Discussion

In deciding whether we should approve the proposed modifications to the Amended Servicing Agreement and related attachments, the Commission is mindful of the course of action we have taken in R.01-10-024 and in D.02-09-053. One of the goals of R.01-10-024 is to allow the utilities "to resume purchasing electric energy, capacity, ancillary services and related hedging instruments to fulfill their obligation to serve and meet the needs of their customers." (R.01-10-024, p. 1.)

In order for PG&E and the other utilities to undertake the operational responsibilities associated with the allocated DWR contracts beginning on January 1, 2003, certain operational arrangements and servicing arrangements need to be in place. With less than one month to go before the utilities are to take over the operational responsibilities for the DWR contracts, DWR and PG&E have been unable to agree on a mutually acceptable servicing arrangement. To ensure a seamless transition of the DWR contracts allocated to PG&E, while ensuring that DWR's legal and financial responsibilities for the DWR contracts continue to be fulfilled, it is imperative that servicing arrangements be in place before the end of 2002.

D.02-09-053 also required DWR to submit proposed operational agreements. As noted in the positions of the parties, certain provisions of the proposed operational agreement that DWR submitted may affect certain provisions of the proposed modifications to the Original Servicing Order and the related attachments. The proposed operating agreement is being considered by the Commission in R.01-10-024. Since DWR and the utilities have been unable to mutually agree on a proposed operational agreement, we believe that the Commission will concurrently adopt an Operating Order when a Servicing Order for PG&E is adopted.

On December 9, 2002, PG&E filed its comments on the draft decision regarding the Servicing Order, and DWR submitted its comments on the three draft decisions regarding the Servicing Order.

DWR's comments state that it is currently in discussions with PG&E regarding possible changes to the existing Servicing Order that was adopted in D.02-05-048, as a result of the Bond Charge Decision. According to DWR, DWR and PG&E have verbally agreed on a procedure to implement the bond charge remittance and DWR has provided PG&E with a draft of the proposed changes to the existing Servicing Order. DWR has also requested a cost estimate for the bond charge remittance process from PG&E. DWR's comments state that it hopes to reach a written agreement with PG&E with regard to these changes, and provide them to the Commission when the reply comments on the draft decision are due.⁴

DWR's December 9, 2002 submission also states that it reserves comment on the draft decisions which would adopt the Servicing Orders. DWR considers it premature to comment on these draft decisions because DWR has submitted a request pursuant to Water Code § 80106(b) to order the utilities to enter into an operating agreement with DWR, and that any Servicing Order adopted by the Commission must be consistent with that request.

We now turn to PG&E's concerns with the proposed modifications to the Original Servicing Order and the attachments.

One of the general concerns of PG&E is that the proposed modifications refer to an Operating Agreement that has not yet been adopted by the Commission. PG&E's comments to the draft decision notes the difficulty of making changes to the Servicing Order when that document contains so many cross-references to a proposed Operating Agreement. PG&E states that if PG&E and DWR are unable to resolve possible conflicts or ambiguities between the two documents, that they may need to file a petition for modification of any decision adopting the Servicing Order.

The proposed Operating Agreement is being examined by the Commission in R.01-10-024.⁵ Without a final Operating Agreement to work off of, we realize that it is difficult to make definitive revisions to the Original Servicing Order. However, since PG&E and the other utilities will take over the operational duties for the DWR contracts on January 1, 2003, including the sale of surplus energy, there is a definite need to have the operational and servicing arrangements in place by that time so that the operational transition for the DWR contracts can proceed smoothly.

Once the Commission adopts an Operating Order for the DWR contracts that have been allocated to the utilities, the utilities and DWR are free to suggest further modifications or refinements to the servicing arrangements so that the servicing arrangements fully conform to the adopted Operating Order. However, in the interim, the attached 2003 Servicing Order will serve as the ordering instrument by which PG&E shall conduct itself with respect to the energy supplied by DWR and allocated to PG&E.

Southern California Edison Company (SCE) raised a point in its comments to the draft decision regarding SCE's servicing order that has applicability to PG&E as well. SCE states in its comments that it has had discussions with DWR as to the possible terms and conditions that could be included in the Amended Servicing Agreement. Although it is unclear at this point whether such discussions will lead to an agreement, SCE seeks clarification from the Commission that SCE be allowed to seek the termination of any Servicing Order that may be adopted, with an executed agreement between SCE and DWR "which substantially and fundamentally comport with the terms and conditions set forth in the ... Servicing Order and the related attachments as they then exist." (SCE December 9, 2002 Comments, p. 11.)

We are receptive to reviewing a mutually agreeable servicing arrangement between PG&E and DWR, so long as the terms do not substantially deviate from what's adopted in today's 2003 Servicing Order. Should PG&E and DWR negotiate such an arrangement, PG&E is free to request that the Commission consider replacing the 2003 Servicing Order adopted in today's decision with the mutually agreeable arrangement.

