2. Background

2.1 The RAR Framework

Since 2002, in the aftermath of the electricity crisis of 2000-2001, California has wrestled with the creation of resource adequacy requirements. Several of the bodies having responsibility for reliable electric service in California have addressed RAR policies for this state, including this Commission, the California Independent System Operator (CAISO), the California Energy Commission (CEC), and the Federal Energy Regulatory Commission (FERC). To date, the process has yielded a determination that California, led by this Commission, should develop these requirements for IOUs, energy service providers (ESPs), and community choice aggregators (CCAs) (collectively, load-serving entities or LSEs) under our jurisdiction. This decision continues our effort to do so in a manner that recognizes the realities of California's existing hybrid market structure.

Among other things, D.04-01-050 adopted key policies for RAR that are applicable to the IOUs as well as to ESPs and CCAs operating within their service territories. The Commission described the concept of resource adequacy and the role of RARs as follows:

"Resource procurement traditionally involves the Commission developing appropriate frameworks so that the entities it regulates will provide reliable service at least cost. This involves determining an appropriate demand forecast and then ensuring that the utility either controls, or can reasonably be expected to acquire, the resources necessary to meet that demand, even under stressed conditions such as hot weather [footnote omitted] or unexpected plant outages. `Resource adequacy' seeks to address these same issues. In developing our policies to guide resource procurement, the Commission is providing a framework to ensure resource adequacy by laying a foundation for the required infrastructure investment and assuring that capacity is available when and where it is needed." (D.04-01-050, pp. 10-11.)

D.04-01-050 adopted the following RAR policies, applicable to the LSEs:

(1) Each LSE within an IOU's service territory has an obligation to acquire sufficient reserves for its customers' load located within that service territory.

(2) Each LSE is subject to a planning reserve margin (PRM) requirement of 15-17% for all months of the year. Each LSE must meet this obligation no later than January 1, 2008 through a gradual phase-in, with interim benchmarks becoming effective in 2005.

(3) Each LSE must forward contract 90% of its summer (May through September) peaking needs (loads plus planning reserves) a year in advance, subject to adjustment if implementation would result in significantly increased costs or foster collusion and/or the exercise of market power in the Western energy markets.

(4) The 5% target limitation on utilities' reliance on the spot market (i.e., Day-Ahead, Hour-Ahead, and Real-Time energy) to meet their energy needs is continued in effect.

(5) The Commission reiterated its commitment that full value be given to the preferred resources identified in the California Energy Action Plan and to the long-term California Department of Water Resources (DWR) contracts.

2.2 Implementing the RAR Framework

2.2.1 Workshops

The principal task at hand is to give effect to the RAR policy framework that we adopted in D.04-01-050. Bearing in mind the critical importance of a reliable electric grid to the well-being of Californians, we intend to implement a comprehensive RAR program during 2005. This requires resolution of several technical, methodological, definitional, and procedural issues. Many of these issues were considered in a series of 11 workshops on load forecasting protocols, resource counting conventions, and other issues, including deliverability.³ These workshops were conducted by ALJ Michelle Cooke from March 16 to May 26, 2004. The Workshop Report on Resource Adequacy Issues (Workshop Report) prepared by ALJ Cooke was issued on June 15, 2004 and served on parties in R.01-10-024 as well as parties in this proceeding. The Workshop Report is included with this decision as Attachment A.

The June 4, 2004 Assigned Commissioner's Ruling and Scoping Memo (Scoping Memo) for this proceeding provided for comments and replies on the Workshop Report, and further stated that these would provide the record for an initial decision on resource adequacy issues by the end of the Summer of 2004. (Scoping Memo, p. 5.)

2.2.2 Additional Issues

The July 8, 2004 Administrative Law Judge's Ruling Requesting Additional Comments on Resource Adequacy Issues (July 8 Ruling) observed the following regarding the target date for full implementation of the 15-17% planning reserve requirement:

"In an April 28, 2004 letter to President Michael Peevey, Governor Schwarzenegger indicated that the `Commission's phase-in date [for resource adequacy] of 2008 is too slow.' President Peevey's response, also dated April 28, concurred with the Governor's assessment and indicated that the phase-in `needs to be accelerated to ensure system reliability.' The Joint Opening Statement of President Peevey and Commissioner John Geesman of the California Energy Commission at the April 30 prehearing conference indicated that `we will look closely not only at refinement of the existing requirements, but also their acceleration as requested by the Governor.'"

The July 8 Ruling went on to provide notice that in this initial decision on resource adequacy issues, the Commission may address the proposed acceleration of the reserve requirement. It invited comments and replies on accelerating the phase-in of the full planning reserve margin from January 1, 2008 to June 1, 2006. Parties were also invited to comment on how the year-round 15%-17% reserve requirement and the seasonal 90% forward contracting requirement that was also adopted in D.04-01-050 interact.

Finally the July 8 Ruling noted that a June 17 FERC order⁴ on a CAISO market design proposal rejected a proposed day-ahead must-offer proposal based on the premise that a day-ahead must-offer would not be necessary if the LSEs are resource adequate. Noting that this Commission's resource adequacy requirements and CAISO Market Design must work together, the ruling requested comments on whether future Commission-approved contracts intended to comply with resource adequacy requirements should include terms and conditions requiring that resources secured to meet the LSE's resource adequacy requirement be available to LSEs to schedule in the day-ahead time frame.

2.2.3 Comments

A total of 24 parties, including the respondent IOUs, filed comments and/or replies in response to the Scoping Memo and the July 8 Ruling.⁵ The following table identifies these parties and the short titles used to refer to them in this decision. It also indicates whether each party filed comments on the Workshop Report ("Workshop Comments" filed July 13, 2004), replies to those comments ("Initial Replies" filed July 27, 2004), comments in response to the July 8 Ruling ("Additional Comments" filed July 22, 2004), and replies to those comments ("Additional Replies" filed July 29, 2004).

³ The workshops were held pursuant to the February 13, 2004 Assigned Administrative Law Judge's Ruling (ALJ) on the Scope and Schedule of Resource Adequacy Workshops (February 13 Ruling) issued in Rulemaking (R.) 01-10-024, the predecessor of the instant proceeding. The order instituting this rulemaking (OIR) explicitly provided that this is the successor proceeding to R.01-10-24 and that the record in that proceeding is fully available for consideration in this proceeding. (OIR, p. 25, Ordering Paragraph 3.) ⁴ See 107 FERC 61,274. ⁵ Consistent with earlier practice as permitted by this Commission, DWR submitted comments and replies by memorandums from its California Energy Resources Scheduling unit.