Discussion

We begin our review by stating that PG&E's Application is not a request to permit Oildale's operation as a QF. Oildale currently operates as a QF and under the amended contract receives supplemental payments above SRAC prices. Instead, this is an application that requests approval of an amendment to a Power Purchase Agreement for Long-Term Energy and Capacity between a utility [PG&E and a Q/F (Oildale)].

PG&E asserts that the Third Amendment and the Assumption Agreement constitute a settlement agreement that provides a fixed energy price, above projected SRAC energy prices, and other benefits to Oildale, while providing benefits to PG&E by resolving Oildale's claims against PG&E. Therefore, we review the Application using the Commission's settlement rules as a standard of review. These rules are found in Rules 51 to 51.10 of the Commission's Rules of Practice and Procedure.⁵ The settlement rules provide in pertinent part that "the Commission will not approve a stipulation or settlement, 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."

In the Public Interest

PG&E and Oildale estimate that the additional $4.7 million in energy payments represents a 10% premium over estimated SRAC energy payments during the term of the Third Amendment. The additional payments result from the differential between the higher energy costs at 5.37 cents/kWh and lower SRAC energy costs estimated at 4 to 4.9 cents/kWh. The Joint Response argues that in return for these greater energy prices, ratepayers receive an "insurance policy" through market stability by avoiding potentially greater SRAC energy prices as a result of potentially greater gas prices.⁶ PG&E and Oildale also argue that approval of the application will improve the local Oildale economy and decrease the likelihood that Oildale would cease operations as a QF.

In assessing these arguments, we believe that market stability is valuable; and, under D.01-06-015, we have previously approved amended contracts using fixed prices for PG&E's QFs. Furthermore, while PG&E and Oildale argue that gas prices might rise in the future, gas prices might also decline; it is not in the best interest of ratepayers to face such uncertainty. Reversion of the contract to SRAC prices places this risk with ratepayers. This uncertainty is removed with the approval of fixed prices in the Amendment to the Purchased Power Agreement before us.

With regard to the continued operation of Oildale, we are concerned about the continued viability of QFs generally, and the economic and energy system effects when QFs cease operation. Our concern has been expressed in numerous decisions including D.01-03-067 (p. 34) where we ordered utilities to pay QFs on a going forward basis; D.01-06-015 (pp. 4-5) where we provided non-standard amendment opportunities to QFs that were automatically deemed reasonable and in D.01-10-069 (p. 11) where we provided an opportunity for utilities and QFs to continue to negotiate contract amendments after the safe harbor date and apply for our approval through the filing of an application. As noted by PG&E, Oildale chose one of the options under D.01-06-015 and amended its contract that provides supplemental payments to Oildale. Although we have taken these actions to help bring stability to the electricity market, utility energy and capacity payments to QFs are defined by the Public Utility Regulatory Policies Act of 1978 (PURPA) and Pub. Util. Code § 390, and using these definitions each QF must determine whether it will operate based on its unique economic circumstances.

PG&E and Oildale assert that the Third Amendment, along with the Assumption Agreement, will resolve substantial litigation and avoid potential damages claimed by Oildale against PG&E. PG&E and Oildale calculate that the value of these claims is at least $45 million⁷ based on termination of the PG&E-Oildale contract and future lost capacity and bonus capacity payments. PG&E and Oildale also contend litigation costs may include other potential damages associated with Oildale's inability to sell on the open market during the summer of 2001 and capacity payments due Oildale during February 2001 through July 2001 when Oildale was partially or fully offline. PG&E and Oildale then apply a 50 percent probability that Oildale would prevail in its claims to conclude that the value of potential litigation ($22.5 million) greatly exceeds the $4.7 million premium that ratepayers would pay under the Third Amendment.

These assumptions regarding litigation analysis are simplifications, but nevertheless helpful. In an effort to determine whether the potential litigation costs represent a reasonable estimate, the ALJ issued the May 7 ruling requesting specific information on these matters. The ALJ also required a response solely from PG&E and not a joint response with Oildale. In its response,⁸ PG&E contends that disclosure of PG&E's litigation risk analysis could constitute a waiver of PG&E's attorney-client privilege and reveal attorney work product. We acknowledge the importance of confidentiality in matters of litigation, however, utilities are provided with legal options under Public Utilities Code Section 583 and General Order 66-C that maintain confidentiality while providing us with necessary information to determine the reasonableness of an application. In similar utility applications, litigation risk, analysis and costs have been submitted for our examination and review under protective order.⁹ PG&E has chosen not to use these options in its application or responses to ALJ rulings. Nevertheless, we are able to determine that PG&E and Oildale's litigation assumptions and estimate of potential litigation costs when compared to the premium energy costs in the Third Amendment are reasonable. Moreover, approval of the Third Agreement provides the state of California with a valuable resource, which will enhance electric grid reliability and mitigate against blackouts. Governor Davis' proclamation of a State of Emergency due to the energy crisis is still in effect.¹⁰ So far this summer, there has been one Stage 1 Alert and one Stage 2 Alert.¹¹ Therefore, approval of this Application is in the public interest.

Consistent with the Law

Negotiation of QF contract amendments after July 31, 2001 are permitted by D.01-07-031 and reiterated by D.01-10-069 and D.02-01-033. Oildale and PG&E have entered into an Assumption Agreement that has been approved by both their bankruptcy courts.

Reasonable in Light of the Whole Record

The record shows that Oildale is a 40 MW gas-fired cogeneration facility that has operated at an average capacity factor of 90%. The litigation risk of PG&E if the Third Agreement is not approved could be as much as $45 million. The estimated premium of settlement is estimated to be $4.7 million. There were no protests.