II. The SCE/DETM Dispute

On May 10, 2006, SCE submitted Application 06-05-018 requesting Commission approval of a settlement agreement dated March 10, 2006 between SCE and DETM. The agreement would settle a dispute between SCE and DETM related to 10 power purchase agreements (PPAs) executed in late 2000 but terminated by DETM in January 2001. The dispute is over the value of the contracts to SCE and how much DETM owes SCE for exercising its termination rights.

In November and December 2000, DETM and SCE entered into 10 separate PPAs. In aggregate, the PPAs provided for delivery by DETM to SCE of more than four million megawatt-hours of power between January 1, 2001 and December 31, 2005. The PPAs included a provision permitting either party to terminate the PPAs under specified conditions. One provision provided that if DETM terminates the PPAs, DETM must pay SCE the difference between the power's market value and its contract price, with interest. This termination payment was to be determined by the parties in a "commercially reasonable manner."

Shortly after the PPAs were executed, events in the western electric power markets plunged SCE into financial distress. On January 16, 2001, SCE issued a Securities and Exchange Commission Form 8-k financial reporting document in which it stated that it was suspending payment on certain obligations, but not on its obligations to DETM pursuant to the PPAs. Nevertheless, DETM terminated the PPAs on January 22, 2001.

The central issue in this matter is the liquidation value of the PPAs. SCE believed DETM owed it a substantial termination payment, while DETM did not agree. On January 25, 2001, DETM sent a letter to SCE stating that SCE owed DETM a certain sum instead of DETM's owing SCE money. SCE asserted that DETM's methodology was incorrect in a letter dated January 26, 2001. Ultimately, on February 27, 2001, SCE invoked the dispute resolution clause of the PPAs.

After attempts at mediation and arbitration from 2002 through 2005, and after rounds of settlement discussions, SCE and DETM negotiated a settlement agreement with the effective date of March 10, 2006.