6. Standard of Review for Least Cost Dispatch under SOC 4

6.1. Positions of the Parties

SCE takes the position that the review for least cost dispatch under SOC 4 is one of compliance, not reasonableness. SCE states that the Commission has adopted an "up front, achievable standard" for contract administration and least cost dispatch, and has added the standard to SCE's procurement plan. SCE concludes that, because the Commission has included its least cost dispatch standard as an element of SOC 4 in its procurement plan, the issue is one of compliance. That is, whether SCE's economic dispatch activities during the record period complied with the following standard, which D.02-12-074 placed in SCE's procurement plan: "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." SCE asserts that its testimony, exhibits and workpapers in this proceeding have demonstrated such compliance.

In support of its position, SCE refers to D.03-06-076, where we stated:

"Contrary to the utilities' characterization, Standard 4 does not impose traditional after-the-fact reasonableness reviews. Standard 4 does not allow the Commission to conduct after-the-fact review of the terms or prices of the contracts themselves. In the December decision, the Commission clarified that contract terms and prices would not be at issue in any review under Standard 4. Rather, Standard 4 establishes a standard for dispatching energy. This standard is not tied to the contracts themselves; rather it applies to all generation resources.

Least-cost dispatch is an up-front standard that is included in the procurement plans. Any subsequent review of dispatch merely ensures that the utilities have complied with the approved procurement plans. Nothing in Section 454.5 prohibits the Commission's review of utility actions to determine whether the utility complied with an approved procurement plan. Indeed, the statute states that a procurement plan shall eliminate the need for after-the-fact reasonableness reviews of a utility's actions in compliance with an approved procurement plan. (§ 454.5(d)(2).)"⁵

ORA takes the position that review for least cost dispatch under SOC 4 must be one of reasonableness. ORA states that a compliance review provides practically no Commission oversight. ORA describes the compliance process to be that "ORA (1) review the actual provisions of the SCE's 2003 procurement plan, (2) locate the provision requiring SCE to operate according to the least cost dispatch principles and, based on these two findings, (3) ORA must conclude that SCE is `in compliance' with its procurement plan - end of analysis."⁶

ORA concludes that the stakes are high and that "...it is simply untenable that the Commission would essentially abdicate its authority to review the `reasonableness' of procurement costs, which amount to billions of dollars. A mere `compliance review' would amount to a severe diminution of the Commission's oversight authority."⁷

In response to ORA, SCE asserts that a compliance review is neither an abdication nor a severe diminution of the Commission's oversight authority. Rather it is recognition that AB 57 has changed the nature of the Commission's oversight authority. SCE describes the review process for SOC 4 as follows:⁸

"First, the Commission reviews SCE's administration of its contracts to verify that its activities have complied with the terms and conditions of the contract, and that any contract disputes that may arise are reasonably resolved.

...Second, the Commission reviews SCE's economic dispatch activities to verify that it dispatched dispatchable contracts (both utility and DWR contracts) when it was most economical to do so, and that it used the most cost-effective mix of total resources under its control, thereby minimizing the cost of delivering electric services to its customer.

...Finally, the Commission reviews SCE's spot market transactions that are conducted in association with its daily dispatch operations. This review is to verify that SCE's economy purchases and sales of energy contributed to its using the most cost-effective mix of the total resources under its control."

6.2. Discussion

The standard of review for least-cost dispatch and contract administration under SOC 4 has been discussed in prior Commission decisions. In summary;

o The Commission's intent is to review contract administration, including least-cost dispatch.⁹

o SOC 4, which sets minimum standards of conduct regarding contract administration and least cost dispatch, was adopted by the Commission¹⁰ and has been included as an element of the utilities' approved procurement plans.

