6. Standard of Review for Least Cost Dispatch under SOC 4

6.1. Positions of the Parties

SCE takes the position that the review for least cost dispatch under SOC 4 is one of compliance, not reasonableness. SCE states that the Commission has adopted an "up front, achievable standard" for contract administration and least cost dispatch, and has added the standard to SCE's procurement plan. SCE concludes that, because the Commission has included its least cost dispatch standard as an element of SOC 4 in its procurement plan, the issue is one of compliance. That is, whether SCE's economic dispatch activities during the record period complied with the following standard, which D.02-12-074 placed in SCE's procurement plan: "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 asserts that its testimony, exhibits and workpapers in this proceeding have demonstrated such compliance.

In support of its position, SCE refers to D.03-06-076, where we stated:

"Contrary to the utilities' characterization, Standard 4 does not impose traditional after-the-fact reasonableness reviews. Standard 4 does not allow the Commission to conduct after-the-fact review of the terms or prices of the contracts themselves. In the December decision, the Commission clarified that contract terms and prices would not be at issue in any review under Standard 4. Rather, Standard 4 establishes a standard for dispatching energy. This standard is not tied to the contracts themselves; rather it applies to all generation resources.

Least-cost dispatch is an up-front standard that is included in the procurement plans. Any subsequent review of dispatch merely ensures that the utilities have complied with the approved procurement plans. Nothing in Section 454.5 prohibits the Commission's review of utility actions to determine whether the utility complied with an approved procurement plan. Indeed, the statute 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).)"⁴

ORA takes the position that review for least cost dispatch under SOC 4 must be one of reasonableness. ORA states that a compliance review provides practically no Commission oversight. ORA describes the compliance process to be that "ORA (1) review the actual provisions of the SCE's 2003 procurement plan, (2) locate the provision requiring SCE to operate according to the least cost dispatch principles and, based on these two findings, (3) ORA must conclude that SCE is `in compliance' with its procurement plan - end of analysis."⁵

ORA concludes that the stakes are high and that "...it is simply untenable that the Commission would essentially abdicate its authority to review the `reasonableness' of procurement costs, which amount to billions of dollars. A mere `compliance review' would amount to a severe diminution of the Commission's oversight authority."⁶

In response to ORA, SCE asserts that a compliance review is neither an abdication nor a severe diminution of the Commission's oversight authority. Rather it is recognition that AB 57 has changed the nature of the Commission's oversight authority. SCE describes the review process for SOC 4 as follows:⁷

"First, the Commission reviews SCE's administration of its contracts to verify that its activities have complied with the terms and conditions of the contract, and that any contract disputes that may arise are reasonably resolved.

...Second, the Commission reviews SCE's economic dispatch activities to verify that it dispatched dispatchable contracts (both utility and DWR contracts) when it was most economical to do so, and that it used the most cost-effective mix of total resources under its control, thereby minimizing the cost of delivering electric services to its customer.

...Finally, the Commission reviews SCE's spot market transactions that are conducted in association with its daily dispatch operations. This review is to verify that SCE's economy purchases and sales of energy contributed to its using the most cost-effective mix of the total resources under its control."

6.2. Discussion

Standards of review for least-cost dispatch and contract administration under SOC 4 have been discussed in prior Commission decisions. In summary;

o The Commission's intent is to review contract administration, including least-cost dispatch.⁸

o SOC 4, which sets minimum standards of conduct regarding contract administration and least cost dispatch, was adopted by the Commission⁹ and has been included as an element of the utilities' approved procurement plans.

o Least-cost dispatch is an up-front standard in the utilities' procurement plans. Therefore, subsequent review of dispatch should ensure that the utilities have complied with the approved procurement plans.¹⁰

o The Commission may review utility actions to determine whether the utility complied with its approved procurement plan.¹¹

