X. Assignment of Proceeding
Michael R. Peevey is the Assigned Commissioner and Christine M. Walwyn is the assigned Administrative Law Judge in this proceeding.
1. For 2004 only, it is reasonable for the utilities to procure resources sufficient to ensure that they meet their peak demand plus appropriate operating reserves.
2. The level of the operating reserve margin is determined by the Western Electricity Coordinating Council and is approximately 7% of peak demand.
3. Based on their filings, it appears that the utilities' planning reserve margins for 2004 are significantly above 7%.
4. The 5% of monthly need target on spot market purchases from D.02-10-062 provides a balance between procurement flexibility and reliability and it is reasonable to continue to require the utilities to justify a higher level.
5. The utility's short-term focus in the planning and procurement process should be on measuring the price risk exposure of its open portfolio position and managing that position, within a specified range of the consumer risk tolerance level, in a manner that ultimately leads to the procurement and dispatch of power in a least-cost manner.
6. SCE is in the process of developing a proprietary in-house model which it states can report TeVaR (To Expiration Value at Risk) to measure and report portfolio risk, and SCE is willing to have this model validated by an independent source.
7. Model validation will confirm that the Commission requirements for transparency, accuracy, and standardization in risk reporting are met.
8. The VaR approaches proposed by PG&E and SDG&E are appropriate for measuring and reporting portfolio risk.
9. The VaR product is a staple of the financial industry, used to provide a quick and succinct "snapshot" of the worst-case scenario for portfolio loss or exposure.
10. 99th percentile portfolio risk reporting will provide additional price volatility information without unduly burdening the IOUs or the PRGs.
11. The Commission's risk reporting policy is guided by TURN's testimony that risk management standards should seek to protect bundled ratepayers against highly unlikely events.
12. The Commission has three primary oversight responsibilities in short-term risk management policy: (1) to specify the interim level of CRT; (2) to make sure each IOU has accurate and transparent tools in place to measure ratepayer risk exposure; and (3) to review and adopt utility procurement plans.
13. It is appropriate for the utilities to enter into contracts of up to five years in term to meet needs occurring in 2004.
14. Utilities should not lock in resources that would preclude Commission action in the long-term phase of this proceeding for the preferred resources identified in the "loading order" of the EAP.
15. It is beneficial to authorize specific procurement products and transaction types.
16. Negotiated bilateral transactions lack transparency and are more appropriately restricted to limited circumstances.
17. Today, the three utilities have all successfully resumed full procurement and the financial prognosis for PG&E is much improved. SCE has regained its investment grade credit rating, a fact that may be officially noticed.
18. In assessing the utilities' financial capabilities, the Commission considers issues which affect capital structure in tandem with those affecting immediate cash needs.
19. There are elements of credit risk related to collateral issues which transcend cash requirements.
20. It is essential to balance the cost of collateral against the risk of counterparty default.
21. The Commission has authorized PG&E, SCE and SDG&E to serve as limited agents for DWR for fuel management services associated with DWR long-term contracts.
22. PG&E, SCE and SDG&E's inherent responsibilities in managing and procuring for an integrated DWR/URG portfolio, subject to the requirements of least-cost dispatch, means that portfolio segregation is not possible.
23. Article 14.4 of PG&E's Servicing Order addresses conditions for force majeure, stating that any insolvency event shall not constitute force majeure.
24. It is appropriate for each utility to review market conditions relative to fuel and power price forecasts on a quarterly basis with its PRG and to file plan updates if the plan does not adequately capture current market conditions.
25. In its short-term plan, SCE does not use the pro rata cost allocation of DWR contracts adopted in D.02-09-053, and confirmed in D.02-12-045 and D.02-12-069.
26. It is beneficial to continue the PRG process through the end of 2004.
27. As SCE has modeled a cost allocation methodology not authorized by the Commission, its short term plan may include `skewed" measures of procurement cost and portfolio risk relative to estimates under the Commission-approved pro rata cost allocation.
