D0209053 Interim Opinion on Procurement Issues: DWR Contract Allocation

8. Operational and Administrative Functions

Under the operational allocation approach adopted today, the utilities will now perform all of the day-to-day scheduling and dispatch functions for the DWR contracts allocated to their portfolios, just as they will perform these functions for their existing resources and new procurements. These functions include: day-ahead, hour-ahead and real time trading, scheduling transactions with all involved parties (e.g., suppliers, the ISO and transmission providers), making surplus sales, preparing forecasts and obtaining relevant information for these functions, such as transmission availability, among others.

Legal title to the contracts resides with DWR. Financial reporting responsibilities, including those associated with the DWR revenue requirements proceeding and Trust indenture reporting requirements, will also remain with DWR. In addition, DWR will be financially responsible for paying all contract-related bills. However, as DWR points out, this does not require that DWR staff and consultants continue to perform the billing and collecting "settlement" function for those contracts. Rather, we expect the utilities to assume these activities for the DWR contracts as they resume the same settlement functions for new procurements. In other words, the utility would verify the invoices and instruct DWR to pay the bills.⁶⁰ The utilities should work with DWR to establish the frequency and format of any information that will ensure fulfillment of these remaining responsibilities, and provide this information to DWR on a timely basis. The resulting arrangements should be reflected in the operating agreements between the utilities and DWR, discussed further below.

As financial obligor under the allocated contracts, DWR will also need to monitor performance of the generators under the contracts to enable DWR as the contract counter party to make decisions related to actions to be taken in the event of performance issues with generators, contract disputes, defaults, or to defend DWR in the event of counterparty claims against DWR. In undertaking these actions, DWR should work in concert with the utilities through provisions to be incorporated into the operating agreements.

We turn next to the issues surrounding utilities assuming responsibilities currently borne by DWR under the gas tolling provisions of the DWR contracts. Currently, a number of the combustion turbine DWR contracts contain gas tolling provisions under which DWR can accept the gas price from the seller or "bring" (e.g., purchase) the gas supplies itself. As DWR explains:

"Usually on an annual basis a fuel plan is submitted. We sit down with the counterparties.... Essentially, they are out there buying the gas at various points on the pipelines and putting a little markup on it. If we can do it cheaper and better, we will do it."⁶¹

At the outset we should distinguish between administrative responsibilities (e.g., choosing to buy gas, contacting gas suppliers, entering agreements to buy gas) and financial responsibilities (i.e., responsibility for paying from a utility revenue requirement for gas procured to generate electricity under DWR contracts). PG&E appears to argue that the Commission cannot impose either administrative or financial responsibility under the gas tolling provisions to the utilities.⁶² SDG&E and SCE apparently object only to imposition of financial responsibility.⁶³

Gas tolling provisions are not unusual in contracts that involve combustion turbine technologies. From an operational standpoint, they provide the contract administrator with an opportunity to minimize an important component of variable costs (i.e., fuel) under these contracts through the regular review of fuel plans and consideration of alternate gas supply options. The utility, and not DWR, should now assume this function because it goes hand in hand with the objective of economic dispatch (to minimize operating costs) for which the utility is now clearly responsible. Moreover, to have DWR continue in this role ignores the fact that it is exiting the electric procurement business in all other respects.

We therefore see no merit to PG&E's position that even administrative responsibility under the gas tolling provisions must remain with DWR. Procurement of gas under certain contracts is part and parcel with managing the rest of a generation portfolio, and requiring that the utilities administer gas purchases is as legally permissible as requiring that the utilities administer the other aspects of the DWR contracts. Moreover, shifting responsibility for administration of gas purchases under gas tolling provisions furthers our goal of extricating DWR from day-to-day procurement activities. In sum, the utility's operational and administrative responsibilities for DWR contracts should extend to the implementation of gas tolling provisions.

