2. System Track I
2.1. Proposed Settlement
A proposed settlement in System Track I was filed on August 3, 2011.7 The majority of parties to this proceeding entered into the proposed settlement. The proposed settlement would resolve the fundamental issue in System Track I, which the proposed settlement defines as: "should the Commission determine that, due to system needs, the IOUs should be directed to obtain additional generation resources?" (Motion for Approval of Settlement Agreement at 4.) We approve the proposed settlement.
Two narrower issues in System Track I were not resolved by the proposed settlement. One unresolved issue related to the need for local generation capacity in the San Diego Gas & Electric (SDG&E) service territory. That issue will be addressed in Application (A.) 11-05-023, as described in the Joint Assigned Commissioners' Ruling issued on January 18, 2012 in both this proceeding and in A.11-05-023. The other issue was raised by Calpine Corporation (Calpine), and consisted of a proposal to require the utilities to do a solicitation aimed at existing power plants that are operating without contracts. We do not approve Calpine's proposal here.
The proposed settlement has the support of most of the active parties in this proceeding, including parties whose interests are not generally aligned. While not all parties have signed or otherwise endorsed the proposed settlement, no party is actively contesting it. Nevertheless, we must ensure that the proposed settlement is reasonable in light of the whole record, consistent with law, and in the public interest. (Commission's Rule of Practice and Procedure 12.1(d).)8
The proposed settlement is, in essence, a punt. The settling parties have agreed to defer determination of the core issue in this proceeding: the utilities' future need for additional generation. To the extent there may be any such need, it appears to be primarily driven by the necessity to integrate higher levels of renewable generation onto the system, in anticipation of a 33% renewable portfolio standard (RPS) target. The settling parties state that: "There is general agreement that further analysis is needed before any renewable integration resource need determination is made." (Settlement Agreement at 5.)
The parties to the proposed settlement describe it as follows:
As a compromise among their respective litigation positions, and subject to the recitals and reservations set forth in this Settlement Agreement, the Settling Parties agree that:
· With respect to system resource need and the integration of intermittent renewable resources into the CAISO grid, the Settling Parties encourage the Commission, in conjunction with the CAISO's ongoing work on this subject, to further examine this issue expeditiously in the next Long-Term Procurement Plan (LTPP) cycle or in an extension of the current LTPP cycle.
· All references to a potential "need to add capacity for renewable integration purposes" shall be interpreted within the context of the CAISO process which considers alternatives as further described in Section III.C below to determine the type of resources (including existing units) available to meet any defined needs. There is no presumption that any Phase 1 "need" requires the addition of new gas-fired generation resources above and beyond those needed to meet the current planning reserve margin.
· As requested by the Commission, the CAISO developed a methodology for assessing renewable integration resource needs (the "CAISO methodology"), and applied this methodology with the assistance of the IOUs to assess the need for flexible capacity for the four CPUC-Required Scenarios and one other CPUC scenario analyzed by the CAISO. The results show no need to add capacity for renewable integration purposes above the capacity available in the four scenarios for the planning period addressed in this LTPP cycle (2012-2020). The additional scenario studied by the CAISO did show need.
· The IOUs applied the same CAISO methodology for the IOU Common Scenarios using different assumptions from those used in the CPUC-Required Scenarios. The results of the IOUs' modeling show need for additional capacity for renewable integration purposes under certain circumstances.
· The resource planning analyses presented in this proceeding do not conclusively demonstrate whether or not there is need to add capacity for renewable integration purposes through the year 2020, the period to be addressed during the current LTPP cycle. The Settling Parties have differing views on the input assumptions used in, and conclusions to be drawn from the modeling. There is general agreement that further analysis is needed before any renewable integration resource need determination is made. [...] (Settlement Agreement at 4-5.)
In considering the proposed settlement, the first step is to look at whether it is reasonable in light of the whole record. While the substantive issue was not fully litigated, the record is still substantial. The joint testimony of the three utilities is clear that under the four scenarios that the utilities were required to analyze, there is no need for additional generation resources by 2020. (See Exhibit 106 at 1-2.) Using other assumptions, however, such as those proposed by the utilities, the modeling did show some potential need. To the extent that there is no need for additional generation resources by 2020, it is clear that the proposed settlement is reasonable, given that it merely defers authorization of generation procurement. If no new generation is needed, then no immediate procurement of generation is needed. On the other hand, if generation is needed by 2020, then deferring procurement of that generation could potentially be problematic.
