Flexible Rules for Compliance

The third task before us is to adopt:

Flexible rules for compliance including, but not limited to, permitting electrical corporations to apply excess procurement in one year to subsequent years or inadequate procurement in one year to not more than the following three years. (Pub. Util. Code § 399.14(a)(2)(C).)

This requirement applies to what is known as the annual procurement target (APT), which is described in § 399.15:

(b) The commission shall implement annual procurement targets for each electrical corporation as follows:

(1) Beginning on January 1, 2003, each electrical corporation shall, pursuant to subdivision (a), increase its total procurement of eligible renewable energy resources by at least an additional 1 percent of retail sales per year so that 20 percent of its retail sales are procured from eligible renewable energy resources no later than December 31, 2017. An electrical corporation with 20 percent of retail sales procured from eligible renewable energy resources in any year shall not be required to increase its procurement of such resources in the following year.

When read together, the two sections indicate that the flexible compliance mechanism applies to annual procurement targets only. The language requiring utilities to procure 20 percent of its retail sales no later than December 31, 2017 is clear and unequivocal. The 2017 deadline is absolute. Accordingly, the task before us is to develop flexible rules for compliance applicable to the annual procurement targets.

PG&E raises a threshold issue regarding the basic nature of the APT. According to PG&E, an APT for a given year only exists if the utility identifies, in its general procurement plan, an unmet need for that year. If there is no unmet long term need identified in the utility's general procurement plan for a given year, then there is no incremental APT for that year. (PG&E Opening Brief, pp. 6-7.)²⁵

PG&E bases this argument primarily on the language in § 399.15(a) that refers to "unmet long-term resource needs." (See, e.g., Ex. RS-7, pp. 1-4, 1-5, 2-5, 2-6.) PG&E places too much reliance on this phrase, and also interprets it, with scant legal analysis, to be utility-specific and utility-determined.²⁶

The section that PG&E relies upon says:

399.15. (a) In order to fulfill unmet long-term resource needs, the commission shall establish a renewables portfolio standard requiring all electrical corporations to procure a minimum quantity of output from eligible renewable energy resources as a specified percentage of total kilowatthours sold to their retail end-use customers each calendar year, if sufficient funds are made available pursuant to paragraph (2), and Sections 399.6 and 383.5 to cover the above-market costs of eligible renewables, and subject to all of the following:

This statute imposes an obligation upon the Commission to establish a standard applicable to all electrical corporations. The basis for that broad obligation is "to fulfill unmet long-term resource needs," a term which is not defined in SB 1078. However, the Legislature expressly found and declared that "[I]ncreasing California's reliance on renewable energy resources may promote stable electricity prices, protect public health, improve environmental quality, stimulate sustainable economic development, create new employment opportunities, and reduce reliance on imported fuels." And "The development of renewable energy resources may ameliorate air quality problems throughout the state and improve public health by reducing the burning of fossil fuels and the associated environmental impacts." (§ 399.11(b) and (c).)

The Legislature's target of 20 percent renewable energy is also a statewide target, with the purpose of "increasing the diversity, reliability, public health and environmental benefits of the energy mix." (§ 399.11(a).) PG&E's position that "unmet long-term resource needs" means a specific utility's resource needs, as defined and identified by that utility, is inconsistent with the statewide focus and purpose of the legislation. "Unmet long-term resource needs" must be considered on a statewide basis, not a utility-by-utility basis, and the legislature has already essentially found that there are statewide unmet long-term resource needs.²⁷

Most of PG&E's arguments ultimately boil down to the fact that it considers a mandatory one percent APT to be bad policy. (See, PG&E Opening Brief, pp. 13-14; PG&E Reply Brief, p. 23.) Nevertheless, the statute contains a mandatory one percent APT. While PG&E may believe that to be a bad policy, PG&E's belief does not allow the Commission to ignore the statute's language. In fact, PG&E turns the statutory language on its head when it argues that it should only be required to procure "up to at least 1 percent" of its self-defined need. (PG&E Opening Brief, p. 6.) We decline to do a similar inversion of the plain language of the statute.

Annual procurement targets are not optional. Throughout SB 1078, they are treated as a requirement. (See, e.g., § 399.14(a)(2)(B) referring to annual obligations under the RPS program.) Flexible compliance is only necessary if compliance is required. Since compliance is required under the statute, we now turn to the real issue, which is how to implement the required flexible rules for compliance, as directed by § 399.14(a)(2)(C).

