THEREFORE, IT IS ORDERED that:

a. After the first sentence of the first full paragraph on page 3, following the bullet points, insert: "For example, the RA framework will remain in transition for 2006-2008 as we phase out certain non-unit-specific contracts."

b. A new fifth sentence is added to the first paragraph on page 14, immediately prior to the sentence beginning, "The alternative of delaying ...." The new sentence shall read: "In addition, we adopt a phase-out of certain contracts that are not compatible with RAR but cannot be eliminated immediately without unnecessary cost or disruption."

c. The Heading for Section 4.1 is restated to read:

    "Contractual Obligations Necessary For A Resource To Count Towards RAR." The Table of Contents is modified to reflect this change.

d. The third, partial, paragraph on page 15 that carries over to page 16 and begins "As set forth throughout our decisions ..." is restated to read:

    "As set forth throughout our decisions on Resource Adequacy, including this one, a key purpose of our RAR is to ensure that resources are made available to the CAISO when and where they are needed. Thus, we clarify here that in order for a resource to count towards an LSE's RAR, an RA resource's contractual requirements cannot end with the RUC process. We hereby adopt the CAISO's request regarding RA resource availability as a form of RA must-offer obligation ("RA-MOO") and require that LSEs contract with RA resources to comply with the RA-MOO. Among other things, the RA-MOO will require RA resources to be made available to the CAISO on a real-time basis to the extent they are physically able to perform. As a practical matter, this means that units that are already running and that have unscheduled RA capacity shall make that unscheduled RA capacity available to the CAISO, if requested. Additionally, short start RA units must self-schedule or offer into the CAISO's hour-ahead market and real time market for each hour of the operating day, subject to use limitation and contingency designations, even if not scheduled in the day-ahead market or committed by RUC, unless otherwise released from this obligation by the CAISO consistent with the CAISO's existing must-offer waiver denial process under the FERC-approved MOO. (We note that the FERC-approved MOO process is mirrored by the RA-MOO in the language drawn from SVLG's proposal and adopted in section 4.4.) LSE contracts with RA resources should reflect these obligations, as well as a general obligation to comply with CAISO tariff requirements so that the CAISO can further refine the operational characteristics of the RA-MOO to meet its reliability needs."

e. The second sentence of the first full paragraph on page 16, which sentence begins, "We hereby reiterate..." is restated to read: "We hereby reiterate that in order to meet their RA obligations LSEs must procure resources that are obligated to submit a zero dollar ($0) bid for RA capacity into RUC and that are not eligible for any RUC availability payment or revenue."

f. The Heading for Section 4.3, on page 21, is restated to read: "The FERC-Based Must Offer Obligation (FERC-MOO)." The Table of Contents is modified to reflect this change.

g. Section 4.3, beginning on page 21 with the words "The MOO is a FERC-approved..." and ending on page 25 with the words "...MRTU process is implemented[]" is restated to read:

    "The existing MOO is a FERC-approved, CAISO-administered mechanism under which certain generation units not otherwise scheduled are obligated to operate and bid into the CAISO's real time market ("FERC-MOO"). The FERC-MOO mechanism includes a process under which the CAISO grants or denies MOO waiver requests, also known as the "must-offer waiver denial" or "MOWD" process. The CAISO provides some compensation to units that are denied waivers and are thus required to be prepared to operate in real time. Parties have asked that this Decision signal to FERC that the FERC-MOO can be eliminated. FERC has indicated its intent that the FERC-MOO should be terminated when the CAISO's market design is implemented. (Rehearing of The Cal. ISO's Market Redesign (2004) 108 F.E.R.C. 61, 254, 2004 FERC LEXIS 1296and Further Development of the Cal. ISO's Market Redesign (2004) 107 F.E.R.C. 61, 274, 2004 FERC LEXIS 1228.) Generators, in particular, are eager to see the FERC-MOO eliminated as soon as possible, and they recommend that the Commission support termination of the FERC-MOO before FERC when the RAR program is implemented. Other parties believe that the mechanism should be retained until both the RAR and the CAISO's Market Redesign and Technology Upgrade (MRTU) programs are operating. At the time we issue this decision, MRTU is slated to commence operation in February 2007.

    In connection with the SVLG's proposal for standard contract language (see Section 4.4 below), the Phase 2 workshop report invited comments on whether the Commission should take the position that the FERC MOO and associated must-offer waiver denial process should remain in place until the MRTU process is implemented (Topic 4). Also, in connection with interagency coordination issues (see Section 5 below), the workshop report invited comments on (1) the proposition that the Commission, the CAISO, and the FERC must coordinate to determine both replacement requirements and the schedule for eliminating the CAISO's FERC-MOO authority (Topic 13); and (2) the proposition that RAR will replace the FERC MOO (Topic 14). We take up these three related topics here to address the Commission's policy position on these issues.

