8. Assignment of Proceeding
Michael R. Peevey is the assigned Commissioner and Thomas R. Pulsifer is the assigned ALJ in this proceeding.
1. Although DWR's authority to enter into new power contracts terminated as of January 1, 2003, at which time the IOUs took over responsibility for the scheduling and dispatch of DWR contract power, DWR still supplies power to retail customers pursuant to previously executed contracts which continue in effect.
2. In D.02-12-069, the Commission identified the fundamental short-term goal to transition full responsibility for energy market related activities back to the IOUs as soon as possible, and to make every effort to relieve DWR from the responsibility to perform any functions that should be performed in the long term by regular market participants.
3. The removal of DWR from the role of supplying power is consistent with the fact that the IOUs--and not DWR--are regular market participants that continue to have a statutory responsibility to serve electric customers.
4. The IOUs' obligation to serve their customers is mandated by state law and is part and parcel of the entire regulatory scheme under which the IOUs received a franchise and under which the Commission regulates IOUs under the Public Utilities Act
5. The most practical means by which DWR can be removed from its role of supplying power is through the novation of DWR contracts.
6. Given the uncertainties as to whether DWR could obtain a release from liability from all contract counterparties, assignment of the DWR contracts does not offer a viable means of removing DWR from supplying power.
7. A number of DWR contracts contain novation clauses whereby, upon request by DWR and satisfaction of specified conditions in the contract, the counterparty must enter into a replacement agreement with a "Qualified Electric Corporation."
8. The number of active DWR contracts has been gradually, declining from 59 originally down to 26 contracts today, with 15 separate counterparties.
9. Assuming no further action to accelerate DWR's removal as a power supplier, the DWR will supply declining amounts of power as contracts expire, gradually reducing to zero by about 2015.
10. Novation clauses have been negotiated in 22 out of the 26 remaining DWR contracts as a vehicle to allow for removal of DWR from its contract obligations by substituting a new contract with a different entity which wholly extinguishes the earlier contract.
11. In order for a novation to be executed, a series of conditions must be satisfied, culminating in the execution of a replacement agreement which substitutes an IOU for DWR as party under the new agreement.
12. In the case of the four contracts lacking novation clauses, DWR and the IOUs cannot unilaterally require the counterparties to those contracts to allow the substitution of DWR with an IOU. Negotiations with those counterparties would be necessary to elicit their agreement before DWR could be relieved of its obligations to supply power under such contracts.
13. In devising a plan for contract negotiations to remove DWR from its role as supplier of power, the most efficient outcome can be expected if negotiations are conducted in a sequence of priorities, beginning with the Sempra and Coral contracts.
14. Prioritizing the Sempra and Coral contracts as the initial focus of negotiations is appropriate, particularly given uncertainties as to whether revised Sempra or Coral contracts can be successfully negotiated, the potential time for negotiations, and the magnitude of benefits to ratepayers that depend on the successful negotiation of these contracts.
15. The IOUs estimated quantifiable net savings to ratepayers of approximately $128 million from DWR contract novation, assuming that all DWR contracts were to be successfully replaced with new agreements by January 1, 2010 through contract novation. The estimates, however, are sensitive to assumptions as to changing conditions in credit and energy markets over time, and have the caveat that the IOUs doubt full novation is achievable, particularly by January 1, 2010.
16. While recognizing various issues that must be resolved, DWR suggests that the novation of all of its contracts could be concluded by January 1, 2010, assuming that the Commission acts expeditiously.
17. To the extent that the full novation of remaining DWR contracts were to occur later than January 1, 2010, the estimated net savings to ratepayers correspondingly are estimated to decline.
18. If negotiations prove to be unsuccessful for the early removal of DWR as a party to the Sempra contract, DWR would be relieved of its obligations under the Sempra contract as of September 2011, the contract's expiration date.
19. If, as a result of unsuccessful Sempra negotiations, the target completion date for novation of DWR contracts was extended to October 2011, net savings would continue to be forecasted, but would be reduced to about $58 million.
