Comments on Draft Decision

The draft decision of the ALJ in this matter was mailed to the parties in accordance with Section 311(g)(1) of the Public Utilities Code and Rule 77.7 of the Rules of Practice and Procedure. Comments were filed by the CCC on July 30, 2002. CCC also filed a Motion for Leave to Supplement the Record.11

CCC reiterates many of the same arguments made earlier in support of the application and asserts that the draft decision fails to give due consideration to benefits of amending the contract including shielding ratepayers from gas price volatility and preserving a valuable QF. CCC concludes that the application is in the public interest, consistent with law and reasonable in light of the whole record.

CCC's supplement to the record is the Declaration of Glenn Sheeren (Declaration), Corporate Manager of Energy and Government Relations for Inland Paperboard and Packaging (Inland). The Declaration states that on April 5, 2002, Inland acquired Gaylord including both the QF and the Gaylord paper mill; and that on July 16, 2002, Inland announced it would close the paper mill, the thermal host for the QF, by September 30, 2002. The Declaration further states that Inland is searching for a feasible alternate thermal host, and that the proposed fixed price amendment providing higher energy prices to a potential QF will increase the likelihood of continued QF operation.12

Regarding the benefit of avoiding gas price volatility identified by CCC, almost 70% of the total QF energy capacity for the three major California utilities now operates under contracts with fixed energy prices. As a result, a substantial "insurance policy" with regard to changing gas prices already exists.

Furthermore, the recent Declaration undermines CCC's remaining argument for approving the application, the preservation of Gaylord as a QF. When filed, the application assumed that there was a viable QF, including its thermal host, providing energy. As now stated, there is no viable QF, but rather the potential for a QF if an economically feasible alternative thermal host can be found. After considering our earlier arguments and this additional uncertainty, we conclude that the benefits do not justify the additional $3.0 million in energy costs, and therefore the application should be denied.

Findings of Fact

1. PG&E filed A.02-01-041, January 31, 2002 requesting Commission approval of a Third Amendment to PG&E's PPA with Gaylord.

2. On July 20, 2001, PG&E and Gaylord entered into a First Amendment to the PPA under the one-year option approved in D.01-06-015.

3. On August 22, 2001, PG&E and Gaylord entered into a Second Amendment to the PPA that changed the energy price to a fixed price of 5.37 cents/kWh. The Second Amendment became a nullity when the safe harbor date for non-standard contract modifications was not extended beyond July 31, 2001.

4. PG&E and Gaylord estimate that under the Third Amendment, PG&E will pay approximately $3.0 million more for energy than PG&E's energy payments using the current generic SRAC formula on a NPV basis.

5. Without Commission approval of the Third Amendment by July 31, 2002, energy payments by PG&E to Gaylord will revert to the Commission's generic SRAC formula.

6. No party has protested PG&E's Application.

7. Settlement of the Gaylord litigation is not contingent on the Commission's approval of the Third Amendment to Gaylord's PPA.

8. The Assumption Agreement was not filed with either PG&E's Application or in the responses to ALJ rulings.

9. PG&E did not provide its litigation analysis.

Conclusions of Law

1. The motion of PG&E for an expedited order is denied.

2. Energy and capacity payments to QFs are defined by PURPA and Pub. Util. Code § 390.

3. PG&E has not demonstrated that the Third Amendment to the PPA is in the public interest.

ORDER

IT IS ORDERED that:

1. Pacific Gas and Electric Company's application for approval of an amendment to the Power Purchase Agreement between Pacific Gas and Electric Company and Gaylord Container Corporation is denied. This denial is without prejudice to the applicant filing a new application for approval of the amendment at such time that applicant can demonstrate that the amendment is in the public interest, is reasonable in light of the record, and consistent with law.

2. Application 02-01-041 is dismissed.

3. This proceeding is closed.

This order is effective today.

Dated September 19, 2002, at San Francisco, California.

11 CCC's Motion for Leave to Supplement the Record is unopposed, and that motion is granted. 12 Inland intends to make its decision on continued QF operation by mid-September of 2002.

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