VII. The Effect of California's Current Capacity Need on this Proceeding
As stated above, in September 2000, the ALJ requested further briefing on the issue of whether or not she should recommend to the Commission that it reject the settlements without prejudice to the settling parties negotiating an outcome that can provide additional power to address California's current needs. The parties were uniform in their conclusions that the Commission should not abandon consideration of the current settlements, and should not require PG&E and the other settling parties to renegotiate their settlements.
The parties are in general agreement that requiring PG&E and the settling bidders to renegotiate the settlements will not remedy the current supply shortage. According to ORA, the reasonableness of the Update settlements is probably best considered separately from the much broader issue of capacity need and responsibility for resource procurement. Aglet states that there is no evidence in this proceeding that the three bidders could complete their projects in time to cure today's market problems, or that prices for electricity generated by the projects would help drive current market prices back toward costs of production. Also, many parties point out that because FERC declared that the Commission's implementation of the FSO4 violated PURPA, contract negotiations between the parties may have to commence from scratch, and would necessarily be lengthy and would create uncertainty.15 According to some parties, the risk of future litigation, eliminated by the proposed settlement, would not be eliminated if the Commission rejected the current settlements and directed further negotiation.
PG&E also believes that it could obtain a better result for ratepayers by negotiating agreements to meet California's energy needs in accordance with the Commission's recent decision regarding bilateral contracts, rather than under the auspices of an Update settlement, because the bidders in the Update process, if acting as rational actors in the marketplace, would seek to recover their sunk costs.
However, ORA requests the Commission to find in this docket that PG&E should not receive rate recovery of its summer wholesale power procurement costs associated with 244 megawatts (the megawatts associated with the Update bids underlying the solicitation) it could have obtained if it had entered into these FSO4 contracts, or a negotiated contract settlement. ORA also argues that in the event PG&E chooses to negotiate for capacity in the future with the settling bidders in this application, PG&E should do so knowing that the maximum the Commission will find reasonable is the contract cost, less the approved settlement amount. PG&E strongly opposes both of ORA's contentions.
Even if we were to require the settling parties to renegotiate an outcome that can provide additional power for California, there is no evidence in this proceeding (as Aglet points out) that the three bidders could complete their projects in time to cure today's market problems, or that prices for electricity generated by the projects would help drive current market prices back toward costs of production. Therefore, we approve the settlements as presented in the application, and do not direct further negotiations. However, we need not and do not make a finding that PG&E did not know or should not have known about the current energy crisis at the time it entered into the settlements. Rather, we hold this package of settlements to be reasonable, in part, because there is no evidence that reactivating the Update solicitation at this point will contribute to a solution to the current energy crisis.
We do not address the additional issues raised by ORA in this proceeding, but permit ORA to raise them in the proceeding where we review PG&E's rate recovery of its summer wholesale power procurement costs, or other appropriate proceeding.
Because PG&E followed the directives of the July ACR and achieved settlements with the three settling bidders for amounts based on reasonable bid preparation or reliance costs, we find the settlement package as a whole to be reasonable, consistent with the law, and in the public interest and that PG&E's entering into these settlement agreements is prudent. In addition, we (1) authorize full recovery, through PG&E's Transition Cost Balancing Account (TCBA), of payments made by PG&E under these settlement agreements subject to PG&E's prudent administration of the settlement agreements; and (2) find these agreements replace all effective megawatts in PG&E's Update solicitation, and that these agreements shall be in lieu of the Update capacity that would otherwise have been awarded to bidders pursuant to PG&E's Update solicitation. In light of this determination, the limited rehearing ordered in D.94-12-051 should be cancelled with respect to PG&E and all effective megawatts in PG&E's Update solicitation.
Comments to the Draft Decision
The draft decision of ALJ Econome in this matter was mailed to the parties in accordance with Pub. Util. Code § 311(g)(1) and Rule 77.7.
1. In this application, PG&E requests approval of a settlement package it has reached with three bidders in PG&E's Update auction. The aggregate principal amount of the settlement package is $9,525,000.
2. According to PG&E, each of these three settlements is based on the settling bidders' reasonable bid preparation costs or reliance costs, one of the settlement structures suggested in the July ACR.
3. The July ACR memorialized the goals and objectives of the settlement process and a number of settlement options, which the Commission unanimously encouraged at its June 21, 1995 meeting. Thus, it carries more weight than an individual ACR expressing the views of only one member of the Commission.
4. The July ACR defined the settlement outcome of a "buyout" as "a settlement which makes an otherwise winning bidder whole for reasonable bid preparation costs or reliance costs."
5. In D.98-12-074, we approved three of SDG&E's Update settlements as reasonable and in the public interest on the basis that SDG&E followed the direction of the July ACR and achieved settlements with the three settling bidders for amounts based on reasonable bid preparation or reliance costs.
6. PG&E followed the direction of the July ACR and achieved settlements with the three settling bidders for amounts based on reasonable bid preparation or reliance costs.
7. A bidder would incur bid preparation costs as part of its preparation efforts to perform an anticipated contract. Therefore, bid preparation costs are a category of reliance interests as used in the July ACR.
8. Even if the value of the NOx offset costs is deducted from AES' reasonable costs, AES' reliance costs still exceed the settlement amount.
9. The letter of credit was one of the prerequisites for executing an FSO4 contract.
10. In D.94-01-020, the Commission directed PG&E to announce the FSO4 auction winners for the Hunters Point project as scheduled. Several days later, PG&E announced AES as the winning bidder for the Hunters Point solicitation.
11. In D.94-06-050, 55 CPUC2d 291, the Commission directed that the Hunters Point solicitation should continue. The Commission refused to modify D.94-06-050 as applied to Hunters Point in D.94-12-051, 58 CPUC2d 300.
