III. CPSD Investigation Report

CPSD's report documents the results of its investigation into Calpine's breach of the Commission's RAR program to date. Staff has not yet released its report to the public so that Calpine may seek confidential treatment from the Commission for any portions of the staff's report it deems confidential. The Commission directs Calpine to identify portions of the report for which Calpine requests confidential treatment and provide justification for continued confidential treatment of such portions in accordance with Commission's rules and policies. Calpine shall provide its justification by written motion filed within seven days of this Order and staff and interested parties may provide responses within seven days of the written motion. Any party opposing the confidential treatment that Calpine requests shall provide justifications for making the relevant parts of the report public. This enforcement proceeding shall be open to the public and transparent because it involves issues affecting the public interest.

A. Calpine's Year-Ahead Filings

Calpine is subject to the Commission's RAR program. Pursuant to
D.05-10-042 and D.06-06-064, Calpine was required to file Year-Ahead System RAR and Local RAR compliance filings by October 31, 2007, for the 2008 calendar year. The purpose of a Year-Ahead Compliance Filing is to demonstrate that the LSE has acquired sufficient resources to satisfy 90% of its forward commitment obligation for loads plus reserve commitment for each of the five summer months May, June, July, August and September, in the year-ahead10. Calpine timely submitted these Year-Ahead filings to the Commission. However, the Commission's Energy Division staff found procurement deficiencies in Calpine's compliance filings, in apparent violation of the RAR rules.

Energy Division staff notified Calpine of the deficiencies on December 13, 2007 and Calpine submitted an amended filing on December 21, 2007, showing that it had acquired the necessary additional capacity to cure the deficiencies. Notwithstanding Calpine's belated correction of these deficiencies, Calpine's failure to comply with the year-ahead filings by October 31, 2007 is subject to penalties pursuant to D.05-10-042 and D.06-06-064. As the Commission noted in D.06-06-064, Calpine's non-compliance is serious because it could have led to the CAISO taking costly remedial measures.

We note that time is of the essence with respect to LSE compliance filings. If an LSE fails to make a timely filing demonstrating it has fulfilled its local procurement obligation, the CAISO may determine that it needs to proceed on the assumption that the LSE is deficient and therefore engage a backstop procurement to cover the deficiency, even if the LSE has in fact acquired the capacity needed to cover its obligation. Such backstop procurement could be necessarily costly. Accordingly, the penalty for failure to make a timely compliance filing should, after a grace period not to exceed 10 calendar days, be equal [to] the penalty for a deficiency.

(D.06-06-064, pp. 68-69.)

D.06-06-064 explained the non-compliance penalties for both System and Local RAR Year-Ahead compliance filings as follows:

Having determined that penalties are needed to assure that the Local RAR programs are met, we turn to the elements of a penalty regime. D.05-10-042 adopted the broad policy that for System RAR, a penalty equal to 300% of the cost of new capacity (150% for 2006 only) is an appropriate sanction for an LSE's failure to acquire the capacity needed to meet its System RAR obligation. ... It is our judgment that a penalty equal to 100% of the cost of new capacity is an appropriate penalty for failure of an LSE to meet its local procurement obligation. (D.06-06-064, p. 67.)

The Commission explained that if an LSE's deficiency would lead to a penalty for System RAR and a penalty for a Local RAR simultaneously, then the imposed penalty should be no more than 300% for the period that the two deficiencies overlap. (D.06-06-064, p. 68.)

B. Calpine's System Resource Deficiency

Calpine's October 31, 2007, Year-Ahead Compliance Filing failed to account for a contract expiring in June of 2008 resulting in system-wide deficiencies. Calpine's RA Compliance Filing- Worksheet A. Certification Form dated February 16, 2006 shows contract CPA-2.10.1-8874 expiring on June 30, 2008. Thus, Calpine wrongly included resources from this expired contract in meeting their RAR obligations for the months of July, August, and September 2008, causing a total system deficiency of 70.37 MW-month. Energy Division discovered these deficiencies in December 2007 and promptly notified Calpine.

The penalty for failing to procure adequate capacity is three times the monthly cost of new capacity, which is valued at $40 per kW-year. Calpine's 70.37 MW-month deficiency would be subject to a penalty of $703,700 using the prescribed amount for capacity ($40) and penalty multiplier (300%)11.

