ML021060032
| ML021060032 | |
| Person / Time | |
|---|---|
| Site: | Diablo Canyon  |
| Issue date: | 04/01/2002 |
| From: | Schaffer J Howard, Rice, Nemerovski, Canady, Falk & Rabkin, Pacific Gas & Electric Co |
| To: | Office of Nuclear Reactor Regulation, US Federal Judiciary, Bankruptcy Court, Northern District of California |
| References | |
| 01-30923 (DM), 94-0742640 | |
| Download: ML021060032 (17) | |
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, ho.. 15 16 17 18 In re PACIFIC GAS AND ELECTRIC COMPANY, a California corporation, Debtor.
Federal I.D. No. 94-0742640 No. 01-30923 DM Chapter 11 Case Date:
April 17, 2002 Time:
9:30 a.m.
Place:
235 Pine Street, 22nd Floor San Francisco, California Judge:
Hon. Dennis Montali DEBTOR'S NOTICE OF MOTION AND MOTION FOR ORDER APPROVING EXPENDITURE OF FUNDS TO CONSTRUCT THE NORTHEAST SAN JOSE TRANSMISSION REINFORCEMENT PROJECT; SUPPORTING MEMORANDUM OF POINTS AND AUTHORITIES
[SUPPORTING DECLARATIONS OF KEVIN DASSO AND VALERIE 0. FONG FILED SEPARATELY]
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DEBTOR'S NOT. OF MOT., MOT. & MPA FOR ORDER APPROVING EXPEND. OF FUNDS TO CONSTRUCT NESJ PROJECT JAMES L. LOPES (No. 63678)
JEFFREY L. SCHAFFER (No. 91404)
-t JANET A. NEXON (No. 104747)
HOWARD, RICE, NEMEROVSKI, CANADY, FALK & RABKIN A Professional Corporation Three Embarcadero Center, 7th Floor San Francisco, California 94111-4065 Telephone:
415/434-1600 Facsimile:
415/217-5910 Attorneys for Debtor and Debtor in Possession PACIFIC GAS AND ELECTRIC COMPANY UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF CALIFORNIA SAN FRANCISCO DIVISION 19 20 21 22 23 24 25 26 27 28
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.15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOTICE OF MOTION AND MOTION I
MEMORANDUM OF POINTS AND AUTHORITIES 2
I.
INTRODUCTION 2
II.
FACTUAL BACKGROUND 4
A.
The NESJ Project 4
B.
NESJ Project Cost 5
C.
The CPUC's Issuance of a CPCN for the NESJ Project 6
D.
PG&E's Management Approved Construction of the NESJ Project 9
M.
THE NESJ PROJECT SHOULD BE AUTHORIZED PURSUANT TO SECTIONS 363 AND 105 OF THE BANKRUPTCY CODE 12 CONCLUSION 14 DEBTOR'S NOT. OF MOT., MOT. & MPA FOR ORDER APPROVING EXPEND. OF FUNDS TO CONSTRUCT NESW PROJECT
-i-HOPMRD CIANUN Page TABLE OF CONTENTS 4
TABLE OF AUTHORITIES 1
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Statutes 9
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,,,,.~15 16 17 18 19 20 21 22 23 24 25 26 11 U.S.C.
105 105(a)
§363
§363(c)
Cal. Pub. Util. Code
§§1001 et seq.
§1005.5
§8100 5.5(ýa)
§1005.5(b)
CPUC Rules of Practice and Procedure 2-8, 15, 16, 17.1, 17.3, 18 (Cal. Code of Regs., tit. 20)
CPUC General Order 131-D Other Authorities 2 Lawrence P. King, Collier on Bankruptcy ¶105.01 (15th ed. rev. 2000)
DEBTOR'S NOT. OF MOT., MOT. & MPA FOR ORDER APPROVING EXPEND. OF FUNDS TO CONSTRUCT NESJ PROJECT
-.ouisiana Pub. Serv. Comm'n v. FCC, 476 U.S. 355 (1986)
Aississippi Power & Light Co. v. Mississippi ex rel. Moore, 478 U.S. 354 (198 Page(s) 1,2 13, 14 1,2, 3 13 3
11 10, 11 11 3
3 13 Cases 8
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d.*. 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOTICE OF MOTION AND MOTION PLEASE TAKE NOTICE that on April 17,2002, at 9:30 a.m., or as soon thereafter as the matter may be heard, in the Courtroom of the Honorable Dennis Montali, located at 235 Pine Street, 22nd Floor, San Francisco, California, Pacific Gas and Electric Company, the debtor and debtor in possession in the above-captioned Chapter 11 case
("PG&E" or the "Debtor"), will and hereby does move the Court (the "Motion") for entry of an order authorizing PG&E to construct and energize the project known as the Northeast San Jose Transmission Reinforcement Project ("NESJ Project") as more particularly described in the accompanying Memorandum of Points and Authorities incorporated by reference herein.
