III. Preliminary Scoping Memo

In this Preliminary Scoping Memo, we describe the issues to be considered in this proceeding and the timetable for resolving the proceeding. Principally, this rulemaking is the forum for review and adoption of the respondents' long-term procurement plans. It is also the forum for our review of procurement incentives; long-term policy issues surrounding expiration of QF contracts; the management audits of SDG&E's and PG&E's electric procurement transactions with affiliates; resource adequacy issues not otherwise addressed in workshops; and the treatment of confidential information.

A. Review and Adoption of Long-Term Procurement Plans

The review and adoption of revised 2004 long-term procurement plans for the utilities is the prime focus of this proceeding. D.04-01-050 was comprehensive in providing guidance to the utilities about the required parameters of these plans, in terms of load scenarios, portfolio choice issues, and cost level issues.¹⁰

Consistent with all requirements set forth in the text of D.04-01-050, we required the utilities to file a working outline of their long-term plans, including the level of detail and specific scenarios addressed in that decision, and in its ordering paragraphs, the means by which the utilities will incorporate the resource adequacy framework developed in the technical workshops (discussed below), and a showing that the material provided in the public filing will allow for meaningful participation by all parties. In January 2004, in D.04-01-050, we announced that these filings should be made at the end of March 2004, and that interested party comments on the outlines should be due by mid-April, although the precise dates were to be announced via ALJ Ruling. That ruling has now been issued, and the utilities' working outlines and interested parties' written comments will be available to us as we commence this new proceeding.

In D.04-01-050, we stated that we would review the revised long-term procurement plans through a full evidentiary process that will conclude with a final Commission decision. As the first step in that process, we will schedule on April 30, 2004, the "early status check" prehearing conference (PHC) referred to in D.04-01-050. At that PHC, the parties should be prepared to discuss the issues addressed in this order, as well as any issues raised in their PHC statements filed in advance of the PHC, including their proposed schedules and critical path timetables.

B. Review of Resource Adequacy Issues Not Otherwise Addressed in Workshops

In D.04-01-050, we directed that certain technical issues related to resource adequacy that are critical to our review of the utilities' long-term procurement plans, be addressed in technical workshops. The focus of the resource adequacy workshops is on developing clear standards and guidelines for forecasting load and counting resources to allow a determination that each load-serving entity has met the requirement that it has forward contracts, at least one year in advance, to serve 90% of its peak summer load. The workshops will allow us to assess the possibility for consensus on the necessary standards and guidelines, work towards consensus where possible, and where consensus is not possible, bring the issues to the Commission for decision in this proceeding. The guidelines and standards for forecasting and counting resources adopted as a result of the efforts in the resource adequacy workshops, should be applied consistently in determining resource adequacy and in the long-term procurement plan filings. We expect to issue a decision further refining these issues in the Summer of 2004.

There are other issues currently being discussed in the resource adequacy workshops (in R.01-10-024) that may not be critical for evaluating the long-term procurement plans. For example, the process for assessing compliance with resource adequacy requirements may not require resolution for us to evaluate the long-term procurement plans. We will continue to explore those issues and work towards their successful resolution in an ongoing workshop process which will occur in this proceeding, rather than keeping R.01-10-024 open for that purpose.

C. Treatment of Confidential Information

In this proceeding, we will revisit our approach relative to the treatment of claims for confidentiality of information submitted in support of procurement related filings. In D.04-01-050, we indicated our intent to expand the scope of utility planning data that is made public during the procurement process and our intent to revise the review procedures for new utility projects and power purchase agreements brought before us for pre approval - all with a view to significantly opening the process. We stated that the breadth of the redactions we have seen in utility filings is incompatible with open decisionmaking and indicated that we are committed to balancing effectively any inherent tension between open decisionmaking and the protection of legitimately confidential information while ensuring a more public process.

