3. Preliminary Scoping Memo

In this Preliminary Scoping Memo, we briefly describe the issues to be considered in this proceeding and the timetable for resolving the proceeding. To provide overarching guidance to parties regarding the scope of this rulemaking, we repeat our policies for the RAR program as described in D.05-10-042:

First, the Commission seeks through RAR to ensure that the infrastructure investment required for reliability actually occurs. Second, the Commission seeks to ensure that the generation capacity made possible through that investment is available to the grid at the times and at the locations it is needed. Third, the Commission intends that capacity must be sufficient for stressed conditions, i.e., sufficient generation should be available under peak demand conditions even when there are unexpected outages. Finally, the Commission noted that the traditional utility role in procurement included the responsibility to provide reliable service at least cost, and that this is one of the "same issues" of traditional resource procurement that RAR seeks to address. Thus, the concept embodied in the phrase "reliability at any cost" is not a policy option. Ultimately, measures that are proposed to promote greater grid reliability should be evaluated by weighing their expected costs against the value of their expected contribution to reliability. (D.05-10-042, pp. 7-8.)

Our overall objective for this proceeding is to give effect to the foregoing policies for RAR.

3.1 Local RAR

In D.05-10-042, the Commission reaffirmed its intention to establish a local capacity component of the RAR program, and it further declared its intention that the local RA component should be implemented for compliance year 2007. In accordance with D.04-10-035, the year-ahead compliance filings for 2007 are to be made by LSEs on September 30, 2006.³ We intend that these compliance filings should demonstrate fulfillment of the local capacity requirements that will be defined in this proceeding. At the same time, as the Commission has recognized, it is important that LSEs have sufficient time after their RA obligations have been determined to make their final resource acquisitions. It is therefore apparent that the local RA obligations need to be determined well in advance of the September 30 filings.

Thus, development and implementation of the local dimension of the RAR program is the centerpiece and the first priority of this rulemaking. We intend to adopt local RAR program elements by June 2006. While it is our intention to timely resolve all topics in this rulemaking so that this vital resource program can achieve its potential effectiveness as soon as possible, it is critical that consideration of the topics listed below not interfere with timely resolution of the local capacity requirements issues. Accordingly, it may be appropriate to consider the issues in this proceeding in phases, with local capacity requirements constituting the first phase. We delegate to the Assigned Commissioner and the Administrative Law Judge (ALJ) the determination of whether and to what extent to establish such phases of this proceeding.

3.2 Implementation of AB 380

As the Commission noted in D.05-10-042, it is necessary to review the requirements of recently enacted AB 380 and take the steps necessary to ensure full implementation of this legislation. Among other things, AB 380 requires that the Commission establish RAR for all LSEs. However, the current RAR program applies only to the three major California IOUs and the ESPs and CCAs operating within their service territories.

We recognize that the current RAR program may not be appropriate for the smaller and multi-jurisdictional IOUs. This rulemaking will be the primary forum to address the manner in which the Commission meets its obligation to establish RAR applicable to those LSEs that are not subject to the RAR program adopted in D.04-01-050, D.04-10-035, and D.05-10-042.

3.3 Compliance Topics

The Commission adopted the policy that a penalty equal to 300% of the cost for new capacity (150% for 2006 only) is an appropriate sanction for an LSE's failure to acquire the capacity needed to meet its RA obligation. (D.05-10-042, pp. 93-94.) In this rulemaking, we will consider ways to give definition and clarity to this policy so that all LSEs and their resource suppliers will have a clearer understanding of their procurement obligations and the consequences of noncompliance with those obligations. We will also address concerns, raised in comments on the draft decision in Phase 2 of the RAR portion of R.04-04-003, that noncompliance penalties imposed by this Commission may accrue to the General Fund of the State of California rather than be used to offset procurement costs that may have been incurred to replace the capacity shortfall associated with an LSE's noncompliance.

3.4 Other Topics Identified in D.05-10-042

D.05-10-042 identified numerous topics for which further consideration in a future RAR proceeding would be appropriate. Also, we recognize that implementation issues pertaining to the LSEs' compliance filings may arise for which Commission action may be appropriate. We do not attempt to list all such topics here. As just one example, we note that the Commission stated that it would provide for further consideration of the need for an adder for determining the capacity value of newer wind technologies to compensate for data lags associated with the introduction of those new technologies. This rulemaking will be the forum consideration of such topics.

3.5 General Order

D.04-10-035 announced the Commission's expectation that a "tangible work product" of future proceedings would be the creation of a new Commission general order that assembles the Commission's RAR regulations into a single source document. (D.04-10-035, pp. 44-45.) D.05-10-042 noted that "it would be helpful for our staff to present a general order that compiles into a single source document the elements of the RAR program." (D.05-10-042, p. 97.) Our staff is preparing a draft general order in response to these statements by the Commission. We will provide for comments and replies on this draft general order, and direct the assigned ALJ to establish a schedule for such comments and replies after the draft general order is published by staff.

3.6 Second Generation RAR Topics

D.04-10-035 identified certain "second generation" topics that, at the time that decision was issued, warranted deferred consideration. These include a multi year forward commitment concept and a resource tagging and trading concept. Subject to the priority consideration of local resource adequacy requirements, we will consider such topics in this rulemaking.

We note that on August 25, 2005, our staff issued a white paper on the subject of capacity markets and that comments and replies pertaining to the white paper were filed in R.04-04-003 on September 23, 2005 and October 11, 2005, respectively. We are ordering that the record of R.04-04-003 as to resource adequacy be available in this rulemaking. Therefore, the white paper and the comments and replies are a part of the record herein.

³ September 30, 2006 is a Saturday. Accordingly, the LSE's year-ahead filings for 2007 are due on October 2, 2006.