Utility Reform Network for Modification of Resolution E-3527.	Application 00-10-028

ORDER MODIFYING DECISION (D.) 02-03-058 AND

DENYING REHEARING OF THE DECISION, AS MODIFIED

This order modifies Decision (D.) 02-03-058 (Decision) and denies Pacific Gas and Electric Company's (PG&E) application for rehearing of the Decision, as modified. The Decision determined that certain "Disputed ISO Charges," which had been paid by DWR, were properly part of Pacific Gas and Electric Company's (PG&E) and Southern California Edison Company's (Edison) utility retained generation (URG) revenue requirements. Thus, the Decision ordered PG&E and Edison to reimburse the California Department of Water Resources (DWR) for these charges.

I. BACKGROUND

The dispute between DWR and the utilities over these ISO charges arises from the Federal Energy Regulatory Commission's (FERC) proceedings addressing the creditworthiness requirements in the California Independent System Operator's (ISO's) tariff. These requirements apply to, inter alia, Utility Distribution Companies (UDCs) (such as PG&E and Edison) and to Scheduling Coordinators (such as the California Energy Resources Scheduling division (CERS) of DWR ). (See ISO Tariff § 2.2.3.2) Scheduling Coordinators and UDCs that do not meet the ISO tariff's creditworthiness requirements are subject to a limitation on their ability to trade with, and may not submit schedules to, the ISO. (See generally, California Independent System Operator (March 27, 2002) 98 FERC ¶ 61,355, at p. 62,419; ISO Tariff, § 2.2.7.3.) In order to be creditworthy, an entity must either maintain an "Approved Credit Rating" as defined in the ISO tariff, or post security. (Id.)

In January 2001, the deterioration of PG&E's and Edison's financial condition prevented them from meeting the ISO's creditworthiness requirements. Thus, in a February 14, 2001 order, the FERC determined how the creditworthiness provisions should be implemented in light of the utilities' financial problems. The FERC kept the creditworthiness requirements in place, allowing an exception only for UDCs scheduling their own generation. However, the UDCs were required to obtain a creditworthy party to cover their net short position. (98 FERC ¶ 61,355, at p. 62,419.) DWR subsequently agreed to serve as the creditworthy buyer for PG&E's and Edison's net short positions. (Id.)

On November 7, 2001, the FERC issued an order (November 7 Order) addressing, among other things, a motion filed by several California generators and municipal utilities (collectively, "Generators"). The motion alleged that the ISO had violated both the creditworthiness requirements in its tariff and the FERC's February 14 order. Generators argued that the ISO violated its own tariff by failing to enforce the credit support requirements of the tariff. Generators also asserted that the ISO was permitting DWR to schedule power for the net short loads without requiring DWR to meet the explicit responsibilities and financial obligations imposed on a Scheduling Coordinator. (California Independent System Operator (November 7, 2001) 97 FERC ¶ 61,151, at p. 61,655; see also Id., n.16.) In answer to the motion, the ISO asserted that the FERC's February order only required a creditworthy buyer for purchases, and the fact that DWR stood behind the utilities rendered the utilities "creditworthy" for purposes of the ISO's tariff. (97 FERC ¶ 61,151, at p. 61,656.) Moreover, since the ISO settlement provisions did not provide for third party guarantors, the ISO believed that PG&E and Edison, and not DWR, should be invoiced for the power purchases backed by DWR. (Id.) The ISO asserted that its tariff did not provide for sending bills to third party guarantors. Thus, based on its interpretation of the FERC's February 14 order, the ISO did not invoice DWR for the charges associated with procuring power to cover the utilities' net short positions. The ISO's stance resulted in a serious practical problem: since the utilities (the ones invoiced for DWR-backed power purchases) did not pay the ISO's invoices, the ISO was not collecting money for its charges. As a result, the generators were not being paid by the ISO.