This Motion is made pursuant to Sections 105 and 363 of the United States Bankruptcy Code (11 U.S.C. §§105, 363) and is based on the facts and law set forth in the attached Memorandum of Points and Authorities, the Declarations of Kevin Dasso and Valerie 0. Fong filed concurrently herewith, the record of this case and any evidence presented at or prior to the hearing on this Motion.
PLEASE TAKE FURTHER NOTICE that this Motion is being noticed for hearing on ten (10) business days' notice pursuant to the above-captioned Court's Order Re Motion For Authority To Make Capital Expenditures In The Ordinary Course of Business dated June 29, 2001 (the "Cap Ex Omnibus Order"). The Cap Ex Omnibus Order does not specify the time for filing any written opposition to this Motion; nonetheless, because both the Court and PG&E should have the opportunity to review any written opposition to this Motion prior to the hearing thereon, parties in interest are advised to file any written opposition to the Motion and the relief requested therein with the Bankruptcy Court no later than two business days prior to the hearing, and to serve any such written opposition upon counsel for PG&E, the Office of the United States Trustee, and the Official Committee of Unsecured Creditors by hand service on the same date. If there is no timely objection to the requested relief, the Court may enter an order granting such relief without further hearing.
DEBTOR'S NOT. OF MOT., MOT. & MPA FOR ORDER APPROVING EXPEND. OF FUNDS TO CONSTRUCT NESJ PROJECT I
1 MEMORANDUM OF POINTS AND AUTHORITIES 2
I.
INTRODUCTION 3
By this Motion, Pacific Gas and Electric Company, the debtor and debtor in 4
possession in this Chapter 11 case ("PG&E" or the "Debtor"), seeks an order pursuant to 5
Sections 363 and 105 of the Bankruptcy Code (11 U.S.C. §363, 105)1 authorizing PG&E to 6
spend up to $183 million for the construction of the NESJ Project. The purpose of the NESJ 7
Project is to build electric transmission facilities to serve electric customers in the cities of 8
San Jose, Santa Clara and Milpitas and the Silicon Valley (collectively the "San Jose area").
9 The California Public Utilities Commission ("CPUC") has ordered PG&E to construct the 10 NESJ Project.
11 PG&E brings this Motion because the requested $183 million exceeds the project 12 limit authorized in PG&E's Motion for Authority to Make Capital Expenditures in the 13 Ordinary Course of Business filed in this case on June 6, 2001, which was approved 14 pursuant to the Court's Order thereon dated June 29, 2001 (such prior Motion and Order 15 hereinafter are collectively referred to as the "Omnibus Cap Ex Motion and Order"). In 16 broad outline, pursuant to the Omnibus Cap Ex Motion and Order, PG&E is authorized to 17 proceed (a) without notice to or approval of the Court or the Official Committee of 18 Unsecured Creditors (the "Committee"), with any project costing less than $10 million, 19 (b) with notice to and no objection by the Committee, with any project costing more than 20
$10 million and less than $50 million, and (c) only upon a motion noticed to the Committee 21 and the United States Trustee on at least 10 business days' notice and approval of the Court, 22 with any project anticipated to cost more than $50 million.
23 PG&E submitted a notice and description of the NESJ Project to the Committee 24 on January 10, 2002. The Committee on January 24, 2002 indicated in writing that it had no 25
-objection to the Debtor proceeding with NESJ Project. PG&E respectfully requests that this 265 Motion be granted and that PG&E be authorized to expend up to $183 million for 26 27 1Unless otherwise indicated, all statutory references in this Motion are to the United 28 States Bankruptcy Code (Title 11 of the United States Code).
DEBTOR'S NOT. OF MOT., MOT. & MPA FOR ORDER APPROVING EXPEND. OF FUNDS TO CONSTRUCT NESJ PROJECT 1
construction of the NESJ Project.
