7. Auction Design

Having decided above to adopt a simplified and standardized contracting program for renewable system-side DG up to 20 MW in the form of RAM and employ an auction mechanism for determining contract price, we next consider specific auction design elements. These include a program capacity authorization, number of auctions per year, project selection criteria, and a simplified contract review process.

In its August 2009 Pricing Proposal, Energy Division suggests that the procurement authorized for the RAM program be capped by a revenue requirement.47 A revenue requirement, or a total program cost cap, would be calculated for each IOU to reflect how much renewable system-side DG each utility needs to procure compared to other renewable procurement strategies. The amount of RAM procurement needed and its associated cost would be based on an evaluation of cost, development risk profile, and development timeframe of each procurement strategy. Since the revenue requirement would reflect the types and costs of resources needed by the utility, it would be reasonable for all RAM contracts signed within that cap to be given a streamlined contract review.

Since it would take some time to implement a methodology to determine IOU renewable DG procurement need, and it must be coordinated with other aspects of IOU procurement planning, the ED's proposal offers that an interim revenue requirement cap reflects an estimated cost of 1,000 MW of RAM procurement over four years.

Several parties support the revenue requirement approach.48 Two parties oppose the approach.49 SCE and Vote Solar propose methodologies for calculating a revenue requirement. SCE's recommended approach would use the MPR multiplied by the energy solicited for a particular auction (assuming an average capacity factor for California's renewable energy mix). Vote Solar suggests that the revenue requirement be calculated based on the costs of a proxy technology for each auction, using publicly available information about the cost of that technology (e.g. data from the Renewable Energy Transmission Initiative), multiplied by the energy in MWhs solicited for in a particular auction.

Several parties provide alternatives to a revenue requirement. Both DRA and First Solar propose a hard megawatt capacity cap instead of a revenue requirement. DRA argues that a revenue requirement, while an innovative approach, would be too complex to calculate at this time. 50 First Solar asserts that a firm capacity cap provides more market certainty, and suggests 3,000 MW.51

In response to ED's proposed 1,000 MW cap, Solar Alliance, Sierra Club, First Solar, FIT Coalition, LA Community College District, Vote Solar and others argue for a higher or no cap. For example, Solar Alliance recommends a cap of 2,000 MW; Sierra Club recommends 3,000 MW (with all FIT contracts included); FIT Coalition recommends 4,000 MW (with a minimum of 1,000 MW auctioned per year); LA Community College District and Vote Solar recommend no cap (i.e. unlimited).

We adopt an interim capacity authorization of 1,000 MW, and allocate this to the three large IOUs using the same allocation used now for the Existing FIT, as shown in Table 1 below. We do this in light of the following considerations.

SCE argues that no cap can be determined in the absence of prices and other variables. We agree that in the long-term we should authorize a capacity amount based on a utility's need for the product and relative costs of the viable alternatives, as recommended by Energy Division's revenue requirement proposal. However, at this time this methodology is not in place and we therefore find that an initial 1,000 MW procurement requirement is reasonable. It provides an adequate quantity to test the program and mitigates against potential adverse outcomes if the program needs adjustment.

SDG&E asserts that the cap should be 1,000 MW allocated to each IOU, but further limited by an IOU's RPS targets. That is, an IOU should be able to suspend its RAM when its RPS program target is reached. We disagree. RPS program targets are minimums, not maximums. Twenty percent by 2010 is the minimum. An IOU may not procure less than 20% without the potential for penalty, but may procure more than 20% without penalty. Moreover, the risk of over-procurement given the amount of allocated RAM MW is minor (e.g., 81 MW allocated to SDG&E).52 If over-procurement becomes a serious risk, IOUs may slightly reduce new contracts selected pursuant to the annual solicitation or other programs that do not have specific allocated capacity at this time. We seek relative simplicity here, and capping the program at 1,000 MW subject to further reductions would add unnecessary confusion and complexity.

Parties provide a variety of recommendations on the appropriate cap level, from an unlimited authorization, to support of ED's 1,000 MW proposal. We have had mixed experience with uncapped programs and decline to adopt this expansion without a program limit, at least before we have some evidence of the results. We decline to adopt a higher cap or no cap. The 1,000 MW cap allocated to three IOUs is sufficiently large to provide market opportunities, while being sufficiently small to provide protection against bad outcomes. In the absence of a revenue requirement cap, we agree with DRA and First Solar and adopt a nameplate capacity cap of 1,000 MW to be procured between the IOUs over the next two years. We may adjust our 1,000 MW cap at any time based on evidence of response and need.

