4. Summary of the Application

Section 851 requires a utility to obtain Commission approval prior to leasing utility property to a third party. Any lease consummated without Commission authority is void. In A.00-08-022, as amended, PG&E requests retroactive approval of the Crockett lease pursuant to Section 851. PG&E states that it did not seek Section 851 approval prior to consummating the Crockett lease in December 1994 because PG&E believed at the time that Section 851 did not apply. PG&E represents that two Commission decisions issued after the lease was signed convinced PG&E to obtain Commission approval for the lease.3

PG&E maintains that the Crockett lease should be approved because of the benefits it provides to ratepayers and the public. In particular, the lease is a crucial element in PG&E's ability to obtain 240 MW of power from the CCP. PG&E argues that the need for the power provided by the CCP was amply demonstrated during the recent electricity crisis when power shortages caused rolling blackouts throughout much of California.

PG&E states that the lease does not impair its ability to serve the public. This is because the lease limits Crockett's use of PG&E's property to purposes associated with the delivery of power to the grid. The lease also prohibits Crockett from interfering with PG&E's public utility operations, from allowing any waste, nuisance, or hazard on PG&E's property, and from constructing anything on PG&E's property without PG&E's prior consent.

PG&E requests authority to make minor modifications to the Crockett lease without having to obtain additional Section 851 approval for the modifications. Specifically, because the term of the lease is quite long, PG&E anticipates there may be a need or desire to: (1) adjust the term of the lease; (2) make minor adjustments to the boundaries of the leased land; or (3) revise provisions in the lease pertaining to insurance, workers' compensation, hazardous waste, and the annual rent.

PG&E argues that it would be a mistake for the Commission to grant prospective, but not retroactive, authority for the Crockett lease. According to PG&E, a denial of retroactive authority would void the lease for the time period prior to the Commission's decision. PG&E is concerned that Crockett's obligations under the lease may be nullified during the time the lease is deemed void. Under the lease, Crockett is obligated to: (1) comply with all laws and regulations relating to hazardous substances; (2) indemnify PG&E for any loss, expense, or liability caused by hazardous substances on the leased premises; and (3) indemnify PG&E for any loss, expense, or liability resulting from property damage, death, or bodily injury occurring on the leased premises. These provisions protect PG&E and its ratepayers from liability associated with Crockett's use of PG&E's property. However, if the lease is deemed void, PG&E believes that Crockett might argue that the provisions protecting PG&E and its ratepayers are not enforceable. This could have potentially significant adverse consequences for PG&E and its ratepayers, according to PG&E.

PG&E offers several reasons why the Commission should not order PG&E to unwind the lease. First, the power provided by the CCP is critical to the State's energy supply. Second, it may not be possible to remove the generation tie on the leased property without the approval of the Independent System Operator. Third, PG&E cannot predict Crockett's response if the Commission orders PG&E to unwind the lease. Finally, Section 851 provides that utility property is not, as a matter of law, useful or necessary to the utility "as to any...lessee...dealing with such property in good faith for value." PG&E states that because it receives fair value under the Crockett lease, Section 851 may prevent the Commission from voiding and unwinding the lease.

General Order (GO) 69-C provides utilities with blanket authority under Section 851 to enter into license agreements with third parties that allow for "limited uses" of utility property. PG&E contends that the Crockett lease satisfies the requirements of GO 69-C. PG&E maintains that although it is not required to obtain Section 851 approval for the Crockett lease, PG&E decided to seek such approval out of an abundance of caution. However, if the Commission finds that the Crockett lease is void for any period of time under Section 851, PG&E asks the Commission to find that the agreement is authorized by GO 69-C.

In the event the Commission finds the Crockett lease is void under Section 851, PG&E asks the Commission to exempt the lease from Section 851 pursuant to Section 853(b). Section 853(b) provides, in part, that the Commission "may ...exempt any public utility...from...[Section 851]...if it finds that the

application thereof with respect to the public utility...is not necessary in the public interest." PG&E states that the Commission has previously exempted transactions from Section 851 to avoid the harsh consequences associated with the voidance of agreements.4

PG&E presents several arguments why the Commission should use its authority under Section 853(b), if necessary, to exempt the Crockett lease from Section 851. First, the lease serves the public interest because it has made additional electric generation available for public consumption. Second, the lease allows generation tie facilities to be sited next to existing transmission facilities, thus avoiding the creation of an additional transmission facility site. Finally, prior to the Crockett lease, the Commission directed PG&E to facilitate the development of cogeneration capacity.5 PG&E asserts that the Crockett lease is directly responsive to the Commission's mandate.

PG&E argues that it should not be fined for its failure to obtain Section 851 approval prior to consummating the Crockett lease. PG&E claims that its failure to obtain advance approval has not caused physical or economic harm to others. The only harm that might have occurred is to the regulatory process. PG&E maintains that this harm is mitigated by PG&E's respect for the regulatory process as demonstrated by its acting quickly to disclose the lease and request

retroactive approval. PG&E also believes that imposing a fine might deter other utilities from disclosing similar violations. PG&E notes that in several recent decisions where a utility was found to have violated the law, the Commission declined to impose penalties or imposed only a nominal fine.

Crockett obtained authority from the CEC to construct the CCP and the associated generation tie, including the facilities eventually constructed pursuant to the Crockett lease. In D.93-10-039, the Commission granted PG&E a CPCN to construct the generation tie. For reasons that are not fully explained in the record of the instant proceeding, Crockett constructed the generation tie instead of PG&E. Crockett did not obtain a CPCN from the Commission to construct the generation tie.

