Reasonableness of the Settlement Agreement

In this proceeding, SDG&E and ORA were the only active parties who conducted discovery and sponsored testimony. SDG&E and ORA fairly reflect all affected interests. SDG&E represents the interests of both its shareholders and customers. ORA represents the interests of all SDG&E's customers.

The Settlement Agreement meets all standards for approval as identified in Rule 51.1(e). That rule states:

The Commission will not approve stipulation or settlements, whether contested or uncontested, unless the stipulation or settlement is reasonable in light of the whole record, consistent with law, and in the public interest.

The Settlement is Consistent with Law and Prior Commission Decisions.

The Settling Parties assert that the Settlement Agreement is fully consistent with law and prior Commission decisions. We agree. Nothing in the Settlement Agreement contravenes statute or prior Commission decisions. In fact, our approval of the Settlement Agreement will allow us to comply with Section 332.1(g) which requires, in pertinent part, that the "...commission shall institute a proceeding to examine the prudence and reasonableness of the San Diego Gas & Electric Company in the procurement of wholesale energy on behalf of its customers, for a period beginning at the latest on June 1, 2000." By addressing SDG&E's electric procurement practices for the period from July 1, 1999 through February 7, 2001, our adoption of the Settlement Agreement will provide in one decision the complete disposition of the issues relating to SDG&E's electric procurement practices up to the time DWR began procuring SDG&E's "net-short" electric supplies. The reasonableness review required by Section 332.1(g) requires no more than one "proceeding" to determine the prudence and reasonableness of SDG&E's procurement activities after June 1, 2000. Additionally, the Settlement Agreement is consistent with D.00-09-040, which was issued to implement Section 332.1(g).

The Settlement Agreement is Reasonable in Light of the Record as a Whole

SDG&E served its original testimony on October 2, 2000 and had it admitted into evidence. ORA issued its report in this proceeding on April 5, 2001; that report has been admitted into evidence. On April 24, 2001, SDG&E served its prepared rebuttal testimony; that rebuttal testimony has been admitted into evidence. Concurrent with the filing of this motion, and attached as Attachment 2, ORA submits the declaration of its witness, Mr. Steve Linsey, addressing ORA's evaluation and recommendations for SDG&E's electric procurement practices for the period September 1, 2000 through February 7, 2001.

ORA stated in its prepared testimony that it conservatively recommended that the Commission disallow a total of $98 million in costs in the period July 1, 1999 through August 31, 2000. ORA took the position that for the period July 1, 1999 through August 31, 2000, SDG&E incurred $61 million of excess costs due to its failure to exercise its existing authority from the Commission to purchase in the Block Forward Market. ORA also took the position that an additional $37 to $78 million in costs were incurred as a result of SDG&E's failure to request from the Commission additional block forward market (BFM) authority and then to act on that authority.

ORA's analysis of SDG&E's electric procurement activities from August 31, 200 to February 7, 2001 disclosed that SDG&E was actively monitoring the forward market during this period of time, which in ORA's view, constituted a significant change in its procurement practices from that which existed during the prior year. In addition, because this time period was not during summer months, ORA's prior contentions on the issue of forseeability are not applicable to this period of time. Finally, SDG&E did, in fact, enter into bilateral contracts based upon its active monitoring of the forward market during this period of time.

ORA witness Linsey stated in his declaration submitted with the Settlement Agreement that there were significant developments after August 2000 that created substantial uncertainties as to how compelling a case for disallowance ORA could make for the period from September 1, 2000 through February 7, 2001. Mr. Linsey stated that SDG&E attempted to participate in the BFM beginning toward the end of July/August 2000, that the Commission granted authority for SDG&E to enter into bilateral contracts to purchase power in October 2000, and that SDG&E exercised this authority.

Conducting a separate or further proceeding focused solely on the additional five month period from September 1, 2000 to February 7, 2001 would unnecessarily consume valuable resources of the Commission, SDG&E and other parties and would delay, and possibly prevent, the realization of the benefits identified above pertaining to reduction of the ERCRSA undercollection.

The immediate impact of our approval of the Settlement Agreement is to reduce the undercollection in SDG&E's ERCRSA by $100 million. As demonstrated by the testimony and rebuttal testimony of SDG&E and the ORA report and the Linsey declaration, there is a significant contestable discrepancy between SDG&E and ORA as to the degree and extent of the reasonableness of SDG&E's electric procurement practices from July 1, 1999 through February 7, 2001. We must evaluate the Settlement Agreement in light of the risk, expense, complexity, and duration of continuing litigation in deciding whether the Settlement Agreement is reasonable in light of the whole record. While SDG&E, through its testimony, believes that it presented a strong case that its electric procurement activities were reasonable and prudent, ORA believes just as strongly that it presented a convincing case that SDG&E was not prudent in its electric procurement activities and therefore should be subject to disallowance.

The Settlement Agreement is in the Public Interest.

The Settlement Agreement results in a reduction to SDG&E's ERCRSA undercollection by $100 million. This is a significant sum of substantial benefit to SDG&E's customers. The $750 million undercollection in the ERCRSA has been generated, primarily, from the deferral by SDG&E customers since June 1, 2000 of their energy commodity costs in excess of 6.5 cents per kWh. To the extent these deferred obligation are reduced, SDG&E's customers are no longer obligated to reimburse SDG&E for them. By virtue of this settlement, more than 13% of the ERCRSA undercollection will be eliminated. This concession by SDG&E is reasonable.

Finally, the Settlement Agreement is in the public interest because it will avoid a potentially long and expensive litigation of issues pertaining to SDG&E's electric procurement activities for the period September 1, 2001 through February 7, 2001. It is appropriate that the settlement pertain to the period of time up to DWR's undertaking the obligation to procure SDG&E's "net-short" energy needs because ORA was able to assess and evaluate SDG&E's electric procurement activities to that point. Conducting a separate or further proceeding focused solely on the additional five-month period after September 1, 2000 would consume valuable resources of the Commission.