There is clear evidence on the record that additional generation is not needed by 2020, so there is record support for deferral of procurement. But it is also necessary to ensure that the same conclusion is reached after considering the whole record. It is important to note that the utilities, who are the parties that proposed assumptions that would result in a need for generation by 2020, are themselves actively supporting the settlement. This would indicate that on balance, and despite their litigation position, the utilities believe it is reasonable to defer procurement authorization as the proposed settlement recommends.
In addition, the scenarios under which there is no need for additional generation are the Commission-mandated scenarios, which were developed in a public, collaborative, and iterative process led by Energy Division staff. This would tend to give them more credibility than the alternative assumptions showing need that were proposed by parties as part of their litigation positions.
Finally, a number of parties address this issue in their briefs on the proposed settlement:
TURN has been monitoring the development of the CAISO methodology for assessing renewable integration resource needs and believes that the model cannot be relied upon to authorize any additional procurement at this time. (The Utility Reform Network (TURN) Opening Brief at 1.)
In the opinion of the GPI, the overwhelming conclusion of the analyses presented in Testimony by the CAISO and the utilities is that it makes little difference which renewables development trajectory is followed. The costs are all about the same, the environmental improvements are all about the same, and despite the fact that promising new technologies for improving grid operations are left out of the analysis, there is still no identified need for new fossil-fired resources for purposes of renewables integration in any of the PUC-defined scenarios. (Green Power Opening Brief at 15-16.)
Regarding Track I, CBE is a party to the settlement agreement submitted on August 3, 2011. CBE recommends the Commission approve the proposed settlement. In so doing, CBE requests that the Commission specifically find that the evidence presented in this proceeding does not establish a need for new generation to integrate renewables. CBE further requests that the Commission specifically find that neither Pacific Gas and Electric ("PG&E) nor Southern California Edison ("SCE") have requested or established a need for new generation to meet local area need. (Communities for a Better Environment (CBE) Opening Brief at 2.)
While the CAISO Opening Brief supports the proposed settlement, the CAISO attaches to it an internal CAISO memo that would seem to indicate that there is a need for additional generation before 2020. As TURN and the Division of Ratepayer Advocates (DRA) point out, however, this memo is not part of the evidentiary record in this proceeding, and other parties have not had an opportunity to address it. (TURN Reply Brief at 1-2; DRA Reply Brief at 1-4.) Accordingly, we cannot and do not rely upon the memo in reaching our decision.
In looking at the whole record, it would be reasonable to find that there is no need for additional generation by 2020 at this time, and accordingly it is reasonable to defer authorization to procure additional generation based on system and renewable integration need.9 The proposed settlement is therefore reasonable in light of the whole record.
The next question is whether the proposed settlement is consistent with the law. The substance of the proposed settlement is generally innocuous, as it merely defers a determination by the Commission, and raises no legal issues. Such a deferral is within the authority of the Commission to manage its own proceedings.
Two cautionary notes are appropriate, however. First, the Commission, not the settling parties, determines the schedule and scope of any subsequent proceeding. Even if the parties agree on a particular schedule, the Commission, not the parties, controls the Commission's processes. Because we understand the proposed settlement's discussion of future Commission proceedings to be a recommendation only, the proposed settlement is consistent with the law on this issue.
Second, the parties may not alter the scope of the Commission's jurisdiction by settlement. Because we understand that the parties merely attempted to describe, rather than change, the Commission's jurisdiction, the proposed settlement is consistent with the law on this issue as well.
Finally, we must confirm whether the proposed settlement is in the public interest. Here there is significant public interest in the substance of the settlement - an adequate supply of electricity. Unlike a case of two businesses or individuals arguing about money, public interest is really the central issue. If there is in fact a pressing need for procurement of more generation, approving the settlement and deferring that procurement would not be in the public interest. That determination, however, must be made based upon the record of this proceeding, which in this case means that the analysis of whether the settlement is in the public interest is similar to the above analysis of whether the proposed settlement is reasonable in light of the whole record.
As discussed above, we conclude that it is reasonable to defer authorization of procurement of new generation. Given the record currently before us, deferring procurement of new generation will not cause a problem. The record clearly supports a conclusion that no new generation is needed by 2020, and the record does not clearly support a conclusion that new generation is needed even after 2020.
Deferring authorization for such procurement is not adverse to the public interest, and two additional factors lead to the conclusion that deferring procurement authorization is in the public interest. First, if there is no need to authorize procurement of generation, then there is no need to incur the costs for procurement of generation, meaning that deferral of that procurement results in lower rates. Second, what the parties propose to do with more time - conduct a better analysis of the need for procurement, particularly for renewables integration, with updated information - may provide a significant benefit. Accordingly, we conclude that the proposed settlement's deferral of generation procurement is in the public interest, and we approve the proposed settlement.
