Title: _

BEFORE THE PUBLIC UTILITIES COMMISSION
OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking on the Commission’s Proposed Policies Governing Restructuring California’s Electric Services Industry and Reforming Regulation. | R.94-04-031(Filed April 20, 1994)

Order Instituting Investigation on the Commission's Proposed Policies Governing Restructuring California's Electric Services Industry and Reforming Regulation.

I.94-04-032
(Filed April 20, 1994)

JOINT REPLY COMMENTS OF SOUTHERN CALIFORNIA EDISON COMPANY 
(U 338-E), PACIFIC GAS AND ELECTRIC COMPANY (U 39-E), SAN DIEGO GAS & ELECTRIC COMPANY (U 902-E), INDEPENDENT ENERGY PRODUCERS, CALIFORNIA COGENERATION COUNCIL AND NRG ENERGY, INC. TO ACR REGARDING REVIEW OF QF CONTRACT RESTRUCTURINGS AND MODIFICATIONS 

	WILLIAM V. MANHEIM
	ALICE L. REID

	Attorneys for
	PACIFIC GAS AND ELECTRIC COMPANY
		77 Beale Street
		Post Office Box 7442
		San Francisco, CA  94120
		Telephone: (415) 973-2966
		Facsimile: (415) 973-5520

April 29, 1998

BEFORE THE PUBLIC UTILITIES COMMISSION
OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking on the Commission’s Proposed Policies Governing Restructuring California’s Electric Services Industry and Reforming Regulation. | R.94-04-031(Filed April 20, 1994)

Order Instituting Investigation on the Commission's Proposed Policies Governing Restructuring California's Electric Services Industry and Reforming Regulation.

I.94-04-032
(Filed April 20, 1994)

JOINT REPLY COMMENTS OF SOUTHERN CALIFORNIA EDISON COMPANY
(U 338-E), PACIFIC GAS AND ELECTRIC COMPANY (U 39-E), SAN DIEGO GAS & ELECTRIC COMPANY (U 902-E), INDEPENDENT ENERGY PRODUCERS, CALIFORNIA COGENERATION COUNCIL AND NRG ENERGY, INC. TO ACR REGARDING REVIEW OF QF CONTRACT RESTRUCTURINGS AND MODIFICATIONS 

I.  INTRODUCTION

	Southern California Edison Company, Pacific Gas and Electric Company and San Diego Gas & Electric Company (the “Utilities”),  Independent Energy Producers, California Cogeneration Council and NRG Energy, Inc. (collectively, the “Parties”) hereby submit these reply comments (“Reply Comments”) to comments filed by various parties in the Assigned Commissioner and Administrative Law Judge’s Ruling Regarding Review of QF Contract Restructurings and Modifications dated February 6, 1998 (“ACR”).
	After lengthy and difficult negotiations, the Parties, together with Enron Capital and Trade Resources (“Enron”), succeeded in negotiating a settlement agreement (the “Settlement Agreement”) on the issues presented in the ACR that fairly accommodates each of the Parties’ interests.  An unexecuted copy of the Settlement Agreement is attached to these Reply Comments as Attachment A.  The Settlement Agreement is a consensus “package”, and therefore the Parties strongly urge the Commission to adopt the Settlement Agreement in its entirety.

Enron is filing separate reply comments.

The Settlement Agreement will be submitted for Commission approval under Rule 51 et seq. of the Commission’s Rules of Practice and Procedure.

As a result of the Parties’ negotiations, these Reply Comments assert positions on behalf of individual parties which differ from the positions asserted in their initial comments.  These changes reflect compromises by each of the parties to the Settlement Agreement which depend on the Commission approving the Settlement Agreement in its entirety as presented.  The Parties reserve the right to reassert their previous positions on any issue in the event that the settlement is not approved.

