V. FERC Jurisdictional PPA

In its application, Edison requests that the Commission approve its proposal to enter into a PPA with MVL, after Edison acquires MVL as a wholly-owned subsidiary, and support the concept that the PPA will be a 30-year, cost-of-service contract, that will give investors adequate assurance of regulatory commitment and cost recovery under the FRD. By choosing this mechanism, the PPA will be reviewed and approved by FERC, instead of being reviewed by this Commission as part of an application for a CPCN. As referenced above, parties were asked to brief whether this proposed mechanism was in the public interest from a ratepayer perspective, and then there was ample record development on this issue during the evidentiary hearings.

Edison has made its position quite clear: in the absence of legislation in California that would secure assurances of full and reasonable cost recovery to investors, parallel to what the federal FRD does, Edison will only go forward with the Mountainview application if the PPA is submitted to and approved by FERC. Edison argued that investors require the certainty that the FRD provides.

This argument at base challenges the Commission's jurisdiction to act in the best interest of Edison's ratepayers while ensuring that the utility recovers reasonable costs to ensure adequate electric service. If Edison failed to follow an order of this Commission which provided it with regulatory assurances that its reasonable costs would be recovered in the acquisition of operation of the Mountainview asset for the benefit of the ratepayers, as this order does, Edison and its management would likely be subject to shareholder lawsuits for breach of its fiduciary duties, among other of action, especially given the enhanced customer load protections provided below.

One of the primary justifications for the PPA arrangement was that Edison's financial status remained sufficiently precarious that only a PPA would give investors adequate assurance of regulatory commitment to, and full cost recovery for, the project. However, in light of recent developments, this ostensible justification for the PPA no longer has any persuasive value.

In July of 2003 when Edison filed its application, Edison's creditworthiness status was precarious, and the proceeding before the Commission to establish rules and guidelines for the electric utilities to plan for and meet their short-term and long-term resource needs, R.01-10-024, was ongoing. Now, all three credit rating agencies, Standard and Poor's, Moody's and Fitch, have given Edison investment-grade credit ratings. In addition, the Commission issued a proposed decision in R.01-10-024 on November 18, 2003, and the Commission is expected shortly to issue a final decision that will set forth a clear delineation of the future rules and guidelines that the electric utilities are to follow in their future short-term and long-term procurement power procurement activities. ⁶

The additional regulatory certainty provided by the Commission's movement forward in the procurement proceeding, coupled with the assurances granted by Assembly Bill 57 (Wright, 2002), provide Edison with a great deal of regulatory certainty for procurement cost recovery. Edison has also achieved full creditworthiness status, and its recent upgrades are noteworthy in the financial community and should provide additional investor security for Edison's transactions. These additional certainties ameliorate Edison's general arguments about the need to lean on the FRD to guarantee this project.

However, notwithstanding Edison's adamant assertion of its position, the major objection to Edison's application posited by most of the interveners is the FERC jurisdictional PPA financing mechanism proposed by Edison and the affiliate issues attendant to that scheme. We find their concerns to be legitimate and their arguments to be compelling. Their concerns converge with our own, and lead us to find that the PPA is not in the public interest from a ratepayer perspective. By denying the PPA, and authorizing Edison to move forward with the project as a utility-owned generation facility, the FERC jurisdiction and affiliate rules are no longer before us. We are convinced that by authorizing Edison to go forward with the project as a direct utility-owned project not only maximizes the advantages to customers and ratepayers, but removes most of the vexing risks noted by TURN.

In light of the fact that the major obstacles that Edison perceived when it proposed the FERC jurisdictional PPA are no longer an issue, the Commission denies the application as framed. However, since we also determine that Edison's proposed acquisition of Mountainview is in the public interest, in this Decision, we will grant Edison the authority to go forward with the project, but as a direct utility-owned facility.

No party participating in the hearings and filing post-hearing briefs argued that the proposal by Edison to use a FERC jurisdictional PPA with an unregulated utility subsidiary is a superior mechanism to having Mountainview operate as a utility -owned generation facility. Our denial of the FERC jurisdictional PPA, while granting the CPCN, should both allay the fears of the interveners regarding the problematic nature of the proposed PPA, and, at the same time affirm the view of Edison and many of the other parties to this proceeding that the acquisition of Mountainview by Edison is in the public interest and will benefit consumers.

The interveners raised serious concerns with the PPA. TURN proposed a litany of modifications to the PPA that would have made the transaction more palatable for ratepayers, though still not preferable to a utility-owned project. ORA's primary concern with the PPA was that the Commission would have to delegate its ratemaking responsibilities and jurisdiction to FERC, and ORA was convinced that this Commission provides proven ratepayer protection that FERC does not provide. Instead of authorizing the PPA, ORA urged the Commission to direct Edison to pursue Mountainview as a pure utility project.

The Navajo Nation was not convinced that the mechanism proposed by Edison that did, which does not allow this Commission to have jurisdiction over MVL, would sufficiently protect ratepayers. Instead, the Navajo Nation urged the Commission to focus on Mohave, a facility over which this Commission possesses full regulatory authority, but which is the subject of another proceeding before this Commission, as discussed above. IEP shared other parties' skepticism over the wisdom of having a 30-year contract outside this Commission's direct jurisdiction and preferred that Mountainview go forward as a utility--owned facility. EPUC and CAC were concerned that the PPA as proposed would not allow this Commission to insure that rates charged by Mountainview are just and reasonable. Sequoia simply urged the Commission to allow the project to go forward under Edison's control. AReM's primary concern was that if certain contingencies occur, like the re-instatement of direct access, there could be stranded costs from the Mountainview facility. AReM wanted the Commission to prohibit Edison from seeking recovery of the potential stranded costs from direct access customers. CLECA also preferred Mountainview as an Edison-owned project and opined that it should be subject to the CPCN process.

After careful analysis of the justifications advanced by Edison for the use of the FERC jurisdiction PPA, and the cogent arguments presented by the intervenors against the mechanism, we find ourselves in the same place as TURN: we prefer a traditional utility-owned generation project, and agree that there are "vexing weaknesses" with the PPA. The proposed PPA structure, while designed to simulate cost-of-service ratemaking, ultimately delegates the regulatory control of the cost of the project to the FERC. California ratepayers need rate relief from the high rates in place since the Energy Crisis of 2000-01, and we are attempting to rectify these rate problems by re-asserting control over many aspects of the electricity industry that were delegated to other entities in the run-up to the Energy Crisis. Therefore, based on what we know today about Edison's improved financial situation, we conclude the most expeditious way to build Mountainview is to deny the PPA, and approve a CPCN for the project in order to allow Mountainview to proceed as a utility-owned plant.

Once it is built and operational, we will include Mountainview in Edison's rate base and employ traditional ratemaking processes to ensure cost recovery for Edison, and we adopt herein a new construction cost cap that approximates the cost limit proposed currently by Edison. By granting a CPCN, we believe we are providing the reliability and reserve benefits to ratepayers, which, as Edison has demonstrated, Mountainview will provide, without complicating the transaction with a problematic and unnecessary FERC-jurisdictional PPA.