12. In March 1995, AES believed it had an FSO4 contract, while PG&E argued that AES did not. In its order staying the solicitation, the Commission in March 1995 again did not reach the issue of whether there were any preexisting contracts between the utilities and the QFs in the FSO4 solicitation. In March 1995, parties to the Update were briefing various options including continuing the existing Update process by shifting reliance from an attempted implementation of federal law to intrinsic state authority.
13. As of the time the July ACR issued, AES had already incurred the bulk of the reliance costs which serve as the basis for the settlement.
14. AES' actual reliance expenditures in June 1996 should have been heavily discounted, but the settlement amount is less then AES' reasonable reliance expenditures as of June 1996.
15. In response to a recent ALJ ruling requesting further briefing on the issue of whether or not the ALJ should recommend to the Commission that it reject the settlements without prejudice to the settling parties negotiating an outcome that can provide additional power to address California's current needs, the parties were uniform in their conclusions that the Commission should not abandon consideration of the current settlements, and should not require PG&E and the settling parties to renegotiate the settlements.
16. Even if we were to require the settling parties to renegotiate an outcome that can provide additional power to California, there is no evidence in this proceeding that the three settling bidders could complete their projects in time to cure today's market problems, or that prices for electricity generated by the projects would help drive current market prices back toward costs of production.
17. We need not and do not make a finding that PG&E did not know or should not have known about the current energy crisis at the time it entered into the settlements. Rather, we hold this package of settlements to be reasonable, in part, because there is no evidence that reactivating the Update solicitation at this point will contribute to a solution to the current energy crisis.
18. We do not raise the additional issues raised by ORA in this proceeding, but permit ORA to raise them in the proceeding where we review PG&E's rate recovery of its summer wholesale power procurement costs, or other appropriate proceeding.
1. Because this application can be resolved on the parties' briefs, hearings are not necessary, and this order should change the determination preliminarily made in Resolution ALJ 176 -3030.
2. We review the package of settlements pursuant to Rule 51.1(e) of the Commission's Rules of Practice and Procedure which provides that, prior to approval, the Commission must find a settlement "reasonable in light of the whole record, consistent with the law, and in the public interest."
3. Reliance costs as used in the July ACR include reasonable costs a bidder incurred in preparing to perform an anticipated contract.
4. In assessing the reasonableness of the settlement package, we are guided by the July ACR.
5. Because PG&E followed the directives of the July ACR and achieved settlements with the three settling bidders for amounts based on reasonable bid preparation or reliance costs, we find the settlements to be reasonable and in the public interest, as well as consistent with prior Commission decisions approving a similar settlement.
6. We determine whether it was reasonable for AES to make particular reliance expenditures at given points in time based on facts that AES knew or should have known at the time the costs were incurred.
7. Our findings with respect to AES do not mean that the settlement should be for the full amount of AES' reasonable bid preparation or reliance costs, but that these costs can serve as a ceiling for a settlement.
8. Our findings with respect to AES are unique to AES and should not serve as precedent for any other bidder in any utility's Update solicitation, because of the unique facts surrounding the Hunters Point solicitation. Thus, our assessment of the reasonableness of AES' reliance costs at a given point in time should not be used by any other utility or bidder as precedent, because no other bidder was similarly situated to AES.
9. The PG&E/AES settlement falls within the bounds of AES' reasonable bid preparation or reliance costs.
10. With respect to the three settlements PG&E has reached with AES, SeaWest/Toyo and Zond, and which are contained in PG&E's application, we: (1) find the settlement package as a whole to be reasonable, consistent with the law, and in the public interest and that PG&E's entering into these settlement agreements is prudent; (2) authorize full recovery, through PG&E's TCBA, of payments made by PG&E under these settlement agreements subject to PG&E's prudent administration of the settlement agreements; and (3) find these agreements replace all effective megawatts in PG&E's Update solicitation, and that these agreements shall be in lieu of the Update capacity that would otherwise have been awarded to bidders pursuant to PG&E's Update solicitation.
11. In light of the determinations made in the preceding Conclusion of Law paragraph, the limited rehearing ordered in D.94-12-051 should be cancelled with respect to PG&E and all effective megawatts in PG&E's Update solicitation.
12. Because we wish to resolve issues relating to PG&E's Update solicitation expeditiously, this decision should be effective immediately.
IT IS ORDERED that:
1. The application of Pacific Gas and Electric Company (PG&E) for approval of its Biennial Resource Plan Update (Update) settlement package is reasonable, consistent with the law, and in the public interest, and is approved.
2. The Commission: (1) finds the settlement package as a whole to be reasonable, consistent with the law, and in the public interest and that PG&E's entering into these settlement agreements is prudent; (2) authorizes full recovery, through PG&E's Transition Cost Balancing Account, of payments made by PG&E under these settlement agreements subject to PG&E's prudent administration of the settlement agreements; and (3) find these agreements replace all effective megawatts in PG&E's Update solicitation, and that these agreements shall be in lieu of the Update capacity that would otherwise have been awarded to bidders pursuant to PG&E's Update solicitation.
3. In light of the determinations made in the preceding Ordering Paragraph, the limited rehearing ordered in Decision 94-12-051 is cancelled with respect to PG&E and all effective megawatts in PG&E's Update solicitation.
4. Because this application can be resolved on the parties' briefs, hearings are not necessary, and this order shall change the determination preliminarily made in Resolution ALJ-176.
5. This proceeding is closed.
This order is effective today.
Dated , at San Francisco, California.
15 PG&E points out that settlement negotiations with each of the settling parties to reach the current agreements took approximately a year, and that negotiations concerning the terms and conditions of a mutually acceptable power purchase agreement could be even more complex and time consuming.
