2. Background

2.1 Earlier RAR Proceedings

In a series of decisions issued over the past two and one-half years, (Decision (D.) 04-01-050, D.04-07-028, D.04-10-035, and D.05-10-042 as modified by D.06-02-007 and D.06-04-040), the Commission has established RAR-related policies and regulations to ensure that there is adequate, cost-effective investment in electric generation capacity for California and that such capacity is made available to the CAISO when and where it is needed for reliable transmission grid operations. These policies are currently applicable to California's large investor-owned utilities (IOUs), i.e., Pacific Gas and Electric Company (PG&E), San Diego Gas & Electric Company (SDG&E) and Southern California Edison Company (SCE), as well as the electric service providers (ESPs) and community choice aggregators (CCAs) that serve retail customers within the service territories of those IOUs.²

The RAR program now establishes aggregate or "system" procurement obligations for these LSEs. Under System RAR, each LSE is required to procure the capacity resources including reserves needed to serve its aggregate system load but is not required to account for local transmission constraints that could prevent the procured capacity from being available to the CAISO to serve load where the LSE's retail customers are located. Thus, under the current program, LSEs could be resource-adequate on an aggregate or system basis but transmission-constrained local load pockets could still be resource-deficient. It is this problem that Local RAR is intended to resolve.³

The Commission has previously recognized the need to better address local reliability issues through LSE procurement obligations. In D.04-07-028, as the summer 2004 peak electric demand season was commencing, the Commission addressed urgent concerns about electric system reliability concerns in Southern California, particularly in the area South of Path 15 (SP 15). Noting operational difficulties that were being encountered by the CAISO and associated near-term reliability concerns, the Commission made clear that reliability is not solely the CAISO's role. Instead, the Commission determined, ".... it is also a utility responsibility to procure all the resources necessary to meet its load, not only service area wide but also locally." (D.04-07-028, p. 2.) Addressing the roles of all participants in assuring electric system reliability, the Commission stated the following with respect to the CAISO and its operational requirements:

In particular, the CAISO is responsible for ensuring "efficient use and reliable operation of the transmission grid consistent with achievement of planning and operating reserve criteria..." [Citation and footnote omitted.] In pursuit of these objectives, the CAISO must each day ensure that sufficient generating capacity is on-line and available to meet the forecast system load. This means not only a sufficient amount of on-line generating capacity to satisfy the total system load, but also whether that capacity is in the right place. The CAISO, for example, must have a minimum amount of on-line generation available in certain locations in order to address transmission constraints or other specific operating requirements, such as maintaining proper voltage and other system-stability related requirements. Absent satisfaction of the CAISO's location-specific operating requirements, the CAISO may be unable to operate the grid reliably. (D.04-07-028, p. 3.)

The facts at issue in D.04-07-028 pertained to capacity availability in Southern California, but the Commission emphasized that the principles it adopted to ensure local reliability applied statewide.

As described in detail in D.05-10-042, at pages 76-82, the Commission determined that for 2007 and beyond, it would address local reliability concerns through the addition of a local procurement component to the developing RAR program. D.05-10-042 left open for further consideration several issues attendant to the establishment of Local RAR, including:

· Weighing the costs and benefits of achieving different degrees of local reliability so that an optimal level of local reliability is targeted.

· Whether local generation capacity is available to all LSEs, including those with small load shares.

· Market power mitigation through means such as a CAISO backstop procurement contract or tariff.

· Allocation of local capacity requirements to individual LSEs.

2.2 Rulemaking (R.) 05-12-013 - Summary of the
Phase 1 Record

The order instituting this rulemaking (OIR) provided that this is the successor proceeding to R.04-04-003 as to RAR issues, and that the record of that prior rulemaking is available for consideration here. Although several important reliability issues are within the scope of this rulemaking, the OIR determined that implementing the earlier policy decision to establish Local RAR is the first priority of the proceeding. Accordingly, this Phase 1 decision addresses Local RAR. We will issue a separate decision in the near future that addresses other Phase 1 issues.

To facilitate timely implementation of Local RAR for 2007, starting with adoption of the program design in mid-2006, D.05-10-042 directed the IOUs and authorized other parties to file proposals for Local RAR within 75 days of the date of that order. Proposals were filed by (1) PG&E, SDG&E, and SCE (IOU proposal); (2) the Alliance for Retail Energy Markets (AReM); (3) the Independent Energy Producers Association (IEP); (4) Mirant California LLC, Mirant Delta LLC, and Mirant Potrero LLC (Mirant); and (5) the CAISO.⁴ The CAISO's filing consisted of its LCR study report for 2006 (2006 LCR Study) along with supporting and explanatory documentation for the 2006 study as well as a proposal to conduct a new LCR study for 2007. The IOUs updated their proposal in comments filed on March 13, 2006. On April 5, 2006, PG&E filed a clarification to the IOUs' Local RAR proposal.

