3. Adequacy of Procurement Plans
This decision renews and updates the utilities' procurement authority on behalf of their bundled customers, consistent with the policies of this Commission and the State of California. The changes to the utilities' procurement authority that are made in this decision are largely technical revisions based on our recent experience, adjustments to reflect changed circumstances, and clarifications based on past experience and issues raised by the parties.
Because this decision largely follows existing policies rather than make new policies, the scope of this decision is relatively narrow. This decision is not intended to result in any new generation facilities being constructed, and it continues to implement the Commission's loading order and Energy Action Plan.
There is one area, however, that reflects a fundamental tension in the process that we need to address. The basic idea that forms the foundation of this proceeding is that the Commission will pre-approve a utility procurement plan, and subsequent utility procurement consistent with that plan is considered reasonable. In proposing their procurement plans, the utilities were directed by the December 3, 2010 Scoping Memo (reiterating the OIR) to base their submissions upon a set of standardized planning assumptions:2
Based on the record in R.08-02-007, we find it reasonable to direct the IOUs' filing of bundled LTPPs [long-term procurement plans] to be based on a limited set of standardized planning assumptions, consistent with those adopted here, using the best information available as described in the Track II Scoping Memo. While we envision that Track II plans will be based on currently effective conformed LTPP plans, our intent is to ensure that the IOUs' plans can be more easily compared to each other and to maintain consistency across utilities to the extent possible. (Scoping Memo at 39-40.)
The standardized planning assumptions that are being used in this proceeding were developed through an exhaustive and open process, involving a wide range of stakeholders. (See, e.g., Scoping Memo at 7-8, 24.) As described above, one important purpose for the standardized planning assumptions was to allow for the utilities' plans to be more readily comparable. Absent some common basis, it would be impossible for the Commission to perform a meaningful comparative analysis of the utilities' procurement plans, and more difficult for the Commission to ensure that those plans are consistent with the requirements of § 454.5. Basing the plans on a known starting point also helps evaluate the scope and effect of any subsequent proposed changes to the plans.
Accordingly, the record in this proceeding relies heavily upon the standardized planning assumptions that the utilities were required to use in preparing their proposed procurement plans.3 Those standardized planning assumptions necessarily contain numerous forecast elements, and any forecast, no matter how carefully made, will end up being at least somewhat off the mark. The utilities need to procure the amount of electricity that is actually needed for the reliable operation of the grid, regardless of the level of need that was forecast in this proceeding. Accordingly, the utilities' actual procurement is likely to vary from that assumed in the standardized planning assumptions.
While we should not force utility procurement to precisely conform to the standardized planning assumptions, the utilities cannot just disregard the standardized planning assumptions and procure whatever they want. Doing so would make this whole process - - and more importantly, Pub. Util. Code § 454.5, which we are implementing here - - pointless. The Commission has a legal duty to ensure that ratepayers pay just and reasonable rates, and accordingly the utilities' procurement activities must have some correlation to the procurement plan approved by the Commission.
A level of procurement and associated costs that closely correspond to those forecast in this proceeding would be ideal. Significant under-procurement that maintains adequate reliability would also be acceptable (while showing that there was a flaw in forecasting), as the cost to ratepayers is likely to be less than the forecast cost.
To the extent that the cost of procurement is higher than forecast, however, there is a potentially significant problem, as the Commission cannot be said to have found the correspondingly higher rates to be just and reasonable, as required under § 454.5(d).
The utilities differ in their positions on how to address this tension. SCE's position is:
The purpose of the Track II planning analysis for SCE was to set position limits and ratable rates (i.e., maximum rates of transaction) to provide an upper boundary on the amount of procurement SCE can engage in without prior Commission approval. (SCE Opening Brief at 23.)
As a general matter, this approach is reasonable - - the Commission sets an upper boundary, and the utilities can procure up to that level without coming back to the Commission. This makes it easier for the Commission to find that the resulting rates are just and reasonable, as there is effectively a cap on procurement amounts and associated costs.