PG&E is concerned about the venue in which the accounting and reporting procedures for the revenues from the sales of surplus energy will take place. Based on the draft decision regarding the Operating Order, the principles by which the utilities will calculate the revenues from the surplus energy sales is addressed in Exhibit C of the Operating Order. Exhibit C of the proposed Operating Order states in part that: "The principles herein, together with the applicable methods and calculations contained in the Servicing Arrangement, form a substantive component of the accounting protocols required to implement the Contract Allocation Order." Should there be a need to conform the methods and calculations for surplus energy sales contained in the 2003 Servicing Order with the Operating Order, we expect that DWR or the utilities will bring this to our attention.

PG&E is also concerned that financial risks are being allocated to PG&E without proper compensation. The other utilities have raised similar concerns in their comments to their respective servicing arrangements. PG&E's comments to the draft decision, and to the alternate draft decision of Commissioner Brown, points out that Section 3.1(c) of the proposed Servicing Order provides that if the utility sells surplus power to an entity that requires collateral, that the cost and obligation to post such collateral shall be the utility's responsibility. PG&E asserts that this approach is at odds with the legal and financial responsibility of DWR for these contracts. PG&E contends that requiring it to use cash to pay collateral for the sale of DWR's contracts, instead of using that cash to pay PG&E's creditors, may increase and prolong PG&E's reliance on the use of state resources. PG&E contends that it should not be required to post collateral for DWR.

We will accept DWR's proposed modification to sections 3.1.(c) and 3.1(d) of the Servicing Order. This is consistent with the Commission's goal of reducing the utilities' reliance on the use of state resources to fulfill their obligations to serve customers. As noted in the Operating Order decision, the collateral requirements are not imposed by the DWR contracts, but rather by exogenous variables such as the ISO tariff. With respect to the incremental costs associated with surplus energy sales, the Operating Order decision addresses the recovery of those costs.

PG&E and the other two utilities have expressed concern about the use of the term or phrase "deemed" and "or is deemed to have provided" in sections 1.58 and 2.2(c) of the proposed modifications to the Original Servicing Order. PG&E contends that the use of such term or phrase may be interpreted to broaden PG&E's remittance obligation to include power that is not actually supplied to customers by DWR.

We agree with PG&E. The use of the term or phrase starting with "deemed" could be interpreted to mean that another calculation of DWR energy is possible. We will delete the references in sections 1.58. and 2.2.(c) of the 2003 Servicing Order.

PG&E has expressed reservations about the reference to the "agency" relationship in section 2.3. PG&E continues to have concerns about being DWR's agent, when PG&E and DWR have not agreed to any agency. PG&E states that the references to PG&E acting as DWR's agent should be removed from the Servicing Order.

The decision regarding the Operating Order notes that the utilities are operating as DWR's agent for limited purposes, and that this limited agency reflects the nature of the capacity in which the utilities are undertaking these functions.

PG&E states that the indemnification provisions of the servicing arrangement are commercially unreasonable because they require PG&E to indemnify and hold DWR harmless for any failure of PG&E to act or perform in accordance with the terms of the servicing arrangement. Section 12 of the Original Servicing Order addresses indemnity. DWR has not proposed any modifications to this section, and PG&E has not proposed any language to clarify the indemnification issue. We refrain from crafting additional indemnification language for the Servicing Order. This issue is best left to DWR and PG&E to work out.

PG&E has also raised concerns about the information that DWR seeks in Service Attachment 2. DWR's October 8, 2002 submission only included the one page "Service Attachment 2," which described the "Title" of the seven sections. Service Attachment 2 also notes that this information is "To be provided by Utility." We will retain the Service Attachment 2 page as part of the 2003 Servicing Order, with the understanding that DWR and PG&E will need to discuss what kind of information DWR wants.

PG&E points out that in DWR's proposed modification of section 3 of Attachment B, that "DWR has again proposed the use of the phrase `total retail load'⁶ ... in an attempt to increase the amount of remittances PG&E would owe to DWR." PG&E asserts that the use of this phrase would exclude the Western Area Power Administration (WAPA) load, whereas the use of the phrase "total load" would include the WAPA load. PG&E states that DWR had raised this issue in the process leading up to D.02-05-048 and that this issue was specifically rejected in that decision.

We have reviewed the WAPA issue in D.02-05-048, and reviewed the proposed modifications that DWR is now seeking. We agree with PG&E that this issue has already been decided by the Commission, and that the WAPA load should be included. Accordingly, section 3 of Attachment B has been revised to use the phrase "total demand." In addition, "total demand" has been used in three places in section 3.(b) of Attachment B.

