3. Discussion

3.1. Background on RPS Procurement Contracts

The duration of RPS procurement contracts was first addressed in SB 1078. Pub. Util. Code § 399.14(a)(4) provides: "In soliciting and procuring eligible renewable energy resources, each electrical corporation shall offer contracts of no less than 10 years in duration, unless the commission approves of a contract of shorter duration."

We first considered this provision in D.03-06-071, when we set the initial parameters of the RPS solicitation process for the three large electric utilities.⁶

Consistent with the SDG&E/TURN proposal, the utilities should seek bids for 10, 15, and 20-year products. The proposals of SCE and PG&E to seek shorter-term (five-year and one-year) products do not appear likely to promote development of new renewable resources. In addition, § 399.14(a)(4) states that: `In soliciting and procuring eligible renewable energy resources, each electrical corporation shall offer contracts of no less than 10 years in duration, unless the commission approves a contract of shorter duration.' We do not see any good reason to permit the utilities to offer contracts of less than 10 years in duration, so we similarly see no reason to deviate from the basic language of the statute. (D.03-06-071, p. 58.)

In a footnote to that discussion, we stated that " [t]he SDG&E/TURN proposal does allow for shorter-term contracts to be bid by developers. Any such shorter-term contracts require express Commission approval." (Id.) We thus made explicit the dual nature of the § 399.14(a)(4) bidding process: utilities must offer long-term contracts in solicitations, but bidders could counteroffer short-term contracts, which could be accepted subject to our approval.⁷ This understanding was incorporated in D.04-06-014, our decision on standard terms and conditions for RPS contracts.

Specific design and implementation questions remained, however, in the application of these requirements to RPS-obligated LSEs that are not utilities, in particular energy service providers (ESPs) and community choice aggregators (CCAs).⁸ In this proceeding, an evidentiary hearing was held in May 2006, on the issues related to the use of contracts of less than 10 years' duration for RPS procurement by all RPS-obligated LSEs. Based on that record, we concluded in D.06-10-019 that (subject to any subsequent adjustments required to comply with SB 107), RPS-obligated LSEs could use procurement contracts with eligible renewable resources for periods as short as one month⁹ for RPS compliance. Such short contracts were allowed, so long as utilities continued to comply with the requirements of § 399.14(a)(4) and D.03-06-071 regarding solicitations for long-term contracts and Commission approval of counter-offered short-term contracts.

3.2. SB 107

Meanwhile, the Legislature was reviewing the RPS program and developing SB 107. This legislation affects many aspects of the RPS program. In this order, we focus on the impact of the legislation on RPS procurement contracting practices.

SB 107 made no changes to the utilities' existing obligations to offer long-term contracts in solicitations.¹⁰

New § 399.14(b), however, both made explicit our ability to allow short-term contracts to fulfill RPS obligations, and put conditions on the use of such contracts. The first condition, found in § 399.14(b)(1), makes short-term contracts ineligible for supplemental energy payments (SEPs) administered by the CEC. (See § 399.13(e).) No action is required here to implement that requirement.

It is the second condition on the use of short-term contracts for RPS compliance, found in § 399.14(b)(2), with which we are principally concerned. This condition requires us to establish "for each retail seller, minimum quantities of eligible renewable energy resources to be procured either through contracts of at least 10 years' duration or from new facilities commencing commercial operations on or after January 1, 2005."¹¹ We view this condition as authorizing us to set up a "gatekeeping" function. In order for a retail seller to count the energy from "a contract of less than 10 years' duration with an eligible renewable energy resource" toward its RPS obligations, it must "go through the gate." The gate is the satisfaction of Commission-established requirements for minimum quantities of long-term contracts (with new or existing facilities) and/or short-term contracts with new facilities.¹²

3.3. What is being Measured by the Minimum Quantity?

SCE, supported by PG&E, proposes that we measure contracted-for energy, not delivered energy. We agree. Section 399.14(b) creates incentives for entering into particular types of procurement contracts. The most straightforward way to implement those incentives is at the level of contracts signed. Each calendar year that the minimum quantity requirement applies, the LSE must, in its annual report, state its prior year's retail sales and calculate 0.25% of that amount. The RPS procurement contracts signed by each LSE, including energy deliveries in each contract, will also be reported in the LSE's annual March compliance report, and categorized as:

a. long-term, with an existing facility or a new facility,

b. short-term with a new facility, or

c. short-term with an existing facility.

Those LSEs that submit their RPS procurement contracts for our approval, whether by advice letter or application, must also indicate with the advice letter or application in which category the contract being submitted falls. All LSEs must indicate in their annual compliance reports the contracted-for energy quantities in each category for the reporting year (the prior calendar year). The Director of Energy Division may require LSEs that do not submit their RPS contracts for our approval to submit copies of contracts to Energy Division for verification of the terms, status, and categorization of the contract. On the basis of the annual reports and supplemental documentation submitted by each LSE, the Director of Energy Division will determine whether each LSE has complied with the "gatekeeping" requirement for the calendar year being reported.

We remind parties that this approach to implementation of § 399.14(b)(2) does not change any other RPS requirements. Actual delivered energy remains the method for meeting RPS obligations, such as the annual procurement target (APT). For the limited purpose of the minimum quantity requirement only, however, contracted-for energy will be measured.

3.4. What is the Metric for the Minimum Quantity?

We seek a metric that can apply to all LSEs in the same way, that is not complex to administer, that fits in with existing reporting requirements, and that allows a straightforward determination of compliance.

