3. Discussion and Analysis

SCE asks for relief in two areas: (a) assurance of cost recovery and (b) clarification of parties' obligations. SCE proposes to both delete and add language to address its concerns.

We decline to adopt the more complicated language recommended by SCE. Rather, we revert to the language used in similar prior resolutions. This language is simpler and covers all situations, as we explain further below. We also clarify our expectations with respect to utility contract administration.

3.1. Assurance of Cost Recovery

SCE's first concern involves assurance of cost recovery.

The four resolutions include the following language in dicta and findings:

Provided the generation is from an eligible renewable energy resource, or Seller is otherwise compliant with Standard Term and Condition 6, set forth in Appendix A of D.08-04-009 and included in the terms of the PPA, payments made by SCE under the PPA are fully recoverable in rates over the life of the PPA, subject to Commission review of SCE's administration of the PPA.2

STC 6 is non-modifiable and addresses eligibility:

Seller, and, if applicable, its successors, represents and warrants that throughout the Delivery Term of this Agreement that: (i) the Project qualifies and is certified by the CEC [California Energy Commission] as an Eligible Renewable Energy Resource ("ERR") as such term is defined in Public Utilities Code Section 399.12 or Section 399.16; and (ii) the Project's output delivered to Buyer qualifies under the requirements of the California Renewables Portfolio Standard. To the extent a change in law occurs after execution of this Agreement that causes this representation and warranty to be materially false or misleading, it shall not be an Event of Default if Seller has used commercially reasonable efforts to comply with such change in law.3

SCE argues that pursuant to non-modifiable STC 6, it is not an event of default if the project no longer qualifies as an ERR due to a change in law occurring after contract execution, so long as seller has used "commercially reasonable efforts" to comply with the change in law. According to SCE, it would still be obligated to pay for deliveries under the contract if, despite the seller's commercially reasonable efforts to comply with the change in law, the generation was no longer from an ERR. SCE concludes that rate recovery cannot be limited to situations where "the generation is from an eligible renewable energy resource," as provided in the first portion of the Resolutions' rate recovery finding.4

SCE is also concerned that the language ties rate recovery to actions solely in control of the seller. In particular, SCE says rate recovery is dependent on two such actions: (a) the generation is from an ERR or (b) seller fulfills STC 6 (i.e., uses commercially reasonable efforts to comply with a change in law).

To cure these problems, SCE proposes the following modifications (language to delete is in brackets, and to add is underlined):

[Provided the generation is from an eligible renewable energy resource, or Seller is otherwise compliant with Standard Term and Condition 6, set forth in Appendix A of D.08-04-009 and included in the terms of the PPA, p] Payments made by SCE under the PPA are fully recoverable in rates over the life of the PPA, subject to Commission review of SCE's administration of the PPA, provided SCE reasonably administers Standard Term and Condition 6, set forth in Appendix A of D.08-04-009, as it is included in the terms of the PPA and any related terms included in the PPA including the definition of commercially reasonable efforts.

We are persuaded by PG&E, however, to "condition rate recovery for RPS PPAs only on the Commission's review of the utility's administration and enforcement of the PPA."5 This is the language used in prior resolutions. SCE supports use of the original cost recovery language as an alternative to its modified language, along with use of the original cost recovery language in future resolutions.6 We adopt the following language (language to delete is in brackets, and language to add is underlined):

[Provided the generation is from an eligible renewable energy resource, or Seller is otherwise compliant with Standard Term and Condition 6, set forth in Appendix A of D.08-04-009 and included in the terms of the PPA, p] Payments made by SCE under the PPA are fully recoverable in rates over the life of the PPA, subject to Commission review of SCE's administration of the PPA.

We adopt the simpler language because it covers all situations. Administration of the PPA includes all contract clauses. STC 6 is one such clause, is non-modifiable, and is included in all RPS contracts. Contract administration includes STC 6. We need not separately identify STC 6, nor related terms employed in some contracts which more specifically define "commercially reasonable efforts." If related terms are included in a contract, administration includes those terms.7

Moreover, administration of the contract includes enforcement of contract terms by the utility. As quoted above, PG&E separately recognizes utility administration and enforcement of the PPA as part of Commission review before authorizing cost recovery. We need not specifically and separately identify enforcement, however, since enforcement is an integral part of contract administration.8 Each resolution says: "Such enforcement activities shall be reviewed pursuant to the Commission's authority to review the administration of such contracts."9 There is no proposal to modify this language, and we retain it without modification.

