VI. FERC Jurisdictional PPA

In its application, Edison requests that the Commission approve its proposal to enter into a PPA with MVL, after Edison acquires MVL as a wholly-owned subsidiary, and support the concept that the PPA will be a 30-year, cost-of-service contract, that will give investors adequate assurance of regulatory commitment and cost recovery under the FRD. By choosing this mechanism, the PPA will be reviewed and approved by FERC, instead of being reviewed by this Commission as part of an application for a CPCN. As referenced above, parties were asked to brief whether this proposed mechanism was in the public interest from a ratepayer perspective, and then there was ample development on the record during the evidentiary hearing on this issue.

Edison has made its position quite clear: in the absence of legislation in California that would secure assurances of full and reasonable cost recovery to investors, parallel to what the federal FRD does, Edison will only go forward with the Mountainview application if the PPA is submitted to and approved by FERC. Edison argues that investors require the certainty that the FRD provides.

Following up on this idea, we find it reasonable that if legislation is enacted that secures cost recovery of the Mountainview investment over the life of the asset, Edison shall file an application, within 60 days of the effective date of the legislation, proposing to terminate the PPA and put the facility in rate base under our jurisdiction.

To address the concerns of many intervenors, Edison states that under its proposal both this Commission and FERC have review and oversight, sequentially. This application is before this Commission first, then, if we give our approval, it goes on to FERC. Although many intervenors are critical of FERC's actions during the energy crisis, Edison reminds us that concerned market-based contracts-this PPA is a cost-based contract.

Edison attempts to allay the fears of the naysayers by arguing that the PPA is consistent with the concept of cost-based rates and provides the Commission with adequate review to ensure that those costs are reasonable. As the Commission reviews the application it has an opportunity to thoroughly examine and approve the PPA's pricing terms and all the costs Edison ratepayers are required to pay, including all cost control mechanisms that limit or preclude future costs and expenses.

No party participating in the hearings and filing post-hearing briefs argued that the proposal by Edison to use a FERC jurisdictional PPA with an unregulated utility subsidiary is a superior mechanism to having Mountainview operate as a utility owned generation facility. That is why the Commission is urging Edison to proceed with the CPCN to own and operate Mountainview as a utility generation facility.

TURN has many concerns about the FERC jurisdiction and regulation, and proposes modifications that make the transaction more palatable for ratepayers. To begin, TURN wants to ensure that if FERC requires any changes to the PPA as a condition of approval, Edison is required to come back to this Commission to see if the modifications meet with our approval. Edison is agreeable to this suggestion and stipulates to seek the approval of this Commission if FERC proposes any modifications that have potential rate impacts.

Next, TURN wants Section 16.01, that allows for the buyer and seller to unilaterally make an application to FERC for a change in rates, changed. TURN fears that this provision could allow MVL to seek changes in the PPA at FERC-changes that could harm ratepayers. TURN characterizes this provision as a waiver of the Mobile-Sierra doctrine,⁷ the doctrine that specifies that when a utility and its customer have contracted for a particular rate and FERC has allowed it to become effective, (1) the utility cannot unilaterally modify the contract using a Section 205 filing; and (2) FERC cannot modify the contract under Section 206 using the just and reasonable standard. TURN is troubled that the PPA explicitly preserves unilateral rights, exempting changes from a public interest review, and allowing the more lenient just and reasonable standard.

Interestingly, TURN was not the only intervenor to focus on Section 16.01. IEP, EPUC, the Navajo Nation, and CAC also recommended amending this section to remove the Mobile-Sierra waiver allowing unilateral action on the part of Edison or MVL to change terms of the PPA .

ORA's primary focus on the jurisdictional issue is that the Commission cannot lawfully delegate its own ratemaking responsibilities and jurisdiction to FERC because the California Constitution, and the California Legislature confer ratemaking jurisdiction and authority on the Commission.⁸ ORA cautions the Commission that if it does cede its authority it will be for the full 30-year term of the PPA, and during that time all FERC approved costs, including capital additions, will be passed through to ratepayers. While FERC may provide assuages of cost collection for investors, ORA opines that this Commission provides superior proven California ratepayer protection to FERC and prefers that this Commission keep this control so that if a situations develop under the PPA that are harmful to ratepayers, the Commission will still have jurisdiction to address them. ORA urges the Commission to direct Edison to pursue and develop Mountainview as a pure utility project.

