4. APT-Based Methodology

The February 2006 initial proposal tracks procurement in three categories: baseline, annual and incremental. It requires adoption of a target for each category: BPT, APT, and IPT.⁷ It also involves measuring actual procurement, and allowing flexible compliance, in each of these three categories: BP, AP and IP. Among its attributes, this approach may result in an LSE being in compliance with the overall AP but not having the right mix of BP and IP. The LSE may or may not then be subject to separate enforcement for baseline and incremental elements, even if its total AP equals its APT. It potentially provides a strong incentive for new generation facilities powered by renewable resources.

SCE, GPI and AReM recommend an alternative methodology that measures only one item: total procurement. This approach first establishes the APT. The APT grows by at least 1% each year. Actual AP (with banking of surpluses and limited carrying forward of deficits) is measured against APT. Any RPS-eligible procurement may be used to meet any portion of the APT, including the IPT. As SCE accurately points out, this reporting focus measures every aspect of an LSE's renewable procurement that is relevant: baseline, increasing procurement by at least 1% each year, and achieving 20% by 2010.

A useful guiding principle is "simpler is better." Using this principle, we adopt the simplest reporting method consistent with the law and achieving program goals: the APT-based reporting method proposed by SCE, GPI, and AReM. We do this for the reasons stated by its advocates, as discussed below.

4.1. Simpler

An APT-based method is simpler. It measures one, not three, categories. It does not require application of flexible compliance rules for three categories, along with potentially complicated accounting of surpluses and deficits in three categories.

Moreover, it does not need to address complications within and between the three categories. For example, output from a baseline resource might be reduced temporarily during years of poor water or wind. Output might be reduced permanently over time as the facility ages, or when the facility is retired. Either temporary or permanent reduction is known as baseline erosion. The initial proposal requires separately measuring BP, and addressing how to treat baseline erosion, with what can be complex and controversial rules.⁸

Also, contracts for nearly all (if not all) baseline resources will eventually be candidates for renewal or renegotiation. The initial proposal requires addressing treatment of these renewed or renegotiated contracts to determine whether these baseline resources remain baseline, or may (in some or all cases) become incremental. This determination may or may not be different when the renewal or renegotiation is with the same LSE compared to becoming a new contract with a different LSE. Importantly, the adopted treatment with the initial proposal could in some cases provide an incentive, as SCE describes it, of one LSE "poaching" an existing baseline resource from another LSE in order to create an "incremental" resource.⁹

Further, the initial proposal requires rules with respect to baseline or incremental treatment of output from phased projects or from repowered projects. All of these potential complications are avoidable with an APT-based method. As TURN and USC say: "No party argues against simplification of the reporting requirements, accounting protocols, and compliance rules." (Reply Comments, p. 5.)

4.2. Easier to Understand and Administer

An APT-based method is easier to understand and administer. As AReM points out, administrative complexity may itself be a deterrent to reaching RPS goals.

For example, the Commission has already spent a considerable amount of time balancing parties' initially competing proposals to implement flexible compliance under the law. Some LSEs have in turn spent a substantial amount of time and resources on further details and argument related to flexible compliance, full earmarking, determination of baseline versus incremental status of resources, and penalty avoidance. This has in turn required the use of additional Commission and other party time and resources to address these matters.

At the same time, we have stressed the importance of all parties focusing more attention on strategies for success rather than on the nuances of compliance and penalty avoidance. (D.06-05-039, pp. 24-32.) We have said, repeated, and again repeat here: "the utilities' focus should now be on seeking and signing the best possible contracts for renewable energy, rather than on seeking adjustments to compliance standards." (D.06-05-039, p. 29, citing D.05-07-039, p. 12.)

In this context, the preferred reporting method is the one that is easiest to understand and administer as long as it is consistent with law and facilitates reaching RPS program goals. The APT-based method does this, as explained more below. Adopting this method now will facilitate LSEs focusing on attaining a renewable procurement portfolio of 20% of retail sales by 2010, and potentially 33% by 2020. Moreover, CEC has advocated a more transparent, less complex RPS program. (CEC Integrated Energy Policy Report, November 2005, p. 107.) An APT-based reporting method is consistent with that objective.

