II. BACKGROUND

Against the backdrop of California's energy crisis, the Commission established comprehensive RAR rules that require LSEs to demonstrate both (1) aggregate and system resource adequacy (acquisition of sufficient generation capacity to serve forecasted retail customer load, including a reserve margin), and (2) local resource adequacy (acquisition of sufficient generation capacity within defined, transmission-constrained areas)1 in their service areas.

A. Resource Adequacy Requirement Compliance Filings

These comprehensive rules require the LSEs to make several filings before the Commission, to demonstrate that they are in compliance with the RAR directives. Among the compliance filings required on October 31, 2007 were:

B. System Resource Adequacy Requirement

The System RAR requires LSEs to demonstrate that they have acquired sufficient capacity to serve their retail customer load and a 15-17% reserve margin beginning in June 2006. The supply contracts that count for RAR purposes must identify specific resources that provide the qualifying capacity rather than contracts with unspecified resources that provide for liquidated damages (LD) in the event of a breach. The Commission also established penalties for non-compliance with System RAR, stating that such penalties were necessary for the program to achieve its objectives of providing reliable, cost-effective electricity and fostering an environment more conducive to investment in generation infrastructure. The penalties were set as a multiple of the cost of the capacity an LSE failed to procure.

C. Local Resource Adequacy Requirement

Local RAR requires LSEs to demonstrate that they had acquired 100% of their Commission-determined "year-ahead" local procurement obligation for the following calendar year. To meet local requirements, LSEs had to make the specific generation capacity procurement within load pockets3 where the demand is needed. LSEs are subject to penalties when they fail to make the required compliance filings. The cost for new capacity was set at $40 per kW-year and a penalty of 100% of the cost was determined to be a reasonable fine.

D. Public Utilities Code Section 380

In January 2006 the Legislature enacted Public Utilities Code section 3804, essentially codifying the Commission's activities under the RAR proceedings and authorizing the Commission to determine the most equitable means for achieving the RAR program goals5. In D.06-06-064, the Commission determined that a penalty regime is the most equitable means for achieving the RAR goals.

It is clear that penalties over and above backstop procurement costs are necessary to deter non-compliance with the Local RAR program. If LSEs were free to rely on CAISO backstop procurement and simply pay the CAISO for that procurement (through the Scheduling Coordinator), and nothing more, the Local RAR program could be rendered ineffectual to the extent that LSEs elect such a course of action. This is fully consistent with our earlier determination that a penalty regime is needed for System RAR. (D.06-06-064, p. 66.)

The Commission previously reached the same conclusion in D.05-10-042.

[A] regulatory program that imposes significant procurement obligations upon LSEs cannot be expected to succeed unless those LSEs have reason to believe there are consequences for non-compliance that outweigh the costs of compliance.
(D.05-10-042, p. 93.)

The Commission is empowered to see that the provisions of statutes affecting public utilities, such as Section 380, "are enforced and obeyed, and that violations thereof are promptly prosecuted and penalties therefore ..., recovered and collected"6. The Commission's enforcement power extends, not only to the Commission's own proceedings but, to the commencement of actions before the Courts of the State and includes authority to seek mandamus and injunctions in order to ensure that its regulatory directives and policies are respected and followed7. Electric service providers (ESPs) are subject to Commission enforcement authority pursuant to the same statutes as if they were public utilities8, and Community Choice Aggregators (CCAs) are subject to Commission enforcement actions pursuant to section 2111.

Consistent with the foregoing provisions of law, the Commission's Energy Division staff established a citation program to fulfill the objectives of the resource adequacy program and Public Utilities Code section 380. The citation program imposes penalties for non-compliance as determined in D.06-06-064 and these penalties are consistent with other citation programs approved by the Commission9.

1 Resolution E-4017, p. 2.

2 LSEs are no longer required to file Advice Letters for RA compliance showings after the 2008 Compliance Year.  D.08-01-025 adopted a new reporting template and electronic submission procedure proposed by the Energy Division to replace Advice Letters for the compliance showings. (D.08-01-025, pp. 16-19.)

3 D.06-06-064 defined load pockets as areas within an LSE's service area which have physical transmission constraints such that the transfer capability of the transmission serving the area is less than the load demand within the area. Thus additional generation capacity within the load pocket is needed to satisfy the load demand.

4 Unless otherwise stated, all citations henceforth are to the California Public Utilities Code.

5 California Public Util. Code, §380(h).

6 California Public Util. Code, § 2101

7 California Public Util. Code, § 2102

8 California Public Util. Code, § 394.25

9 Resolution E-4017.

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