VII. Specific Types of Transactions

Several parties discussed the types of products or transactions that should not be authorized for interim procurement. In their testimony, the CEC, TURN and ORA recommend limiting or prohibiting certain types of transactions.

CEC gave several recommendations for restrictions on utility transactions, including: prohibiting utilities from entering into bilateral contracts with affiliates, limiting procurement arrangements to one year or less, prohibiting any utility from entering into contracts that limit the operations of any of its utility retained generation (URG) units (with the exception of "interchange" transactions, where one utility sends energy to another over a specified time frame in exchange for energy at another time).

ORA recommends that the utilities be prohibited from entering into asymmetric derivative contracts. ORA does not provide an argument as to why such types of arrangements should be disallowed. Edison, in its rebuttal testimony, found the ORA position to be inconsistent, citing ORA's support for hedging devices such as call and put options.

The use of financial instruments (derivatives) in such a manner that their effect would be to amplify the net portfolio price risk shall not be allowed. By its definition, a hedge is used based upon an entity's underlying portfolio position to mitigate price risk; actions taken by a utility that amplify net portfolio risk are prohibited.

The procurement products listed in Table 1 represent a compilation of the types of procurement products requested by the respondent utilities in testimony, as well as products that we consider appropriate to meet procurement needs. While we authorize the utilities to procure the products described in Table 1, this list should not be considered exhaustive. The procurement plans must specify each utility's comprehensive list of products, including a definition of each product type and the associated benefit/cost attributes.

Table 1 Authorized Procurement Products
Transaction	Description	Benefit /Cost
Forward Spot (Day-Ahead & Hour-ahead (purchase, sale, or exchange)	Purchase pre-scheduled energy or load reductions at fixed price	Needed to balance short-term load/resource changes/ Vulnerable to price volatility
Real-time (purchase or sale)	Energy imbalance transactions or load reductions	Balances Short-term needs/ Vulnerable to price volatility
Forward Energy (purchase or sale)	Contracts entered into in advance of delivery time, includes block/forward products (e.g., fixed amounts of energy over a specified period of time (e.g., 7x24, 6x16, super-peak, and shaped products) Could be fixed price	Reduces price risk / Risk that prices will be below contracted rate
Forward Energy (demand side)	Baseload usage reduction through investments in permanent energy efficiency	Reduces price risk and cost overall
Capacity (purchase or sale)	Right to purchase energy in exchange for capacity payment. If exercised, buyer also pays incremental energy charge at specified rate	Reduces spot price risk / Reduced risk comes at cost of reservation and energy charges
Capacity (demand side)	Right to purchase load reductions for capacity payments	Provides dispatchable reliability
On-site energy or capacity	Energy or capacity products self-generated on the customer side of the meter	Provides locational reliability and lowers price risk through supply diversity
Tolling Agreement	Type of capacity product where buyer hedges fuel cost risk by providing the gas supply, transportation, and storage	Reduces peak price risk / Buyer pays reservation or capacity charges, and is open to gas price risk
Peak for off-peak exchange	Trades peak energy for off -peak energy (x peak MWh < y off-peak MWh)	Reduces peak price risks / Increases off-peak price risks
Seasonal exchange	Buyer receives peak energy in Summer and returns peak energy in Winter	Reduces summer price risk /Increases winter peak price risk
Physical call (or put) option	Deal to purchase energy in future at pre-set price (price may be pegged to an index). [Call is right to purchase, put is right to sell.]	Call reduces price risk, with option to not exercise right if prices lower. Put insulates from reduced value of excess energy / Fee associated with these rights
Financial call (or put) option	Caps energy price without losing the benefit of lower prices. Price of energy is capped at a fixed price; at times when an agreed upon index price falls below the fixed (strike) price, the buyer pays the lower index price	Reduces price risk / Reduced risk comes at price of option premium (fee)
Financial swap	Buyer gets or pays difference between floating price index and a fixed negotiated price	Locks in fixed price (reduces price risk) / Cost if negative difference between floating index and fixed price
Insurance (Counterparty credit insurance, cross commodity hedges)	Buyer can insure against various adverse events (such as extreme temperature, a generating unit failure, or counterparty default, among others), to reduce price risk	Insurance policies can reduce price risk, but increase energy costs by the amount of the insurance premium
Electricity Transmission Products	Arranged through CA ISO and with non-CAISO transmission owners. Also includes purchase of transmission rights or use of locational spreads.	Reduces price risk associated with varying transmission conditions.
Gas Transportation Transaction	Buyer contracts for transportation of gas to a determined delivery point, at a set price (could be fixed or variable) over a specified time-frame	Reduces price risk associated with gas transportation (and therefore, limits some electric generation price risk for gas-fired units)
Gas Storage	Buyer reserves gas storage capacity for a defined price	Hedges price risk associated with gas storage
Gas Purchases	Purchased on a monthly, multi-month, or annual block basis	Used to hedge fuel cost risk associated with capacity contracts
Ancillary Services	Replacement reserve, regulation up, regulation down, spinning-reserve, non-spinning reserve	Needed to assure system reliability