ML023050257
| ML023050257 | |
| Person / Time | |
|---|---|
| Site: | Diablo Canyon  (DPR-080, DPR-082) |
| Issue date: | 10/25/2002 |
| From: | Landau 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: ML023050257 (16) | |
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9 10 11 12 wwRD 13 NEMBOVU cANADy 14 FALK 15 16 17 18 In re PACIFIC GAS AND ELECTRIC COMPANY, a California corporation, Debtor.
Federal I.D. No., 94-0742640 Case No. 01-30923 DM Chapter 11 Case Date:
Time:
Place:
Judge:
November 14,2002 9:30 a.m.
235 Pine Street, 22nd Floor San Francisco, California Hon. Dennis Montali NOTICE OF MOTION AND MOTION FOR AUTHORITY TO ENTER INTO CERTAIN POWER PROCUREMENT CONTRACTS; MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT THEREOF
[SUPPORTING DECLARATION OF ERIC SCOTT FILED SEPARATELY]
MOT. FOR AUTHOR. TO ENTER INTO CERTAIN POWER PROCUREMENT CONTRACTS; MPA JAMES L. LOPES (No. 63678)
GARY M. KAPLAN (No. 155530)
JULIE B. LANDAU (No. 162038)
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 Mal A'a:
0 0 o f
1 TABLE OF CONTENTS 2
Page 3
NOTICE OF MOTION AND MOTION 1
4 MEMORANDUM OF POINTS AND AUTHORITIES 2
5 I.
FACTUAL BACKGROUND.
2 6
A.
CPUC's August 22, 2002 Order.
4 7
- 1.
Interim Procurement Contracts.
4 8
- 2.
Renewable Energy Contracts.
5 9
- 3.
QF Contracts.
5 10 B.
Proposed Interim Procurement and Renewable Energy Contracts.
6 11
- 1.
Interim Procurement Contracts.
6 12
- a.
Terms and Conditions.
6 HomD 13 N c1
- b.
Bidding and Selection Process; Review by cANFAtK 14 Procurement Review Group.
7 SRABKIN 15
- 2.
Renewable Energy Contracts.
8 16 C.
Proposed QF Contracts.
9 17 II.
PG&E SHOULD BE AUTHORIZED TO ENTER INTO THE CONTRACTS PURSUANT TO BANKRUPTCY CODE 18 SECTION 363(B)(1).
10 19 A.
Interim Procurement Contracts.
11 20 B.
Renewable Energy Contracts.
11 21 C.
QF Contract Extensions.
12 22 CONCLUSION 13 23 24 25 26 27 28 MOT. FOR AUTHOR. TO ENTER INTO CERTAIN POWER PROCUREMENT CONTRACTS; MPA
-i-
TABLE OF AUTHORITIES Page(s) 1 2
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9 10 Committee of Equity Sec. Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d 1063 (2d Cir. 1983)
Official Comm. of Subordinated Bondholders v. Integrated Res., Inc.
(In're Integrated Res., Inc.); 147 B.R. 650 (S.D.N.Y. 1992)'
Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985)
Stephens Indus., Inc. v. McClung, 789 F.2d 386 (6th Cir. 1986) 11 11 11 11 11 12 H2ow^m 13 KACE cND 14 FAWNK
- 15 16 17 18 19 20 21 22 23 24' 25 26 27 28 Statutes 11 U.S.C.
§1108 Cal. Pub. Util. Code
§§399.11-399.15
Rules Fed. R. Bankr. P. 9018 N.D. Cal. Local Bankr. R. 9014-1(c)(2)
Other Authorities 3 Lawrence P. King, Collier on Bankruptcy ¶363.02[1][g]
(15th ed. rev. 1998)
MOT. FOR AUTHOR. TO ENTER INTO CERTAIN POWER PROCUREMENT CONTRACTS; MPA
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1 NOTICE OF MOTION AND MOTION 2
PLEASE TAKE NOTICE that on November 14, 2002 at 9:30 a.m., or as soon 3
thereafter as the matter may be heard, in the Courtroom of the Honorable Dennis Montali, 4
located at 235 Pine Street, 22nd Floor, San Francisco, California, Pacific Gas and Electric 5
Company, the debtor and debtor in possession in the above-captioned Chapter 11 case 6
("PG&E"), will and hereby does move the Court for authority to enter into certain power 7
procurement contracts, subject to the specific conditions described below (the "Motion").