	As a result of the Settlement Agreement reached among the Parties and consistent with the principles adopted therein, these Reply Comments will serve principally as the Parties’ joint response to comments filed in the ACR by the Office of Ratepayer Advocates (ORA) and Southern California Gas Company.

ORA declined the offer to participate in settlement negotiations and is not a party to the settlement.

II.

A. 	THE QFRRL IS SUPPORTED BY ALL PARTIES AND SHOULD BE ADOPTED IMMEDIATELY BY THE COMMISSION
	All parties support the QFRRL process.  The Commission should adopt this process as soon as possible as an efficient, streamlined procedure for review of restructured QF contracts.

B. 	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 WHERE THE BENEFITS HAVE BEEN ALLOCATED THROUGH VOLUNTARY, ARM’S-LENGTH NEGOTIATIONS BETWEEN UTILITIES AND QFS OR THEIR REPRESENTATIVES
The Parties strongly urge the Commission to adopt the standard of reasonableness for approving restructurings set forth in the Settlement Agreement and to reject ORA’s “commensurate” standard for the following reasons.  The Commission has previously determined, in its Year-11 decision on this issue, that a restructuring is reasonable, and should be approved, if ratepayers are at least no worse than financially indifferent and where feasible realize some economic gain:

“It seems obvious, at least to us, that a modification that left ratepayers economically indifferent but offered other identifiable but hard-to-quantify benefits would meet the minimum level of acceptability.”
(D.94-05-018, Section 2.6)

This standard was and continues to be appropriate when considered under a range of reasonable economic and operational assumptions.  The current settlement language reaffirms the Commission’s policy in this area and encourages restructuring activity while still protecting ratepayers’ interests.  Any restructuring that both the QF and the utility, parties with opposing financial considerations, can voluntarily agree to and that provides benefits should be approved by the Commission.  

D.94-05-018, Section 2.6 provides, “… we expect the utilities to make intelligent use of sensitivity analyses to demonstrate that the modification will continue to result in ratepayer indifference or benefits over a reasonable range of possible values for the critical variables.”

C.	NEGOTIATIONS THAT DO NOT RESULT IN A RESTRUCTURING AGREEMENT SHOULD NOT BE SUBJECT TO REASONABLENESS REVIEW
	All parties agree that QF contract restructurings must remain voluntary.  Neither a utility nor a QF should be forced to modify a QF contract.  ORA contends, however, that a utility’s determination not to restructure a QF contract should be subject to reasonableness review.  This notion is inconsistent with the principle that contract restructurings should be voluntary, and the Commission should reject it.
Commission review of utility restructuring negotiations that do not result in an agreement may cause utilities to accept restructuring proposals that do not truly or adequately benefit ratepayers in order to avoid the risk that the Commission will disallow payments made under the unrestructured contract following a reasonableness review of the failed negotiation.

As the Utilities noted at page 14 of their opening brief, any attempt to disallow prices paid QFs under Commission approved standard offers would contravene established Commission and other precedent authorizing cost recovery to utilities under such contracts.

The Commission should review executed agreements, not negotiations.  The procedure advocated by ORA, however, awkwardly thrusts the Commission into the parties’ negotiations and places the utility, the only negotiating party that the Commission regulates, at a severe bargaining disadvantage.  This is unlikely to yield ratepayer benefits.
Utilities must remain free to negotiate voluntarily.  In the context of QF contract restructurings, this means that utilities must be free, without the prospect of second-guessing, to reject proposals that do not truly benefit ratepayers.  The Commission should confirm that QF contract restructurings are voluntary for both Utilities and QFs and that neither can be forced to modify a contract.  The Commission should not subject a utility’s restructuring decisions to reasonableness review unless a final agreement has been voluntarily reached with the QF and submitted to the Commission for approval. 

