III. CONCLUSION

In the Decision, we adopted an allocation mechanism that ensured an IOU's costs for certain long-term contracts would be borne by those on whose behalf those costs were incurred. The class of "benefiting customers" to whom we allocated those costs consisted of customers to whom we were permitted to allocate costs pursuant to section 380(g), which specifically allows us to impose nonbypassable charges. Moreover, MDL was included in the class of "benefiting customers" because we had previously determined that departing load should bear such costs in Long Term Procurement, supra. The Decision did not adopt a benefit test, nor did the adoption of the allocation mechanism involve factual issues the resolution of which would have benefited from a trial-type evidentiary hearing. When we do examine factual issues, relating to need, we will allow parties to address how those issues affect the allocation of costs to MDL.

The Decision also makes no attempt to establish a role for IOUs in the procurement of power for POU customers; the Decision only allocates cost responsibility to potential future MDL customers. Finally, the Decision was properly circulated for comment as a PD, and was properly revised before it was adopted. As a result, the allegations of error contained in the rehearing decision are without merit. We will, however, modify the Decision to make these points clear, and deny rehearing of the Decision, as modified.

THEREFORE, IT IS ORDERED that:

1. For purpose of clarification, D.06-07-029 is modified as follows:

a. The first full paragraph on page 7, which paragraph begins, "Therefore we are adopting..." is restated to read:

    "Therefore we are adopting a cost-allocation mechanism on a limited and transitional basis, that allows the costs of new generation be allocated broadly to a defined class of "benefiting customers" consistent with applicable law and precedent, and also allows the RA benefits of this new generation to be shared by all LSE customers in an IOU's service territory. Benefiting customers as defined in Section IV.B.1 pay only for the net cost of this capacity, determined as a net of the total cost of the contract minus the energy revenues associated with dispatch of the contract."

b. The first sentence of the first full paragraph on page 15, which sentence begins, "The Joint Parties ask..." is modified to read: "The Joint Parties ask the Commission to rule that as a transitional mechanism the utilities, or another entity if feasible, may procure new generation within an IOU's distribution service territory with the net costs of these new resources being allocated to a defined class of `benefiting customers' consistent with applicable law and precedent, and the RA benefits being shared among the LSE customers in the IOU's service territory."

c. The last sentence of the first full paragraph on page 16, which sentence begins, "While and IOU..." is modified to read: "While an IOU is an entity with the resources to make such a commitment, PG&E and SCE believe that it would be unfair for their bundled customers, alone, to pay the premium that new resources command as compared with existing resources when they are obtaining new resources on behalf of a broad group of customers."

d. The second sentence of numbered paragraph 5 on page 27, which sentence beings "Nothing we adopt herein..." is modified to read: Nothing we adopt herein relieves or adds to that responsibility with respect to contracts that are not subject to this decision's cost-allocation mechanism."

e. A new sentence is added at the end of footnote 22, on page 28, which reads: "The relationship of D.04-12-048 to the treatment of the net costs of long-term contracts subject to this decision's allocation mechanism is described elsewhere."

f. The last sentence in numbered paragraph 15, on page 31 is restated to read: "The contract costs paid and RA benefits received by DA, CCA, and bundled customers should be based on a share basis equal to the credit share received, with cost responsibility for departing customers being calculated by assuming that they did not depart."

g. Section IV.C.6, entitled "Legal Authority" and appearing on pages 40-43 is restated to read as follows:

    "In conjunction with their JP, the Joint Parties provided legal support for their cost-allocation scheme citing AB 380, codified as Section 380 in the Public Utilities Code, for the Commission's authority to approve the plan. The main applicable section of the code is as follows:

An electrical corporation's costs of meeting resource adequacy requirements, including, but not limited to, the costs associated with system reliability and local area reliability, that are determined to be reasonable by the commission, or are otherwise recoverable under a procurement plan approved by the commission pursuant to Section 454.5, shall be fully recoverable from those customers on whose behalf the costs are incurred, as determined by the commission, at the time the commitment to incur the cost is made or thereafter on a fully non-bypassable basis, as determined by the commission.19

    In addition, Section 380(b) requires that we allocate costs equitably and avoid cost shifting. Thus, Section 380 gives us clear authority to allow an IOU to recover the costs it incurs to sustain "system reliability and local area reliability" from all customers "on whose behalf the costs are incurred." We construe benefiting customers as defined in Section IV.B.1 to be those customers on whose behalf the costs have or will be incurred.

    Joint Parties posit that the Legislature's intent is clear from the statutory language that they did not want to limit recovery for system and local area reliability to just an IOU's bundled customers, but authorized recovery from a larger group of customers. Therefore, Joint Parties argue that the JP is consistent with the Legislative intent of AB 380 since it provides for an equitable cost allocation for the new capacity needed for system reliability from all benefiting customers.

    We agree with the Joint Parties that Section 380 clearly authorizes the Commission to adopt a cost-allocation methodology that spreads the cost of the new generation authorized by this decision. Because it prevents bundled customers, alone, from bearing the costs for new resources, the allocation mechanism prevents cost shifting. We note as well that Section 380(g) clearly states that these costs are to be recovered "on a fully nonbypassable basis, as determined by the [C]omission." These mandates are expressed clearly by the statute's language, and we are carrying them out in a straightforward manner. There should be no question that Section 380(g) provides us with a basis on which to adopt the JP's cost allocation mechanism.

    Further, we read Section 380 to include a mandate that (as part of the Commission's obligation to establish RAR) we must support "new" generating capacity and equitably allocate the costs. That mandate also provides a basis on which to adopt the JP's allocation mechanism. The pertinent portion of Section 380 that addresses RA is as follows:

    (b) In establishing resource adequacy requirements, the commission shall achieve all of the following objectives:

    (1) Facilitate development of new generating capacity and retention of existing generating capacity that is economic and needed.