20. The estimate of quantifiable net ratepayer savings as a result of extending the target novation completion date to October 2011 is reduced principally because DWR reserves associated with the Sempra contract would not be released early.
21. If the Coral contract negotiations also were not successful, the Coral contract would expire in June 2012.
22. The failure to amend the Coral and/or CalPine contracts would not necessarily preclude novation of the other remaining DWR contracts.
23. Although there are unquantified potential financial impacts from DWR contract novation assuming that existing DWR contract claims or counterclaims were linked to a replacement contract, such impacts cannot be determined until a replacement contract is negotiated, and subjected to review and approval by the Commission.
24. If the target date for completing DWR contract novation were to be extended to June 2012, there would only be about 500 MW of DWR contract power remaining. The estimated net benefits of novating the remaining contracts would be reduced to about $30.5 million.
25. Although the estimated benefits of novation decline as the target date for completion is extended, the associated risks and potential impediments to novation also decline correspondingly.
26. Although uncertainties exist as the prospects for achieving successful replacement of all DWR contracts by January 2010, and a precise measure of future net benefits is sensitive to various uncertainties that may change over time, the potential for some benefits outweigh the potential downside risks, subject to appropriate safeguards as will be implemented in Phase II (a)(2).
27. Uncertainties exist as to whether, or to what extent, parties may be able to negotiate a replacement contract that provides benefits relative to the existing DWR contract, or (in the case of contracts without novation clauses) whether the counterparty will agree to novation at all.
28. The trade-off between negotiating an "as is" novation versus more extensive amendments may be different for each contract depending on the relative bargaining strength of the counterparty, the specific terms of the existing contract, and the potential to arrive at a bargaining result that is mutually beneficial both to the counterparty and to the IOU and its customers.
29. If DWR were to terminate its ownership interests in the remaining DWR contracts, through the plan adopted in this decision, then DWR would no longer be supplying power under AB1X.
30. A potential impediment to the IOUs entering into negotiations to execute a new contract to replace a DWR contract up until now has been uncertainties as to how the resulting contract costs could be allocated among the IOUs and their customers in an equitable manner.
31. Because PG&E's proposed methodologies for allocating each utility's "equitable" share of contract costs is different from the methodology adopted in D.05-06-060, its proposals would require modifying that decision and relitigating the cost allocation methodology.
32. SCE's proposed methodology for allocating contract costs to each utility would maintain the allocation principles adopted in D.05-06-060, and would be consistent with the Commission's goal not to relitigate the allocations adopted in D.05-06-060.
33. Under SCE's proposal, all unavoidable DWR contract costs would be allocated to the customers of the IOU that administers the subject contract, described as a "costs follows contract" allocation.
34. In order to ensure that ratepayers are left indifferent to the effects of a "costs follow contracts" allocation, SCE's proposal calls for developing a schedule of transfer payments to ensure that the allocation equities adopted in D.05-06-060 are preserved.
1. The basis for deciding whether or how to move forward with a plan to expedite the removal of DWR from its role as supplier of power is whether it is in the public interest to implement such a plan.
2. In D.02-12-069, the Commission expressed a preference for returning the IOUs to their traditional role of supplying power as a matter of public policy. This proceeding provides a forum to address analytically whether (or how) such an undertaking can be cost-effective.
3. Good cause exists to move forward to Phase II (a)(2) of this proceeding for the purpose of implementing negotiations to execute novations of DWR's remaining contracts.
4. The goal of removing DWR from the role of supplying power should be pursued under a balanced approach, providing the opportunity for contract negotiations to produce ratepayer benefits, but with safeguards to limit or redirect contract negotiation efforts if, or to the extent that negotiations do not progress positively.
5. Many of the DWR contracts require, as a condition of transfer, that the Commission first conduct a review and issue findings that the terms of the "Replacement Agreement" are "just and reasonable" under Public Utilities Code Section 451.
