BEFORE THE PUBLIC UTILITIES COMMISSION OF THE
STATE OF CALIFORNIA
Investigation on the Commission’s Own Motion Into the Performance Obligations of Qualifying Facilities Pursuant to Contracts With California Public Utilities / )))) / Investigation 01-04-027
SUPPLEMENTAL COMMENTS OF SOUTHERN CALIFORNIA EDISON COMPANY (U 338-E) CONCERNING DRAFT DECISION DATED JUNE1,2001, AND MOTION SUBMITTING FOR COMMISSION APPROVAL: (1) EXECUTED LONG-TERM AMENDMENTS WITH CERTAIN GAS-FIRED COGENERATORS; (2) EXECUTED SHORT-TERM "BRIDGE" AMENDMENTS WITH CERTAIN GAS-FIRED COGENERATORS;
(3) STANDARDIZED FORM AMENDMENT PROVIDING FOR FIVE-YEAR ALTERNATIVE "FIXED" SRAC PRICE OF 5.37 CENTS/KWH
RUSSELL C. SWARTZ
JAMES B. WOODRUFF
Attorneys for
SOUTHERN CALIFORNIA EDISON COMPANY
2244 Walnut Grove Avenue
Post Office Box 800
Rosemead, California 91770
Telephone: (626) 302-1924
Facsimile: (626) 302-1904
E-mail:
Dated: June 12, 2001
06-12-01 Supplemental Comments re DD.DOC(00)7/6/01
BEFORE THE PUBLIC UTILITIES COMMISSION OF THE
STATE OF CALIFORNIA
Investigation on the Commission’s Own Motion Into the Performance Obligations of Qualifying Facilities Pursuant to Contracts With California Public Utilities / )))) / Investigation 01-04-027
SUPPLEMENTAL COMMENTS OF SOUTHERN CALIFORNIA EDISON COMPANY (U 338-E) CONCERNING DRAFT DECISION DATED JUNE1,2001, AND MOTION SUBMITTING FOR COMMISSION APPROVAL: (1) EXECUTED LONG-TERM AMENDMENTS WITH CERTAIN GAS-FIRED COGENERATORS; (2) EXECUTED SHORT-TERM "BRIDGE" AMENDMENTS WITH CERTAIN GAS-FIRED COGENERATORS;
(3) STANDARDIZED FORM AMENDMENT PROVIDING FOR FIVE-YEAR ALTERNATIVE "FIXED" SRAC PRICE OF 5.37 CENTS/KWH
In its initial Comments on the Draft Decision of Commission President Lynch dated June 1, 2001 (“Draft Decision”), Southern California Edison Company (“Edison”) stated that it planned “to begin filing with the Commission various forms of executed contract amendments and other form agreements to resolve the SRAC pricing issues discussed in the Draft Decision” by late last week. Edison’s Comments Regarding Draft Decision of Commissioner Lynch Dated June 1, 2001 (“Comments”), p. 3, n. 3. Although Edison had hoped to submit such documents to the Commission by last Friday, Edison did not conclude negotiations with some QFs until early today, hence the unexpected delay in this filing.
These supplemental comments discuss three types of agreements which are the product of months of negotiations and address many of the concerns raised in the Draft Decision .[1] Taken as a whole, the agreements submitted with these supplemental comments provide significant benefits for ratepayers, QFs, Edison and the State by providing for stable and reasonable SRAC pricing over the next five years at a time when both pricing and supply are highly uncertain. These agreements also provide for resolution of numerous litigation and regulatory matters which threaten to further destabilize the energy market by further diminishing Edison’s creditworthiness and substantially increasing the State's “net short” exposure.
In light of the urgency indicated in the Draft Decision, and in an effort to comply with the directives contained therein, Edison requests expedited review and approval of the agreements submitted with these supplemental comments in connection with the Commission’s consideration of the Draft Decision on June 13, 2001.[2]
I.
INTRODUCTION
On June 1, 2001, President Lynch issued the Draft Decision, which proposes to pre-approve voluntary non-standard contract modifications that meet the guidelines offered in the Draft Decision. It is clear from the Draft Decision that the Commission is well-informed of the current state of progress in the negotiations between Edison and various QF industry representatives to achieve an overall resolution of issues concerning reform of short-run avoided cost pricing (“SRAC”) methodology as well as issues relating to nonpayment by Edison for energy and capacity delivered during the period November 1, 2000 through and including March 26, 2001 (the “Disputed Payment Period”). President Lynch’s comments at the Commission’s June 7, 2001 meeting concerning the Draft Decision (Item H-21) refer specifically to such negotiations and noted “that the parties really are running out of time to address [the Draft Decision] and come to closure in the negotiations that are being conducted by the Governor’s office.” Transcript of President Lynch’s Comments on Item H-21 during Commission Meeting No. 3064 held on June 7, 2001, emphasis supplied.[3] Consistent with President Lynch’s directive to conclude negotiations expeditiously, Edison and QF representatives have now completed their lengthy and sometimes contentious negotiations. Edison therefore files these supplemental comments in response to the Draft Decision and seeks expedited review and approval of a standard form agreement applicable to one class of generators and a number of actual contract amendments applicable to another class.
