PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

ENERGY DIVISION			           		                  RESOLUTION E-3657
        FEBRUARY 17, 2000

RESOLUTION

Resolution E-3657.  Pacific Gas and Electric Company Requests Authorization for Restructuring of a Qualifying Facility Contract with Ultrapower 3.  Approved.

By PG&E Advice Letter 1927-E Filed October 13, 1999

SUMMARY

In Advice Letter 1927-E, Pacific Gas and Electric Company (PG&E) proposes for Commission approval a Termination and a Bridging Agreement (Agreements) between Ultrapower 3 (UP3) and PG&E which, after Commission approval, terminate an ISO4 power purchase agreement (the PPA) between the two parties.  Under the Agreements, PG&E will make monthly termination payments to UP3 through the year 2007.  PG&E estimates net ratepayer benefits of between $12.1 and $12.7 million.  The Agreements also provide a shareholder incentive payment of $1.09 million.  

Prior to this filing, and as required by D.98-12-066, PG&E submitted this advice letter to the Office of Ratepayer Advocates (ORA) for review.  ORA requested certain modifications, which were agreed to by PG&E and ORA, and are incorporated into the proposed Agreements.

Specifically, PG&E requests a resolution:
o	approving the Agreements as reasonable;
o	authorizing recovery of all payments that PG&E has made and will make pursuant to the Agreements through PG&E’s Annual Transition Cost Proceeding or any other mechanism authorized by the Commission, subject only to PG&E’s prudent administration of the Agreements; and
o	authorizing PG&E to recovery of a shareholder incentive of $1,090,000 for the Agreements. 

No protests were filed in response to this advice letter.  

The advice letter is approved without modifications. 

BACKGROUND

Contract Overview

In December 1983, PG&E and UP3’s predecessor, Ultrapower, Incorporated, entered into a 30-year PPA for a then-proposed project (Project) at Blue Lake, in Humboldt County.  Under the PPA, PG&E agreed to purchase energy and capacity generated by an 11.4 MW (nameplate rating) wood-waste-fueled electric generation facility.  On July 3, 1985 the Project began deliveries of energy and as-delivered capacity to PG&E’s 60 kV transmission system.  Beginning on August 5, 1985 these deliveries were made on an interim basis under an SO1 contract.  On July 9, 1986, UP3 successfully completed a firm capacity demonstration test for 10.5 MW.  This caused the SO1 to terminate and the PPA to become effective.  

The PPA is a 30-year ISO4 contract and extends to July 8, 2016.  For PPA energy payments, UP3 elected to be paid at 80 percent of energy payment option 1 (forecasted energy prices) during its fixed price period, which ended on July 8, 1996.  In the subsequent period (from July 9, 1996 to July 8, 2016), energy payments are made at PG&E’s short-run avoided cost.  Firm capacity payments are subject to minimum performance requirements and obligations defined in the PPA.  UP3 is also eligible for firm capacity bonus payments of up to 17.6 percent, based on performance.  Under the PPA, PG&E also pays UP3 for capacity delivered in excess of firm capacity on an as-delivered basis in accordance with as-delivered capacity option 2 at fixed forecasted as-delivered capacity prices.

Project Overview

The Project is located in the Blue Lake Industrial Park in the city of Blue Lake, near the north fork of the Mad River.  The facility has a nominal rating of 11.4 MW and is fueled by wood waste.  The boiler is a single drum, rotating grate stoker.  The generator and non-reheat steam turbine are rated at 13,806 kVA.  The water supply is obtained from the city, or Humboldt Municipal Water District.  The Project is designed to operate on a 24-hour-per-day basis, providing baseload electrical generation to PG&E’s Humboldt substation.  

Project Ownership and Historical Performance

UP3 is a joint venture composed of Ultrapower 3, Incorporated, a California corporation, and Rincon Investing Company, an Arizona corporation doing business as Rincon-Blue Lake Company.  North American Power Group, Ltd., a subsidiary of North American Power Group Holdings, owns 100 percent of the outstanding stock of Ultrapower 3, Incorporated and Rincon-Blue Lake.  PG&E and its affiliates are not in any way affiliated with any of the above-mentioned companies.  

Since its inception, the Project has performed acceptably well.

Project Viability

PG&E represents that the Ultrapower Blue Lake plant is well-designed, built, operated, and maintained and, if the facility continues its current level of maintenance, should remain technically viable throughout the term of its ISO4 contract.  In reviewing the contract restructuring, ORA relied upon PG&E’s assessment of Project viability, although PG&E had not conducted a formal site visit since 1994.  PG&E confirmed to ORA through a letter from the Project’s owner, North American Power Group, that normal maintenance at the facility is performed on an ongoing basis, while major overhauls are performed on the basis of recommendations from its equipment manufacturers and insurance carriers.

