2. Incremental Procurement Target (IPT)

The incremental procurement target (IPT) represents the amount of RPS-eligible procurement that the LSE must purchase, in a given year, over and above the total amount the LSE was required to procure in the prior year. An LSE's IPT equals at least 1% of the previous year's total retail electrical sales, including power sold to a utility's customers from its DWR contracts.⁴⁴ Many LSEs will need to exceed the 1% incremental annual procurement increase in at least one year in order to achieve the required 20% by 2010.

As stated in Section III.A above, any RPS-eligible procurement is eligible to count towards meeting the IPT or any other portion of the APT.

In the years 2004-2009, the IPT is a portion of the APT and does not stand separately from the APT as a procurement target. In 2010 and beyond, when LSEs have an APT of 20% of prior year retail sales, the IPT is the delta between the prior year's APT and 20% of the prior year's retail sales. For example, if an LSE's APT in 2009 is 13%, its IPT in 2010 is 7% of 2009 total retail sales.

i. IPT Calculation

The IPT in 2004-2009 is calculated using the following equation: ⁴⁵

IPT = 1% of the prior year's retail sales

IV. RPS Flexible Compliance Rules

In order to be in compliance in a given year, LSEs must meet the APT in full with delivered eligible procurement.⁴⁶ If an LSE is out of compliance without an allowable reason it may be subject to penalties⁴⁷ for any procurement deficits.⁴⁸ However, pursuant to SB 1078 and to D.03-06-071 and D.05-07-039, LSEs are allowed some flexibility regarding RPS compliance.

Specifically, and as further described below, LSEs may bank surplus procurement, may maintain a procurement deficit for up to three years following the year in which the deficit is incurred, and may, in certain cases, provide allowable reasons for noncompliance.

As an additional flexible compliance allowance, D.03-06-071 allows the three large IOUs to defer 100% of their IPT for the first year in which they have an IPT without explanation.⁴⁹ Any use of this 100% deferral for the first year is subject to the requirement that it be made up within three years.⁵⁰

A. Procurement Surpluses and Deficits

1. Procurement Surpluses

If eligible procurement is not used to meet the APT in the year in which it was procured, it may be reported as surplus procurement and may be banked and used to meet procurement targets in past or future years.

For example, if an LSE procures 100 MWh of eligible procurement in 2005 but only has a 2005 APT of 60 MWh, it may bank the extra 40 MWh as surplus procurement and use it to help meet any outstanding 2004 procurement deficits or deficits in the years 2006 and beyond.

2. Procurement Deficits in the Years Prior to 2010

A procurement deficit occurs when an LSE's eligible procurement is less than the LSE's APT. LSEs must continue to report procurement deficits for as long as the deficits exist, regardless of whether penalties have been assessed or paid (subject to further Commission order).

An LSE must make up any shortfall created by procurement deficits with additional delivered procurement in order to be in compliance with its APT.

A procurement deficit measuring less than or equal to 25% of that year's IPT may be carried, without CPUC approval, for up to three years. Only procurement in the following three years that is in excess of what is needed to meet those years' APTs may be used to satisfy that earlier year deficit. In other words, earmarking may not be used for a procurement deficit that is less than or equal to 25% of IPT (see discussion of earmarking in IV.A.2.i. below).⁵¹

Pursuant to D.03-06-071, LSEs are allowed to carry, for up to three years, procurement deficits greater than 25% of that year's IPT (including deficits larger than 100% of the IPT) without penalty if they have demonstrated to the CPUC an allowable reason for noncompliance, four of which are:⁵²

1) Insufficient response to the RPS solicitation

2) Contracts already executed will provide future deliveries sufficient to satisfy current year deficits (see section IV.A.2.i. on earmarking below)

3) Inadequate public goods funds to cover above-market renewable contract costs

4) Seller non-performance

Shortfalls in excess of 25% of the IPT are also permitted upon a persuasive showing of lack of effective competition, that a deferral would promote ratepayer interests and the overall procurement objectives of the RPS program, or upon showing of good cause.⁵³

