IV. Background

On January 17, 2001, Governor Gray Davis proclaimed a state of emergency when "unanticipated and dramatic increases in the price of electricity [ ] threatened the solvency of California's major public utilities, preventing them from continuing to acquire and provide electricity sufficient to meet California's energy needs..." thereby imperiling the "... safety of person and property within the state."⁹ In response to the crisis, Governor Davis ordered the DWR to procure electricity to mitigate the effects of the emergency. The State's General Fund loaned more than $6 billion to DWR, and DWR obtained an Interim Loan in the amount of $4.3 billion to purchase power during the electricity crisis.¹⁰

On January 19, 2001 Governor Davis signed Senate Bill (SB) 7X, which authorized DWR to purchase electric power for California consumers. On February 1, 2001, Governor Davis signed Assembly Bill (AB) 1X. AB1X, as amended by Senate Bill (SB) 31X (the Act),¹¹ requires that the Commission impose specific charges on electric customers sufficient to compensate DWR for its costs under the Act, including procuring and delivering power and issuing and paying bond principal and interest. (See, Water Code §§ 80110, 80134.)

In Decision (D.) 02-02-051, the Commission adopted the Rate Agreement. The Rate Agreement facilitates DWR's issuance of the bonds authorized by Water Code
§ 80130, and establishes a framework for discharging DWR's and the Commission's statutory obligations set forth in the Act. According to the terms of the Rate Agreement (and pursuant to the statutory scheme), the Commission will impose charges sufficient to provide for the payment of all bond-related costs incurred by DWR.

To meet these obligations, on June 6, 2002, the Assigned Commissioner's Ruling (June 6th ACR) initiated a new phase (Bond Charge Phase) in this proceeding for the purpose of setting a bond charge to recover the bond-related costs incurred by DWR. The June 6th ACR further noted that D.02-02-051 did not decide whether a bond charge should be levied on customers to the extent they purchase power from an ESP (namely, DA customers), but directed that the Commission consider this issue in a future decision. The proceeding leading to that future decision would provide an opportunity for parties to present all legal and policy considerations relevant to reaching that decision. The June 6th ACR stated that these policy issues would be addressed in R.02-01-011. Finally, the June 6th ACR noted that there would be coordination between the Bond Charge Phase and R.02-01-011.

On July 23, 2002, a Prehearing Conference (PHC) was held at the Commission in San Francisco, at which time the Administrative Law Judge (ALJ) and parties discussed and resolved procedural issues identified in a Joint Case Management Statement.

On July 26, 2002, the ALJ issued a ruling that clarified the scope of this proceeding, including its relationship with R.02-01-011. In particular, expanding upon the ACR, this ruling stated:

"R.02-01-011 will make the policy determination concerning whether and how DA and departing load (DL) customers bear responsibility for the costs of financing these bonds. This proceeding, in contrast, will determine the bond charge rates and recovery mechanisms for raising the revenues needed to finance the bonds."¹²

The ruling ordered that a workshop should be held on the first date scheduled for hearings in order to allow the parties the chance to resolve some of the outstanding issues and discovery disputes. Furthermore, in response to discussions during the PHC, the ruling addressed the novel situation pertaining to discovery. The ruling explained that Section 80110 of the California Water Code sets forth, along with other duties, DWR responsibility for conducting any review of the reasonableness of the revenues required to finance the bonds. The ruling also noted that the Commission and parties to the proceeding require information to ensure that any bond charge adopted by this Commission is supported by facts. Finally, the ruling noted that in the Rate Agreement, DWR agreed to participate and provide "any other materials necessary to facilitate the Commission's completion of its proceedings, taken in connection with the establishment of Power Charges or Bond Charges by the Commission."¹³

On July 29, 2002, the parties participated in the workshop, discussing the testimony provided by DWR. In addition, the parties discussed how, in light of the clarification of the scope of the proceeding, they could withdraw testimony that pertained to the policies under examination in R.02-01-011. Finally, parties agreed on a series of scenarios that could be used to estimate the charges that would result from alternative policies and methodologies for setting the bond charge.

Three days of hearings were held on July 30, 31 and August 1, 2002. Parties filed opening briefs on August 9, 2002 and reply briefs on August 16, 2002.¹⁴

In addition, on August 5, 2002, PG&E filed a "Motion to Compel Responses to Data Requests and Production of Documents by DWR" (Motion to Compel). On August 9, 2002, DWR responded to the Motion to Compel with a Memorandum served on all parties to this proceeding. On August 13, the ALJ presided over a telephonic Law and Motion Hearing. On August 16, an ALJ Ruling memorialized the resolution of the various discovery issues and accepted into evidence late-filed Exhibits 2, 3 and 101.

On August 12, the Commission authorized its General Counsel to issue a certificate that financing documents consistent with an "Amended and Restated Addendum of Material Terms of Financing Documents" comply with Section 7.10 of the Rate Agreement.¹⁵ This addendum permits DWR to increase the amount of net bond proceeds to $11.95 billion.

On August 13, DWR submitted a transmittal note and "Supplemental Testimony of Douglas Montague on behalf of the California Department of Water Resources." The transmittal note states that this is "significant additional material relied upon in proposed determination of a revenue requirement," thereby indicating that the material is part of DWR's administrative proceeding to determine its 2003 revenue requirement. This material deals with DWR's bond-related costs. The cover sheet of the Supplemental Testimony notes that DWR is "voluntarily submitting Prepared Testimony in this proceeding." We will identify this filing as Reference Exhibit 1-a.

On August 14, SCE submitted a copy of comments (dated August 14, 2002) submitted to DWR in its administrative proceedings on DWR's 2003 revenue requirement. SCE noted that it served these comments on participants in this proceeding.