4. What Should the Minimum Quantity be?

4.1. Can the Minimum Quantity be Zero?

Parties make proposals for the minimum quantity that vary widely, from zero19 to up to 80% of APT in 2010.20 In support of their "zero" position, AReM, CCSF, and GPI argue, based in part on the record from the evidentiary hearing in May 2006 and in part on other analysis, that setting a requirement greater than zero will provide no additional incentive for RPS procurement through long-term contracts or short-term contracts with new facilities. They assert that it is clear that there is not enough existing renewable capacity in California to meet RPS requirements, so contracting for new capacity will be required regardless of the statutory scheme. CCSF, MU, and Pilot Power also suggest that a minimum quantity of zero is appropriate because it will be difficult for small LSEs to organize their RPS procurement to meet a requirement of long-term contracting and/or short-term contracting with specific types of facilities. 21

TURN, by contrast, asserts that § 399.14(b) would be meaningless if the Legislature intended to have a minimum of zero. TURN bases this assertion largely on the drafting history of the addition of new § 399.14(b) to SB 107.22 We disagree. We conclude that the plain language of § 399.14(b)(2), which is not brought into question by different versions of the section in the drafting of SB 107,23 gives us the discretion to set the minimum quantity at any level that reasonably contributes to the goals of the RPS program. As explained below, however, we determine that level to be greater than zero.

4.2. What Level Other than Zero Should the Minimum Quantity be?

a. General Considerations

We believe that the RPS program would benefit from a minimum quantity that is greater than zero. Proposals from parties for a level greater than zero range from, at the far extreme, CCP's suggestion that 90% of all RPS contracts be long term, to TURN's escalating percentage of APT, to the 25% of APT flat rate proposed by PG&E, and SDG&E's proposed flat rate of 10% of APT.24

We find that these proposals for large, and even increasing, fractions of APT as the minimum quantity would exceed the mandate of § 399.14(b)(2) by essentially creating a new RPS procurement element. Instead of implementing conditions to integrate the use of short-term contracts with existing facilities with the use of long-term contracts and contracts with new facilities, these proposals would turn § 399.14(b)(2) into a new requirement for extensive use of long-term contracts and contracts with new facilities.

The large utilities are already using long-term contracts, often with new facilities, for the majority of their new RPS procurement. We see no need to use § 399.14(b)(2) to add requirements related to long-term contracts and/or new facilities to their current contracting practices, which-as noted by many parties-are largely dictated by the need to make long-term contractual arrangements that will support the construction of new renewable generation that will be delivered into California. We believe that a more modest minimum contracting requirement will prevent the large utilities from backsliding in their RPS procurement from new facilities, while not interfering with the implementation of the procurement plans we recently conditionally approved in D.07-02-011.

For other LSEs, we seek a balance between encouraging their contribution to the construction of new renewable generation and facilitating their progress toward overall RPS procurement goals. We agree with the majority of parties that propose that there be one, uniform minimum quantity requirement that applies to all RPS-obligated LSEs. This requirement will be more or less significant in an LSE's planning, depending on its size and its procurement policies, but a uniform requirement will be easy to administer and will allow each LSE to contribute to the development of new renewable generation in proportion to its size or procurement capacity.

These goals can reasonably be accomplished by requiring that, in each calendar year for which the requirement applies, each RPS-obligated LSE-utility and non-utility-must sign long-term contracts and/or contracts with new facilities for energy deliveries equivalent to 0.25% of its prior year's retail sales, in order to count the energy deliveries from any short-term contracts with existing facilities signed in that year toward its RPS obligations in any year.

We set the amount at 0.25% of prior year's sales based on several considerations. Any requirement at 1% of APT or above would be equal to or greater than the LSE's IPT. That would essentially require 100%, or even more, of incremental procurement growth to be from long-term contracts or contracts with new facilities. As explained above, that would in effect create a new RPS program element, which we believe is both unnecessary and not consistent with the language of § 399.14(b)(2). It could also, as a practical matter, be prohibitively difficult for LSEs that are not large utilities. Considering the range of possibilities offered by the parties' comments, we believe that 0.25% of prior year's sales (which is equivalent to 25% of the expected annual RPS program growth) is a reasonable and sufficient incentive for use of long-term contracts and short-term contracts with new facilities, without being excessive.25

b. Implementation

If an LSE fails to meet the 0.25% of prior year's retail sales gatekeeping requirement in a calendar year, the energy deliveries from the long-term contracts and short-term contracts with new facilities that it does sign will count toward the LSE's RPS obligations. Only the energy deliveries from the short-term contracts with existing facilities will be barred from use for RPS compliance, though the LSE of course may sell that energy to its customers even though it will not count toward its RPS obligations.

