JAMES F. WALSH / SBN 58565			
Beth EaglesonBETH EAGLESON/ SBN 118733118733			
SEMPRA ENERGY
101 Ash Street, 12th Floor
 San Diego, CA  92101
(619) 699-5029699-5029	
Attorneys for Counter-Claimant, 
San Diego Gas & Electric CompanySan Diego Gas & Electric Company		 

STUART K. GARDINER / SBN 65883
Beth EaglesonPACIFIC GAS AND ELECTRIC COMPANY
Law Department, B30A
77 Beale Street (94105)
P.O. Box 7442
699-5029San Francisco, CA 94120
 (415) 973-2040
Attorney for Counter-Claimant, 
San Diego Gas & Electric CompanyPacific Gas and Electric Company

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF CALIFORNIAAMERICAN ARBITRATION ASSOCIATION
DALLAS OFFICE 
KENNETH SEEDORFRELIANT ENERGY POWER GENERATION, INC., et al.,

		Claimants,

vs.

SAN DIEGO GAS & ELECTRICCALIFORNIA INDEPENDENT SYSTEM OPERATOR CORPORATION, et al.,

		Respondents.	

   CASE NO.   7119829599

  RESPONSE TO CLAIM AND COUNTERCLAIM
	
KENNETH SEEDORFSAN DIEGO GAS AND ELECTRIC COMPANY and PACIFIC GAS AND ELECTRIC COMPANY

		Counter-Claimants,
vs.