8 This Motion is based on this Notice of Motion and Motion, the accompanying 9
Memorandum of Points and Authorities, the Declaration of Eric Scott filed concurrently 10 herewith, the record of this case and any evidence presented at or prior to the hearing on this 11 Motion.
12 PLEASE TAKE FURTHER NOTICE that pursuant to Rule 9014-1 (c)(2) of the HOWARD 13 Bankruptcy Local Rules for the Northern District of California, any written opposition to the IUCE
_cANK 14 Motion and the relief requested herein must be filed with the Bankruptcy Court and served
,*KABKIN "15 upon appropriate parties (including counsel for PG&E, the Office of the United States 16 Trustee and the Official Committee of Unsecured Creditors) at least five (5) days prior to the 17 scheduled hearing date. If there is no timely objection to the requested relief, the Court may 18 enter an order granting such relief without further hearing.
19 PLEASE TAKE FURTHER NOTICE that PG&E is not including copies of the 20 voluminous exhibits attached to the Declaration of Eric Scott with the service copies of this 21 Motion. However, any person served with this Motion may obtain copies of the exhibits by 22 written request by mail to Howard,-Rice, Nemerovski, Canady, Falk & Rabkin, Attn:
23 Nathaniel H. Hunt, Three Embarcadero Center, 7th Floor, San Francisco, California 94111 24 4065, or by e-mail request to nhunt@hrice.com. Additionally, copies of these exhibits will 25 be available for review at the hearing on this Motion.
26 27 28 MOT. FOR AUTHOR. TO ENTER INTO CERTAIN POWER PROCUREMENT CONTRACTS; MPA 1
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,16 17 18 19 20 21 22 23 24 25 26 27 28 MEMORANDUM OF POINTS AND AUTHORITIES Pacific Gas and Electric Company ("PG&E"), the debtor and debtor in possession in the above-captioned Chapter, 11 case, requests authority, pursuant to Section 363(b)(1) of the Bankruptcy Code, to enter into and extend certain power procurement contracts (collectively, the "'Contracts"), subject to specified conditions precedent to PG&E's financial and legal obligations under such contracts in order to protect PG&E's estate from any material financial or ratemaking risk. In particular, PG&E seeks authorization to: (i) enter into contracts at its discretion on a joint basis with the California Department of Water Resources ("DWR"), which would obligate PG&E-for the power purchases under the contracts only after PG&E regains its investment-grade credit rating and only after the California Public Utilities Commission ("CPUC") has approved the contracts as reasonable for purposes of rate recovery; (ii) enter into contracts to purchase renewable energy under similar terms; and (iii) extend the term of certain qualifying facilities ("QF") contracts. With the exception of the extended QF contracts, the foregoing contracts would continue to be the legal and financial responsibility of the DWRR until PG&E regains its investment-grade credit rating. Furthermore, the foregoing contracts (except for the extended QF contracts) would be new contracts that PG&E and DWR have jointly negotiated with power suppliers; none of the contracts would include existing DWR power supply contracts that DWR previously has entered into as part of its own power purchasing program.
I. FACTUAL BACKGROUND.!
PG&E filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on April 6, 2001. A trustee has not been appointed, and PG&E continues to function as a debtor in possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code.
Due to a number of events that occurred priornto the filing of PG&E's Chapter 11
'The evidentiary basis and support for the facts set forth in this Motion are contained in the Declaration of Eric Scott filed concurrently herewith (the "Scott Declaration").
MOT. FOR AUTHOR. TO ENTER INTO CERTAIN POWER PROCUREMENT CONTRACTS; MPA 1
petition, including the downgrading of its credit ratings and resulting loss of its investment 2
grade status, PG&E became unable to obtain wholesale power in early 2001.2 In January 3
2001, DWR was authorized to purchase power to maintain the continuity of supply to retail 4
customers of PG&E and other investor owned utilities (collectively, the "IOUs"). In 5
February 2001, California Assembly Bill No. 1 of the first extraordinary session ("AB IX")
6 was enacted into law, authorizing DWR to enter into contracts for the purchase of electric 7
power. AB IX also required PG&E to deliver the power purchased by DWR over its 8
distribution systems and act as a billing agent on behalf of DWR, but did not make PG&E 9
legally or financially responsible for DWR's contracts. Significantly, AB IX prohibited 10 DWR from entering into new contracts to purchase energy on and after January 1, 2003.