2 Before PG&E's Chapter 11 filing in July 1998, PG&E applied to the CPUC 3
pursuant to applicable provisions of the California Public Utilities Code2 for a certificate of 4
public convenience and necessity (a "CPCN") to construct the NESJ Project. In a final 5
decision dated December 11, 2001 (the "CPUC Order"), the CPUC approved the Project 6
and, subject to PG&E's acceptance of the conditions in the CPUC Order, issued PG&E a 7
CPCN.3 As discussed further below, the CPUC Order purports to set a "cost cap" on the 8
NESJ Project in the amount of $147,542,555 (approximately $35.5 million less than PG&E 9
estimates the Project will cost to build). In response to PG&E's expressed concerns about 10 constructing the NESJ Project in light of the CPUC's effort to interfere with PG&E's 11 recovery of the anticipated costs of doing so, the CPUC ordered PG&E to construct the 12 NESJ Project.
S13 N otw ithstanding the CPU C 's "cost cap," PG & E respectfully requests that this ZOO 14 Motion be granted and that PG&E be permitted pursuant to Section 363 to expend up to 15
$183 million to construct the NESJ Project. PG&E further requests that it receive such 16 approval forthwith because the NESJ Project already is behind schedule. As was the case 17 with PG&E's recent motions for authority to incur capital expenditures in connection with 18 its Path 15 Project and Tri-Valley Project (which were granted by separate orders issued by 19 the Court on February 2, 2002), PG&E by the present Motion is not asking the Court to 20 address or rule on any state law regulatory issues; rather, PG&E by this Motion only seeks 21 authorization to incur the subject capital expenditures pursuant to Section 363 of the 22 Bankruptcy Code.
23 24 25 26 2.See Cal. Pub. Util. Code §§1001 et seq.; CPUC Rules of Practice and Procedure 2-8, 15, 16, 17.1, 17.3, 18 (Cal. Code of Regs., tit. 20); CPUC General Order 131-D.
27 3A true and correct copy of the CPUC Order is attached as Exhibit 2 to the Declaration 28 of Kevin Dasso ("Dasso Declaration") filed concurrently herewith.
DEBTOR'S NOT. OF MOT., MOT. & MPA FOR ORDER APPROVING EXPEND. OF FUNDS TO CONSTRUCT NESJ PROJECT 1
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FACTUAL BACKGROUND4 A.
The NESJ Project The San Jose area has key businesses and industries affecting the overall California economy. With only a small number of electric generation facilities in the area, PG&E relies heavily on its electric transmission facilities to import power to serve customer demand.
Before the recent energy crisis and current economic downturn, this area had been experiencing high economic expansion and electric demand growth. Between the years 1995 and 2000, peak electric demand grew from 1,320 megawatts ("MW") to 1,900 MW, or an average of 100 MW per year. Electric demand, while lower in 2001, is expected to grow at or near the previous pace in the longer term with the recovery of the California economy.
The loadings on several local 115 kilovolt ("kV") power lines and transformer equipment at PG&E's Newark and Metcalf substations are expected to exceed their capability by 2002 or 2003, depending upon the pace of economic recovery. Other 115 kV lines in south San Jose are also loaded at or close to their capability. As noted in the CPUC Order, the California Independent System Operator ("ISO") has concluded that the transmission system in the northeast San Jose area was in violation of the ISO grid planning criteria for reliability in the summers of 2000 and 2001. To support the load growth and correct violations of the ISO reliability criteria, the ISO has found, and the CPUC has agreed, that substantial additions to PG&E's transmission system will be required to be in place by 2003 to meet demand and ensure system reliability.5 4The evidentiary basis and support for the facts set forth in this Motion are contained in the Dasso Declaration (cited as the '"Dasso Decl.") and in the Declaration of Valerie 0. Fong (hereinafter referred to as the "Fong Declaration" and cited as the "Fong Decl.") filed concurrently herewith. Where there is no citation supporting a particular fact, the evidentiary basis for such fact is contained in the Dasso Declar1tion. Where, on the other hand, the evidentiary basis for a particular fact is contained in the Fong Declaration, we will specifically cite to i& Fong Declaration.
5Pursuant to the ISO's comprehensive transmission planning and approval process, the ISO Governing Board in January 2000 approved the NESJ Project as the preferred transmission alternative to address the identified reliability concerns on the ISO Grid.
