1. Compliance With Section 380

Calpine and IEP claim the Decision does not comply with section 380, subdivision (c). Section 380 was added in 2005 by Assembly Bill No. 380 ("AB 380") (Stat. 2005, ch. 367, §2). The bill, which was enacted as the proceeding to adopt the Decision was under way, confirms the Commission's authority to establish an RAR program, and contains requirements for the Commission and LSEs to follow. The statute became effective on January 1, 2006, after the decision was issued.

Subdivision (c) requires each LSE to "maintain physical generating capacity adequate to meet its load requirements," including reserves. In addition, this capacity must be deliverable. (Pub. Util. Code, § 380, subd. (c).) IEP argues that LD contracts cannot be used for RAR because they do not provide the required physical resources, and are not deliverable. Calpine also asserts that LD contracts contravene the statute's requirements because they are not deliverable. According to Calpine, "a deliverability determination can only be made with respect to physical resources-in other words, contracts that specify where the contract is being sourced." (Calpine's Rehearing Application, at p. 4.) As a result, these two parties claim section 380(c) requires us to entirely disallow the use of LD contracts in conjunction with an RAR program.

These claims do not demonstrate error. Both Calpine's and IEP's claims are based on a misreading of the Decision. The Decision establishes an RAR framework that does not include in-area LD contracts. The Decision states its "ultimate" goal is to disallow the use of in-area LD contracts to fulfill LSEs' capacity obligations, and the Decision's real result is to reduce the use of in-area LD contracts to 0% over a three-year period. (D.05-10-042, at p. 61.)⁵ For 2006-2008, the Decision establishes a transition period during which in-area LD contracts will be phased out. Yet the two rehearing applications describe the Decision as an affirmative determination to include LD contracts in the RAR framework. IEP argues that the Decision "permits" LD contracts to be used to satisfy RAR obligations. (IEP's Rehearing Application, at p. 3.) Calpine argues: "Allowing RAR obligations to be met through the use of LD contracts" is inconsistent with past decisions and section 380.

These allegations do not recognize the fact that the Decision repeatedly describes the requirements in place for 2006-2008 as transitional. In several places the Decision makes clear that because the RAR program creates entirely different requirements from the currently imposed procurement regime, the first few years of the RAR program will be transitional. Acknowledging that a transition period is needed to allow LSEs to change their procurement practices, the Decision states at page 11:

LSEs and their suppliers will need to change their procurement strategies. We will seek to avoid imposing unnecessary disruptions and costs on market participants, and we recognize that transitional mechanisms will be required to avoid unduly impairing existing business arrangements.

In its discussion of the federally-imposed MOO, the Decision further acknowledges that the Commission is "permitting the use of certain non-unit-specific [i.e., LD] contracts on a transitional basis." (D.05-10-042, at p. 23.) Elsewhere, on page 2, the Commission states: "While we believe this decision is a significant step forward, it does not represent the final word for resource adequacy in California. More work needs to be done. We have deferred action on certain RAR program elements...."

D.04-10-035 also acknowledges that the RA framework was adopted on an accelerated basis. The Decision is designed to achieve a 15-17% reserve margin in 2006, rather than in 2008, as previously anticipated. (Resource Adequacy Decision [D.04-10-035], supra, at pp. 12-13 (slip op.).) The Decision's approach to the MOO points out the tension between the Commission's desire to have some form of framework in place for 2006 and the fact that not all of the desired program elements would be in place, or fully tested, at that time. The Decision notes that parties believed that the FERC-imposed MOO should be in place until the CAISO's MRTU was completed as "an interim mechanism to assure dispatch of needed resources." (D.05-10-042, at p. 22.) The Decision then notes that the early stages of its RAR program should be considered experimental, noting that, "any major new program such as RAR may have unanticipated initial implementation issues, [so] it is prudent to proceed with caution." (D.05-10-042, at p. 24.)⁶