    (2) Equitably allocate the cost of generating capacity and prevent shifting of costs between customer classes.

While we have adopted RAR for all LSEs, we have not specified that any portion of the capacity must be "new." Sempra, in its comments, points this out, and this may be an area that we address in the future. In the interim, the cost-allocation methodology we are adopting in this decision is intended to support new generating capacity.

To further bolster their claim that the cost allocation proposal in the JP is consistent with law and Commission precedent, the Joint Parties reiterate the that cost allocation or the recovery of the costs for new generation must be "just and reasonable" and cannot be unfair or discriminatory. The Joint Parties cite to a number of cases where the Commission imposed surcharges upon a broad group of customers when costs are incurred by the IOU for of all customers, not just for its bundled-service customers.20

More pertinently, the Joint Parties refer to D.04-12-048, where we found that it was appropriate and reasonable for the IOUs to recover the net costs of long-term commitments (i.e., long-term agreements to construct new facilities) from "all customers, including departing customers."21 We agree with the Joint Parties that some aspects of the JP's allocation mechanism are matters of settled policy. We have already established that an allocation mechanism for IOU costs for long-term contracts that provide capacity needed not just by the IOU's bundled customers should charge the net costs incurred by the IOU to a broad group of customers, including departing customers.22 The JP is consistent with this holding.

Finally, we note that Joint Parties point to the "physical interconnectedness of California's electricity system."23 From their perspective, it is not the sufficiency of the largest entity's resources that ensures reliability, as much as it is the sufficiency of all entities' resources. Since a fully resourced LSE can be subjected to an outage because of an under-resourced LSE, if, pursuant to the JP, an IOU obtains new generation that contributes to system reliability, that generation will be obtained on behalf of all LSEs, and all LSE's customers.

Thus we agree with the Joint Parties that Section 380 and Commission precedent supports the adoption of the cost allocation formula set forth herein, and in addition, we read Section 380 as mandating that we take proactive steps to facilitate new generating capacity and the cost sharing mechanism we prescribe is the appropriate way to equitably allocate the cost (e.g. avoid cost-shifting) and keep rates just and reasonable."

h. Section IV.C.13, entitled "POU Concerns" on page 48 is restated to read:

"Our definition of benefiting customers subject to the cost allocation mechanism does not include current POU customers, and departing customers who take POU service will not be able to avoid cost responsibility pursuant to D.04-12-048, as modified by D.05-12-022. As noted in D.04-12-048, Ordering Paragraph 9, IOUs are required to forecast and plan
for departing load as they file their biennial long-term procurement plans which establish each IOU's long-term resource needs. Further, we will consider issues of need in a subsequent phase of this proceeding and POUs may address whether specific facts suggest refining our approach to the allocation of costs to municipal departing load."

i. The second sentence of the second paragraph on page 50, which sentence begins, "Our findings in this decision..." is restated to read:

    "Our findings in this decision result from the application of settled legal principles, or are based on facts previously litigated and policy determinations."

j. Finding of Fact 9, on page 55 is restated to read: "In D.04-12-048, we allowed the IOUs to recover any stranded costs from all customers, including departing customers, for a period of either the life of the contract ,or 10 years, whichever is less."

k. Finding of Fact 19, on page 56 is restated to read:

"The cost allocation mechanism that is set forth with particulars herein will spread the costs of new generation to the defined class of benefiting customers and allow the RA benefits of new generation to be shared by all LSE customers in an IOU's service territory. We designate the IOUs to procure this new generation. The LSEs in the IOU's service territory will be allocated rights to capacity that can be applied toward each LSE's RA requirements. The LSE customers and other defined benefiting customers will pay only for the net cost of this capacity, determined as a net of the total costs of the contract minus the energy revenues associated with dispatch of the contract."

l. A new sentence is added at the end of Finding of Fact 25, stating, "This review will also allow POUs to raise issues about the application of the cost allocation mechanism to municipal departing load consistent with our past practices."

m. A new sentence is added at the end of Conclusion of Law 2 reading:

"It is also consistent with D.04-12-048, as modified by

D.05-12-022 for departing customers to allocated cost responsibility, as that decision holds that an IOU's long-term contract costs should be allocated to all customers, including departing customers."

"It is reasonable, and consistent with law, for the Commission to adopt this limited and transitional cost allocation mechanism to support the development of new generation by having the costs allocated to the defined class of benefiting customers and RA benefits shared by all relevant customers."

l. The last sentence of Ordering Paragraph 1, on page 62 is modified to read:

    "The IOUs will allocate only the net cost of capacity obtained pursuant to this decision, determined as a net of the total costs of the contract minus the energy revenues associated wit the dispatch of the contract."

Dated November 16, 2007, at San Francisco, California.

19 Cal. Pub. Util. Code § 380(g).

20 Joint Parties Proposal, March 7, 2006, p. 13, citing D.02-11-022 (addressing charges for direct access customers); R.03-09-007 (addressing charges for CCA); D.03-04-030 (addressing charges for distributed generation departing load); D.03-07-028 (addressing charges for municipal departing load) and D.05-12-041 (addressing charges for CCA).

21 Long Term Procurement [D.04-12-048], supra, at p. 60 (slip op.), see generally, id. at pp. 58-60 (slip op.).

22 Id. at p. 63 (slip op.). As a corollary, we allowed the IOUs to recover costs related to enhancing reliability from all LSE customers in their respective service areas, not just from those taking bundled service.

23 Joint Parties' Comments, April 19, 2006, p. 3.

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