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ALJ/MSW/sid Mailed 6/30/2006

Decision 06-06-064 June 29, 2006


Order Instituting Rulemaking to Consider Refinements to and Further Development of the Commission's Resource Adequacy Requirements Program.

Rulemaking 05-12-013

(Filed December 15, 2005)



Title Page


1. Summary 2

2. Background 4

3. Local RAR (Staff Report I.) 11

4. Other Issues (Staff Report IV.) 74

5. Clarification of Order Instituting Rulemaking 75

6. Comments on Draft Decision 76

7. Assignment of Proceeding 76

Findings of Fact 76

Conclusions of Law 83



1. Summary

Taking another step towards full implementation of a comprehensive program of resource adequacy requirements (RAR) applicable to Commission-jurisdictional electric load-serving entities (LSEs), the Commission establishes a new local procurement obligation as a component of the broader RAR program. Beginning in 2007, LSEs must demonstrate annually that they have acquired adequate amounts of generation capacity within defined, transmission-constrained areas. Key determinations made herein include the following:

· The 2007 local capacity requirements (LCR) study by the California Independent System Operator (CAISO) provides an adequate basis for establishing local procurement obligations to be met by LSEs for 2007.1 We provide for a supplemental review process to create an opportunity to identify transmission improvements that were not confirmed when the CAISO completed its study as well as to address certain questions and concerns parties have raised regarding the study.

· The Commission approves LSE procurement obligations that are based on a level of reliability described as "Option 2" in the CAISO's LCR study report. For 2007, that option represents the most appropriate balancing of reliability objectives and the costs of attaining reliability based on information that is currently available. However, for purposes of assigning procurement obligations to LSEs, we direct the Commission's Energy Division to adjust the LCRs for the local areas for which deficiencies in qualified generation capacity have been identified by the CAISO.

· While the CAISO's 2007 LCR study is found to be reasonable for purposes of establishing Local RAR for 2007, certain modifications and refinements to the LCR study process are found to be necessary for 2008 and future years. Among other things, we find that future LCR studies would benefit from the use of a probabilistic rather than a deterministic approach.

· The Energy Division is authorized and directed to allocate LCRs to individual, Commission-jurisdictional LSEs, thereby establishing each LSE's local procurement obligation, using the allocation principles adopted herein.

· We aggregate certain transmission-constrained local areas for 2007 for purposes of assigning procurement obligations to LSEs. We do so as a market power mitigation measure.

· LSEs shall demonstrate they have acquired 100% of their Commission-determined "year-ahead" local procurement obligation for the following calendar year, i.e., the 12 months from January through December. These compliance demonstrations are made concurrently with the LSEs' annual System RAR "90% year-ahead" (May through September) compliance filings. We do not require LSEs to make month-ahead compliance filings for Local RAR.

· To facilitate coordination of the Local RAR program, the System RAR program, and the CAISO's Reliability Must Run (RMR) process, we adopt a detailed implementation schedule for Local RAR for 2007. Among other things this schedule changes the date for year-ahead Local and System RAR compliance filings from September 30 to October 31, 2006. It also requires preliminary Local RAR compliance filings to be made on September 22, 2006.

· We decide against adopting a proposed transfer payment mechanism whereby LSEs with more capacity than they need to meet their procurement obligations in a local area would receive "transfer payments" from LSEs with insufficient capacity. We find that the proposed mechanism would be unduly burdensome to administer.

· We adopt a waiver-of-penalties provision that relies in part on a threshold price of $40 per kilowatt-year (kW-year). If an LSE demonstrates that a waiver is justified, it will pay for backstop procurement but will not be penalized.

· In the event that an LSE does not meet its local procurement obligation and the LSE has not been granted a waiver, it will be subject to a penalty of $40 per kW-year on the amount of its deficiency, in addition to backstop procurement costs.

This decision addresses Local RAR issues. We will issue a separate decision in Phase 1 of this proceeding that addresses proposals pertaining to the development of a tradable capacity product as well as certain technical matters that have arisen during the recent implementation of the system RAR program.

1 As used herein, "local capacity requirement" refers to the CAISO's determination of the requirement for capacity resources in a particular location and for a given level of reliability. "Local RAR" refers to the local procurement obligation of LSEs that is considered in this decision. "System RAR" refers to this Commission's RAR program as currently constituted.

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