STATE OF CALIFORNIA GRAY DAVIS, Governor



PUBLIC UTILITIES COMMISSION

505 VAN NESS AVENUE

SAN FRANCISCO, CA 94102-3298

September 23, 2002

TO: ALL PARTIES OF RECORD IN RULEMAKING 01-10-024

Decision 02-09-053 is being mailed without the Dissent of President Loretta Lynch. The Dissent will be mailed separately.

Very truly yours,

/s/ ANGELA K. MINKIN for

CAROL A. BROWN, Interim Chief

Administrative Law Judge

CAB/tcg

ALJ/MEG/tcg Mailed 9/23/2002

Decision 02-09-053 September 19, 2002

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking to Establish Policies and Cost recovery Mechanism for Generation Procurement and Renewable Resource Development.

Rulemaking 01-10-024 (Filed October 25, 2001)

INTERIM OPINION ON PROCUREMENT ISSUES:
DWR CONTRACT ALLOCATION

TABLE OF CONTENTS

Title Page

INTERIM OPINION ON PROCUREMENT ISSUES: DWR
CONTRACT ALLOCATION 1

1. Introduction and Summary 2

2. Procedural Background 7

3. Threshold Issue: Operational or Planning Allocation 11

4. Contract Allocation Options and Positions of the Parties 18

4.1 DWR's Presentation of Allocation Options 20

4.2 SCE and SDG&E's Preferred Allocation 23

4.3 PG&E's Preferred Allocation 25

4.4 Additional Options Prepared at the Direction of the ALJ 26

4.5 ORA's Position 28

5. Adopted Contract Allocation 28

6. DWR Contracts, Economic Dispatch and Cost Allocation Issues 38

7. Treatment of Revenues from Sales of Surplus Energy 41

8. Operational and Administrative Functions 46

9. Reasonableness Review Risk and Indemnification 52

10. Implementation Filings 60

11. Comments on Proposed Decision 62

Findings of Fact 63

Conclusions of Law 69

INTERIM ORDER 71

LIST OF ATTACHMENTS

Attachment 1 - List of Acronyms and Abbreviations

Attachment 2 - Contract Allocation of Must-Take Contracts Under Different Options

Contract Allocation of Dispatchable Contracts Under Different Options

Attachment 3 - Comparison of Net Short Calculations

Attachment 4 - Assessment of Allocation of Capacity, Energy Residual Net Short and Surplus

Assessment of Power Costs

Assessment of Above Market Costs (Analysis by SCE)

INTERIM OPINION ON PROCUREMENT ISSUES:
DWR CONTRACT ALLOCATION

1. Introduction and Summary¹

Since early 2001, Pacific Gas and Electric Company (PG&E), San Diego Gas & Electric Company (SDG&E) and Southern California Edison Company (SCE), collectively referred to as "the utilities," have not purchased power for their customers' net short needs. By "net short" we refer to the difference between customer loads and the power already under contract to the utilities or generated from a utility-owned asset.

The Legislature enacted Assembly Bill (AB) X1-1 on January 31, authorizing the California Department of Water Resources (DWR) to make electricity purchases for the purpose of selling electricity to utility retail customers. This was necessary for at that time the utilities were not financially able to meet their net short needs.

Under the law, DWR's authority to contract for such purchases will expire on January 1, 2003. The Commission initiated this rulemaking to establish ratemaking mechanisms and procedures that would enable the utilities to resume the responsibility of procuring power for their customers. Today's decision addresses one of the outstanding issues that must be resolved before the utilities can submit final resource procurement plans or resume procuring their net short, i.e., the allocation among the utilities of the power contracted for by DWR.

At present, DWR is managing thirty-five long-term contracts with twenty-four counterparties that cumulatively represent an average annual capacity of 10,780 MWs over the next seven years. The contracts range in term from two to twenty years, although the contracted capacity and energy drops off significantly after 2009. Some of the contract quantities are exclusively "must-take," some are all dispatchable under the option of DWR, and others include a combination of both must-take and dispatchable purchases.

