III. Proposed Settlement

A. Summary of the Proposed Settlement

The proposed settlement agreement addresses issues relating to cost responsibility surcharges for DL served by onsite or "over-the-fence" generation. The settlement addresses DG issues only, but does not address cost responsibility for municipal load. Issues relating to municipal load will be addressed in a separate order.

The Settlement Agreement proposes that DL that began to receive service from onsite or over-the-fence generation after January 17, 2001, pay a "DWR Shortfall Charge" equal to 72 percent of the DWR bond charge imposed on bundled service customers.⁷ "Existing" and "grandfathered" DL are exempt from paying any surcharge for DWR's ongoing costs, as is DL served by new onsite or over-the-fence generation up to an annual megawatt ("MW") cap.⁸ DL covered by the Settlement Agreement is required, however, to continue to contribute toward the recovery of SCE's past procurement-related undercollections.⁹ Finally, the Settlement Agreement would require that DL that is not statutorily exempt from paying CTC to pay a tail CTC consisting of the components specified in Pub. Util Code § 367(a).¹⁰

The Settlement Agreement does not address certain issues that Settling Parties do not consider to be fully ripe for determination, such as the applicability of an HPC for PG&E, or how, if at all, generator refunds in pending FERC dockets would apply to DL customers. The Settlement Agreement likewise does not address narrow issues that Settling Parties believe are better left to case-specific applications. For example, specific questions relating to the implementation of charges at customer sites with multiple accounts, and sites at which the customer maintains no utility connection are not addressed in the Settlement. The Settlement Agreement also does not address the question of exemption from CRS for "eligible customer generators" as defined in Pub. Util. Code § 2827(b)(2), or eligible biogas digester customer-generator" as defined in Pub. Util. Code § 2827.9.

Various parties filed comments opposing the Settlement. ORA and SDG&E oppose the "Shortfall" charge, and argue, instead, that a DL should pay full share of the DWR Bond Charge on the same pro rata basis that applies to bundled and DA customers. Additionally, ORA opposes the proposed exclusions from ongoing DWR power charges under a megawatts (MW) cap. Other parties representing CG interests opposed the Settlement for opposite reasons, arguing against imposition of any surcharges on the basis that it would be contrary to public policy and statutory mandates in favor of developing new sources of alternative generation.

B. Standard for Considering Settlements

In this phase of the proceeding, the record consists of (1) the evidence developed through written testimony and oral cross examination on the underlying merits of issues in dispute and (2) the Settlement Agreement which represents a negotiated compromise of certain parties.

The Settlement Agreement is sponsored by parties representing a range of interests, including bundled utility customers, customers who are in the process of developing Customer Generation to meet their electricity requirements or have already departed the utility grid, generation developers and turbine manufacturers, investor-owned utilities, and affected state agencies and educational institutions.11

The Settlement, however, is not supported by all parties. Certain provisions within it were also opposed by a number of parties, including ORA, SDG&E, and various parties representing Customer Generation interests.

In reviewing the Settlement, we are guided by the Commission's Settlement Rules set forth in the Rules of Practice and Procedure, Article 13.5: "Stipulations and Settlements." Rule 51.1(e) provides that the Commission must find a settlement, whether contested or uncontested, to be "reasonable in light of the whole record, consistent with the law, and in the public interest" before it may approve a settlement. As we explained in D.96-01-011:

"[W]e consider whether the settlement taken as a whole is in the public interest. In so doing, we consider individual elements of the settlement in order to determine whether the settlement generally balances the various interests at stake as well as to assure that each element is consistent with our policy objectives and the law." (Re Southern California Edison Company, 64 CPUC2d 241, 267, citing D. 94-04-088.)

In D. 01-12-018, we stated that when a contested settlement is presented to us where hearings have been held on the contested issues, we are free to consider such settlements under Rule 51.1(e) or as joint recommendations that may or may not be supported by the evidence in the record. In this instance, evidentiary hearings were held on the contested issues, although various parties elected to waive or curtail cross-examination. Nonetheless, the underlying testimony was received into evidence, and forms an independent basis against which to evaluate the reasonableness of the Settlement Agreement.

Under Rule 51.1(e), we may reject a settlement if one or more of its elements is not consistent with our policy or the law, without elaborate examination of all the elements and without dealing with each contention of each party. We recognize that considerable time and effort has been expended preparing this settlement, which is sponsored by a number of parties representing diverse interests. Nevertheless, we cannot abandon our regulatory obligations in favor of a negotiated outcome.