6. We do not prejudge how negotiations for a replacement contract should be conducted or whether the negotiated terms of the new contract would be found "just and reasonable" under Section 451. The framework for conducting and approving replacement contracts pursuant to Section 451 should be developed in Phase II (a)(2) of this proceeding.
7. The Commission will not be required to make any findings as to the justness and reasonableness of any existing DWR contracts as a result of the novation process, but instead will make those findings for new replacement contracts. Any replacement contract to be negotiated should be reviewed in reference to the relevant conditions, including market conditions, in effect at the time of negotiation and for the period that such replacement contract would be in effect.
8. Any "just and reasonable" findings that may be made by the Commission in connection with replacement agreements executed pursuant to DWR contract novation or other negotiations should in no way be construed as affecting the disposition of any pending litigation relating to existing DWR contracts.
9. In order to provide the appropriate incentives for the IOUs to enter into negotiations for replacement contracts, provision should be made to ensure that the cost allocation equities established in D.05-06-060 are preserved.
10. SCE's proposed contract allocation methodology should be adopted since it preserves the allocation equities established in D.05-06-060, and provides a practical approach to protect customers against cost shifting as replacement contracts are taken on by the three respective IOUs.
11. Because the Coral and Sempra unavoidable contract costs are tied to the delivery of natural gas or an index of natural gas prices, to calculate these costs for Sempra and Coral, an assessment of forward natural gas prices should be used to determine the total unavoidable contract costs at the time that the indifference payments are calculated.
12. This decision should be effective immediately so that the contract negotiations discussed in this decision may commence expeditiously.
IT IS ORDERED that
1. A process is hereby authorized to facilitate efforts aimed at the early removal of the Department of Water Resources (DWR) from its role as supplier of power to retail electric customers through negotiations to remove DWR as a party to its existing contracts by executing new replacement agreements.
2. A Working Group shall be organized as a vehicle for DWR, the investor-owned-utilities (IOUs), and Commission staff to plan and implement protocols and strategies for conducting negotiations with the counterparties to the DWR contracts with the goal of removing DWR as a party to the contracts while ensuring that any resulting contract changes are not detrimental to ratepayers. The role of the Working Group is to develop protocols and strategies in the negotiation of replacement contracts. The working group, itself, will not be involved in all of the specific contract negotiations. Each IOU (along with DWR) will responsible for the negotiation of replacement agreements only for those specific DWR contracts that have been allocated to that respective IOU. However, we do not expect to see any replacement contracts that reduce customer benefits and these benefits must be sufficient to counterbalance any costs of posting collateral and letters of credit.
3. A process will be established for periodic progress reports on negotiation efforts by the Working Group for assessing the prospects for agreement on acceptable new contracts, with the goal being to curtail unproductive negotiation efforts before they result in the expenditure of unnecessary costs or time. Appropriate procedural processes will be addressed in the next phase to provide appropriate notice to-and input from other interested parties that are not members of the Working Group.
4. The Assigned Commissioner will issue a procedural ruling in Phase II (a)(2) addressing the formation, organization, and operation of this Working Group, prescribing, among other things, vehicle(s) for communication among the Working Group members, confidentiality protocols, and contingency plans for mid-course adjustments, if necessary, as negotiations progress. The procedural ruling will also establish a process for the timely updating of estimates of potential net benefits associated with the expedited replacement of DWR contracts. The ruling will also provide for further consideration of how to allocate the early release of DWR reserves to ratepayers.
5. The initial target date for the removal of DWR from all of its outstanding contracts shall be January 1, 2010. We clarify that this is not the target date for reopening direct access. Nothing in the instant decision prejudges the merits of (or manner of) lifting the direct access suspension.
6. The following priorities shall apply for purposes of scheduling and sequencing negotiations for replacement contracts. The first priority shall be negotiating to replace the Sempra contract. The second priority shall be negotiating to replace the Coral contract. The next priority shall be renegotiation of the PPM and SFO Peakers contracts, followed by novation of any remaining DWR contracts. Prioritization, however, does not rule out the possibility of overlap in time lines where negotiations may begin on certain contracts before others have been entirely finalized. The sequencing of negotiations shall also take into account any interrelationships that may exist among the contracts. More specific timing and sequencing issues shall be addressed in Phase II (a)(2).