In D.04-01-050, we specified that all product, price and availability information contained in the utilities' procurement-related applications submitted for our approval must be public information to the extent possible and not subject to confidentiality protections in the absence of a convincing showing that public release will harm ratepayer interests. We ordered parties to submit comments on the issues of whether and how California ratepayers would be harmed as a result of our making public all product, price, and other information contained in the utilities' procurement-related applications.¹¹ We also required the parties to address whether and how ratepayers would be harmed by requiring quarterly procurement transaction compliance filings to be submitted as public information not subject to confidentiality protections. These comments were filed on March 1, 2004, and as specified in D.04-01-050, they will be fully considered in this docket, rather than R.01-10-024. Very shortly, the Commission will provide further direction to the parties on these issues.

D. The Development of Procurement Incentives

In D.02-10-062, we expressed our preference to adopt a uniform incentive mechanism to provide an opportunity for utilities to balance risk and reward in the long-term procurement process. In 2003, in coordination with other utilities, SDG&E sponsored an all-party workshop designed to develop a procurement-related incentive mechanism proposal, but this ambitious effort did not result in a consensus for uniform incentives. Rather than chart a course that would lead us away from a uniform incentive mechanism, our preferred outcome, we explicitly restated that preference in both D.03-12-062 and D.04-01-050 and identified this rulemaking as the forum for developing an "integrated incentive mechanism that rewards utilities for proper balancing of preferred resources, as identified in the Energy Action Plan `loading order' as well as D.02-10-062."¹² Today, we clarify how we intend to develop this overall incentive mechanism in close coordination with the other resource-specific proceedings identified in this order.

The goal of this effort is to motivate the IOUs to procure least-cost supply-side resources and make cost-effective demand-side investments, taking into account the environmental costs (or benefits) of various resource options. Our challenge will be to create an overall procurement incentive framework that aligns the interest of utility investors, management and ratepayers such that the proper balancing of these preferred resources occurs in the procurement of power from existing and new resources.

We believe that a workshop process is the best forum for encouraging productive dialogue among interested parties on this issue and, in turn, informing the Commission. To facilitate this process, we attach a concept paper prepared by Commission staff that outlines an incentive framework for utility procurement modeled after the cap-and-trade principles of the Sky Trust (Attachment B). It is intended to illustrate one approach to procurement incentives to initiate the workshop discussions. As soon as practicable, the assigned ALJ will issue a ruling soliciting pre-workshop comments and scheduling a series of workshops on the topic of procurement incentives, at which the proposal described in the attached concept paper and other alternatives can be explored. We recognize the need to closely coordinate our consideration of procurement incentives in this proceeding with our consideration of new ratemaking policies for natural gas procurement.¹³ Accordingly, the assigned ALJ shall notice all parties in R.04-01-025 when soliciting comments on Attachment B and scheduling workshops on the issue of procurement incentives.

As discussed in D.03-12-062 and D.04-01-050, any incentive mechanisms being considered in resource-specific proceedings (e.g., energy efficiency) will need to be consistent with the overall procurement incentive framework we adopt in this proceeding.¹⁴ Accordingly, we intend to adopt an overall framework for procurement incentives before we make our final determinations on resource-specific incentive mechanisms. Nonetheless, some work on resource-specific mechanisms may proceed concurrently, since several key aspects of those mechanisms (e.g., performance basis and measurement protocols for energy efficiency) will need to be developed irrespective of the overall procurement incentive structure. We will also consider, on a case-by-case basis, issuing interim decisions in resource-specific proceedings on aspects of incentive design, as long as doing so will not prejudge our determinations in this proceeding.

In sum, the initial focus of our efforts on performance incentives will be to establish an overall procurement incentive framework in this proceeding, consistent with the goals of the Energy Action Plan. This, in turn, will provide a context for resource-specific incentive mechanisms we may consider in other proceedings. Any discussion of incentive mechanisms, whether supply-side or demand-side, will be carefully coordinated by the assigned ALJs and Commissioners in rulemaking proceedings relevant to particular resources (for example, energy efficiency incentives in R.01-08-028 or demand response incentives in R.02-06-001) and the assigned ALJ and Commissioner in this rulemaking using the Case Management Conference mechanism previously described.

