Ordering Paragraph 9: Avoided Costs

Ordering Paragraph 9 provides:

"The utilities shall use the most updated costs available in their cost-benefit analyses for PY 2001, such as the avoided cost forecast report prepared by the California Energy Commission (CEC)."

Pub. Util. Code §399.15(b)(8) further requires that the cost-effectiveness tests be reevaluated "in light of increases in wholesale electricity costs and of natural gas costs to explicitly include the system value of reduced load on reducing market clearing prices and volatility."

The parties were able to reach agreement on several components of the avoided cost formula, including the use of a discount rate of 8.15% and the use of the Market Clearing Price (MCP) forecast as currently reported, as a total $/MWh, including both energy and capacity costs. These recommendations are reasonable.

The utilities, the CEC, TURN and ORA each submitted separate recommendations. However, reviewing the recommendations, it appears that the there is very little disagreement about MCP basis adjustments and other inputs. The major disagreements relate to: 1) whether on-peak escalators should be used to capture the system value of reduced load on reducing market clearing prices, and if so, the values of the escalators; and 2) whether off-peak escalators should be used, and if so, the values of the escalators.