Background

SCE and the County entered into a power purchase contract on November 5, 1985, using a Commission-approved standard form QF contract, commonly referred to as a Standard Offer No. 2. The contract provides that SCE will purchase energy from the County's cogeneration facility. The length of this contract is for 30 years. The County's cogeneration facility became operational in July 1988, and was declared to be in "firm operation" under the terms of the contract in November 1988.¹

Under the contract, the County elected to provide SCE with 22.204 megawatts (MW) of firm capacity (contract capacity) in exchange for a capacity price of $165 per kilowatt per year. Section 6.1 of Appendix B.2 of the contract provides that the County will receive full capacity payments only if it delivers the contract capacity during the on-peak hours in each peak month, subject to a 20% monthly allowance for forced outages. Under Section 8 of Appendix B.2 of the contract, if the County does not meet the minimum performance requirement in Section 6.1, and its performance is not excused by an uncontrollable force as defined in Section 4.33 of the contract, the County may be placed on probation for a period not to exceed 15 months. If the County fails to demonstrate that it can deliver contract capacity during this probationary period, Section 8.1.3 of Appendix B.2 provides that the contract capacity may be derated to the greater of the level of capacity actually delivered during the probationary period or the capacity level that the County is reasonably likely to meet. In the event of a derating of contract capacity, Section 8.1.3 of Appendix B.2 and Section 5.5 provide that the County would owe SCE a capacity overpayment refund. If the failure to perform is excused by an uncontrollable force, then SCE is obligated to continue the County's capacity payments for up to 90 days and the County would not be subject to probation and derating.

The disputes that are the subject of the settlement agreement focus on whether the County should be excused from meeting the contract's firm capacity performance requirements in July and August 1999 because of certain alleged uncontrollable force events.² These events include the failure of a steam turbine at the facility and subsequent delays by a third-party contractor in making the required repairs to the turbine. SCE contends that the County had failed to carry its burden of establishing the existence of uncontrollable forces and reduced the County's capacity payments for the two months in question. The County argues that SCE had improperly rejected the County's claims of uncontrollable forces, and that SCE had underpaid the County $788,501.31 for capacity delivered in July and August 1999, and for winter bonus payments during the period from October 1999 through May 2000.

SCE and the County also dispute whether SCE had properly instituted a probationary period when the County did not meet its performance requirements in July 1999. They dispute whether SCE had properly derated the project from 22.204 MW to 10.325 MW³ when the County failed to demonstrate its ability to deliver the contract capacity during the first month of the probationary period in August 1999. SCE began offsetting against the payments for deliveries from October 2000 through part of January 2001. The offset was to collect the capacity overpayment refund obligation that SCE calculated as being equal to $7,150,579.95 as of October 1, 2000.

SCE and the County initially began negotiations to settle the disputes in September 2000. However, these negotiations were unsuccessful and no agreement was reached.

During the time of the ongoing dispute between SCE and the County, wholesale electric rates in California began to rise dramatically. According to SCE, it continued to meet customer demand by procuring power at exorbitant rates. However, SCE was unable to pass these costs through to customers because SCE's authorized rates were lower than the prevailing wholesale rates. This resulted in a severe cash flow problem for SCE, and impaired its ability to borrow funds.

SCE filed a petition and two motions before the Commission in which it asserted that a number of factors were causing short-run avoided cost (SRAC) energy prices, including those provided for in the contract with the County, to exceed the avoided cost limits imposed by federal law. As a result of a combination of these factors, SCE suspended payments to QF generators and other creditors beginning in late December 2000. Consequently, SCE did not make payments to QFs for energy deliveries in November through March 26, 2001.

In D.01-03-067, we agreed that the formula for calculating SRAC prices was flawed, and modified the formula as of April 1, 2001. SCE was also ordered in that decision to resume payments to the QFs for deliveries on and after March 27, 2001. SCE continued to contest the lawfulness of the SRAC prices for the period from November 2000 through March 26, 2001.⁴

The suspension of the payments to the QF generators and the issuance of D.01-03-067 resulted in about 30 lawsuits being filed against SCE by the QFs. Starting in June 2001, SCE began to enter into a series of agreements and contract amendments with the QFs. According to SCE, these agreements and contract amendments generally provided for the following: "(i) payment for past power deliveries upon the satisfaction of certain conditions; (ii) a five-year alternative energy price; (iii) stays of or forbearance from litigation to permit Edison time to address its liquidity concerns; and (iv) full releases and dismissal of litigation upon payment by Edison." (Prepared Testimony, p. 8.)

During this time of turmoil in the energy markets, SCE and the County held further settlement discussions. A settlement agreement was subsequently reached, which became effective on July 5, 2001.

The terms of the settlement agreement are contained in the "Settlement Agreement Between County of Los Angeles (Pitchess Honor Rancho, QFID 2180) and Southern California Edison Company." The settlement agreement, as well as an unredacted copy of the application and an unredacted copy of the prepared testimony were filed under seal. Redacted copies of the application and the prepared testimony, and the full version of the contract and amendment between SCE and the County, were filed with the Commission. When SCE filed these public and non-public pleadings, SCE also filed a motion for a protective order to keep the settlement agreement and the confidential and sensitive information in the application and the prepared testimony sealed. In a ruling dated October 17, 2001, the assigned ALJ granted SCE's motion to keep those materials under seal, and to limit access to the non-public version of those documents.

SCE seeks Commission approval of the terms of the proposed settlement as reasonable, and that it be authorized to recover all payments made or to be made by SCE to the County pursuant to the settlement agreement, subject only to SCE's prudent administration of the settlement agreement and the QF contract between SCE and the County.

Notice of the filing of SCE's application was published in the Commission's Daily Calendar on September 27, 2001. No one filed any protest or response to the application, and no evidentiary hearings were held.