3. Threshold Issue: Operational or Planning Allocation

The testimony and filings to date identify a threshold issue for our consideration; namely, should the allocation of DWR contract quantities include the allocation of specific contracts to individual utilities, or should DWR continue to perform the scheduling and dispatch functions for its statewide portfolio of contracts. By way of background, we first describe the manner in which these functions are performed today.

Currently, the process begins with the utilities submitting to the California Energy Resource Scheduling group at DWR (referred to as "CERS") their net short forecast for the day, as well as a seven-day rolling forecast. CERS fills the net short using the following procedures: First, CERS uses the energy available under DWR's must-take contracts to meet the utilities' forecasted net short positions. If there is remaining net short, CERS evaluates whether it is economical to dispatch energy available under the dispatchable DWR contracts by comparing the market price of power to the variable cost of the dispatchable contracts. If it is economic, CERS will dispatch the required energy from existing dispatchable contracts. If not, CERS will purchase spot power from the market. If CERS finds that its existing must-take contracts exceed the utilities' net short forecast, it will sell the excess must-take power into the market. Similarly, if it determines that it is economic to dispatch available capacity for sale into the market, it will do that as well.

CERS then submits a trade schedule to the California Independent System Operator (ISO), indicating that CERS is "sending" a specific amount of energy to each utility. The utilities submit a comparable trade schedule to the ISO to indicate that they are "receiving" the same amount of energy from CERS. These trade schedules are referred to as a Scheduling Coordinator to Scheduling Coordinator ("SC to SC") Trades. If additional spot purchases are necessary or if it is economic to dispatch and sell excess capacity, CERS and the counterparties to these transactions will separately send similar trade schedules to the ISO indicating the amount of energy purchased or sold.

The allocation approach contemplated by the April 2 Scoping Memo, and referred to in this decision as the "operational approach," is to allocate specific contracts to the utilities to manage as an integral component of their resource portfolios. Under this allocation paradigm, the involvement of DWR, through CERS, in day-to-day scheduling and dispatch would disappear. The utilities would assume these functions for the existing DWR contracts, just as they would continue to schedule and dispatch utility resources and assume similar functions for new purchases.⁸

ORA, SDG&E and PG&E recommend that the Commission allocate DWR contract quantities for planning purposes only, that is, for the purpose of determining the amount of resources that each utility should procure in the marketplace. Under this allocation paradigm, referred to as the "planning approach," DWR would continue to administer and dispatch the contracts in a single statewide portfolio, similar to the manner described above. A certain amount of DWR's contract energy would be made available to each of the utilities in estimating their residual net short for procurement planning purposes. However, in practice, the utility would have the option of utilizing less than its allocated share, and the operational decisions for the contracts (e.g., dispatch and sales of surplus) would continue to be made by DWR. As PG&E explains:

"Under our proposal, DWR remains responsible for the operation of the contract....That is, all the available energy from each contract is allocated on a pro rata basis to each of the utilities. So, in essence, you can view it as a slice of each contract is available to each utility.

"Then, in the day-ahead market, the utility will give to [DWR] an estimate of the open position, which includes all the energy that we could absorb, given our load and the remaining resources we have available to us, and any energy that is economically used of the contracts. That is, the contract has a certain variable cost, and we will compare that variable cost against the market price. If the variable cost is lower, then we will take the energy...if it isn't then we would leave the surplus for [DWR] to dispose of."⁹

In further support of the planning approach, SDG&E and SCE argue in their transition briefs that the Commission is prohibited by law from allocating specific contracts to the utilities: "ABX1-1 provides that DWR retains title to the energy it sells to the customers of SCE and the other utilities. (ABX1-1. Water Code Section 80110.) As such, DWR's contract energy cannot be allocated to SCE or the other utilities, as the [April 2 Scoping Memo] seems to imply."¹⁰

We disagree. The established practices by which DWR and the utilities have implemented ABX1-1 belie SCE's contention. DWR contract energy is presently allocated daily to SCE and the other utilities via "SC to SC" trades, as described above.¹¹ Under current practice it is ultimately the utility that schedules DWR contract energy with the ISO following the SC to SC trade, and it is the utility that transmits and distributes the DWR contract energy to its ultimate users.¹² Consistent with ABX1-1, DWR retains title to the energy notwithstanding the fact that the energy is traded to and distributed by the utilities under the Scheduling Arrangements.¹³ There is, in short, ample precedent for title to energy remaining with one entity while another trades, or schedules, or otherwise disposes of the energy. Under ABX1-1 the utilities can and do accept allocation of DWR contract energy on an hour-by-hour basis. The requirement of ABX1-1 that DWR retain title to DWR contract energy in no way serves as a bar to allocation of operational control over DWR contract energy.