We also decline to add language that may lead to misinterpretation or misunderstanding. For example, SCE proposes additional language as part of its recommended cure. SCE acknowledges that the "language SCE proposes is admittedly nuanced."10 We agree with SCE that its proposed language is nuanced. Nuanced language can be vulnerable to misinterpretation or misunderstanding. This is another reason we believe reverting to the prior language is reasonable.11

SDG&E proposes further language changes (which it describes as minor) to SCE's proposed modifications. We decline to adopt SDG&E's proposed additional modifications because the additional language is unnecessary, while adding to the risk of misinterpretation or misunderstanding.

We are also not persuaded to modify the resolutions on the basis of SCE's claim that compliance with important terms is solely in the control of the seller. To the contrary, the buyer has important contract administration responsibilities. The simpler prior language captures these important responsibilities. We clarify our expectations with respect to utility contract administration to explain why SCE's concern is misplaced.

STC 6 requires that the seller warrant throughout the term of the PPA that (i) the project qualifies and is certified as an ERR and (ii) the output qualifies under requirements of the California RPS. The only exception is upon a change in law, wherein seller is contractually obligated to use commercially reasonable efforts to comply with the change in law.

One approach to contract administration is for the utility buyer to rely on the RPS seller honoring this term, including both the ongoing warranty and the use of commercially reasonable efforts to comply. If breached by the seller, the buyer may, upon learning of the breach, stop payments to the seller and seek damages, to the extent permitted under the PPA. Significant payments may have been made for non-RPS-eligible electricity, however, if the breach is not discovered for an extended period of time. Such payments by the utility would undermine the purpose of the RPS program, and pursuit of damages could involve complex and costly litigation.

Ongoing achievement of RPS goals is too important for a utility buyer to passively accept that its purchases are RPS-compliant if and when they are not. It is also too important, in the case of a change in law, for the buyer to passively accept that seller has engaged in commercially reasonable efforts to comply with a change in law if and when that is not the case.

Therefore, we expect utility contract administration to include active monitoring of each seller's compliance with STC 6. Utilities seek recovery of RPS procurement costs in an annual Energy Resource Recovery Account (ERRA) filing, or a filing in another appropriate cost-recovery proceeding. To meet its burden of proof, each utility should make an affirmative showing in each ERRA (or other appropriate) proceeding of its active monitoring of RPS sellers' compliance with STC 6, and the results of that active monitoring. Disallowance of a utility's requested rate recovery is appropriate when the utility's ERRA (or other appropriate) showing fails to establish that the utility's contract administration, including active monitoring of STC 6 and related terms, is reasonable through clear and convincing evidence.12

SCE asserts that the seller has the responsibility for complying with STC 6. The CEC, according to SCE, imposes several requirements for CEC-certification as an ERR and, if the seller violates one of those requirements, SCE "may have no way of discovering such violation before contract payments are made."13 We are not convinced. Responsible contract administration by the buyer includes the buyer assuring itself (and in turn assuring the Commission and ratepayers) that each seller is performing in accordance with the contract.

The CEC website lists eligible facilities that participate in the RPS program.14 The list is updated monthly. Beginning in 2008, the Qualified Reporting Entity (or in some cases the load serving entity) reports meter data to the CEC. CEC staff verifies the accuracy of the data, with one of the first steps in the process being to verify that the facility is RPS certified. RPS data is also reported to the Western Renewable Energy Generation Information System (WREGIS) for use in tracking and trading of renewable energy credits.15 The utility buyer may use CEC and WREGIS sources to facilitate active and responsible contract administration.

Moreover, the utility's contract with the seller may require the seller to report to the utility if and when certain events occur. For example, if CEC eligibility requires that an ERR use no more than a certain percentage of fossil fuel, the utility may require the seller to include a statement on its monthly invoice of the percentage fossil fuel used over the relevant prior period. This may or may not coincide with the facility losing ERR status, but would alert the utility to more closely monitor a particular contract. Similarly, the utility may require the seller to state on its invoice the amount of money spent in the relevant prior period on maintaining its ERR status when there is a change in law.