PG&E, however, takes a very different approach, as it explains in response to other parties:
More fundamentally, MEA and AReM ignore the fact that PG&E expressly explained that it is not seeking procurement authority based on the energy and capacity tables in the BPP [bundled procurement plan]. Whether CCA [community choice aggregation] and DA [direct access] load is or is not included in the energy and capacity tables in Appendix A of PG&E's BPP will not impact or change PG&E's procurement decisions. Rather, PG&E procures to meet its bundled customer needs based on the products and processes included in the BPP, not based on the energy and capacity tables. SDG&E takes a similar approach, as it explained in detail in its opening brief. (PG&E Reply Brief at 9-10.)
As PG&E observes, SDG&E provided the most detailed description of its position on this issue:
As noted above, the Track II Scoping Memo requires the IOUs to base their respective Track II bundled plans upon a set of Standardized Planning Assumptions prepared by Commission staff. While, as explained by Mr. Anderson, SDG&E has serious reservations concerning the accuracy of the Standardized Planning Assumptions, it notes that as a practical matter, it will often be the case that actual resource needs differ from forecasted need included in an IOU's bundled plans (whether such forecasted need is based upon Commission-developed or IOU-developed assumptions). Thus, while the Bundled Plan includes assumptions designed to provide a context for establishing upfront standard consistent with AB 57, the plan makes clear that these assumptions are not intended to establish specific procurement targets:
"Consistent with Commission direction, SDG&E's resource plan serves as an `umbrella' document, incorporating and consolidating inputs from other Commission proceedings and, in some cases, necessarily making assumptions about the outcomes of proceedings currently underway or assumptions regarding the amount and timing of resource additions. For example, energy savings and demand reductions from the EE [energy efficiency] programs are based on the Commission's adopted targets for committed programs. However, the capacity shown in the Plan for these higher priority resources is based on forward-looking assumptions that are not intended to operate to set minimum or maximum capacity targets." [Citing Ex. 304 at 66.]
SDG&E's Bundled Plan notes that "SDG&E will procure capacity based on actual resource needs, which may deviate significantly from the assumptions included in the Plan." It emphasizes that "while the Plan sets forth necessary guidelines and upfront standards for procurement, and may include certain assumptions regarding need, the procurement ultimately undertaken by SDG&E pursuant to the Plan will reflect actual need rather than assumptions that may be included in the Plan." Mr. Anderson echoed this point, cautioning that the energy and capacity tables provided with the Bundled Plan "must be viewed as being illustrative because many of the assumptions that go into these tables change frequently and are outside of SDG&E's or the Commission's control." He noted that the tables provided "should be viewed as one possible outcome based on a given set of assumptions," and further that "[a]ctual procurement will vary over time, based on the best available data at that time." He pointed out that given the high probability that actual need will differ from what is projected in the Bundled Plan, the outcome contemplated in the Bundled Plan should not be considered SDG&E's preferred resources or be relied upon to establish procurement targets:
"[T]he bundled plan resources needs will constantly be changing based on new information regarding loads, resources and costs. The Scoping Memo provided a set of assumptions that SDG&E was directed to use in preparing its LTPP filing. There are a large number of other assumptions that may have the same or an even higher probability of occurring in the future. Thus, the one outcome contemplated in the LTPP, based on this one set of assumptions, should not be viewed as SDG&E's preferred or the most likely set of resources over the next ten years. Likewise, the assumptions referenced in the Plan should not be viewed as targets, or as setting a ceiling or floor on SDG&E's procurement authority." [Citing Ex. 301-E at RBA-11.]
Thus, while SDG&E included the Standardized Planning Assumptions in its 2012 LTPP, consistent with Commission direction, it is important that the Commission remain mindful of the fact that reliance on these assumptions produces a forecasted need in the Bundled Plan that may, but most likely will not, be accurate, and that the outcome of the Bundled Plan should not be used to identify SDG&E's preferred set or resources or to establish procurement targets or limits. (SDG&E Opening Brief at 11-13. Footnotes omitted, emphasis in original.)
