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HomeMy WebLinkAbout1990-09-04; City Council; 10816; SDG&E Response NCRRA Incinerator Power Contract.. 2 0 5 a i 0 2 3 0 0 4B#* MTG. 3EPT. CA - CIT OF CARLSBAD - AGEND. BILL SDG&E'S RESPONSE TO REQUEST RE: NCRRA INCINERATOR POWER CONTRACT TITLE: DEPT. HD. CITY All CITY MG RECOMMENDED ACTION: Review SDG&E's rejection of the City Council's request that the company institute proceedings seeking relief from the NCRRA power contract and take action as the City Council determines appropriate. ITEM EXPIANATION The City Council at your meeting of July 24, 1990 authorized Mayor Lewis to send a letter to SDG&E asking that they initiate proceedings in court and before the Public Utilities Commission for relief from the uneconomic terms of the contract which obligates the company to purchase power generated by the San Marcos incinerator. A copy of Mayor Lewis's letter of July 26, 1990 is attached. Mayor Lewis has received an answer from SDG&E dated August 3, 1990 which is also attached. SDG&E declines to state a position based on a claim of "contract ethics." The company also declines to "engage in our contract administration through the press or in public forums." That clearly begs the question since the PUC and the courts are public forums and are exactly the forums we believe prudent contract administration requires the company to appear before now to obtain relief for their rate payers who otherwise would be forced to pay higher electric bills to subsidize the San Marcos incinerator. That might seem to some to be an oxymoron. The company previously indicated a willingness to seek relief if they could do so without incurring liability. The case of Pacific Gas & Electric Co. v. Bear Stearns & Co. removes any real possibility of liability yet the company claims the case does not stand for that proposition. Fairly read, there's no doubt that it would protect the company so it appears they have been less than straightforward in their statements to us. The letter concludes by characterizing the incinerator problem as a "political question. It There is nothing t'political't about the substantial adverse consequences that SDG&E's power contract with NCRRA will have for the region's rate payers. The adverse effects on Carlsbadls environment from the incinerator are real not Itpolitical. It Without SDG&E*s contract it is doubtful that the project can be built. Contrary to the assertions in the letter we were not asking SDG&E to make *'political judgments." We were asking them to honor their obligation to the areals rate payers by seeking relief from a contract which is contrary to the best interests of the people the company is supposed to serve. Agenda Bill # '0181 (0 September 4, 1990 Page 2 It may or may not be advisable or possible for Carlsbad to pursue this matter either in court or before the PUC. It is my recommendation that the Council, by motion, authorize this office in consultation with Escondido and Encinitas to proceed at our discretion with those options in an effort to obtain relief from the contract either by invalidation or by charging the cost to the stockholders not our rate payers. The City Council should take action as you consider appropriate. Mayor Lewis's letter to SDG&E SDGtE's letter to Mayor Lewis July 26, 1990 Thomas Page President and Chief Executive Officer San Diego Gas & Electric 101 Ash San Diego, California 92101 RE: NORTH COUNTY RESOURCE RECOVERY ASSOCIATES Dear Mr. Page: On November 14, 1983 SDG&E entered into Contract No. 83-0247 with North County Resource Recovery Associates (NCRRA) to purchase energy from NCRRAIs proposed incinerator to be located at the San Marcos landfill in North San Diego County. At the time, the terms and price to be paid for the energy as specified in the contract may have been reasonable, but since then the situation has changed dramatically. If this contract is enforced, SDG&E will be paying almost three times the current market cost of power. We are informed that the current market cost for kilowatt hour of power is approximately 2.7 cents per KWH, yet this contract will require a payment of 7.8 cents per kilowatt hour. This llpremiumll will result in a subsidy to the incinerator of approximately $13 million per year and approximately $318 million over the expected life of the contract. This llsubsidyll will be paid by all utility users in your service territory not just those who live in the geographical area to be served by the incinerator. As you know, the contract has no start date, and consequently, no specified ending date. We believe that SDG&E would certainly be within its rights to request cancellation of the contract based upon the grounds that it lacks an essential term, i.e., a beginning and ending date. Certainly, this huge contractual subsidy should not be left hanging over the rate payers indefinitely. We believe that the contract is entirely inappropriate. On behalf of the City of Carlsbad and its rate payers, we respectfully request that you immediately institute proceedings at the Public Utilities Commission, or in court if appropriate, to terminate the contract. We believe that you will be acting within your legal rights to take such action, that you have a duty to take such action, and that you will not be exposing the company to liability. We note that the California Supreme Court has recently ruled that such a good faith action on you part to terminate