7. Whether to execute novation by replacing the contract "as is," or to seek more extensive revisions at the same time shall be assessed on a contract-by-contract basis, rather than necessarily requiring the same approach for every contract.
8. Novated DWR contracts, as well as any replacement contracts, shall count towards the IOUs' resource adequacy requirements for a period extending at least through the remaining term of the existing DWR contracts for existing DWR contract quantities. Imposing this requirement is necessary so that the IOUs do not lose resource-adequacy-eligible capacity from the novation process.
9. A two-step cost allocation process to facilitate a transition to a "cost-follows-contracts" methodology to facilitate the IOUs' taking over replacement contracts pursuant to DWR novation is hereby adopted, as set forth in Appendix 2.
10. The adoption of the SCE proposal shall constitute a modification of the cost allocation methodology adopted in Decision (D.) 05-06-060, with the purpose of ensuring that IOU customers remain indifferent as a result of an IOU taking over a replacement contract pursuant to a DWR contract novation.
11. This proceeding shall remain open for consideration of subsequent Phase II(a)(2) issues. As a priority, Phase II(a)(2) of this proceeding shall address the appropriate "just and reasonable" standards to be used in the review and approval of any replacement agreements, in order to ensure consistency with the applicable requirements of Section 451.
This decision is effective today.
Dated November 21, 2008, at San Francisco, California.
MICHAEL R. PEEVEY
President
DIAN M. GRUENEICH
JOHN A. BOHN
RACHELLE B. CHONG
TIMOTHY ALAN SIMON
Commissioners
APPENDIX 1
(END OF APPENDIX 1)
APPENDIX 2
Adopted Measures to Implement Revised
Cost Allocation Methodology
1. The revised DWR cost allocation methodology adopted in this decision maintains the equity of the permanent cost allocation methodology adopted in D.05-06-060 by implementing a "costs-follow-contracts" methodology with indifference payments to keep each IOU's respective customers indifferent to the attempt to novate DWR contracts. Specifically, "avoidable" DWR contract costs shall continue to be allocated on "costs follows contracts" (CFC) basis as is currently required under D.05-06-060. "Unavoidable" DWR contract costs shall also be allocated on a CFC basis to the customers of the IOU that administers the subject DWR contract. DWR costs included in the calculation of DWR's Power Charge Revenue Requirement that are not attributable to energy deliveries should remain allocated on the fixed percentage allocations required by D.05-06-060 - 42.2% to PG&E, 47.5% to SCE, and 10.3% to SDG&E. In addition, costs allocated pursuant to DWR's Bond Charge Revenue Requirement are not impacted by this revised DWR cost allocation methodology. The DWR annual power charge revenue requirement determination process will continue until all of the DWR contracts have expired, been novated, or otherwise terminated.
2. The indifference payment calculation described below in Paragraphs 3-9 will include the costs and revenues associated with unavoidable DWR contract energy deliveries, including: unavoidable DWR contract costs, gas collateral costs, allocated William Gas Cost reductions, the previously-approved 2009-2010 Calpine Reduction Credit, and any other applicable categories of costs and/or revenues associated with unavoidable DWR contract energy deliveries. For purposes of this Appendix, costs that are included in the indifference payment calculation are referred to generically as "unavoidable DWR contract costs." The CCSF-DWR contract forecast of unavoidable DWR contract costs is not currently included in DWR's data. If this contact becomes effective, an indifference payment schedule will be developed at that time for the allocation of CCSF-DWR contract costs.
3. The revised DWR cost allocation methodology involves two steps: (1) establishing an indifference payment schedule, and (2) implementing a new CFC cost allocation methodology, effective for calendar year 2009.
