Assignment of Proceeding

Michael R. Peevey is the Assigned Commissioner and Carol A. Brown is the Assigned Administrative Law Judge.

Findings of Fact

1. D.03-12-059 authorized Edison to enter into a PPA with MVL for electricity from Mountainview.

2. The PPA required FERC approval for the project before Edison could exercise its option to acquire MVL.

3. Ordering Paragraph #2 of D.03-12-059 required Edison to seek approval of this Commission if FERC required any modifications to the PPA that had potential rate impacts.

4. On February 25, 2004, FERC issued order 106 FERC ¶ 61, 183 conditionally approving the PPA, subject to Edison submitting a compliance filing reflecting the FERC ordered changes to the PPA.

5. The FERC ordered changes to the PPA has only a minimal timing impact on rates.

Conclusion of Law

The FERC required changes to the PPA approved by this Commission in D.03-12-059 do not create any detrimental rate impacts for Edison customers and we adopt and approve the FERC changes.

ORDER

IT IS ORDERED that The Commission accepts the conditions required by the Federal Energy Regulatory Commission (FERC) as modifications to the Power Purchase Agreement we approved in Decision 03-12-059. A copy of FERC Order 106 FERC ¶ 61, 183 is attached as Attachment A.

This order is effective today.

Dated March 16, 2004, at San Francisco, California.

MICHAEL R. PEEVEY

President

CARL W. WOOD

GEOFFREY F. BROWN
SUSAN P. KENNEDY

Commissioners

I reserve the right to file a dissent.

/s/ LORETTA M. LYNCH

Commissioner

106 FERC ¶ 61, 183

UNITED STATES OF AMERICA

FEDERAL ENERGY REGULATORY COMMISSION

Before Commissioners: Pat Wood, III, Chairman;

Nora Mead Brownell, and Joseph T. Kelliher.

Southern California Edison Company, Docket No. ER04-316-000

On behalf of Mountainview Power

Company, LLC

ORDER CONDITIONALLY ACCEPTING PROPOSED RATE SCHEDULE

AND REVISING AFFILIATE POLICY

(Issued February 25, 2004)

1. In this order, we are conditionally accepting for filing a Power Purchase Agreement (PPA) between Southern California Edison Company (Edison) and Mountainview Power Company, LLC (Mountainview), an exempt wholesale generator (EWG). We will condition our acceptance, among other things, on Mountainview submitting a compliance filing reflecting ordered changes to the PPA, committing to filing a FERC Form 1 annually, maintaining its books and records in accordance with the Uniform System of Accounts, and limiting its market activity to cost-based sales to Edison. This action benefits customers by accommodating the construction of new generation in California while ensuring that Mountainview's rates are just and reasonable.

BACKGROUND

2. On December 19, 2003, Edison filed, on behalf of Mountainview, its to-be-acquired subsidiary, a proposed PPA between itself and Mountainview. Mountainview owns a yet-to-be completed 1054 MW state-of-the-art generating plant.⁴ Edison seeks to exercise an option to purchase the project by purchasing Mountainview from its current owner, Sequoia Generating LLC (Sequoia).⁵ Edison claims that its purchase of Mountainview will restore stability to the marketplace, enhance reliability and provide substantial benefits to Edison's ratepayers, but Edison requests Commission approval of the PPA before it will exercise its option. The PPA is not a market-based contract; instead, it is a cost-based rate schedule which includes ratemaking features that give Mountainview incentives to control discretionary costs that it will incur and pass on to Edison. The PPA is structured as a tolling agreement, giving Edison the responsibility for gas procurement, hedging, and plant dispatch.

3. Edison states that it has elected to use this subsidiary-PPA structure because it is just beginning to return to financial health, and because significant unresolved policy issues in California "demand the increased assurance of cost recovery that a FERC-filed, cost-based PPA provides."⁶ In other words, Edison "requires greater security of investment recovery than is available under traditional state-jurisdictional ratemaking."⁷ The utility asserts that this is a unique request, unlikely ever to be repeated, because of the urgent need for new generating capacity in California. Edison notes that the Public Utilities Commission of the State of California (CPUC) has found that this transaction is in the public interest.⁸ In summary, the CPUC ruled that ratepayers will be better off with Mountainview than without it.⁹

4. The Energy Policy Act of 1992 amended the Public Utility Holding Company Act of 1935 (PUHCA) to allow an EWG to sell power to an affiliated utility only if the state regulatory authority makes certain findings, described in Section 32(k) of PUHCA (Protection Against Abusive Affiliate Transactions).¹⁰ The CPUC has made the requisite PUHCA findings, noting among other things that: (1) the PPA does not violate any state law; (2) the PPA does not confer any unfair competitive advantage; and (3) the CPUC has sufficient regulatory authority, resources, and access to books and records of both Edison and Mountainview.¹¹

5. Applicants request that the PPA be made effective upon execution, which is expected to be at the financial closing. Because the closing may not occur within 120 days from the date of the filing, Applicants seek waiver of the 120-day advance notice requirement.