Regarding economic viability, PG&E’s study of the Project’s projected cash flows for the remainder of the PPA term (i.e., through 2016) indicate that the Project’s operating costs would be covered.  

Summary of the Agreements

Under the Agreements terminating the PPA, in return for monthly payments extending through 2007, UP3 agrees to terminate the PPA and waive any right to require PG&E to purchase the electrical output from the Project.  Under the Agreements, PG&E’s obligation to make payments pursuant to the PPA was suspended as of May 1, 1999.  At the same date, PG&E began paying to UP3 a series of monthly termination payments.  If the Commission approves the Agreements negotiated between PG&E and UP3, then these payments will continue through 2007.  If the Commission rejects the Agreement, then the termination payments will end, and the deliveries and payments pursuant to the original PPA will be resumed.  

The Agreements have two components, a Bridging Agreement and a Termination Agreement.  These operate in sequence.  The Bridging Agreement went into effect on May 1, 1999 and will stay in effect until the Commission acts on the advice letter (PG&E 1927-E) proposing the buyout Agreements.  While the Bridging Agreement is in effect, UP3 sells no power to PG&E, but is free to sell and deliver power to third parties.

The Termination Agreement will go into effect once the Commission approves the buyout Agreements.  If the Commission rejects the Agreements, then the Termination Agreement will never go into effect, and instead the original PPA will resume.  The level of monthly termination payments under the Bridging Agreement is identical to the level under the Termination Agreement, and this is substantially less than the level of payments that PG&E would have made to UP3 had UP3 continued to sell its generation to PG&E pursuant to the PPA.  

The payment stream of termination payments is subject to a potential reduction in the event that future judicial, legislative, or regulatory actions reduce or eliminate the payment obligations PG&E would have retained under the PPA had it not been terminated.  The Agreement does stipulate a limit to the amount by which the payments can be reduced pursuant to this consideration.  If the Commission does not approve the Agreements by June 30, 2000, then PG&E or UP3 may terminate the Agreements.  

Ratepayer Benefits and Shareholder Incentives

PG&E estimates that the proposed buyout will result in ratepayer savings of between $12.1 and $12.7 million.  One of the factors affecting savings estimates is the Energy Loss Adjustment Factor (ELAF) assumed.  If a lower ELAF is instituted by the Commission in the future, then the QF payments under the PPA would be reduced, and the savings to ratepayers resulting from the PPA buyout would also be reduced.  ORA and PG&E were able to reach an agreement on the amount of shareholder incentive for this buyout, and PG&E now requests an incentive payment of $1.09 million.

Procedure for Filing QF Contract Restructurings

In Decision 98-12-066, the Commission established a Restructuring Advice Letter Filing (RALF) procedure for review of Qualifying Facility (QF) contract restructurings.  This procedure provides for Commission approval of QF contract restructurings by means of a resolution in response to the filing of an advice letter.  A key feature of this process is a letter from ORA accompanying the advice letter, stating its neutrality or support.  As noted above, ORA reviewed the proposed advice letter prior to its being filed.  ORA requested certain modifications, which were agreed to by PG&E and ORA, and are incorporated into the proposed terms of the PPA restructuring.

A proposed resolution approving the restructuring advice letter shall make at least the following findings:
o	that the restructuring is reasonable;
o	that all payments to be made pursuant to the restructuring shall be recovered through the Annual Transition Cost Proceeding or other Commission-approved mechanism, subject only to the utility’s prudent administration of the restructuring agreement.

Commission Policies on Contract Restructurings

In Decision 99-02-085, the Commission issued the following rulings regarding QF restructurings:  
o	the standard of reasonableness is “in light of the whole record, consistent with the law, and in the public interest...” (Finding of Fact #1); the Commission declined to adopt a new standard for reasonableness (Conclusion of Law # 3);
o	the filing of advice letters should be voluntary for both the utility and the QF (Order # 3);
o	utility decisions in restructuring negotiations should be subject to reasonableness reviews regarding anti-competitive behavior (Order #4);
o	the shareholder incentive to renegotiate QF contracts is retained at the level of 10% of estimated ratepayer savings; this will be trued up, however, to adjust for the time value of money associated with the time lag between the initial filing of the net present value of the savings and the final Commission approval of the contract restructuring (Orders # 5, 6, and 7).

NOTICE

Notice of PG&E’s Advice Letter 1927-E was made by publication in the Commission Daily Calendar and by mailing copies to interested parties.

