Pursuant to Rules 45 and 51.1(c) of the Rules of Practice and Procedure of the California Public Utilities Commission (the "Commission"), Southern California Edison Company ("SCE"), Pacific Gas and Electric Company ("PG&E"), San Diego Gas & Electric Company ("SDG&E") (collectively, "the Utilities"), Independent Energy Producers Association ("IEP"), California Cogeneration Council ("CCC"), NRG Energy, Inc. (NRG) and Enron Capital & Trade Resources ("Enron") ( collectively, the "Settling Parties") hereby jointly move the Commission for an order adopting the settlement agreement (the "Agreement") attached hereto as Exhibit A.

The Agreement attached to this motion is the product of literally years of extremely difficult negotiations among the Settling Parties. The Settling Parties represent divergent and competing interests within this state's electric power community, and the Agreement was achieved only through significant compromises by each of the Settling Parties. Each provision of the Agreement therefore integrates carefully negotiated understandings among the Settling Parties, such that the Settling Parties have concluded and stipulated that they will only be bound by the Agreement if it is adopted by the Commission without modification in its entirety.

The Agreement continues to urge that the Commission adopt a voluntary, optional method to expedite Commission review of proposed QF contract restructurings, called the Qualifying Facility Restructuring Reasonableness Letter ("QFRRL"). If adopted by the Commission, the QFRRL procedure will streamline the procedure for Commission approval of restructuring agreements, while ensuring that ratepayer interests are advocated and protected. All parties to this proceeding recognize the need for an expedited procedure to review specific proposals for restructuring, and the QFRRL procedure has received universal support.

The Agreement addresses and resolves long disputed positions concerning each of the four issues raised in the Joint Assigned Commissioner and Administrative Law Judge Ruling dated February 6, 1998 ("ACR"). Specifically, in addition to urging adoption of the QFRRL, the Agreement also confirms acceptance of the following principles concerning the standard of reasonableness to be applied by the Commission, the voluntary nature of contract restructuring negotiations and the shareholder incentive:

1. A QF contract restructuring is reasonable and should be approved if it provides ratepayer benefits under a range of reasonable economic and operating assumptions and the benefits have been allocated through voluntary, arm's-length negotiations between Utilities and QFs or their representatives.

2. QF contract restructuring negotiations are voluntary for both utilities and QFs, and QF contracts may be modified only by the parties upon their mutual agreement. Although agreements to restructure QF contracts are subject to Commission review, utility restructuring decisions or actions that do not result in a restructuring agreement are not subject to reasonableness review.

3. The shareholder incentive should be 10 percent of the expected ratepayer benefits as approved in D. 96-12-077. In this regard, the Settling Parties agree that the Commission should deny the Office of Ratepayers Advocates' ("ORA") Petition For Modification of D. 96-12-077, dated February 14, 1997.

The Settling Parties agree that adoption of these principles by the Commission will fully address and resolve issues 1-4 raised by the ACR and eliminate the need for further discussions and Commission proceedings concerning these issues.

Furthermore, the Agreement addresses issue number 5 in the ACR by recognizing the desirability of addressing further issues related to QF contract restructuring in this or another Commission proceeding at the appropriate time. Additionally, the Settling Parties have acknowledged that they will engage in a "participatory process" to discuss -- and attempt to resolve mutually prior to any Commission filing -- issues concerning:

1. Transitioning short run avoided cost energy payments to the clearing price paid by the Power Exchange as identified in Public Utilities Code § 390; and;

2. Other suggestions to achieve ratepayer benefits through QF contract restructurings including proposals to use securitized bonds to finance the buyout or buydown of QF contracts, divestiture of all or a portion of Edison's and PG&E's QF contract portfolios, or other such suggestions.

The Commission has long recognized the desirability of QF contract restructuring to achieve ratepayer benefits. To that end, the Utilities endorsing this Agreement have already undertaken negotiations to restructure numerous QF contracts. From the perspective of both the Utilities and the QF community, there is a need to ensure that such negotiations are voluntary and fair and that any agreement reached through negotiations will be subject to reasonableness review by the Commission under a uniform standard that takes into account the interests of both the contracting parties and the ratepayers. In the newly deregulated electric power market, it also is essential that the Commission adopt standards that promote certainty and finality in the complex and competitive area of contract restructuring.

