11. The 2009-2011 RA Confirmation should be approved

The Pastoria Energy Facility will provide a needed RA product for the BC/V Local Area. Also, as discussed below, SCE has reasonably demonstrated that the 2009-2011 RA Confirmation meets our requirements for approval. We conclude that the transaction should be approved without modification.

11.1. Requirements for Approval under D.04-12-048

In D.04-12-048, the Commission established a list of specific criteria to judge whether an RA agreement is in accordance with our policies and procurement requirements.23 Specifically SCE must demonstrate:

Each of these requirements, as they relate to SCE's request for approval of the 2009-2011 RA Confirmation, is discussed below.

11.1.1. Capacity Need

The LCR study performed by the CAISO locates and describes transmission constraints in various Local Areas in California. Pursuant to Commission decision (D.06-06-064 and D.07-06-029) we establish the appropriate level of Local Capacity obligations and allocate them out to the LSEs based on load share within IOU service areas. To satisfy the Commission's Local RA obligation, SCE has been required to procure their share of Local RA capacity in the BC/V Local Area. Since the Pastoria Energy Facility is located within the BC/V Local Area, it is eligible to provide Local RA product. SCE's Local RA obligation in the BC/V Local Area justifies this purchase for 2008, and the Commission finds it reasonable for SCE to procure capacity from the Pastoria Energy Facility to meet a forecasted Local RA obligation of a similar magnitude in the years 2009 - 2011.

11.1.2. Compliance with the EAP Loading Order

The EAP Loading Order, published May 8, 2003 and endorsed again in D.04-12-048, contains explicit direction regarding the state's preferences for meeting identified resource needs, and the IOUs are to prioritize their resource selections accordingly."24 Cost effective procurement of Demand Response (DR), Distributed Generation (DG), and Renewable Energy are to occur prior to any procurement of fossil resources.

In D.04-12-048, the Commission chose to accept compliance with the EAP by finding that the LTPPs "are EAP-compliant to the extent they include EAP targets established in the RPS, DR and EE proceedings; included, at a minimum, the DG forecasts in the 2003 IEPR, and added transmission and clean central-station generation to meet remaining energy and capacity needs."25 Chapter IV of SCE's LTPP laid out the goals for the growth of DR, DG, and RPS eligible resources in a table alongside projections of need for fossil resources. Chapter IV discussed the "bottom-up" methodology that SCE would use to compute residual need for cost effective fossil generation after all the higher order resources are accounted for and subtracted. In order to protect resource mixes and other commercially sensitive information, we merely say here that this agreement does not constitute a departure from the EAP, since it is in line with SCE's LTPP and fits within the residual net short after preferred higher order resource targets are achieved.

11.1.3. Types of Approved Transactions and Products

D.02-10-062 lists a set of approved products and transactions, including the approval for restricted bilateral agreements and the procurement of RA Capacity.26

11.1.4. Open and Transparent RFO

In this application, SCE seeks approval of procurement via direct bilateral contracting, not via an open and transparent RFO. D.03-12-062 allows direct bilateral contracting such as this only in four cases - (1) Short-term transactions of less than 90 days' duration and with delivery beginning less than 90 days forward; (2) Longer-term non-standard products provided that the IOU includes a product justification in quarterly compliance filings; (3) Standard products in cases where there are five or fewer counterparties (for gas storage and pipeline capacity, only; and (4) to enhance Local Area Reliability. Since this transaction is the product of a settlement with some bilateral negotiating involved, this transaction falls under condition (2) above, the longer term non-standard product for which the IOU must report on in the quarterly compliance filing. SCE does provide a product justification in A.07-08-007, but, for purposes of fulfilling the requirements of D.03-12-062,27 must include this justification in subsequent quarterly compliance reports, which will allow the Commission to review the transaction in that context.

11.1.5. Highest Value to Ratepayers via LCBF

D.04-12-048 requires the use of a LCBF methodology.28 Since this is an RA only product, discussions of potential dispatch are not included here. Since this is a BC/V Local RA product, need is determined via SCE's BC/V Local RA obligation for 2008, and implied continuation of that obligation into the future years of this contract. LCBF is measured in comparing the NPV of this transaction versus possible transactions for similar products. In this case, SCE presented NPVs based on bids received from generators offering BC/V Local RA product in the quantities transacted here. SCE showed that this transaction would create net present costs less than comparable transactions bid into the RFO, and significantly lower than the residual BC/V Local RA offered into the RFO that was not procured. Even though this transaction was not the result of an RFO, it is cost competitive in terms of NPV over the term of the contract.

11.1.6. Consultation with PRG

SCE consulted with the PRG on April 11, 2007 regarding the settlement with CES that restructured their existing contract for capacity and energy from the Geysers facilities. In this meeting, SCE presented the structure of the settlement, including provisions for extension of the RPS eligible purchases from the Geysers facilities. SCE also presented a swap of RA capacity from the Geysers units for capacity from the Pastoria Energy Facility and an increase in the total amount of RA capacity purchased. SCE presented valuations which demonstrated that this swap represents an increase in value for SCE, particularly given that SCE has a Local RA obligation in BG/V, but not in the area in which the Geysers is located (North Coast/North Bay Local Area), and that this transaction increases the total amount of capacity SCE has under contract.

SCE's presentation also compared the value of the NPV of this transaction against the NPV of bids for similar products made in their recent RFO. The presentation made by SCE presented a comparison of the proposed pricing of Local RA capacity from the Pastoria Energy Facility against bids it received for other Local RA capacity (both LA Basin and BC/V) in its recent All Source RFO for products that can deliver in 2008 and beyond. All offers were adjusted to cover the entire 2008-2011 timeframe, and a comparison of the NPV of the Pastoria settlement versus the NPV of the first unaccepted offer of similar size and location was provided. Since the initial PRG meeting to the current application, the pricing has increased somewhat, but the Commission is satisfied that SCE has adequately fulfilled its obligation to consult with the PRG.

11.2. Required Elements of an RA Contract under D.05-10-042 and D.06-07-031

D.05-10-042, while not adopting a standard capacity contract, lays out certain required elements that must be included in a valid RA capacity contract. D.06-07-031 builds off those required elements and adds more definition to them. It also specifically elaborates on the elements of a standard tradable product. The RA contract between SCE and CES regarding the Pastoria Energy Facility has incorporated those provisions, including scheduling and deliverability obligations to the CAISO, flexibility regarding the treatment of outages, CAISO net qualifying capacity rating procedures, good utility practice and compliance with GO 167, and provisions regarding the resale of the designated RA capacity from Pastoria Energy Facility. The RA contract approved here sufficiently obligates the Seller to the RA provisions of the CAISO Tariff, including reporting, performance, scheduling and deliverability, as well as installs the proper safeguards against double selling and verification. The Commission is satisfied that the provisions of D.05-10-042 and D.06-07-031 are met.

23 D.04-12-048, p. 154, exempts contracts of five years or less from the requirement to add a GHG adder to all fossil bids.

24 D.04-12-048, p. 31.

25 D.04-12-048, p. 45.

26 D.02-10-062, pp. 37-38.

27 D.03-12-062 Ordering Paragraph 11.

28 D.04-12-048, page 127, orders IOUs to use "Qualitative and quantitative attributes include performance risk, credit risk, price diversity (10- vs. 20-year price terms), and operational flexibility etc." when evaluating bids in an all source RFO.

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