The Decision will be modified to make this aspect of the RAR program explicit. Once it is understood that the fully implemented RAR program excludes in-area LSE-negotiated LD contracts, the claim that we are improperly including them in RAR is revealed to be without merit. Further, we believe it is more than clear that we have authority to establish a transition period before fully implementing the RAR program. The rehearing parties do not even acknowledge the effect of the phase-out or provide any arguments or analysis that claim a phase-out is improper. (Compare, Commission Rules of Practice and Procedure, Rule 86.1, Code Regs, tit. 20, § 86.1.) Even section 380 allows for such a result. The statute contains no deadlines or timelines for Commission action to implement RAR. Subdivision (a), for example, does not require that the RAR framework to be established at any particular time. It also makes little sense to read a prohibition on a phase-out into section 380 when it is acknowledged that some of the LSE's procurement practices prior to RAR were the subject of Commission orders and comply with other provisions of the Public Utilities Code, such as section 454.5

Moreover, we believe that section 380, subdivision (h) explicitly gives us discretion to determine how to implement an RA program. Section 380(h) states that the

Commission is entitled to "determine and authorize the most efficient and equitable means for achieving" four enumerated goals, including achieving the overall "objectives of this section [380]." As Edison, Sempra, Constellation, and DWR point out, that authority is sufficient to allow us to establish a transition period as a "means for achieving" our RAR program. As the Decision states, adopting a transition period that allows LSEs to phase out their reliance on LD contracts without unnecessary cost or disruption is the fairest and most effective means for achieving the goals of RAR that are set forth in section 380.⁷

We do not believe the legislative purpose of section 380 is to limit or detract from our authority. The requirements contained in the statute show that the Legislature, in fact, intended section 380 to augment and clarify our authority. Subdivision (j) makes it clear that the statute was designed to assist the Commission in setting up an RAR program applicable to all LSEs by defining the term "load-serving entity" broadly. The statute's legislative history shows that a main purpose of section 380 is to eliminate any dispute over our ability to establish requirements applicable to all LSEs, including ESPs and CCAs.⁸ Similarly, while the statute sets out requirements for an RA program,

subdivision (h) gives us discretion to determine the best way to implement those requirements. Such a statute cannot properly be read to prevent us from establishing a transition period as a way to replace the current procurement regime without causing unnecessary cost and disruption.

Finally, the rehearing applications are incorrect to claim that this Decision, D.05-10-042, makes the determination to allow LD contracts to be used in conjunction with the RAR framework. The Decision merely implements a conclusion reached in Resource Adequacy Opinion [D. 04-10-035], supra. That decision found that LD contracts, "provide economic value..." and to the extent that LD contracts are backed by portfolios of generating units, they may be more reliable than unit-specific contracts. (Id. at p. 23 (slip op.).) Resource Adequacy Opinion [D. 04-10-035], supra, then explicitly rejected the outcome where "we ... entirely disallow their use...." (Ibid.) As a result, Resource Adequacy Opinion [D. 04-10-035], supra, establishes a counting convention that will include, in some way, LD contracts.⁹ The Decision simply implemented this requirement and must be understood as holding that if LD contracts are not to be "entirely disallowed," then they should be phased out over a three year transition period.

It is not error for us to follow the requirements established in Resource Adequacy Opinion [D.04-10-035], supra, as applied to LSEs in Ordering Paragraph 1.¹⁰ If parties wished to challenge the legality of that order, they should have done so when it was issued. Section 1731(b) provides, in relevant part:

After any order or decision has been made by the commission, any party to the action or proceeding . . . may apply for a rehearing in respect to any matters determined in the action or proceeding. . . . No cause of action arising out of any order or decision of the commission shall accrue in any court to any corporation or person unless the corporation or person has filed an application to the commission for a rehearing within 30 days after the ... date when the commission mails the order or decision to the parties. . . .

No party filed an application for rehearing of D. 04-10-035.¹¹ As a result, the time for challenging the conclusion that LD contracts can be used in conjunction with the RA program has passed.

For all these reasons, the rehearing applications' claims about the effect of section 380 do not demonstrate error. Because the rehearing applications did not appear to understand the actual effect of the Decision, we will make modifications to clearly articulate the transitional nature of the 2006-2008 RAR program. We will also modify the Decision to make it clear that its action on the question of LD contracts only followed D.04-10-035. Rehearing of the Decision, as modified, is denied.

⁵ The Decision requires this result because of LD contracts' lack of unit-specific requirements and deliverability issues. Since the decision disallows the use of LD contracts for the same reasons set forth in section 380, subdivision (c), the Decision's holdings are in fact consistent with the statute's mandate.