In essence, SDG&E and PG&E are saying that it does not matter what comes out of this proceeding - - they will procure whatever they want, in whatever quantity they think best. In a historic context, this would not be particularly problematic - - the utility had the authority to procure adequate electricity to serve its customers. The Commission would provide oversight by pre-approving certain costs to be covered in rates, and would also perform after-the-fact reasonableness reviews to ensure that the utilities made proper and prudent use of ratepayer money.
But under the new § 454.5 paradigm, the Commission pre-approves a more general procurement plan, and gives up its after-the-fact review. Under § 454.5, the Commission's approval of the utility's procurement plan must provide for just and reasonable rates. If, as PG&E and SDG&E claim, the utilities are free to procure any amount or mix of resources regardless of what the Commission bases its decision upon, the Commission cannot be sure that the resulting rates will be just and reasonable. In short, this approach would render the Commission's approval largely meaningless, but could potentially insulate the utilities from subsequent reasonableness reviews. Such an abdication of responsibility is not consistent with California law, sound public policy, or the best interests of the ratepayers. The position of PG&E and SDG&E means that their procurement plans, as initially submitted, do not comply with the requirements of § 454.5.
In addition, having utilities take radically different approaches to procurement makes it difficult, if not impossible, for the Commission to ensure that its pre-approval of utility procurement plans complies with the requirements of § 454.5(d):
(d) A procurement plan approved by the commission shall accomplish each of the following objectives:
(1) Enable the electrical corporation to fulfill its obligation to serve its customers at just and reasonable rates.
(2) Eliminate the need for after-the-fact reasonableness reviews of an electrical corporation's actions in compliance with an approved procurement plan, including resulting electricity procurement contracts, practices, and related expenses. However, the commission may establish a regulatory process to verify and assure that each contract was administered in accordance with the terms of the contract, and contract disputes which may arise are reasonably resolved.
(3) Ensure timely recovery of prospective procurement costs incurred pursuant to an approved procurement plan. The commission shall establish rates based on forecasts of procurement costs adopted by the commission, actual procurement costs incurred, or combination thereof, as determined by the commission. The commission shall establish power procurement balancing accounts to track the differences between recorded revenues and costs incurred pursuant to an approved procurement plan. [...]
(4) Moderate the price risk associated with serving its retail customers, including the price risk embedded in its long-term supply contracts, by authorizing an electrical corporation to enter into financial and other electricity-related product contracts.
(5) Provide for just and reasonable rates, with an appropriate balancing of price stability and price level in the electrical corporation's procurement plan.
Accordingly, on a going forward basis, for the Commission to be pre-approving utility procurement plans, it would make sense for those plans to be at least roughly equivalent. The current plans are not equivalent.
SCE's approach is fundamentally more consistent with the code than the approach recommended by PG&E and SDG&E. The Proposed Decision, based on the record of this proceeding at the time, did not order PG&E and SDG&E to completely revise their procurement approach to mirror that of SCE, but indicated that future phases of the LTPP proceeding may require PG&E and SDG&E to move their procurement approaches towards that taken by SCE in order to ensure compliance with § 454.5.
Since the Proposed Decision found that rigid compliance with the Standardized Planning Assumptions was not viable, and was not ordering PG&E and SDG&E to adopt SCE's approach, it proceeded to develop a methodology for ensuring that the procurement activities of PG&E and SDG&E would be consistent with the requirements of § 454.5.
Section 454.5(c) expressly allows the Commission to reject a utility's procurement plan. If the Commission were to do so here, there would not be adequate time for the utilities to prepare new plans in compliance with the law and submit those for Commission approval. If the Commission did simply reject PG&E's and SDG&E's procurement plans, the appropriate default would be for the utilities to continue under the Commission's prior procurement regime, including after-the-fact reasonableness reviews.
