Excess Energy Sales and Revenues

Treatment of revenues from sales of excess energy is an area that remains very much in flux, despite our best efforts to pin it down. To the extent details are available, they are set forth in Appendix A. Otherwise, we are primarily adopting general principles to provide guidance as this issue is subject to further refinement by the Commission, utilities, and DWR.

In D.02-09-053, we addressed the treatment of revenues attributable to excess energy sales:

Sales revenues should be accounted for based on the composite of resources that each utility dispatches from its portfolio, rather than the timing with which specific resources were acquired. Accordingly, we will prorate sales revenues between the utility's revenue requirements and DWR's revenue requirements based on the relative quantities dispatched from utility generating assets (including contracts and market purchases in the future) and the DWR contracts. (Id., pp. 42-43.)

We further specified, in some detail:

Given these circumstances, we believe that the pro rata approach is the most equitable way to determine the relative amounts of retail and surplus sales revenues between DWR and the utilities. However, based on DWR's comments, we clarify that this approach involves the following steps: [fn. omitted] (1) calculating the amount of surplus sales based on the excess of total utility portfolio resources (including DWR contracts allocated today) relative to loads, (2) allocating those sales revenues between DWR and the utilities based on the relative quantities dispatched from utility resources and the DWR contracts, and (3) calculating the revenue from retail customers using the difference between dispatched quantities and the surplus sales quantities calculated under (2). We direct the utilities to work with DWR to develop specific accounting and reporting procedures consistent with the pro rata approach we adopt today. These procedures should be developed in DWR's 2003 revenue requirements proceeding. (Id., pp. 44-45.)

Today we continue to flesh out the approach adopted in D.02-09-053. The utilities were granted an extension of time to submit their procedures for implementing that decision, and filed them on October 8, 2002, after the close of evidentiary hearings in this proceeding. Even with the extension, the utilities' proposed procedures are still very much works-in-progress, and do not reflect final agreement between the utilities and DWR. This reinforces the constantly moving target nature of this proceeding, but our task is made somewhat easier by the fact that SDG&E, SCE, ORA, and TURN largely agree on the general principles to be applied.¹²

As we discussed above, revenues associated with surplus sales of DWR power should not be pooled, but instead should offset the portion of the DWR revenue requirement allocated to the customers of the dispatching utility. This approach is consistent with the policy of D.02-09-053, as it maximizes the incentives for utilities to make sales of surplus energy.

As SDG&E puts it:

SDG&E recommends that revenues from sales of excess DWR energy be apportioned to the customers of the utility making the sales, and not to all utilities' customers as a pool. D.02-09-053 declined to address this issue, instead deferring it to this proceeding. SDG&E further proposes that revenues from sales of surplus DWR energy will be credited to the DWR revenue requirement allocated to the utility's customers. By apportioning the revenues in this manner, the utility making the sale will know that its action will directly benefit its customers. If revenues from those sales were pooled, there would be little incentive for any one utility in making those sales because the results would be spread among the customers of all utilities. Keeping sales revenue with the utility making the sale is also consistent with D.02-09-053's requirement that variable costs follow contracts. The revenue from these surplus sales can vary depending, at least to an extent, on the decisions of the utility. Market conditions will be the primary factor affecting the revenue from these sales. The Commission should therefore adopt SDG&E's proposal and order that the revenue from these sales be apportioned to the customers of the utility making the sales. (SDG&E Opening Brief, pp.5-6.)

SCE and SDG&E each propose certain adjustments to this general principle, with each claiming their proposal will render the outcome more closely congruent with the complexities of reality. SCE proposes to exclude what it calls "resource specific sales," such as off-system sales from resources located outside the ISO control area. SDG&E, instead of applying the ratio of total URG to DWR energy, uses only must-take energy in its calculation.¹³ These proposed adjustments add needless complexity and opportunities for gaming, and are inconsistent with our clear statement in D.02-09-053 that surplus sales calculations are to be based on total utility portfolio resources. (Id., p.7.)

Our task is complicated by the fact that DWR's August 16 Determination was prepared prior to the issuance of D.02-09-053, and accordingly does not reflect our adopted treatment of revenues from sales of surplus energy. While DWR subtracts anticipated surplus sales revenues from its revenue requirement, DWR's surplus sales revenues are likely to be significantly different than those assumed in the August 16 Determination.

The sales protocol adopted in D.02-09-053 will cause DWR surplus sales to decrease, with a corresponding increase in utility surplus sales. Likewise, DWR retail sales will increase, with a corresponding decrease in utility retail sales. In essence, the revenues collected by DWR would be based on a power charge calculated using retail sales numbers from its August 16 Determination (rather than from the protocol set forth in D.02-09-053), but applied to a much larger retail sales volume. This will result in utility undercollection and DWR overcollection relative to the figures in DWR's August 16 Determination.

SCE, SDG&E, TURN, and ORA agree that the revised allocation protocols for sales adopted in D.02-09-053 will require an adjustment to DWR figures to reflect greater retail sales and less surplus sales revenues by DWR. DWR should incorporate an appropriate adjustment in its supplemental determination.

SCE proposes establishing utility-specific balancing accounts that would capture each utility's allocation of DWR costs and each utility's energy sales revenues paid to DWR. This tracking of the costs and revenues related to the DWR contracts allocated to each utility would be for the purpose of future allocation true-ups. (SCE Opening Brief, pp.10-11.) The proper scope and nature of allocation true-ups has not been determined. As described below, all issues relating to the true-up of DWR's 2001-2002 revenue requirement have been deferred until 2003. It would be premature to approve balancing accounts for 2003 before determining the propriety of recovery for 2001 and 2002. SCE's proposal to establish utility-specific balancing accounts is not approved here, but SCE may raise the issue again in the portion of this proceeding addressing the true-up of DWR's revenue requirement for 2001-2002.

The utilities are in the process of negotiating servicing agreements with DWR, and those negotiations provide a reasonable forum for the resolution of the administrative details needed to implement the general policies we adopt on this issue. DWR should incorporate in its supplemental determination the updated terms of the servicing agreements, along with the protocols adopted in D.02-09-053.