DEBTOR'S NOT. OF MOT., MOT. & MPA FOR ORDER APPROVING EXPEND. OF FUNDS TO CONSTRUCT NESJ PROJECT 1
The NESJ Project has been designed to solve transmission deficiencies in the 2
San Jose area. To complete the NESJ Project as approved by the CPUC, PG&E will:
3
- Acquire 20 acres of land and construct a new transmission substation, Los 4
Esteros, with three 420 MVA transmission transformers, capacitors and 5
other electric equipment; 6
- Construct approximately 7.3 miles of 230 kV double circuit transmission 7
line (2.8 miles of underground and 4.5 miles of overhead);
8 0 Construct approximately 1.5 miles of 115 kV power line and reconfigure 9
existing 115 kV power lines to make four additional 115 kV connections to 10 Los Esteros substation; and 11 N Install'equipment and make required upgrades at substations impacted by 12 the NESJ Project.
S13 PG & E originally scheduled construction on the N E SJ Project to begin in 2001 14 so that the Project would become operational in June 2002. Because of delays in the CPUC FaK 15 proceedings, the NESJ Project currently is behind schedule. To meet the relevant 16 operational deadlines for 2003, construction must begin no later than May 2002.
17 B.
NESJ Project Cost 18 In February 1997, PG&E's Board of Directors approved an appropriation of $71 19 million to fund PG&E's proposed NESJ Project. The CPUC substantially redesigned the 20 NESJ Project, ordering changes in the proposed route, requiring PG&E to underground 2.8 21 miles of transmission lines, purchase more costly land, and interconnect with PG&E's 22 transmission grid at a different location. The CPUC-ordered changes and delay, and to a 23 lesser extent more detailed design, increased the original project estimate of $71 million to 24 PG&E's current cost estimate of approximately $183 million.6 25 6As PG&E witnesses testified before the CPUC in PG&E's supplemental cost 26 testimony submitted in August 2001 and during the September 2001 hearings, the relative per-mile cost of constructing underground transmission line in the NESJ Project is 27 substantially more than the cost of constructing overhead transmission line. The $112 28 million increase in the NESJ Project cost estimate reflects not only the increase in costs (continued...)
DEBTOR'S NOT. OF MOT., MOT. & MPA FOR ORDER APPROVING EXPEND. OF FUNDS TO CONSTRUCT NESJ PROJECT 1
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10 11 12 13 iax 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 On February 20, 2002, PG&E's Board of Directors approved updated capital expenditures in the aggregate amount of $183 million, subject to Bankruptcy Court approval.
On January 10, 2002, PG&E submitted a notice and description of the NESJ Project to the Committee, and on January 24, 2002, the Committee notified PG&E that it did not oppose the NESJ Project but asked PG&E "to notify the Committee immediately should there be material changes to the scope of work/services (i.e., CPUC/FERC reviews, delays, etc.)."
Fong Decl. ¶¶2, 3 & Ex. B.
In addition to being the only CPUC-certified approach for providing the electric transmission capacity required to serve the projected loads in the San Jose area, the NESJ Project is the lowest cost alternative to serve new electric customer demand in the San Jose area. The overall NESJ Project is expected to increase the Company's revenue requirement by a net present value of $243 million. Generally speaking, the cost of transmission facilities is expected to be included in PG&E's base utility revenue requirements and is expected to earn the rate of return authorized by the Federal Energy Regulatory Commission
("FERC").
C.
The CPUC's Issuance of a CPCN for the NESJ Project In July 1998, PG&E submitted an application to the CPUC for a CPCN authorizing the construction of the NESJ Project. After consultation with the Don Edwards San Francisco Bay National Wildlife Refuge, PG&E re-filed its CPCN application with a different proposed route in September 1999. The CPUC eventually conducted evidentiary hearings in August and September 2000. The CPUC issued a decision on May 14, 2001 (the "May CPUC Opinion"), approving the NESJ Project, but selecting a different route for the 230 kV transmission line based on environmental considerations. The CPUC's
... continued) related to the additional miles of underground transmission line, but also higher real estate values due to the three-year delay and the change in selected route, environmental mitigation measures and electrical configuration changes due to the change in the selected route, more detailed design of certain components, hi her indirect costs such as contingency costs (which are calculated as a percentage of the subtotal of labor, material, contract, and other direct costs), and general cost escalation due to the three-year Project delay.
