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STATE OF CALIFORNIA ARNOLD SCHWARZENEGGER, Governor

PUBLIC UTILITIES COMMISSION

505 VAN NESS AVENUE

SAN FRANCISCO, CA 94102-3298

January 12, 2004 Agenda ID 3136

TO: PARTIES OF RECORD IN RULEMAKING 01-10-024

RE: NOTICE OF AVAILABILITY OF REVISED ALTERNATE PROPOSED DECISION COMMISSIONER LYNCH

Consistent with Rule 2.3(b) of the Commission's Rules of Practice and Procedure, I am issuing this Notice of Availability of the above-referenced alternate proposed decision. This alternate proposed decision was originally issued by Commissioner Lynch on December 4, 2003, part of which was subject to a vote on December 18, 2003. The subject matter of the portion considered on December 18, 2003, for a vote resulted in the adoption of Decision (D.) 03-12-062. The remaining portion of this alternate proposed decision reflects changes based on comments and eliminates the already adopted matters in D.03-12-062. This revised alternate proposed decision is now being made available for additional public comment. An Internet link to these documents were sent via e-mail to all the parties on the service list who provided an e-mail address to the Commission. An electronic copy of these documents can be viewed and downloaded at the Commission's Website ( www.cpuc.ca.gov). A hard copy of these documents can be obtained by contacting the Commission's Central Files Office [(415) 703-2045].

This is the alternate proposed decision of Commission Lynch. This matter was categorized as ratesetting and is subject to Pub. Util. Code § 1701.3(c). Pursuant to Resolution ALJ-180, a Ratesetting Deliberative Meeting to consider this matter may be held upon the request of any Commissioner. If that occurs, the Commission will prepare and mail an agenda for the Ratesetting Deliberative Meeting 10 days before hand, and will advise the parties of this fact, and of the related ex parte communications prohibition period.

When the Commission acts on the alternate proposed decision, it may adopt all or part of them as written, amend or modify them, or set them aside and prepare its own decision. Only when the Commission acts does the decision become binding on the parties.

Parties to the proceeding may file comments on the alternate proposed decision as provided in Article 19 of the Commission's "Rules of Practice and Procedure." These rules are accessible on the Commission's website at http://www.cpuc.ca.gov. Pursuant to Rule 77.6 opening comments shall not exceed 15 pages and no reply comments will be accepted. Comments are due by noon on Tuesday, January 20, 2004. Given that this decision has been revised and is being made available for a second round of public comments, comments on the revisions are particularly welcome.

Consistent with the service procedures in this proceeding, parties should send comments in electronic form to those appearances and the state service list that provided an electronic mail address to the Commission, including ALJ Christine M. Walwyn at cmw@cpuc.ca.gov and Commissioner Lynch's Advisor Aaron Johnson at ajo@cpuc.ca.gov. Service by U.S. mail is optional, except that hard copies should be served separately on ALJ Walwyn and Aaron Johnson, and for that purpose I suggest hand delivery, overnight mail or other expeditious methods of service. In addition, if there is no electronic address available, the electronic mail is returned to the sender, or the recipient informs the sender of an inability to open the document, the sender shall immediately arrange for alternate service (regular U.S. mail shall be the default, unless another means - such as overnight delivery is mutually agreed upon). The current service list for this proceeding is available on the Commission's Web page, www.cpuc.ca.gov.

 /s/  

Angela K. Minkin, Chief

Administrative Law Judge

ANG:epg

COM/LYN/epg ALTERNATE DRAFT Agenda ID 3136

Decision REVISED ALTERNATE PROPOSED DECISION OF
COMMISSIONER LYNCH (Mailed 01/12/2004)

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

(Filed October 25, 2001))

INTERIM OPINION

TABLE OF CONTENTS

(con't.)

TITLE PAGE

INTERIM OPINION 33

I. Summary 33

II. Procedural History 77

III. Regulatory Goals and Interagency Collaboration 99

IV. Threshold Policy Issues 1212

V. Long-Term Planning Assumptions 8080

TABLE OF CONTENTS

TITLE PAGE

VI. Procedural Process and Schedule for Future Filings 151151

VII. Confidentiality Issues 154154

VIII. Next Steps 156156

IX. Oral Argument and Comments on the Proposed Decision 157157

X. Assignment of Proceeding 158158

Findings of Fact 158158

Conclusions of Law 168168

INTERIM ORDER 176176

INTERIM OPINION

I. Summary

This decision provides policy guidance and adopts components of a long-term regulatory framework under which California's three largest investor-owned utilities, Pacific Gas and Electric Company (PG&E), San Diego Gas & Electric Company (SDG&E), and Southern California Edison Company (SCE), will plan for and procure the energy resources and demand-side investments necessary to ensure their customers receive reliable service at low and stable prices. As part of this framework, we promote environmentally sensitive resource choices, set reserve margin standards to ensure reliability, and provide cost-recovery mechanisms that promote the creditworthiness of each utility.

In our decisions last year, the Commission took the actions necessary for the three respondent utilities to resume full procurement on January 1, 2003. We allocated to the three utilities the contracts the California Department of Water Resources (DWR) entered into during the energy crisis when the utilities did not have the creditworthiness to continue to procure energy for their customers, approved short-term procurement plans and cost-recovery mechanisms under which the utilities would resume procurement, and gave the policy direction for long-term procurement plans to be filed in 2003.

