4. Petitions for Modification of D.07-12-052
4.1. SCE and SDG&E's January 23, 2008 and PG&E's January 28, 2008 Petitions for Modification
The PFMs filed by SCE and SDG&E on January, 23, 2008 and PG&E on January, 28, 2008, address the treatment of debt equivalence (DE) in the evaluation of competitive bids in their solicitations. D.07-12-052 broke with the Commission's decision in the 2004 LTPP, D.04-12-048, and eliminated DE as a factor the IOUs could use in evaluating bids. The IOUs strongly urge the Commission to re-institute it as a bid evaluation factor.
SCE and SDG&E raise four points in support of their PFM. First, SCE and SDG&E suggest that DE is a real economic cost to the IOUs that should be considered in the bid evaluation process to avoid sub-optimal procurement contracting decisions. Furthermore, they argue that elimination of the use of DE adders in solicitations that include UOG bids does not address the identified problem with head-to-head competition. Their third point is that failure to consider DE in the contract selection process could potentially lead to a deterioration of an IOU's creditworthiness. Finally, they suggest that failure to consider DE with respect to the evaluation of replacement or repower contracts may violate state law [specifically, Pub. Util. Code § 454.5(c)].
PG&E raises three main points in its PFM in support of re-instituting DE as a bid evaluation tool: without the DE adder, there will be disparity in the bid evaluation process; eliminating consideration of DE violates Pub. Util. Code § 454.5(c); and there is no factual support for reversing past Commission decisions.
Two parties [IEP and the Cogeneration Association of California and the Energy Producers and Users Coalition (CAC-EPUC)] filed responses opposing SCE and SDG&E's PFM. Three parties filed responses opposing PG&E's PFM [IEP, the Western Power Trading Forum (WPTF) and CAC-EPUC], and SCE filed a response in support of PG&E's PFM.
Replies were filed by SCE and SDG&E and PG&E to the responses to their respective PFMs.
On May 20, 2008, the Administrative Law Judge (ALJ) issued a ruling requesting additional briefs and reply briefs to address five assumptions and six questions specifically related to DE. Opening briefs were filed June 20, 2008, and reply briefs were due July 18, 2008.
4.2. Independent Energy Producers Association's Petition for Modification
IEP's proposed modifications to D.07-12-052 seek to clarify the decision's discussion of UOG participation in head-to-head competition with privately-owned projects. IEP sees an inherent conflict in the IOU's "dual role of primary purchaser and potential supplier of electricity."1 However, IEP offers some suggestions to improve the hybrid market and prevent abuses where the IOU is both a supplier and a procurer of electricity in the same solicitation.
To begin, IEP discusses the fact that the Commission does not allow UOG projects to participate in competitive solicitations because the Commission has not developed "a fair, publicly-vetted comparison methodology."2 IEP then finds it inconsistent that the Decision does allow purchase and sales agreements (PSA) and EPCs to compete against IPP PPAs. IEP recommends that the Decision be modified to remove these inconsistencies. In addition, IEP finds that allowing EPCs and PSAs to compete against PPAs does not promote a hybrid market between the IOUs and the IPPs. IPPs are in the business of building, owning and operating power plants. However, under PSA and EPC models, outside companies build the plants, but then the IOU owns and operates the facilities. IEP questions whether the competitive solicitation process, when PSAs and EPCs are allowed to bid against PPAs, is merely a mechanism to select the construction contractor for IOU power plants.
IEP proposes removing the exception that allows for EPC contracts and PSA agreements. IEP offers to work with the Commission to develop a fair, publicly-vetted comparison methodology for making evaluations between IPP bids and UOG proposals (which from IEP's perspective includes PSAs and EPCs).
4.3. Competitive Market Advocates' Petition for Modification
CMA is concerned with the development of a competitive wholesale market structure for electricity. The focus of CMA's PFM is on modifying the decision so that new ratepayer funded UOG projects do not fill all of the IOUs' resource needs and unnecessarily complicate the transition to a competitive market. CMA suggests changing the following three conclusions in the decision regarding UOG projects:
1. The decision allows for head-to-head competition between bids for PPAs and bids for PSA or engineering, procurement and construction (EPC) contracts without fully explaining how a fair evaluation and comparison of bids for privately-owned and utility-owned resources can be made;
2. The decision allows for UOG projects outside of a solicitation if the utility believes the project is needed for reliability, but CMA is concerned that this could compromise the integrity of the resource adequacy (RA) requirements; and
3. The decision allows for UOG projects outside of a solicitation if the UOG project would expand an existing facility.
In summary, CMA fears that if these conclusions remain in the LTPP decision, IPPs will not have any interest in investing in California's generation resources and only the utilities, with ratepayer funding, will invest in new generation projects. According to CMA, that could be the end of the competitive market. To cure this deficiency, CMA asks the Commission to do the following:
1. Either eliminate the IOUs' ability to solicit any UOG (including PSAs and EPCs) in their solicitations3 or develop transparent evaluation criteria for comparing UOG and PPA bids; and
2. Eliminate the two new categories of circumstances under which the utilities may propose UOG projects, reliability and facility expansion, or clarify that these exceptions are only permitted in extraordinary circumstances.
