5. RPS Program Background

5.1. The RPS Program Requires Each Utility to Increase the Amount of Renewable Energy in Its Portfolio

The California RPS Program was established by Senate Bill (SB) 1078, effective January 1, 2003. It requires that a retail seller of electricity, such as SCE, purchase a certain percentage of electricity generated by Eligible Renewable Energy Resources (ERR). The RPS Program is set out at Pub. Util. Code §§ 399.11 et seq.⁶ Each utility is required to increase its total procurement of ERRs by at least 1 percent of annual retail sales per year so that 20 percent of its retail sales are supplied by ERRs by 2017.

The State's Energy Action Plan (EAP) called for acceleration of this RPS goal to reach 20 percent by 2010.⁷ This position was reiterated again in Order Instituting Rulemaking (R.) 04-04-026 issued on April 28, 2004, which encouraged the utilities to procure cost-effective renewable generation in excess of their RPS annual procurement targets⁸ (APTs), in order to make progress towards the goal expressed in the EAP.⁹ On September 26, 2007, Governor Schwarzenegger signed SB 107,¹⁰ which officially accelerated the State's RPS targets to 20 percent by 2010.

5.2. Commission Has Established Procurement Guidelines for the RPS Program

In response to SB 1078, the Commission has issued a series of decisions that establish the regulatory and transactional parameters of the utility renewable procurement program. On June 19, 2003, the Commission issued its "Order Initiating Implementation of the Senate Bill 1078 Renewables Portfolio Standard Program," D.03-06-071. Instructions for utility evaluation (known as "least cost best fit") of each offer to sell products requested in an RPS solicitation were provided in D.04-07-029. The Commission adopted standard terms and conditions for RPS power purchase agreements in D.04-06-014 as required by § 399.14(a)(2)(D). In addition, D.06-10-050, as modified by D.07-03-046, refined the RPS reporting and compliance methodologies.¹¹ In that decision, the Commission established methodologies to calculate an LSE's initial baseline procurement amount, APT and incremental procurement amount (IPT).¹²

On June 9, 2004, the Commission adopted in D.04-06-025, its Market Price Referent (MPR) methodology for determining the utility's share of the RPS seller's bid price, as defined in §§ 399.14(a)(2)(A) and 399.15(c). On December 15, 2005, the Commission adopted D.05-12-042 which refined the MPR methodology for the 2005 RPS Solicitation. Subsequent resolutions adopted MPR values for the 2005, 2006, and 2007 RPS Solicitations.¹³

In addition, the Commission has implemented § 399.14(b)(2), which states that before the Commission can approve an RPS contract of less than ten years' duration, the Commission must establish "for each retail seller, minimum quantities of eligible renewable energy resources to be procured either through contracts of at least ten years' duration (long-term contracts) or from new facilities commencing commercial operations on or after January 1, 2005." On May 3, 2007, the Commission approved D.07-05-028, which established a minimum percentage of the prior year's retail sales (0.25 percent) that must be procured with long-term contracts or from new facilities in order for short-term contracts to be used towards RPS compliance.

5.3. The Commission Requires Certain Terms and Conditions in all RPS Power Purchase Agreements

On June 9, 2004, the Commission adopted standard terms and conditions for RPS power purchase agreements as required by § 399.14(a)(2)(D). Of the fourteen standard terms and conditions adopted in D.04-06-014, the Commission specified five that could be modified by parties, and nine that may not be modified or only modified in part. Two parties jointly filed a petition for modification of this decision and subsequently an amended petition for modification. The Commission granted relief in substantial part in D.07-11-025, the "Opinion on Amended Petition for Modification of Decision 04-06-014 Regarding Standard Terms and Conditions."

As a result of D.07-11-025, ten standard terms and conditions are modifiable and four are non-modifiable.¹⁴ The non-modifiable terms and conditions that must be in every RPS power purchase agreement include: Commission Approval, RECs and Green Attributes, Eligibility and Applicable Law. The Commission also required that pending advice letters with contracts which have not yet been approved or rejected should be amended to comply with D.07-11-025.

5.4. Above-MPR Costs Can now Be Recovered in Rates

Pursuant to SB 1078 and SB 107, the California Energy Commission (CEC) was authorized to "allocate and award supplemental energy payments" to cover above-market costs¹⁵ of long-term RPS-eligible contracts executed through a competitive solicitation.¹⁶ The statute required that developers seeking above-market costs apply to the CEC for SEPs.

The above-market cost recovery mechanism was reformed on October 14, 2007 when Governor Schwarzenegger signed SB 1036,¹⁷ which authorizes the Commission to provide above-MPR cost recovery through electric retail rates for contracts that are deemed reasonable. Above-MPR cost recovery has a cost limitation equal to the amount of funds that were accrued in the CEC's New Renewable Resources Account, which had been established to collect SEP funds, plus the portion of funds that would have been collected through January 1, 2012. In addition, pursuant to SB 1036, § 399.15(d)(2) provides that:

"The above-market costs of a contract selected by an electrical corporation may be counted toward the cost limitation if all of the following conditions are satisfied:

(A) The contract has been approved by the commission and was selected through a competitive solicitation pursuant to the requirements of subdivision (d) of Section 399.14.

(B) The contract covers a duration of no less than 10 years.

(C) The contracted project is a new or repowered facility commencing operation on or after January 1, 2005.

(D) No purchases of renewable energy credits may be eligible for consideration as an above-market cost.

(E) The above-market costs of a contract do not include any indirect expenses including imbalance energy charges, sale of excess energy, decreased generation from existing resources, or transmission upgrades."

The CEC and this Commission are currently working collaboratively to implement SB 1036, which has an effective date of January 1, 2008.

⁶ Subsequent statutory references are to the Public Utilities Code unless otherwise indicated.

⁷ The EAP was jointly adopted by the Commission, the California Energy Resources Conservation and Development Commission and the California Power Authority. The Commission adopted the EAP on May 8, 2003.

⁸ A Load Serving Entity's (LSE) APT for a given year is the amount of renewable generation an LSE must procure in order to meet the statutory requirement that it increase its total eligible renewable procurement by at least 1 percent of retail sales per year.

⁹ Most recently reaffirmed in D.06-05-039.

¹⁰ SB 107, Chapter 464, Statutes of 2006.

¹¹ D.06-10-050, Attachment A.

¹² The IPT represents the amount of RPS-eligible procurement that the LSE must purchase, in a given year, over and above the total amount the LSE was required to procure in the prior year. An LSE's IPT equals at least 1 percent of the previous year's total retail electrical sales, including power sold to a utility's customers from its California Department of Water Resources (DWR) contracts.

¹³ Respectively, Resolution E-3980, Resolution E-4049, and Resolution E-4110.

¹⁴ In D.08-04-009, the Commission compiled the standard terms and conditions into one document. In doing so, modifiable term and condition 3 (Supplemental Energy Payment (SEP) Awards, Contingencies) was deleted. The four non-modifiable terms and conditions were unchanged.

¹⁵ "Above-market costs" refers to the portion of the contract price that is greater than the appropriate MPR.

¹⁶ Section 399.15(d).

¹⁷ Chapter 685, Statutes of 2007.