Our focus now is on ensuring the respondent utilities refine the process for making the longer-term investments necessary to provide reliable service to all California customers over the coming decade. At this point, with critical resource issues unresolved by this Commission, including the feasibility of different entities ensuring resource adequacy, uniform forecasts of load growth (including issues surrounding future customer base), and Renewable Portfolio Standard (RPS) benchmarks for competitive solicitation, it is premature to provide the utilities with procurement authority for the next five years and to enact a long-term regulatory framework in its entirety. Given the operation of recently enacted legislation providing pre-approval of purchasing plans, AB 57 (Wright, 2002), providing the utilities with procurement approval extending throughout the next five years without resolving the concomitant statutory issues and policies in AB 117 (Migden, 2002) and SB 1078 (Sher, 2002), this Commission would be handing the utilities a pre-approved blank check for five years worth of procurement authority.

We authorized the utilities procurement activities for 2004 in D03-12-062 and now we provide the utilities with additional guidance on the structure of their long-term plans. This decision resolves many of the policy issues raised in and by the first iteration of those plans filed in mid 2003, moves some of those issues to other, more appropriate fora, and orders the utilities to file revised long-term plans after a series of workshops in the first quarter of 2004, with final approval of those long-term plans coming before the end of 2004.

The California Independent System Operator (ISO) has deferred to the Commission to adopt and enforce adequate planning reserve requirements for the utilities and other electricity providers operating in their service territories. We find that there is ample surplus of electric energy capacity available in the Western Electricity Coordinating Council (WECC) region that California can draw upon today and for the next few years. Therefore, we adopt a gradual phase-in of a planning reserve requirement over the next four years. Our approach is consistent with the timetable and process recommended jointly by the three utilities, the California Energy Commission (CEC), the Office of Ratepayer Advocates (ORA), and The Utility Reform Network (TURN).

We address here the market structure rules the utilities should follow in making long-term resource acquisitions. Having provided for direct utility ownership of new plant, we make permanent our ban on affiliate transactions, with exceptions for existing plant, as a direct and effective means of preventing potential conflicts of interest at a level where we have less oversight and control. The holding companies and affiliates of each utility should plan for future generation investment to be made outside of their utility's service territory and sold to other load serving entities.1

In reviewing each utility's resource plan, we look to the statutory requirements of Assembly Bill (AB) 57 and the goals of the Energy Action Plan, a joint product of the Commission, the CEC, and the California Power Authority (CPA). We also look to the utilities to pursue an integrated resource planning process that balances the need for additional generation, transmission, and demand-side investments and to do this in a public proceeding that allows all interested parties an opportunity to participate effectively and rejects decision-making based on non-public and/or redacted materials. We require each utility to adhere to upfront standards in conducting their procurement and to be accountable for operating in a manner that mitigates the risks of high prices, ensures reliable service and delivers measurable value to their customers.

We adopt the recommendation of the three utilities, ORA, CEC, and TURN to have the utilities resubmit their long-term procurement plans in 2004, following the Commission's adoption of specific resource adequacy criteria to be addressed in upcoming workshops in the first quarter of 2004. We firmly discourage the utilities from making ad hoc long-term resource decisions until a long-term framework can be adopted in 2004. The current limited needs of the utilities, the widespread availability of WECC capacity, and corresponding temporary respite for the development of new generation resources allow us to proceed cautiously in the coming year as we establish the long-term framework.

It is essential that California does not over-commit to existing fossil resources because this could raise rates for consumers and preclude the utilities from adhering to the loading order preference in the Energy Action Plan. In the coming year, we expect to receive additional clarity that will help shape outstanding issues, including transmission integration into the long-term plans, Renewable Portfolio Standards (RPS) solicitation guidelines, energy efficiency program administration and possibly customer base issues (affected by both the community choice aggregation and the uncertain future of direct access). Resolution of these issues will give the utilities more certainty in their planning process, allow for a more accurate assessment and evaluation of the utilities long-term plans and allow the Commission to ensure that its broad policy goals about resource loading order are firmly implemented through those plans. We will expect the utilities to provide a variety of scenarios and load forecasts in those plans to ensure that the Commission has the necessary flexibility to accommodate developments in the areas listed above.

Finally, we discuss the issues that should be addressed in the new Procurement OIR we expect to open in the first quarter of 2004. These issues are: (1) review and adoption of revised 2004 long-term procurement plans for the three utilities; (2) the need to develop a long-term policy for expiring QF contracts; (3) review of the management audits of SDG&E's and PG&E's electric procurement transactions with their regulated affiliates; (4) handling resource adequacy issues not addressed or resolved2 through the workshop process; and (5) consideration of procurement incentive mechanisms for each utility. We will open this new procurement OIR in the first quarter of 2004.

1 SCE's Mountainview application was before us as separate matters and was not addressed in this proceeding. The same applies to SDG&E's RFP, which will be addressed in a subsequent decision. 2 Ultimately, resolution would need to occur through a decision adopting any agreements in the workshop.

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