4.3. Incorporates Incentives

An APT-based method reasonably provides all necessary incentives. That is, as SCE correctly asserts, it holds each LSE accountable for maintaining its baseline, since otherwise the LSE has an even greater challenge meeting its targets. It also requires each LSE to annually increase its procurement by at least 1% of prior year retail sales and reach 20% by 2010.

An important reason behind the initial proposal was to ensure adequate incentive for the development of new resources. Separate measurement of BP and IP in the initial proposal, along with the requirement that IP be fulfilled only from new resources, provides this direct incentive. Otherwise, some were concerned that LSEs would buy only from existing resources. In particular, there was a concern that existing Geysers geothermal resources could provide so much renewable energy capacity that other new renewable projects would be shut out of the procurement process.

AReM convincingly shows, however, that these fears are unfounded. In 2004, only 10.2% of the state's electricity was produced by renewable resources. To reach 20% by 2010, California will need to double its existing renewable resource base. Existing resources simply cannot provide enough output to reach state-adopted goals, and significant amounts of new renewable generation are required. Even more will be required if some existing resources (now in the 10.2% renewables base) are not repowered but are retired. An additional increment will be required if there is positive growth in retail sales. Moreover, while existing geothermal at the Geysers may have some effect, there is no credible evidence that it will materially affect the need for substantial amounts of new renewable resources. As SCE says:

"...all existing renewable generation is already in some LSE's portfolio and all LSEs are currently short renewables. The only long-term solution for LSEs is to contract for new renewable generation." (Comments, p. 33.)

And specifically with respect to a three part versus a one part reporting method, we agree with GPI that:

"The fact is that statewide California already has a deficit of renewable energy generating capacity. The RPS program is already motivating the development of new renewables, regardless of whether separate accounts are kept for Incremental and Baseline." (Comments, p. 7.)

TURN and UCS state another concern with an APT-based method. While they agree that the reporting methodology has become incredibly complex, they are concerned that an APT-only method may create an opportunity for an LSE to roll-forward deficits indefinitely. (Comments, p. 6.)

TURN and UCS are correct that we have rejected LSEs being able to carry deficits forward indefinitely, and would do so again here. We are not persuaded, however, that an APT-only method will have this result. Rather, carrying deficits forward is a function of flexible compliance rules, not the reporting methodology. The reporting method itself, and the complexity or simplicity of that method, has no effect on rolling-forward of deficits.

Thus, an APT-based reporting system is consistent with providing reasonable incentives for an LSE to maintain its baseline resources, increase procurement by at least 1% per year and acquire new resources. It does not facilitate rolling forward deficits indefinitely.

4.4. Consistent with Law

An APT-based method is consistent with the law. Specifically, the RPS legislation requires that the Commission establish an initial baseline for the purpose of setting APTs. (§ 399.15(a)(3).¹⁰) We have done so for the three largest investor owned utilities, and are doing so for others. (See D.04-06-014, and Proposed Decision of Administrative Law Judge (ALJ) Simon mailed August 22, 2006 in R.06-02-012.) The APT-based method is consistent with this requirement.

The law requires that the Commission implement APTs, and that APTs grow by at least 1% per year. (§ 399.15(b).) The APT-based reporting methodology does this.

In contrast, the initial proposal would require reporting and tracking three categories, not one. This is based on the law's clear purpose of providing an incentive for new investment in renewable generation. This purpose is evident in several aspects of the law.

For example, in establishing the program the legislature declared "a target of 20 percent renewable energy..." (§ 399.11(a).) There would have been no need to establish a target if renewable energy was already 20% of California's resource mix.

Similarly, contracts are to be of no less than 10 years in duration, absent specific approval otherwise. (§ 399.14(a)(4).) This duration is specified in order to permit reasonable development of new resources.

The Commission is required to establish the program in order "to fulfill unmet long-term resource needs..." (§ 399.15(a).) Further, we are required to consider at least four long-term factors in establishing a methodology to determine the market price of electricity. These include long-term market price, along with long-term ownership, operations and fixed price fuel costs. (§ 399.15(c).) The requirements to fulfill unmet long-term resource needs, and consider long-term factors, are consistent with the development of new renewable resources.¹¹

Our view that the program seeks to develop new resources is not new. Since at least 2003 we have recognized that a fundamental program goal is to develop new resources, and bring additional renewable generation on line. (D.03-06-071, pp. 45, 58.) No party disputes that this concept is consistent with the law. TURN and UCS agree, saying some parties raise issues that should be given little weight because they "distract the Commission from the real intent of the RPS program-to bring about new renewable resources." (TURN/UCS Reply Comments, p. 1.)

