5. Cost Allocation Mechanism Opt-Out

5.1. Background

Decision 06-07-029, as modified by D.07-11-051, designated the IOUs as the procuring agents to sign long-term power purchase agreements (PPAs) for new resources, and it adopted a cost allocation mechanism (CAM) that provides for the advantages and costs of those resources to be shared by all benefiting customers in the IOU's service territory. Capacity and energy from the PPAs are unbundled, and rights to the capacity are allocated among all the LSEs in the IOU's service territory according to each LSE's share of the coincident peak. LSEs can apply this allocated CAM-related capacity towards their RA procurement obligations.

In D.06-07-029, the Commission found appealing the concept of an opt-out mechanism, stating that it would like to agree with parties who say that "any LSE that can demonstrate that it is fully resourced with new generation for the 10-year time frame may opt-out of the cost allocation mechanism." (D.06-07-029 at 35.) However, the Commission expressed concern that there was no viable enforcement program or mechanism for doing so. D.06-07-029 therefore deferred any CAM opt-out mechanism to this proceeding, where it could be considered along with capacity markets and multi-year RA requirements.

5.2. CAM Opt-Out Proposals

AReM, BTG, PG&E, and SCE offered CAM opt-out proposals in response to the Phase 2 Scoping Memo.

AReM would restrict the ability to opt out to non-IOU LSEs to mitigate what it sees as the inherent anti-competitive effects of the CAM. AReM proposes a dual approach. First, for PPAs authorized in D.06-07-029 for which the IOUs elect to use the CAM, non-IOU LSEs would be allowed to opt out of the CAM by demonstrating that they have procured comparable generation resources for the remaining term of the CAM. The LSE must separately procure megawatts up to its current pro-rata share of the project for which it is opting out. If the project for which an LSE opts out provides local RA capacity, the newly procured megawatts must likewise provide local capacity, albeit in any local reliability area designated by the CAISO. If the project for which an LSE opts out is new construction, the opting-out LSE would have to procure new construction. The LSE would be able to opt out at any time during the term of the project. Second, for future projects, AReM proposes a more flexible approach with more options for LSEs. The LSE must demonstrate that it has procured megawatts up to its current pro-rata share of its peak load in the IOU service territory for which the Commission has approved future procurement. The procured megawatts must provide either system or local RA capacity, whichever has been identified by the Commission as needed for future procurement. If the project for which an LSE opts out is new construction, the opting-out LSE would have to procure new construction. If an LSE seeks to opt out before a project is approved for future procurement, it may do so with a contract term of at least four years. Compliance demonstrations would be made to the Commission's Energy Division pursuant to delegated authority. Opting-out LSEs would tie their requests to a specific set of customers for which they have signed multi-year contracts. If the opt-out is granted, billing and RA credits to the LSE and its customers would be modified accordingly to reflect the change. By locking in specific customers, load migration issues would be obviated.

BTG favors a CAM opt-out provision to encourage LSEs to enter into their own multi-year forward contracts for new generation. BTG proposes two requirements to qualify for the opt-out. First, the LSE must have signed a capacity contract of at least three years in length for a new resource that is planned to be operational within four years. Second, the capacity contract at a minimum must equal the LSE's load ratio share of the megawatts determined to be needed.

In connection with its March 30, 2007 proposal for backstop procurement, PG&E proposes that to the extent that an LSE has responsibly planned for the future by contracting for new capacity that offsets the needs identified in the needs assessment, it should receive credit for new capacity backstop costs. PG&E believes this represents the opting out process anticipated by the Commission in D.06-07-029. In its reply comments, PG&E notes that the issue of opting out of the CAM received only limited time during the workshops and was not extensively discussed in the Staff Report. PG&E requests further proceedings on this complex issue.

SCE proposes that the Commission should only allow LSEs to opt out from the CAM in connection with proceedings leading to the issuance of a Commission decision authorizing the entity tasked with conducting specific backstop new generation procurement subject to the CAM to proceed with that procurement. Any LSE authorized to opt out of the CAM would be required to submit monthly reports on the status of its procurement efforts.

TURN found fault with AReM's opt-out proposal and offered an alternative approach. Since TURN's alternative was submitted with its reply comments and was not discussed in workshops, the Staff Report, or opening comments, we find the record insufficiently developed with respect to the proposal and do not consider it here.

5.3. Discussion

As TURN points out, there are two flaws in AReM's recommended approach. First, since only non-IOU LSEs would be permitted to opt out of the CAM, only IOUs would be expected to commit new resources on behalf of bundled services customers. Non-IOU LSEs would not be bound by such an expectation. Whether or not, as TURN maintains, this one-sided aspect would create a disincentive for IOUs to commit new resources, with the result that the CAM is a primary procurement vehicle rather than a backstop, we see no sound basis for the disparate treatment of LSEs proposed by AReM.

Second, under AReM's proposal, the opt-out could occur at any time, even after the resources procured by the CAM are on line and producing power. However, once the resource has been committed under the CAM, the reliability need that gave rise to CAM procurement in the first place has been filled. Any future opt-outs would lead to over-procurement for the system and stranded costs for which the IOUs and their customers would be responsible. We do not find this outcome to be reasonable.

We find that the issue of the opt-out did not receive adequate attention in the workshops, the Staff Report, or the comments, and that the record does not support adoption of any of the opt-out proposals before the Commission. Therefore, pending further order of the Commission the CAM procedure adopted in D.06-07-029 will remain in effect without modification by this decision. Since this topic is closely related to the BTG proposal for a new generation backstop mechanism, it may be appropriate to further consider it in a future proceeding that addresses the backstop mechanism. We note that Senate Bill 695 (Stats. 2009, Ch. 337), which among other things added Section 365.1, impacts certain aspects of the CAM. While we do not modify the CAM at this time, we anticipate addressing any necessary changes to it in the forthcoming LTPP rulemaking. In this manner we will be able to take a comprehensive look at the CAM and make any and all necessary changes.