ML023050126
| ML023050126 | |
| Person / Time | |
|---|---|
| Site: | Diablo Canyon  |
| Issue date: | 10/25/2002 |
| From: | Scott E 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, 94-0742640 | |
| Download: ML023050126 (8) | |
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,p,...d.-*15 16 In re PACIFIC GAS AND ELECTRIC COMPANY, a California corporation, Debtor.
Federal I.D. No. 94-0742640 Case No. 0 1-30923 DM Chapter 11 Case Date:
November 14, 2002 Time:
9:30 a.m.
Place:
235 Pine Street, 22nd Floor San Francisco, California DECLARATION OF ERIC R. SCOTT IN SUPPORT OF MOTION FOR AUTHORITY TO ENTER INTO CERTAIN POWER PROCUREMENT CONTRACTS DECLARATION OF ERIC R. SCOTT JAMES L. LOPES (No. 63678)
GARY M. KAPLAN (No. 155530)
JULIE B. LANDAU (No. 16203 8)
HOWARD, RICE, NEMEROVSKI, CANADY, FALK & RABKIN A Professional Corporation Three Embarcadero Center, 7th Floor San Francisco, California 94111-4065 3-29 Telephone: 415/434-1600 3
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 17 18 19 20 21 22 23 24 25 26 27 28
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I, Eric R. Scott, declare:
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I have been employed by Pacific Gas and Electric Company ("PG&E")
3 since 1972. Since March 2001, I have held the position of Manager of Market and 4
Regulatory Issues. In this position, I am responsible for assessment of regulatory and 5
legislative issues pertaining to electric procurement and for managing specific electric 6
procurement projects.
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This declaration is submitted in support of PG&E's Motion for Authority to 8
Enter into Certain Power Procurement Contracts (the "Motion"). Defined terms used herein 9
shall have the meanings set forth in the Motion. I make this declaration based on personal 10 knowledge, except where otherwise indicated, and if called as a witness, could and would 11 testify competently to the matters set forth herein.
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Due to a number of events that occurred prior to the filing of PG&E's CAM 13 Chapter 11 petition, including the downgrading of its credit ratings and resulting loss of its RKIC C
14 investment-grade status, PG&E became unable to obtain wholesale power in early 2001. In BLK 15 January 2001, DWR was authorized to purchase power to maintain the continuity of supply 16 to retail customers of PG&E and other investor owned utilities (collectively, the "IOUs"). In 17 February 2001, Assembly Bill No. 1 of the first extraordinary session ("AB lX") was 18 enacted into law, authorizing DWR to enter into contracts for the purchase of electric power.
19 AB IX also required PG&E to deliver the power purchased by DWR over its distribution 20 systems and act as a billing agent on behalf of DWR, but did not make PG&E legally or 21 financially responsible for DWR's contracts. AB lX prohibited DWR from entering into 22 new contracts to purchase energy on and after January 1, 2003.
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Despite the large number of power contracts already entered into by DWR, 24 there remains a net short'position for PG&E in 2003 and beyond, particularly during the 25 hours2.893519e-4 days <br />0.00694 hours <br />4.133598e-5 weeks <br />9.5125e-6 months <br /> of each month with the highest customer demand ("peak hours"). An agreement with 26 DWR under which DWR will enter into new power purchase contracts, subject to PG&E 27 taking responsibility for such contracts if and when it becomes investment-grade, along with 28 extending certain pre-existing QF contracts, will allow PG&E to call upon power during the DECLARATION OF ERIC 1
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O*- 15 16 17 18 19 20 21 22 23 24 25 26 27 28 peak hours to reduce its reliance on the "spot market," thereby mitigating electric price and volume volatilities for PG&E's net short position and thus stabilizing rates for its customers.
At the same time, PG&E's financial and legal risks under the contracts will be minimized, because DWR will be the financially and legally responsible party under~the new contracts until such time as PG&E is investment-grade again, and DWR's costs will be recovered directly from retail customers rather than from PG&E's estate.
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The California Public Utilities Commission (the "CPUC") issued its Decision 02-08-071 on August 22, 2002 in the proceedings entitled Order Instituting Rulemaking to Establish Policies and Cost Recovery Mechanisms for Generation Procurement and Renewable Resource Development (the "CPUC Decision"). The CPUC Decision sets forth procedures for PG&E (and the other IOUs) to follow for an expedited procurement process in order to facilitate electric procurement for the period from January 1, 2003 until such time as PG&E regains an investment-grade credit rating. A true and correct copy of the CPUC Decision is attached hereto as Exhibit A.