In accordance with the schedule and procedures established by the ALJ, the CAISO performed the 2007 LCR study using input and assumptions and methodologies discussed at a "meet and confer" process conducted by the CAISO on February 17, 2006. The CAISO filed a report summarizing the meet and confer session on February 22, 2006 (Meet and Confer Report), and it issued errata to the report on March 10, 2006. The CAISO timely completed and reported on its 2007 LCR study on April 21, 2006, and on April 24, it filed the report with the Commission. On April 26, 2006, the CAISO convened a workshop on the completed 2007 study. It issued a corrected version of the LCR study on April 28, 2006 and filed it on May 1, 2006.

A prehearing conference was convened on February 3, 2006. The Energy Division led a series of workshops on Phase 1 topics on February 8, February 9, March 7, March 15, and March 27, 2006. The workshops held on February 8, February 9, and March 15 were transcribed. On April 3, 2006, SCE filed a report on the tradable capacity product issues that were discussed at the March 27 workshop. As noted above, those issues will be addressed in a separate decision. On April 10, 2006 the Energy Division issued a comprehensive report on Phase 1 issues (Staff Report). The Staff Report was incorporated into the record by an ALJ's ruling of the same date.

In addition to the filings described above, the Phase 1 record includes initial comments filed on March 13, 2006; post-workshop comments and replies filed April 21 and April 28, 2006, respectively; and comments and replies on the 2007 CAISO LCR study filed April 28 and May 3, 2006, respectively. Phase 1 was submitted for decision on May 3, 2006. The following table lists the commenting parties and the comments and/or replies they filed.

COMMENTING PARTIES

Commenting Party or Parties	Short Title for Party or Parties	Initial Comments (3/13/06)	Post- Workshop Comments (4/21/06)	Replies to 4/21/06 Comments (4/28/06) *	Comments on 2007 LCR Study (4/28/06) *	Replies to 4/28/06 Comments (5/3/06)
Aglet Consumer Alliance	Aglet		X	X	X
Alliance for Retail Energy Markets	AReM	X	X	X	X
California Independent System Operator	CAISO	X	X	X		X
California Manufacturers & Technology Association and California Large Energy Consumers Association	CMTA/CLECA	X	X
California Municipal Utilities Association	CMUA	X	X	X	X	X
City and County of San Francisco	CCSF				X
Constellation Energy Commodities Group, Inc. and Constellation NewEnergy, Inc.	Constellation	X	X	X	X	X
Division of Ratepayer Advocates	DRA	X	X	X	X	X
Energy Producers and Users Coalition	EPUC			X	X
Good Company Associates on behalf of TAS	Good/TAS	X
Independent Energy Producers Association	IEP	X	X	X	X	X
Mirant California LLC, Mirant Delta LLC, Mirant Potrero LLC; NRG Energy Inc., and West Coast Power (WCP did not join in 4/21 comments)	Mirant/NRG	X	X
Pacific Gas and Electric Company	PG&E		X		X	X
Pilot Power Group, Inc.	Pilot Power		X
Powerex Corp.	Powerex		X
San Diego Gas & Electric Company	SDG&E		X	X	X
Sempra Global	Sempra Global	X	X
Southern California Edison Company	SCE	X	X	X	X	X
The Utility Reform Network	TURN	X	X	X	X	X
Western Power Trading Forum	WPTF	X	X
PG&E, SDG&E, and SCE	IOUs	X
APS Energy Services, CLECA, CMTA, Coral Power LLC, DRA, Energy Users Forum, J. Aron & Company, TURN, Silicon Valley Leadership Group, and Strategic Energy LLC (APS did not join in 4/21 comments)	Joint Parties	X	X

* Aglet, AReM, EPUC, SDG&E, SCE, and TURN combined their April 28 replies and their April 28 comments into single documents.

² Later in this rulemaking, we will explore the means of implementing the legislative mandate of Assembly Bill (AB) 380 (Stats. 2005, Ch. 367) to establish RAR for all LSEs.

³ Transmission system additions are an alternative means of resolving local reliability issues. We endorse the position that cost-effective transmission additions should be pursued, i.e., those that can, at lower societal cost, supplant the need for local generation capacity. We also note, however, that transmission projects often tend to have multi-year planning and development horizons whereas the RAR program is currently focused on a shorter-term resource planning horizon. This mismatch of planning time frames may complicate efforts to weigh transmission and generation options. In future RAR and other resource planning proceedings, we will pursue ways to better coordinate local procurement requirements and transmission planning to ensure that optimal solutions are pursued.

In addition to major transmission addition projects, local transmission constraints can, in some circumstances, be addressed by changes in how the transmission grid is operated. Such operational solutions have been considered by the CAISO in its 2007 LCR study, and by this decision we provide opportunity for further consideration before local procurement obligations for 2007 are finalized.

⁴ On December 14, 2005, the Executive Director authorized an extension of time for these filings to January 24, 2006. Pursuant to authorization of the Administrative Law Judge (ALJ), the CAISO filed its LCR proposal on January 31, 2006.