IV. Required Contract Terms

For the contracts involving renewable energy (all but the Simplot contract), certain requirements of the RPS program apply. The Tunnel Hill and Eden Vale facilities qualify as "eligible renewable energy resources" within the meaning of Pub. Util. Code § 399.12.5 In the RPS proceeding, the Commission adopted standard contracts for renewable energy. (Decision [D.] 04-06-014, Appendix A, and D.06-10-019, mimeo., p. 33.) The latter decision, D.06-10-019, outlined four contractual terms from D.04-06-014 that were obligatory. Those terms relate to Definition and Ownership of RECs [Renewable Energy Credits], Eligibility, Assignment and Applicable law, as follows:

Decision 06-10-019: Ordering Paragraph 20

20. Any procurement contract on which any ESP [energy service provider] or CCA [community choice aggregator] relies for RPS compliance shall, until further notice, include the following non-modifiable terms and conditions set out in Appendix A to D.04-06-014:

"Environmental Attributes" means any and all credits, benefits, emissions reductions, offsets, and allowances, howsoever entitled, attributable to the generation from the Unit(s), and its displacement of conventional energy generation. Environmental Attributes include but are not limited to: (1) any avoided emissions of pollutants to the air, soil or water such as sulfur oxides (SOx), nitrogen oxides (NOx), carbon monoxide (CO) and other pollutants; (2) any avoided emissions of carbon dioxide (CO2), methane (CH4) and other greenhouse gases (GHGs) that have been determined by the United Nations Intergovernmental Panel on Climate Change to contribute to the actual or potential threat of altering the Earth's climate by trapping heat in the atmosphere; and (3) the reporting rights to these avoided emissions such as Green Tag Reporting Rights. Green Tag Reporting Rights are the right of a Green Tag Purchaser to report the ownership of accumulated Green Tags in compliance with federal or state law, if applicable, and to a federal or state agency or any other party at the Green Tag Purchaser's discretion, and include without limitation those Green Tag Reporting Rights accruing under Section 1605(b) of The Energy Policy Act of 1992 and any present or future federal, state, or local law, regulation or bill, and international or foreign emissions trading program. Green Tags are accumulated on kWh basis and one Green Tag represents the Environmental Attributes associated with one (1) MWh of energy. Environmental Attributes do not include (i) any energy, capacity, reliability or other power attributes from the Unit(s), (ii) production tax credits associated with the construction or operation of the energy projects and other financial incentives in the form of credits, reductions, or allowances associated with the project that are applicable to a state or federal income taxation obligation, (iii) fuel-related subsidies or "tipping fees" that may be paid to Seller to accept certain fuels, or local subsidies received by the generator for the destruction of particular pre-existing pollutants or the promotion of local environmental benefits, or (iv) emission reduction credits encumbered or used by the Unit(s) for compliance with local, state, or federal operating and/or air quality permits. If Seller's Unit(s) is a biomass or landfill gas facility and Seller receives any tradable Environmental Attributes based on the greenhouse gas reduction benefits or other emission offsets attributed to its fuel usage, it shall provide Buyer with sufficient Environmental Attributes to ensure that there are zero net emissions associated with the production of electricity from such facility."

New Section 3.4 shall be added to the Agreement as follows:

"3.4 Environmental Attributes. Seller hereby provides and conveys all Environmental Attributes from the Unit(s) to Buyer as part of the Product being delivered, as such term is described in the applicable Transaction confirmation for the period set forth in such confirmation. Seller represents and warrants that Seller holds the rights to all Environmental Attributes from the Unit(s), and Seller agrees to convey and hereby conveys all such Environmental Attributes to Buyer as included in the delivery of the Product from the Unit(s)."

"10.2(xiii) [Party __ or Seller], and, if applicable, its successors, represents and warrants throughout the term of the Delivery Term of each Transaction entered into under this Agreement that: (a) the Unit(s) qualifies and is certified by the CEC as an Eligible Renewable Energy Resource ("ERR") as such term is defined in Public Utilities Code Section 399.12 or Section 399.16; and (b) the Unit(s) output delivered to [Party __, or Buyer] qualifies under the requirements of the California Renewable Portfolio Standard."