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The CPUC Decision acknowledges the need to minimize exposure of the IOUs' customers to volatile electricity spot market prices and authorizes the IOUs, on an interim basis through the end of 2002, to jointly enter into new power purchase contracts with DWR (the "Interim Procurement Contracts") to meet the utilities' remaining net short position. DWR would have all legal -and financial responsibility for these contracts and, under AB 1X,.would be authorized to recover the costs of the contracts in its own rates under its own statutory authority, rather than through PG&E's rates or from PG&E. Under the terms of the joint contracts, at such time as PG&E regains its investment-grade credit rating from both Standard and Poor's and Moody's Investors Service, PG&E would assume all legal and -financial responsibility for the contracts and DWR's further obligations would be extinguished. Pursuant to the CPUC Decision, if the IOUs choose to enter into such interim contracts, the IOUs are required to hold a competitive -solicitation for the Interim Procurement Contracts, to consult with a group of non-market participants (referred to as the "Procurement Review Group") on the results of the solicitation and to submit proposed DECLARATION OF ERIC 1
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,.,, 15 16 17 18 19 20 21 22 23 24 25 26 27 28 contracts to the CPUC for expedited approval after the winning bidders are selected.
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The CPUC Decision and recently-enacted legislation require the IOUs to procure renewable energy to ensure that an additional one percent (1%) per year of the IOUs' annual electricity sales (approximately 750 GWh for PG&E) is generated from renewable resources. The CPUC Decision directs that each IOU hold a competitive solicitation to procure the renewable energy required (the "Renewable Energy Contracts")
and to submit the proposed contracts to the CPUC for approval after the winning bidders are selected. As with the Interim Procurement Contracts, the Renewable Energy Contracts will be the legal and financial responsibility of DWR until PG&E regains its investment-grade credit rating.
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The CPUC Decision also requires that the IOUs offer to extend the term of certain QF contracts whose prices are established under federal law and whose costs are fully recoverable in PG&E's rates under that law. Specifically, the CPUC Decision provides that the IOUs are required to offer Standard Offer 1 contract extensions to QFs, meeting the following conditions: (i) the QF must have been in operation and under contract to provide power with an IOU at any point between January 1, 1998 and the effective date of the CPUC Decision; and (ii) the QF contract must be set to expire before January 1, 2004, have already expired or have already been terminated. The CPUC Decision requires PG&E to submit the proposed QF contract extensions ("QF Contract Extensions") to the CPUC for approval.
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PG&E submitted the Interim Procurement Contracts to the CPUC for approval on October 22, 2002 and anticipates submitting the Renewable Energy Contracts to the CPUC for approval by November 5, 2002. A true and correct copy of the October 22, 2002 Advice Letter to the CPUC is attached hereto as Exhibit B. Under the CPUC Decision, PG&E anticipates that CPUC approval will be obtained within 30 days of submission.
PG&E's obligation to enter into these contracts is conditioned upon: (i) CPUC approval, in a form satisfactory to PG&E in its sole discretion, of the contracts with timely cost recovery and no "reasonableness" review, thereby ensuring that PG&E will be entitled to rate recovery for the cost of the power purchased thereunder for the entire term of the contracts; DECLARATION OF ERIC t
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,-,.,.15 16 17 18 19 20 21 22 23 24 25 26 27 28 and (ii) PG&E having no immediate legal or financial obligation under the contracts because DWR will participate as a contracting party with the full legal and financial responsibility for the contracts until PG&E regains its investment-grade credit rating.
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The general terms and conditions applicable to the Interim Procurement Contracts are set forth in the attached exhibits as follows: (i) 5 Confirmation Letters (Exhibit C), representing terms applicable to each of the products that PG&E was authorized to solicit bids for (system tolling, unit tolling, firm energy, seasonal exchange and weekly exchange products); (ii) Master Power Purchase and Sale Agreement (Exhibit D); (iii)
Guaranty Agreement (Exhibit E); and (iv) Surety Bond (Exhibit F).
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PG&E is requesting approval to enter into the Interim Procurement Contracts.without the necessity of disclosing certain material terms, including the specific suppliers with whom PG&E will contract, the contract prices and contract quantities, due to the commercially sensitive nature of this information. However, PG&E notes that the terms of the Interim Procurement Contracts range from one to three years commencing on and after January 1, 2003. Furthermore, PG&E estimates that the total costs to be incurred under the Interim Procurement Contracts will not exceed $42 million in 2003, $37 million in 2004, and $33 million in 2005.
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As set forth in more detail in the Advice Letter, PG&E attempted to obtain the.largest possible number of bids in the procurement process. In developing its list of potential bidders, PG&E contacted current California market participants, suppliers with whom PG&E has previously contracted, suppliers with DWR contracts and other potential participants. PG&E also worked with industry groups, including Independent Energy Producers, to identify additional potential suppliers. As a result of this process, PG&E received and evaluated 59 bids for the Interim Procurement Contracts. All bids that were timely received were explicitly modeled and a market value was calculated. PG&E reviewed each of the bids to ensure that each transaction met certain basic commercial and non-commercial terms, eliminating those that did not meet the basic terms. PG&E examined the characteristics of the existing portfolio to determine its sensitivity to various risk factors DECLARATION OF ERIC 1
such as electric price, gas price, hydro conditions and variations to load. The proposed 2
transactions were evaluated, including calculations of value under a wide range of scenarios.