Developing the record for future LTPP cycles should utilize processes similar to those used here, including workshops and other public and stakeholder processes that inform and draw input from parties about renewable integration and local area needs. A robust and transparent process is essential to support and develop the complex and sophisticated analyses required, such as the detailed power flow modeling required for determination of local area needs. Given the long-term ramifications that will flow from this or successor proceedings, it is important that the outcome is the result of a solid and credible process.
2.2. SDG&E Local Reliability
SDG&E requested that the Commission authorize 415 megawatts (MW) of new generation to meet its Local Capacity Requirement (LCR). (SDG&E Opening Brief at 11.) Because of transmission constraints, SDG&E notes:
[E]ven if system-wide studies do not identify a need for additional resources on a statewide basis, there may nevertheless still be a need for new resources to meet local resource adequacy criteria. (Id. at 5.)
DRA, Pacific Environment, Natural Resources Defense Council (NRDC), and Sierra Club opposed SDG&E's request. (See, DRA Reply Brief at 5-6, Pacific Environment Reply Brief at 7, NRDC Opening Brief at 9, and Sierra Club Reply Brief at 1-3.)
This issue was moved to A.11-05-023 by a Joint Assigned Commissioners' Ruling issued January 18, 2012 in both this proceeding and in A.11-05-023.
2.3. Calpine
Calpine recommends that the Commission direct the utilities to engage in intermediate term (3-5 year) solicitations aimed specifically at existing power plants that do not currently have contracts with the utilities. According to Calpine:
Current and expected wholesale market conditions do not provide uncontracted existing generation resources with reasonable opportunities to secure sufficient and stable revenue streams to recover going forward costs, including maintenance necessary to ensure availability in the future. As a result, if a procurement mechanism is not adopted in the near term to address this situation, economic retirements should be expected. (Calpine Opening Brief at 3.)
Calpine notes that in this proceeding existing generation has been assumed to remain in operation, but if in fact that existing generation shuts down, then new replacement generation will be needed to meet reliability and renewable integration needs. (Id. at 7.)
PG&E, SCE, TURN and DRA oppose Calpine's proposal, arguing that it is not needed, not adequately supported by the record, and it overstates the risk of generation shutdown. (See, e.g., PG&E Opening Brief at 13-14, TURN Opening Brief at 2-5.) The CAISO generally supports Calpine's proposal, as the CAISO is concerned by Calpine's prediction of lost generation capacity. (CAISO Opening Brief at 6-8.)
In order to evaluate Calpine's claim, we need to evaluate the potential risks presented. First, what is the actual risk that existing generation will shut down for economic reasons. Second, how much generation would shut down. And third, to the extent that generation does shut down, would that make it permanently unavailable in the future. After evaluating those risks, we need to consider what would be the most appropriate response.
The actual risk of shutdown is difficult to evaluate based on the record. While Calpine owns significant quantities of uncontracted generation, Calpine sought to present its argument as a general problem facing all existing uncontracted generation resources, not just Calpine resources. (Calpine Reply Brief at 8-9.) But Calpine was unable to identify what non-Calpine generation might fit into this category:
Q So you don't know whether there are any other uncontracted combined cycle units outside of Calpine's fleet?
A I strongly suspect there are, but I don't know that for a fact. (Calpine witness Barmack, Transcript vol. 6 at 865-866.)
Q Dr. Barmack, what units other than the Calpine units do you believe are at risk of shutting down?
A It would be purely speculation on my part, but I'm aware of other combined cycles that were built around the same time as many of our units... I'm not aware of whether those units are contracted or not. (Id. at 888.)
Alternatively, Calpine could have provided information about the economics of the uncontracted Calpine plants that it asserts are at risk of economic shutdown, but Calpine chose not to do so:
Q So Calpine hasn't provided any information about the cost of operating the existing units in its combined cycle fleet to the Commission in this proceeding, has it?
A No. We haven't provided information about the specific economics of our units. (Id. at 851.)
Other than generic market data showing that revenues for combined cycle generation have generally been declining, Calpine presented no evidence to support its claim that its uncontracted generation resources are at risk of shutting down, and it could not even identify any uncontracted non-Calpine generation resources, much less show that they were at risk of economic shutdown.