With DWR no longer in the business of procuring electric power on behalf of SCE's, SG&E's and PG&E's customers as of January 1, 2003, we believe that the best way to coordinate DWR's existing contracts with utility resources is to put them all in the utilities' resource portfolios to be scheduled and dispatched in a least-cost manner. For this purpose, we allocate DWR contracts to PG&E, SCE and SDG&E as shown in Table 1.

Our adopted allocation results in a reasonable middle ground among the various proposals with respect to each utility's share of power from the contracts, preliminary cost estimates and projected residual net short position.² In addition, our adopted allocation avoids the need for inter-zonal transfers as much as possible by allocating all quantities that have NP-15 (north of Path 15) specified delivery points to PG&E, and allocating contracts with SP-15 (south of Path 15) specified delivery points to SDG&E and SCE. It also strikes a reasonable balance with respect to contracts that involve some delivery uncertainties by distributing those contracts among all three utilities, i.e., Sempra to SCE, Sunrise to SDG&E and Coral to PG&E. In addition, our adopted allocation produces a resolution of the issues without requiring any utility to manage the contract of its affiliate.

The utilities can now move forward with their procurement planning knowing exactly what DWR contracts they will need to integrate into their resource portfolios. Today's decision eliminates the current two-tier 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 described in this decision, the utilities will now perform all of the day-to-day scheduling, dispatch and administrative functions for the DWR contracts allocated to their portfolios, just as they will perform those functions for their existing resources and new procurements. Legal title, financial reporting and responsibility for the payment of contract-related bills will remain with DWR.

We reiterate the long-standing principle that least-cost or "economic" dispatch should be the operating rule for the utility's portfolio of resources, including the DWR contracts that we allocate today. However, we reject SCE's and SDG&E's arguments that cost allocation must follow the allocation of contract power for operational purposes in order to achieve an economic dispatch. As discussed in this decision, variable costs are the only ones that are incurred for dispatch purposes--fixed costs are considered "sunk." Dispatch and operation of the DWR contracts does not require the allocation of total costs, any more than a utility requires the consideration of its total costs to dispatch its own utility retained generation.

Cost allocation of DWR's revenue requirement, which is comprised in large part of contract costs, will occur in the upcoming DWR revenue requirement proceeding. We leave the issue of contract cost allocation to be decided in that forum, where we will have all the relevant information concerning DWR's revenue requirement and can carefully examine cost allocation alternatives. However, based on the record in this proceeding, we establish the policy that the variable costs of each contract should follow contract allocation. This is necessary in order to ensure that utility dispatch decisions are based on the appropriate operating cost information. Accordingly, we direct DWR to present a contract-by-contract delineation between fixed and variable costs for our consideration in the DWR revenue requirement proceeding.

We also address various protocols with respect to how the dispatch or curtailment of DWR must-take contracts should be sequenced relative to other resources in the utility's portfolio, and how the sales of surplus capacity should be accounted for between DWR and the utilities, along with the corollary of how to account for retail sales. We find that sequencing protocols for this purpose are neither necessary nor appropriate in a procurement environment where the utility dispatches all resources from a single utility portfolio. Thus, we will allocate revenues from surplus sales between DWR and the utility based on the relative quantities dispatched from DWR contracts and from utility generating assets, including existing utility contracts and market purchases in the future.

This involves the following steps: (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). DWR and the utilities are directed to work together to develop specific accounting and reporting procedures consistent with this approach, and to submit those procedures in the DWR revenue requirement proceeding for our consideration.

The reasonableness of the utilities' administration of the DWR contracts we allocate today, including how they elect to dispatch the contract power quantities relative to other resources in their portfolio, shall be at issue over the life of the contracts. The forum for this review shall be the annual procurement proceedings, where the utility procurement process as a whole is reviewed.