5. Scope of Review for Least Cost Dispatch under SOC 4

In adopting the regulatory framework under which SCE, Pacific Gas and Electric Company and San Diego Gas & Electric Company would resume full procurement responsibilities on January 1, 2003, D.02-10-062 ordered that the utilities comply with minimum standards of conduct, including Standard of Conduct #4 (SOC 4), which states:

"The utilities shall prudently administer all contracts and generation resources and dispatch the energy in a least-cost manner. Our definitions of prudent contract administration and least cost dispatch are the same as our existing standard."¹

In elaborating on SOC 4, we stated that,

"Prudent contract administration includes administration of all contracts within the terms and conditions of those contracts, to include dispatching dispatchable contracts when it is most economical to do so. In administering contracts, the utilities have the responsibility to dispose of economic long power and to purchase economic short power in a manner that minimizes ratepayer costs. Least-cost dispatch refers to a situation in which the most cost-effective mix of total resources is used, thereby minimizing the cost of delivering electric services.... The utility bears the burden of proving compliance with the standard set forth in its plan." ²

SCE and ORA assert different positions on the scope of least-cost dispatch review. In considering this issue, we keep in mind previous Commission decisions as well as our responsibility to ensure just and reasonable rates. As explained below, the scope of least-cost dispatch review in the ERRA includes SCE's decisions to dispatch the resources under its control in the daily, hourly and real-time markets.

5.1. Positions of the Parties

SCE has interpreted the least-cost dispatch principle to require the scheduling of resources and contracted energy under SCE's control to result in the projected minimization of costs (including the maximization of net revenues for excess energy sales) to SCE's bundled service customers, based on the best information available to SCE at the time schedules were submitted to the Independent System Operator (ISO).

SCE asserts that only spot market transactions (day ahead, hour ahead and real-time) should be included in the Commission's review of least cost dispatch, since they are the transactions that occur within the operating window that the utility makes its dispatch decisions. Futhermore, SCE states that the daily dispatch decisions are decisions made based on then-current daily market conditions and do not include the utility's forward transactions, which are made weeks, months or years in advance under the utility's procurement plan.

ORA's interpretation of least-cost dispatch is different than that of SCE. By requiring that the utilities operate their system on a least-cost dispatch basis, ORA asserts that the Commission intended that the utilities lower the overall cost to ratepayers by selecting resources based on the known variables and existing constraints in a manner that minimizes costs to ratepayers. As such, ORA's interpretation of least-cost dispatch is to determine whether the utility, while complying with the utility's procurement plan, selected the least-cost resources to meet the utility's load requirements over the entire time period that all short term procurement decisions and actions were made that impacted the dispatch day.

ORA asserts that to determine whether the utility selected least-cost dispatch, ORA needs to review the decisions, actions and estimates made by the utility as long as a year before the dispatch day, as well as month-ahead, week-ahead, day ahead and possibly hour ahead decisions. ORA states that it is important to determine what decisions and actions were made (or not made) based on what was known during those different periods.

ORA concludes that without the ability to review all of SCE's dispatched resources, it cannot determine whether SCE complied with the Commission's directive to "optimize" the value of the overall portfolio. In order to enable meaningful review in future proceedings, ORA requests the Commission to confirm that the scope of the least-cost dispatch analysis includes (1) all of SCE's dispatched resources and (2) all decisions, actions and estimates made by SCE as long as a year before the dispatch day.

SCE argues that it is unnecessary for ORA to review forward transactions in order to verify from the relevant workpapers that SCE used the most cost-effective mix of total resources on any given day in the record period. SCE explains that for each operating day, SCE must evaluate the total mix of resources available for dispatch, including spot market transactions, utility-owned generation, and dispatchable utility and California Department of Water Resources (CDWR) contracts, and determine what would be the most economic mix of total resources to dispatch under existing circumstances. SCE states that this is the total mix of resources that the Commission and ORA must review to verify that SCE complied with least-cost dispatch standards that the Commission placed in SCE's procurement plan and that this mix of resources is laid out in the daily energy planning workpapers that SCE provided for each operating day of the record period.