There is significant agreement among the parties that excess renewable procurement in one year should be allowed to be carried over to future years without limitations on time or quantity. (See, e.g. PG&E Opening Brief, p. 9; SDG&E Opening Brief, pp. 19-20; Green Power Opening Brief, p. 2; TURN Opening Brief, p. 34; CalWEA Opening Brief, p. 20.) Such unlimited forward banking is consistent with the language of § 399.14(a)(2)(C), which allows excess procurement in one year to be applied to subsequent years. Furthermore, giving credit for excess procurement is consistent with the purpose of SB 1078. It must be remembered that the 2017 date for 20 percent renewable procurement is a "no later than" date, and the annual procurement requirement of an additional 1 percent of retail sales is an "at least" amount. (§ 399.15(b)(1).) Accordingly, it is fully consistent with the statute for any utility to procure more than 1 percent per year, or to reach 20 percent renewables before 2017.²⁸

Furthermore, in the context of SB 1078, unlimited forward banking of excess procurement simply makes sense. As SCE puts it: "Adopting a rule ensuring that all renewable procurement in excess of the current year targets "counts" will effectuate the policy goals of the RPS legislation by creating an incentive for early procurement." (SCE Opening Brief, p. 5) SDG&E also observes that, "It also would smooth out lumpiness in renewables procurement caused by certain renewables projects generating larger than immediately needed quantities." (SDG&E Opening Brief, pp. 19-20.) Accordingly, we will permit unlimited forward banking of excess procurement.

The main controversy regarding flexible compliance is in the case of inadequate procurement in a given year. In other words, what happens if a utility does not procure enough renewable generation to meet its APT.²⁹ There are three basic proposals that have been presented, ranging from virtually no flexibility to the absolute maximum flexibility. We adopt a middle ground that blends aspects of the various proposals.

CalWEA proposes the strictest regime. Under CalWEA's proposal, each utility would have three months after the end of a compliance year to remedy any shortfall that existed at the end of that year. (CalWEA Opening Brief, p. 19) For example, if on December 31, 2007, a utility was short of its APT for 2007, it would have until March 31, 2008 to make up the difference. CalWEA's proposal would allow a utility to fall below its APT by 5 percent without penalty and without explanation, but not repeatedly. (Id., p. 20.) CalWEA's proposal is strongly opposed by all three utilities, and garnered no significant support among other parties.

CalWEA's proposal is too rigid, and does not reflect the present realities of renewable procurement. As CalWEA describes the basis for its proposal, its three-month true up mechanism reflects the fact that a utility may be out of compliance "due to naturally occurring variances in annual renewable resource production or variations in load as a result of factors outside the utility's control (e.g. weather)." (Id. P. 20) The five percent margin reflects the fact that "[I] is impossible to predict precisely how much renewable sellers will generate and how much retail customers will consume." (Id.)

CalWEA's arguments imply a constant supply of renewable generators, with the main variation being in how much energy they generate in a given year. This is not the current reality, nor is it the focus of either the legislation or this proceeding, which in large part is about bringing additional generation units on line - a much lumpier and uncertain process. The five percent margin proposed by CalWEA is simply inadequate to deal with the uncertainties of the real world issues facing the utilities, even if those utilities are committed to procurement of additional renewable resources. Furthermore, it would result in a needless expansion of the Commission's workload in the form of utilities seeking exemption from this requirement.³⁰

In addition, the three-month period allowed to make up any deficit is too short. As SCE points out, "CalWEA's true-up proposal essentially collapses the three-year deficit banking provision into three months." (SCE Opening Brief, p.9.) While conceivably the Commission could in fact require the utilities to make up any deficit in three months (as the statute says that the adopted rules should allow "no more than" three years), it is simply not a good idea. As SDG&E argues, the three-month true-up period could create a seller's market (SDG&E Opening Brief, p. 22), which would not be in the best interests of ratepayers.

At the other extreme are the proposals of PG&E and SCE (supported by AReM). They propose adoption of a rule permitting deferral of the entire procurement obligation for up to three years, with no review or penalties. (PG&E Opening Brief, p. 9, SCE Opening Brief, pp. 7-8.)³¹ The basically similar proposals of PG&E and SCE correspond to the absolute maximum flexibility permissible under the statute. (See, PG&E Opening Brief, p. 7; SCE Opening Brief, p. 4; Pub. Util. Code § 399.14(a)(2)(C).) While this is something the Commission could adopt, just as we could adopt the CalWEA proposal, it also is not a good idea.