Another concern of PG&E is the timing of when PG&E shall make its remittances to DWR for the sale of surplus energy. Under section 4.2(g) and Attachment J, PG&E is to remit DWR's share of the surplus sales revenues on the first business day after the 20th day of the month following each delivery month. Such requirement would also apply to the revenues from ISO spot market sales, even though the revenues from such sales would not be realized until about 43 business days after the last day of a particular delivery month. PG&E contends that the funding of this lag period is not a wise use of PG&E's cash. PG&E also points out that Exhibit C of the proposed Operating Order addresses remittances, and that Exhibit C's resolution of the issue "is fair and workable to both parties." Attachment J of the proposed Servicing Order refers to Exhibit C of the proposed Operating Order. PG&E presumes that Exhibit C of the draft Operating Order will be adopted by the Commission, and that the provisions in Exhibit C should override any conflicting language in the proposed Servicing Order. PG&E proposes in its December 12, 2002 comments on the alternate draft decision of Commissioner Brown to the draft decision on the Servicing Order, that Section 4.2(g) of the proposed Servicing Order and Attachment J should be deleted.

In D.02-09-053, at page 46, we stated that although DWR remains financially responsible for paying all contract-related bills, we expect that the utilities will "verify the invoices and instruct DWR to pay the bills." This statement suggests that PG&E should not have to advance funds to DWR before DWR has to pay its invoices. The provisions in section 4.2(g) and Attachment J would require PG&E to remit payments within 20 days of each delivery month, which presumably does not match up with when the invoices are due. Exhibit C of the Operating Order, which is entitled "Settlement Principles For Remittances And Surplus Revenues," provides at page C-3 that the: "Revenues from a forward market sale shall not be distributed to the Parties until after Utility receives the revenues from the sales and any sale-related charges." In reference to "ISO Real Time Market Sales," Exhibit C states that the: "Revenues from delivery of surplus energy to the ISO real time market shall not be distributed to the Parties until after Utility receives payment for final monthly invoice from the ISO for the month in which the surplus energy was delivered." Both of the quoted passages mean that PG&E should not have to remit revenues from the energy sales to DWR until PG&E has received payment. Accordingly, we shall change the reference in Section 4.2(g) of the Servicing Order to the 20 days to make it consistent with Exhibit C of the Operating Order.

Attachment J of the proposed Servicing Order is premised on remitting a preliminary amount of the surplus energy sales revenues to DWR on the first business day after the 20th day of the month. However, as discussed above, Exhibit C of the Operating Order specifies that revenues from forward sales, and sales to the ISO, are to be remitted to DWR after the utility has received payment. In order to make the Servicing Order consistent with the Operating Order, proposed Attachment J should be deleted from the 2003 Servicing Order that we adopt in this decision. In addition, other references to Attachment J that appear in the following sections of the 2003 Servicing Order shall also be deleted: Table of Contents; 1.32.5.; 2.2.(e); 2.6.; 4.1.; 4.2.; 4.2.(e); 4.2.(f); 4.2.(h); 4.2.(i); 5.1.; 5.5.; and 14.17.

PG&E states that Attachment I of the proposed Servicing Order should be revised. Attachment I addresses real-time energy and ISO invoiced charges, and Section 13 of Attachment I provides for the automatic termination of Attachment I upon the occurrence of certain conditions. Upon such termination, Section 13 provides that "nothing in this Attachment I shall establish, bind or allocate financial responsibility for either party for ISO invoiced charges from such time forward."

PG&E contends that the problem with Attachment I is that the final settlement from the ISO for the period from January 17, 2001 to December 31, 2002, or whenever PG&E assumes administration for DWR, may not be issued until after termination. PG&E states that Attachment I should be revised to clarify that expenses incurred prior to termination should continue to be the responsibility of DWR or PG&E respectively, including prior day adjustments that are the results of the ISO settlement process. PG&E contends that this would remove any ambiguity that DWR would directly pay the ISO for charges incurred when DWR had administrative control of the contracts."

PG&E's proposed change to Section 13 of Attachment I would clarify that the financial responsibility for the final ISO settlement continues even after the termination of Attachment I. We do not believe that such a clarification is needed because it is evident that the settlement should be paid by whoever incurred the charges. In addition, we are reluctant to make that change since Attachment I has been in existence for a number of months already.

The majority of the proposed modifications to the Amended Servicing Agreement reflect the actions taken in the Contract Allocation Decision, and are also linked to the proposed Operating Agreement. All of the proposed modifications, as shown in the attached 2003 Servicing Order and as discussed above, are consistent with the directives ordered in D.01-09-015, D.02-02-051, D.02-02-052, and D.02-09-053.⁷

The marked and clean versions of the 2003 Servicing Order, which are attached to this decision as Appendix A and Appendix B, are approved. PG&E shall be directed to comply with the terms and conditions of the attached 2003 Servicing Order.