5. Scope of Review for Least Cost Dispatch under SOC 4

In adopting the regulatory framework under which SCE, Pacific Gas and Electric Company and San Diego Gas & Electric Company would resume full procurement responsibilities on January 1, 2003, D.02-10-062 ordered that the utilities comply with minimum standards of conduct, including Standard of Conduct #4 (SOC 4), which states:

"The utilities shall prudently administer all contracts and generation resources and dispatch the energy in a least-cost manner. Our definitions of prudent contract administration and least cost dispatch are the same as our existing standard."¹

In elaborating on SOC 4, we stated that,

"Prudent contract administration includes administration of all contracts within the terms and conditions of those contracts, to include dispatching dispatchable contracts when it is most economical to do so. In administering contracts, the utilities have the responsibility to dispose of economic long power and to purchase economic short power in a manner that minimizes ratepayer costs. Least-cost dispatch refers to a situation in which the most cost-effective mix of total resources is used, thereby minimizing the cost of delivering electric services.... The utility bears the burden of proving compliance with the standard set forth in its plan." ²

SCE and ORA assert different positions on the scope of least-cost dispatch review. In considering this issue, we keep in mind previous Commission decisions as well as our responsibility to ensure just and reasonable rates. As explained below, least-cost dispatch review in the ERRA should include review of actions, decisions and estimates related to the dispatch of all resources, for up to a year prior to the dispatch day.

5.1. Positions of the Parties

SCE has interpreted the least-cost dispatch principle to require the scheduling of resources and contracted energy under SCE's control to result in the projected minimization of costs (including the maximization of net revenues for excess energy sales) to SCE's bundled service customers, based on the best information available to SCE at the time schedules were submitted to the Independent System Operator (ISO).

SCE asserts that only spot market transactions (day ahead, hour ahead and real-time) should be included in the Commission's review of least cost dispatch, since they are the transactions that occur within the operating window that the utility makes its dispatch decisions. SCE states that the daily dispatch decisions do not include the utility's forward transactions, which are made weeks, months or years in advance under the utility's procurement plan.

ORA's interpretation of least-cost dispatch is different than that of SCE. By requiring that the utilities operate their system on a least-cost dispatch basis, ORA asserts that the Commission intended that the utilities lower the overall cost to ratepayers by selecting resources based on the known variables and existing constraints in a manner that minimizes costs to ratepayers. As such, ORA's interpretation of least-cost dispatch is to determine whether the utility, while complying with the utility's procurement plan, selected the least-cost resources to meet the utility's load requirements over the entire time period that all short term procurement decisions and actions were made that impacted the dispatch day.

ORA asserts that to determine whether the utility selected least-cost dispatch, ORA needs to review the decisions, actions and estimates made by the utility as long as a year before the dispatch day, as well as month-ahead, week-ahead, day ahead and possibly hour ahead decisions. ORA states that it is important to determine what decisions and actions were made (or not made) based on what was known during those different periods.

ORA concludes that without the ability to review all of SCE's dispatched resources, it cannot determine whether SCE complied with the Commission's directive to "optimize" the value of the overall portfolio. In order to enable meaningful review in future proceedings, ORA requests the Commission to confirm that the scope of the least-cost dispatch analysis includes (1) all of SCE's dispatched resources and (2) all decisions, actions and estimates made by SCE as long as a year before the dispatch day.

SCE argues that it is unnecessary for ORA to review forward transactions in order to verify from the relevant workpapers that SCE used the most cost-effective mix of total resources on any given day in the record period. SCE explains that for each operating day, SCE must evaluate the total mix of resources available for dispatch, including spot market transactions, utility-owned generation, and dispatchable utility and California Department of Water Resources (CDWR) contracts, and determine what would be the most economic mix of total resources to dispatch under existing circumstances. SCE states that this is the total mix of resources that the Commission and ORA must review to verify that SCE complied with least-cost dispatch standards that the Commission placed in SCE's procurement plan and that this mix of resources is laid out in the daily energy planning workpapers that SCE provided for each operating day of the record period.

5.2. Discussion

SOC 4 establishes a standard for dispatching energy and applies to all generation resources. The Commission's responsibility to ensure just and reasonable rates supports subsequent reviews based on SOC 4 and is consistent with Assembly Bill (AB) No. 57's intent to direct the Commission to assure that each electrical corporation optimizes the value of its overall supply portfolio, including CDWR contracts and procurement pursuant to Section 454.5, for the benefit of its bundled service customers.³

While SCE indicates that all resources are evaluated in its least cost dispatch process, it asserts that its actions that are subject to least cost dispatch review under SOC 4 are limited to spot market transactions -- day-ahead, hour-ahead and real-time purchases and sales. Based on our obligation to ensure just and reasonable rates, we see no reason to place such limits on our review.

For example, forward purchase and sale transactions constitute a portion of the overall supply portfolio that is ultimately dispatched. SCE indicates that forward transactions are reviewed in the Quarterly Procurement Advice Letter process. However, while the type of product purchased or sold, the bidding or other transaction procedure followed, and terms and prices of such transactions are subject to review in quarterly procurement advice letters, utility decisions to dispatch supply resources and transact in the market are subject to review under SOC 4 in the ERRA.⁴ To the extent that SCE has discretion, within contract terms, as to how much and/or when forward transactions are made available for dispatch, the exercise of such discretion impacts the analysis of the cost effectiveness of the total resource mix.

Therefore, in order to ensure that SCE optimizes the value of its overall supply portfolio and the most cost effective mix of total resources is used, SCE's decisions, actions and estimates related to dispatch, for all resources, should be subject to analysis and review under SOC 4, regardless of whether such decisions or actions occurred on the dispatch day or prior to the dispatch day. For such review, ORA's recommendation to include utility dispatch related decisions, actions and estimates up to a year in advance of the dispatch day should be sufficient to analyze the cost-effectiveness of the total supply mix. As such, it is reasonable and will be adopted.