28. Modeling based on cost allocation methodologies not approved by the Commission undermines the principle of transparency, on which the Commission's procurement policy is based.
29. There is no record in this proceeding on methodologies for cost allocation of the DWR contracts, nor have other parties had an opportunity to be heard on this issue; therefore the appropriate forum for revisiting this methodology is the 2004 DWR revenue requirement proceeding.
30. There are about 600 Qualifying Facilities (QFs) under contract to PG&E, SCE, and SDG&E. These QFs supply power used to serve about one-fourth of the combined retail load for the three utilities.
31. In light of the continuing need for most of the power that QFs currently provide, and the short-term focus of this decision, the IOUs should renegotiate expiring or expired contracts with existing QFs to cover calendar year 2004.
32. The IOUs should not enter into any new QF contracts with new QF facilities during the short interim period in which we shall be evaluating how the QFs will fit into the IOUs' procurement planning processes on a long-term basis.
33. In this decision we authorize only the overall funding levels for procurement energy efficiency programs. We refer program specific review and approval, including required programmatic or budgetary modifications to utility procurement program proposals, to the Energy Efficiency Rulemaking 01-08-028 where the Commission will select a balanced portfolio of utility and non-utility energy efficiency programs for 2004 and 2005.
34. SDG&E's proposed non-bypassable charge approach for funding procurement energy efficiency provides a simple to understand, fair, and expeditious mechanism for providing utilities cost-recovery for procurement related energy efficiency activities.
35. It is appropriate to refer the issue of energy efficiency incentives to R.01-08-028 and demand response incentives to R.02-06-001, for disposition in those rulemakings. Future activities on all incentive mechanisms should be closely coordinated among all relevant proceedings, through the assigned ALJs and Commissioners hosting joint workshops or other similar mechanisms.
36. Demand response, like energy efficiency, is a demand-side resource for the utilities. While energy efficiency resources can often meet baseload procurement needs, demand response can fill on-peak requirements.
37. In D.02-10-062, we directed that the demand response targets adopted in R.02-06-001 should be integrated into the utilities' procurement plans.
38. In D.03-06-032, the Commission adopted demand response goals for each utility and directed that the IOUs include the MW targets for calendar years 2003 through 2007 in their procurement plans, specifically stating the filings in this proceeding should include: numeric targets coinciding with the findings in this decision; documentation of the amount of demand response (price-triggered) to be achieved by July 1 of each calendar year (with the exception of 2003, where the goals shall be met by the end of the calendar year); which programs and/or tariffs the IOU will rely upon to achieve the targets; and a contingency plan for covering capacity needs should the utility fall short of meeting the demand response goals.
39. Funding for price-responsive demand response programs is also addressed in D.03-06-032.
40. One goal of the RPS program is to foster a long-term market for renewable energy by providing contracts of 10 or more years. We do not find that PG&E's proposed short-term solicitation adheres to this principle.
1. The Commission's legislative mandate is to ensure that all utility customers receive reliable service at just and reasonable rates, as specifically stated in Pub. Util. Code § 451 with § 701 giving the Commission power to undertake all necessary actions to properly regulate and supervise California's investor-owned utilities.
2. AB 57 and SB 1976, codified in Pub. Util. Code § 454.5, provides a regulatory procurement framework for the Commission.
3. As required by Pub. Util. Code Section 454(b)(1), an electrical corporation's proposed procurement plan shall include an assessment of the price risk associated with the electrical corporation's portfolio.
4. Under AB 57, the Commission must assure that each electrical corporation optimizes the value of its overall supply portfolio for the benefit of its bundled service customers.
5. As specified in D.02-12-074 the utilities should analyze portfolio risk based on a probability distribution of risk factors.