11 Despite the large number of power contracts already entered into by DWR, there 12 remains a net short positions for PG&E in 2003 and beyond, particularly during the hours of HOWARD 13 each month with the highest customer demand ("peak hours"). An agreement with DWR FJCE cNFALIIK 14 under which DWR will enter into new power purchase contracts, subject to PG&E taking "15 responsibility for such contracts if and when it becomes investment-grade, along with 16 extending certain pre-existing QF contracts, will allow PG&E to call upon power during the 17 peak hours to reduce its reliance on the "spot market," thereby mitigating electric price and 18 volume volatilities for PG&E's net short position and thus stabilizing rates for its customers.
19 At the same time, PG&E's financial and legal risks under the contracts will be minimized, 20 because DWR will be the financially and legally responsible party under the new contracts 21 until such time as PG&E is investment-grade again, and DWR's costs will be recovered 22 directly from retail customers rather than from PG&E's estate.
23 24 2 For additional background regarding PG&E's inability to purchase wholesale 25 power, see Section IV.B of the Disclosure Statement for Plan of Reorganization Under Chapter 11 of the Bankruptcy Code for Pacific Gas and Electric Company Proposed by 26 Pacific Gas and Electric Company and PG&E Corporation dated April 19, 2002 (Docket No.
6054).
27 3 The net short or net open position is the amount of energy needed to serve a 28 utilities' customers net of existing resources, including those supplied by DWR.
MOT. FOR AUTHOR. TO ENTER INTO CERTAIN POWER PROCUREMENT CONTRACTS; MPA 1
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10 11 12 HoWAo 13 RICE NMAIUOVSM G&NADY FALK 14 S15 16 17 18 19 20 21 22 23 24 25 26 27 28 A.
CPUC's August 22,2002 Order.
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").4 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. Specifically, the CPUC Decision addresses three types of procurement contracts, as explained below.
- 1.
Interim Procurement Contracts.
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 r~sponsibility 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
,contracts to-the CPUC for expedited approval after the wiiiing bidders are selected.
4 The CPUC Decision is attached as Exhibit A to the Scott Declaration.
MOT. FOR AUTHOR. TO ENTER INTO CERTAIN POWER PROCUREMENT CONTRACTS; MPA 1
- 2.
Renewable Energy Contracts.
2 In addition, the CPUC Decision and recently-enacted legislation5 require the 3
IOUs to procure renewable energy to ensure that an additional one percent (1%) per year of 4
the IOUs' annual electricity sales (approximately 750 GWh for PG&E) is generated from 5
renewable resources. The CPUC Decision directs that each IOU hold a competitive 6
solicitation to procure the renewable energy required (the "Renewable Energy Contracts")
7 and to submit the proposed contracts to the CPUC for approval after the winning bidders are 8
selected. As with the Interim Procurement Contracts, the Renewable Energy Contracts will 9
be the legal and financial responsibility of DWR until PG&E regains its investment-grade 10 credit rating.
11
- 3.
QF Contracts.
12 The CPUC Decision also requires that the IOUs offer to extend the term of H*waRD 13 certain QF contracts whose prices are established under federal law and whose costs are PJCE NEME1Lv5K1 c,'FNAR 14 fully recoverable in PG&E's rates under that law. Specifically, the CPUC Decision provides
& RABKIN
" 15 that the IOUs are required to offer Standard Offer 1 contract extensions to any QFs meeting 16 the following conditions: (i) the QF must have been in operation and under contract to 17 provide power with an IOU at any point between January 1, 1998 and the effective date of 18 the CPUC Decision; and (ii) the QF contract must be set to expire before January 1, 2004, 19 have already expired or have already been terminated. The CPUC Decision requires PG&E 20 to submit the proposed QF contract extensions ("QF Contract Extensions") to the CPUC for 21 approval.