3 A short list of proposed suppliers with higher market values and higher cost/benefit ratios 4
was selected and the Interim Procurement Contracts were negotiated with the proposed 5
suppliers.
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The CPUC Decision required that PG&E establish a Procurement Review 7
Group ("PRG") to ensure that the Interim Procurement Contracts would be subject to 8
sufficient review before being submitted to the CPUC. In addition to ex officio members, 9
CPUC Energy Division and the Office of Ratepayer Advocates ("ORA"), the PRG included 10 The Utility Reform Network ("TURN"), the California Energy Commission ("CEC"), the 11 Natural Resources Defense Council ("NRDC") and California Utility Employees ("CUE").
12 Subject to non-disclosure agreements, the PRG members had the right to consult with PG&E HOaM 13 and review the details of PG&E's interim procurement strategy, proposed procurement RKE cmtx 14 contracts and procurement processes. After participating in this process, none of the PRG
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... 15 members oppose CPUC approval of the Interim Procurement Contracts and TURN 16 affirmatively supports CPUC approval. NRDC, CEC and CUE neither support nor oppose 17 CPUC approval of the Interim Procurement Contracts. ORA and CPUC Energy Division are 18 not taking any position at this time.
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The general terms and conditions applicable to the Renewable Energy 20 Contracts are substantially the same as those applicable to the Interim Procurement 21 Contracts, with two material exceptions: (i) the contracts will be for 5, 10 and 15-year terms, 22 commencing on and after January 1, 2003; and (ii) there will be a liquidated damages 23 provision in the amount of $15,000 for each megawatt ("MW") specified in the contract 24 documents if a unit covered thereby is not operable and deliverable to PG&E by December 25 31, 2003. Suppliers under the Renewable Energy Contracts will be required to post a letter 26 of credit or a surety bond to secure their obligations. The 2 Confirmation Letters applicable 27 to the Renewable Energy Contracts (for unit-firm and intermittent renewable products) are 28 attached hereto as Exhibit G.
DECLARATION OF ERIC 1
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After conducting a competitive bidding process for the Renewable Energy 2
Contracts, PG&E received responses representing approximately ten times the volume 3
needed to satisfy the requirements in the CPUC Decision for 2003. Evaluations of the offers 4
and discussions with potential suppliers are currently ongoing (some of the offers were 5
eliminated based on non-compliance with the terms of the offer). PG&E expects to 6
negotiate final contracts that will meet the 1% requirement discussed above. The CPUC 7
Decision also set a provisional benchmark price of 5.37 cents per kilowatt hour ("KWh"), at 8
or below which any Renewable Energy Contract would be deemed reasonable by the CPUC.
9 PG&E anticipates that the aggregate-of the Renewable Energy Contracts should be within 10 the range of this benchmark and should not exceed 6 cents per KWh; based thereon, it is 11 estimated that the'total costs for 2003 'will not exceed $45 million.
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- 16. PG&E is also requesting approval to enter into the Renewable Energy 13 Contracts without necessity of disclosing certain material terms, including the specific o
14 suppliers with whom PG&E will contract, the contract prices and contract quantities, due to
, 15 the commercially sensitive nature of this information. As with the Interim Procurement 16 Contracts, the Renewable Energy Contracts will be subject to the PRG review process.
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In the event that the conditions PG&E has placed on its willingness to enter 18 into the contracts are not met (i.e., acceptable commercial terms, DWR agreement to assume 19 full legal and financial liability until PG&E is investment-grade, and CPUC approval of the 20 reasonableness of the contracts for ratemaking purposes), PG&E retains the discretion not to 21 enter into the Interim Procurement Contracts and the Renewable Energy Contracts.
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PG&E has identified twelve (12) QFs that qualify for contract extensions 23 under the terms set forth in the CPUC Decision and have expressed a willingness to enter 24 into the contract extensions. PG&E intends to request CPUC approval for the QF Contract 25 Extensions by November 5, 2002. The QF Contract Extensions will be executed in 26 substantially the form attached hereto as Exhibit H. Generally, the QF Contract Extensions 27 will provide for a term ending no later than December 31, 2003. The CPUC Decision 28 provides for the term of the applicable QF contracts to be extended to the date on which DECLARATION OF ERIC 1
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PG&E estimates that the total costs for 2003 under the QF Contract Extensions will not exceed $59.5 million. The pricing under the QF Contract Extensions consists of variable energy and fixed capacity components. The fixed capacity component is currently set at $62 per kilowatt-year. The variable energy payment will be the Short-Run Avoided Cost, a formulaic price based upon an index of natural gas prices that is recalculated and published monthly. The 12 QFs represent an installed capacity of approximately 212 MW and are estimated to generate approximately 860 GWh in 2003, or approximately 1.1% of PG&E's annual electricity sales.
I declare under penalty of perjury under the laws of the United States of America that the foregoing is true and correct and that this Declaration is executed this 25th day of October, 2002, at San Francisco, California.
ERIC R. SCOTT WD 102402/1-1419905/1032174/vl DECLARATION OF ERIC