E. Development of Long-Term Policy for Expiring QF Contracts

This Commission has already committed to a modification of current QF pricing methodologies,¹⁵ and the upcoming QF pricing rulemaking that will accomplish this task, along with any other proceedings(s) involving avoided costs, will be coordinated with this proceeding. However, the Commission will also explore in this proceeding the development of a long-term policy for addressing expiring QF contracts.

Prior to the time the Commission adopts such a policy, it will allow existing QFs with expired or soon-to-be expired utility contracts, to participate in the market via (i) voluntary participation in IOU competitive bidding processes; (ii) renegotiation of contract terms by the QF and the IOU on a case-by-case basis; and (iii) five-year SO1 contracts with the understanding that appropriate revisions by the Commission of the QF pricing methodology will apply to the renewed five-year SO1 contracts. The Commission found that compliance with any of these three alternatives should ensure fairness to the QF community, and to IOUs and their ratepayers.¹⁶

Although D.04-01-050 may have relieved the immediate pressure, our task in this proceeding is to determine for the longer term, a policy addressing how to handle expiring QF contracts. We will begin this determination by inviting parties to file their proposals for such a long-term policy, and then taking written comments on these proposals. Respondents and other commenting parties shall specify how their proposals meet the test used in D.04-01-050: assuring fairness both to the QF community and to the IOUs and their ratepayers. Parties who believe that the Commission must hold evidentiary hearings on these proposals, and the underlying issues, must specify the issues requiring hearings and why hearings are required on those issues. After reviewing these filings, we will determine how to proceed in developing our long-term policy.

F. Review of Management Audits of SDG&E's and PG&E's Electric Procurement Transactions with Affiliates

1. SDG&E Management Audit

As noted above, D.04-01-050 specified that the review of this audit will occur in this proceeding. This is a review of whether SDG&E's negotiated transactions with SoCalGas should be subject to special transaction rules and reporting requirements.¹⁷ This management audit is to be narrowly focused on two issues: Sempra Energy Utilities' (SEU) participation in the risk management committee structure for SDG&E electric procurement operations; and any rules or reporting needed for SDG&E's energy procurement transactions with SoCalGas. The Commission has required its Energy Division staff to draft the scope of work required, select an independent auditor, and oversee that analysis. At the audit's conclusion, the report is to be filed with the Commission and served on all parties to this proceeding. The Commission contemplates that the auditor will remain available to explain the report's findings and to testify in evidentiary hearings the Commission may hold on the report's findings.

For the moment, D.04-01-050 has detailed the audit workplan and the course to be followed after preparation of the audit report. However, the Energy Division should be prepared to provide a status report to the assigned ALJ at the initial Prehearing Conference in this proceeding.

2. PG&E Management Audit

D.04-01-050 also specifies that the review of PG&E's management audit take place in this proceeding. After reviewing as series of procurement-related affiliate dealings, that decision stated:

"We should establish rules for any dealings with PG&E Gas Transmission Northwest if PG&E needs to deal with this affiliate in order to access Canadian gas pipelines. In cases where PG&E is using its own facilities, we have the same concern with negotiated rates that we discuss earlier for SDG&E and also question whether the limited competitive market for storage services is an appropriate benchmark or whether a cost-based standard should be developed. For dealings with other departments, we should examine any potential for abuse due to different department's cost recovery mechanisms and incentive structures. Therefore, we direct a management audit focused on these procurement issues be undertaken using the same procedure we specify above for the management audit of SDG&E." (D.04-01-050, mimeo., p. 78.)

Again, our prior decision has detailed the audit workplan and the course to be followed after preparation of the audit report. However, the Energy Division should be prepared to provide a status report on the audit's progress to the assigned ALJ at the initial PHC in this proceeding.