DEBTOR'S NOT. OF MOT., MOT. & MPA FOR ORDER APPROVING EXPEND. OF FUNDS TO CONSTRUCT NESJ PROJECT 1
"environmentally superior route' 7 specifies 2.8 miles of underground construction, crosses 2
more expensive land than PG&E's proposed route and requires a different interconnection to 3
PG&E's transmission grid. Because PG&E had never estimated the costs of constructing the 4
NESJ Project along the CPUC-selected route, the May CPUC Decision also ordered PG&E 5
to provide detailed cost estimates for the new route within 30 days so that the CPUC could 6
use these estimates to set a cost cap for the Project.
7 In June 2001, PG&E submitted a detailed cost estimate of $182.4 million to 8
construct the NESJ Project along the CPUC-selected route. Faced with the higher cost, the 9
CPUC ordered a stay on the NESJ Project, ordered additional hearings and ordered PG&E to 10 submit additional written and oral testimony regarding, among other things, the need for the 11 NESJ Project to ensure system reliability under state and federal standards, the basis for the 12 June 2001 cost estimate for the CPUC-selected route, and the estimated costs of constructing H
13 the NESJ Project along alternative route segments various alternative Project routes. All RIOA a
14 other parties to the proceeding also had an opportunity to present evidence on the need for 4RAHUN 15 the NESJ Project and the accuracy of PG&E's cost estimates. The additional costs incurred 16 to prepare the requested additional cost estimates, written testimony and participate in 17 administrative hearings drove PG&E's cost estimate to $182.9 million.
18 After a week of hearings in September 2001, the CPUC issued a proposed draft 19 decision on October 10, 2001 (the "Draft Decision"). In the Draft Decision, the CPUC 20 reaffirmed the need for the NESJ Project to ensure reliable electric service, reconfirmed the 21 Project's selected route and placement of transmission lines, and issued a CPCN for the 22 NESJ Project. The Draft Decision, however, adopted a "cost cap" of approximately $143.5 23 on project expenditures. In October 2001, PG&E filed comments on the Draft Decision 24 25 7The CPUC-approved environmentally superior route begins with overhead construction, tapping off of an existing 230 kV line east of Newark Substation and running south along the west side of Highway 1-880. In south Fremont, the route will transition to 26 underground construction for 2.8 miles through the Bayside Business Park (as advocated by the owner of the Bayside Business Park). At the southern end of the business park, the line 27 will transition back to overhead construction for the remaining three miles to the proposed Los Esteros substation site.
28 11 DEBTOR'S NOT. OF MOT., MOT. & MPA FOR ORDER APPROVING EXPEND. OF FUNDS TO CONSTRUCT NESJ PROJECT 1
objecting to the proposed "cost cap" and the purported bases for each of the "reductions" of 2
various Project components in PG&E's cost estimate.8 3
On December 11, 2001, the CPUC issued the CPUC Order granting a CPCN for 4,
the NESJ Project.9 Over PG&E's objections, however, the CPUC Order still asserted the 5
right to impose a "cost cap" on PG&E's recovery of costs for the NESJ Project and stated 6
that the "maximum cost determined to be reasonable and prudent" for the NESJ Project is 7
$147,542,555. Dasso Decl. Ex. 2 (CPUC Order at 31 (Ordering Paragraph 2)).1o This 8
amount is approximately $35.5 million less than the amount of PG&E's estimated cost for 9
the CPUC-approved NESJ Project. Following PG&E's stated concerns about proceeding 10 with the NESJ Project in light of the CPUC's attempts to interfere with PG&E's recovery of 11 the actual costs of the Project, the CPUC also ordered PG&E to construct the NESJ Project.
12 In January 2002, PG&E filed an application for rehearing of the CPUC Order HoM~R 13
("Rehearing Application"), in which PG&E stated its position, among other things, that:
RKE m<' 14 (a) the CPUC has no authority, under either the FERC-approved ISO Tariff or state law, to BUK
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,.*.d0X-9 15 reconsider ISO's determination that the NESJ Project is needed to ensure the reliability of 16 the electrical transmission system; (b) the CPUC has no authority under state or federal law 17 to impose a "cost cap" on the Project; (c) the CPUC has no authority under state or federal 18 law to order PG&E to construct the Project; and (d) the CPUC has no authority under 19 federal law to conduct a duplicative "reasonableness review" of PG&E's NESJ Project 20 expenditures because FERC sets rates to recover transmission costs. Dasso Decl. Ex. 3 21 (Rehearing Application at 2-6, 8-20). In addition, PG&E argued that the CPUC Order's 22 8PG&E also objected to other components of the Draft Decision, including the CPUC's 23 lack of authority under state or federal law to impose a cost cap on the NESJ Project, its reconsideration of the ISO's determination that all components of the NESJ Project are 24 needed to ensure system reliability, and its order directing PG&E to submit an application 25 seeking a CPUC "reasonableness review" of NESJ Project costs.