In this instance, upon review, we find that the terms of the Settlement are not in the best interest of the public. While the Settlement reflects a broad range of divergent interests, including those of the utilities (i.e., PG&E and SCE), residential customers (i.e., TURN), commercial and industrial customers who have developed, or are developing, customer generation projects (i.e., BOMA, EPUC, and CIPA), developers of Customer Generation (i.e. Clarus Energy Corporation and Real Energy), the UC/CSU and the CEC, the Settlement is not supported by other parties (ORA, SDG&E) who raise important concerns with the overall settlement. Additionally, various specific provisions of the Settlement have been protested by CEERT, CalSEIA, and Capstone. As discussed further below, we find merit in the objections raised by ORA and SDG&E regarding Navigant's forecast of customer generation. We also find merit in CEERT's objections to the Settlement Agreement's treatment of clean/ultra-clean distributed generation.

C. Comments to the Settlement Agreement

In comments on the Settlement Agreement, a number of parties raised various concerns with specific provisions of the Settlement Agreement and ORA and SDG&E objected to the Settlement Agreement in its entirety. While AReM/WPTF neither opposes nor supports the Settlement, it notes its concern that in the absence of "straightforward and transparent rules" for administrating the allocation of annual MW cap, smaller projects will face significant barriers in qualifying within the cap.

CLECA argues that while it may have made sense to impose CTC charges when utilities were receiving market prices for their output, now that that market structure is absent, it no longer makes sense for departing load to pay any portion of the CTC. Similarly, CMTA argues that Pub. Util Code § 372(a)4 exempts load served by cogeneration projects from the tail CTC.

CalSEIA argues that the Settlement Agreement fails to address provisions in the Pub. Util. Code and AB58 that limit the Commission's authority to impose surcharges on net metered customers.

Capstone does not support the Settlement Agreement because it is inconsistent with state policy aimed to promote clean distributed generation. Capstone argues that an exemption from departing load surcharges should apply to small, clean distributed generation that (1) is less than 5 MW, (2) is located within a single facility, (3) is on-site/over-the-fence load pursuant to Pub. Util Code §§ 216 and 218, (4) is powered by fuel, other than diesel, and (5) complies with emission standards adopted by the State Air Resources Board.

ORA objects to the MW cap proposed by the settling parties. It argues that the basis for the MW cap is a forecast done by Navigant which has little, if any, connection to actual purchasing decisions by DWR.

CEERT reminds the Commission that Pub. Util Code § 353.2(b) allows the Commission to "consider energy efficiency and emission performance to encourage early compliance with air quality standards established by the State Air Resources Board for ultra-clean and low-emission distributed generation."

D. The Settlement Agreement and the Public Interest

The majority of the parties support the settlement agreement. However, some parties raise serious objections to major underlying aspects of the settlement agreement. We must find a balance between the public interest, the settlement agreement and the objections raised by the parties to provisions of the settlement agreement.

In looking at the public interest, we must first assure ourselves that each element of the settlement is consistent with the policy and intention established in this proceeding to prevent cost-shifting of DWR costs incurred on behalf of IOU customers and to establish a stable customer base.¹² This settlement agreement has only one underlying element which we need to consider.

Going forward, the settlement agreement proposes to exempt (1) "Grandfathered" DL that becomes operational on or before January 1, 2003, or that submitted its CEQA application on or before August 29, 2001, and becomes operational on or before January 1, 2004, and (2) "Qualifying" new DL that falls within an annual megawatt cap.¹³

The MW cap proposed in the Settlement Agreement is based on the forecast of Customer Generation that was available to DWR at the time the contracts were being negotiated. Settling Parties argue that there is therefore a logical connection between the amount of Customer Generation excluded from going-forward costs and the amount of Customer Generation for which DWR was not negotiating contracts. We do not agree. The cap relied upon in the settlement agreements simply represents Navigant's forecast of possible customer generation. And while Navigant was providing DWR with forecasts which it used to negotiate long-term contracts, we find nothing in this record to suggest that there is indeed a logical connection between the amount of customer generation predicted by Navigant and the amount of load for which DWR did not procure long-term or short-term power. In fact, as ORA points out, during evidentiary hearings Navigant witness Mr. Macdonald noted that its "job was generally to give them [DWR] the facts and not to make recommendations in terms of how much they should be buying or the specific terms of the contracts."¹⁴ The record simply does not support the extent to which DWR's energy procurement efforts were affected by Navigant's forecasts. According, we reject the settlement agreement.