IV. Discussion

We conclude that while both of the alternative proxies proposed by parties represent short-term market prices, the CAISO INC price is the more appropriate proxy, and we hereby adopt it for TBS purposes. SDG&E, in its comments, identifies three criteria to consider in evaluating a price proxy: (1) relationship of the proxy price to the actual costs of utility service; (2) price transparency; and (3) dependability and continuity of the source of the price. We are persuaded, and thus, by these comments, conclude that these criteria reasonably define a conceptual framework for selection of a suitable price proxy. We also conclude that the INC proxy meets these criteria better than does the ICE index. We thus decline to adopt the ICE as a proxy, as proposed by PG&E.

Since the ISO pays the INC price to generators to increase output when generation is not sufficient to meet load, this proxy represents a current marginal price that is appropriate to charge to safe harbor customers. Although the utilities will be buying imbalance energy from the ISO and paying INC prices for it, the utilities will not all necessarily be buying energy through the ICE or any other particular exchange and paying their particular index prices for it. Thus, a proxy from a market used continually by all three utilities is more appropriate than a proxy from one particular private exchange. The INC price provides a uniform price that can be applied on a statewide basis, thereby avoiding the situation where returning DA customers pay differing prices, depending upon the service territory location of their facilities.

In SDG&E's opening comments on the draft decision, while expressing support for the CAL ISO price as the adopted proxy, also proposes that the adopted proxy reflect changes in the pricing of ISO imbalance energy settlement pricing that are expected to occur early in 2004. SDG&E specifically asks that the Commission affirm, as part of its adoption of the TBS price proxy, that the successor to the INC price, once it is implemented by the FERC, shall be applied as the TBS proxy price. SDG&E believes that an express statement to this effect in today's decision will avoid unnecessary confusion since implementation of the TBS price proxy and the revised ISO pricing to be implemented by FERC may occur almost contemporaneously.

As explained in SDG&E's comments, the California ISO submitted its proposal to the FERC on May 1, 2002, for a comprehensive market design ("MD02"). FERC⁷ conditionally approved the ISO's proposed Real-Time economic dispatch methodology, which, among many other changes, would introduce the use of a single zonal Market Clearing Price (MCP) and eliminate the current dual pricing using separate INC and DEC MCPs.

On July 8, 2003, the ISO filed its tariff Amendment No. 54 in FERC Docket No. ER03-1046. Amendment No. 54 would implement tariff changes in Phase 1B of MD02, including the introduction of the single zonal MCP and the elimination of INC and DEC prices. SDG&E reports that the ISO and market participants are currently running market simulation tests of the Phase 1B changes, and final implementation of Phase 1B is expected to occur in February 2004.

SDG&E states that the Phase 1B successor price to the INC price for purposes of TBS proxy pricing should be the "Zonal Settlement Interval Ex Post Price." As defined in the October 22, 2003 FERC Order on Proposed Tariff Amendment No. 54, the "Zonal Settlement Interval Ex Post Price" is the price within a [10-minute] Settlement Interval in each Zone equal to the absolute value Energy weighted average of the Dispatch Interval Ex Post Prices in each Zone, where the weights are the system total Instructed Imbalance Energy, except Regulation Energy, for the Dispatch Interval. This price will be used to settle Imbalance Energy from non-participating Load (emphasis added) and Uninstructed Energy from participating resources."⁸

SDG&E argues that because the Zonal Settlement Interval Ex Post Price will be used to settle Imbalance Energy from non-participating load, that makes it comparable to the current INC price, and therefore appropriate to charge to safe harbor customers. Since the utilities will be buying imbalance energy from the ISO at INC prices, utility non-participating load, including all bundled load, currently pays the INC price for imbalance energy. Upon implementation of the Phase 1B tariff changes, utility bundled load will be paying the Zonal Settlement Interval Ex Post Price for imbalance energy.

The Zonal Settlement Interval Ex Post Price also continues to relate the proxy price to the actual costs of utility service. To the extent the utility serves TBS load with imbalance energy, the new Zonal Settlement Interval Ex Post Price will be used to determine the cost of that utility service. While other short-term purchases in the bi-lateral market may be used to serve TBS load, index prices for those other short-term purchases such as the ICE index do not provide for price transparency or dependability and continuity of the source of the price. The Zonal Settlement Interval Ex Post Price, however, satisfies both of these criteria equally as well as the INC price, because both prices are from the ISO.

SDG&E identified the pending adoption of the "Zonal Settlement Interval Ex Post Price," as defined in the FERC Order on Proposed Tariff Amendment No. 54, for the first time in its opening comments on the draft decision. In reply comments on the draft decision, no party expressed any objection to SDG&E's proposed approach. In the absence of any opposition by any party regarding the merits of incorporating this pending tariff change, it is reasonable to approve the approach suggested by SDG&E to provide for transition from the INC to the pricing that FERC may adopt to replace it.

While the specific FERC tariff revisions cited by SDG&E were not identified in the workshop report or parties' briefs filed prior to the issuance of the ALJ's draft decision, we find SDG&E's proposal persuasive concerning the merits of acknowledging the pending revisions. To the extent that the INC is superseded by a revised pricing structure, it makes sense to make provision for incorporating the successor pricing structure in the TBS price proxy as adopted herein. There is no point in requiring an obsolete pricing formula to remain in effect once it has been superseded. Accordingly, in view of the imminent expectation of FERC's action adopting the revised pricing structure as outlined above, we shall adopt the INC with the provision for it to be superseded by the "Zonal Settlement Interval Ex Post Price," as defined in the FERC Order on Proposed Tariff Amendment No. 54.⁹

The utilities are authorized to file an appropriate TBS tariff amendment advice letter to incorporate the revision of the FERC tariff rate upon final adoption and implementation of the revised rate structure by FERC (i.e., when the new "Zonal Settlement" pricing structure replaces the INC, which would no longer apply). If, for some reason, the FERC tariff changes are not adopted as anticipated in SDG&E's comments, then the participants in the workshop should apprise the Commission of the changed circumstances so that appropriate action at that point could be determined. Nothing in this order is intended to foreclose parties' rights subsequently to raise concerns regarding the use of the FERC tariff to the extent they identify new issues not addressed in SDG&E's comments, but which they believe are relevant to the applicability of the FERC tariff changes as the successor to the INC.

The Status Report also addresses several undisputed "technical adjustments" regarding how to calculate the final price to be charged TBS customers.¹⁰ The three utilities agree to clarify their tariff filings to explicitly state that the ISO Grid Management Charge (GMC) for Congestion (Charge Type 522 Interzonal Scheduling GMC) should not be included in the TBS rate. The three utilities also agree to explicitly state the billing determinant for the GMC components included in the TBS rate.

The three utilities agree that the UFE modifier be based on recent historical numbers available from the ISO, and that it should be adjusted no more than semi-annually if actual UFE departs from the historical rate.