NOTICE, INTERVENTIONS AND COMMENTS

6. Notice of Edison's filing was published in the Federal Register, 69 Fed. Reg. 63 (2004), with motions to intervene and protests due on or before January 9, 2004. The CPUC filed a notice of intervention and comments in support of the proposal. Timely motions to intervene raising no substantive issues were filed by AES Corporation, Constellation Power Source, Inc. and Constellation New Energy, Inc., and Pacific Gas and Electric Company. Timely motions to intervene and comments in support of the filing were filed by California Small Business Roundtable and California Small Business Association (CSBR/CSBA), Consumers First, Electric Consumer Alliance, Sequoia Generating LLC (Sequoia), and The Utility Reform Network (TURN). The following filed timely motions to intervene and protests: California Manufacturers and Technology Association (CMTA), Calpine Corporation (Calpine), Cogeneration Association of California (CAC), Electric Power Supply Association and Western Power Trading Forum (jointly, Competitive Suppliers), Energy Producers and Users Coalition (EPUC), FPL Energy, LLC (FPL), Independent Energy Producers Association (Independent Producers), Reliant Resources, Inc. (Reliant), and the Silicon Valley Manufacturing Group (SVMG).

7. In addition, members of Congress submitted comments supporting the proposal stressing the need for new generation capacity in California. One Congressman opposed the filing. Several California Assemblymen also commented, requesting a full evidentiary hearing.

8. On January 14, 2004, Water and Energy Consulting filed a late motion to intervene on behalf of Black Mesa Trust and To' Nizhoni Ani' (WEC).

9. On January 26, 2004, Edison, Sequoia, and TURN filed answers responding to the protests. Independent Producers, Calpine, and CMTA subsequently filed replies.

POSITIONS OF THE PARTIES

10. Supporters of the filing, including several organizations representing consumer interests,¹² claim that the Mountainview project is needed so that Edison can meet its immediate requirements for dispatchable peaking and intermediate capacity and its long-term need for baseload resources. Supporters also state that the PPA will not have an adverse effect on competition. The CPUC concludes that Mountainview is "a very good deal for Edison's customers"¹³ and that the plant's location in Edison's load center makes the plant an efficient addition to its system. The CPUC also notes that the Mountainview project has already received a license for the project and an environmental review has been concluded. Consumers First and the Electric Consumer Alliance state that the PPA will promote reliability of California's energy supply and foster a more cost-effective, consumer-responsive energy market. Finally, while the CPUC and TURN both would prefer that the development of the Mountainview project be completed as a traditional utility-owned rate-based investment, they support the proposed PPA since it is cost-based and in many respects mirrors the cost recovery treatment of a rate-based investment.

11. Opponents of the filing argue that Edison has not shown that the Mountainview project is either needed or in the public interest. Additionally, opponents argue that Edison has failed to have an open and fair competitive bidding process prior to completing the Mountainview transaction and that the absence of competitive procurement will strike a blow to competitive markets in California. Specifically, Calpine and FPL argue that, had a request for proposals been available, they would have participated. Opponents also argue that Edison should be required to satisfy the Commission's Edgar standard¹⁴ regarding affiliate transactions as well as affiliate abuse concerns. The Independent Producers raise numerous concerns regarding the PPA. For example, they argue that the terms and conditions are unjust, unreasonable and unduly discriminatory or preferential. They also raise issues regarding the development of the PPA's rates and charges such as its use of incentives, escalation indices, and other cost-of-service concerns. SVMG argues that the approval of the Mountainview PPA will initiate re-regulation in California. CAC and EPUC argue that the Mountainview project must not displace the need for existing and future qualifying facility (QF) needs and must comply with the provisions of the Public Utility Regulatory Policies Act of 1978 (PURPA).

DISCUSSION