IV. Least-Cost Dispatch
In D.02-12-074, the Commission required energy utilities to include Standard of Conduct No. 4 (SOC 4) as part of their procurement plans. Under SOC 4, energy utilities are required to prudently administer all contracts within the terms and conditions of those contracts and to dispatch contracts when it is most economical to do so. SOC 4 also requires the utilities to dispose of economic long power and to purchase economic short power based on a least-cost dispatch process. 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.1
SCE implements this least-cost standard by evaluating all dispatchable resources available to it based on daily market conditions at the time of dispatch into the daily, hourly and real-time markets. SCE decides which resources under its control would be most economical to dispatch by comparing the variable operating cost of each dispatchable unit with the market price of power at the time of dispatch. If the variable operating cost of a given dispatchable unit is less than the market price of power, the unit is dispatched. If the variable operating cost is greater than the market price, the unit is not dispatched.
DRA's independent examination of SCE's least-cost dispatch consisted of a review of the application and prior Commission decisions guiding the least-cost dispatch process, meetings with SCE staff, review and follow up of data responses, review of SCE internal Risk Management Committee meeting minutes, and detailed hourly data from three sample days.
DRA found from its independent examination that the deviations in SCE's load and resource forecasts were reasonable and that the day-ahead spot transactions were in line with the published day-ahead market prices.2 DRA also found from its analysis that hour-ahead sales prices were significantly lower than hour-ahead purchase prices during on-peak and off-peak periods. Because SCE did not substantiate the reasonableness of these price differences to DRA, it concluded that SCE failed to comply with the least-cost standard that it act in the most cost-effective manner and that a monetary penalty was appropriate.
DRA recommends a $16.36 million disallowance ($7.91 million for on-peak hour-ahead sales and $8.45 million for off-peak hour-ahead sales) for SCE selling energy in the hour-ahead market at unreasonable prices compared to the prices SCE pays for purchases in the hour-ahead market.3
As required by Ordering Paragraph 24b of D.02-12-074, the utilities have the burden of proving compliance with the least-cost standard. However, that decision was silent on how the utilities should substantiate that they acted in the most cost-effective manner. Not recommending a specific standard for SCE to use in this instance, DRA applied the differences between average sales and purchases on a monthly basis to assess whether SCE satisfied the least-cost standard.4
However, the reasonableness review undertaken by DRA is not an appropriate method. This is because such a comparison inappropriately assumes that hour-ahead sales and purchases are comparable. These transactions are not comparable because they are impacted by demand, availability of product types, delivery points, volatility of minute-to-minute changes in natural gas prices, transmission conditions, and load or resource forecasts.
There is no dispute that SCE is required to substantiate that its hour-ahead sales and purchases were made in the most cost-effective manner. Unfortunately, there is no hour-ahead sale or purchase market to compare the reasonableness of SCE's activities. It is not reasonable to hold SCE to a "most cost-effective" standard when neither D.02-12-074 nor DRA recommends a specific method or procedure to satisfy this standard. Absent an established "most cost-effective" standard, we review the process SCE currently uses to assess the reasonableness of its least-cost dispatch process.
Under its process, SCE rank-orders all available dispatchable resources, with the resource having the lowest variable operating cost being ranked first. The lowest cost resource is dispatched first; the second lowest cost resource is dispatched second, and so on up the supply stack.
If SCE is short on dispatchable resources to meet its load, it dispatches only those resources within its portfolio whose variable operating costs are below the market price of power. Resources whose variable operating costs are above the market price of power are not dispatched. SCE balances its short positions by purchasing additional energy in the daily and hourly spot market until its load is satisfied. If SCE has more dispatchable resources in its portfolio than it needs to meet its load, it dispatches all resources whose variable operating costs are less than the market price of power. Any excess energy is then sold in the daily and hourly spot market to maximize its value.
SCE also established protocols designed to assure that its dispatch decisions result in use of the most cost-effective mix of total resources to minimize the cost of delivering electric services and to satisfy the SOC 4 least-cost dispatch efficiency requirement. Details of these protocols are set forth in Exhibits 1 and 7. SCE's least-cost dispatch process is reasonable.
Given the reasonableness of SCE's least-cost dispatch process and absence of a standard to assess the "most cost-effectiveness" of its hour-ahead market transactions, we must reject the disallowance recommended by DRA. SCE and DRA should work jointly in establishing a standard to satisfy the most cost-effective standard of SCE's hour-ahead activities. Until such a standard is established, SCE should continue to maintain a record of its actual hour-ahead sales prices with bid prices in the same time period from other entities that purchase energy from SCE. SCE should also maintain a record of its actual hour-ahead purchase prices with asking prices from other entities selling energy, to the extent publicly available.
1 D.02-12-074, Ordering Paragraph 24b, mimeo., p. 74.
2 Exhibit 8, p. 4 and p. 7 through p. 8.
3 The disallowance was based on the average price between the monthly hour-ahead purchase and sale prices as the price SCE should have received for its sales. DRA calculated its disallowance by multiplying the monthly hour-ahead sales of SCE by the difference between the average price and the actual price SCE received for its monthly hour-ahead sales.
4 Reporter's Transcript, Vol. 1, p. 60, line 22 through p. 61, line 18.
