Discussion

In deciding whether we should approve the proposed modifications to the Amended Servicing Agreement and related attachments, the Commission is mindful of the course of action we have taken in R.01-10-024 and in D.02-09-053. One of the goals of R.01-10-024 is to allow the utilities "to resume purchasing electric energy, capacity, ancillary services and related hedging instruments to fulfill their obligation to serve and meet the needs of their customers." (R.01-10-024, p. 1.)

In order for SCE and the other utilities to undertake the operational responsibilities associated with the allocated DWR contracts beginning on January 1, 2003, certain operational arrangements and servicing arrangements need to be in place. With less than one month to go before the utilities are to take over the operational responsibilities for the DWR contracts, DWR and SCE have been unable to agree on a mutually acceptable servicing arrangement. To ensure a seamless transition of the DWR contracts allocated to SCE, while ensuring that DWR's legal and financial responsibilities for the DWR contracts continue to be fulfilled, it is imperative that servicing arrangements be in place before the end of 2002.

D.02-09-053 also required DWR to submit proposed operational agreements. As noted in the positions of the parties, certain provisions of the proposed operational agreement that DWR submitted may affect certain provisions of the proposed modifications to the Amended Servicing Agreement and the related attachments. The proposed operating agreement is being considered by the Commission in R.01-10-024. Since DWR and the utilities have been unable to mutually agree on a proposed operational agreement, we believe that the Commission will concurrently adopt an Operating Order when a Servicing Order for SCE is adopted.

On December 9, 2002, DWR submitted its comments on the three draft decisions regarding the Servicing Order. DWR's submission of December 9, 2002 included a copy of "Amendment No. 2 To First Amended and Restated Servicing Agreement" (Amendment No. 2) between DWR and SCE. DWR states that Amendment No. 2 is intended to effect changes to the Servicing Agreement requested in D.02-11-074, the Bond Charge Decision. That decision, among other things, ordered SDG&E to make changes to its billing systems to impose the bond charges. SCE and DWR executed Amendment No. 2 on or about December 6, 2002. DWR states that it agrees to the provisions of Amendment No. 2, and requests that the Commission approve Amendment No. 2 or that the provisions of Amendment No. 2 be incorporated in the Commission's final 2003 Servicing Order decision.

DWR's December 9, 2002 submission also states that it reserves comment on the draft decisions which would adopt the Servicing Orders. DWR considers it premature to comment on these draft decisions because DWR has submitted a request pursuant to Water Code § 80106(b) to order the utilities to enter into an operating agreement with DWR, and that any Servicing Order adopted by the Commission must be consistent with that request.

The comments of SCE, dated December 9, 2002, states that DWR and SCE have reached agreement on Amendment No. 2. SCE states that Amendment No. 2 accommodates the DWR bond charge. SCE included a copy of Amendment No. 2 in Attachment C of its comments.

Amendment No. 2 makes four changes to SCE's existing Amended Servicing Agreement. The first change is a revised Attachment A to the Amended Servicing Agreement. The revised Attachment A changes the contact information for SCE, and deletes the "Surplus Energy Power Sales Remittances" contacts that DWR had proposed in its October 8, 2002 submission. The second change is a revised Attachment B to the Amended Servicing Agreement. The revised Attachment B includes the DWR bond charges as part of the remittance methodology, and provides for payments through the Automated Clearing House. The third change is a revised Attachment C to the Amended Servicing Agreement. The new Attachment C revises the format of the daily and monthly reports to include additional information about the implementation of the bond charges. The fourth change is a revised Attachment G to the Amended Servicing Agreement. As revised, Attachment G provides an estimate of SCE's incremental costs associated with the DWR bond charge.

We will incorporate the provisions of Amendment No. 2, as agreed to by DWR and SCE into the Servicing Order that we adopt today. The revisions in Amendment No. 2 enable SCE to carry out the Commission's directives contained in the Bond Charge Decision. Thus, the versions of Attachments A, B, C and G of the Servicing Order that we adopt today, are reflected in Amendment No. 2.⁷

SCE also recommends that certain modifications be made to the Attachments B and H of the Servicing Order. SCE's suggested modifications appear in Attachment B of its comments. SCE's suggested modification to Attachment B of the Servicing Order would eliminate the reference to the "transition" between the "More Precise Billing Methodology" to the "Post-Transition Remittance Methodology." SCE's proposed modifications specify a single, defined methodology for each point in time.