SAN DIEGO GAS & ELECTRICCALIFORNIA INDEPENDENT SYSTEM OPERATOR CORPORATION, a California Nonprofit Public Benefit Corporation; and DOES 1-500,
		Counter-Respondents.		
I.
SAN DIEGO GAS & ELECTRIC COMPANY'S
AND PACIFIC GAS AND ELECTRIC COMPANY’S 
Response to Claim
	1.	Reliant Energy Power Generation, Inc., et al. (“Reliant”) is not entitled to be paid twice for ancillary service capacity, as it seeks in its claim.  Neither the federally regulated tariff upon which it relies nor its separate rate schedule for service to the California Independent System Operator Corporation (“CAISO”) establishes its right to a double payment.  More specifically, the CAISO Operating Agreement and Tariff (“Tariff”), filed with and subject to the jurisdiction of the Federal Energy Regulatory Commission (“FERC”), is contrary to Reliant’s claim because it does not authorize, let alone require, payment for ancillary service capacity provided at the direction of CAISO under a “Reliability Must Run” (“RMR”) rate schedule.  By contrast, Reliant already receives payments for this ancillary service capacity under its rate schedule for RMR service to CAISO, which is an unexecuted agreement filed with FERC (“RMR Contract”).  Without legal authority, however, CAISO has paid Reliant substantial amounts under the Tariff, in error, for ancillary service capacity provided and paid for under the RMR Contract.	
	2.	Since CAISO began commercial operation on April 1, 1998,  San Diego Gas & Electric Company (“SDG&E”) and Pacific Gas and Electric Company (“PG&E”) have been charged by CAISO, and have paid for ancillary service capacity provided under a set of federally regulated rate schedules, the RMR Contracts with RMR generating plant owners, including Reliant.  In addition, CAISO improperly charged for the same RMR ancillary service capacity in other bills issued to SDG&E’s and PG&E’s Scheduling Coordinator, the California Power Exchange Corporation (“PX”); the PX, in turn, passed a portion of these charges through to SDG&E and PG&E, based on their respective end-use electric load.  These improper charges are the basis for the counterclaim asserted along with this Response.  As load-serving entities improperly billed under the CAISO Tariff for RMR ancillary service capacity, SDG&E and PG&E have a direct interest in the outcome of Reliant’s Claim.
	3.	Whether payment is required for ancillary services capacity provided under the RMR Contract is at the heart of Reliant’s claim against CAISO.  Reliant incorrectly asserts that it must be paid under the Tariff because it is not being paid for ancillary service capacity under its RMR Contracts. However, the Tariff does not authorize, let alone mandate, what amounts to a double payment for RMR ancillary service capacity.  The reason is quite simple:  Reliant’s RMR “contracts”, which until at least June 1, 1999, were not bilateral contracts at all but only rate schedules filed with FERC, already provide payments which cover RMR unit operators’ cost of providing energy and ancillary service capacity called by CAISO through RMR dispatch notices issued pursuant to that rate schedule.  Therefore, RMR operators have already been paid for providing ancillary service capacity and there is no requirement, or reason, to pay them again.
II.
STATUS OF SDG&E
	4.	Counter-claimant SDG&E is a California corporation.  Under CAISO’s Tariff, SDG&E is both a load-serving entity, obligated to pay for ancillary service capacity, and an owner of electric transmission facilities controlled by CAISO (“Transmission Owner”), obligated to pay for 
/ / /
RMR services from RMR owners whose units are located in the SDG&E service area.  As such, it is an interested party in the outcome of this claim.
iII.
STATUS OF PG&E
	5.	Counter-claimant PG&E is a California corporation.  Under CAISO’s Tariff, PG&E is both a load-serving entity, obligated to pay for ancillary service capacity, and a Transmission Owner, obligated to pay for RMR services from RMR owners whose units are located in the PG&E service area.  As such, it is an interested party in the outcome of this claim.
IV.
BACKGROUND
	6.	CAISO commenced commercial operations on April 1, 1998, under its Tariff and related protocols that are filed with FERC and subject to its jurisdiction.  Among other duties, CAISO is charged with maintaining the reliability of the transmission grid within its electrical control area.  A vital tool to maintain grid reliability is the use of RMR units that provide electric services through dispatch notices issued by CAISO under the RMR Contract.  When dispatch notices are given to operators of RMR plants, they must provide a specified amount of electric energy, capacity, or both, within a specified time period. In exchange for responding to dispatch notices, RMR plant owners receive payments which compensate them for the cost of providing all dispatched services.  Rates, as well as terms and conditions, for these services set forth in the RMR Contract are filed with and accepted by FERC.  There are no obligations under either the RMR Contracts or the Tariff to make additional payments to RMR unit owners or their Scheduling Coordinators for ancillary services capacity supplied in response to RMR dispatch notices.
	7.	CAISO’s Tariff authorizes payment at market clearing prices only for ancillary service capacity purchased in its competitive ancillary services auctions, and not for ancillary service capacity furnished under RMR Contracts for which the RMR owner has already been paid.  Despite the lack of Tariff authorization to pay for ancillary service capacity dispatched under RMR Contracts, CAISO has paid again for such services ever since FERC authorized market prices for ancillary services capacity delivered from RMR units through the CAISO’s competitive auctions.   Thus, the Scheduling Coordinators of those RMR unit owners with market based ancillary service rate authorization from FERC have erroneously received the market clearing price for all ancillary service capacity provided to CAISO, even capacity provided under RMR dispatch notices for which RMR owners have already been paid under the RMR Contract.