9The CPUC Order incorporates the May CPUC Decision and lifts the CPUC's stay of 26 that decision. Dasso Decl. Ex. 2 (CPUC Order at 31 (Ordering Paragraph 1)).
20The CPUC order also stated that the CPUC retains jurisdiction to review the 27 reasonableness of PG&E's final NESJ Project expenditures. Dasso Decl. Ex. 2 (CPUC Order at 30 (Conclusions of Law 3)).
28 DEBTOR'S NOT. OF MOT., MOT. & MPA FOR ORDER APPROVING EXPEND. OF FUNDS TO CONSTRUCT NESJ PROJECT 1
arbitrary reductions of PG&E's costs estimates are not supported by the evidence and should 2
be reversed. Id. at 6, 21-40.
3 As of the filing of this Motion, the CPUC has not ruled on the Rehearing 4
Application.
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D.
PG&E's Management Approved Construction of the NESJ Project 7
In deciding whether to approve construction of the NESJ Project and seek 8
Bankruptcy Court approval to expend the necessary funds, PG&E management weighed the 9
risks posed by the CPUC's identification of the "maximum reasonable and prudent cost" 10 (assuming, as PG&E must, that PG&E's Rehearing Application is denied). Due to the 11 aggregate amount of the "reductions" to PG&E's cost estimate ($35.5 million), the 12 identification of the "maximum reasonable and prudent cost" as $147,542,555 poses 13 potential substantial risks to cost recovery on the NESJ Project. Because of the need for the RKE m'
14 NESJ Project to maintain reliable electrical service and PG&E's belief that the CPUC "cost
,*,i.WQ.. 15 cap" likely will not interfere with cost recovery for the reasons set forth below, PG&E 16 management is willing to proceed with the NESJ Project despite the CPUC having purported 17 to identify the "maximum reasonable and prudent cost" approximately $35.5 million below 18 PG&E's estimated costs for the Project."
19 In making the Motion and seeking this Court's authorization under Sections 363 20 and/or 105 of the Bankruptcy Code for PG&E to expend up to the requisite $183 million to 21 proceed with and complete the NESJ Project, PG&E is not asking this Court to address or 22 rule on whether or how PG&E may seek or obtain any cost recovery for the $35.5 million 23 that exceeds the CPUC's so-called "cost cap" or otherwise to make any ruling with respect 24 to the merits of PG&E's position respecting the CPUC's "cost cap." Nonetheless, a 25 26 "PG&E's decision to proceed with the NESJ Project despite the CPUC's arbitrary "cost cap" does not mean that PG&E will recommend proceeding with any other 27 transmission project where the CPUC sets a "cost cap" below PG&E's estimated costs. The 28 risk associated with each project will be considered individually.
DEBTOR'S NOT. OF MOT., MOT. & MPA FOR ORDER APPROVING EXPEND. OF FUNDS TO CONSTRUCT NESJ PROJECT 1
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15 16 17 18 19 20 21 22 23 24 25 26 27 28 summary of PG&E's position regarding the "cost cap" may be helpful to the Court.
The CPUC asserts authority to set a "cost cap" based on California Public Utilities Code Section 1005.5(a), which provides:
Whenever the commission issues to an electrical or gas corporation a certificate authorizing the new construction of any addition to or extension of the corporation's plant estimated to cost reater than fifty million dollars
($50,000,000), the commission shall specify in the certificate a maximum cost determined to be reasonable and prudent for the facility. The commission shall determine the maximum cost using an estimate of the anticipated construction cost, taking into consideration the design of the project, the expected duration of construction, an estimate of the effects of economic inflation, and any known engineering difficulties associated with the project.
PG&E contends that: (a) the CPUC has been deprived of state law authority to set "cost caps" on transmission projects by the California Legislature's transfer of responsibility for the electrical transmission grid to the ISO; and (b) any CPUC authority to "cap" transmission projects' costs is preempted by the FERC tariff with the ISO. Through the enactment of AB 1890,12 the California Legislature created the ISO, transferred control of the electrical transmission grid from the CPUC to the ISO, and ordered the ISO to submit control of the transmission grid to FERC jurisdiction. The ISO now operates the transmission grid pursuant to a FERC-approved tariff, which has the force of federal law.