this contract 1200 Carlsbad Village Drive Carlsbad, California 92008-1 989 (61 9) 434-2830 would not expose your company to any liability. See, Pacific Gas & Electricitv Co. v. Bear, Stearns & Co., California Supreme Court, June 7, 1990, DAR page 6359. Carlsbad has traditionally not been involved in the rate proceedings of your company before the PUC. We feel strongly enough about this issue, however, because of its impact on our citizens that we might have to reconsider that position if your company does not take prompt, appropriate action to relieve itself and rate payers of the burden of this contract. The City Council at their meeting of July 24, 1990 unanimously voted to ask that SDG&E immediately begin proceedings in court or before the PUC as necessary to cancel the contract. Please let me know your response to this request as soon as possible so I can place it before the Council. Mayor J SDGF San Diego Gas & Electric PO. BOX 1831 SAN DIEGO, CA 92112 6191696-2000 I REFERRED TO CITY MANAGER I FOR RESPONSE RECEIVED FILE NO August 3, 1990 The Honorable Mayor Claude A. Lewis City of Carlsbad 1200 Carlsbad Village Drive Carlsbad, California 92008-1989 Dear Mayor Lewis: Thank you for your letter dated July 26, 1990. Mr. Page has asked me to respond to your request. To understand how San Diego Gas & Electric (SDG&E) addresses contract issues such as the one you raise, it may be helpful for me to describe some of SDG&E's corporate philosophy. SDG&E honors its contractual commitments to others, and it expects others to honor their contractual commitments to SDG&E. The Company believes this policy to be consistent with good business practice, corporate ethics, and contract law. As part of routine contract administra- tion, we scrutinize carefully whether parties to contracts with us are honoring their commitments, and communicate with them accordingly. These are business matters between contracting parties and we do not typically publicize them. We apply this policy to all contractual relations, including that with North County Resource Recovery Associ- ates (NCRRA). To address your concern as fully as I can within the boundaries of contract ethics, let me state that NCRRA is fully aware of the type of performance we have expected of them and the consequences of any failure to perform. We believe it is inappropriate to engage in our contract administration through the press or in public forums. However, we are always prepared to justify our actions before the California Public Utilities Commission (CPUC) should they express concerns. One of the issues which you have raised is the cost that SDG&E would incur under the contract with NCRRA. .. 4 -2- SDGE San Diego Gas & Electric We would agree that, compared to other resources available to SDG&E today, the contract appears costly from the custom- ers' perspective. This is not surprising given the condi- tions that existed at the time the contract was executed. The contract was signed in 1983 when the price of oil to the Company exceeded $35 per barrel. At that time, indications were that prices for oil and gas would continue to rise in the foreseeable future. The CPUC approved this contract because it was superior to contracts that the CPUC was mandating at the time state-wide for similar types of projects. SDGCE evaluates contract costs among the many factors SDG&E considers in its contract administration process, consistent with the principles I described above. Your letter asks SDG&E to institute legal proceed- ings to terminate the contract, asserting that SDG&E would be protected from any risk of liability by virtue of the recent California Supreme Court decision in Pacific Gas and Electric Company v. Bear Stearns & Co. Our attorneys have indicated that it would not be appropriate to share the Company's legal conclusions on this or any other issue, which are privileged and confidential communications. However, they have observed that the legal issue decided in the PGtE case is not the one you suggest in your letter. Your letter appears to raise the political ques- tion of whether NCRRA's project should be built. These types of political questions cannot drive SDG&E's decisions in contract administration. Such political issues are more appropriately raised before the Board of Supervisors and before any public bonding authority on which the project depends. In the course of the Board's examination and determination whether to engage in further transactions with NCRRA, we would expect NCRRA to address completely any questions those agencies consider important regarding whether NCRRA has adhered to its commitment to SDG&E, as well as whether NCRRA has breached its agreement with the County. SDG&E cannot make the political judgement about the desirability of the project, nor would it be appropriate for us to do so. Neither are SDG&E's contract administration policies a proper focus of such a political consideration. We do believe that if there are questions about whether the -3- SDGE San Diego Gas & Electric NCRRA project should proceed, they are matters which the Board of Supervisors should consider carefully, and we encourage you to raise your concerns with the Board. We will be happy to work with you to the extent appropriate. Sincerely, &* Karen D. Hutchens Governmental Affairs Director KDH : bj j cc: Supervisor John MacDonald, County of San Diego T. A. Page, Chairman of the Board, President, Chief Executive Officer, SDG&E