Note: Past decisions did not expressly state that the flexible compliance rules regarding whether deficits need an allowable reason to be carried forward are based on procurement deficit sizes in relation to the IPT, not the APT. We clarify here that the rule allowing deficits of up to 25% to be carried without explanation, but allowing larger deficits only with an allowable reason, is in relationship to the size of IPT, not to the APT. See Table 2 below for an example.

i. Earmarking Procurement

D.05-07-039 expanded upon the flexible compliance rules outlined in D.03-06-071 by allowing LSEs, beginning in 2005, to use "earmarked" contracts with future deliveries as a temporary allowable reason for noncompliance and an accounting mechanism for calculating an LSE's return to compliance. Earmarking does not allow contracts to count as compliance with procurement targets. Only delivered generation may be used to meet procurement targets. Earmarking allows an LSE to use signed contracts with future deliveries as a temporary reason for noncompliance with the current year's APT, allowing any actual deliveries from earmarked contracts to count towards deficits for the year they were earmarked. To count as an allowable reason for noncompliance, earmarked contracts must deliver enough procurement to fill the deficit no more than three years after the year in which the deficit occurs.

Table 2: Procurement Deficit Eligible to be Met with Earmarked Contracts

#		Year 1	Calculation
A	IPT	12	Prior year retail sales * 1%
B	APT	102	A + prior year APT
C	Delivered eligible procurement	95	- -
D	Procurement deficit	7	B - C
E	Procurement deficit that may be carried for up to 3 years without explanation, and that must be made up with procurement in excess of APT in Years 2, 3 or 4	3	A * 25%
F	Procurement deficit that may be carried for up to 3 years only with an allowable reason, such as earmarking	4	D - E

Earmarking may only be used for a procurement deficit that is greater than 25% of a given year's IPT. In Table 2 above, the amount of the LSE's deficit that is up to 25% of its IPT will need to be made up within the following three years with procurement that is in excess of the procurement targets in those three years. The remaining 4 units may be earmarked in Year 1 and, if the earmarked procurement is delivered within the following three years, used to bring the LSE into compliance for Year 1, regardless of whether there is enough additional procurement purchased to meet those three following years' APTs.

Note: Flexible compliance rules and treatment of procurement deficits in 2010 and after are expected to be determined in a subsequent Commission order.

3. Procurement Targets in the Years Prior to 2010 Increase Regardless of Past Years' Deficits

Each year's procurement targets and deficits are separate and distinct from the targets and deficits of other years. APTs build on prior year APTs, not on prior year actual procurement. LSEs are responsible for meeting each year's APT (subject to the applicable flexible compliance rules) regardless of past years' procurement deficits. If, as in Figure 1 below, an LSE has a procurement deficit in Year 1, it may incur separate (and increasingly larger, since APTs increase year to year) procurement deficits in following years during which the LSE does not procure more RPS-eligible energy than it did in Year 1.

Figure 1: APTs Increase By 1% Annually

Regardless of Past Years' Actual Procurement



In Figure 1 above, an LSE procures a steady 20 GWh each year and incurs increasingly larger deficits in each year as APTs continue to increase by 1% of the prior year's retail sales annually. Therefore, as shown in Table 3 below, the LSE must report each deficit separately (and calculate associated penalties regardless of any stated reasons for non-compliance).