Edison is submitting three types of agreement with these supplemental comments: (1) a form agreement made available generally to renewable generators which provides for a five-year fixed price for SRAC (the “Fixed Energy Rate Agreement”; (2) a series of contract amendments made available to certain natural gas fueled cogenerators which provide for pricing based on the Topock border indices, in lieu of the Malin indices as approved in D.01-03-067 (the “Gas Amendment”); and (3) a series of short-term amendments, similar in form and content to the Gas Amendment, which have been made available only on a 30-day basis (the “Bridge Amendment”).
In addition to SRAC pricing terms consistent with the general guidance offered in the Draft Decision, the Fixed Energy Rate Agreement contains terms relating to payment of by Edison to QFs for deliveries made during the Disputed Payment Period upon the occurrence of certain events, as described in that agreement. Consistent with the directives of the Draft Decision, the Fixed Energy Rate Agreement provides for an immediate payment of 10% of an amount assumed to be owing for settlement purposes only, plus interest on such amount.[4] In addition, the Fixed Energy Rate Agreement provides for a second 10% payment, ongoing interest payments, and payment in full when certain conditions set forth in the Fixed Energy Rate Agreement have been satisfied, as more fully discussed in Section IIA below. This payment structure becomes generally available to gas-fired cogenerators who have executed the Gas Amendment through a provision in the latter agreement prohibiting QF creditor “preferences.” Finally, both the Gas Amendment and the Fixed Energy Rate Agreement contain terms that provide for staying and tolling outstanding disputes as well as terms providing for releases of claims asserted by the parties for past performance under the contract upon the occurrence of final payment by Edison of the amounts agreed to for settlement purposes applicable to deliveries during the Disputed Payment Period.
Edison has already executed seven long-term amendments with gas-fired cogenerators and has tentative commitment to an eighth agreement with a governmental entity (the County of Los Angeles) that is required to obtain board approval before it can execute. Copies of these eight agreements are submitted for review and approval at Tab 1 of the Appendix filed concurrently herewith. Edison has also executed five Bridge Amendments with gas-fired cogenerators, copies of which are submitted for review and approval at Tab 2 of the Appendix.[5]
At this time, Edison has not executed any Fixed Energy Rate Agreements with renewable QFs, and this form of agreement is therefore submitted instead as a standardized agreement for approval by the Commission.[6] It should be noted, however, that Edison has concluded negotiations with designated representatives of the renewable industry. Edison caused a copy of the generic Fixed Energy Rate Agreement to be forwarded to all eligible QFs at approximately 1:15 p.m. on Monday, June 11, 2001, thereby commencing a five-day “QF Review Period,” as defined in the agreement, during which QFs that wish to execute the agreement must elect whether to sign and deliver an agreement based on the form to Edison. As explained more fully below, at the conclusion of the QF Review Period, Edison will determine, in its sole discretion, whether a sufficient number of QFs have “subscribed” to the Fixed Energy Rate Agreement and, therefore, if this “subscription condition” has been met. If the subscription condition has been met, Edison will execute and deliver the Fixed Energy Rate Agreement to any QF that has executed such agreement during the QF Review Period.[7]
The Fixed Energy Rate Agreement and the Gas Amendment each require “Commission Approval” in accordance with their terms. Specifically, certain key terms and conditions of the Gas Amendment and of the Fixed Energy Rate Agreement are expressly subject to and do not become effective without Commission Approval being obtained or waived by Edison. In addition, the Fixed Energy Rate Agreement terminates automatically if Commission Approval, as defined therein, has not been approved or waived by Edison within 120 days of mutual execution of the agreement by the parties. Similarly either party may terminate the Gas Amendment if Commission Approval, as defined therein, has not been obtained or waived by June 30, 2001.[8] For these and other reasons, Commission Approval is essential. Edison discusses the specific findings of reasonableness which are necessary to make the Gas Amendment and the Fixed Energy Rate Agreement fully effective in Section IV below.
II.
