3.3.2. Appropriateness of Including an Adjustment for "Gross Margins," and Calculation of Such an Adjustment

One element of the avoided cost calculation in this proceeding that has been particularly contentious is whether or not it is appropriate to adjust the avoided generation capacity cost to subtract the "gross margins," which represent revenues that the simulated combustion turbine would gain from the sales of energy when it runs during non-demand response event hours. All three utilities removed these "gross margins" from their calculated gross avoided generation capacity costs. However, the specifics of the gross margin calculations have not been transparent or easily understandable to all parties. In particular, both Commission staff and CLECA noted that the gross margin calculation seemed to be higher than expected because the utilities' models simulated a combustion turbine that operated many more hours per year than actual combustion turbines do (i.e., the simulated combustion turbines had unusually high capacity factors). As a result, both Commission staff and CLECA objected to the specific gross margin calculations and results used by the utilities both in this proceeding¹⁵ and in A.08-06-001 et al.,¹⁶ which focused on the demand response activities and budgets for 2009-2011.

Based on concerns over the specific methods proposed in the utilities' straw proposal for calculating gross margins, the 2008 Staff Proposal recommended that the avoided generation capacity costs calculated in the utilities' models should not be adjusted to remove gross margins (i.e., that the gross margins adjustment should be assumed to be zero). Most parties, including the three utilities and various intervenors, including consumer advocates such as DRA and TURN, objected to this recommendation, arguing that despite concerns over specific methods of calculating this value, combustion turbines do sell electricity into the electric market at non-demand response event hours, and the value of these sales should be considered in the calculation to avoid overstating the value of the avoided generation capacity costs and thereby overstating the cost-effectiveness of demand response programs.

The adoption of the Avoided Cost Calculator obviates the need for a separate, specific calculation of gross margins, because a gross margin calculation is embedded in the model. For this reason, the concerns of parties such as CLECA about the gross margin calculation proposed by the Consensus Framework and used by the utilities in A.08-06-011 et al. are no longer relevant, because the Avoided Cost Calculator specifies one consistent method for the overall calculation. We believe that the consistency brought through the adoption of a single avoided cost model, and the transparency gained through the use of publicly available data, address parties' concerns about the specifics of the model originally proposed by the utilities. At the same time, the Avoided Cost Calculator calculates the gross margins value, allowing more consistent and reliable results.

¹⁵ Request of CLECA for hearings, September 19, 2007, at 9; CLECA argues that a method for calculation of gross margins recommended in the utilities' straw proposal significantly overstates electricity sales from a combustion turbine generator and therefore the gross margin number, leading to results that understate the capacity value of the combustion turbine generator and demand response that may substitute for it.

¹⁶ Filing on February 23, 2009, by CLECA at 4.