The Navajo Nation's first point is that Edison has not made a compelling argument that ownership of Mountainview through MVL is preferable to straightforward Edison ownership. The Navajo Nation is concerned that under the PPA, unlike where utilities own large generation projects, MVL's direct capital and operating and maintenance costs will be recovered entirely through the PPA, then Edison will recover those costs from its customers through ratemaking procedures by this Commission. The Commission will not have regulatory oversight to require justification of the operating and maintenance costs in regular rate case proceedings. The Navajo Nation is skeptical of Edison's claims that the Commission's continuing jurisdiction over Edison, but not over MVL, will suffice to ensure future ratepayer protections. From the perspective of the Navajo Nation, the Commission should focus on Mohave, a facility over which the Commission possesses full regulatory authority, making Mohave a much more desirable option.

IEP shares other parties' skepticism over the wisdom of having a 30-year contract outside this Commission's direct jurisdiction and prefers that Mountainview go forward as a utility owned facility. IEP does not view the PPA as a true, negotiated sales agreement because of the absence of the natural tensions that would exist between buyer and seller in a real bargained-for exchange. IEP also wonders how Edison can get the PPA through FERC within the February 29, 2004 timeframe.

EPUC and CAC urge the Commission to reject the application on the grounds that the proposal as structured by Edison does not allow the Commission to properly review Edison's market price acquisition of Mountainview and the FERC jurisdiction would deprive the Commission from insuring that rates charged by Mountainview are just and reasonable. For example, EPUC and CAC argue that the PPA is structured in a manner that "pre-approves" certain categories of costs, tying the Commission's hands in future reviews both by the contract terms and the filed rate doctrine.

Sequoia posits that the only choice before the Commission is whether the structure as Edison proposed is preferable to any other likely alternative. Sequoia suggests that if Edison does not go forward with this transaction, Mountainview most likely would be developed as a merchant facility and such sales would be subject to exclusive FERC jurisdiction. Sequoia raises the question whether the structure as proposed by Edison will give this Commission more oversight than a PPA entirely outside of the Commission's review.

AReM did not submit testimony, participate in cross-examination, or file post-hearing briefs, but did file a protest and a brief on the FERC jurisdiction issue. AReM's primary worry about the PPA as structured under FERC jurisdiction is the potential for stranded costs if certain contingencies occur. Agreeing that the regulatory environment is uncertain, ARem fears that if the suspension of direct access is lifted and a core/noncore structure is implemented for California's retail electric market, Edison would seek recovery of the stranded costs from its customers, both bundled and direct access. If Edison was prohibited from seeking the recovery of any stranded costs associated with the Mountainview PPA, especially from direct access customers, AReM is not against the proposal as framed by Edison.

CLECA filed a protest, submitted a brief on the FERC jurisdiction issue, and served direct testimony. CLECA does not automatically oppose the arrangement as presented by Edison just because it involves FERC's review of costs, but would prefer if Edison brought Mountainview to the Commission as a utility owned project subject to a CPCN application.

After careful analysis of the justifications advanced by Edison for the use of the FERC jurisdiction PPA, and the cogent arguments presented by the intervenors against the mechanism, we find ourselves in the same place as TURN: We prefer a straight utility-owned generation project, and argue that there are "vexing weaknesses" with the PPA. However, based on what we know today about Edison's financial situation, even though they have received investment grade ratings from Moody's, Fitch and Standard and Poor's, we concluded the most expeditious way to build Mountainview is as proposed; nevertheless, we believe the historical, rate-based approach would be better and should be viewed by Edison as an appropriate alternative. Edison should continue to evaluate the circumstances surrounding its investment and if conditions improve and Edison would be willing to make Mountainview a directly owned plant we would view this with considerable favor. If Edison changed the financing/ownership mechanism for Mountainview from a FERC jurisdictional PPA to a directly-owned utility plant, we would include Mountainview in rate-base and would adopt a new construction cost cap that approximates the cost limit proposed currently by Edison.