In the November 7 Order, the FERC disagreed with the ISO's tariff interpretations and stated that: "[w]e also disagree with the ISO and DWR's representation that under the Tariff the ISO must invoice the non-creditworthy UDCs, or that a new contractual arrangement is necessary for DWR to assume financial responsibility as the guarantor for the non-creditworthy UDCs." (97 FERC ¶ 61,151, at p. 61,659.) The FERC tied the requirement that a creditworthy counterparty back the transaction to its must-offer requirement, noting that "[t]he must offer requirement assumes a matching must pay requirement. (97 FERC ¶ 61,151, at p. 61,659.) The FERC concluded that "because DWR functions as a Scheduling Coordinator for [the] net short position of PG&E and Edison, DWR must abide by the requirements of the ISO Tariff and the Scheduling Coordinator Agreement." (Id.) Under the ISO tariff, the ISO is required to "invoice, collect payments from, and distribute payments to DWR, as the Scheduling Coordinator . . ., including transactions where DWR serves as the creditworthy counterparty for the applicable portion of PG&E's and SoCal Edison's load." (Id.) In part, this finding relied on the settlement provisions of the ISO tariff, negating the ISO's claim that DWR was "a guarantor, . . . not the debtor under the ISO settlement procedures." (Compare 97 FERC ¶ 61,151, at p. 61,656 with 97 FERC ¶ 61,151, at p. 61,659, fn. 25.)

A dispute between DWR and the utilities over ultimate responsibility for certain ISO charges emerged after this order. Under the ISO tariffs, Scheduling Coordinators are assessed a variety of charges. (See ISO Tariff § 11.1.6.) In a December 6, 2001 letter to Commissioner Brown, DWR outlined the different charges levied by the ISO and indicated that it believed that DWR was "ultimately" responsible for what DWR called "energy-related costs," while the utilities were "ultimately" responsible for various "non-energy costs" (such as penalties incurred by the utilities in the operation of their own generation, the ISO's Grid Management Charge (GMC), and transmission costs).¹ DWR engaged this issue at the FERC in a December 12, 2001 Protest of an ISO filing (which was in turn a response to the November 7 order). DWR protested that:

instead of invoicing CERS only for costs relating to the "net short position, i.e., power that is not self-supplied by the UDCs" (Order, at 61,653 n.2), the ISO has invoiced CERS for amounts (1) relating not only to "power that is not self-supplied," but also covering all costs associated with load of the UDCs and (2) admittedly in excess of the IOUs' net short position. (Protest of DWR to California ISO Compliance Filing, dated December 12, 2001, at p. 5.)

PG&E and Edison, along with PG&E's unsecured creditors, asserted in response to DWR's protest that the November 7 order required DWR to actually assume liability for all ISO charges. (98 FERC ¶ 61,355, at pp. 62,423, 62,426.)

In an order issued March 27, 2002 (March 27 Order), the FERC clarified its creditworthiness requirements and denied rehearing of the November 7 Order. The March 27 Order reaffirms that DWR should pay the ISO charges associated with its role as the Scheduling Coordinator and creditworthy buyer for PG&E's and Edison's net short positions. (98 FERC ¶ 61,355, at p. 62,434.) However, the March 27 Order also denies a request from PG&E and Edison that the ISO tariff be revised to clarify that PG&E and Edison should not be responsible for the Disputed ISO Charges. Most significantly for purposes of this rehearing request, the FERC held that "it is beyond the scope of this ruling to determine if the non-creditworthy UDCs remain ultimately liable for the purchases DWR procured on their behalf and which it is immediately responsible for paying." (98 FERC ¶ 61,355, at p. 62,426.)

The Decision was issued on March 25, 2002, ahead of the Commission's main decision on Utility Retained Generation (URG). The Commission found that ISO cost issues were ripe for decision, in part because DWR and Edison had reached agreement about how the Disputed ISO Charges should be handled. (Decision, at p. 2.) Furthermore, the Decision noted that if it had not acted at its March 21st meeting, it would have faced a requirement to raise DWR's 2001-2002 revenue requirement by $609 million.² (Decision, at p. 2.)

PG&E filed a timely application for rehearing of the Decision.³ We have carefully considered all the arguments presented by PG&E and are of the opinion that no grounds for rehearing have been demonstrated. However, we note that the Decision should be modified to clarify the nature of DWR's recovery of the Disputed ISO Costs and to correct two clerical errors. Therefore, D.02-03-058 is modified as discussed below, and PG&E's application for rehearing of the Decision, as modified, is denied.