The Settling Parties respectfully submit that the Agreement offers a framework, which, if adopted by the Commission, will permit Utilities and QFs to negotiate contract restructurings freely and fairly with an appropriate level of Commission involvement, while at the same time preserving and promoting the interest of ratepayers. This Agreement is fair, reasonable and in the public interest; the Settling Parties urge the Commission to adopt the Agreement in its entirety.

On April 20, 1994, the Commission commenced these proceedings by issuing its Orders Instituting Rulemaking and Investigation on the Commission's Proposed Policies Governing Restructuring California's Electric Services Industry and Reforming Regulation. (R. 94-04-031; I. 94-04-032). Thereafter, in D.96-12-088 (the "Roadmap 2 Decision") the Commission requested interested parties to file proposals to establish a generic method to review the reasonableness of QF contract restructuring, including standards for reasonableness and an expedited process for contract restructuring review by the Commission. Following the Roadmap 2 Decision, the interested parties filed proposals, the Commission conducted a workshop and the Commission's Energy Division issued a workshop report. In addition, Assigned Commissioner Neeper held two meetings with the interested parties on October 16, 1997 and January 14, 1998 for the purpose of discussing issues related to contract restructuring principles.

As a result of these activities, the Assigned Commissioner and Administrative Law Judge Econome issued the ACR on February 6, 1998, requesting interested parties to comment on the QFRRL process endorsed by the Utilities, the QF community and ORA, as well as the standard for reasonableness, the voluntariness of negotiations for restructuring, the implementation of the shareholder incentive mechanism and any other issues necessary to facilitate QF contract restructuring. The ACR ordered opening comments to be filed by March 9, reply comments to be filed by March 23, 1998, and proposed a decision no later than June 22, 1998. Each of the interested parties has filed opening and reply comments in accordance with the ACR.

Following the issuance of the ACR, several of the interested parties continued the discussions (which led initially to the introduction of the QFRRL process) in an effort to negotiate a mutually acceptable set of principles governing QF contract restructuring. These discussions included representatives of the Utilities, the QF community and other interested parties including Enron and NRG. No interested party was excluded from these discussions, although some chose to drop out of the discussion or not to participate at all. Negotiations concerning the issues raised by the ACR lasted several months, ultimately yielding the Agreement which is the subject of this joint motion.

Pursuant to Rule 51.1(c) of the Commission's Rules of Practice and Procedure, the Settling Parties provided notice that a settlement conference would be convened on May 7, 1998 at 2:00 p.m. at a public hearing room at the Commission for the purpose of discussing the Agreement. Pursuant to the notice, a settlement conference was, in fact, convened. The settlement conference was attended by representatives of each of the Settling Parties, ORA, the Commission's Energy Division, as well as representatives of other interested parties.

At the settlement conference, representatives of the Settling Parties explained the terms and conditions of the Agreement, answered questions posed by representatives of other interested parties, and participated in a candid exchange with representatives of ORA concerning the issues raised and resolved by the Agreement. Additionally, two interested parties also voiced their support of the settlement at the conference. The settlement conference lasted approximately two hours.

As will be evident from even a cursory reading of the Settling Parties' opening and reply comments, the Settling Parties have advocated what may appear to be fundamentally irreconcilable positions concerning the issues raised by the ACR. During the course of the negotiations which led to the Agreement, however, the Settling Parties ultimately recognized that the relationship among the issues raised in the ACR could be used to formulate mutually satisfactory restructuring principles. Because of this relationship, the Settling Parties were able to reach compromises with respect to all of the issues that could never have been achieved with respect to any one issue alone.

Therefore, in considering the Agreement, it is essential to understand that for each of the Settling Parties, acceptance of each provision depends in whole or in part on the precise wording of the other provisions. For example, as discussed more fully below, the Utilities agreed to the precise formulation of the reasonableness standard in the Agreement only because IEP, CCC, NRG and Enron agreed to the exact statement of the principle of voluntary negotiations set forth in the Agreement. Similarly, Enron only agreed to withdraw its motion for order to show cause against SCE because the Utilities agreed to the "participatory process" described in section 6 of the Agreement.

Standing alone, few of the principles enunciated in the Agreement would be acceptable to all of the Settling Parties. Taken together, however, all of the principles set forth in the Agreement are acceptable to all of the Settling Parties. Recognizing that the elimination -- or even the rewording -- of any one of the principles adopted in the Agreement would render the Agreement unacceptable to some or all of the Settling Parties, the Settling Parties have agreed that if the Agreement is not approved in its entirety by the Commission, then the Settling Parties will withdraw their support for the Agreement and revert to the positions advocated in their opening and reply papers.

