ALJ/AES/jt2 Date of Issuance 10/20/2008

Decision 08-10-026 October 16, 2008

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking to Develop Additional Methods to Implement the California Renewables Portfolio Standard Program.

Rulemaking 06-02-012
(Filed February 16, 2006)

DECISION ON MARKET PRICE REFERENT FOR THE CALIFORNIA RENEWABLES PORTFOLIO STANDARD

TABLE OF CONTENTS

Title Page

DECISION ON MARKET PRICE REFERENT FOR THE CALIFORNIA RENEWABLES PORTFOLIO STANDARD 2 2

1. Summary 2 2

2. Procedural Background 3 3

3. Discussion 5 5

3.1. History 5 5

3.2. Gas Costs 6 6

3.2.1. Long-Term Gas Forecast 6 6

3.2.1.1. NYMEX Data 8 8

3.2.1.2. Transition to Fundamental Forecast 10 10

3.2.2. California Basis Adjustment 13 13

3.3. Capacity Factor 14 14

3.3.1. Background 14 14

3.3.2. Proposed Changes 16 16

3.3.3. Discussion 19 19

3.4. Non-Gas Costs 21 21

3.4.1. Installed Capital Costs 21 21

3.4.1.1. Data Set 21 21

3.4.1.2. Capital Cost Escalation 23 23

3.4.1.2.1. Escalation of Historic Costs 23 23

3.4.1.2.2. Escalation of Current Capital Costs 24 24

3.4.2. Generation Meter Multiplier (GMM) (Transmission Line Losses) 25 25

3.5. Contract Length Greater Than 20 Years 26 26

3.6. GHG Compliance Costs 27 27

3.7. Issues Not Requiring Adjustments to Methodology 32 32

3.8. Confidentiality 33 33

4. Next Steps 35 35

5. Comments on Proposed Decision 36 36

6. Assignment of Proceeding 37 37

Findings of Fact 38 38

Conclusions of Law 39 39

ORDER 40 40

DECISION ON MARKET PRICE REFERENT FOR THE CALIFORNIA RENEWABLES PORTFOLIO STANDARD

1. Summary

This decision refines the methodology for the market price referent (MPR) for use in the California renewables portfolio standard (RPS) program in 2008 and later years. The MPR implements the Legislature's mandate that the Commission determine the market price of electricity in order to evaluate the reasonableness of prices of long-term power purchase agreement (PPAs) for RPS-eligible electric generation. This decision continues the use of a "proxy plant" for modeling the levelized price of a utility's long-term PPA with a new natural-gas fueled generation facility in California.

The decision addresses several aspects of the existing MPR methodology in order to improve the accuracy, transparency, and simplicity of the modeling for the MPR proxy plant. It adjusts the method for determining the cost of natural gas fuel for the proxy plant to include data from up to 12 years of forward natural gas contracts traded on the New York Mercantile Exchange and to provide a reasonable prediction of gas prices in the later years of the proxy plant's long-term forward gas contract. It refines the methodology for the capacity factor used for the combined cycle gas turbine proxy plant to increase consistency and transparency of the modeling by adopting a statewide technical capacity factor. The decision makes minor updates to the methodology for calculating installed capital costs for the proxy plant. It also ends the use of a factor for calculating transmission line losses.

The decision includes as a permanent feature of the MPR methodology the calculation of the cost of compliance with regulatory programs limiting greenhouse gas (GHG) emissions. It sets forth a method for determining the GHG compliance cost for the MPR proxy plant that takes into account the rapid changes occurring in this regulatory area.

The decision also maintains the Commission's current practices of publicly disclosing the MPR calculation and of requiring the public disclosure of the information whether the price of an RPS procurement contract is at, below, or above the MPR.

Finally, the decision examines briefly several issues raised by Energy Division staff and the parties related to the MPR that do not require changes to the MPR methodology, but should be considered by staff in preparing the actual calculation of the MPR for 2008 and later years.