2. Background
A threshold issue in this application is to determine what customer base should pay for the costs of SCE's four peaker units. An understanding of the events in the summer of 2006 that led to the Commission directing SCE to build up to 250 megawatts (MW) of peaking power is useful in resolving this issue. In July 2006, a prolonged and severe summer heat storm hit California and stretched to capacity the state's electric resources, especially in southern California. In response to a widely held concern for the adequacy of the state's electric resources for summer 2007, President Peevey issued an Assigned Commissioner's Ruling (ACR)1 on August 15, 2006 ordering SCE to build in its service territory five peaker units, 49MW each, that could provide additional capacity and collateral grid-reliability benefits in time for summer 2007. The ACR also authorized SCE to "seek different ratemaking treatment for the costs of these peakers than would otherwise be applicable to utility-owned generation under Decision (D.) D.06-07-029."2 While the ACR did not address the ratemaking treatment of the peakers, it directed SCE to track its cost by an advice letter, and file an application for the cost recovery and ratemaking issues.
SCE immediately responded to the ACR and undertook the process for developing five peaker units, but as of this date, only four are built and operational. The fifth peaker unit is still in the permit and development stages and is not addressed in either the application filed by SCE or this decision. SCE filed Advice Letter 2031-E for interim treatment of the costs of the peakers, and Resolution E-4031, issued November 9, 2006, set forth the procedures for the interim tracking of the peaker installation and acquisition costs. Resolution E-4031 directed SCE to file an application to demonstrate the reasonableness of these costs and to address SCE's recovery of the associated revenue requirement for 2007-2008. On December 31, 2007, SCE filed Application (A.) 07-12-029 for the recovery of the peaker costs.
The Commission issued D.06-07-029 on July 20, 2006 in order to address who pays for certain costs in order to stimulate the development of new generation. The three investor-owned utilities (IOUs) were reticent to impose the costs of new generation on their bundled customers and the independent power producers (IPP) were adverse to investing in new generation without the assurance of long-term contracts. This resulted in a stalemate with no new generation being built in California. D.06-07-029 addressed this conundrum by establishing a cost-sharing mechanism (CAM) to support the IOUs investment in long term power purchase agreements (PPAs) for new generation from the IPPs. In summary, D.06-07-029 designates the IOUs as procurers of new generation for their respective service territories through the PPAs. The capacity and energy from the PPAs is unbundled and the IOUs allocate the rights to the capacity to all load-serving entities (LSE) in their service areas so that the LSEs can apply the capacity to their resource adequacy requirements. The energy from the PPAs is auctioned pursuant to protocols established in D.07-09-044. The LSEs' customers receiving the benefit of this additional capacity pay only for the net cost of this capacity, determined as a net of the total cost of the contract minus the energy revenues received from the auction.
D.06-07-029 specifically excluded utility-owned generation (UOG) from this cost-sharing mechanism because UOG "generation is essentially dedicated to bundled customers."3 D.06-07-029 has not been modified to change the exclusion of UOG from the CAM.
1 The ACR was issued in Rulemaking (R.) 06-02-013, the Commission's long-term procurement plan proceeding for the state's three major investor-owned utilities.
2 ACR, p. 7.
3 D.06-07-029, p. 4.