On the other hand, PG&E points out:
During cross-examination, Calpine witness Barmack acknowledged that there are significant regulatory limitations on Calpine's ability to retire a power plant. As Dr. Barmack acknowledged, under the Commission's General Order ("GO") 167, Calpine is obligated to maintain its generating units in California in readiness for service unless the Commission, after consultation with the CAISO, affirmatively declares that the units are unneeded during a specified period of time. Moreover, under GO 167, Calpine is obligated to notify the Commission and the CAISO in writing at least 90 day in advance of any planned change in the long term status of any Calpine unit in California. Under the CAISO's tariff, the CAISO has the authority to issue a "risk of retirement" designation to keep a resource in operation that is otherwise at risk of retirement during the current "resource adequacy" year if the CAISO believes the resource will be needed for reliability by the end of the following calendar year. Thus, a number of regulatory protections are in place to assure that Calpine's units, if needed for reliability in California, will remain on-line and operational. (PG&E Opening Brief at 13-14.)
We have no specific evidence in the record of this proceeding showing that any combined cycle plants, owned by Calpine or anyone else, are facing a real risk of economic shutdown.10 Both the Commission and the CAISO have mechanisms to mitigate the risk of one or more power plants shutting down. Even if there is a risk of economic shutdown, we have no record basis to evaluate how much generation could potentially shut down, and whether that would have a significant impact on potential future needs.
Finally, even if there are generation units at risk of economic shutdown, it is not clear that a shutdown would result in those units becoming permanently unavailable. Calpine indicated that it could physically remove components such as combustion turbines and steam turbines for use in other locations. (Transcript vol. 6 at 858-859.) TURN, however, argues that this simply does not make sense, and notes that Calpine could not identify a single instance of any generator shutting down and dismantling a modern combined cycle gas turbine unit in the United States for economic reasons. (TURN Opening Brief at 4-5.) TURN's witness Woodruff noted that other approaches would make more sense:
Even if the short-term operating economics are unfavorable, Woodruff explains that Calpine has a variety of options including asset sales or temporary shutdown. The notion that Calpine would physically dismantle these units, which is the basis of their request, is simply not credible. (Id. at 5.)
Even if we give Calpine the benefit of the doubt on every point, and assume that there is a real risk of the permanent shutdown of a significant quantity of modern combined cycle power plants, it is not clear that Calpine's proposed solution is an appropriate response. Calpine proposes that the utilities be required to engage in a solicitation defined so narrowly that Calpine could be the only bidder. (TURN Opening Brief at 4.) This approach would likely result in Calpine extracting a premium price from the ratepayers of the IOUs. (Id.)
Calpine may be correct that there is some level of market failure in the California electricity markets. The current hybrid market structure is an artifact of the ill-fated restructuring of the California electricity markets under Assembly Bill (AB) 1890 and the subsequent California energy crisis, and it is neither elegant nor efficient. Nevertheless, Calpine has failed to show that the specific problem it is complaining about is as imminent or dire as it claims, and it has failed to show that the specific solution it proposes is reasonable. Accordingly, we decline to adopt Calpine's proposal.
7 Motion For Expedited Suspension Of Track 1 Schedule, And For Approval Of Settlement Agreement Between And Among Pacific Gas And Electric Company, Southern California Edison Company, San Diego Gas & Electric Company, The Division Of Ratepayer Advocates, The Utility Reform Network, Green Power Institute, California Large Energy Consumers Association, The California Independent System Operator, The California Wind Energy Association, The California Cogeneration Council, The Sierra Club, Communities For A Better Environment, Pacific Environment, Cogeneration Association Of California, Energy Producers And Users Coalition, Calpine Corporation, Jack Ellis, Genon California North LLC, The Center For Energy Efficiency And Renewable Technologies, The Natural Resource Defense Council, NRG Energy, Inc., The Vote Solar Initiative, And The Western Power Trading Forum.
8 Rule 12.1(d) states: "The Commission will not approve settlements, whether contested or uncontested, unless the stipulation or settlement is reasonable in light of the whole record, consistent with law, and in the public interest."
9 While the focus of this proceeding extends out to 2020, it is important to note that the record similarly does not support a finding of need for additional generation beyond 2020. Accordingly, it is also reasonable to defer procurement of generation for any estimated need after 2020.
10 We note that Calpine filed a notice with the Commission under GO 167 on 11/22/11, stating that it intended to retire its Sutter Energy Center generation plant in 2012. Draft Resolution E-4471 orders Calpine not to retire the Sutter plant. http://docs.cpuc.ca.gov/word_pdf/COMMENT_RESOLUTION/157581.pdf.