Table 3: Multiple Deficits Are Incurred When Eligible Procurement Does Not Increase

#		Year 1	Year 2	Year 3	Year 4	Calculation
A	Total Retail Sales	300 GWh	300 GWh	300 GWh	300 GWh	- -
B	APT	23 GWh	26 GWh	29 GWh	32 GWh	prior year B + (prior year A * 1%)
C	Delivered Eligible Procurement	20 GWh	20 GWh	20 GWh	20 GWh	- -
D	Annual Deficit (not cumulative)	3 GWh	6 GWh	9 GWh	12 GWh	B - C
E	Annual Penalty (not cumulative)	$150,000	$300,000	$450,000	$600,000	D * ($0.05 * 1,000,000)

(END OF ATTACHMENT A)

Compliance reports must be filed by each load serving entity (LSE) subject to the Renewables Portfolio Standard (RPS) Program (Pub. Util. Code §§ 399.11 et seq.). Each compliance report shows whether or not the LSE has procured enough renewable energy to satisfy its annual procurement target (APT) in a particular year. If not, the report may state reasons in support of an LSE's request for deferral or waiver of applicable penalties, if any. An initial compliance determination can be made during the year after the year of procurement. This initial determination is after the California Energy Commission (CEC) adopts the relevant verification report, and upon an updated showing of the LSE using the verified information. A final compliance determination cannot be made in some cases until four years after the year of procurement, since existing flexible compliance rules allow a procurement deficit in years prior to 2010 to be carried forward for up to three years. Given these facts, a tentative schedule for Commission determination of RPS compliance and enforcement of penalties is as follows:

Year	Initial Determination	Final Determination	Notes
2004	2007	2008	LSEs may carry forward deficits until end of 2007[1]
2005	2007	2009	Subject to earmarked contracts[2]
2006	2007	2010	Subject to earmarked contracts[2]
2007	2008	2011	Subject to earmarked contracts[2]
2008	2009	2012	Subject to earmarked contracts[2]
2009	2010	2013	Subject to earmarked contracts[2]
2010	2011	2011	No carry forward of deficits under existing rules[3]
2011	2012	2012	No carry forward of deficits under existing rules[3]

^[1] D.03-07-061, p. 50, footnote 41.

^[2] Contracts earmarked for each year (i.e., 2005, 2006, 2007, 2008, 2009) must be approved or rejected by the Commission before a final compliance determination may be made.

^[3] Rules for flexible compliance in 2010 and after are currently being given further consideration in comments filed pursuant to the August 21, 2006 Scoping Memo in R.06-05-027 and SB 107.

(END OF ATTACHMENT B)

⁴⁴ See, SB 1078, Sections 399.15(b)(1) and 399.15(b)(2), and D.04-06-014, p.B-1. The IPT is 1% unless set higher by the Commission (see D.04-06-014, p. B-1).

⁴⁵ D.04-06-014, p. B-1.

⁴⁶ See D.03-06-071, pp. 46-47, R.04-04-026, p. 5 and D.04-06-014, p. B-2.

⁴⁷ D.03-06-071, p. 50 adopts an interim penalty of 5 cents per kilowatt-hour, with an overall annual penalty cap of $25 million per utility.

⁴⁸ For example, suppose an LSE had an APT of 350 GWh in Year X, which included an IPT of 80 GWh. If it procured 310 GWh of eligible procurement, it would have a deficit of 40 GWh. If it was found to be out of compliance with no allowable reason, it could be assessed 40 * 1,000,000 * $0.05 = $2,000,000 for the Year X deficit.

⁴⁹ D.03-06-071, p. 49 allows IOUs to use this first-year flexible compliance mechanism. D.06-10-019 CoL 2 and 12 allows ESPs and CCAs to do the same, subject to further development of flexible compliance mechanisms in accordance with SB 107.

⁵⁰ See D.03-06-071, p. 49, fn. 41. As we note in section IV.A.2. below, prior decisions including D.03-06-071 have referred to the 1% IPT as APT when discussing what size deficits an LSE may carry without explanation. This white paper clarifies the distinction.

^{51 4}See D.05-07-039, p. 13. For example, if an LSE has a procurement deficit of less than 25% of its IPT in both years 1 and 2, then in year 3 the LSE must meet its procurement obligations in the following order: Year 3 IPT (current year), then Year 1 deficit, then Year 2 deficit.

⁵² See D.03-06-071, p. 49.

⁵³ See D.03-06-071, p. 53 and D.03-12-065, p. 8.