These are some, and there might be other, ways for the utility to accomplish reasonable monitoring. We do not specify the technique for active monitoring of seller compliance with STC 6. Rather, we expect each utility to devise a method and make an affirmative showing in each ERRA (or other appropriate) filing of its method, along with the results of its active monitoring of RPS sellers' compliance with STC 6. We also note that, because the contract term may begin before commercial operation, administration and active monitoring may need to include obligations both before and after the commercial operation date, as appropriate. Thus, in some cases, the showing for cost recovery in an ERRA (or other appropriate) filing may need to address the period before the commercial operation date.

3.2. Clarification of Parties' Obligations

SCE's second concern involves clarification of parties' obligations.

The four resolutions include the following two findings, of which SCE objects to the second sentence of the second finding:16

The resolutions include related language in the dicta:17

Therefore, while we include the required finding here, this finding has never been intended, and shall not be read now, to allow the generation from a non-RPS eligible resource to count towards an RPS compliance obligation. Nor shall such a finding absolve any contracting party of its obligation to obtain CEC certification and/or to pursue remedies for breach of contract to ensure that only RPS-eligible generation is delivered and paid for under a Commission-approved contract. Such contract enforcement activities shall be reviewed pursuant to the Commission's authority to review the administration of such contracts.

According to SCE, the second sentence in the second finding obligates SCE to enforce compliance with STC 6 in isolation of how the term is used in the relevant contract. SCE recommends the finding be changed to clarify that SCE's obligation is to enforce STC 6 in combination with related terms in the contract, and that its obligation is limited to "reasonable" enforcement. Specifically, SCE proposes the following modified language for the second finding (language to delete is in brackets and language to add is underlined):

The immediately preceding finding shall not be read to allow generation from a non-RPS eligible renewable energy resource under this PPA to count towards an RPS compliance obligation. Nor shall that finding absolve SCE of its obligation to reasonably enforce compliance with Standard Term and Condition 6, set forth in Appendix A of D.08-04-009, [and] as it is included in this PPA and any related terms included in this PPA including the definition of commercially reasonable efforts.

SCE proposes similar modified language for the dicta as follows (language to delete is in brackets and language to add is underlined):

Therefore, while we include the required finding here, this finding has never been intended, and shall not be read now, to allow the generation from a non-RPS eligible resource to count towards an RPS compliance obligation. Nor shall such a finding absolve any contracting party of its obligation to obtain CEC certification and/or to reasonably pursue remedies for breach of [contract to ensure that only RPS-eligible generation is delivered and paid for under a Commission-approved contract] Standard Term and Condition 6, set forth in Appendix A of D.08-04-009, as it is included in this PPA and any related terms included in this PPA including the definition of commercially reasonable efforts. Such contract enforcement activities shall be reviewed pursuant to the Commission's authority to review the administration of such contracts.

We decline to adopt SCE's recommendations. First, the Commission neither expects nor requires "unreasonable" contract enforcement by any utility. Including "reasonably" adds nothing.

Second, for the reasons stated above, simpler and more generalized language similar to that used in prior resolutions is preferred. This approach covers all situations, and is less likely to be misinterpreted or misunderstood.

We adopt the following language for the second finding (language to delete is in brackets and language to add is underlined):

The immediately preceding finding shall not be read to allow generation from a non-RPS-eligible renewable energy resource under this PPA to count towards an RPS compliance obligation. Nor shall that finding absolve SCE of its obligation to enforce compliance with [Standard Term and Condition 6, set forth in Appendix A of D.08-04-009, and included in] this PPA.

We adopt the following language for the dicta (language to delete is in brackets and language to add is underlined):

Therefore, while we include the required finding here, this finding has never been intended, and shall not be read now, to allow the generation from a non-RPS-eligible resource to count towards an RPS compliance obligation. Nor shall such [a] finding absolve [any contracting party] the seller of its obligation to obtain CEC certification [and/] or the utility of its obligation to pursue remedies for breach of contract [to ensure that only RPS-eligible generation is delivered and paid for under a Commission-approved contract]. Such contract enforcement activities shall be reviewed pursuant to the Commission's authority to review the administration of such contracts.

The adopted language also makes a minor wording change. It replaces "any contracting party" with more specificity relative to the obligations of the seller and the utility.