5.2. Discussion

The issue that is in dispute between the parties is the scope of review that is permitted under SOC 4 with respect to SCE's dispatch decisions. In resolving the dispute, we look to previous Commission decisions as well as to the Public Utilities Code for guidance. As a matter of background, Assembly Bill 57 ("AB57") added to the Public Utilities Code, among other sections, section 454.5(d)(2) which provides that a procurement plan approved by the Commission shall accomplish, among other things, the following:

Eliminate the need for after-the-fact reasonableness reviews

of an electrical corporation's actions in compliance with an

approved procurement plan, including resulting electricity

procurements contracts, practices, and related expenses.

However, the commission may establish a regulatory process

to verify and assure that each contract was administered in

accordance with the terms of the contract, and contract

disputes which may arise are reasonably resolved.

In order to eliminate the need for after-the-fact reasonableness review of an electrical corporations actions in compliance with an approved procurement plan, Public Utilities Code Section 454.5(b)(7) was added to direct the Commission to include in an electrical corporation's procurement plan, "The upfront standards and criteria by which the acceptability and eligibility for rate recovery of a proposed procurement transaction will be known by the electrical corporation prior to execution of the transaction..."

Consistent with this directive, the Commission adopted various standards of behavior or standards of conduct that would become part of each utility's procurement plan. These standards of conduct are the upfront standards found in Public Utilities Code Section 454.5(b)(7). With respect to the dispute at hand, SOC 4 is the upfront standard in a utility's procurement plan regarding prudent contract administration and energy dispatch decisions. In carrying out the mandate of AB57, SOC 4 does not allow the Commission to conduct after-the-fact review of the terms or prices of the utilities' procurement contracts. Rather, SOC 4 establishes a standard for dispatching energy. This standard is not tied to specific generation contracts themselves; rather it applies to all generation resources.

Furthermore, least-cost dispatch is an up-front standard that is included in SCE's procurement plan. Any subsequent review of dispatch in SCE's ERRA filings merely ensures that SCE has complied with the approved procurement plan. Nothing in section 454.5 prohibits the Commission's review of SCE's actions to determine whether it complied with an approved procurement plan. Indeed, the statute itself states that a procurement plan shall eliminate the need for after-the-fact reasonableness reviews of a utility's actions in compliance with an approved procurement plan. (§ 454.5(d)(2).)

SCE indicates that all generation resources are evaluated in its least cost dispatch process based solely on then-current daily market conditions and that its procurement transactions that are subject to least cost dispatch review under SOC 4 are limited to spot market transactions -- day-ahead, hour-ahead and real-time purchases and sales.³ It is true that the existing scope of SOC 4 does not encompass all procurement activities. Specifically, ERRA filings review the reasonableness of contract administration and least-cost dispatch.

As previously stated, least-cost dispatch refers to a situation in which the most cost-effective mix of total resources is used, thereby minimizing the cost of delivering electric services. SCE's decisions to dispatch the resources under its control in the daily, hourly and real-time markets is relevant for review in ERRA filings. On the other hand, forward purchase and sale transactions done months prior to the time of dispatch are considered procurement activities and as such, should be reviewed in the quarterly compliance Advice Letter filings. Indeed, previous Commission decisions have made this determination:

Whereas the SOC#4 review focuses on utility decisions to dispatch DWR-IOU supply resources and transact in the market, the type of any product purchased or sold, together with the bidding or other transaction procedure followed, and the contract's terms and price will be reviewed in the quarterly compliance Advice Letter filings. (D.03-06-067, p. 10, D.03-12-003, p. 6)

Therefore, we reiterate that SCE is required to optimize the value of its overall supply portfolio and consistent with D.02-10-069, that as part of the least-cost portfolio management standard, is prohibited from any action that results in inappropriate preference for URG resources or the utility's own negotiated contracts.