"Assignment. Neither Party shall assign this Agreement or its rights hereunder without the prior written consent of the other Party, which consent shall not be unreasonably withheld; provided, however, either Party may, without the consent of the other Party (and without relieving itself from liability hereunder), transfer, sell, pledge, encumber or assign this Agreement or the accounts, revenues or proceeds hereof to its financing providers and the financing provider(s) shall assume the payment and performance obligations provided under this Agreement with respect to the transferring Party provided, however, that in each such case, any such assignee shall agree in writing to be bound by the terms and conditions hereof and so long as the transferring Party delivers such tax and enforceability assurance as the non-transferring Party may reasonably request."

Section 10.6 of the EEI Master Agreement, "Governing Law," shall be included in the Agreement and amended by deleting "NEW YORK" and inserting "CALIFORNIA" in place thereof.

In an October 17, 2006 ruling, the ALJ asked PG&E why the contracts did not at least contain the four contractual terms mandated for RPS contracts in D.06-10-019. PG&E responded on October 31 , 2006, stating that it did not believe the four terms were required in the types of PPAs at issue here. At the PHC held on December 13, 2006, however, ALJ Thomas noted that it was her belief that D.06-10-019 required the four terms in the Tunnel Hill and Eden Vale contracts. PG&E agreed at the PHC to inquire whether the terms were

acceptable, and on January 5, 2007, supplemented its application with new versions of the Tunnel Hill and Eden Vale PPAs that include the four terms. Inclusion of these four standard terms is part of the basis for determining the contracts to be reasonable.

In a ruling dated January 31, 2007, the ALJ asked PG&E additional questions about the application, including one regarding the "Definition and ownership of RECs" standard contract term. The ALJ asked the following questions regarding the "zero net emissions" provision:

The RPS standard language PG&E submitted with its amended PPAs with Eden Vale (and Tunnel Hill Hydro) contains a requirement (under the contract term "Definition and Ownership of RECs") providing the following: "If Seller's Unit(s) is a biomass or landfill gas facility and Seller receives any tradable Environmental Attributes based on the greenhouse gas reduction benefits or other emission offsets attributed to its fuel usage, it shall provide Buyer with sufficient Environmental Attributes to ensure that there are zero net emissions associated with the production of electricity from such facility."

a. Is Eden Vale aware of the expense that it could incur if required to purchase Environmental Attributes to ensure its operations produce zero net emissions?

b. Has PG&E discussed the implications of this provision fully with Eden Vale?

PG&E responded that the term requiring "zero net emissions associated with the production of electricity from such facility" applies only to the "engine-generator set" Eden Vale uses to generate electricity it sells to PG&E: "tradable Environmental Attributes will be granted to PG&E only to offset CO2 emissions (a GHG) of the engine-generator set, and only if Eden Vale receives such credits for the destruction of methane gas (another GHG) associated with dairy waste."7

The Commission has not yet interpreted the "zero net emissions" provision. It may be that a provider such as Eden Vale must make its entire operation - and not just the generator it uses to furnish power to an investor-owned utility - have zero net emissions. Such a requirement could require Eden Vale (or PG&E) to purchase offsets for operations at Eden Vale's dairy other than the generator from which it will sell energy to PG&E.

How to interpret a standard RPS contract term is beyond the scope of this proceeding, however, and better addressed generically in the RPS proceeding.8 Therefore, nothing in this decision resolves the issue one way or another. If the Commission interprets the "zero net emissions" provision to apply more broadly than PG&E and Eden Vale now interpret it - that is, to apply to Eden Vale's entire operation and not just a single engine-generator set - PG&E and Eden Vale will have to comply with such provision.

5 The required contract language does not apply to the Simplot contract, since it is a cogeneration deal and the energy source is not renewable.

6 While D.07-02-011 modified this provision, the modification was not retroactive, and did not change provisions (such as the "zero net emissions" clause) discussed herein.

7 Response of [PG&E] to Second Ruling Requesting Additional Information Regarding Application, dated Feb. 8, 2007, Answer 5(a).

8 On February 1, 2007, Southern California Edison Company/PG&E filed a Petition to Modify D.04-06-014, regarding the standard contract terms. To the extent presented in the Petition or responses to the Petition, the resolution of that Petition may also address how to interpret the terms.

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