Summary of Proposed Standards in D.00-12-065

D.00-12-065 stated that the primary purpose for allowing utilities to enter into bilateral contracts is to lower costs to ratepayers. D.00-12-065 established increased supply as a secondary reason to enter into bilateral contracts. The decision proposed for comment the criteria the utilities should consider in developing their bilateral forward contract portfolios recognizing that, once finalized, the criteria should be used by the Commission in considering the reasonableness of the utilities' bilateral forward contract portfolio.

D.00-12-065 proposes to modify the approach to pre-approval of near-term and medium-term contracts previously adopted. The proposed standards would require the utility to use uniform evaluation criteria, in net present value (NPV) terms, to compare contracts to the utility-developed NPV of forecasted prices for the product or service. D.00-12-065 proposed to replace the "5% of average price" ceiling reasonableness standard adopted for SCE and SDG&E near-term contracts, the reasonable "pre-defined range" of prices for PG&E, and the specific price benchmark pre-approval for SCE medium-term contracts with specific price benchmarks. Given market conditions, D.00-12-065 stated that we would regard any bilateral forward flat (7 days a week, 24 hours a day) contract with a 5-year term, with an energy price below 5¢/kWh to be per se reasonable with out further review. Contracts priced between 5¢/kWh and 6¢/kWh (for the same product) would also be reasonable unless the contract was entered into with an entity affiliated with a utility. Contracts priced above 6¢/kWh (for the same product) would be subject to reasonableness review at the Commission's discretion. We were particularly interested in receiving comments to help us evaluate and develop formulas for converting 7 X 24 product prices to allow for comparison to other products.

We clarified that reasonableness review would be a review of the portfolio of contracts, not a contract-by-contract review, assuming that the individual contracts meet or beat the appropriate price benchmark. We explained that any individual contract that meets or beats the appropriate price benchmark would not be subject to reasonableness scrutiny as a stand-alone contract, but would be included in the overall review of the reasonableness of the utility's procurement practices as part of the utility's emergency bilateral forward contract portfolio. Contracts that do not meet each of the criteria we proposed would be evaluated in the context of the utility's overall procurement strategy.

We expected that the utility's forward contracts, on a portfolio basis, would meet the Commission's goals for the emergency bilateral forward contract program. We stated that we "prefer to rely on utility management to exercise good judgement in making procurement decisions with flexibility to adjust to changing times." (D.00-12-065, p. 9.)