A. THE AGREEMENT ENDORSES THE QFRRL PROCESS.

The QFRRL procedure is consistent with current Commission policy requiring notice to the public that the utility and QF are proposing a contract restructuring for Commission approval and providing all interested parties an opportunity to comment on the proposed restructuring. Under the proposed expedited procedure, a restructuring remains subject to review by ORA. If, following a period to accommodate public notice and comment, ORA signs the final QFRRL, the Commission will normally approve the restructuring in a reasonableness proceeding without further review. Consistent with stated Commission policy favoring contract restructuring in appropriate circumstances, the QFRRL procedure expedites the process for obtaining Commission approval, thereby minimizing the risk and uncertainty associated with sometimes protracted reasonableness proceedings.

No party opposes the QFRRL procedure, and the Settling Parties urge the Commission to adopt it immediately.

B. THE STANDARD FOR REASONABLENESS REVIEW PROTECTS RATEPAYERS BY REQUIRING VOLUNTARY, ARM'S-LENGTH RESTRUCTURING NEGOTIATIONS TO YIELD BENEFITS UNDER A REASONABLE RANGE OF ECONOMIC AND OPERATING ASSUMPTIONS.

The Agreement adopts the following standard for reasonableness review by the Commission:

The Commission's standard of reasonableness for approving a QF contract restructuring should be based on a determination of ratepayer benefits under a range of reasonable economic and operating assumptions. A QF contract restructuring is reasonable and should be approved if it provides ratepayer benefits under a range of reasonable economic and operating assumptions and the benefits have been allocated through voluntary, arm's-length negotiations between utilities and QFs or their representatives.

Prior to the Agreement, the principal difference among the Settling Parties concerning the standard of reasonableness review centered on whether the Commission, in reviewing each contract restructuring, should be required to determine that such restructuring yields "commensurate ratepayer benefits". IEP and CCC contended, among other things, that the term "commensurate ratepayer benefits" is vague and unclear and that adoption of such a standard by the Commission would be difficult and confusing to enforce. IEP and CCC urged the Commission, instead, to focus its review process on confirming that any contract restructuring yields "ratepayer benefits under a range of reasonable economic and operating assumptions." The Utilities contended that adoption of a reasonableness standard requiring less than commensurate ratepayer benefits would unduly tilt the negotiation balance in favor of the QF by creating the expectation in the QF community that virtually any restructuring proposal offering even modest ratepayer savings must be accepted by the utility in order for the utility to avoid the threat of disallowance. The Utilities expressed concern that under such circumstances, QFs would be likely to take more extreme positions during negotiations, thereby reducing substantially potential ratepayer savings.

During the course of negotiations, the Settling Parties concluded that the need for flexibility in restructuring negotiations is not inconsistent with the need for certainty in the standard of reasonableness to be applied by the Commission. The principles stated in the Agreement recognize and accomplish both of these goals. The reasonableness review standard contained in the Agreement does not require that ratepayer benefits be "commensurate," thereby eliminating whatever barrier to successful restructurings may have been created by a lack of common understanding as to the proper application of that term. The Agreement also ensures, however, that restructuring benefits must be allocated through voluntary, arm's-length negotiations and that only consummated restructuring agreements will be subject to review for reasonableness under that standard. As described below, utility decisions not to restructure QF contracts are not subject to reasonableness review by the Commission under the Agreement. This latter clarification will provide the Utilities with the discretion to reject restructuring proposals that do not offer sufficient ratepayer benefits. The reasonableness review standard is, therefore inextricably linked to the principle that negotiations for restructuring must be completely voluntary for all parties. The Settling Parties submit that the reasonableness review standard proposed in the Agreement strikes an appropriate balance between the needs for certainty and flexibility. It provides the contracting parties sufficient certainty to ascertain in what circumstances restructuring negotiations make economic sense and the flexibility to avoid or discontinue negotiations that do not, thereby ensuring that the parties' and the Commission's resources are allocated to restructurings most likely to yield ratepayer benefits.

C. AFFIRMING THAT QF CONTRACTS CAN ONLY BE MODIFIED OR TERMINATED BY MUTUAL CONSENT AND THAT ONLY EXECUTED RESTRUCTURING AGREEMENTS ARE SUBJECT TO REASONABLENESS REVIEW BY THE COMMISSION WILL YIELD THE GREATEST RATEPAYER BENEFITS.