Green Power notes that the SCE and PG&E proposals would allow unlimited deficit carryover for three years, and argues that such deficit carryover could easily be abused and ultimately threaten the goals of the RPS program. (Green Power Opening Brief, p. 2.)

PG&E additionally argues that renewable contracts that expire should not be added to the following year's APT. (PG&E Opening Brief, p. 10.) Instead, the utility would be given the discretion to replace that generation at any time "in order to meet the 20% requirement by 2017." (Id.) SCE takes a similar position. (See, SCE witness Bergmann, Tr. p. 2649.)

TURN responds by arguing that the RPS obligation requires a net increase each year, and that PG&E's position is inconsistent with SB 1078 . (TURN Reply Brief, pp. 4-5.) CalWEA also opposes PG&E's (and SCE's) position, arguing that it could actually result in a year-to-year decline in the total amount of renewable generation. (CalWEA Reply Brief, pp. 2-3.) Ridgewood also disagrees with PG&E and SCE, arguing that the statutory language clearly mandates a net increase in renewable energy purchases. According to Ridgewood, PG&E and SCE's positions contradict the statute, as they do not require a net increase. (Ridgewood Opening Brief, pp. 8-9.) (See also Green Power, Opening Brief, p.4; Vulcan Opening Brief, pp. 40-41.)

The position of TURN, CalWEA, and Ridgewood is more consistent with the statute than PG&E's and SCE's position. As TURN, CalWEA, and Ridgewood point out, the statute requires each electrical corporation increase its total procurement of eligible renewable energy resources by at least an additional 1 percent of retail sales per year. (TURN Opening Brief, pp. 2-4, CalWEA Reply Brief, pp. 2-4, Ridgewood Opening Brief, pp. 8-9, all citing § 399.15(b)(1).) The focus on the utilities' total procurement indicates that the Commission cannot ignore the expiration of renewable contracts, as those contracts are part of the total.

SCE and PG&E would sever any linkage between the annual targets of 1% and the eventual 20% target. This simply makes no sense; the small annual targets are steps on the way to the larger ultimate target, and eliminating the steps would make the ultimate target that much harder to reach. The criticisms of SCE's and PG&E's proposed flexible compliance rules are accurate: their proposed rules are simply too flexible, and fail to ensure compliance.

TURN and SDG&E have jointly proposed a flexible compliance mechanism. If a utility failed to procure (and did not have banked from previous years) sufficient energy to meet its APT, it would be allowed to carry forward a shortfall of 25% of its APT without Commission approval. (SDG&E Opening Brief, p. 20.) Carrying forward any shortfall larger than 25% would require Commission approval, dependent upon the utility making a showing of specific conditions. (TURN Opening Brief, p.35.) The TURN/SDG&E proposal is based on the expectation that a utility should be able to obtain at least 75% of its APT in the current year. (SDG&E Opening Brief, p. 20.) Ridgewood, Green Power, and Solargenix support the TURN/SDG&E proposal.

TURN and SDG&E also differ from PG&E and SCE in how a deficit that is carried over is subsequently made up. SCE describes its proposal: "Any compliance in a year following a deficient year should be applied first in fulfillment of the oldest outstanding, unmet compliance targets." (SCE Opening Brief, p. 7) So if in 2010, SCE had an APT of 50 units, but only acquired 40 units, the first 10 units acquired in 2011 would go to make up the deficit. TURN criticizes this feature as allowing the utility "to simply defer procurement for up to three years and carry a three year deficit indefinitely." (TURN Opening Brief, p. 37.) While slightly overstated, TURN's criticism is well founded, as SCE's proposal would allow a utility to essentially roll over its deficit each year.

By contrast, SDG&E would only permit a utility to use renewable MWh in excess of the utility's APT in a given year to make up a prior year's shortfall; in other words, a utility must first apply its procurement to its current year's APT, and only after that is satisfied can any excess procurement be utilized to satisfy a shortfall from a prior year. (SDG&E Opening Brief, p. 23.)