22 23 24 5 The legislation consists of newly-enacted California Public Utilities Code Sections 454.5 (AB 57, 2002 Cal. Stat. ch. 835) and Sections 399.11-399.15 and 399.25 (SB 1078, 25 2002 Cal. Stat. ch. 516). AB 57 became effective in September 2002 and SB 1078 will 26 become effective on January 1, 2003. Both statutes, although different in certain respects, require the IOUs to procure additional renewable resources with the objective of reaching certain minimum portfolio thresholds. The annual requirement under these statutes is to 27 purchase power from new renewables resources equal-to 1% of the IOUs' total retail electric 28 load. See Pub. Util. Code §§454.5(a)(9)(A); id. §399.15(b)(1).
MOT. FOR AUTHOR. TO ENTER INTO CERTAIN POWER PROCUREMENT CONTRACTS; MPA
.7 1 t
1 B.
Proposed -Interim Procurement and Renewable Energy Contracts.
2 PG&E submitted the Interim Procurement Contracts to the CPUC for approval on 3
October 22, 20026 and anticipates submitting the Renewable Energy Contracts to the CPUC 4
for approval'by November 5, 2002. Under the CPUC Decision, PG&E anticipates that 5
CPUC approval will be obtained within thirty days of submission. PG&E's obligation to 6
enter into these contracts is conditioned upon: (i) CPUC approval,'in a form satisfactory to 7
PG&E in its sole discretion, of the contracts with timely cost recoveryand no 8
"'reasonableness" review, thereby ensuring that PG&E will be entitled to rate recovery for 9
the cost of the power purchased thereunder for the entire term of the contracts; 7 and (ii) 10 PG&E having no immediate legal or financial obligation under the contracts because DWR 11 will participate as a contracting party with the full legal and financial responsibility for the 12 contracts until.PG&E regains its investment-grade credit rating. The contract terms and HomD 13 bidding process are described in more detail below.
RIUC NEME£KI~, G FALK 14
- 1. - Interim Procurement Contracts.
"RABKIN "15
- a.
Terms and Conditions. The general terms and conditions applicable to 16 the Interim Procurement Contracts are set forth in Exhibits C, D, E and F attached to the 17 Scott Declaration. 8 18 PG&E is requesting approval to enter into the Interim Procurement Contracts 19 without the necessity of disclosing certain material terms, including the specific suppliers 20 with whom PG&E will contract, the contract prices and contract quantities, due to the 21 22 6 PG&E's advice letter dated October 22, 2002 to the CPUC is attached (without 23 confidential exhibits) as Exhibit B to the Scott Declaration (the "Advice Letter").
7 CPUC approval of the contracts will constitute a determination that the costs 24 incurred by PG&E under the contracts' are "reasonable" and "prudent" for purposes of recovery in retail rates under the California Public Utilities Code for the full term of the 25 contracts. See CPUC Decision (Scott Decl. Ex. A) at 19.
8 Exhibit C includes 5 Confirmation Letters, representing terms applicable to each of
- 26.
the products that PG&E was authorized to solicit bids for (system tolling, unit tolling, ýfirm energy, seasonal exchange and weekly exchange products). Exhibit D includes the Master 27 Power Purchase and Sale Agreement. Exhibit E includes the form of Guaranty Agreement 28 and Exhibit F includes the form of Surety Bond.
MOT. FOR AUTHOR. TO ENTER INTO CERTAIN POWER PROCUREMENT CONTRACTS; MPA 1
commercially sensitive nature of this information. 9 However, PG&E notes that the terms of 2
the Interim Procurement Contracts range from one to three years commencing on and after 3
January 1, 2003. Furthermore, PG&E estimates that the total costs to be incurred under the 4
Interim Procurement Contracts will not exceed $42 million in 2003, $37 million in 2004, and 5
$33 million in 2005.
6
- b.
Bidding and Selection Process; Review by Procurement Review 7
Group. As set forth in more detail in the Advice Letter, PG&E attempted to obtain the 8
largest possible number of bids in the procurement process. In developing its list of 9
potential bidders, PG&E contacted current California market participants, suppliers with 10 whom PG&E has previously contracted, suppliers with DWR contracts and other potential 11 participants. PG&E also worked with industry groups, including Independent Energy 12 Producers, to identify additional potential suppliers. As a result of this process, PG&E HOWARD 13 received and evaluated fifty-nine bids for the Interim Procurement Contracts.