If the LSE exceeds the 0.25% requirement for a calendar year, it may carry forward (or "bank") the "excess" contracted-for energy and use it to meet the 0.25% requirement in later years. This mechanism will allow smaller LSEs to enter into larger contracts, whether long-term or short-term with new facilities, to meet their § 399.14(b)(2) obligations. Such contracts may be easier to procure, as well as more efficient, than annual procurement of smaller contracts. Allowing banking will also encourage smaller LSEs to enter into long-term contracts and/or short-term contracts with new facilities sooner rather than later, since they will be able to capture full credit under § 399.14(b)(2) for the contracted energy.

In order to use the banking mechanism, an LSE must include in its annual report the amount of contracted-for energy, if any, from long-term contracts or short-term contracts with new facilities that it would like to carry forward. It also must indicate whether it is using any credit toward its § 399.14(b)(2) obligation carried forward from a prior year. An LSE may not, however, erase a failure to meet the 0.25% requirement in a prior year by applying a later year's contracted-for energy in excess of the 0.25% requirement. The banking mechanism is one-way, forward, only.26

Thus, if an LSE fails to meet the gatekeeping requirements in 2007, it may not count its short-term contracts with existing facilities for RPS compliance, but it will begin 2008 with a clean slate. If it exceeds the 0.25% requirement in 2008, it will be able to count its short-term contracts with existing facilities signed in 2008 for all RPS compliance purposes, and may bank any energy contracted for (either long-term contracts or short-term contracts with new facilities) in excess of the 0.25% for future years.

This requirement will ensure a modest but real annual contribution to new renewable generation. A simple example, using ESPs, will illustrate this point. In 2005, ESPs as a group had statewide retail sales of approximately 20,000,000 megawatt hours (MWh).27 One quarter of 1% of that total is approximately 50,000 MWh. If, for illustrative purposes, all ESPs statewide met the minimum quantity requirement through purchases of wind energy, at a 30% capacity factor, approximately 19 megawatts (MW) of new wind capacity would be required.28 In the past, utilities have signed RPS wind contracts for smaller total capacity; for example, PG&E signed an 18 MW contract with the Diablo Winds facility. (See Resolution E-3900, November 19, 2004.) Thus, the potential contribution of ESPs statewide would be equivalent to or greater than some RPS procurement contracts of large utilities. We note that this contribution could be made through a number of contracts signed by individual ESPs around the state. It could also be made through contracts obtained by a procurement entity, as authorized by § 399.14(f).

TURN, supported by AReM, proposes that we allow "trading" of "excess" contracting for long-term contracts and/or contracts with new facilities among LSEs of the same type (e.g., CCAs, ESPs). Although not fully developed, this suggestion on its face is substantially too complex for the limited purposes served by § 399.14(b)(2). The statute itself authorizes us to set contracting requirements for each RPS retail seller. It does not suggest that those requirements could be met by transfer of credit for one LSE's contracting to another LSE.

Nor would such a system advance the purposes of the statute. If, for example, LSE "A" reports that it has sold credit for 10 "excess" gigawatt hours (GWh) of long-term contracts to LSE "B" in 2007, what would that mean? Has LSE "A" sold the rights to receive 10 GWh of delivered energy? Or has LSE "A" simply sold the right to claim the signing of long-term contracts for 10 GWh of energy? If the former, extensive monitoring would be required to verify the transaction, since the energy could be delivered several years after the year the contract is signed. If the latter, it could create an incentive for LSEs to enter into short-term contracts with existing facilities and hope that they would be able to buy credit for a portion of another LSE's long-term contracts or contracts with new facilities before the end of the calendar year. This would distort the value of such contracts, and could in fact be contrary to the purpose of § 399.14(b)(2), by leading to the transfer of funds from "long-term contract poor" to "long-term contract rich" LSEs without any underlying increase in new renewable generation for California.

