ALJ/CMW/jva REVISED DRAFT Item 4

Agenda 1146

10/24/02

Decision ______________________

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking to Establish Policies and Cost Recovery Mechanisms for Generation Procurement and Renewable Resource Development.

Rulemaking 01-10-024

(Filed October 25, 2001)

INTERIM OPINION

(See Appendix A for List of Appearances)

Table of Contents

Pages

INTERIM OPINION 2 2

I. Summary 2 2

II. Procedural Background 5 5

III. Returning the Respondent Utilities To Full Procurement 7 7

IV. Procurement Plan Elements 14 14

V. Resource Options 18 18

A. Conventional Generation 20 20

B. Renewable Resources 20 20

1. Renewable Procurement Prior to Full RPS Implementation 22 22

2. Implementing the Renewable Portfolio Standard Program 25 25

C. Distributed and Self-Generation 28 28

D. Demand-Side Resources 28 28

1. Energy Efficiency 29 29

2. Demand Response 29 29

E. Transmission 30 30

F. Reserves 30 30

VI. Utility Options for Procurement Transactions 31 31

A. Competitive Solicitations 33 33

B. Transparent Exchanges 34 34

C. ISO Markets: Hour-Ahead, Day-Ahead (when available), and
Imbalance Energy and Ancillary Services 34 34

D. Inter-Utility Exchanges 34 34

E. Utilities may Provide Showing for Direct Bilateral Contracting for
Short-Term Products As an Additional Alternative Procurement Method 36 36

F. Utility Ownership 37 37

VII. Specific Types of Transactions 37 37

VIII. Price Benchmarking and the Development of an Incentive Mechanism 41 41

A. TURN's Proposed Price Benchmark Strategy 41 41

B. ORA's Proposed Benchmark Strategy for Portfolio Management 42 42

C. Discussion 42 42

IX. Risk Management 44 44

1. Timing Risks - Exercising Caution and Allowing the Market to Develop 44 44

2. Supply Risks - Diversifying the Supplier Portfolio 45 45

3. Price Risks - Establishing Consumer Risk Tolerance Level For
Overall Portfolio 45 45

4. Reliability Risks 47 47

X. Procurement Plan Process 48 48

A. Short-term Procurement Plans 48 48

B. Long-term Procurement Plans 50 50

XI. Standards for Utility Behavior 52 52

XII. Ratemaking Treatment for Generation Procurement 55 55

A. Parties Proposals 57 57

1. Parties Balancing Account Proposals 57 57

2. Scope of Included Expenses 58 58

3. Edison Treatment of Pre and Post December 31, 2003 59 59

4. Rate Adjustments and Amortization Periods 60 60

B. Discussion 61 61

1. Balancing Account and Related Issues 61 61

2. Balancing Account Trigger Mechanism 66 66

Comments on the Proposed Decision 68 68

Findings of Fact 69 69

Conclusions of Law 74 74

INTERIM ORDER 79 79

Appendix A

Appendix B

Appendix C

Appendix D

INTERIM OPINION

I. Summary

This decision adopts the regulatory framework under which Southern California Edison Company (Edison), Pacific Gas and Electric Company (PG&E) and San Diego Gas & Electric Company (SDG&E) shall resume full procurement responsibilities on January 1, 2003. The framework we adopt contains requirements for updating utility procurement plans, expedited review procedures, and timely cost recovery mechanisms that conform to Assembly Bill (AB) 57's statutory requirements.¹

The energy crisis of 2000 and 2001 has changed the regulatory landscape in a profound way for utilities, their customers, their creditors, and regulators. The means by which we fulfill our mandate to ensure just and reasonable rates and reliable service is not straightforward or simple in today's energy markets. We need to give the utilities flexibility in transacting for energy to meet their obligation to serve their customers so that the utilities can take advantage of market opportunities that result in the low and stable prices. At the same time, the utilities request we provide assurance of more timely regulatory review and cost recovery.

