3. Resource Adequacy Requirements

The need for and substance of RAR, as well as related filing requirements, are detailed in the OII/OSC (pp. 3-6). Briefly:

The Commission established comprehensive RAR rules that require load serving entities (LSEs) to demonstrate both (1) aggregate and system resource adequacy (acquisition of sufficient generation capacity to serve forecasted retail customer load, including a reserve margin), and (2) local resource adequacy (acquisition of sufficient generation capacity within defined, transmission-constrained areas) in their service areas.

The system RAR requires LSEs to demonstrate that they have acquired sufficient capacity to serve their retail customer load and a 15-17% reserve margin beginning in June 2006. The supply contracts that count for RAR purposes must identify specific resources that provide the qualifying capacity rather than contracts with unspecified resources that provide for liquidated damages in the event of a breach. The Commission also established penalties for non-compliance with system RAR, stating that such penalties were necessary for the program to achieve its objectives of providing reliable, cost-effective electricity and fostering an environment more conducive to investment in generation infrastructure. The penalties were set as a multiple of the cost of the capacity an LSE failed to procure.

Local RAR requires LSEs to demonstrate that they had acquired 100% of their Commission-determined "year-ahead" local procurement obligation for the following calendar year. To meet local requirements, LSEs had to make the specific generation capacity procurement within load pockets¹ where the demand is needed. LSEs are subject to penalties when they fail to make the required compliance filings. The cost for new capacity was set at $40 per kW-year and a penalty of 100% of the cost was determined to be a reasonable fine.

¹ D.06-06-064 defined load pockets as areas within an LSE's service area which have physical transmission constraints such that the transfer capability of the transmission serving the area is less than the load demand within the area. Thus additional generation capacity within the load pocket is needed to satisfy the load demand.