DISCUSSION OF SPECIFIC TERMS AND
CONDITIONS OF THE AGREEMENTS
A. Overview
As stated in Edison’s Comments, the Draft Decision provides useful, but very general guidance, concerning certain terms and conditions of agreements which the Commission will pre-approve as reasonable. Comments, at 3-4. The Draft Decision indicates that the utilities should implement modifications to existing contracts prior to formal amendments being negotiated or approved as to reasonableness by the Commission. Draft Decision at pp. 6-7. While the Draft Decision does provide guidance, it understandably lacks the necessary detail on all issues that arise in matters this complex. As Edison and the many QF industry representatives who have been embroiled in months of negotiations well know, “the devil is in the details.” Therefore, as previously indicated in its Comments, Edison believes that it is desirable for the Commission to consider the reasonableness of specific contract amendments and other agreements intended to effectuate the Commission’s policy, as enunciated in the Draft Decision. Comments, at 4.
One need only consider the proposal to modify existing power purchase agreements to include a fixed rate of 5.37 cents/kWh. When does the five-year period start? Is the amendment available to QFs which are still in the first period, and if so, on what terms? Are time-of-delivery factors applicable to the “fixed” rate? Does such fixed rate comply with PURPA avoided cost standards absent agreement by both parties to accept the rate? What is the effect, if any, of the fixed rate being made available with respect to ongoing disputes arising from allegations of nonperformance under existing contracts? Similar questions may be raised about the other forms of amendment proposed in general terms by the Draft Decision.[9]
The agreements submitted with these supplemental comments put flesh on the bones of the principles set forth in the Draft Decision, addressing numerous issues that the Draft Decision does not address. Each of the agreement variations is the result of months of difficult negotiations and, therefore contains interdependent terms and conditions reflecting bargained-for compromise.[10] It should also be noted that because the negotiations underlying the agreements presented with these supplemental comments proceeded on parallel but separate tracks, the form of the Gas Amendment and Bridge Amendment were finalized prior to the issuance of the Draft Decision, while the form of the renewable agreement was not. The separate negotiation tracks also necessarily meant that the ultimate agreements reached contain terms and conditions that differ in many respects from each other. In any event, a direct comparison between the agreements is not appropriate because each represents a unique “package” that reflects “gives and takes” that were deemed necessary to meet specific requirements of one class of generators as opposed to another.
Furthermore, Edison submits that each agreement must be judged on its own merits, rather than by the extent to which the agreement adheres strictly to the largely ex post facto guidelines enunciated in the Draft Decision.[11] The standard by which each of the forms of agreement should be judged is, rather, whether it achieves the broader policy objectives enunciated in the Draft Decision of taking “action to ensure that QFs generate as much electricity as reasonably possible, and at reasonable prices” by, among other things, providing a mechanism for “address[ing] partial payment of past amounts owed, notwithstanding the existence of bona fide disputes over the amounts owed, in order to improve the financial condition of QFs so that they can resume production.” Draft Decision at 3. Judged by this standard, and under all of the circumstances, the agreements are reasonable and should be approved by the Commission.
A. Agreement Addressing Renewable Energy Pricing and Payment Issues.
As set forth in Section 2.9 of the Fixed Energy Rate Agreement, the parties’ representatives intend to accomplish five principal goals: (1) establish an alternative fixed rate SRAC for renewable QFs on the occurrence of certain events; (2) establish a unity line loss factor in lieu of the factor approved in D.01-01-007; (3) create a mechanism, conditioned on the occurrence of specified events, for resolving the parties’ dispute concerning the amount owed to QFs by Edison for deliveries during the Disputed Payment Period; (4) provide a basis for staying and tolling claims by the parties in litigation related to nonpayment; and (5) provide for a release of certain claims upon Edison’s payment for deliveries made during the Disputed Payment Period. Each of these provisions is discussed below.
1. Alternative Fixed Rate SRAC.
Section 3.4.2 of the Fixed Energy Rate Agreement provides that on the occurrence of certain conditions subsequent (defined as the “Final Payment Date,” Edison will pay any renewable QF which is currently paid SRAC based on the Commission-approved methodology, and which executes such agreement, a fixed rate of 5.37 cents/kWh in lieu of the Commission-approved SRAC methodology for a period of five years commencing on the date on which Edison pays the QF a Stipulated Amount, as defined in the agreement, applicable to deliveries during the Disputed Payment Period.[12] (The mechanism for making such payment, which is a principal feature of the Fixed Energy Rate Agreement is discussed below.) This alternative SRAC pricing will not apply either at all, or without necessary modification, to contracts which contain non-standard pricing terms, such as price floors, or to contracts which remain in the “first,” or fixed forecast pricing, period.