D0209053 Interim Opinion on Procurement Issues: DWR Contract Allocation

7. Treatment of Revenues from Sales of Surplus Energy

When the utilities resume the net short procurement function, there will be hours, particularly in the off-peak period, when each utility is long energy on a portfolio basis and will have to make system sales. As SCE explains:

"The reference point is the market price for power.... If the plant costs $20 a megawatt hour to operate and the market price is above that, then the plant will operate regardless of whether that power is needed to meet load or not. So we dispatch, as a first step, the generation against the market price. Then the next step is to look at how much generation we have relative to the load, and we're either long or short. At that point, if we're short, we need to buy additional power. If we're long, there needs to be a sale from the portfolio."⁵¹

At the time the sales are made, or decisions to back down resources are considered, the utility should perform such actions in a least-cost, economic manner. As discussed during workshops and subsequent comments, there is one additional step that needs to be taken after these decisions are made, i.e., the revenues resulting from sales of excess power must be credited to the corresponding revenue requirement.⁵²

To do this, an accounting protocol needs to be established to determine whether these revenues (or what portion thereof) were generated from DWR contract quantities or from the utility's other resources. Prior to electric industry restructuring, there was no need to determine the source of the sale, because all revenues (retail sales to customers or sales of surplus power on the market at wholesale) from the utility's portfolio were credited to the revenue requirement of the utility. And during the time that DWR has been procuring electric power on behalf of utility customers, all sales have been made from DWR's contract portfolio and credited to its revenue requirement. However, with the allocation of DWR contracts to the utilities and their return to procurement activities, an accounting protocol now needs to be established to apportion the portfolio sales revenues between DWR and each utility that makes the sale.

In its July 30 comments, SCE reiterates a recommendation that it submitted with its procurement plan.⁵³ Specifically, SCE recommends a protocol that would establish the following hierarchy to account for the sales of surplus power: (1) sales are first attributed to quantities dispatched from the utility's new supply obtained after it resumes procurement, (2) sales are next attributed to quantities dispatched from DWR contracts, and finally, (3) sales are attributed to the utility's existing supply resources. SDG&E endorses this hierarchy in its August 5 reply comments, and recommends that it be extended to curtailments of must-take contract quantities. Both argue that this hierarchy is reasonable because it reflects the sequence with which the various resources were acquired. PG&E prefers that this issue be deferred to DWR's revenue requirements proceeding.

While there is some appeal to SCE's and SDG&E's logic based on the sequence of historical events, their proposal imposes an artificial hierarchy to dispatched quantities, based on the timing of resource acquisition, that does not represent the way retail load is served or surplus power sales are generated in an integrated utility portfolio. As described above, the utility will now dispatch all of the must-take quantities in its portfolio (including must-take DWR contracts) plus all of its dispatchable resources up to the market price for each product. Contrary to SDG&E's suggestion,⁵⁴ there is no need to establish a sequential protocol for dispatch and curtailment among must-take contracts: By definition, the utility will need to "take" (dispatch) all of those quantities and then determine whether it makes more economic sense to sell excess power from its portfolio, ramp down utility-owned generating plants, or take some combination of these and other actions based on least-cost economic dispatch if it finds itself in a long position.

We prefer to account for sales revenues in a manner that better reflects the procurement process described above. 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.

In its comments on the proposed decision, DWR suggests that this approach to accounting for surplus sales revenues (and the corollary, for revenue from retail customers, or "remittances") will have the unintended outcome of creating a higher utility pro rata share of remittances at the expense of DWR's revenue requirement stream. DWR recommends that the pro rata protocol be modified to specify that all must-take resources are considered to first serve retail load, based on available contract capacity.

In effect, DWR is asking us ensure that its must-take contract quantities are priced at retail rates for the purpose of booking revenues into its account, rather than at the much lower rates associated with sales of surplus power. ⁵⁵ As a result, DWR's total revenues will be higher than under the protocol established in the proposed decision, and less subject to fluctuations due load and resource imbalances.

SCE, on the other hand, argues that the pro rata approach could increase surplus sales of utility resources (and less of DWR contract quantities), relative to the status quo. This, in turn, would have the effect of reducing utility sales revenues. To address these concerns, SCE reiterates its proposal for a sales revenue accounting protocol that would place all existing utility resources (must-take or dispatchable) first in line to be priced at retail rates for the purpose of calculating utility revenues. SDG&E also reiterates its proposal for a similar hierarchy when must-take quantities exceed loads.⁵⁶ PG&E proposes an accounting protocol that would treat DWR contract power (must-take and dispatchable) as the first to sell at surplus or to curtail, relative to utility must-take resources.⁵⁷

We understand the motivation behind each of these proposals-clearly DWR prefers a protocol that results in more of its contract quantities being accounted for as retail sales (and less as surplus sales), and the utilities prefer the opposite.⁵⁸ However, as described above, the utilities will not be making the distinctions that DWR, SDG&E or SCE recommend in dispatching their integrated resource portfolios.

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:⁵⁹ (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.

In their comments on the proposed decision, SDG&E and SCE urge the Commission to specify that the revenues from sales of excess energy will be apportioned to each utility or its customers individually, and not to the utilities as a pool. SCE recommends that this be accomplished through the development and operation of utility-specific balancing accounts that would capture each utility's allocation of DWR costs and each utility's wholesale and retail revenues paid to DWR. We believe that this issue belongs in DWR's 2003 revenue requirements proceeding, to be considered in the context of DWR cost allocation alternatives, and do not address it here.

⁵¹ RT at 109. ⁵² See RT at 110-112, 116-117. ⁵³ Exhibit 1, "Volume I, Southern California Edison Company's Testimony on Procurement Issues," pp. IV-8 to IV-10. See also RT at 112. ⁵⁴ SDG&E's August 5, 2002 Reply Comments, pp. 4-6. ⁵⁵ This differential is substantial: In its comments, DWR uses an estimate of $95/MWh for retail sales and $20/MWh for sales of surplus. See DWR Comments, September 6, 2002, Attachment 2. ⁵⁶ See Opening Comments of SCE on the Proposed Decision , pp. 9-11; Opening Comments of SDG&E on Proposed Decision, pp. 7-8. ⁵⁷ Opening Comments of PG&E on Proposed Decision, p. 11. ⁵⁸ The total procurement costs to ratepayers is the same either way-the only difference is to which "pot" of revenue requirements (utility versus DWR) the costs are assigned. ⁵⁹ As can be seen from the calculations presented in Attachment 2 of DWR's comments, there is no need to specify a dispatch order among must-take resources or between utility resources and DWR contracts for the purpose of calculating revenue streams under our adopted protocol. This is because revenues from retail customers are calculated as a "residual" after the revenue from sale of surplus is prorated and allocated. It is only under DWR's preferred approach to accounting for surplus sales revenues-i.e., determining retail revenues first, and treating surplus sales as the residual calculation, that the order in which resources are dispatch to meet loads (or curtailed) even becomes an issue for revenue accounting purposes.