The TURN/SDG&E approach is the best of the methods presented. Accordingly we adopt the compliance program proposed by TURN and SDG&E. A utility will be allowed to carry over a deficit of 25% of its APT to the next year without explanation.³² If a minimum of 50% of that carried-over APT is not satisfied by the second year, an order to show cause (OSC) will be issued but we would also entertain suggestions for pre-determined penalties. Pursuant to an OSC process, if that route is chosen, the utility would have the burden of proof to show why it failed to comply with its APT, and why its failure was reasonable. ³³ Inadequacy of PGC funds would provide a justification for non-compliance. We find that the TURN/SDG&E approach to deficit carryover, which requires the present year's APT to be met before applying procurement to previous years' deficits, is consistent with the language and purpose of the statute, and we adopt it.

The following is an example of how our adopted approach would work. In 2010, a utility has an APT of 10 units, but procures 8, creating a deficit of 2. In 2011, the same utility has an APT of 10 and procures 10, resulting in a carried-over 2010 deficit of 2. In 2012, the utility has an APT of 10 and procures 11, resulting in a carried-over 2010 deficit of 1. This is smaller than 25% of the APT for 2010, which is acceptable, except that the deficit has not been made up within three years. If any APT for a given year remains unsatisfied by the third year, an OSC will issue, following the same procedures and with the same characteristics as already described.

Following a hearing on the OSC, the Commission may impose penalties upon a utility, or the Commission may choose to establish upfront penalties and would welcome suggestions from parties on this matter, including proven experience and examples from other states (e.g., Texas). In addition, we would entertain suggestions for how any penalty dollars could be used to fund additional renewables and/or supplement the PGC. We solicit these suggestions in this alternate draft given fast-approaching statutory deadline in this proceeding and out of concern to establish concrete, transparent rules in advance of the utilities RPS activities. Every party that addressed penalties acknowledged the Commission's authority to impose penalties under Pub. Util. Code § 399.14(d) and its existing authority. (See, e.g., SCE Opening Brief, pp. 12-13; PG&E Reply Brief, pp. 30-31.) A number of parties, including CalWEA and TURN,³⁴ recommended the Commission adopt automatic penalties for non-compliance.

A utility's compliance with the statute is affected by its creditworthiness. As discussed above, utilities that are not creditworthy are not required to procure under the RPS program. (§ 399.14(a)(1).) Since we determined that a utility will have an APT for a given year even if that utility is not creditworthy, we need to determine how that APT is treated for compliance purposes. We find that just as the APT itself is deferred to future years when the utility is creditworthy, so are the compliance requirements. Compliance requirements are not triggered until the beginning of the first calendar year after the utility is deemed creditworthy by the Commission.

We can use an example of a utility that: 1) in 2004 was not creditworthy and had an APT for 2004 of 10 units; 2) sometime in 2005 became creditworthy and had an APT for 2005 of another 10 units; and 3) had an APT for 2006 of another 10 units. In 2006, rather than having a current year requirement of 10 units and a deficit of 20 units, the utility would merely have a current year requirement of 30 units. In other words, the three year compliance period begins when the utility is fully creditworthy in 2006, rather than in 2004, when the APT came into existence.³⁵

Overall, the rules we adopt for compliance provide the necessary flexibility not only to deal with the issues of creditworthiness, market uncertainties, and teething pains of the RPS process, but also to satisfy the request of the ISO that our compliance mechanism be flexible enough to reduce the likelihood that utilities may have to deal with excess output at times of expected over-generation conditions. (ISO Opening Brief, p. 9.)

In addition, we have concerns regarding PG&E's and SCE's apparent resistance to the requirements of SB 1078 and renewable procurement in general. CEERT argues, with some justification, that the intent of PG&E and SCE is to "dismantle, not implement, the RPS Program as intended by SB 1078." (CEERT Reply Brief, p. 2.) PG&E has made very aggressive arguments (especially on the issues of creditworthiness and utility need) in an attempt to remove itself from the requirements of SB 1078. SCE has been slightly less aggressive in its arguments, but SCE's main witness Bergmann (while very knowledgeable and precise) was extremely uncooperative.³⁶

We note that the utilities may procure more renewable energy resources than the minimum amount required by the statute and this decision. If PG&E and SCE are serious about proving CEERT wrong, the best way to do that is to voluntarily procure more than the bare legal minimum of renewable generation. This would certainly be the best way to alleviate our concerns, and would also be consistent with California's Energy Action Plan.