LYN/tcg 4/2/2002

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking to Establish Policies and Cost Recovery Mechanisms for Generation Procurement and Renewable Resource Development.

Rulemaking 01-10-024

ASSIGNED COMMISSIONER'S RULING
ESTABLISHING CATEGORY AND PROVIDING SCOPING MEMO

Pursuant to Rules 6(c )(2) and 6.3 of the Commission's Rules of Practice and Procedure, this ruling designates the category of this proceeding, the need for hearing, and the principal hearing officer and also provides a scoping memo confirming and clarifying the issues and schedule discussed at the prehearing conference (PHC) held on January 8, 2002. This ruling is appealable only as to category of this proceeding under the procedures in Rule 6.4.

1. Summary

This ruling sets forth a process and schedule for utilities to submit forecasts of the costs they will incur when they resume procurement of energy and reserves to serve their electric customers. Under this schedule, the Commission will adopt a forecast of procurement costs and a cost recovery mechanism no later than October of this year. In addition, I request submittals from utilities and other parties on acquiring renewable resources in the near term, and direct the utilities and Staff to prepare long-term resource plans which consider generation, demand-side and transmission resources.

2. Background

Prior to late 1970s, virtually all the power needed to meet the electric demand in California was generated by the large investor-owned utilities. With the OPEC oil embargoes and delays and cost overruns experienced with nuclear plants in the late 1970s, this practice changed dramatically. As part of a national plan to address the increasing costs and environmental consequences of electricity production, the federal Public Utilities Regulatory Policy Act of 1978 (PURPA) created a class of privately-owned generation called Qualifying Facilities (QF) with the legal right to sell power to the utility at the utility's own avoided cost. To promote the development of these new generation resources, California implemented a series of Standard Offer Contracts to provide QFs with a simple process for obtaining a contract to sell their generation, and to clarify for utilities what was considered reasonable by the Commission. Importantly, these avoided-cost energy prices were fixed for a period of up to ten years to provide price stability to consumers and a stable source of revenues for the QFs, allowing them an opportunity to obtain financing. As a result, the QF industry in California boomed, as many previously stalled generation projects became instantly financible.

As it became clear that QFs would provide the majority of new generation serving utility customers, the Commission established a biennial resource planning process centered on allowing QFs to compete against proposed utility projects. The Commission's Biennial Resource Plan Update (BRPU), replaced the Commission's prior process of reviewing utility resource plans in triennial general rate cases. Under the BRPU, the Commission required utilities to submit resource plans using CEC demand and supply projections as well as other scenarios at the utilities discretion. The Commission would then determine which proposed new utility plants could be supplanted by QF generation - so-called Identified Deferrable Resources (IDRs). QFs were then allowed to bid against the costs of the IDRs.

Similar processes were simultaneously underway at more than 30 state PUCs across the country, integrating cost-effective procurement strategies with objectives such as contingency planning and environmental sensitivity. The approach came to be known as Integrated Resource Planning, defined by the Edison Electric Institute as:

"A utility planning process which evaluates the costs and benefits of alternative projects and resources available to satisfy anticipated customer demand for electricity...(which) integrates and supply-side and demand-side resources...deals with uncertainty... (by testing) against a variety of worst-case scenarios... (and) is sensitive to environmental issues."

The BRPU included consideration of demand-side management options, transmission limitations and costs, and environmental costs of air emissions. As the process began to gather momentum, however, two events conspired to halt it in its tracks:

¬ Southern California Edison successfully complained to FERC that the Commission's process was inconsistent with Federal law due to the inclusion of air pollution costs and limiting the competition to QFs.

¬ The Commission's policy on the acquisition of resources changed as the Commission pursued deregulation. Both the Commission staff report "California's Electric Service Industry: Perspectives on the Past, Strategies for the Future" (the "Yellow Book") and the federal Energy Policy Act of 1992 (EPAct), in their emphasis on market-directed investment decisions, forced reconsideration of the basic approach of the BRPU.

Ultimately the Commission ruled in D.93-06-098 to forestall resource planning. Although no determination was made to eliminate the BRPU process, the passage of AB 1890 in 1996 - under which investment decisions were left to competition, the approach to integrated resource planning contained in the BRPU process was effectively abandoned by the Commission. As proven in early 2000, reliance on market forces and the lack of a policy perspective in this area contributed to the energy crisis of 2000-01.

Much has changed since the Commission first embarked on an integrated resource planning process. But the Commission's role in ensuring that there is a comprehensive and effective approach in planning both the immediate and longer-range resource acquisition of California's electric utilities remains the same. The Commission retains its responsibility to conduct resource planning as follows:

1) Under § 451 the Commission is required to insure that all utility charges are just and reasonable:

¬ Ch.3 Art. 1 §451: "All charges demanded or received by any public utility, or by any two or more public utilities, for any product or commodity furnished or to be furnished or any service rendered or to be rendered shall be just and reasonable."