6. Portfolio risk should be reported using TeVaR.
7. Standardized risk reporting is important in order to measure ratepayer risk.
8. Risk reporting should be a "roadmap," alerting the Commission to the relative risk in different time periods.
9. Under Pub. Util. Code Section 454.5, the Commission must assess the price risk associated with each utility's portfolio, ensure the utility has moderated its price risk, and ensure that the adopted procurement plan provides for just and reasonable rates, with an appropriate balancing of price stability and price level.
10. The Commission should authorize the utilities to continue to use the interim consumer risk tolerance level adopted in D.02-12-074.
11. Negotiated bilateral transactions should be separately reported in the utilities' quarterly compliance filings.
12. For transactions of greater than 90 days, the utilities should consult with the PRG.
13. In D.03-06-076, the Commission found that the ban on affiliate transactions was properly noticed, jurisdictional, constitutional, violated no federal laws, and the record supported the need for a moratorium on utility procurement from its own affiliates until adequate safeguards are fashioned.
14. D.03-06-076 sustained Standard of Behavior 1.
15. Where there are five or fewer counterparties in the relevant market, we should authorize the use of negotiated bilaterals for standard products for two categories of gas products cited by SCE: gas storage and pipeline capacity.
16. Each utility should update its fuel and power forecasts and submit updated loads/resource capacity and energy balance tables and residual net open estimates within 30 days from the effective date of this decision by compliance acquire letter.
17. Each utility should meet and confer with its PRG on a quarterly basis.
18. Commission approval of the utilities' Procurement Plans does not preclude the need for DWR to conduct after-the-fact reasonableness reviews.
19. QFs in operation and under contract to provide power to an IOU at any point between January 1, 1998 and the present date, whose contracts are set to expire before January 1, 2005, should be afforded interim treatment, consistent with that provided in D.02-08-071.
20. The Commission should carefully consider how to modify the SRAC methodology and whether to seek legislative changes to Section 390.
21. We do not have an adequate record on which to adopt an energy efficiency incentive.
22. Consistent with the July 3, 2003 Assigned Commissioner's Ruling in R.01-08-028, we should authorize utility procurement energy efficiency budgets for the two-year period 2004 and 2005.
23. We should authorize procurement energy efficiency budget levels for the utilities for 2004 and 2005 as follows: PG&E - $25 million for 2004 and $50 million for 2005; SCE - $60 million for 2004 and $60 million for 2005; SDG&E - $25 million for 2004 and $25 million for 2005.
24. Consistent with our desire to proffer a uniform energy efficiency portfolio, the Commission should evaluate and select utility 2004 and 2005 procurement energy efficiency proposals using both the selection process and primary and secondary selection criteria adopted in D.03-08-067.
25. Respondent utilities should establish a one-way Procurement Energy Efficiency and Balancing Account (PEEBA) to track the costs and revenues associated with authorized programs in this proceeding. Costs associated with these accounts should be submitted simultaneously with utility monthly ERRA filings to the Energy Division for review on a monthly basis.
26. In their future demand forecasts utilities should include expected energy savings from non-utility programs that operate in their service territories.
27. PG&E's demand reduction proposal should be adopted.
28. SCE's new ACCP programs and its funding request need to be reviewed in R.02-06-001 or its successor demand response rulemaking.
29. IOUs will file separate renewable procurement plans pursuant to Pub. Util. Code § 399.14(a)(3), thus the 2004 procurement plans currently under consideration do not constitute a filing of the required renewables plans.
30. Our approval of the 2004 procurement plans today does not "trigger" an RPS solicitation as detailed in D.03-06-071.
31. PG&E's request for an interim all-in benchmark of 5.37 cents per kWh for renewables should not be adopted.
32. PG&E's request for one-year renewables contracts should be denied; attention should focus instead on progress towards a full RPS solicitation in early 2004.
33. All renewables contracts must be filed for approval by the Commission by Advice Letter filing as required by D.03-06-071 and the ACR.
34. Energy Division should, in consultation with each utility and its PRG, select an outside auditor to review and verify the quarterly compliance filings, and the audit expenses should be paid by the utilities and recorded in a memorandum account. A resolution for the Commission's agenda should only be prepared if Energy Division or the outside auditor find transactions or procurement practices that are not in compliance with the adopted plans.