4. Establishing the indifference (transfer) payment schedule requires a determination of the annual difference between the unavoidable DWR contract costs that would have been allocated to each IOU's customers under D.05-06-060 and the unavoidable DWR contract costs that will be allocated to those customers under the CFC methodology, for each year from 2009 until the last DWR contract is scheduled to expire. The indifference payments made by an IOU, or received by an IOU, will equal the amount necessary to allocate the same amount of unavoidable DWR contract costs to the IOU's customers that would have been allocated if D.05-06-060 was not modified.
5. The calculation of indifference payments for each year from 2009 until the last DWR contract is scheduled to expire shall be jointly filed and served by the IOUs in an advice letter compliance filing due 30 days after the effective date of this decision. The IOU's shall concurrently serve a copy of the compliance filing on all parties to this proceeding. Parties will have a 15-calendar-day period within which to file comments on the IOU's filing. If no objections are filed, the IOUs compliance filing will become effective five calendar days thereafter. If objections are filed, Energy Division will prepare a formal resolution resolving objections.
6. For the purposes of calculating the indifference payments (except for the Coral and Sempra contracts), parties shall utilize the final DWR 2009 revenue requirement determination workpapers to determine unavoidable DWR contract costs.
7. To calculate the indifference payments applicable to the unavoidable DWR contract costs of the Coral and Sempra contract and the Williams Gas Cost reduction, the IOUs will need to determine a forward curve for the price of natural gas during the remaining term of those contracts. The IOUs may agree to submit to the Energy Division the IOUs' respective forward natural gas curves derived from then-current market/brokers' quotes and reviewed by Energy division-approved Independent Evaluators. The Energy Division would then calculate an average forward curve for natural gas from the three price curves submitted by the IOUs. If the IOUs agree to use the average curve calculated by the Energy Division, then that forward natural gas price curve shall be utilized in the 30-day compliance filing. Alternatively, if the IOUs and the Energy Division agree upon a different acceptable procedure for calculating a forward natural gas price curve, then the forward curve resulting from that mutually agreed-upon procedure shall be utilized in the 30-day compliance filing. If the parties are unable to agree upon a forward natural gas price curve, then the IOUs shall retain one or more consultants to provide an assessment of the most current forward curve for natural gas at the time the 30-day compliance filing is being prepared. The assessment will be a monthly price forecast of gas prices applicable to pricing terms of the Williams Gas Cost reduction and the Coral and Sempra contracts, and shall be coordinated by the Commission's Energy Division.
8. The indifference payments calculated by the parties and included in the compliance filing shall reflect the annual difference between the existing D.05-06-060 cost allocation and the CFC methodology. In preparing their compliance filing, the IOUs shall comply with the following principles of AB 1X: (1) DWR power is sold by DWR to end-use customers, and (2) the IOUs collect the money owed for such DWR power from their customers and hold that money in trust until they remit it to DWR. In addition, the methodology for making the indifference payments must comply with the Rate Agreement. These principles may require that an IOU that owes an indifference payment to another IOU pay that sum directly to the other IOU.
9. During the 30-day compliance period, the IOUs shall explore with the Energy Division a mutually acceptable shaping or indifference payments across multiple years, such as levelized fixed payments or an alternative shape that would facilitate rate stabilization. Any such shaped payments should not adversely impact a given IOU's customers when compared to payments based on the annual difference between the existing D.05-06-060 cost allocation and the CFC methodology. If the IOUs agree upon shaped payments, that agreement shall be reflected in the 30-day compliance filing. In addition, during the 30-day compliance filing period, the IOUs will explore whether any modification to the payment schedule for indifference payments is appropriate.
10. DWR's true-ups of actual DWR contract costs and remittances for contract deliveries in 2009 and beyond, reflected in the IOUs' respective utility-specific balancing accounts, will correspond to each IOU's allocated contracts. For true-ups related to pre-2009 costs and remittances, the D.05-06-060 cost allocation methodology should be used to calculate true-up amounts.
(END OF APPENDIX 2)