2) Under § 701.1 the Commission has the responsibility to pursue resource planning for fuel diversity and renewable generation development:

¬ Ch. 4 Art. 1 §701.1 (A) "The Legislature finds and declares that, in addition to other ratepayer protection objectives, a principal goal of electric and natural gas utilities' resource planning and investment shall be to minimize the cost to society of the reliable energy services that are provided by natural gas and electricity, and to improve the environment and to encourage the diversity of energy sources through improvements in energy efficiency and development of renewable energy resources, such as wind, solar biomass, and geothermal energy." (B) "The Legislature first finds and declares that, in addition to any appropriate investments in energy production, electrical and natural gas utilities should seek to exploit all practicable and cost-effective conservation and improvements in the efficiency of energy use and distribution that offer equivalent or better system reliability, and which are not being exploited by any other entity."

3) The Legislature is considering AB 57, which would require the utilities to submit a procurement proposal and the Commission to adopt a procurement plan prior to the date on which the utilities would resume purchasing power for their retail customers.

Since January 2001, Edison, SDG&E and PG&E have not purchased power for their customers' net short needs. The Legislature enacted ABX1 1 (Keely) on January 31, authorizing the California Department of Water Resources (DWR) to make electricity purchases for the purpose of selling electricity to utility retail customers. This was necessary for at that time the utilities were not financially able to meet their short term purchase obligations¹ -- the utilities' "net short" needs. Under the law DWR's authority to contract for such purchases will expire on January 1, 2003. For the utilities to resume the responsibility to procure power for their customers, the Commission should evaluate their procurement practices, incorporating: 1) the actions of DWR in contracting for power; 2) Power Authority efforts to develop reserve generating capacity;² and 3) the cumulative effects of the various DSM programs underway in the state. A comprehensive assessment of the state's immediate and long-term energy requirement, incorporating the many recent changes to the electricity landscape as well as the priorities retained under the P.U. Code, must be developed and implemented to ensure that utilities' procurement activities will best serve California's electric retail customers.

On October 29, 2001, the Commission issued an Order Instituting Rulemaking (OIR), designated as Rulemaking (R.) 01-10-024, to

(1) establish ratemaking mechanisms to enable California's three major investor-owned electric utilities, Southern California Edison Company (Edison), San Diego Gas & Electric Company (SDG&E), and Pacific Gas and Electric Company (PG&E) to resume purchasing electric energy, capacity, ancillary services and related hedging instruments to fulfill their obligation to serve and meet the needs of their customers, and

(2) consider proposals on how the Commission should comply with Public Utilities Code Section 701.3 (Section 701.3) which requires that renewable resources be included in the mix of new generation facilities serving the state.

A preliminary scoping memo contained in the OIR set a schedule for respondent utilities to file procurement proposals and for interested parties to comment on the proposals, and scheduled a PHC for January 8, 2002. SDG&E and PG&E filed their proposals on November 21, 2001 and Edison late-filed its proposal on November 27, 2001.³ Interested parties requested and were granted a one-week extension until December 21, 2001 to file comments. In their comments, many parties urged the Commission to develop a fully integrated resource planning process but to only decide quickly those issues that need to be in place for the utilities to resume full procurement responsibilities no later than January 1, 2003, as anticipated by Assembly Bill ABX1 1 (Keely).

At the January 8 PHC, assigned administrative law judge (ALJ) Christine M. Walwyn stated that after review of parties' comments, the Commission would narrow the scope of its initial hearings. She then outlined the scope of issues and proposed schedule to be initially addressed here and invited parties' comments. The assigned ALJ also stated that disputes identified by parties in their comments regarding the treatment of confidential information would be handled under the Commission's Law and Motion procedures by ALJ Kirk McKenzie, who at the PHC held an initial discussion with parties.

¹ Although unable to contract for short term power procurement, the utilities continued to produce power from the generating assets they own and to purchase power that was under long term contract. DWR stepped in to purchase that relatively small amount of power not already under contract to the utilities or generated from a utility-owned asset.

² The California Consumer Power and Conservation Financing Authority (Power Authority) was established by SBX1 6 (Burton, Bowen), which was signed into law May 16, 2001. On February 15, 2002, the Power Authority issued its first Energy Resource Investment Plan. In that document, the Power Authority describes its role in ensuring an adequate future reserve of electricity.

³ I grant here Edison's motion to accept its late-filed proposal.