Just as we state above regarding cost recovery and contract administration, we state here that SCE's "obligation to enforce compliance with this PPA" and "pursue remedies for breach of contract" is with regard to all contract clauses. It includes, but is not limited to, non-modifiable STC 6. It includes, but is not limited to, contract terms related to STC 6, if any, such as a definition of commercially reasonable efforts included in some contracts. We adopt simpler, more generalized language, because it covers all situations and is less likely to be misinterpreted or misunderstood.

And, just as we state above regarding cost recovery, we repeat here: utility contract enforcement activities will be reviewed pursuant to the Commission's authority to review contract administration. We expect utility contract administration to be active, and require an affirmative showing in ERRA filings that meets the utility's burden of proof by presentation of clear and convincing evidence. This responsibility applies to all contract terms, as necessary for the utility to carry its burden of proof. We specifically clarify this responsibility with respect to STC 6. We are serious about utility contract administration sufficiently assuring that energy purchased pursuant to RPS contracts is RPS-eligible electricity (subject only to limited cases which may occur due to a change in law).

2 Resolution E-4293 at 11, 17 (Finding 10); Resolution E-4263 at 8, 11 (Finding 10); Resolution E-4300 at 10, 13 (Finding 13); Resolution E-4295 at 10, 13 (Finding 11).

3 Decision (D.) 07-11-025, Attachment A at 2.

4 SCE's concern is misplaced because the phrase continues: "or Seller is otherwise compliant with Standard Term and Condition 6, set forth in Appendix A of D.08-04-009 and included in the terms of the PPA." We need not address this further, however, because we decline to adopt SCE's proposed language for other reasons explained in this order.

5 April 5, 2010 PG&E Reply at 2.

6 April 15, 2010 SCE Further Information Regarding Proposed Cost Recovery Language at 2.

7 SCE points out that some contracts include limits on the out-of-pocket expenses that a seller is required to incur in making commercially reasonable efforts to comply with a change in law. The Commission-approved SCE 2009 pro forma RPS model contract, for example, includes a limit of $1,000,000 in required out-of-pocket expenses by the seller. (SCE Application at 8, citing §§ 1.10, 3.18, and 10.02(c) of SCE's June 22, 2009 Amended 2009 RPS Procurement Plan, Attachment 2-3.) For its 2010 pro forma contract, SCE does not include a specific amount, but requires that seller propose a dollar amount, with the amount subject to SCE's acceptance. (April 2010, Amended 2010 RPS Procurement Plan, Attachment 2-5, § 1.10.)

8 Utility contract administration, for example, includes bringing an action against the seller for contract breach, if necessary.

9 Resolution E-4293 at 14; Resolution E-4263 at 10; Resolution E-4300 at 11; Resolution E-4295 at 12.

10 SCE Reply to DRA Protest, April 5, 2010 at 2.

11 SDG&E says the difference between the language in the resolutions and that proposed by SCE "is a subtle, but important distinction." (SDG&E Response, March 29, 2010 at 4-5.) We agree it is subtle. Subtle differences can lead to misinterpretation or misunderstanding. The language in prior resolutions is less subject to these potential problems.

12 SCE explains this element of ERRA as follows: "The function of the ERRA reasonableness proceeding is to ensure that contract administration actions are reasonable, consistent with Commission directives, administered equally, and consistent with utility and/or industry practice. It is the IOU's burden to demonstrate that its actions are reasonable through clear and convincing evidence [citing D.87-07-026 at 19-20; D.88-03-036 at 5]." SCE Amended 2010 RPS Procurement Plan, April 9, 2010, Attachment 1 at 22.

13 SCE Application at 11.

14 The list may be accessed via this link: http://www.energy.ca.gov/portfolio/documents/list_RPS_certified.html

15 WREGIS is an independent, renewable energy tracking system for the region covered by the Western Electricity Coordinating Council. WREGIS tracks renewable energy generation from units that register in the system using verifiable data and creates renewable energy certificates for this generation.

16 Resolution E-4293 at 18 (Findings 15 and 16); Resolution E-4263 at 11-12 (Findings 11 and 12); Resolution E-4300 at 13-14 (Findings 14 and 15); Resolution E-4295 at 14 (Findings 13 and 14).

17 Resolution E-4293 at 14; Resolution E-4263 at 9-10; Resolution E-4300 at 11; Resolution E-4295 at 12.

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