The Agreement endorses the principal of voluntary negotiations as follows:

QF contract restructuring negotiations are voluntary for both utilities and QFs and QF contracts may be modified only by the parties upon their mutual agreement. Although agreements to restructure QF contracts are subject to Commission review, utility restructuring decision or actions that do not result in a restructuring agreement are not subject to reasonableness review.

Prior to the Agreement, all parties agreed that executed restructuring agreements should be subject to reasonableness review (under some standard), but differed with respect to whether utility decisions not to enter into a particular proposed restructuring should be subject to reasonableness review by the Commission. Thus IEP and CCC argued that it is within the purview of the Commission to review any utility decision for reasonableness. Some of the Settling Parties (as well as ORA) have argued that reasonableness review of utility decisions not to enter into a particular proposed restructuring will motivate utilities to restructure contracts. In contrast, the Utilities argued that only consummated restructuring agreements should be subject to review. The Utilities contended that reasonableness review of utility decisions not to enter into any particular proposed restructuring would shift the delicate negotiation balance in favor the QF and force the Utilities to accept the QF's optimum terms or risk a disallowance.

The principle of completely voluntary negotiations for restructuring articulated in the Agreement reflects the Utilities' commitment to restructure their QF contracts, in accordance with the Commission's stated policy favoring restructuring. Indeed, the Utilities already have demonstrated this commitment by applying for Commission approval of numerous restructurings. The Utilities' endorsement of the principles in the Agreement also demonstrates their commitment to restructuring. In addition, the 10 percent shareholder incentive endorsed by the Agreement operates, as intended by the Commission, as an inducement for Utilities to negotiate and consummate contract restructurings that yield ratepayer benefits. The Utilities commitment to restructuring is also virtually compelled by the need to reduce the ultimate cost of serving electric customers. No additional inducement is necessary to bring the Utilities to the bargaining table.

The principle of completely voluntary restructuring negotiations also recognizes that not all QF contracts are amenable to restructurings. Both of the parties to such contracts must be free not to enter into restructuring negotiations. In other cases, the contracting parties' best efforts at the bargaining table may prove unsuccessful. Reasonableness review of utility decisions in these circumstances will merely promote and prolong negotiations unlikely to yield ratepayer benefits and needlessly consume the parties' and the Commission's time and resources.

D. THE SHAREHOLDER INCENTIVE SHOULD BE 10 PERCENT OF THE EXPECTED RATEPAYER BENEFITS AS APPROVED IN D.96-12-077.

The Settling Parties agree that the shareholder incentive should be 10 percent. This provision of the Agreement is consistent with the Commission's Preferred Policy Decision (D.95-12-063 as modified by D.96-01-009) and the Commission's Decision on Cost Recovery Plans (D.96-12-077) which, taken together, dictate that utility shareholders should retain 10 percent of expected ratepayer benefits when a QF contract is renegotiated. As intended by the Commission, the 10 percent shareholder incentive is an obvious inducement for Utilities to enter into and finalize negotiations for restructurings that provide ratepayer benefits. As noted above, confirmation of the shareholder incentive logically supports and justifies the principle of completely voluntary negotiations by giving the Utilities a powerful inducement to find restructuring opportunities that yield ratepayer benefits.

Only ORA opposes the Commission's implementation of the 10 percent shareholder incentive. On February 14, 1997, ORA filed a petition to modify D.96-12-077. The Utilities subsequently filed an opposition to ORA's petition. The Settling Parties believe that ORA's petition is procedurally defective, lacks merit, and should be denied.

E. THE AGREEMENT COMMITS THE SETTLING PARTIES TO ENGAGE IN A "PARTICIPATORY PROCESS" FOR THE PURPOSE OF DISCUSSING AND ATTEMPTING TO RESOLVE ISSUES RELATED TO CONTRACT RESTRUCTURING

The Commission's adoption of the restructuring principles advocated in the Agreement will result in Enron withdrawing its Motion requesting an Order to Show Cause Against Southern California Edison Company. As with other principles of the Agreement, Enron's commitment to withdraw its motion depends on the Commission's approval of a related principle. Specifically, Enron's agreement to withdraw its motion depends on the other Settling Parties' agreement that, at the appropriate time, either this or another Commission proceeding will address the suggestions to achieve ratepayer benefits through QF contract restructurings including proposals to address divestiture of all or a portion of Edison's and PG&E's QF Contract portfolios. The Utilities also desired a platform to begin discussions with the QF community, regarding Section 390 of AB 1890, particularly transitioning short run avoided cost energy payments to the clearing price paid by the Power Exchange. Accordingly, the Settling Parties have agreed that the following matters will be addressed either in this or another Commission proceeding.