Under SOC 4, the utilities must demonstrate that they have prudently administered all contracts and dispatched the energy in a least-cost manner. SCE has articulated reasonableness criteria and provided testimony to support the prudence of its contract administration. Therefore, there are elements of reasonableness review within SOC 4. As we have previously stated, this is not a traditional reasonableness review in that only certain aspects (contract administration and least cost dispatch) are subject to review in the ERRA, while other aspects (including terms and prices) are reviewed in the quarterly procurement advice letter process. However, with regard to least cost dispatch, we have not specified prudence or reasonableness evaluative criteria. We have instead stated that the utilities must use the most cost-effective mix of total resources, thereby minimizing the cost of delivering electric services. That is a compliance matter.

It is for these reasons that we agree with SCE's characterization of the SOC 4 review process as well as its position that least-cost dispatch review is one of compliance. However, this determination does not necessarily diminish the need for, or breadth of, the utility's showing to demonstrate least-cost dispatch compliance, when compared to that required in a reasonableness review. As SCE has explained,

"[In the traditional reasonableness review] the Commission looks at a range of outcomes that a reasonable manager could have come to conclusion or an appropriate action to take. In other words, there is not a specific outcome that defines reasonableness. There's a range of outcomes that defines reasonableness, and it's based on what the manager knew or should have [known] at the time that the decisions were made. There's no standard per se when you can measure the actions the utility took against the standard. And that's what distinguishes an after-the-fact reasonableness review from our compliance review. Our compliance review in this ERRA proceeding with respect to Standard of Conduct 4 is a showing that demonstrates that we have operated our resources to produce the lowest possible cost for customers."¹²

Therefore, in the compliance review there are no ranges of possible outcomes. The outcome or standard for review has been predetermined -- that is the lowest cost. SCE must demonstrate that it has complied with this standard, by providing sufficient information and/or analysis in order for the Commission to verify that SCE's dispatch resulted in the most cost-effective mix of total resources, thereby minimizing the cost of delivering electric services. Based on analyses of SCE's showing and subsequent discovery, ORA or any other party may take the position that SCE did not fully comply with SOC 4. In such cases, we will judge the merits of the parties' positions and may impose disallowances and/or penalties, up to the maximum penalty cap.¹³ This compliance process encompasses much more than that characterized by ORA. Imposing a compliance process for least-cost dispatch under SOC 4, rather than a reasonableness review process, does not diminish our ability to ensure just and reasonable rates.

ORA cites D.02-12-069 in support of its position that SOC 4 should be subject to reasonableness review. D.02-12-069 upheld the reasonable manager standard for purposes of administering CDWR contracts. However, that decision also stated, "The adoption of the utilities' procurement plans eliminates the need to conduct traditional reasonableness review of the utilities' activities related to procurement. Instead, consistent with the requirements of AB 57 and Senate Bill 1976, the Commission will approve the utilities procurement plans, including up-front standards of minimum behavior, and will conduct compliance review to evaluate utility compliance." (D.02-12-069, p. 56.) Under SOC 4, that compliance would consist of a showing of prudence for contract administration (for which the reasonable manager standard would apply) and a showing that resources were dispatched in a least cost manner. We do not find that our decision today is inconsistent with D.02-12-069.

In this decision we have defined the scope of least-cost dispatch review and have indicated the utilities' responsibility for proving compliance with the least-cost dispatch standard. However, at this time, the Commission has not specified criteria that should be used to determine what constitutes least-cost dispatch compliance or what the utility needs to provide to meet its burden to prove such compliance. If there is a need for such criteria, it should be developed in a generic proceeding where all affected utilities, as well as interested parties, could participate. In the meantime, SCE and ORA should use a master data request process, as discussed later in this decision, as a means to reach some understanding on the types of information or analyses that would be useful in demonstrating SOC 4 compliance as it relates to least cost dispatch.

Further, if ORA or another party can demonstrate that SCE has not dispatched resources in a least-cost manner, the Commission will review that evidence and make appropriate adjustments for non-compliance.