If an IOU would like to procure more than its allocated share of the 1,000 MW cap, it may request an increase in its implementation advice letter. If approved by the Commission, the additional capacity can be submitted via the streamlined Tier 2 advice letter process. In addition, we expect the 1,000 MW to be only an initial authorization. After the first authorization is expired, it makes sense to authorize RAM procurement based on a more informed evaluation of a utility's need. While the inputs and methodology are not in place to adopt a revenue requirement cap at this time, we authorize the Director of Energy Division to explore methodologies for aligning RAM procurement authority with the Commission's procurement planning process.

In addition, at any time, the Director of Energy Division may issue a resolution, either on its own motion or in response to a utility advice letter filing to update the cap. A utility advice letter request would need to justify the cap adjustment.

We adopt the same allocation percentages used for the Existing FIT to allocate the 1,000 MW capacity cap as follows:

TABLE 1

TOTAL PROGRAM CAPACITY ALLOCATION

UTILITY

INITIAL

ALLOCATION (MW)53

PERCENT OF INITIAL ALLOCATION

EXPANDED ALLOCATION

(MW)

SCE

247.7

49.84

498.4

PG&E

209.2

42.09

420.9

SDG&E

40.1

8.07

80.7

TOTAL

497.0

100.00

1,000.0

ED recommends that the program cap be allocated to IOUs over four years.54 We decline to adopt a four-year horizon for this program. Nonetheless, we are concerned about the degree of competition and take reasonable steps to increase the competitive environment in which RAM will operate.

Therefore, each RAM auction shall result in contracts for 25% of the total allocation55:

TABLE 2

TOTAL ALLOCATION PER AUCTION

Given two auctions per year (adopted below), the 1,000 MW cap can not be subscribed faster than over a two-year period. It may take longer, depending upon the number of sellers and selected bids per auction. The rate of procurement is an important measure of the interest and success of the program, and will help us judge if and when to change the cap. The 249.2 MW cap per year for SCE compares favorably to SCE's voluntary RSC program cap of 250 MW per year, and is reasonable.

We balance these concerns with the need to assure sellers that is not so small as to limit the number of transactions. To do so, we require each IOU to offer no less than the allocated capacity for each auction.56 SDG&E, for example, will offer 20.2 MW in each auction.

We make one exception. The exception is that we require IOUs to bring unsubscribed amounts (or subscribed amounts that drop out of the program) to the next auction. That will increase the capacity offer (both maximum and minimum) in subsequent auctions by the amount of the unsubscribed (or dropped) capacity that is brought forward. This will promote seller assurance of the total market size, will assist with meeting California RPS goals, and is consistent with similar treatment in our two recently authorized solar PV programs.

In addition, if SCE chooses to apply any capacity from already-executed 2010 RSC program contracts (provided they are approved by the Commission), SCE must detail its net capacity allocation in its initial implementation advice letter. SCE must also propose a schedule for soliciting the remainder of its capacity allocation in RAM solicitations over the next two years.

ED proposes a minimum of two auctions per utility per year, staggered between IOUs throughout the year. Parties present a range of views. We require two auctions per year held simultaneously by the three IOUs for the reasons stated below.

DRA, Reid, and PG&E generally support one auction per year, asserting that multiple auctions are unreasonably costly and time consuming. TURN recommends holding one auction per year at least for the initial two years (asserting that two auctions may be administratively burdensome). TURN says adding a second auction could be based on whether a sufficient number of acceptable bids are submitted. Solar Alliance recommends a minimum of three auctions per year asserting that this will enhance competition and developer knowledge of the new market, thereby resulting in lower bid prices. SCE says the number of auctions should be determined in the long-term procurement planning (LTPP) proceeding, and the auctions be held concurrently with other procurement to promote efficiency and administrative cost savings.

One important advantage of a fixed-price FIT is that it is continuously available (i.e., projects can access the tariff at any time). We lose that benefit with RAM, but in exchange gain potential cost savings from competition. At the same time, we want to minimize the loss of the continuous availability element as much as possible.

We are not persuaded that multiple auctions are unreasonably costly and time consuming. To the contrary, we want the standard contract to be simplified and easy to implement. We want the auctions and winning bid selections to be streamlined. A requirement of more than one auction per year will provide an incentive for IOUs to accomplish this goal.