We meet the above objectives proactively, by setting up a procurement planning and implementation framework. By regularly revisiting and updating the utilities' procurement plans, we will incorporate the knowledge we gain when the utilities resume procurement on January 1, 2003 into their adopted procurement plans, making the plans the working blueprints envisioned by the legislature in AB 57.

While this decision adopts the utilities' procurement plans filed on May 1, 2002, as modified by later utility filings and this decision, we find they need to be modified prior to January 1, 2003, to reflect this decision, the allocation of existing California Department of Water Resources (DWR) contracts and any procurement done under the transitional authority we granted in Decision (D.) 02-08-071.² Therefore, we direct the utilities to file modified short-term procurement plans (for 2003) consistent with this decision November 12, 2002, provide an opportunity for all interested parties to file written comments, and anticipate a draft decision for the Commission's consideration of the modified plans at our 2nd meeting of December 2002.

The regulatory framework we adopt in this decision requires for 2003, the active involvement and expertise of nonmarket participants, through continuing the procurement review group (PRG) process adopted in D.02-08-071 and providing intervenor compensation to those parties eligible to receive the awards for their work in this process and in the on-going review of procurement advice letters and expedited applications.³ We make the finding here that participation in the procurement review process discussed above by nonmarket participants who are eligible to request intervenor compensation should be fully compensated because their active participation makes a significant contribution to this proceeding.⁴

We also provide a great deal of detail in this decision on the direction the utilities should take in their long-term procurement planning, and require that they file their long-term plans on April 1, 2003. In particular, we require the utilities' long-term plans to include a mix of resources including conventional generation, distributed generation, demand-side resources, transmission and a reserve requirement.

In this decision, we also reiterate our commitment to developing California's renewable generation stock, and take several steps to promote renewables in the near term and in pursuit of the new Renewable Portfolio Standard (RPS) program. We will ensure that the respondent utilities follow our directive to procure 1% incremental renewable energy in partnership with DWR, and note that this directive was given prior to the passage of Senate Bill

(SB) 1078, under the mandate of Pub. Util. Code Section 701.3 (Section 701.3).⁵ As
such, we will enforce the purchase requirements of our previous order in 2003, and without DWR credit support, if necessary. We also provide that any renewable procurement undertaken prior to a utility becoming creditworthy will count toward its RPS requirement.

We also state 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. We direct SDG&E to convene a public workshop to flesh out a consensus proposal for the incentive mechanism.

¹ AB 57 was approved by Governor Davis on September 24, 2002. ² At hearing on July 3, 2002, Edison, ORA, PG&E, and SDG&E represented that while an update filing before January 1, 2003 was necessary, the May 1, 2002 plans constituted the utilities procurement plan submissions contemplated by (then proposed) Section 454.5(a) of AB 57, See July 3, 2002 Transcript: page 2299, lines 12-25; pages 2300-2301, lines 23-7; page 2303, lines 8-24; and pages 2306-2308. SB 1976 signed by Governor Davis on September 24, 2002, changes the 90-day procurement resumption requirement of Section 454.5(a) to 60 days. Periodic review and modification of procurement plans are contemplated by Section 454.5(e) of AB 57. PG&E modified its May 1, 2002 plan on September 13, 2002 in response to an ALJ Ruling dated August 27, 2002 and issued in R.01-10-024 to address a deficiency Commission staff discovered in PG&E's May 2002 filings. All three utilities have since modified their plans by updating their residual net-short positions pursuant to Ordering Paragraph of D.02-09-053, the Commission decision that allocated the DWR long-term contracts among the three utilities. ³ Parties eligible to receive awards of intervenor compensation in this proceeding are those parties who timely filed a notice of intent (NOI) to claim compensation and have received an administrative law judge ruling on their NOI. ⁴ The PRG process is an interim measure while the Commission augments its staff pursuant to the $600,000 as appropriated to the Commission for the purposes of implementing AB 57 and engages an independent consultant or advisory service to evaluate risk management and strategy as authorized under proposed Section 454.5(f). ⁵ All statutory references refer to the Public Utilities Code, unless otherwise noted.