We would rather see LSEs contract directly to meet their needs under § 399.14(b)(2). Alternatively, one of the suggestions made at the May 2006 evidentiary hearing could be implemented on a broader scale than has been the case to date: a larger entity could enter into a long-term contract, and repackage the contracted-for energy into various forms that could meet the needs of RPS-obligated LSEs. For example, a 10-year contract for 50 GWh/year from a new facility could be re-divided to yield both 10-year contracts for 5 GWh/year and three-year contracts for 10 GWh/year.

The LSE that is the purchaser of such repackaged contracts could use them to meet the requirements of § 399.14(b)(2), so long as the repackaged contract is either with a new facility or is a long-term contract. That is, the repackaged contract must itself meet the requirements of being either a long-term contract or a short-term contract with a new facility. Use of repackaged contracts is subject to proper documentation and reporting to this Commission, including verification that the underlying contract, before repackaging, was a long-term contract with an RPS-eligible facility or a short-term contract with a new RPS-eligible facility. It is also subject to verification by the CEC.29 Generators building new facilities could also develop short-term contracts and sell them directly to RPS-obligated LSEs.

The procurement flexibility provided by both carrying forward "excess" contracted-for energy and using repackaged contracts should allow all LSEs to meet their § 399.14(b)(2) obligations, if and when they have them.30 It can also provide an opportunity for an LSE to begin or intensify a "green" marketing campaign, improving relations with existing customers and improving its image with potential customers.

19 AReM, CCSF, GPI, MU, and Pilot Power propose a minimum quantity of zero, or a "nominal" quantity.

20 TURN proposes an obligation that escalates each year from 20% of APT in 2007 to 80% of APT in 2010.

21 Pilot Power also argues that we do not have jurisdiction over the contracting practices of ESPs. We reject this argument as plainly contrary to the language of § 399.14(b), which imposes the minimum contracting requirement on "each retail seller." ESPs are retail sellers under the RPS statute. (§ 399.12(h)(3).)

22 TURN did not accompany this argument with a motion, pursuant to Rule 13.9, seeking official notice of the different versions of new § 399.14(b) in SB 107. No party objected to TURN's citation of this history, however, so we will take official notice of the different versions of new § 399.14(b). (See Quintano v. Mercury Casualty Co. (1995) 11 Cal.4th 1049, 1062 n.5.)

23 There are two versions of § 399.14(b). The August 7, 2006 version read:

The August 29, 2006 version was changed as follows (with new language in italics and deleted language in strike-outs):

24 Aglet and DRA each propose that a workshop be held to set the minimum quantity. DRA advances no specific proposal, while Aglet proposes basing the minimum quantity on determining the minimum percentage of long-term contracts by comparing volatilities and the correlation between long-term and short-term products.

We recognize that the parties have made disparate proposals, but we believe that a workshop is not necessary to resolve the issues raised by the implementation of § 399.14(b)(2). Consideration of the rationales advanced by the parties, in conjunction with analysis of the legislative language, leads us to conclude that our discretion in implementing the legislative policy allows us to make the necessary findings and conclusions based on the current record.

25 We reiterate, as explained above, that although this minimum quantity is numerically equivalent to 25% of IPT, it is a separate measure that is not related to or dependent on IPT or APT.

26 Carrying forward credit for compliance with § 399.14(b)(2) is independent of, and has no impact on, the existing requirements and flexible compliance mechanisms for meeting an LSE's APT obligations with delivered energy.

27 This information is derived from the responses of ESPs to the ALJ's Ruling Requiring Submission of Information for Determination of Baselines and Procurement Targets (November 13, 2006).

28 The use of wind is illustrative only. An LSE may meet its obligations with contracts with any RPS-eligible generation certified by the CEC.

29 See Section 2, Methodology, in the CEC's Renewables Portfolio Standard Verification Report, found at http://energy.ca.gov/2006publications/CEC-300-2006-002/CEC-300-2006-002-CMF.PDF.

30 An LSE that does not sign any short-term contracts with existing facilities in a particular year will not need to meet the § 399.14(b)(2) requirements that year. MU points out that it will not be signing contracts with any existing generating facilities, because MU is not connected to the grid. MU would, therefore, not have obligations under § 399.14(b)(2).

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