While the program purpose to stimulate new investment in renewable resources is clear, it does not take a three-part reporting system to accomplish this purpose. Rather, an APT-based system, with compliance and enforcement based on APT, will provide the necessary incentive for new investment, as discussed above. This incentive will be powerful given that the current overall renewable resource base is only about 10%. There is no credible evidence of any incremental benefit of separately enforcing a BPT and an IPT. On the other hand, it is clearly more complex and costly to do so, and the incremental benefits, if any, will not outweigh the complexity and cost.

While the law's intention to stimulate new investment is clear, the law does not specifically direct Commission implementation of that intent by separate creation and treatment of baseline, annual and incremental categories. It does not state that the Commission shall enforce compliance in each of three categories, nor that flexible compliance rules are to be devised for each of three categories. The Legislature knows how to make its directions specific when appropriate and necessary. It did not in this case uniquely and exclusively create three separate categories in a reporting, compliance and enforcement scheme.

An APT-based reporting method is clearly consistent with the letter of the law. It is also consistent with the legislative purpose of stimulating new investment in renewable resources. Thus, we conclude it is consistent with law.

4.5. Test of Proposals

GPI used example numbers to test the initial proposal (three-part reporting method) against the APT-based (one-part) reporting method. GPI's test demonstrates several things, including that the one-part method is simpler, easier to understand, and equally effective in implementing the state's RPS Program.

We agree with GPI on the merits of the simpler system. We also agree with GPI that the more complex system provides few incremental benefits, if any. For example, there is no compelling evidence that any different level of penalties under the more complex system provides incremental incentives for success not adequately incorporated in the APT-based approach. Rather, the ultimate outcome in either system is the same: 20% by 2010. GPI's test data show that either system requires an immediate and sustained procurement effort by each LSE, with the majority of the eligible procurement available only from new renewable resources. GPI shows that the maximum penalty is the likely outcome under either reporting system for at least one of the largest LSEs, absent substantial and sustained effort otherwise. This is likely to be the case for other LSEs, absent similar substantial and sustained effort. Adoption of the more complex reporting system provides no meaningful incremental benefits.

Therefore, we conclude that the APT-based system is simpler; easier to understand and administer; reasonably incorporates necessary incentives; is consistent with the letter and spirit of the law; and, based on GPI's test data, is reasonable.

⁷ The APT is the sum of the BPT and IPT, but is separately tracked in the initial proposal.

⁸ For example, in the initial proposal any deviation in baseline procurement would be determined to be a deficit, including either normal fluctuation in the output of a baseline resource or permanent reduction. Further, the replacement energy would need to be procured in the year of the deficit, not later. Finally, the deficit would be counted within IPT, not baseline. PG&E recommended that baseline erosion be limited to permanent curtailment or shutdown of a baseline generating facility, the replacement energy not be required until the year after (not the year of) the erosion, and baseline erosion not be added to IPT. In support, PG&E argued that normal fluctuation should be considered normal, that an LSE will not necessarily know in advance if and when a plant will be retired, and it unnecessarily complicates IPT calculations to count baseline erosion in IPT. This level of detail and debate (including how much to count as normal variation, if any) is reasonably eliminated with an APT-based methodology.

⁹ As SCE accurately points out, the way such rule treats poaching may conflict with GP 6 (that the rules not create market power for LSEs, renewable generators or other market participants). Again, this level of detail and debate is reasonably eliminated with an APT-based methodology.

¹⁰ References here are to code sections pursuant to SB 1078. Some code sections change under SB 107, effective January 1, 2007. The principles discussed in this section, however, remain the same.

¹¹ In related law regarding resource adequacy requirements for LSEs, we are required to establish requirements that "shall...facilitate development of new generating capacity." (§ 380(b)(1).) Also, we shall ensure "investment is made in new generating capacity." (§ 380(h)(2).)