	8.	In turn, CAISO recovered its Tariff payments since April 1, 1998, for all (RMR and market) ancillary service capacity from Scheduling Coordinators in proportion to each Scheduling Coordinator’s demands during the hour in which the capacity was provided.  Accordingly, each Scheduling Coordinator responsible for load has borne a portion of the excessive payments received by RMR owners.  SDG&E’s and PG&E’s Scheduling Coordinator, the PX, in turn assigned SDG&E and PG&E their shares of the PX’s ancillary service capacity cost in proportion to SDG&E’s and PG&E’s respective demand.  SDG&E and PG&E are uncertain of the amount they have overpaid as the result of CAISO’s erroneous practice because information upon which to base an accurate calculation is available only from it.  Although CAISO has thus far declined to furnish this information, SDG&E and PG&E believe that the amount of overpayment is at least several million dollars and may be in the tens of millions.
V.
COUNTERCLAIM
	9.	Based upon the foregoing, SDG&E and PG&E are entitled to relief in this matter.
	10.	First, they are entitled to a determination that CAISO has breached the Tariff provisions applicable to ancillary services capacity payments and to an order that the CAISO recalculate the amounts payable by all Scheduling Coordinators for load for each hour in which CAISO called on RMR units for ancillary service capacity since April 1, 1998.  That recalculation should remove all amounts previously paid for ancillary service capacity provided pursuant to RMR dispatch notices, leaving only charges for ancillary services obtained through CAISO’s auction.  Second, following this determination, SDG&E and PG&E through their Scheduling Coordinator, the PX, are entitled to reimbursement with interest of the unwarranted payments each has made to CAISO through the PX. Third, SDG&E and PG&E are entitled to an order that, until such time as the Tariff may be amended to provide payments at market prices to RMR owners in connection with ancillary service capacity furnished under RMR dispatch notices and such amendment is accepted by FERC, CAISO cease issuing any bill to a Scheduling Coordinator for such RMR ancillary service 
capacity. 
VI.
fIRST CLAIM FOR RELIEF
(Breach of Contract)
	11.	Counter-claimants incorporate each and every allegation contained in Paragraphs 1 through 10, inclusive, of this Response to Claim and Counterclaim, as though set forth herein.  
	12.	As stated above, CAISO has breached its Tariff by making payments to the Scheduling Coordinators of RMR owners or operators for ancillary service capacity provided under RMR dispatch notices, and by charging the cost of these unauthorized payments to Counter-claimants’ Scheduling Coordinator, the PX, which in turn billed Counter-claimants for these improper charges.
	13.	Counter-claimants have performed all promises, conditions, and covenants required of them.
	14.	As a direct and proximate result of CAISO’s breaches, Counter-claimants have been damaged in an amount as yet undetermined but to be proven at arbitration.
vii.
SECOND CLAIM FOR RELIEF
(Declaratory Relief)
	15.	Counter-claimants incorporate each and every allegation contained in Paragraphs 1 through 14, inclusive, of this Response to Claim and Counterclaim, as though set forth herein.
	16.	An actual controversy has arisen and now exists between Counter-claimants and CAISO concerning the respective rights, duties, and obligations with respect to payments regarding ancillary service capacity made by CAISO and collected from Counter-claimants.
	17.	Counter-claimants desire a determination of their rights, duties, and obligations, past, present, and future.  A declaration of rights, duties, and obligations is necessary and appropriate at this time under these circumstances in order that the parties may ascertain their rights and duties in connection with the payments made in the past, and to be made in the future, for ancillary service capacity under conditions where those services have been, or may be, called for by CAISO through RMR dispatch notices.

	Based upon the foregoing, Counter-claimants ask for relief against Respondents as follows:
1.	For compensatory damages according to proof;
2.	For a declaration that CAISO has improperly charged SDG&E’s and PG&E’s Scheduling Coordinator, the California Power Exchange Corporation, which in turn invoiced Counter-claimants for these improper charges for RMR ancillary service capacity, and that it will not do so in the future;
3.	For an order enjoining CAISO from billing any Scheduling Coordinator for RMR ancillary service capacity until such time as the CAISO Tariff may be lawfully amended to require market price payments to RMR owners in connection with such service;
4.	For costs associated with the filing and prosecution of this counterclaim; and 
5.	For such other and further relief as this panel deems just and proper.

DATED:    July 30, 1999				OFFICE OF THE GENERAL COUNSEL	

						By:	_______________________________________
							James F. Walsh
						Beth Eagleson
							Attorneys for Counter-Claimant
							SAN DIEGO GAS & ELECTRIC COMPANY
	
							PACIFIC GAS AND ELECTRIC COMPANY

						By:	_______________________________________
							Stuart K. Gardiner 
							Attorney for Counter-Claimant
							PACIFIC GAS AND ELECTRIC COMPANY