D.	THE SHAREHOLDER INCENTIVE SHOULD BE 10% OF THE EXPECTED RATEPAYER BENEFITS AS APPROVED IN D. 96-12-077 AND ORA’S PETITION TO MODIFY THAT DECISION SHOULD BE DENIED
Only ORA urges the Commission to eliminate or modify its approved 10% shareholder incentive.  ORA advocates a burdensome and inconsistent monthly “true-up.”  ORA argues that the Utilities will overstate expected ratepayer benefits if the incentive is based on forecast benefits. There is no evidence, however, that the Utilities will act in bad faith.
One standard should be applied to ascertain reasonableness in the context of a restructured contract.   If the Commission can determine whether a restructuring will likely yield ratepayer savings based on forecasts, it should also be able to calculate a 10% shareholder incentive payment based on the same forecasts.
ORA’s monthly “true-up” proposal would also create an administrative burden at a time when the Commission, the Utilities and QF groups have expressed concern that the QF restructuring approval process is too slow and needs to be streamlined.  Rather than eliminating disputes over calculation of the incentive as ORA claims, ORA’s proposal would generate disputes concerning the appropriate measure of “actual” savings over time and would perpetuate the need for periodic oversight proceedings (including the potential for ongoing and inappropriate ORA reasonableness review of previously Commission-approved restructurings) until 2025.  ORA does not attempt to measure the costs to ratepayers and the public of the administrative burden of such continuing controversies.

See Roadmap II decision, D. 96-12-088.  In addition, the QFRRL process, which has unanimous support from all major parties, including ORA, grew out of the parties’ perceived need for a more efficient, streamlined process for review and approval of QF restructurings.

Adoption of ORA’s monthly true-up proposal reverses the Commission’s efforts to streamline and improve the QF restructuring process.  For the reasons set forth in the Utilities’ initial comments and in these Reply Comments, the Parties respectfully urge the Commission to deny ORA’s February 14, 1997 petition seeking to modify D. 96-12-007 and reconfirm that the shareholder incentive should be 10% of the expected ratepayer benefits as approved in that decision.

E.	ACTIVE PARTICIPATION IN QF CONTRACT RESTRUCTURINGS BY SOUTHERN CALIFORNIA GAS COMPANY IS NOT WARRANTED
	Speculating that restructuring may raise gas transportation costs for its “core” ratepayers, Southern California Gas Company (“SoCalGas”) asks to become an active participant in the QF contract renegotiation process for each QF buyout/buydown undertaken by a QF and a utility where SoCalGas is a supplier or a transporter of natural gas to that QF.  Further, SoCalGas requests the Commission to:  (1) order jurisdictional utilities to notify SoCalGas at the inception of any such negotiations, or immediately in the case of existing negotiations;  (2) allow SoCalGas to seek discovery of, possess and use any and all relevant studies concerning the negotiations for such buyouts/buydowns; and  (3) order that SoCalGas be informed of the potential benefits associated with the proposed restructuring.  With this information, SoCalGas argues that it can then “quantify and seek the necessary remedies to account for the expected impact on gas ratepayers.”  The Commission should reject this request for the reasons stated below.

	First, SoCalGas has not shown that restructuring will increase the cost of transporting gas.  Indeed, depending on gas price and the type of QF technology at issue, the demand for gas may increase or remain static.
	Second, because SoCalGas is a party to the Global Settlement, SoCalGas’ shareholders--not its ratepayers--are at risk for underrecovery of noncore revenue requirement throughput up to a variance cap until July 31, 1999.  Moreover, throughput, cost allocation, and rate design will be addressed fully in SoCalGas’ next biennial cost allocation proceeding (“BCAP”).  SoCalGas’ concerns should be addressed in that proceeding.

Paragraph 5 of Section II of the Global Settlement, approved by the Commission in D. 94-04-088 and D. 94-07-064, provides, “[d]uring the five-year period commencing on the effective date of the [Global Settlement], SoCalGas shall be at risk for any underrecovery of the noncore revenue requirement for each year of this five-year period … and SoCalGas shall bear any revenue shortfalls that result …”.