o The Commission may review utility actions to determine whether the utility complied with its approved procurement plan.¹¹

o The adoption of the utilities' procurement plans eliminates the need to conduct traditional reasonableness review of the utilities' activities related to procurement. Instead, consistent with the requirements of AB 57 and SB 1976, the Commission will approve the utilities procurement plans, including up-front standards of minimum behavior, and will conduct compliance review to evaluate utility compliance.¹²

Review of SOC 4 is one of compliance. SCE must show that it complied with SOC 4's directives to prudently administer all contracts and generation resources and dispatch the energy in a least-cost manner. For that reason, it is appropriate to consider this a compliance review. However, this determination neither precludes the use of reasonableness criteria in considering compliance, nor diminishes the need for, or breadth of, SCE's showing to demonstrate compliance.

In its testimony, SCE has articulated reasonableness criteria and provided testimony to support compliance with the SOC 4 requirement to prudently administer all contracts. SCE uses traditional reasonableness guidelines including the "reasonable manager" standard, as summarized in D.90-09-088¹³, as the bases for demonstrating its prudence. The guiding principle is:

The act of the utility should comport with what a reasonable manager of sufficient education, training, experience and skills using the tools and knowledge at his disposal would do when faced with a need to make a decision and act.

The Commission has recently reaffirmed this traditional standard of review, and has refined the standard in the context of allocating DWR procurement contract to the utilities, and transferring back to the utilities their traditional responsibilities for procuring energy resources for their customers. As we have previously stated, this is not a traditional reasonableness review in that only certain aspects (contract administration and least cost dispatch) are subject to review in the ERRA, while other aspects (including terms and prices) are reviewed in the quarterly procurement advice letter process.

The use of reasonableness criteria, in demonstrating compliance with the contract administration requirement of SOC 4, is appropriate and is not an issue in this proceeding. However, the use of reasonableness criteria in demonstrating compliance with the least-cost dispatch requirement of SOC 4 is the crux of the issue between SCE and ORA in defining whether least-cost dispatch is subject to compliance review or reasonableness review.

While this decision defines review of SOC 4 to be one of compliance, there is no reason why reasonableness criteria cannot be used in evaluating compliance with the least-cost dispatch requirements. SCE has the burden to demonstrate such compliance, but rejects the concept of reasonableness review. Under its proposed scope of review for least-cost dispatch, use of reasonableness criteria may have limited value in evaluating compliance with SOC 4. SCE only includes spot market transactions in least-cost dispatch and indicates that compliance with SOC 4 should result in the lowest cost. There are no ranges of possible outcomes. SCE indicates it is able to meet this standard because its economic models allow it to determine within the dispatch day and the prompt day which of its dispatchable resources would be economic to run. However, today's decision adopts a broader scope of review than proposed by SCE. Besides spot market transactions, it includes decisions, actions and estimates of forward purchases and sales up to a year prior to the dispatch day. For such transactions, it is not reasonable to require perfect forecasts and decisions as measures of compliance. Instead, in such instances where utility discretion is employed, the use of the "reasonable manager" standard is appropriate for evaluating compliance with SOC 4.

Today's decision clarifies the scope and standard of review for least-cost dispatch in the ERRA. At this time, the Commission has not specified criteria for determining least-cost dispatch compliance or what the utility needs to provide to meet its burden to prove such compliance. If there is a need for such criteria, it should be developed in a generic proceeding where all affected utilities, as well as interested parties, could participate. In the meantime, SCE and ORA should use a master data request process, as discussed later in this decision, as a means to reach some understanding on the types of information or analyses that would be useful in demonstrating SOC 4 compliance as it relates to least cost dispatch.

Based on analyses of SCE's showing and subsequent discovery, ORA or any other party may take the position that SCE did not fully comply with SOC 4. In such cases, we will judge the merits of the parties' positions and may impose disallowances and/or penalties, up to the maximum penalty cap.¹⁴ Such actions may also be taken if SCE does not meet its burden of demonstrating compliance with all aspects of SOC 4. The compliance review process does not diminish our ability to ensure just and reasonable rates.