PROTESTS

No protests were filed in response to this advice letter.

DISCUSSION

It is Commission policy to foster ratepayer savings by encouraging QF contract restructurings.  Previous Commission decisions (D.98-12-066 and D.99-02-085) have provided the procedural framework for the processing of QF contract restructurings via advice letter and resolution and also the guidelines to be used in evaluating the advice letters.  

In conformance with Commission guidelines regarding RALFs, PG&E included with its advice letter submission a letter from ORA stating that it finds the proposed UP3 contract restructuring reasonable.

It would have been desirable for PG&E, or an independent consultant, to have conducted an on-site review to confirm the facility’s ongoing technical viability.  However, given PG&E’s familiarity in dealing with the plant on an energy-delivery basis, we accept PG&E’s assurances that the facility is in good condition and that it should continue to be capable of normal operation through the term of contract.

Because PG&E has no ownership interest in UP3, there is no concern regarding a conflict of interest in the buyout.

The estimated savings to ratepayers resulting from the Contract restructuring range between $12.1 million and $12.7 million, depending on market energy price scenarios.  Even when different ELAF assumptions are made, these savings are robust and substantial.

The Commission policy is that shareholders should be rewarded 10% of any estimated ratepayer savings resulting from QF contract restructurings.  PG&E is proposing a shareholder reward of $1.09 million.  This is less than 10% of the ratepayer savings estimates claimed by PG&E, and is reasonable.

Because this PPA restructuring provides robust ratepayer savings under a variety of scenarios, it is in ratepayer interests and should be approved.  Furthermore, all payments to be made pursuant to the restructuring should be recovered through a Commission-approved mechanism such as the Annual Transition Cost Proceeding, subject only to the utility’s prudent administration of the restructuring agreement.

COMMENTS

This is an uncontested matter in which the resolution grants the relief requested.  Accordingly, pursuant to PU Code Section 311(g)(2), the otherwise applicable 30-day period for public review and comment is being waived.  Accordingly, this matter will be placed on the Commission agenda directly for prompt action.

FINDINGS

1.	In Advice Letter 1927-E, filed on October 13, 1999, PG&E proposes that the Commission find reasonable a restructuring of the geothermal QF Contract with UP3.

2.	In conformance with Commission policies regarding RALFs, PG&E included with its advice letter submission a letter from ORA stating that it finds the proposed UP3 contract restructuring reasonable.

3.	The current PPA with UP3 is a 30-year ISO4 contract which ends on July 8, 2016.  The PPA contains both energy and capacity payment components.

4.	PG&E asserts that were it not for the PPA restructuring, UP3 would be viable both technically and economically through the end of the current contract term.

5.	Under the proposed restructuring, PG&E’s obligation to procure power from UP3 would end permanently.  In exchange, PG&E would pay UP3 a series of monthly supplemental payments.  These payments began in May 1999 under a Bridging Agreement.  The payments would continue, once the Commission approves the buyout, under a Termination Agreement, and end in December 2007.  Ratepayer savings would result primarily from the avoidance of capacity payments during this period.  Estimates of ratepayer savings range from $12.1 million to $12.7 million.

6.	If the Commission rejects the proposed buyout, then UP3 once again will sell electricity to PG&E under the resumed terms of the PPA.

7.	PG&E proposes a shareholder reward of $1.09 million.  This equals less than 10% of PG&E estimates of ratepayer savings.

8.	No protests were filed against this advice letter.

9.	The PPA restructuring is reasonable.  

10.	All payments that PG&E has made and will make under the Agreements should be authorized to be recovered through the Annual Transition Cost Proceeding or any other mechanism authorized by the Commission, subject only to PG&E’s prudent administration of the Agreements.

11.	PG&E is entitled to a shareholder incentive of $1.09 million for the Agreements.     

Therefore it is ordered that:

1.	PG&E Advice Letter 1927-E shall be approved.

2.	PG&E shall revise its list of Contracts and Deviations to include the Agreements ordered above and shall file such revised tariff sheets with the Commission within sixty (60) days of the effective date of this Resolution.

3.	This resolution shall be made effective today.

I certify that the foregoing resolution was duly introduced, passed, and adopted at a conference of the Public Utilities Commission of the State of California held on February 17, 2000; the following Commissioners voting favorably thereon:

													   _______________________
						
								     WESLEY M. FRANKLIN
								         Executive Director

								     RICHARD A. BILAS
									   President
								      HENRY M. DUQUE
								      JOSIAH L. NEEPER
								      CARL W. WOOD
								      LORETTA M. LYNCH
									Commissioners