SCE's proposed modifications to Attachment B of the Servicing Order would change the wording that SCE and DWR agreed to in Amendment No. 2. Accordingly, we will not adopt SCE's proposed modifications to Attachment B of the Servicing Order.

SCE states that Attachment H of the Servicing Order contains "circular and/or improper definitions for many critical terms which determine how DWR remittances are to be trued-up when actual data becomes available." According to SCE, its proposed modifications would "remedy the methodological problems included in the version of Attachment H that DWR proposed and that the Draft Decision subsequently adopted." (SCE Comments, Attachment B, p. 2.)

Although SCE's suggested changes to Attachment H appear to improve the methodology used to calculate the true-up adjustments, we will not adopt SCE's suggested changes at this time. Instead, it is appropriate for SCE and DWR to discuss and understand what changes are needed to the true-up adjustments.

We now turn to SCE's concerns with the proposed modifications to the Amended Servicing Agreement. As part of this review, we compared SCE's proposed modifications to the proposed modifications suggested by DWR.

SCE's proposed modifications to the Amended Servicing Agreement would delete the use of the phrase "or is deemed to have provided" in section 1.51 of the Amended Servicing Agreement. SCE does not believe that DWR's concept of "deemed delivery" is consistent with D.02-09-053 because it would set up a priority for DWR power to serve load over any other power. SDG&E, in its comments to the proposed modifications to SDG&E's servicing agreement, raised a similar concern.

We agree with SCE. The use of the phrase could be interpreted to mean that DWR power has a priority over any other power. We will delete the phrase in section 1.51. of the Servicing Order.

SCE seeks to remove from the servicing agreement most of the references to the proposed Operating Agreement. SCE contends that the servicing agreement should be able to stand alone with an Operating Agreement, and that any provisions relating to settlements and remittances, including the calculation of DWR revenues resulting from surplus energy sales, should be in the servicing agreement and not in the Operating Agreement. SCE proposes that Exhibit D of the proposed Operating Agreement should be included in the Servicing Order as part of Attachment J. SCE also proposes that Exhibit C of the proposed Operating Agreement should be included in the Servicing Order as part of Attachments H and J.

We decline to adopt SCE's proposal to remove the references to the Operating Agreement or Operating Order from the Servicing Order, and to incorporate Exhibits C and D of the proposed Operating Agreement into the Servicing Order. The provisions of the proposed Operating Agreement are being examined separately in R.01-10-024. It is premature at this point to remove the references to the Operating Order from the Servicing Order or to incorporate Exhibits C and D of the proposed Operating Agreement into the Servicing Order.

SCE seeks to delete section 2.2.(b) from the Amended Servicing Agreement. SCE notes that this section will need to be updated with the scheduling procedures that are effective on January 1, 2003. We will not delete section 2.2.(b) at this time. DWR and SCE should discuss how this section should be updated.

SCE has raised concerns about the costs associated with credit risk management and the incremental costs associated with the sales of surplus energy.

In SCE's reply comments to the alternate draft decision of Commissioner Brown, SCE states that it agrees with the comments of the other two utilities that they should not be required to post collateral for sales of surplus energy from the DWR contracts allocated to them. SCE is concerned that it is taking on "risks that are attendant to the underlying DWR contracts." (SCE Reply Comments, Dec. 17, 2002, p. 1.)

We will accept DWR's proposed modification to sections 3.1(c) and 3.1(d) of the Servicing Order. This is consistent with the Commission's goal of reducing the utilities' reliance on the use of state resources to fulfill their obligations to serve customers. As noted in the Operating Order decision, the collateral requirements are not imposed by the DWR contracts, but rather by exogenous variables such as the ISO tariff. With respect to the incremental costs associated with surplus energy sales, the Operating Order decision addresses the recovery of those costs. We will not adopt SCE's recommendation to add an additional sentence about the recovery of costs to section 3.5 of the Servicing Order.

SCE proposes to remove section 10.(b), the reference to DWR and SCE agreeing to negotiate changes to the Servicing Order if the rating agencies request changes to the Servicing Order. We decline to adopt SCE's proposal because it could have an impact on DWR's bonds.

SCE also seeks to add a section to the Servicing Order regarding "Dispute Resolution." Given the current inability of DWR and SCE to reach a mutually agreeable servicing agreement, the addition of such a section would not be realistic at this time.

SCE proposes to delete section 2.2.(d) of Service Attachment 1. This section was approved in D.02-07-039 as part of Amendment No. 1 at the request of SCE. We see no need to remove it from this attachment.