IT IS ORDERED that:
1. We adopt short-term procurement plans, consistent with the terms of this decision, under which Pacific Gas and Electric Company (PG&E), San Diego Gas & Electric Company (SDG&E), and Southern California Edison (SCE) will operate in 2004. PG&E, SDG&E and SCE may begin transacting business under these approved plans as of the effective date of this decision.
2. PG&E, SCE, and SDGE shall undertake risk reporting using To Expiration Value at Risk (TeVaR), measured on a 12-month rolling basis, at a 99 percent confidence level.
3. We adopt the provisional use of SCE's model, subject to the model verification steps outlined in this decision.
4. PG&E, SCE and SDG&E shall file monthly portfolio risk reports with the Energy Division in 2004, and shall file quarterly reports in 2005.
5. We adopt PG&E's proposal for risk notification, consistent with the discussion in this decision.
6. As part of our approval of short-term plans, we authorize the utilities to enter into contracts with terms up to five years for procurement transactions with delivery beginning in 2004.
7. Utilities are authorized to enter into procurement transactions using the methods approved in this decision.
8. Until further notice, the parties shall abide by the affiliate transactions prohibition, as specified in Decision (D.) 02-10-062 and D.03-06-076.
9. PG&E's request for relief from responsibility to hedge gas on behalf of DWR to the extent that it's collateral requirements associated with such hedges, in combination with other procurement-related collateral requirements would exceed PG&E's ability to provide such collateral, is denied.
10. When extending unsecured credit limits to non-investment counterparties, the utilities shall explore the use of credit mechanisms such as parent company or third party guarantees, letters of credit, surety bonds, and similar mechanisms.
11. When extending unsecured credit limits to non-investment counterparties, the utilities' credit assessment shall rely on master agreements with special parent or guarantor provisions for posting collateral and for assuring continuity of service.
12. Each investor-owned utilities (IOU) shall update its short-term plan by compliance advice letter within 30 days from the effective date of this decision to reflect more recent fuel price forecasts and resulting changes to the loads/resource capacity and energy balance tables and residual net open estimates. The update shall incorporate renewables procurement activity from 2003 and subsequent changes to the quantity of renewable energy delivered in 2004. Each IOU shall meet this requirement by furnishing updated tables to its short-term plan in its compliance advice letter filing (resubmission of all of the entire plan is not required).
13. SCE shall amend its short-term plan and model its procurement costs and estimate portfolio risk based on the pro rata allocation approved by the Commission in its prior orders.
14. QFs in operation and under contract to provide power to an IOU at any point between January 1, 1998 and the present date, whose contracts are set to expire before January 1, 2005, shall be afforded interim treatment, consistent with that provided in D.02-08-071.
15. Consistent with the Assigned Commissioner's Ruling in R.01-08-028, we hereby authorize utility procurement energy efficiency budgets for the two-year period 2004 and 2005.
16. The specific procurement products and transaction methods enumerated in this decision are hereby authorized.
17. PG&E's demand reduction proposal is adopted.
18. SCE's new Airconditioning Cycling Programs and its funding request are not approved, but must be reviewed in the context of the Commission broader demand response efforts in R.02-06-001.
19. PG&E and SCE's joint petition to modify D.02-10-062 to extend the due date of the Quarterly Procurement Plan Compliance Reports from within 15 days of the end of the quarter to within 30 days of the end of the quarter, is granted, to the extent consistent with the discussion in this decision.
20. In consultation with each utility and its Procurement Review Group, Energy Division will select an outside auditor to review and verify the quarterly compliance filings, and the audit expense shall be paid by the utilities and recorded in a memorandum account. This process requires a resolution only in the event that the outside auditor finds transactions or procurement practices that are not in compliance with the adopted plans.
