II. Background

A. QF Switcher Dispute

In D.99-11-025, The Commission adopted a motion of several QFs which allowed QFs to switch to the PX price. In adopting the requested QF motion, the Commission also stated that it was reasonable to grant the motion subject to a later "true-up"⁵ by the Commission. On January 18, 2001, the PX ceased to function; and on January 19, 2001, the Commission required QF Switchers⁶ to return to the previous QF payment mechanism.

On April 29, 2004, TURN, DRA, and PG&E filed a motion requesting a briefing schedule to determine what the appropriate price paid to QF Switchers should have been during the true-up period. On May 14, 2004, Calpine Corporation, the California Cogeneration Council, and the Independent Energy Producers (IEP) filed responses; and on May 24, 2004, TURN, DRA and PG&E replied.

On April 24, 2005, the Assigned Administrative Law Judge (ALJ) issued a ruling setting a prehearing conference (PHC) and directing parties to file PHC statements. During the PHC on October 17, 2005, the assigned ALJ requested that parties file briefs addressing "why and whether a true-up (of payments to QF Switchers) is justified and on what basis." Opening and reply briefs were filed on August 4 and 14, 2006, respectively.

While proceedings in this rulemaking were continuing, the Commission initiated R.04-04-025 "To promote Consistency in Methodology and Input Assumptions in Commission Application of Short-run and Long-run Avoided Costs, Including Pricing for Qualifying Facilities," and R.04-04-003 "To Promote Policy and Program Coordination and Integration in Electric Utility Resource Planning." These rulemakings were consolidated for hearings on policy and pricing related to QF contracts.

Following ALJ Division mediation in these consolidated rulemakings, PG&E and IEP negotiated and ultimately reached a settlement on a number of QF-related issues. Included in that settlement, among other issues, was a resolution of the QF Switcher Dispute by 36 of the 58 QFs who elected to switch to the PX based price.⁷

On October 13, 2006, the assigned ALJ convened a PHC to establish a procedural schedule to address the QF Switcher matter for those QFs that had not joined in the PG&E/IEP settlement. At the PHC, the assigned ALJ raised the possibility of convening a Commission-sponsored Alternative Dispute Resolution (ADR) process to resolve the QF Switcher dispute for the remaining QF Switchers. All parties attending the PHC expressed an interest in ADR as a means to settlement.

On October 23, 2006, the assigned ALJ issued a ruling providing an opportunity for participation in the ADR process. The ruling was mailed to the service list and to all QF Switchers that had not entered into the PG&E/IEP settlement, inviting them to participate in the mediation as parties, either individually or through counsel of their choice. The noticing of the settlement conference was made pursuant to Rule 12.1(b),⁸ providing an opportunity to all affected QF Switchers to participate. Parties, but not all QF Switchers, met in mediation during November and December and reached a settlement. The Settlement Agreement⁹ was filed April 26, 2007. At the request of the assigned ALJ, the Settlement Agreement was served on all QF Switcher parties, including QF Switchers that did not enter into the Settlement Agreement, because the Settlement Agreement affects all QF Switchers that have not previously entered into Settlement with PG&E.

PG&E requests and the Indicated QF Switchers, DRA and TURN support the Commission's expeditious issuance of an order that:

· Adopts the Settlement Agreement without change;

· Declares PG&E shall fully recover in rates all payments made pursuant to the Settlement Agreement, subject only to ongoing Commission review regarding the reasonableness of PG&E's administration of the Settlement Agreement; and

· States that the terms of the Settlement Agreement shall apply to all QF Switchers that have not previously entered into settlement with PG&E, including those that did not participate in the mediation.

B. Remand Dispute

In D.96-12-028, the Commission adopted a transition formula to determine SRAC energy payments. The transition formula included a utility-specific "factor" which was designed to relate SRAC prices to gas border prices for each utility. Transition formulas were adopted for SCE, SDG&E and PG&E. Each transition formula uses a starting energy price, and is adjusted monthly to reflect changes in assumed utility fuel costs, as reflected in percentage change to certain border gas price indices. SRAC energy payments for SCE and SDG&E were based on published gas border indices at Topock,¹⁰ while PG&E relied on a 50/50 weighting of gas indices at Topock and Malin.¹¹ The transition formula¹² was intended to be used until QF energy payments could be based on the PX price.

On March 27, 2001, in response to various pleadings raising issues with the transition formula, the Commission issued D.01-03-067 which modified D.95-12-028 by, among other things, replacing the Topock gas index, with a gas price based on an average of Malin gas indices.

On April 27, 2001, SCE filed an application for rehearing in which it asserted that the Commission erred in, among other things, failing to order retroactive application of the modified SRAC formula for the period December 2000 through March 2001, also referred to as the Remand Period. The Commission denied SCE's application for rehearing on this issue, following which SCE sought a writ of review challenging, among other things, the lawfulness of the Commission's refusal to consider a retroactive adjustment. QF parties participating in SCE's writ of review proceeding supported the Commission.

The Court of Appeal for the Second District issued the writ and subsequently determined that "by failing to make a decision as to whether the SRAC prices should be applied retroactively, the Commission ran afoul of the Congressional mandate that public utilities not pay QFs more than the avoided cost."¹³ The Court then remanded the case to the Commission stating:

It may be that the evidence will show the SRAC prices were correct for the period of December 2000 through March of 2001. If the Commission makes this determination and it is based upon substantial evidence, that will end the matter. However, if the evidence shows that the formula in Decision No. 01-03-067 should have been applied retroactively to arrive at a more accurate SRAC then it is the Commission's duty to apply it retroactively.

Since the Court's remand, the Commission has taken extensive comments on the propriety of the SRAC prices paid during the December 2000 through March 2001 time period.

On February 15, 2005, President Peevey issued a Proposed Decision (PD) in response to the Court's remand that, if adopted, would have found "the evidence shows SRAC prices were correct between December 2000 and March 2001, and retroactive application of the modified SRAC formula is not warranted.¹⁴

On April 21, 2005, the PD was withdrawn, and on April 26, 2005, an Assigned Commissioner and ALJ Joint Ruling provided parties an opportunity for additional comments regarding cost information. The Remand Dispute remains pending for those QFs who have not resolved this matter with PG&E or SCE.

⁵ D.99-11-025, 3 CPUC3rd 315, 319.

⁶ All 58 QF Switchers which elected to switch to the PX price are in PG&E's service territory. There were no QF Switchers in either SCE's or San Diego Gas and Electric's (SDG&E) service territory. The QF Switchers switched to the PX price between June and December 2000.

⁷ The PG&E/IEP settlement also resolved the Remand Dispute for those QFs who entered into this settlement.

⁸ All references to Rules are to the Commission's Rules of Practice and Procedure and references code section are to the California Public Utilities Code.

⁹ The Settlement Agreement is marked for identification as Exhibit Settlement 1, and is received into evidence as part of the record in this proceeding.

¹⁰ Topock is located at the California/Arizona border and is an entry point for gas into Southern California Gas Company's system.

¹¹ Malin is located at the California/Oregon border and is an entry point for gas into PG&E's system.

¹² The transition formula includes a heat rate, a gas price based on the price of gas at a California border location, and an operational and maintenance expense adder.

¹³ Southern California Edison Company v. Public Utilities Commission (2002) 101 Cal. App.4^th 982. 998.

¹⁴ PD of Commissioner Peevey in R.99-11-022 mailed February 15, 2005, mimeo., p. 2.