    The CAISO, LSEs, and their customers generally supported having the FERC-MOO, including the must-offer waiver denial process, in place until the CAISO's MRTU program is implemented. As described in the workshop report, there is concern that if the FERC-MOO and the associated waiver process are eliminated prior to MRTU implementation, the CAISO will not have a mechanism to commit RA resources for the next day. However, such a mechanism will be available with implementation of the day-ahead market as part of the MRTU. They argue that retaining the FERC-MOO until MRTU implementation would provide an interim mechanism to assure dispatch of needed resources. Additionally, SCE believes that retention of the FERC-MOO will provide needed market power mitigation until MRTU is implemented. Joint Parties believe that the FERC-MOO will remain necessary until the Commission's RAR program has been proven to meet California's energy needs, the CAISO has implemented the MRTU and its day-ahead market, and the CAISO has authority to enter into backstop local capacity contracts.8 They also propose that the CAISO track must-offer waiver denials for non-RA resources and report them to the Commission. They believe that this would indicate whether: (1) the CAISO is relying on excess reserve levels, (2) needed local resources have been properly identified, and (3) the RAR program design is missing any needed element.

    Suppliers of generation and others opposing continuation of the FERC-MOO beyond June 2006 contend that it would undermine the incentive to contract for long term capacity, and discourage investment by continuing short-term procurement and inadequate compensation. They also believe that the FERC-MOO will not be necessary when the RAR program is operative, and in particular they dispute the workshop report's conclusion that the FERC-MOO mechanism is necessary as an interim measure for the CAISO to commit resources in the day ahead time frame. For example, IEP contends that there is no need to retain the FERC-MOO since RAR contracts will provide the CAISO with the commitments and resource availability is needs.

    It appears that the availability of the FERC-MOO as a backstop procurement mechanism available to the CAISO may discourage long term contracting for capacity and provide inadequate compensation to generators, thereby discouraging the creation of a stable investment environment. For these reasons, the FERC-MOO is not aligned with some of our RAR goals, and thus it is appropriate that FERC is considering its eventual replacement.9 However, we understand and appreciate the need for the FERC-MOO as a backstop procurement mechanism during the transition to a comprehensive RAR program.

    The RAR program outlined in this decision is not complete. As discussed later in this decision, we are permitting the use of certain non-unit specific contracts for RAR showings on a transitional basis. These contracts may not provide the CAISO with the level of commitment that unit-specific contracts should provide. Additionally, we decline to impose a localized RAR at this point. Finally, any major new program such as RAR may have unanticipated initial implementation issues. Consequently, it is prudent to proceed with caution. For the early stages of the RAR program, we do not have the same level of confidence as the generator parties that RAR contracts will provide the CAISO with the commitments and resource availability that it needs. Thus, we support FERC's determination that FERC-MOO remain in place until the CAISO's market design is implemented and our RAR program becomes fully implemented.

    While we recognize that the continued existence of the FERC-MOO may act as a disincentive for LSEs to enter into forward contracts, one of our purposes in moving towards a complete RAR is to provide the incentives that should lead to that very result - forward contracting. Eventually, adding a multi-year forward commitment dimension to the RAR program may enhance this effect. In any event, we note that nothing prohibits multi-year forward capacity commitments from qualifying for year-ahead RAR showings, and we encourage such commitments. At this time, we decline to adopt as part of our policy position on the FERC-MOO the other preconditions for termination of the FERC-MOO that were suggested by Joint Parties. In particular, we will not adopt the position that that the RAR program be proven (at least in the context of a formal proceeding) to have met California's energy needs, as that strikes us as an unnecessarily high standard for elimination of a mechanism that appears to be at odds with our RAR goals.10 The proposal that the CAISO track waiver denials for non-RA resources and report them to the Commission appears reasonable as an early means of monitoring the effectiveness of the RAR program. We request that the CAISO periodically provide such reports to our Energy Division during the transitional period between the commencement of the RAR program and the termination of the FERC-MOO.

    The workshop report states that continuation of the FERC-MOO mechanism on an interim basis may require that supplier cost information be provided to the CAISO so that it can efficiently select necessary resources. It also notes that existing FERC-MOO compensation may duplicate payments under RA contractual arrangements, and suggests that appropriate adjustments to FERC-MOO compensation for RA resources should be considered. After reviewing all of the comments and replies, we are persuaded that these measures are not necessary and we will not advance them at FERC. In particular, the possibility of duplicate payments seems somewhat unlikely.