SCE has questioned the need for the information that DWR seeks in Service Attachment 2. SCE states that DWR expects the utilities to prepare this attachment, but little or no discussion about this attachment has occurred. DWR's October 8, 2002 submission only included the one page "Service Attachment 2," which described the "Title" of seven sections. DWR's Service Attachment 2 also notes that this is "To be provided by Utility." We will retain the Service Attachment 2 page as part of the Servicing Order, with the understanding that DWR and SCE will need to discuss what kind of information DWR wants from SCE.

In its reply comments to the alternate draft decision of Commissioner Brown, SCE agrees with the other two utilities that they should not be required to remit the revenues from the sales of surplus energy to DWR until it has received such revenues.

We will also make a change to the Servicing Order with respect to the timing of remittances from SCE to DWR resulting from the sales of surplus energy. Section 4.2(g) of the Servicing Order was drafted to require that SCE remit an estimate of the sales revenues to DWR 20 days after delivery. Exhibit C of the Operating Order, which is entitled "Settlement Principles For Remittances And Surplus Revenues," provides at page C-3 that the: "Revenues from a forward market sale shall not be distributed to the Parties until after Utility receives the revenues from the sales and any sale-related charges." In reference to "ISO Real Time Market Sales," Exhibit C states that the: "Revenues from delivery of surplus energy to the ISO real time market shall not be distributed to the Parties until after Utility receives payment for final monthly invoice from the ISO for the month in which the surplus energy was delivered." Both of the quoted passages mean that SCE should not have to remit revenues from the energy sales to DWR until SCE has received payment. Accordingly, we shall change the reference in Section 4.2(g) of the Servicing Order to the 20 days to make it consistent with Exhibit C of the Operating Order.

Attachment J of the proposed Servicing Order is premised on remitting a preliminary amount of the surplus energy sales revenues to DWR on the first business day after the 20th day of the month. However, as discussed above, Exhibit C of the Operating Order specifies that revenues from forward sales, and sales to the ISO, are to be remitted to DWR after the utility has received payment. In order to make the Servicing Order consistent with the Operating Order, proposed Attachment J should be deleted from the Servicing Order that we adopt in this decision. In addition, other references to Attachment J that appear in the following sections of the Servicing Order shall also be deleted: Table of Contents; 1.30.5.; 2.2.(e); 2.6.; 4.1.; 4.2.(g); 4.2.(h); 5.1.; 5.5.; 14.17.

The majority of the proposed modifications to the Amended Servicing Agreement reflect the actions taken in the Contract Allocation Decision, and are also linked to the proposed Operating Agreement. All of the proposed modifications, as shown in the attached Servicing Order and as discussed above, are consistent with the directives ordered in D.01-09-014, D.02-02-051, D.02-02-052, and D.02-09-053.

Since DWR and SCE have been unable to timely agree on a mutually acceptable modified Amended Servicing Agreement, we have further modified DWR's proposed modifications to the Amended Servicing Agreement to turn the document into a Servicing Order. The marked version of the Servicing Order, which is attached to this decision as Appendix A, is approved.⁸ SCE shall be directed to comply with the terms and conditions of the attached Servicing Order.

We note that today's approval of the Servicing Order does not prevent DWR and SCE from negotiating a mutually agreeable modified servicing agreement in the future and bringing such an agreement to us for approval. However, due to the approaching deadline for when SCE is to take over the operational aspects of the DWR contracts allocated to SCE, the attached Servicing Order is needed so that the operational transition for the DWR contracts can proceed smoothly.

SCE states in its comments that it has had discussions with DWR as to the possible terms and conditions that could be included in the Amended Servicing Agreement. Although it is unclear at this point whether such discussions will lead to an agreement, SCE seeks clarification from the Commission that SCE be allowed to seek the termination of any Servicing Order that may be adopted, with an executed agreement between SCE and DWR "which substantially and fundamentally comport with the terms and conditions set forth in the ... Servicing Order and the related attachments as they then exist." (SCE December 9, 2002 Comments, p. 11.)

We are receptive to reviewing a mutually agreeable servicing arrangement between SCE and DWR, so long as the terms do not substantially deviate from what's adopted in today's servicing order. Should SCE and DWR negotiate such an arrangement, SCE is free to request that the Commission consider replacing the Servicing Order adopted in today's decision with the mutually agreeable arrangement.