See, e Louisiana Pub. Serv. Comm'n v. FCC 476 U.S. 355, 368-69 (1986). PG&E's analysis of these issues is set forth more fully in its Rehearing Application, attached as Exhibit 3 to Dasso Declaration. Because the recovery of transmission costs is under FERC jurisdiction, the CPUC cannot legally constrain transmission cost recovery by setting a "maximum reasonable and prudent cost."
Even the CPUC seems to concede this point; the CPUC has previously ruled that the Project is a FERC-jurisdictional transmission project and FERC will address cost recovery for this Project. See 2000 Cal. PUC LEXIS 239, Decision 00-02-046 (February 17, 2000) at 322, Part 3 of 4 ("The Northeast San Jose Transmission Relief [sic]
12AB 1890 is codified at Sections 330 through 398.5 of the California Public Utilities Code.
DEBTOR'S NOT. OF MOT., MOT. & MPA FOR ORDER APPROVING EXPEND. OF FUNDS TO CONSTRUCT NESJ PROJECT 1
[Reinforcement] Project is a transmission project, and the costs of this project will be 2
recovered through FERC-approved transmission rates") (emphasis added). The CPUC, 3
moreover, may not prevent PG&E from recovering those costs that FERC has found 4
recoverable and, for the same reasons may not conduct "a reasonableness review" of 5
PG&E's Project costs because FERC will do so. Mississippi Power & Light Co. v.
6 Mississippi ex rel. Moore. 478 U.S. 354, 369-70 (1988) (no state prudence review where 7
FERC approves the rates).
8 Moreover, even if the CPUC has authority to set a "cost cap" for the NESJ 9
Project pursuant to Section 1005.5(a), PG&E may apply to the CPUC for an increase in such 10 "cost cap" specified in the CPCN:
11 After the certificate has been issued, the corporation may apply to the commission for an increase in the maximum cost specified in the 12 certificate. The commission may authorize an increase in the specified maximum cost if it finds and determines that the cost has in fact HCWA.
13 increased and that the present or future public convenience and R-E necessity require construction of the Project at the increased cost; c.,"
14 otherwise, itshall deny the application. (Cal. Pub. Util. Code ANKIN 1005.5(b))'
,.,,.15 The CPUC Order recognizes such right. Dasso Decl. Ex. 2 (CPUC Order at 7, 16 30). In the event that the actual project costs exceed the CPUC's "cost cap" or further 17 evidence supports estimated costs that exceed the CPUC's "cost cap," PG&E may seek an 18 increase pursuant to Section 1005.5(b) if PG&E at such time believes it will be fruitful to do 19 SO.
20 Finally, the CPUC Order requires PG&E to "file a written notice with the 21 Commission... executed by an officer of PG&E duly authorized... to acknowledge 22 PG&E's acceptance of the conditions set forth in Ordering Paragraphs 1 through 11 and 13, 23 inclusive, of this decision." Dasso Decl. Ex. 1 (May CPUC Decision at 91 (Ordering 24 Paragraph 12)). The CPUC's "cost cap" is not contained in those ordering paragraphs; 25 26 13Pending California AB 47 (Diaz, as amended June 25, 2001), if enacted, would 27 amend Section 1005.5 to provide that "the application for an increase may occur before, 28 during, or after construction."
DEBTOR'S NOT. OF MOT., MOT. & MPA FOR ORDER APPROVING EXPEND. OF FUNDS TO CONSTRUCT NESJ PROJECT 1
however, Ordering Paragraph 4 of the May CPUC Decision states: "This order shall become 2
effective once the Commission reviews the cost data and comments thereon and incorporates 3
a cost cap and any other necessary changes into this decision." Id. at 89. For the reasons set 4
forth above, PG&E does not believe that the CPUC may require PG&E to agree that it will 5
not seek to recoup all of the actual Project costs in transmission rates. In all events, PG&E's 6
written notice filed on February 22, 2002 affirmatively asserts PG&E's right to seek 7
recovery of all Project costs from FERC, even if actual costs exceed the CPUC's "cost cap."