SoCalGas will be filing an application for its next BCAP in October of this year, with rates expected to commence on August 1, 1999 at the conclusion of the Global Settlement.

	Third, electric utilities and their ratepayers are not guarantors of the contracts between QFs and SoCalGas.  SoCalGas is merely a third party contractor with various QFs.  It is not a party to the contracts between the QF and the electric utility.  Nor is it a third party beneficiary of such contracts.  Indeed, the Commission has expressly held that standard offer contracts are not intended to benefit third parties.  Pacific Gas & Electric Co., et al., (1983) 13 Cal. P.U.C. 2d 84, 130 (D.83-10-093) (“We reiterate that the standard offer is intended to be a statement of the rights and obligations of only two parties -- the utility and the QF.”).  SoCalGas’ only remedy for breach by a QF is against the QF, not the electric utilities and their ratepayers.

Furthermore, assuming some rational mechanism could be articulated for translating a reduction in electric utility ratepayer savings into a subsidy for gas utility ratepayers, such a procedure would effectively grant SoCalGas preferred creditor status vis-à-vis the QF’s other creditors.  SoCalGas has advanced no reason to treat it differently than other similarly situated, unsecured third party creditors of a QF.

Finally, SoCalGas’ remedies against a breaching QF are adequate; there is no need for special treatment by the Commission.  A QF is subject to all of the remedies for breach of contract, including prejudgment attachment.  SoCalGas has not demonstrated otherwise.

SoCalGas does complain that some of the QFs with whom it has contracted may be undercapitalized, difficult to locate or serve, or mere shells against whom it is difficult to recover.  This is merely a risk of doing business and certainly does not justify shifting the costs associated with those risks from gas to electric ratepayers.  Indeed, in the only example cited by SoCalGas to demonstrate that its remedies in the courts are inadequate, it appears that SoCalGas’ case was dismissed on the ground that it was premature, i.e., that SoCalGas had neither suffered damage nor established an imminent threat that it would.

	In short SoCalGas has not shown that it should be treated differently than others who have contracted with a QF to supply goods or services.  SoCalGas’ participation in this proceeding is not necessary.  Its concerns should be addressed in the BCAP in the context of SoCalGas’ overall rate design.  Consideration of these peculiar issues in this proceeding can only complicate and delay the ultimate goal of facilitating QF restructurings for the benefit of the electric utilities’ ratepayers.

F.	THE COMMISSION SHOULD COMPLETE AND CLOSE ITS REVIEW OF QF CONTRACT RESTRUCTURING PRINCIPLES; OTHER ISSUES RAISED BY THE PARTIES SHOULD BE ADDRESSED IN THIS, OR ANOTHER PROCEEDING
It is time for the Commission to enhance the parties’ ability to pursue QF contract modifications that provide ratepayer benefits.  To that end, the  Commission should: 1) immediately adopt the uncontested QFRRL process; 2) adopt the proposed Settlement Agreement which resolves the matters set forth as issues 2, 3 and 4 in the ACR and close its
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 investigation of those specific issues; and 3) determine that either this or another Commission proceeding will address the issues identified in paragraph 6 of the Settlement Agreement, and any other issues raised by parties in this proceeding in response to issue 5 of the ACR that the Commission determines would facilitate QF contract restructurings.

	Respectfully submitted,

	WILLIAM V. MANHEIM
	ALICE L. REID

In accordance with Rule 2.2 of the Commission’s Rules of Practice and Procedure, each of the Parties has authorized counsel for PG&E to sign and submit these joint Reply Comments on its behalf.

	By 						
	                    ALICE L. REID

	Attorneys for
	PACIFIC GAS AND ELECTRIC COMPANY
	
	77 Beale Street
	Post Office Box 7442
	San Francisco, CA  94120
	Telephone: (415) 973-2966
	Facsimile: (415) 973-5520

April 29, 1998