RICE NEMEF0VMKI CN^DKY 14 All bids that were timely received were explicitly modeled and a market value SKABI"N "15 was calculated. PG&E reviewed each of the bids to ensure that each transaction met certain 16 basic commercial and non-commercial terms, eliminating those that did not meet the basic 17 terms. PG&E examined the characteristics of the existing portfolio to determine its 18 sensitivity to various risk factors such as electric price, gas price, hydro conditions and 19 variations to load. The proposed transactions were evaluated, including calculations of value 20 under a wide range of scenarios. A short list of proposed suppliers with higher market 21 values and higher cost/benefit ratios was selected and the Interim Procurement Contracts 22 were negotiated with the proposed suppliers.
23 9 In recognition of the proprietary and/or confidential nature of the power 24 procurement in ormation, the CPUC issued a protective order dated May 1, 2002 that governs access to and use of all "Protected Materials" of the IOUs in connection with the 25 approval process for the power procurement contracts (the "Protective Order"). PG&E's Advice Letter was submitted in accordance with the terms of the Protective Order, with the 26 contract documents submitted under seal in order to protect the proprietary information contained therein. To the extent necessary, PG&E requests that the Court protect the 27 proprietary and commercially sensitive nature of this information pursuant to Rule 9018 of 28 the Federal Rules of Bankruptcy Procedure.
MOT. FOR AUTHOR. TO ENTER INTO CERTAIN POWER PROCUREMENT CONTRACTS; MPA 1,
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10 11 12 HOWARD 13 WCE NEMEM2QSK cNAD 14 S15 16 17 18 19 20 21 22 23 24 25 26 27 28 In addition, the CPUC Decision required that PG&E establish a Procurement Review Group ("PRG") toensure that the Interim Procurement Contracts would be subject to sufficient review before being submitted to the CPUC. In addition to ex officio members, CPUC Energy Division and the Office of Ratepayer Advocates ("ORA"), the PRG included The Utility Reform Network ("TURN"), the California Energy Commission ("CEC"), the Natural Resources Defense Council ("NRDC") and California Utility Employees ("CUE").
Subject to non-disclosure agreements, the PRG members had the right to consult with PG&E and review the details of PG&E's interim procurement strategy, proposed procurement contracts and procurement processes. After participating in this process, none of the PRG members oppose CPUC approval of the Interim Procurement Contracts and TURN affirmatively supports CPUC approval.10
- 2. -, Renewable Energy Contracts.
The general terms and conditions applicable to the Renewable Energy Contracts are substantially the same as those applicable to the Interim Procurement Contracts, with two material exceptions: (i) the contracts will be for 5, 10 and 15-year terms, commencing on and after January 1, 2003; and (ii) there will be a liquidatedcdamages provision in the amount of $15,000 for each megawatt (WMW") specified in the contract documents if a unit covered thereby is not operable and deliverable to PG&E by December 31, 2003.. Suppliers under the Renewable Energy Contracts will be required to post a letter of credit or a surety bond to secure their obligations.11 After conducting a competitive bidding process for the Renewable Energy Contracts, PG&E received responses representing approximately ten times the volume needed to satisfy the requirements in the CPUC Decision for 2003;- Evaluations of the offers
-10 NRDC, CEC and CUE neither support nor oppose CPUC approval of the Interim Procurement Contracts. ORA and CPUC Energy Division are not taking any position at this time.
11 The general contract terms for the Interim Procurement Contracts are applicable to the Renewable Energy Contracts with the exception of the Confirmation Letters; the 2 Confirmation Letters applicable to the Renewable Energy Contracts (for unit-firm and intermittent renewable products) are attached as Exhibit G to the Scott Declaration.
MOT. FOR AUTHOR. TO ENTER INTO CERTAIN POWER PROCUREMENT CONTRACTS; MPA 1
and discussions with potential suppliers are currently ongoing (some of the offers were 2
eliminated based on non-compliance with the terms of the offer). PG&E expects to 3
negotiate final contracts that will meet the 1% requirement discussed above. The CPUC 4
Decision also set a provisional benchmark price of 5.37 cents per kilowatt hour ("KWh"), at 5
or below which any Renewable Energy Contract would be deemed reasonable by the CPUC.