The parties agree that we should apply a single minimum quantity, encompassing both long-term contracts with a new facility or an existing facility, and short-term contracts with new facilities, rather than separate minimums for each type of contract. We agree. This method is consistent with the statute's language that the minimum quantity is to be procured either through long-term contracts or through short-term contracts with new facilities. There is no reason to add complexity and difficulty by requiring, in effect, two minimums, when the Legislature made no such requirement.

There are many possible ways to express the minimum quantity. The ALJ's Comment Ruling posed four possibilities for parties' consideration of the basis of the minimum quantity.¹³ Most parties commenting on this issue proposed that the minimum quantity be a percentage of the APT for each LSE, though their proposals for the percentage varied.¹⁴

The use of the APT as the basis for the minimum quantity is intuitively appealing, since APT is the LSE's total RPS obligation for each calendar year. On reflection, however, the use of APT is more problematic than it first appears. The APT is easy to state, as noted in our recent decision on reporting and compliance, D.06-10-050: "Current year APT = prior year APT + current year IPT."¹⁵ The APT each year is a fixed number, but in satisfying the APT, an LSE may employ various flexible compliance options. The flexible compliance options that may apply to the APT are potentially complex, including deferral without explanation of up to 25% of the incremental procurement target (IPT) amount and the use of "earmarking," allowing an LSE to "use signed contracts with future deliveries as a temporary reason for noncompliance with the current year's APT. . . "¹⁶ AReM suggests that analogous flexible compliance requirements would need to be applied to the minimum quantity.

While we could use the APT itself as the metric without the flexible compliance elements, the flexible compliance rules potentially present some complexity. Given the simple function of the minimum quantity, it does not seem sensible to pick a basis for the minimum quantity metric that is subject to potentially complex regulatory and compliance interpretations.

Nor is it necessary to do so. The minimum quantity, as noted above, performs a gatekeeping function: providing an incentive for all LSEs to contribute to new renewable generation, while allowing the use of short-term contracts with existing facilities once the minimum quantity has been met. This relatively simple function can be measured with a simple quantity-a proportion of each LSE's prior year's retail sales. Prior year's retail sales are transparent, readily accessible to each LSE, and reported as part of the standard RPS reporting format. This quantity therefore provides a sound and easy to use basis for the minimum quantity.¹⁷

Use of prior year's retail sales also simplifies the integration of new ESPs or CCAs into the system, consistent with the plan for ESPs and CCAs laid out in D.06-10-019. A new ESP or CCA (or new utility, for that matter) would not be subject to the minimum quantity requirement in its first year of operation. Rather, after the first year in which it had retail sales, that figure would be used as the basis for the LSE's obligation in its second calendar year of operation. This would then put the newer LSE on a par with other LSEs that had previously been subject to the minimum quantity obligation.¹⁸

⁶ PG&E, SDG&E and SCE.

⁷ Throughout this decision, unless a particular context requires greater specificity, we will use "contracts of at least 10 years in duration" and "long-term contracts" interchangeably. We will also use "contracts of less than 10 years in duration" and "short-term contracts" interchangeably.

⁸ With the enactment of Assembly Bill (AB) 200 (Leslie), Stats. 2005, ch. 50, codified as § 399.17, the application of RPS requirements to multi-jurisdictional utilities serving fewer than 60,000 customers in California (currently, PacifiCorp and Sierra Pacific) was altered to grant those utilities increased flexibility in using out-of-state resources for RPS requirements. Section 399.17 did not alter the underlying RPS program requirements for utilities. To the extent that adjustments to implementation of existing requirements, including those of § 399.14(b), are needed in the context of § 399.17, we will address them in our separate consideration of § 399.17.

⁹ The California Energy Commission (CEC), charged with verifying RPS compliance, requires this minimum contract length for verification purposes.

¹⁰ Section 399.14(a)(4) continues to provide:

In soliciting and procuring eligible renewable energy resources. each electrical corporation shall offer contracts of no less than 10 years in duration, unless the commission approves of a contract of shorter duration.

¹¹ Unless the context requires otherwise, we will refer to RPS-eligible generation facilities that began operation on or after January 1, 2005 as "new facilities." We will refer to RPS-eligible generation facilities that began operation before January 1, 2005 as "existing facilities." In the event that an existing facility undertakes repowering, its status will be determined by the CEC in accordance with its RPS Eligibility Guidebook found at http://www.energy.ca.gov/2007publications/CEC-300-2007-006/CEC-300-2007-006-CMF.PDF.

¹² Unless the context requires otherwise, we will refer to this requirement generally as the "minimum quantity."

¹³ "Should minimums be established with respect to the RPS annual procurement target? With respect to the incremental procurement target? As a percentage of actual RPS-eligible procurement? As a percentage of total retail sales? On some other quantitative basis?" (ALJ Comment Ruling, p. 2.)

¹⁴ CCSF and SES suggest that the minimum quantity be a subset of the overall 20% renewable procurement target.

¹⁵ D.06-10-050, Attachment A, p. 6.

¹⁶ D.06-10-050, Attachment A, p. 10.

¹⁷ The prior year's retail sales also forms the basis for the IPT, which is 1% of prior year's retail sales. The minimum quantity metric is not, however, part of the IPT or related to it. The use of prior year's retail sales is independent in the two measures.

¹⁸ This approach also resolves CCSF's concern about possible "legacy" procurement by IOUs that would be passed on to CCAs: only the CCA's own retail sales would be used in the calculation of the minimum quantity obligation for each year.