The second-order question is whether the utilities can be made financially responsible for fulfilling gas-purchasing obligations under the gas tolling provisions of certain DWR contracts. As noted above, by "financially responsible" we mean responsible for paying from a utility revenue requirement for gas procured to generate electricity under DWR contracts. Making utilities financially responsible for the gas tolling provisions would require revision of both the DWR revenue requirement (reducing it to reflect a cessation of gas purchases) and the utilities' retained-generation revenue requirements (increasing them to reflect gas purchases under the tolling provisions). The utilities are not signatories to the contracts containing the gas tolling provisions, which may pose an insurmountable bar to altogether ending DWR involvement in gas procurement and making utilities financially responsible for gas purchases insofar as the contracts prohibit assignment of DWR's rights (e.g., the right to procure gas).

We observe that making the utilities financially responsible for gas purchases under the gas tolling provisions of the DWR contracts would lead to an asymmetry in cost allocation. Gas purchased by the utilities would be paid from the utilities' revenue requirements, while gas purchased by a generator would be rolled into the per-MW/h cost of electricity, and be paid from DWR's revenue requirement. We see no principled reason for in one case having gas costs become a utility obligation, while in another case having gas costs devolve upon DWR.

We note another asymmetry. The utilities are not financially responsible for any other aspect of the DWR contracts. It seems odd to single gas costs under tolling agreements out for inclusion in utility revenue requirements. Singling out gas costs for migration from DWR's Revenue Requirement to the utilities' Revenue Requirements seems inconsistent with our previously stated principle that legal title, financial reporting and responsibility for the payment of contract-related bills will remain with DWR.

A justification for making the utilities financially responsible for gas procurement may arguably be found in ABX1-1, as codified in Water Code § 80260, but this argument ultimately fails. Water Code § 80260 provides that:

On and after January 1, 2003, the department shall not contract under this division for the purchase of electrical power. This section does not affect the authority of the department to administer contracts entered into prior to that date or the department's authority to sell electricity.

A simplistic response to an argument that Water Code § 80260 bars DWR from having any responsibility (administrative or financial) for gas procurement is that this section speaks only of "electrical power," and so this provision is not implicated by the discussion at hand. The counter is that electric energy involves more than just electrons, but no one thinks DWR should buy, say, land. To this argument the reply is that as posited here, the utilities, and not DWR, would be the ones entering the contracts, and that paying for gas, whether procured by a generator or by a utility, under the tolling provisions, is part of "administering contracts entered into prior to [January 1, 2003]." DWR would simply reimburse the utilities at the end of the day (or at whatever interval is appropriate) for their reasonable gas procurement costs.

Obviously, divorcing decision-making responsibility from financial responsibility is an invitation to disaster. This leads us directly to the question of whether and how this Commission can review utility administration of DWR contracts.

⁶⁰ See RT at 154-155. We recognize that DWR will require sufficient information to verify and validate that payments and remittances are appropriate. This might include reviewing and auditing the remittances and payments periodically, which will have an impact on DWR's revenue requirements. ⁶¹ RT, p. 147. ⁶² See Opening Comments of PG&E on Proposed Decision, p. 4: "The [proposed decision] erroneously specifies that the utilities shall become responsible for fuel planning under DWR contracts." See also Reply Comments of PG&E on Proposed Decision, p. 5. "DWR's comments seek clarity as to the party responsible for fuel procurement and the related treatment in that party's revenue requirement. That party must be DWR. PG&E is not and cannot be made legally or financially accountable for fuel, transportation, storage, hedging, or other fuel related activities under DWR contracts." ⁶³ See: Opening Comments of SCEon Proposed Decision, p. 3. See also Reply Comments of SCE on Proposed Decision, p. 1: "the [proposed decision] should be revised to make clear that (1) the [utilities] are not financially responsible for fuel supply that supports the operation of DWR's gas tolling contracts allocated to that [utility's] customers; and (2) the utilities' responsibility is limited to merely administering the fuel-related component of the DWR tolling contracts." See also SDG&E's July 30, 2002 Comments, p. 14 and Reply Comments of SDG&E on Proposed Decision, p. 4, objecting to: "CDWR's assertion that the utilities should assume fuel and CAISO charge exposure for the remainder of CDWR's contractual obligations." (Emphasis added). The concern seems to be with "charge exposure," not with administrative responsibilities, which in SDG&E's view can be addressed in an Operating Agreement.