6 PG&E anticipates that the aggregate of the Renewable Energy Contracts should be within 7
the range of this benchmark and should not exceed 6 cents per KWh; based thereon, it is 8
estimated that the total costs for 2003 will not exceed $45 million.
9 PG&E is also requesting approval to enter into the Renewable Energy Contracts 10 without necessity of disclosing certain material terms, including the specific suppliers with 11 whom PG&E will contract, the contract prices and contract quantities, due to the 12 commercially sensitive nature of this information. As with the Interim Procurement HOWARD 13 Contracts, the Renewable Energy Contracts will be subject to the PRG review process.
RJCE NEMMEVSKI cA,*D 14 In the event that the conditions PG&E has placed on its willingness to enter into K RABKJN "15 the contracts are not met (i.e., acceptable commercial terms, DWR agreement to assume full 16 legal and financial liability until PG&E is investment-grade, and CPUC approval of the 17 reasonableness of the contracts for ratemaking purposes), PG&E retains the discretion not to 18 enter into the Interim Procurement Contracts and the Renewable Energy Contracts.
19 20 C.
Proposed OF Contracts.
21 PG&E has identified twelve (12) QFs that qualify for contract extensions under 22 the terms set forth in the CPUC Decision and have expressed a willingness to enter into the 23 contract extensions. In accordance with the CPUC Decision, PG&E intends to request 24 CPUC approval for the QF Contract Extensions by November 5, 2002. The QF Contract 25 Extensions will be executed in substantially the form attached as Exhibit H to the Scott 26 Declaration. Generally, the QF Contract Extensions will provide for a term ending no later 27 28 MOT. FOR AUTHOR. TO ENTER INTO CERTAIN POWER PROCUREMENT CONTRACTS; MPA 1
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E_,ILK 14 S15 16 17 18 19 20 21 22 23 24 25 26 27 28 than December 31, 2003.12 The total estimated costs for 2003 under the QF Contract Extensions is not likely to exceed $59.5 million. 13 II.
PG&E SHOULD BE AUTHORIZED TO ENTER INTO THECONTRACTS PURSUANT TO BANKRUPTCY CODE SECTION 363(b)(1).
As the Court is aware, PG&E's inability to recover its wholesale power costs was a major cause of this bankruptcy filing. Since the bankruptcy filing, DWR has been responsible for procuring the full net short position for PG&E's retail customers and DWR is financially and legally responsible for the costs of all such power purchases. As explained above, PG&E will assume financial responsibility for the Interim Procurement Contracts and Renewable Energy Contracts only if and when its investment-grade credit rating is restored.
Therefore, tlhe Contracts are subject to specific conditions precedent to protect PG&E financially. Since the Contracts represent initial steps toward an eventual shift in responsibility for future'electric procurement to PG&E once PG&E is'again financially healthy, PG&E is seeking this Court's approval to enter into the Contracts under Section 363(b)(1) of the Bankruptcy Code.
In determining whether to authorize the use, sale or lease of property of the estate under Section 363(b)(1), courts require a debtor to show that a sound business purpose justifies such actions, applying essentially the same "business judgment" test that is used in determining whether to aplrove the assumption or rejection of an executory contract. See, 12 The CPUC Decision provides for the term of the applicable QF contracts to be extended to the date on which PG&E fully implements its long termprocurement plan approved by the CPUC or to December 31, 2003, whichever occurs first.
13 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 twelve 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.
MOT. FOR AUTHOR. TO ENTER INTO'CERTAIN POWER PROCUREMENT CONTRACTS; MPA 1
eg., Stephens Indus., Inc. v. McClung, 789 F.2d 386, 389-90 (6th Cir. 1986); Committee of 2
Equity Sec. Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d 1063, 1070-71 (2d Cir.
3 1983); 3 Lawrence P. King, Collier on Bankruptcy ¶363.02[1][g] (15th ed. rev. 1998).