PG&E and Crockett represent that the Commission's jurisdiction is limited to investor-owned utilities.6 Crockett states that it did not apply for a CPCN because it does not consider itself to be an "electric public utility" subject to the Commission's jurisdiction.7 Crockett adds that even though it is not a regulated by the Commission, Crockett elected to comply with the conditions set forth in Ordering Paragraph (OP) 1.c. of D.93-10-039 to the extent applicable to construction. OP 1.c. states, in relevant part, as follows:

1. A certificate of public convenience and necessity is granted to [PG&E] to construct, operate, and maintain a single-circuit 230-kV underground transmission line from the Crockett facility to PG&E's existing Lakeville-Sobrante No. 1 Line, and related facilities (transmission project) in the manner described in this application subject to the following conditions:

Crockett asserts that when it constructed the generation tie, it followed all Commission-related statutes, rules, and regulations applicable to PG&E, including GO 128, GO 131, and Rule 21. As a result, Crockett believes the Crockett lease facilities comply with all Commission requirements.

PG&E argues that the Commission does not have to conduct an environmental review of the Crockett lease pursuant to the CEQA. This is because the CEC conducted a thorough environmental review in accordance with applicable California law when it reviewed Crockett's Application for Certification (AFC) of the CCP and associated generation tie. The CEC concluded its environmental review in May 1993 when the CEC approved the CCP and generation tie.8

Following the CEC's approval of the CCP and generation tie, PG&E filed A.93-08-018 for a CPCN to construct the generation tie. PG&E asserts that the Commission in D.93-10-039 accepted the CEC's environmental review and granted a CPCN for the generation tie. In D.93-10-039, at Footnote 3, the Commission stated:

The CEC's environmental discussion in the May 3, 1993 (AFC) decision states that the CEC's site certification process has been certified by the Resources Agency as the "functional equivalent of the environmental impact report process under CEQA. (Public Resources Code Section 21080.5 and 25541.5.) See also the CEQA guidelines, 14 Cal. Code Regs. Section 1525 (k)). Moreover, PU Code Section 1002(b) provides that the CEC's AFC decision shall take the place of the requirement for consideration by this Commission of the four factors specified in Section 1002(a)...GO 131-C provides that CPCN applicants need not comply with Rule 17.1 of our Rules of Practice and Procedure (Special Process for Implementation of CEQA) when an AFC has been or will also be issued by the CEC.

Additionally, D.93-10-039 noted that "no one in the proceeding has raised any environmental concerns and we have not discovered any."9 The Commission concluded, as a matter of law, that:

PG&E should be granted a CPCN to construct operate and maintain a single-circuit 230 kV underground transmission line from the Crockett facility to PG&E's existing Lakeville-Sobrante No. 1 Line and related facilities, in the manner described in this application, subject to the conditions set forth in this decision, as well as applicable "conditions of certification and compliance verifications" specified in the decisions issued May 3, 1993 by the CEC in Docket No. 92-AFC-1. (D.93-10-039, Conclusion of Law Number 4.)

Finally, the Commission ordered that:

PG&E shall comply, or use its best efforts to assist Crockett Cogeneration in complying with all application "conditions of certification and compliance verification" concerning the transmission project specified in the decision issued May 3, 1993 by the [CEC] in Docket No. 92-AFC-1....
(D.93-10-039, Ordering Paragraph 1.b.)

PG&E believes the previously cited portions of D.93-10-039 demonstrate that the Commission accepted the CEC's environmental review of the facilities that were eventually constructed pursuant to the Crockett lease. PG&E adds that Crockett complied with all applicable environmental requirements adopted in the CEC's AFC decision, which are the same requirements that would have applied to PG&E. PG&E submitted a declaration from one of Crockett's officers stating that Crockett complied with all the CEC's requirements during the construction process and remains responsible for continuing compliance.

PG&E represents that revenues from the Crockett lease were initially credited above-the-line to ratepayers. PG&E asserts that in D.00-02-046, the Commission's decision regarding PG&E's 1999 general rate case (GRC), the Commission adopted PG&E's proposal of excluding all revenues and rate base associated with generation ties from PG&E's electric distribution revenue requirement. The result, according to PG&E, is that rates for electric distribution adopted in D.00-02-046 did not reflect revenues from the Crockett lease.

3 PG&E cites D.96-04-045 and D.94-02-008. We note that D.94-02-008 was issued 10 months before PG&E signed the Crockett lease. 4 PG&E cites D.02-01-055 wherein the Commission held that because Section 851 does not allow the Commission to grant retroactive approval, the Commission should grant an exemption from Section 851 pursuant to Section 853(b) because it was "not necessary in the public interest to deem the sales void where the sales were reasonable and in the public interest." 5 PG&E cites D.91107, issued on December 19, 1979, wherein the Commission held that PG&E's efforts to promote the development of cogeneration were seriously inadequate and, as a result, reduced PG&E's authorized rate of return by 20 basis points. 6 The circumstances under which the Commission requires CPCNs for the construction of major electric transmission lines are set forth in GO 131-D, Section III(A), which states: "No electric public utility shall begin construction in this state...of major electric transmission line facilities...without this Commission's first having found that said facilities are necessary to promote the safety, health, comfort, and convenience of the public, and that they are required by the public convenience and necessity." 7 Crockett represents that the CCP is a "qualifying facility" under the Public Utilities Regulatory Policy Act of 1978 and is certified by the Federal Energy Regulatory Commission as a qualifying cogeneration facility. As such, Crockett claims that it is exempt from Commission's jurisdiction pursuant to Sections 218(b) and 2803. Consequently, Crockett believes that it did not have to obtain a CPCN pursuant to Section 1001. 8 CEC Adoption Order No. P800-93-004, Docket No. 92-AFC-1. 9 D.93-10-039, Section 3.2.3

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