⁶ The characterization of the first years of RAR as transitional is also supported by the record. The Workshop Report specifically describes the "Top Down" approach adopted for RAR as transitional. (Workshop Report at p. 52.) The Workshop Report further describes the task of accommodating LD contracts into the RAR framework as a matter of transitioning those contracts. (See, Workshop Report at pp. 77, 78.)

⁷ IEP argues that the set of "objectives" that the Commission may use its discretion to implement is smaller than the objectives of the entire section. According to IEP, the Commission may only exercise its discretion in achieving the objectives in subdivision (b): (1) facilitating the development of new capacity, (2) equitably allocating costs, and (3) minimizing enforcement requirements and costs. The actual language of the statute is not as narrow as IEP claims. Section 380(h)(1) gives the Commission authority to authorize the most equitable means of achieving "the objectives of this section." (Emphasis added.) This language plainly refers to the goals expressed throughout "section" 380, not just those goals set forth in one subdivision. Moreover, the Legislature identified the "objectives" set out in subdivision (b) as the Commission's objectives, not those of section 380.

IEP's reading also makes little sense because subdivision (h) repeats several of the objectives from subdivision (b) in its list of goals that the Commission may use discretion to achieve. If subdivision (h)(1) intended to cross reference subdivision (b), as IEP suggests, then subdivisions (h)(2), (h)(3) and (h)(4) would not need to repeat the requirements contained in subdivision (b) because they would have been incorporated via the cross-reference in subdivision (h)(1). (Compare Pub. Util. Code, §380, subd. (h) with subd. (b).)

⁸ The need for clarification is the only topic discussed in the Comment section of several bill analyses. Previously, "ESPs have contested the [Commission's] authority to require ESPs to meet the [Commission's] requirements, but haven't changed the [Commission's] mind or succeeded in getting a court to overturn the [Commission's] jurisdiction." The Commission supported the bill, taking the position that it "minimizes, if not eliminates, any legal uncertainty over [the Commission's] authority to set resource adequacy standards." (Sen. Rules Committee, Off. of Sen. Floor Analysis, 3d reading Analysis of Assembly Bill No. 380 (2005-2006 Reg. Sess.), as amended September 6, 2005, p. 4.) Similar language appears in the other bill analyses for AB 380. (Sen. Rules Com., Off. Of Sen. Floor Analyses, 3d reading analysis of Assembly Bill No. 380 (2005-2006 Reg. Sess.), as amended September 2, 2005, p. 4, Sen. Rules Com., Off. Of Sen. Floor Analyses, 3d reading analysis of Assembly Bill No. 380 (2005-2006 Reg. Sess.), as amended August 24, 2005, p. 4, Sen. Com on Util. and Commerce, Rep. on Assembly Bill No. 380 (2005-2006 Reg. Sess.), June 30, 2005, p. 2, Assembly Com. on Approp., Rep. on Assembly Bill No. 380 (2005-2006 Reg. Sess.), May 11, 2005, p.3, Assembly Com. on Util., and Commerce, Rep. on Assembly Bill No. 380 (2005-2006 Reg. Sess.), April 18, 2005, p. 2.)

⁹ Ordering Paragraph 1of D. 04-10-035 makes all respondent LSEs "subject to the load forecasting protocols and resource counting conventions adopted in this interim order as the basis for resource adequacy requirements until directed otherwise by subsequent orders or decisions." (Resource Adequacy Opinion [D.04-10-035], supra, at p. 54[Ordering Paragraph ("OP") No. 1] (slip op.).)

¹⁰ We are also puzzled by the rehearing applications because they assert that the determination not to disallow LD contracts errs because it does not comply with a statute that became effective after both the initial determination to retain LD contracts was made and the decision implementing that determination was issued. Although aware of this timing issue, the applications cite no authority and provide no explanation about how a statute could have such a retroactive effect. (Compare, Rehearing Application of IEP, at p. 4, Rule 86.1, Code Regs, tit. 20, § 86.1.) We do not address this point in detail because we believe that our decisions are, in fact, consistent with the Legislature's directives.

¹¹ In fact, Calpine, one of the parties now applying for rehearing, appeared to have accepted this outcome during the workshops. Calpine's position, described in the workshop report, "was that only LD contracts signed on or before October 28, 2004 (the effective date of the Phase 1 decision) should count for resource adequacy." (D.05-10-042, at pp. 62 & 79.) This position is directly at odds with Calpine's current claim that no LD contracts should be allowed to count towards fulfilling RA obligations.