21. Respondent utilities shall establish a one-way Procurement Energy Efficiency and Balancing Account to track the costs and revenues associated with authorized programs in this proceeding. Costs associated with these accounts shall be submitted simultaneously with utility monthly Energy Resource Recovery Account filings to the Energy Division for review on a monthly basis. Within 20 days of the effective date of this decision, utilities shall file advice letters establishing the methodology and surcharge rate for incremental procurement energy efficiency programs for Program Year 2004 and 2005.
22. The motion to intervene of the Ratepayers for Affordable Green Energy is granted, to the extent specified in this decision.
23. The motion to intervene of Constellation NewEnergy, Inc. is granted, to the extent specified in this decision.
24. Each utility should file a compliance advice letter within 30 days describing its revised short-term plan conforming to this decision.
This order is effective today.
Dated December 18, 2003, at San Francisco, California.
MICHAEL R. PEEVEY
President
CARL W. WOOD
LORETTA M. LYNCH
GEOFFREY F. BROWN
SUSAN P. KENNEDY
Commissioners
I will file a concurrence.
/s/ LORETTA M. LYNCH
Commissioner
CONCURRING OPINION of Commissioner Loretta M. Lynch:
Today's decision bifurcates the utilities' short- and long-term procurement plans and addresses only the short-term plans. My original alternate decision was intended to do just this and I am pleased that the decision we vote out today is now consistent with my alternate on this two-step procurement approach. However, I disagree with the decision of the majority today to continue the Procurement Review Group, or PRG, for the coming year in those short-term plans.
The PRG is an exclusive group of non-market participants, like other state agencies and some consumer groups, that has reviewed utility procurement decisions before they come to this Commission for approval. The PRG's initial purpose was to create a process for rapid review of the utilities' initial procurement efforts at the end of 2002 as the utilities prepared to resume their traditional procurement role and the State exited power procurement. Now, the PRG has out-lived its intended purpose. In effect, the PRG has substituted for an open and transparent procurement review process at this Commission with appropriate due process and an opportunity for notice and comment for all parties, as required by law and the rules of this Commission. Moreover, the secrecy inherent in the PRG process precludes the legislature and the press from ever knowing what is happening and how ratepayer monies are being committed before the Commission votes. On balance and in deference to the need for open procurement processes at the Commission, I believe it is not beneficial to continue the PRG process. The Commission could have encouraged the utilities to continue to have a regular dialogue with Commission staff and interested parties on an ongoing basis. But with the PRG remaining in place, I do not believe the Commission will move toward a more open and transparent procurement review process, which is needed as soon as possible.
I would also like to speak to the portion of this decision that is not addressed today. There are many complicated aspects of the long-term plans that were under consideration in the original proposed decision and various alternate decisions and I encourage the Commission to take the time to get these right. It is not enough to put the long-term decision off a few weeks because we did not get it done before the holidays. The long-term decisions need more work and deliberation, as well as public input, before we act.
As one example, the Commission intends to make decisions on the appropriate reserve level for a resource adequacy requirement and then afterward hold a workshop to figure out how such a requirement will actually work and what the appropriate data are. It makes more sense to hold the workshops first so that the Commission understands the issues at hand and can then decide how to move forward. Many parties agreed that more workshops on a wide array of subjects in the long-term plans are necessary before reaching decisions on many of these matters. I encourage the assigned commissioner to not wait for a decision on the issues within the long-term plans but to get the workshops started through a ruling. If we start now, we can tackle the long-term issues in this coming year and create a viable long-term utility procurement structure. If we rush forward, particularly in establishing a steep reserve requirement for the utilities, we will shift the wholesale market from a buyer's market to a seller's market with one regulatory action. Decisive action is necessary to provide procurement direction to California's utilities. But we
should not repeat the mistakes of AB 1890 by rushing into that action assuming we know the correct course.
Therefore, I concur.
Dated December 18, 2003, San Francisco, California.
/s/ LORETTA M. LYNCH |
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LORETTA M. LYNCH |
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Commissioner |