SCE filed a response to CMA's PFM addressing the request to eliminate the two new categories for proposing UOG projects. SCE states that the authorization to the utilities to submit applications for approval of UOG projects, outside of a head-to-head solicitation, to address reliability concerns or to expand on existing facilities is well-reasoned, supported by the record, and good public policy for California. Specifically, SCE argues that allowing applications for UOG projects that address unique reliability issues is not a blank check to subvert the Commission's RA policies, and allowing applications for projects that expand existing facilities may promote the state putting forth innovative proposals that encourage reliability and protect the environment. In fact, SCE reminds parties that the decision requires the IOU to file an application for a UOG project, justify in the application why a competitive solicitation is not feasible and support the unique circumstances that justify this request. All interested parties have an opportunity to raise opposition to the application and to urge the Commission to deny the application if the new resource is not in the ratepayer and/or public interest.
PG&E, SDG&E, Division of Ratepayer Advocates (DRA) and The Utility Reform Network (TURN) (Joint Parties) filed a joint response to both CMA's PFM and IEP's PFM. In regards to CMA's request to eliminate PSAs and EPCs from competing in solicitations, Joint Parties argue that to grant this would be a complete reversal of the Commission's policy of encouraging a hybrid market until there is a competitive market. From the Joint Parties perspective, if CMA's requests were granted and UOG alternatives were eliminated from future solicitations, PPAs would be competing just against one another, without the "discipline that utility-owned cost-of-service-based projects can exert in such solicitations." Joint Parties believe that more competition, not less, will bring new resources and benefit ratepayers. As the Joint Parties suggest, there is no evidence that the hybrid market as currently designed is failing. In fact, Joint Parties reference the recent PG&E and SDG&E solicitations and discuss how many PPAs bid into the solicitations, creating a "robust" competitive process.
Both CMA and IEP discuss a "code of conduct" referenced in the Decision that would govern the relationships among employees within the utility as a precondition for the participation of UOG in competitive solicitations. CMA suggests that eliminating the IOUs ability to consider any type of UOG bid in their solicitations, including PSAs and EPCs, would remove any problems or inconsistencies with the code of conduct.
IEP, on the other hand, suggests developing the code of conduct in a public process subject to Commission approval. IEP notes that while the code of conduct is discussed in the decision, it is not included in the Findings of Fact (FOF), Conclusions of Law (COL) or Ordering Paragraphs (OP). IEP suggests in its PFM that this omission be addressed.
Joint Parties urge the Commission to defer the topic to the 2008 LTPP, R.08-02-007, and not "bog down the development of a code of conduct with additional process or to reopen the issue of the code of conduct now. . ."4 SCE urges the Commission to outright reject IEP's suggestions vis-à-vis a code of conduct, especially the suggestion that there could be a "one size fits all" code for all three utilities.5 SCE paraphrases the language from the Decision, and clarifies that the intent was that if a utility should choose to conduct a head-to-head solicitation, prior to launching it, the utility must develop an internal procedure for complying with the requirement that the utility not share information between employees involved with the development of the bid and the choosing of the bids.
SCE argues that there is no need for a uniform code of conduct universal to all IOUs, especially since (1) some utilities may not choose to allow head-to-head competition between UOG and IPP bids in their solicitations, and (2) some utilities already have their own code in place. Furthermore, SCE argues that if a code is needed, it would need to be tailored to each utility, and waiting until a code of conduct was in place could delay the process, to the disadvantage of ratepayers. Finally, even if a code was developed, SCE questions whether a public forum is the best way to accomplish the goal.
In summary, SCE asks the Commission to reject any amendments to D.07-12-052 on the code of conduct issue since (1) the utilities are not government entities subject to public review of their internal processes; (2) D.07-12-052 did not improperly delegate to the Energy Division (ED) review of the utilities internal processes; and (3) Rulemaking (R.) 08-02-007 has already signaled that it will give all interested parties an opportunity to propose refinements to the bid evaluation process.
4.4. Calpine Corporation's Petition for Modification
Calpine's PFM focuses on modifying and clarifying the language of D.07-12-052 to emphasize that the IOUs are not to exclude existing generation resources from IOU resource solicitations.
SDG&E and the Joint Parties [PG&E, TURN, SCE and DRA] filed responses. SDG&E argues that Calpine's PFM should be denied for the following reasons: the IOUs need new generation in their service territories and the utilities need flexibility in their RFOs to meet this need; the RA proceeding is addressing Calpine's concerns for just and reasonable compensation for existing energy and capacity; there is no compelling reason to ask the Commission to deviate from its current policy that allows the IOUs to tailor their RFOs; and D.07-12-052 provides safeguards to ensure that RFOs are fairly designed and conducted properly.