1. Transitioning short run avoided cost energy payments to the clearing price paid by the Power Exchange as identified in Public Utilities Code § 390; and

2. Other suggestions to achieve ratepayer benefits through QF contract restructurings including proposals to use securitized bonds to finance the buyout or buydown of QF contracts, divestiture of all or a portion of Edison's and PG&E's QF contract portfolios, or other such suggestions.

Furthermore, as set forth in section 6 of the Agreement, the Settling Parties have agreed to engage in a "participatory process" for the purpose of discussing these and other matters related to contract restructuring.

A. ADOPTION OF THE AGREEMENT IN ITS ENTIRETY WILL ACHIEVE BENEFITS FOR RATEPAYERS.

Although the Agreement represents a compromise of the Settling Parties advocated positions, the principles enunciated in the Agreement do not compromise the interest of ratepayers. To the contrary, taken as a whole, the Agreement sets forth a practical framework intended to yield the maximum benefit for ratepayers from QF contract restructuring.

Most importantly, the Agreement embodies a commitment of competing and often contentious representatives of all sectors of the of electric power community in this state to a mutually acceptable approach for contract restructuring. The Settling Parties are fully committed to the expedited QFRRL process and urge the Commission to adopt all of the principles of the Agreement as soon as possible. Doing so will allow the parties to move forward quickly with the business of restructuring. The Settling Parties have also demonstrated their commitment through the Agreement to continuing the discussions which have already resulted in agreement on the QFRRL procedure and the principles set forth in the Agreement. While the issues which the Settling Parties have agreed to discuss are difficult, the Settling Parties are hopeful that further discussion and cooperation will yield additional benefits for ratepayers.

Adoption of the Agreement in its entirety will give the Utilities both the means and the motivation to maximize ratepayer benefits in restructuring negotiations. It will also ensure that restructuring agreements are reviewed for reasonableness under a test that safeguards ratepayer interests. The reasonableness review standard proposed by the Agreement protects ratepayers by requiring restructuring agreements to yield benefits under a range of reasonable economic and operating assumptions. Additionally, the proposed reasonableness standard protects ratepayers by providing that "benefits have been allocated through voluntary, arm's length negotiations between utilities and QFs." The Settling Parties (which include representatives from both sides of the restructuring bargaining table) firmly believe that agreements approved by the Commission under this standard will be agreements that conclusively demonstrate ratepayer benefits.

Finally, notwithstanding ORA's decision not to participate in the negotiations which led to the Agreement, the Agreement in no way diminishes ORA's ability to advocate the interests of ratepayers as it sees fit. Although ORA has indicated its opposition to virtually every aspect of the Agreement, the simple fact remains that every contract restructuring proposed for Commission approval is subject to comment by ORA. As a practical matter, if the Commission approves the Agreement, parties to proposed restructuring agreements will undoubtedly attempt to anticipate and account for ORA's concerns in order to take advantage of the desirable expedited QFRRL procedure.

In short, the Agreement is designed to achieve ratepayer benefits.

B. THE AGREEMENT IS REASONABLE IN LIGHT OF THE WHOLE RECORD.

The Agreement addresses and resolves issues 1 through 4 of the ACR. In addition the Agreement addresses issue 5 of the ACR by identifying further matters that need to be discussed by the Settling Parties and addressed by the Commission at the appropriate time. The Agreement not only identities these issues, but also establishes a workable procedure for discussing and resolving them informally. The "participatory process" developed by the Settling Parties may, therefore, save Commission resources.

The Agreement will also conserve resources of the Commission and the parties by minimizing further briefing concerning the disputes that are resolved by the Agreement. Adoption of the Agreement will result in the withdrawal of several pending motions, and eliminate the need for further briefing concerning the ACR. In short, expeditious adoption of the Agreement by the Commission will allow the Settling Parties and their constituencies to move on to the business of restructuring with the certainty and the flexibility that the task demands.

For the foregoing reasons, the Settling Parties respectfully request that the Commission:

• Find that the Agreement is reasonable in light of the whole record, consistent with law, and in the public interest;

• Approve the Agreement in its entirety on an ex parte basis;

• Grant any further relief that the Commission deems appropriate.

Respectfully submitted,