Therefore, for the initial roll-out of the program, we require two auctions per year. We require the auctions to be held simultaneously by the three IOUs in order to maximize competition. A project may bid into all three auctions. IOUs should propose in their implementation advice letters any methodologies necessary for coordination, including a process for bidders to notify IOUs if they are shortlisted in more than one RAM solicitation.

We expect IOUs, ED, and parties to monitor auctions and make recommendations over time if the number should be changed. We would eventually like the program to be sufficiently routine that auctions may be held even more frequently, if not continuously.57

ED proposes that projects submit a price bid and IOUs make selections on the basis of price by selecting the least expensive projects in each product category. ED recommends that projects of the same product type be compared to each other instead of being compared to all renewable products that participated in the auction. ED proposes that the IOUs predetermine the amounts of renewable products they intend to solicit in each auction based on the individual IOU's renewable need. ED offers three examples of products: baseload, peaking as-available, and non-peaking as-available. ED proposes that annual RPS procurement plans specify how much of each product the IOU will procure, with selection based on price and limited by a revenue requirement cap for each product category. 58

Many parties support selection based on price in order to secure the least-costly products with the maximum benefits of price competition. SCE supports the use of an auction to determine the price for each project, but recommends only one RAM energy product, with the selection not made on the basis of price, but made on the other qualitative and quantitative attributes related to a project's costs and benefits. According to SCE, this method permits the IOU to select the best combination of resource types and deliveries; SCE calls this a "value-based selection process." Parties mention other alternatives, such as selection based on project viability or lottery.

As for ED's recommendation to require three distinct products in each auction, parties offer a range of views. SCE says that each auction should be open to all technologies and not limited by specific types of resource categories, such as baseload, peaking as-available, and non-peaking as-available. Others, such as FuelCell Energy, GreenVolts, Inc. (GreenVolts), Sierra Club, and GPI, argue for technology differentiation, asserting that this helps preserve production differentiation and encourages resource diversity. 59

We agree with ED that selection should be limited to price. Bid selection based only on price is reasonable because, as recommended by ED, we authorize an IOU to solicit product-specific megawatts in a quantity that reflects an IOU's portfolio need. In each IOU's RAM implementation advice letter, the IOU will choose what portion of their allocated RAM capacity they will solicit from various product buckets. These product buckets are baseload, peaking as-available, and non-peaking as-available. Also, RAM bid prices must be adjusted by an IOU's time of delivery (TOD) factors before the bids are ranked and selected, so that the project's value relative to the IOU's portfolio is considered. As a result, while we do not adopt SCE's proposal to use additional qualitative and quantitative criteria for bid selection, the RAM program does enable a utility to target products that provide specific value to their portfolio. For the initial roll-out of this program, we allow the utilities to define the products they wish to procure in their implementation advice letter filings. IOUs may choose to procure baseload, peaking as-available, and non-peaking as-available products, or a combination of the products. Once approved, the utilities are to solicit the minimum amounts of products approved through the implementing advice letter.

If an IOU additionally wishes to establish other metrics, such as a seller concentration limit, for the evaluation of RAM bids, it may propose the metric(s) in its implementation advice letter filing for consideration by the Commission. These metrics must fit within the price-only selection framework established for RAM, and would not, for example, include a proposal to add qualitative adders (e.g. transmission cost adders) to the bid evaluation process.

Finally, we provide the IOUs with discretion to reject bids from an auction under two circumstances: there is evidence of market manipulation, or the prices are not competitive. An IOU may reject an entire auction's results based on such an assessment or reject individual bids even before their allocated capacity cap has been reached. In other words, an IOU may evaluate the supply curve of bids received in an auction and assess whether any of the bid prices are unreasonable and uncompetitive relative to the IOU's other renewable opportunities. If an IOU wishes to utilize this discretion, it shall demonstrate in an advice letter filing to the Commission why bids were rejected before the capacity cap was exhausted.60

DRA has proposed the use of the Independent Evaluator (IE) to oversee the RAM auctions. We adopt DRA's proposal in order to ensure that the competitive solicitations are administered fairly and properly. The IOUs shall use an IE consistent with and pursuant to the requirements established in D.07-12-052, as modified by D.08-11-008.

