BACKGROUND

In D.02-09-053 (the Contract Allocation Order), the Commission allocated thirty-five long-term DWR contracts with twenty-four counterparties to SCE, Pacific Gas and Electric Company (PG&E), and San Diego Gas and Electric Company (SDG&E).⁶ SCE was allocated nine of the thirty-five DWR contracts, four of which have gas tolling provisions and are the subject of SCE AL 1701-E.

The Contract Allocation Order determined that the three utilities shall assume operational responsibility for the contracts and are required to:

"...perform all of the day-to-day scheduling, dispatch and administrative functions for the DWR contracts allocated to their portfolios, just as they will perform those functions for their existing resources and new procurements. Legal title, financial reporting and responsibility for the payment of contract-related bills will remain with DWR."
(D.02-09-053, page 5)

In D.02-12-069 (the Operating Order decision), the Commission adopted the Operating Order under which the three utilities "will perform the operational, dispatch, and administrative functions for the DWR Contracts as of January 1, 2003,"⁷ given that the utilities and DWR were unable, at that point, to negotiate such an agreement on their own. The Operating Order decision found that the relationship⁸ between the utilities and DWR is accurately characterized as that of principal (DWR) and limited agent (each utility), in which DWR has the following authority:

"Assume legal and financial responsibility, and approve Utility's entering into transactions as DWR's limited agent, for the purchase (or sale, as the case may be) of gas, gas transmission services, gas storage services and financial hedges, and timely consent to Utility's performance of the operational and administrative responsibilities for such purchases under gas tolling provisions under the Allocated Contracts , including the review of fuel plans and consideration of alternative fuel supply, all as more specifically provided in the Fuel Management Protocols attached hereto as Exhibit B;" (D.02-12-069 , Attachment A, SCE Operating Order, Section 5.01b)

In addition, D.02-12-069 broadly outlined DWR's prospective responsibilities regarding the DWR contracts assigned to the utilities:

"In sum, as of January 1, 2003, DWR will: 1) retain legal and financial responsibility for the DWR contracts, 2) remain responsible for calculating the DWR revenue requirement and for submitting revenue requirements to the Commission, and 3) continue to service the bonds as issuer. DWR's responsibilities do not extend to conducting a reasonableness review of the utilities' portfolio dispatch decisions. That responsibility rests with the Commission." (D.02-12-069, page 14)

The purpose of the Gas Supply Plan was set forth in D.02-12-069 (the Operating Order):

"The utilities are responsible for preparing "Gas Supply Plans" detailing their strategies for procuring gas and proposed use of risk management instruments. These plans will set parameters under which the utilities will perform the various gas-related activities pursuant to the gas tolling provisions. The utilities shall file these plans for Commission approval through Advice Letter filings on a semi-annual basis. The Commission will review and approve these plans on an expedited basis. Following approval of the Gas Supply Plans, the utilities will negotiate with suppliers for gas supplies, transportation, and storage. Negotiated agreements will then be submitted to DWR for execution." (D.02-12-069, page 27)

On April 3, 2003, the Commission issued D.03-04-029 (the Operating Agreements decision) which, among other things, provided a concise overview of the operating agreement process between each of the three utilities and DWR:

"In D.02-09-053, the Commission directed the utilities to negotiate an operating agreement addressing contract administration services with DWR and jointly file such agreement with the Commission. D.02-12-069 was issued by the Commission as an "Operating Order" after concluding that the utilities had not succeeded in reaching an agreement with DWR.

D.02-12-069 allowed the utilities to continue negotiating with DWR to attempt to reach consensus on a mutually acceptable operating agreement, stating:




"We understand that DWR believes there is a realistic possibility that such an Operating Agreement can be worked out with the utilities through continued negotiations and we continue to support these efforts. The utilities may continue to negotiate with DWR to attempt to reach consensus on a mutually acceptable Operating Agreement. If such an agreement is reached, the utilities should submit the agreement to the Commission for approval and request termination of the Operating Order. Assuming that the agreement is substantially similar to the Operating Order we adopt today, we anticipate that it could be approved on an expedited basis, after the necessary public review and comment."

PG&E and SDG&E have submitted Operating Agreements for Commission approval via advice letter.⁹ However, SCE still opts to be governed by the Operating Order with respect to DWR contract administration.¹⁰ With regard to the Gas Supply Plans, the Commission stated that it will attempt to resolve any conflicting Commission-DWR mandates. However, the Commission determined that the utilities are to operate within Commission-defined boundaries, yet also adhere to specific DWR requirements:

"In response to SCE's concerns regarding how the Commission intends to resolve any conflicts between what the Commission approves and what DWR is willing to implement, we note that we expect the utilities to prepare and file comprehensive Gas Supply Plans describing their proposed methods of meeting gas supply needs. The Commission will approve or disapprove these methods and plans. We expect DWR to file comments on the utilities' Advice Letter filings as necessary to identify any concerns they may have regarding the plans. These concerns will be taken into account in the Commission's decision, however, in the event that DWR only authorizes a subset of what the Commission has approved, the utilities must operate within the limitations of DWR's approval. Similarly, if the Commission rejects portions of the Gas Supply Plans that DWR would otherwise authorize, we expect the utilities to operate within the limitations of the Commission's decision.
(D.03-04-029, pages 24-25, emphasis added)

The Commission also noted the similar but differing objectives of the Commission and DWR:

"Although the Commission's and DWR's objectives are very closely aligned, it is not reasonable to expect their objectives to be perfectly aligned due to the fact that the Commission and DWR have differing jurisdictions and responsibilities. For example, DWR is in the best position to determine the level of credit support available for utility purchases under the gas tolling agreements, and the Commission will not second-guess DWR's determination in this regard. We request that DWR provide written notification to the Commission regarding its approval or rejection of the utilities' Gas Supply Plans. (D.03-04-029, pages 24-25)

D.03-04-029 required the three utilities the file their respective Gas Supply Plans on April 17, 2003. SCE requested, and was granted, a one-day extension and filed SCE AL 1701-E on April 18, 2003. On April 21, 2003, SCE filed a "Substitute Sheet for 1701-E" which contained a slightly revised copy of the Gas Supply Plan submitted on April 18, 2003. Both copies of the Gas Supply Plan are the same, except that the April 21, 2003 copy added "confidentiality language that was inadvertently omitted from Appendix A" when first filed on April 18, 2003. Also on April 21, 2003, SCE filed "Supporting Workpapers" for AL 1701-E. The workpapers, on computer diskette, consisted of hourly forecasts of power prices and gas prices for the period May 1, 2003 through December 31, 2007.

D.03-04-029 also directed the utilities to circulate unredacted copies of their proposed gas supply plans to their Procurement Review Groups (PRGs) for review and comment.¹¹ The Commission originally established PRGs in D.02-08-071 in order "to ensure that interim procurement contracts entered into by the utilities [were] subject to sufficient and expedited review and pre-approval" by the Commission.¹² Individual PRGs are not parties to any proceeding. Instead, PRGs are intended to act in an advisory fashion regarding the respective utilities' confidential procurement plans and activities.