At the same time, it would be more consistent with the intent and policy of § 454.5 to approve procurement plans for PG&E and SDG&E. The Proposed Decision correctly noted that we cannot approve the plans as submitted, but § 454.5 also expressly allows the Commission to modify a utility's procurement plan. The Proposed Decision then proceeded to modify the procurement plans of PG&E and SDG&E in order to ensure compliance with the requirement of § 454.5 (and the fundamental duty of this Commission) to provide for just and reasonable rates by imposing a 10% cap on increases in system average rates due to procurement costs.
The Proposed Decision found that procurement activities (consistent with this and other Commission decisions) that result in no more than a 10% system average rate increase over a rolling 18-month period are reasonable, although it noted that a rate increase of that size was highly unlikely, and that a 10% system average rate increase due to procurement costs was significantly higher than what the utilities forecast in their procurement plans.
The Proposed Decision found that a utility that exceeds the cap is no longer operating under a Commission-approved procurement plan, and accordingly would only have allowed PG&E and SDG&E to recover in rates procurement costs to the point those costs would result in no more than a 10% system average rate increase over a rolling 18-month period. Any costs above that level would only be recovered after a reasonableness review that examines all utility procurement.
In their Opening Comments on the Proposed Decision, PG&E and SDG&E (supported by SCE) criticize this approach, arguing that it is unclear, unnecessary, and inconsistent with the intent of § 454.5. These criticisms are baseless, and PG&E and SDG&E ignore the fact that their proposed procurement plans did not comply with the requirements of § 454.5.
The Proposed Decision's cost cap approach would be consistent with the Commission's responsibility and authority under § 454.5, and would be less disruptive than the alternatives that this Commission could adopt. EPUC argues that the Commission should reject PG&E's proposed plan in its entirety, and subject PG&E to a traditional after-the-fact reasonableness review. (EPUC Opening Comments at 2-3.) Sierra Club argues that the Commission should reject the utilities' proposed plans and require them to refile conforming plans. (Sierra Club Opening Comments at 1, 4-5.) EPUC and Sierra Club are correct that the Commission could adopt either of these approaches.
PG&E and SDG&E, however, propose (in almost identical language) an alternative approach, under which they would use an approach based on that of SCE:
PG&E [SDG&E] is willing to modify its BPP in order to establish position limits similar to those of SCE. Specifically, the portion of SCE's methodology that PG&E [SDG&E] is willing to adopt is contained in Section 3 ("Procurement Limits and Ratable Rates") of SCE's proposed 2012 bundled plan. PG&E [SDG&E] proposes to follow the methodology set forth in subsection (b) of Section 3, which applies to bundled system capacity procurement, and subsection (f), which applies to transaction compliance accounting and limit updates. PG&E [SDG&E] would adopt these aspects of SCE's bundled plan and apply them to PG&E's [SDG&E's] bundled procurement in the same manner as detailed in SCE's bundled plan. (PG&E Opening Comments at 6; SDG&E Opening Comments at 10-11.)
This proposed approach provides additional protection to ratepayers, and allows us to find that the utilities' proposed bundled procurement plans, as modified by this decision, are reasonable under § 454.5. Accordingly, we adopt the alternative approach proposed by PG&E and SDG&E, modeled on SCE's bundled procurement plan, rather than the cost cap approach set forth in the Proposed Decision.
For all utilities, there is also a modified reporting requirement. Consistent with quarterly Procurement Review Group (PRG) processes from previous LTPPs, each utility shall also review their current position relative to their Commission-approved limit on a rolling 24-month forward basis, compare it to their positions in the previous quarter, and include that information in their quarterly PRG meeting.
2 The OIR had generally referred to these standardized planning assumptions as "planning standards." (See OIR at 14.)
3 The utilities were also allowed to present their own alternate planning assumptions.
