5. SDG&E's Petition to Modify

On June 13, 2003, SDG&E filed a Petition to Modify D.03-04-029. SDG&E requests that the Commission confirm that SDG&E has properly tied to the Huntington Beach Units 1 and 2 quantities and net revenues for energy delivered during a CAISO RMR dispatch notice and excluded these deliveries from pro rata sharing.

On June 20, 2003, the Administrative Law Judge (ALJ) issued a ruling directing parties to file comments on SDG&E's Petition.³ SCE and DWR filed comments on July 1, 2003. SDG&E, SCE and PG&E filed reply comments on July 8, 2003.

5.1 Background

In D.02-09-053, the Commission allocated DWR's long-term power supply contracts to the utilities. Among the contracts allocated is the Williams contract entered into by DWR on February 16, 2001. The original Williams contract delivered up to 1,400 megawatts (MW) of must-take energy products to SP-15 delivery points (i.e., delivery points south of Path 15). The Commission allocated the original Williams contract to SDG&E.

On November 11, 2002, the Williams contract was amended. The amended contract delivers 60% less must take energy and up to 1,175 MWH of dispatchable capacity. The must-take energy is delivered to SP-15. The dispatchable capacity ("Product D") is delivered to the bus bar of the facilities that produce the power, Huntington Beach Units 1 and 2, (the "Huntington Units") which are within SCE's service territory.

The Huntington Units are subject to a RMR contract between the CAISO and Williams that has been in place since April 1998. Under the Williams RMR contract, the CAISO may "call" upon the Huntington Units at any time to support grid reliability on SCE's system. Generally, the costs incurred by the CAISO under each RMR contract are payable to the CAISO by the responsible utility⁴ in whose service area the RMR generating units are located.

5.2 SDG&E's Request

SDG&E requests that the Commission clarify the SDG&E-DWR Operating Agreement to provide that SDG&E has been calculating the remittance amount for RMR energy delivered from the "Huntington Units" at the hourly ex post market clearing price in a fashion consistent with the Commission's Decisions and the SDG&E-DWR Operating Agreement. Alternatively, SDG&E requests that the Commission modify Exhibit C of the SDG&E-DWR Operating Agreement to explicitly state that RMR energy is to be treated like CAISO Instructed Energy. ⁵

SDG&E's position is that it is not obligated to take the RMR deliveries, but that it has taken delivery of the dispatched RMR energy as an "accommodation" to Williams, the CAISO and DWR, to prevent the energy from being dumped into the ISO's real time market and priced at zero dollars, and accepted it to serve retail customers within its service area when RMR deliveries are instructed by the CAISO. SDG&E explains that it has treated this RMR energy as a market purchase and informed DWR that remittances to DWR associated with the RMR energy would be calculated based on the CAISO's SP-15 hourly ex post market price for instructed energy (approximately $42 per MW hour during January-April 2003).

SDG&E maintains that it has treated the energy delivered under the RMR contract similar to other must-take energy purchases, for the purpose of scheduling, in that it would displace energy that SDG&E would otherwise have economically dispatched. SDG&E believes that treating this energy as resource-specific and pricing it at the hourly ex post market price for energy is analogous to the treatment of CAISO Instructed Energy⁶ in the SDG&E-DWR Operating Agreement and complies with the relevant Commission decisions on procurement.

SDG&E's arguments are twofold. First, SDG&E states that DWR fails to identify any provisions in the Williams contract that support its allegation that the Williams RMR energy was sold to DWR as a component of Product D. SDG&E notes that Section 3(a) of the Product D component of the DWR-Williams Contract recognizes the pre-existing RMR contract by stating the DWR has the right to dispatch the Huntington Units and utilize net electric energy "except to the extent a Designated Unit is dispatched by the CAISO." In addition, SDG&E notes that Section 8(f)(i) states that "[n]otwithstanding any provision herein, [DWR's] right and obligations shall at all times be subject to any Must-Run Agreement (MRA)⁷ applicable to any Designated Unit."

SDG&E also notes that the payment provisions in Section 7(c) of Product D recognize that Williams should be paid by the CAISO (and indirectly by SCE as the Responsible Utility) and not by DWR for RMR capacity and energy products delivered pursuant to an CAISO dispatch notice issued for the exclusive benefit of maintaining the local reliability of SCE's service territory. SDG&E contends that the DWR-Williams Contract thus recognizes the distinct and separate nature of the products that Williams is providing to the CAISO and DWR.