D.07-12-052 ordered the IOUs to develop a pool of at least three Ies to use for all long-term solicitations that involve affiliate transactions or utility-owned or utility-turnkey bids, and for all competitive RFOs. D.08-11-008 modified the circumstances under which an IOU must retain the services of an IE. We believe this requirement is sufficient to ensure a fair and transparent of solicitation. Each IOU shall provide the IE's reports regarding project solicitations in its annual program compliance report to the Commission or in the advice letter submitting the executed contracts.

In light of our objective to establish a simple procurement program that reduces transaction costs for the buyer, seller, and regulator, we propose a mechanism for streamlined contract review through a Tier 2 advice letter filing. As discussed above, in the long-term, the amount of generation procured through allowed a simplified review should reflect a utility's need for renewable resources and the comparative costs of various types of generation to meet that need, as identified through a procurement planning process. However, since this methodology is not yet in place, we now discuss an interim approach to authorize a limited amount of RAM procurement through a streamlined contract review process.

The proposed decision would have established a simplified preapproval threshold (SPT) for Tier 1 contract review. The proposed SPT equaled the appropriate MPR plus a 50% premium. This approach would have required IOUs to procure all RAM bids up to the SPT, allowed all procurement below the SPT to utilize the simplified contract review process, and allowed all procurement at or above the SPT to be filed by Tier 3 advice letter or application. As discussed earlier, parties disputed the legality of imposing a must-take obligation up to the SPT. This issue is rendered moot in this decision because the SPT is eliminated and IOUs are provided the discretion to evaluate whether there is an appropriate price threshold above which bids are not competitive and should be rejected. The simplified contract review mechanism provides that an IOU batch and submit all standardized RAM contracts from an auction in one Tier 2 advice letter for contracts up to the utility's capacity allocation.61 This will permit simplified review and approval of contracts. We note, however, that nothing in this decision diminishes the Commission's authority to reject contracts that the utilities submit based on the RAM program if the Commission finds those contracts are not in the interest of ratepayers. For those contracts that are approved, this mechanism thereby provides assurance of cost-recovery for the IOU.62

47 Pricing Proposal at 8.

48 CALSEIA, Recurrent, Solar Alliance, Vote Solar, TURN,

49 DRA, First Solar.

50 Pricing Comments at 10.

51 Pricing Comments at 8.

52 SDG&E has voluntarily committed to 33% by 2020. (D.08-12-058 at 265). In approving the Sunrise Powerlink Transmission Project, we said we do not take this commitment lightly, and fully expect SDG&E to follow though. (Id.) SDG&E is concerned with the quantity and cost of over-procurement, absent the ability to suspend RAM when its RPS program targets are reached. Given its commitment to 33%, SDG&E's concern is misplaced.

53 This is the total initial Existing FIT allocation (e.g., the sum of the allocation for water/wastewater and other) found in D.07-07-027 at 9, as expanded for SDG&E in D.08-09-033. The four small and multi-jurisdictional utilities (SMJUs) in the statewide total of 498 MW are not included here. (See Background discussion above.)

54 Pricing Proposal at 8.

55 This is subject to the IOUs' discretion to reject contracts based on uncompetitive pricing, as discussed in Section 7.3.

56 As discussed earlier, an IOU may request an increase to this allocation in its initial implementation advice letter or in a future advice letter filing.

57 We have encouraged IOUs to explore and propose continuous procurement pursuant to RPS Procurement Plans, and we encourage IOUs to do the same for the RAM. (See D.06-05-039 at 56 regarding annual RPS Procurement Plans.)

58 Pricing Proposal at 8.

59 GPI recommends cost-of-generation based fixed-price tariffs. (Pricing Reply Comments at 5.) Generation costs vary by technology. A cost-of-generation based fixed-price tariff would therefore require different tariffs by technology.

60 If an IOU executes contracts from a RAM solicitation, but not sufficient to hit its capacity cap, then it can justify its decision in its Tier 2 advice letter requesting approval of a portion of the projects. If the IOU terminates the entire solicitation, it must file an advice letter with this rationale without the request for approval of any contracts.

61 This capacity allocation may equal an IOU's share of the 1,000 MW, more than its share if requested an approved by the Commission, or less in SCE's case if they adjust their cap with RSC contracts.

62 § 454,5(d)(2). Cost recovery is predetermined to be reasonable and is assured subject to Commission review of IOU contract administration.

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