4 The burden of establishing a valid business purpose for the use of property of the 5
estate outside the ordinary course of business falls upon the debtor. See In re Lionel Corp.,
6 722 F.2d at 1070-71. Once the debtor has articulated a rational business justification, 7
however, a presumption attaches that the decision was made on an informed basis, in good 8
faith and in the honest belief that the action was in the best interest of the debtor. See, e.g.,
9 Official Comm. of Subordinated Bondholders v. Integrated Res., Inc. (In re Integrated Res.,
10 Inc.), 147 B.R. 650, 656 (S.D.N.Y. 1992) (citing Smith v. Van Gorkom, 488 A.2d 858, 872 11 (Del. 1985)).
12 A.
Interim Procurement Contracts.
HOWARfD 13 PG&E believes that the terms of the Interim Procurement Contracts are favorable IJCE NEMEP7vKI Ca IFALu( 14 and that these contracts are necessary to provide a reliable supply of power to its customers R ABKIN "15 at stabilized prices, assuming that the conditions precedent to PG&E's legal obligations 16 under the contracts are maintained. PG&E will not enter into the Interim Procurement 17 Contracts without CPUC approval and the protections that such approval will provide, 18 including the finding that the costs incurred under the contracts are reasonable and prudent 19 for rate recovery purposes for the full term of the contracts. It is noteworthy that none of the 20 PRG members (which include several parties who have opposed other PG&E proposals, 21 including its Plan of Reorganization) oppose CPUC approval of these contracts. Also, the 22 contracts will be the legal and financial responsibility of DWR until PG&E regains its 23 investment-grade credit rating. Given all of these circumstances, sound business 24 justifications support PG&E's decision to enter into the Interim Procurement Contracts.
25 B.
Renewable Energy Contracts.
26 The Renewable Energy Contracts should allow PG&E to meet the 1% renewable 27 energy requirement described above. PG&E will not enter into the Renewable Energy 28 Contracts without CPUC approval and the protections that such approval will provide, MOT. FOR AUTHOR, TO ENTER INTO CERTAIN POWER PROCUREMENT CONTRACTS; MPA 1
including the finding that the costs incurred under the contracts are reasonable and prudent 2
for rate recovery purposes. As with-the Interim Procurement Contracts, these contracts will 3
be the legal and financial responsibility of DWR until PG&E regains its investment-grade 4
credit rating. Given all of these circumstances, sound business justifications support 5
PG&E's decision to enter into the Renewable Energy Contracts.
6 C.
QF Contract Extensions.
7 The QF Contract Extensions are necessary for PG&E to comply with its PURPA 8
obligations (as discussed in the CPUC Decision) and to ensure that power supplies from 9
these 12 QFs remain available to PG&E through 2003 or until PG&E's long-term 10 procurement plan is approved by the CPUC. PG&E will not enter into the QF Contract 11 Extensions without CPUC approval. Together with the Interim Procurement Contracts 'and 12 the Renewable Eniergy Contracts, the QF Contract Extensions will allow PG&E to meet its S13 power procurement needs for 2003. Furthermore, PG&E believes that it has the financial RICE NMEWI2.SKJ kFAt 14 capability to make payments under the QF Contract Extensions without causing any
& KABKIN "15 detriment to its creditors. Given all of these circumstances, sounds business justifications 16 support PG&E's decision to enter into the QF Contract Extensions.
17 18 19 20 21 22 23 24 25 26 27 28 MOT. FOR AUTHOR. TO ENTER INTO CERTAIN POWER PROCUREMENT CONTRACTS; MPA 1
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10 11 12 HOWARD 13 RICE NEMEJ0vWI CANADY FA^D 14
& KABKIN 15 16 17 18 19 20 21 22 23 24 25 26 27 28 CONCLUSION For all of the foregoing reasons, PG&E respectfully requests that the Court authorize PG&E to enter into the Contracts on the terms and conditions set forth above, and grant such other and further relief as may be just and appropriate.
DATED: October 25, 2002 Respectfully, HOWARD, RICE, NEMEROVSKI, CANADY, FALK & RABKIN A Professional Corporation Attorneys for Debtor and Debtor in Possession PACIFIC GAS AND ELECTRIC COMPANY WD 102502/1-1419905/1032463/vl MOT. FOR AUTHOR. TO ENTER INTO CERTAIN POWER PROCUREMENT CONTRACTS; MPA