SDG&E states that its interpretation of the DWR-Williams Contract is that the RMR energy produced by the Huntington Units is a product for Williams to market. As support for its position, SDG&E states that, under the RMR contract, the generator can select between two payment options for RMR energy: a "contract path" payment option or a "market path" payment option. According to SDG&E:

"Under the RMR Contract, if Williams selects the "contract path" for payments of its variable costs, then the energy is sold by Williams into a market other than the CAISO's real time market and SCE is ultimately responsible for the variable energy costs, less any applicable credits. These credits are calculated by Williams based on the revenues it receives from the market transaction for billable megawatt hours (MWhs), as set forth in Section 9.1(e) of the RMR contract. However, if Williams selects the "market path" then SCE bears no cost responsibility for RMR energy and Williams' only source of revenue to reimburse it for its variable costs to generate RMR-related energy is from a market transaction." (SDG&E Petition, p. 3-4)

Thus, under the "market path" option selected by Williams the revenue received by Williams for its variable costs is the amount payable by SDG&E. Although DWR has informed SDG&E that it believes the "market path" option is appropriate since Product D was allocated to retail customers served within SDG&E's service area, SDG&E maintains that the DWR-Williams contract did not state that this election right was assigned to DWR and the RMR energy product was sold to DWR.

Second, SDG&E argues that even if the Commission were to find that Williams RMR energy is a component of Product D, D.03-04-029 requires SDG&E to reimburse DWR for the RMR energy at a remittance rate reflecting economic dispatch, not DWR's retail remittance rate. SDG&E states that DWR fails to address how valuing RMR energy at the retail remittance rate can be reconciled with the least cost dispatch requirements adopted in D.02-09-053, D.02-10-063, D.02-12-074, and D.03-04-029.

SDG&E states that, in essence, DWR is asking that this RMR energy be treated as first-in-line energy quantities to be sold to the retail customers served by SDG&E and DWR at the retail remittance rate for the purposes of booking revenues into DWR's account. SDG&E explains that the Commission explicitly rejected this position in D.02-09-053, D.02-12-069, and D.03-04-029 and instead directed SDG&E to dispatch the allocated contracts and utility retained generation as a combined portfolio using least cost dispatch principles.

According to SDG&E, under the pro-rata sharing policy adopted in D.02-09-053, SDG&E is charged with dispatching its combined generation portfolio on a least-cost basis, with least-cost generation resources dispatched to meet retail load and the remainder dispatched as surplus. SDG&E is only responsible for paying DWR the retail remittance rate for the proportion of DWR generation dispatched to meet the utility's retail load. Surplus sales revenues are prorated between the utility's revenue requirements and DWR's revenue requirements based on the relative quantities dispatched from utility generating assets (including contracts and market purchases in the future) and the DWR contracts. In this case, SDG&E argues, the RMR generation would necessarily be uneconomic and would therefore displace generation that would otherwise be dispatched on a least cost basis.

Finally, SDG&E points out that because DWR would have SDG&E pay the retail remittance rate for power that is dispatched out of economic order, DWR's position is inconsistent with Section 2.02(a) (Standards of Contract Administration) and Article I of Exhibit A (Resource Commitment and Dispatch) of the Operating Agreement. According to SDG&E, these provisions require SDG&E to "perform its dispatch functions in a commercially reasonable manner, exercising Good Utility Practices, and in a fashion reasonably designed to serve the overall best interests of retail electric customers." (SDG&E Petition, p. 6.)

5.3 DWR's Position

DWR requests that the Commission deny SDG&E's June 13, 2003 petition and direct SDG&E to "dispatch, schedule and remit Power Charges to DWR at the Commission established remittance rate for RMR energy associated with the Williams contract."⁸ DWR believes that SDG&E's calculation of remittances to DWR based on the CAISO's SP-15 hourly ex post market price for instructed energy violates D.02-09-053 and Assembly Bill 1 of the First Extraordinary Session of 2001 (AB 1X, Stats. 2001, Ch.4) and creates an administrative burden on DWR. DWR further argues that D.02-09-053 requires SDG&E to administer the Williams contract, of which DWR argues, the RMR component is an integral part.

DWR argues that since the energy was delivered by DWR for retail use, SDG&E should compensate DWR at the Commission-approved retail remittance rate for the power. DWR argues that the under the RMR component of the contract, the energy is must take for DWR and DWR is obligated to schedule that energy to a load. DWR also states that it is financially responsible for 100% of the RMR power produced under the Williams contract and is entitled to the entire power output of all Williams Product D generating units.

5.4 SCE

SCE presents no opinion on the merits of SDG&E's request, but notes that it opposes any amendment or renegotiation of a contract by DWR that increases ratepayer costs or decreases the value of the contracts.