    Finally, with regard to the concerns raised in the FERC-MOO discussions that the CAISO needs a mechanism to commit RA Resources in the day ahead time frame, we note that we are ordering that RA contracts require resources to comply with an RA-MOO mechanism, and the CAISO tariff generally (see the discussion in Section 4.1, above). We have also outlined contract language that mirrors the FERC-MOO in section 4.3, below. We anticipate that the RA-MOO will mirror the FERC-MOO's must-offer waiver denial process. This will ensure that the CAISO has a mechanism to commit RA resources in the day ahead time frame, regardless of the existence of the FERC-MOO, and will ensure that RA resources are available to the CAISO when needed, which is one of the primary goals of our RAR."

h. Section 5.a.iv of the contract language on page 27 should be clarified to read: "iv. Capacity must be made available subject to the existing FERC Must Offer Obligation ("FERC-MOO") or if the FERC-MOO is no longer operative, Capacity shall be made available subject to the same obligations and timelines that exist under the current FERC-MOO process.

i. At the end of the first full paragraph on page 60, which begins "D.04-10-035 noted that LD contracts...," new language is inserted reading: "Because of their reliability, among other factors, D.04-10-035 concluded that LD contracts must be used in conjunction with RAR, and that decision concluded that these contracts would not be `entirely disallow[ed].' (D.04-10-035, at p. 23 (slip. op.).) We must accommodate that holding here."

j. The paragraph that spans pages 60-61, beginning, "However, despite their proven performance..." and ending with "forward capacity payments" is eliminated. In its place the following language is inserted at the beginning of the first full paragraph on page 61: "However, LD contracts do present us with some concerns. LD contracts may not always be subject to deliverability screens, and they present a risk of double counting. There is a risk these resources may not be available to the CAISO, despite historical precedents, and these contracts may not induce forward capacity payments. We expressed some concern on these matters in D.04-10-035."

k. The last sentence of the first, partial, paragraph on page 62, which sentence begins, "Accordingly it is our policy," and ends, "the interests of LSEs that rely on LD contracts[,]" is eliminated. In its place the following language is added:

    "D.04-10-035 has already determined that in-area LD contracts should not be entirely eliminated once the RAR program begins. Accordingly, to comply with that requirement, and to take into account the interests of LSEs that rely on LD contracts, we will establish a transition period during which in-area LD contracts may be used in conjunction with the RAR program. Once the phase-out is over, the RAR program will operate without in-area LD contracts. Adopting a transition period allows us to implement an RAR program now while also taking into account the reality that completely disallowing these contracts, even if permitted, would be costly and disruptive."

l. The fifth sentence of the paragraph headed "Sunset Date" on page 64 that begins "Therefore, we determine that..." is restated to read: "Therefore, we determine that in-area LD contracts will not count for purposes of RAR showings after the transition period ends on December 31, 2008."

m. Finding of Fact 9, on page 98 is restated to read:

    "To count towards RAR, LSE contracts with RA resources should include an RA MOO requirement as described in section 4.1 of this Decision, and similar to the FERC-ordered MOO (including the associated must-offer waiver denial process) and should require the resource to comply with the CAISO tariff generally. We are instituting this requirement as part of the RA framework to ensure that RA resources are made available to the CAISO when needed."

n. A new Finding of Fact 27a is inserted after Finding of Fact 27 reading:

    "DWR LD contracts are the subject of a different procurement regime, governed by previous decisions and portions of the Water Code enacted in response to the energy crisis. Their status as RA resources has been previously established and is not affected by this decision."

o. Finding of Fact 31, on page 101, is restated to read:

    "Terminating the eligibility of LD contracts to count for RAR showings too rapidly would contravene D.04-10-035 and would be unnecessarily disruptive and costly to LSEs. Using a transition period to move towards our goal of a fully capacity-based program is an appropriate way to balance the needs of RAR with the fact that LSEs have made commitments while operating under a different procurement regime."

p. Conclusion of Law 14, on page 104, is restated to read:

    "Pursuant to D.04-10-035, LD contracts cannot be entirely disallowed from use in conjunction with the RAR program. A transition period should be established in which the eligibility of in-area LD contracts to count towards an LSE's RAR showings is phased out. This transition period accommodates the directives of D.04-10-035 and effectively balances the needs of the RAR program and the interests of LSEs that rely on LD contracts."

2. Rehearing of D.05-10-042, as modified herein, is denied.

This order is effective today.

Dated April 13, 2006, at San Francisco, California.

8 CMTA states that it no longer joins the other parties with which it submitted joint comments (CLECA and Joint Parties) with respect to their positions on the MOO. CMTA now characterizes the MOO as a "vestige of the energy crisis which should be eliminated as soon as possible." (CMTA supplemental comments, p. 2.)

9 We note that on August 25, 2005, IEP filed a complaint with FERC, seeking to replace the MOO with an alternative tariffed payment structure. The Commission will be participating in that proceeding, Independent Energy Producers Assoc. v. California Independent System Operator Corp., FERC Docket No. 05-146 (IEP Complaint).

10 Of course, mid-course corrections to the RAR program may prove necessary. Also, as noted elsewhere in this decision, we are planning to conduct further proceedings to upgrade the RAR program and to consider developing a centralized capacity market.

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