And, as discussed earlier, if legislation is enacted to secure cost recovery of a utility generation investment over the life of the asset, Edison is to file an application, within 60 days of the effective date of the legislation, seeking authorization to terminate the PPA and put Mountainview in rate base under Commission jurisdiction.

If Edison does proceed with the CPCN to acquire, develop, construct, own, and operate Mountainview as a utility-owned generation, it has all the authorization necessary to exercise the option agreement now, without any attendant risks and time delays associated with seeking FERC approval of the PPA.

We expedited the CPCN review because Edison's application tendered all of the elements required for a CPCN -- need, cost-effectiveness, cost cap, and environmental review, and the record addressed each element. In addition, we are addressing the issue of Edison's procurement needs in both this decision and in R.01-10-024. Until Edison submits and receives approval of its long-term plan, Mountainview can be reviewed under a "no regrets" criteria. In this perspective, Mountainview could be added as a highly cost-effective option under Edison's April filed plan. Similarly, there is no necessity for the Commission to conduct a CEQA review. Since MVL already completed the AFC certification process before the CEC, and CEC conducted an environmental analysis of the project before issuing CEC Decision (00-AFC-2) certifying the power plant, this Commission is exempt from CEQA requirements, and no further CEQA review is necessary to grant the CPCN.

However, if Edison does proceed for authorization to proceed with the FERC jurisdictional PPA, we approve the transaction, subject to the amendments and conditions set forth below.

We are approving the PPA because the record supports the findings that Mountainview is in the public interest. Edison has established a need for the power in light of its growth projections for the foreseeable future, and the expiring Department of Water Resources (DWR) and QF contracts. Although it is unclear if Edison has a need for the entire 1,054 MW of capacity in the years 2006 to 2008, Mountainview can meet Edison's immediate need for dispatchable peaking and intermediate capacity to mitigate forecasted near-term capacity shortfalls. Edison has demonstrated that it will need the base load resources Mountainview can provide about 2010.

The economics of Mountainview make it a cost-effective resource to meet Edison's short-term and long-term resource needs. The attractive purchase price coupled with its state-of-the-art low heat rate, environmental benefits, and its location in Edison's load center justify authorizing the transaction now, irrespective of the year in which the state has a need for additional generating capacity.

Following the evidentiary hearing, Edison submitted an amended PPA⁹ that proposed the following changes:

· Article I, adding definition of Environmental Costs, and revising definition of Capital Costs

· Section 6.03, revised to have seller responsible for environmental penalties

· Section 7.02, revised to have Edison solely responsible for all fuel costs

· Section 12.01, revised to reflect lower heat rate.

These proposed changes to the PPA are adopted.

In addition, the PD proposed adopting the following modifications, as suggested by TURN, many of which Edison agreed to and amended the terms of the PPA to reflect the changes:

· Any changes made by FERC to the PPA should be subject to subsequent CPUC review and approval prior to Edison accepting any modifications that have potential rate impacts.

· The PPA is changed to eliminate the explicit Mobile-Sierra waiver contained in Section 16.01. Edison amended Section 16.01 of the PPA to eliminate this waiver.

· Commission pre-approval is required in the event MVL seeks to make any capital expenditure referenced in Section 8.09 that exceeds $10 million unless emergency conditions require immediate action.

· The availability targets in the PPA that are tied to incentive payments, are increased by 2% for both summer and winter months.

· For the first ten years of the contract, all cost associated with the project will be the financial responsibility of all customers currently ineligible for direct access through a cost responsibility surcharge.

· There will be a cap of 5% of the total project cost estimates.

· Edison's request for rate recovery of its option payments to Sequoia if Mountainview is not approved or consummated is denied.

· Edison's proposed treatment of working capital is adopted.