C. Local Area Resource Deficiencies

Calpine's 2008 Year-Ahead Local Compliance Filing included local procurement obligation deficiencies as well. Calpine failed to use the correct number in its demand response calculations creating a deficiency totaling 10.76 MW-month for 2008. The Commission created a penalty equal to 100% of the cost of new capacity for failure to meet local procurement obligations in D.06-06-064. (D.06-06-064, p. 67.) Calpine's penalty for the 10.76MW-month deficiency calculated with the prescribed amount and multiplier is $35,867.

D. Penalty Assessments

The combined penalties for both System and Local RAR deficiencies total $739,567. In D.06-06-064 the Commission addressed situations where penalties overlap and clarified that when two penalties overlap for both system and local procurement obligations elements, only the System RAR penalty would apply12.

Calpine's deficiencies in the System and Local RAR compliance filings overlapped for July, August, and September 2008. Therefore, the Local RAR deficiency penalty would not be added for these three months. The amount of local capacity deficiency during the overlap period is 1.21MW-month, which computes to a penalty of $4,033. Deducting this amount from the yearly total reduces the Local Area penalty from $35,867 to $31,834. Therefore, Calpine's total penalties are $703,700 for System deficiencies and $31,834 for Local deficiencies, totaling $735,534.

A renegotiated liquidated damages (LD) contract is ineligible for RA qualification. D.05-10-042 addressed the grandfathering of LD contracts in phasing out LD contracts. Therefore, Calpine's renegotiation subsequent to D.05-10-042 is not applicable to this proceeding for purposes of determining Calpine's compliance with the RAR program.

Therefore, IT IS ORDERED that:

1. An investigation on the Commission's own motion is instituted into the Operations and Practices of Calpine Power America-CA, LLC to determine whether Calpine violated Commission Resource Adequacy program rules, regulations, or orders in its October 31, 2007 Year-Ahead Compliance Filings. A copy of CPSD's Investigation Report on Calpine's compliance violations will be placed in the docket designated for this proceeding, subject to redactions consistent with the Commission's confidentiality protocols.

2. Calpine is directed to appear at a time and place to be determined by an Administrative Law Judge (ALJ) and show cause why the Commission should not find that Calpine violated RAR rules made pursuant to Public Utilities Code section 380 by allowing system wide and local procurement deficiencies. The Commission's authority to impose penalties is well established in Public Utilities Code section 2107 and 2108.

3. After an ALJ is assigned, a Prehearing Conference pursuant to Rule 7.2 will be convened, and the ALJ will calendar a date, time and location for a hearing on the Order to Show Cause in a subsequent ruling or order. The subsequent ruling will set a schedule for the issuance of prepared testimony and any additional discovery matters. Respondent shall serve prepared testimony responding to the issues stated above and any other allegations presented in this OII/OSC.

4. This ordering paragraph suffices for the "preliminary scoping memo" required by Rule 7.1(c) of the Commission's Rules of Practices and Procedure (Rule). This proceeding is categorized as adjudicatory and will be set for evidentiary hearing. Pursuant to Rule 8.2(b) of the Commission's Rules of Practice and Procedure, in any adjudicatory proceeding, ex-parte communications are not allowed. The issues of this proceeding are framed in the above order.

5. A prehearing conference shall be scheduled for the purpose of setting a schedule for this proceeding, including dates for the exchange of written testimony, determining which witnesses will need to testify, and addressing discovery issues. As to categorization of this proceeding, this order is appealable pursuant to Rule 7.6. Any person filing a response to this Order Instituting Investigation, Notice with Opportunity to be Heard, and Order to Show Cause must state in any response any objections to such orders and notice regarding the need for hearings, issues to be considered, or proposed schedule. However, objections may not address factual allegations that an evidentiary hearing will decide.

6. The Commission directs Calpine to identify portions of the CPSD report for which Calpine requests confidential treatment and provide written justifications within seven days of this Order for continued confidential treatment of such portions in accordance with Commission's rules and policies.

7. The Executive Director of the Commission shall cause a copy of this order and the staff report to be personally served on the Respondent at:

8. The temporary service list is hereby established for this proceeding to include Calpine, the Director of the Energy Division, and the Director of the CPSD, and shall be used for service of all pleadings until a new service list for this proceeding is established. An initial service list for this proceeding shall be created by the Commission's Process Office and posted on the Commission's Website (www.cpuc.ca.gov) as soon as it is practicable after the first prehearing conference. Any interested party may also obtain the service list by contacting the Process Office at
(415) 703-2021.

This order is effective today.

Dated January 29, 2009 at San Francisco, California.

10 D.05-10-042, p. 87.

11 D.05-10-042, Conclusions of Law (COL) 26, and D.06-06-064, COL 25.

12 D.06-06-064, p. 68.

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