III. Regulatory Goals and Interagency Collaboration

The three service territories of the respondent utilities account for approximately 80% of California's electricity usage, placing the procurement issues before us here at the forefront of the state's energy agenda:

"California is a diverse and vibrant society. The fifth largest economy in the world, California's population is expected to exceed 40 million by 2010. California's economic prosperity and quality of life are increasingly reliant upon dependable, high quality, and reasonably priced energy. Following the biggest electricity and natural gas crisis in its history, the state is well aware of the need for stable energy markets, reliable electricity and natural gas supplies, and adequate transmission systems. Looking forward, it is imperative that California have reasonably priced and environmentally sensitive energy resources to support economic growth and attract the new investment that will provide jobs and prosperity throughout the state." (Energy Action Plan.)

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 (§ 451), with § 701 giving the Commission power to undertake all necessary actions to properly regulate and supervise California's investor-owned utilities. Our ability to fulfill this mandate was challenged in the energy crisis of 2000 and 2001, both by reliability alerts that included rolling blackouts and by extreme price volatility (i.e., price spikes) in the wholesale price of natural gas and electricity. The crisis led to substantial rate increases for utility customers, financial turmoil for the utilities, their investors, and their creditors, and for two years, from January 2001 through December 2002, the state assumed the utilities' responsibilities for procuring power for customers.

From this crucible of experience, the Commission, the legislature, interested parties, and the public have closely examined market structure issues and questioned the means by which the utilities plan for and acquire energy resources, and the means by which the utilities obtain cost approval and cost recovery for their acquired energy resources. This proceeding is where the Commission has addressed these issues, within the regulatory framework provided by the 2002 legislature in AB 57, and been able to return the utilities to their full procurement responsibilities on January 1, 2003.

AB 57 and SB 1976, codified in Pub. Util. Code § 454.5, provides a regulatory procurement framework for the Commission that (1) requires each utility to prepare and file a procurement plan that meets specified requirements;⁸ (2) provides the criteria by which the Commission should review and either adopt, modify, or reject each utility's plan; (3) eliminates the need for after-the-fact reasonableness reviews of utility actions in compliance with an approved plan; (4) ensures timely recovery of prospective procurement costs incurred pursuant to an approved plan; and (5) requires that an approved plan enable the utility to fulfill its obligation to serve its customers at just and reasonable rates, with such just and reasonable rates to include an appropriate balancing of price stability and price level.

In 2002, we adopted 2003 short-term procurement plans for each utility under the AB 57 regulatory framework, recognized the need for the utilities to procure reserves on behalf of their customers' needs, and directed each utility to undertake an integrated resource planning effort, based on a 20-year time horizon, to include procurement from a mixture of different sources with various environmental, cost, and risk characteristics. At the February 18, 2002 PHC, as well as in the Energy Action Plan, we emphasized that in making plans to procure a mixture of resources, the utilities should take into account the Commission's longstanding procurement policy priorities - reliability, least cost, and environmental sensitivity; we also stated the Commission's policy preference that resource adequacy be met first through cost-effective energy efficiency programs, other cost-effective demand reduction programs, and cost-effective renewable resources.

In 2003, we carefully reviewed the long-term plans each utility filed, and focused on key policy issues of resource adequacy and market structure. We have reached out in partnership to other agencies, recognizing that common goals exist and can best be met by coordinated action. The ISO is an active participant in this proceeding, and we will rely on their continued involvement in future proceedings. Their analysis and expertise in electricity grid operations and wholesale electricity markets is especially beneficial in setting reliability standards, monitoring and reporting of planning reserve levels, and transmission grid assessment. The CEC and CPA, partners with the Commission in the Energy Action Plan, also contribute their considerable resources and expertise to our record, and we join with them in pursuing our goal to:

"Ensure that adequate, reliable, and reasonably-priced electric power and natural gas supplies, including prudent reserves, are achieved and provided through policies, strategies, and actions that are cost-effective and environmentally sound for California's consumers and taxpayers." (Energy Action Plan.)