Joint Parties also urge the Commission to deny Calpine's PFM on the following grounds: the utilities need flexibility in designing their RFOs to meet specific needs; Calpine has made the same arguments before that the Commission rejected; there are procedural safeguards in place to ensure that the RFOs are properly designed; and generators will have ample opportunity to contract with utilities for energy and capacity and to be compensated. Joint Parties do not want the Commission to require that existing generation be allowed to participate in all RFOs.
4.5. SDG&E's June 9th, 2008 Petition for Modification
SDG&E's June 9th, 2008 PFM requests clarification of two issues: (1) what is the timing on SDG&E's authorization to procure additional local capacity resources (LCR) to address any local area reliability shortfalls between the time when the Sunrise Powerlink project (Sunrise) is approved (if it is approved) and when it is operational, and (2) whether an Independent Evaluator (IE) is required for short-term solicitations for RA capacity.
D.07-12-052 authorizes 530 MW of new local capacity, that includes 130 MW of already approved peakers, with the remaining 400 MW conditioned upon whether Sunrise is approved or not. If Sunrise is approved, D.07-12-052 found that SDG&E does not need the additional 400 MW. However, given the lag time between when a project is approved and the date it becomes operational, SDG&E is concerned that it may face a shortage of local area capacity in that time period that was unaccounted for in D.07-12-052.
Therefore, in this PFM, SDG&E requests authorization for up to 322 additional MWs (the amount of local capacity needed without Sunrise) beyond the 130 MW already approved to meet local reliability needs during the period between approval and the on-line date of Sunrise. SDG&E further states that any long-term contracts signed to meet this need will come before the Commission, thus the Commission will be able to ensure that only needed new capacity is being added.
SDG&E also requests clarification on the use of an IE for short-term RA capacity solicitations when an affiliate may be present among the bidders. D.07-12-052 requires that an IE be retained for all RFOs seeking products of more than three months in duration. SDG&E states that short-term RA capacity solicitations involve "standard local or system RA products where only a very limited set of factors is involved (local or system RA, amount, location and price),6 thus, minimal negotiation is involved and is based mostly upon these standard factors. Furthermore, all transactions are reported in the quarterly compliance filings, and if an affiliate is selected, the deal would be evaluated under affiliate transaction reporting. SDG&E therefore requests that short-term (from one month to one year) RA capacity transactions be exempt from the IE requirement even if an affiliate submits a bid.
There were no responses filed on SDG&E's PFM.
4.6. PG&E and SDG&E's June 13th, 2008 Joint Petition for Modification
PG&E and SDG&E request in their joint PFM that the IE requirements in D.07-12-052 be changed from requiring the retention of an IE for all RFOs that seek products greater than three months duration to all RFOs that seek products of two years or more in duration, using the definition of duration adopted in D.07-12-052. In solicitations where affiliate, IOU-built or IOU-turnkey bidders are present, an IE would be required regardless of the length of the contract term.
PG&E and SDG&E state that while the Commission's goal of ensuring an impartial bidding process is appreciated, the administrative burden and excess costs associated with retaining an IE for all products greater than three months, regardless of the presence of affiliate, IOU-built or IOU-turnkey bidders, is disadvantageous to the ratepayer. Furthermore, all RFOs with a product term greater than three months are reviewed by the procurement review group (PRG) and are reported in the quarterly compliance filings, thus non-market participants and Commission Staff have the opportunity to ensure the transparency and impartiality of the selection process.
SCE and WPTF filed responses. SCE generally supports PG&E and SDG&E's PFM; however, SCE offers two additional refinements: (1) SCE suggests that an IE requirement should be eliminated for all RFOs, regardless of product duration, if no affiliate products are sought, and (2) for RFOs that seek products of less than two years' duration, an IE should not be required unless and until the IE receives notice that an affiliate intends to participate.
WPTF opposes adoption of the PFM on the following grounds: (1) the PFM ignores the intent of the Commission to ensure a fair, competitive procurement process free of real or perceived conflicts of interest, (2) much of utility procurement, including summer peaking procurement, falls into the three month to two year category, and the use of an IE is likely to reduce processing time, including litigation, and (3) the proposal is premature given that all parties have not had sufficient time utilizing the new standards to draw definitive conclusions about price increases and time delays caused by the retention of an IE for shorter-term solicitations.
1 IEP's PTM, February 6, 2008, p. 2.
2 IEP, p. 4.
3 Joint Response to CMA's PTM, March 14, 2008, p. 2.
4 Joint Parties Response, March 14, 2008, p. 2.
5 SCE Response, March 7, 2008, p. 2.
6 SDG&E June 9, 2008 PFM of D.07-12-052.
