6. Assignment of Proceeding

Michael R. Peevey is the assigned Commissioner and Thomas R. Pulsifer is the assigned Administrative Law Judge in this proceeding.

Findings of Fact

1. On December 6, 2006, the Alliance for Retail Energy Markets et al. filed a petition pursuant to Pub. Util. Code § 1708.5 requesting that the Commission institute a rulemaking to consider rules for lifting the suspension of direct access.

2. The market and regulatory conditions in effect at the time that direct access was suspended in 2001 have continued to evolve.

3. Although DWR's authority to enter into new power contracts terminated as of January 1, 2003, and the IOUs took over responsibility for the scheduling and dispatch of DWR contract power after that date, DWR's authority to sell electric power to retail customers pursuant to previously executed DWR contracts continues in effect.

4. Water Code § 80110 provides that DWR shall retain title to all power sold by it to the retail end use customers, and is entitled to recover, as a revenue requirement, amounts necessary to enable it to comply with Section 80134.

5. Financial reporting responsibilities associated with the DWR power supply remain with DWR in both the revenue requirements proceeding and Trust Indenture reporting requirements. DWR is also financially responsible for paying all DWR contract-related bills.

6. DWR performs the functions of holding legal title to the power, and "selling" the power to retail customers. Water Code § 80104 explains that "[u]pon the delivery of power to them, the retail end use customers shall be deemed to have purchased that power from [DWR]."

7. The Commission designated Phase I of this rulemaking for the purpose of determining whether, or subject to what timing of other conditions, legal authority exists for the Commission to lift the suspension of direct access.

8. Phase I was also to address legal issues involved with facilitating the novation or assignment of DWR contracts as a possible vehicle to satisfy the requirement that DWR no long supplies power under AB 1X, whereas the substantive merits and related process and timing issues of such an action were to be deferred to Phase II.

9. In D.02-12-069, the Commission has stated that a fundamental short-term goal is to transition full responsibility for energy market related activities back to the utilities as soon as possible, and to make every effort to relieve DWR from the responsibility to perform any functions that should be performed in the long term by regular market participants.

10. DWR has continued efforts to renegotiate contracts, and regularly monitors its contracts to determine if there are opportunities which could lead to more favorable terms and costs.

11. A number of the renegotiated DWR contracts contain novation clauses which may be exercised at the discretion of DWR, whereby upon a written request by DWR, the counterparty to a contract must enter into a replacement agreement with one or more qualified electric suppliers

12. By 2010, the remaining long-term DWR contracts are expected cover only 15% of the IOU requirements. The vast majority of DWR contracts are scheduled to expire by 2011. The task of DWR assigning its remaining contract interests may become more manageable as additional contracts expire.

Conclusions of Law

1. Although the Commission has broad authority to interpret governing statutes, such authority is to be applied so as to bear a reasonable relation to the statutory purpose and language.

2. The general rule of statutory construction is that if statutory language is clear and unambiguous, there is no need to look beyond the plain language of the statute.

3. The question of whether the Commission has legal authority to lift the suspension of direct access turns on whether DWR continues to supply power under AB1X.

4. Before the direct access suspension may be lifted under existing statutory authority, the Commission must first determine that such action is compliant with the condition in AB1X mandating the suspension continue until DWR "no longer supplies power" pursuant to the statute.

5. Once DWR "no longer supplies power" under AB1X, the Commission then has the legal authority to lift the direct access suspension.

6. The provisions underlying AB1X require interpretation to discern the meaning of the language referencing whether DWR continues to supply power. While the Commission has authority to interpret AB1X, the interpretation must be within the bounds of the governing statutory language. The Commission's authority to interpret a statute does not permit disregarding statutory language or to make an interpretation that bears no reasonable relation to statutory purposes and language.

7. The interpretation that DWR no longer supplied power once its authority to enter into new procurement contracts ended is invalid and does not bear a reasonable relation to statutory purposes and language.

8. The interpretation that DWR no longer supplied power once the day-to-day power scheduling and dispatch functions were transferred to the IOUs is invalid and does not bear a reasonable relation to statutory purposes and language.

9. The interpretation that bears a reasonable relation to the statutory purposes and language of AB1X is that DWR supplies power in its current capacity as legal owner holding title to the power under DWR contracts and selling the power to retail customers.

10. The Commission currently cannot lift the suspension on direct access because DWR supplies power under the provisions of AB1X by virtue of owning the power dispatched under DWR contracts and selling it to retail customers.

11. If DWR were to terminate its ownership interests in the remaining DWR contracts, then DWR would no longer be supplying power under AB1X. The substantive merits of whether termination of DWR's ownership interests in the contracts, such as through novation or assignment, would be in the public interest, and how such a process might work, are issues to be addressed in Phase II of this proceeding.

12. As part of the inquiry into how the Commission could legally lift the suspension, it is reasonable to proceed in Phase II to consider the merits of alternatives to remove DWR from its role as supplier of power under AB1X. Alternative approaches to be considered include whether or how to terminate DWR's ownership interests under existing contracts, and whether the CACES concept of redirecting the flow of DWR power to the wholesale market has merit from a legal as well as an operational perspective. Alternatives are not necessarily mutually exclusive.

13. The Commission should continue proceedings in this rulemaking in Phase II in accordance with the scope set forth in the OIR, subject to any subsequent rulings.

14. As an element of Phase II, the Commission should consider the merits of possible alternative approaches such as through the novation or assignment of DWR contracts, to satisfy the statutory condition so as to allow the suspension to be lifted on a more expedited basis.

15. Review of any possible DWR contract assignment should take into account the effects on the DWR bonds and bondholders, including reserve requirements, bond ratings, interest charges, and any other relevant concerns.

ORDER

IT IS ORDERED that:

1. Phase I of this proceeding is hereby resolved by the determination herein that the Commission does not currently have authority to lift the direct access suspension because California Department of Water Resources (DWR) currently supplies power under Assembly Bill (AB) 1X.

2. Phase II of this proceeding shall move forward consistent with the general scope as defined in the OIR (R.07-05-025) dated May 24, 2007, as modified by Assigned Commissioner's Ruling dated July 19, 2007, and subject to any subsequent rulings.

3. Phase II of this proceeding shall also consider the merits of possible alternative approaches to satisfy the legal conditions s as to allow the suspension to be lifted on a more expedited basis.

4. A scoping memo will be issued prescribing how Phase II issues shall be coordinated and sequenced consistent with the further inquiry relating to termination of DWR's power supply role.

This order is effective today.

Dated February 28, 2008, at San Francisco, California.

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