SCE goes on to argue that "in short, under the current legislative and regulatory framework, DWR cannot allocate energy to each of the utilities as though such energy were a component of each utility's supply portfolio. Instead, each utility will need to verify with DWR on an hourly basis subject to that utility's final acceptance, the amount of energy DWR will deliver to that utility's customers."¹⁴

The foregoing discussion by SCE appears to be an attempt to reflect current practice under the Servicing Arrangements. We recognize that the Servicing Arrangements will need to be altered to reflect the new operational arrangements that emerge from this proceeding. We expect that DWR will negotiate with SCE and SDG&E appropriate modifications to their respective Servicing Agreements, and DWR will request of us appropriate appropriate modifications to the Servicing Order governing PG&E. We see no element of the "current legislative and regulatory framework" that poses an insurmountable bar to inclusion by the utilities of DWR contract energy in each utility's resource portfolio. We recognize that current practice allows the utilities to dispatch its generating assets and contracts first, prior to calling on any DWR contract energy, but this practice is nowhere legally mandated outside of the Servicing Arrangements, which are within our control and subject to modification as just discussed.

SCE continues that "an equitable methodology needs to be established that provides clear guidelines on how DWR will determine how much energy it has available to deliver to each utility's customers on an hourly basis . . . Effectively, DWR's long-term contract portfolio needs to be apportioned to the customers of each utility, and coordinated with each utility's supply portfolio to meet the needs of that utility's customers." We agree with SCE on these points, but fail to see why this need for an equitable methodology is inconsistent with (or a bar to) allocation of DWR contract energy to the utilities for dispatch on a utility portfolio basis. Indeed, working out the particulars of an appropriate prioritization of DWR contracts and utility generating resources and contracts is one of the central issues of this proceeding.

SCE concludes its arguments that contract allocation is illegal with a reference to AB 57.¹⁵ We observe that AB57 currently provides that the utilities have 90 days to prepare procurement plans from the time that the Commission "specifies the allocation"¹⁶ methodology for DWR contract energy. The use of the expression "specifies the allocation" makes it clear that the legislature contemplates - indeed, expects - that DWR contract energy can and will be allocated to SCE and the other utilities, just as the April 2 Scoping Memo implies.

From a policy perspective, we believe that the best way to coordinate DWR and utility resources as the utilities resume procurement is to put all these resources under the dispatch control of the utilities, subject to our oversight. The operational approach to contract allocation achieves this by making the utilities responsible for integrating the scheduling and dispatch of the specific DWR contracts allocated to them with their existing generation assets, contracts and new procurements. As the California Power Authority discusses in its comments, this is the most effective way to ensure that resources are being dispatched in a least cost manner: "The bottom line is that it is a major mistake to split the existing and anticipated contract administration from the continuing utility duty to provide net short procurement."¹⁷

In contrast, the planning approach perpetuates a two-tiered procurement system in California that was put in place on a temporary basis, and only under emergency circumstances, until the utilities could resume their procurement role. As of January 1, 2003, DWR is no longer in the business of procuring electric power on behalf of SCE, SDG&E and PG&E's customers, and the utilities will resume that responsibility. The operational allocation approach best reflects this reality.

ORA suggests that the Commission consider a transition to operational allocation by adopting a planning approach for 2003, while the Commission further study physical and cost allocation proposals during 2003 and 2004.¹⁸ In ORA's view, this approach would allow the utilities to begin procurement activities without committing them to an inefficient or inequitable permanent physical or cost allocation.

We see little advantage to this approach, and considerable downside to deferring the allocation of contracts. In particular, we are concerned that deferring contract allocation will necessitate the deferral of residual net short procurement. If we were to adopt a planning allocation for the year 2003 only, we would effectively limit the utilities' procurement authority to a one year period. The utilities have all pointed out that procurement for 2003 needs requires contracting for transactions beyond that a one-year time horizon.¹⁹ Eliminating the utilities' ability to enter into any multi-year transactions may limit both suppliers' interest in utility solicitations and the utilities' ability to acquire the necessary resources at more favorable prices.

For these reasons, we will adopt an operational allocation of DWR contracts, rather than a planning approach. In the following sections, we examine several options for allocating specific DWR contracts to the utilities.

¹⁶ "Each electrical corporation shall file a proposed procurement plan with the commission 90 days after the commission specifies the allocation of electricity, including quantity, characteristics, and duration of electricity delivery, to be provided by the Department of Water Resources under its power purchase agreements to the customers of the electrical corporation."