8 III.
THE NESJ PROJECT SHOULD BE AUTHORIZED PURSUANT TO SECTIONS 363 AND 105 OF THE 10 BANKRUPTCY CODE 11 As set forth at some length in the Omnibus Cap Ex Motion, PG&E on an annual 12 basis makes approximately $1.5 billion in capital expenditures in the ordinary course of its 13 business of providing gas and electric service to its customers. These capital expenditures 4'
14 cut across the utility functions of the company (including electric distribution, gas
&RAEUN Afti4.*
15 distribution, electric transmission, gas transmission and electric generation) and generally 16 fall into one or more of three broad categories: (1) emergency/safety projects; (2) projects 17 that are mandated by regulatory or legal orders (including projects undertaken to remain in 18 compliance with regulatory and legal requirements); and (3) other projects, such as projects 19 designed to improve the reliability of PG&E's distribution or-transmission system which 20 may not be mandated by specific performance requirements. See Omnibus Cap Ex Motion 21 at 3:19-4:4.
22 The NESJ Project has elements of all three expenditure categories, in that the 23 completion of the Project will help avoid emergency shortages in Northern California, 24 PG&E has been ordered to construct the Project, and the Project is designed to improve the 25 reliability of the electric transmission system.
26 As previously noted in the Cap Ex Omnibus Motion, PG&E believes that the 27 expenditures on virtually all of its capital projects as described above are within the ordinary 28 course of its business. As such, PG&E appreciates that such expenditures should be DEBTOR'S NOT. OF MOT., MOT. & MPA FOR ORDER APPROVING EXPEND. OF FUNDS TO CONSTRUCT NESJ PROJECT 1
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10 11 12 HYM~BD 13 a14 AI*0O*.
15 16 17 18 19 20 21 22 23 24 25 26 27 28 permitted without notice or hearing or any Bankruptcy Court approval pursuant to 11 U.S.C.
Section 363(c) as a use, sale or lease of estate property in the ordinary course of business.
However, recognizing that few are the cases in which a debtor in possession must make well over $1 billion in capital expenditures per year due to the unique nature of its business and the complex regulatory environment in which it operates, PG&E already has agreed that the Committee and the Court should be apprised of and/or asked to approve PG&E's capital expenditures at certain substantial materiality thresholds as established in the Omnibus Cap Ex Motion and Order. See generally Omnibus Cap Ex Motion at 15:23-17:20. Thus, although the NESJ Project was conceived and will be undertaken in the ordinary course of PG&E's business, PG&E seeks this Court's authority to proceed with the NESJ Project because the anticipated cost of the Project exceeds $50 million, and a motion and Court approval therefore are required pursuant to the Omnibus Cap Ex Motion and Order.
PG&E has demonstrated in Part II above that the NESJ Project is important to the reliability of the electric transmission system and service in the San Jose area, and that the proposed maximum $183 million expenditure for such Project pursuant to the Motion most cost-efficiently attains the implementation and completion of the Project. Accordingly, this Court plainly can and should utilize its authority under Section 363 of the Bankruptcy Code to approve the capital expenditure authorization for the NESJ Project requested by the Motion.
Additionally, Section 105(a) of the Bankruptcy Code authorizes this Court to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." The purpose of Section 105 is "to assure the bankruptcy courts' power to take whatever action is appropriate or necessary in aid of the exercise of their jurisdiction." 2 Lawrence P. King, Collier on Bankruptcy ¶105.01, at 105-6 (15th ed. rev.
2000). For the reasons set forth above, the capital expenditures authorization for the NESJ Project requested by this Motion plainly will best serve the interests of the Debtor, its creditors and its customers alike, and will not violate any principle or precept of the Bankruptcy Code. Accordingly, pursuant to the Court's authority and discretion under DEBTOR'S NOT. OF MOT., MOT. & MPA FOR ORDER APPROVING EXPEND. OF FUNDS TO CONSTRUCT NESJ PROJECT 2
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13 c1'Er 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Section 105(a) of the Bankruptcy Code, the Court can and should grant the Motion.
CONCLUSION For all of the foregoing reasons, PG&E respectfully requests that this Court make and enter an order granting the Motion, authorizing PG&E to enter into contractual commitments and incur the expenditure of funds up to a maximum of $183 million to construct the NESJ Project.
DATED: April 1,2002 Respectfully submitted, HOWARD, RICE, NEMEROVSKI, CANADY, FALK & RABKIN A Prof iional Corporation By:
(
LmR Attorneys for D tor and Debtor in Possession PACIFIC GAS AND ELECTRIC COMPANY DEBTOR'S NOT. OF MOT., MOT. & MPA FOR ORDER APPROVING EXPEND. OF FUNDS TO CONSTRUCT NESJ PROJECT