Summary of Comments

PG&E considers the standards proposed in D.00-12-065 to be inferior to those adopted in D.00-08-023 because the proposed standards do not address its concerns about after the fact reasonableness review. PG&E believes the proposed standards will discourage the use of bilateral contracts and that publicizing the price benchmark will ensure that suppliers will enter into contracts only at that benchmark price, not below. PG&E states that the 5¢/kWh benchmark is unrealistic. PG&E asks us to establish in advance the volumes and timing of purchases of standard and non-standard products, keep this portfolio mix confidential, and to adjust the mix periodically based on market conditions. PG&E also asks that we renew its authority to use gas-based financial hedges³ and allow it to use other financial tools to manage its electricity portfolio. PG&E stresses that utilities should be able to use financial instruments, not just contracts backed by physical assets, or supply options will be further constrained. PG&E would not bar contracts with affiliates as long as they comply with the affiliate rules because the limitation would have a chilling effect on new generation development. PG&E encourages us not to limit contracts to those developed through a bidding process, noting that non-standard products (for example, load following products) require negotiation. Because it is the supplier of last resort, PG&E opposes limits on the amount of long-term volumes it can acquire.

SDG&E considers adoption of any fixed price benchmark to be unrealistic, and argues the benchmarks in D.00-12-065 do not reflect today's market conditions. Like PG&E, SDG&E recommends that we provide guidelines regarding an appropriate portfolio mix, the quantity of energy requirements that should be locked in, and reasonable contract terms. SDG&E asks for authorization to use all financial and physical tools available, like it is authorized to do for its gas procurement portfolio, to manage its portfolio.

SDG&E encourages us to evaluate reasonableness based on the circumstances and information available at the time the decision to enter into a contract is made. SDG&E recommends that utilities enter into bilateral contracts of up to five years length to meet 50-75% of their demand not served by retained assets or contracts. The remainder of the demand would be served through a mix of longer-term contracts and spot purchases. SDG&E recommends that if this portfolio structure is maintained, the purchases would be deemed per se reasonable. For contracts that do not meet the per se reasonableness criteria, SDG&E asks that the Commission approve such contracts within 30 days. SDG&E does not favor after the fact reasonableness review and reminds us of numerous Commission decisions discussing why after the fact reasonableness review is to be disfavored.

SCE argues that is it impractical to define a generic cost-based benchmark for each contract product, instead, we should adopt a "process-driven, market-based standard" to encourage use of bilateral contracts that are considered per se reasonable. SCE proposes that the utility submit a procurement plan describing its proposed forward product mix, purchase timing, and contract duration, within ranges. The Commission would review only whether SCE's purchases were within the plan's targets and made at market prices. SCE would provide market support for the pricing to the Commission who would be required to review the market information and approve or reject the contract within 60 days or it would be deemed approved. SCE also reminds the Commission that not only can forward contracting save money, it can also result in large losses relative to the spot market.

TURN recommends that we adopt a price benchmark of 6¢/kWh for 2001 generation portfolio costs. Although TURN believes that 6¢/kWh may be high, it does not believe 5¢/kWh would be achievable based on today's market conditions. TURN argues that utility owned generation assets, contracts, and spot purchases are all part of a prudent generation portfolio and should be assessed together. TURN would set the price benchmark and provide the utilities with flexibility and incentives to meet that benchmark. Assuming the utility meets the price benchmark, TURN proposes that no review of individual contracts would be conducted after the fact. TURN does not believe that a 7 x 24 flat product represents the correct benchmark because retained assets will meet much of the baseload demand (which is most comparable to the 7 x 24 flat product), procurement from the market will take place for peak load. TURN notes that the $74/MWh advisory benchmark adopted by FERC should not be used as a benchmark for 7 x 24 flat product because the figure reflects a fully shaped load, and the figure adopted by FERC was improperly inflated by 10 percent.

ORA would limit the price benchmark to 75% of unmet load (exclusive of direct access load) to avoid excess supply problems. ORA supports the idea of adopting a price benchmark for bilateral contracts but thinks 5-6¢/kWh is not viable now. ORA recommends that we develop an overall portfolio standard including hedging, financial derivatives, and long term contracts and consider a performance based ratemaking mechanism for procurement in the long run. ORA would require an independent review of utility risk management standards, and then would set a standard of 7.4¢/kWh as adopted by FERC for bilateral contract reasonableness. ORA would allow the utilities to enter into contracts whose goal is price stability even if stability comes at a cost. ORA notes that the holders of physical supply are the same generators that are controlling the markets today and it believes that requiring physical assets for contracts would limit the potential suppliers for bilateral contracts. To expand potential supply sources, ORA would allow utilities to engage in financial forwards. ORA would not subject interutility contracts to the same level of review as affiliate contracts.

Dynegy would subject utility actions (or inaction) to reasonableness review under the standard of whether the utility decision was reasonable in light of the information that was known, or should have been known, at the time the decision was made. Dynegy does not support adoption of a specific price benchmark because it argues it will be out of date too quickly to be of use. Dynegy asserts that its approach eliminates to need for pre-approval of contracts. Dynegy would eliminate the physical dispatch requirement and allow the utilities to utilize financial tools as well as contracts for physical delivery. Dynegy does support giving guidance regarding purchases from affiliates and other utilities and specifically supports the guidance provided in D.00-12-065.

IEP recommends that we review the totality of the supply portfolio, not just bilateral contracts, for reasonableness. IEP does not support contract by contract review or pre-approval. IEP urges us to set the benchmark realistically to reflect underlying conditions (like gas costs) in the region and to review utility decisions based on information known at the time the decision to enter into a contract was made. IEP recommends that any modifications to the price benchmark be prospective. IEP supports development of diverse supply portfolios and encourages voluntary QF contract restructuring. IEP does not support overreliance on solicitations to enter into contracts.

CCC supports applying any reasonableness standards adopted here to renegotiated QF contracts. Renewable Generators recommend that we specify that the supply portfolio should contain percentage of renewables to support diversity of supply. Renewable Generators also would encourage voluntary QF contract modifications, but notes that contract certainty is important to contracting parties.

WPTF points out that forward contracts do not necessarily mean costs will always be lower. WPTF opposes the requirement that physical assets secure a contract for it to be found reasonable.

CalPX asks us to confirm in our order that exchange based forwards in the BFM will be considered reasonable under the same standard for bilaterals and notes that its BFM meets the criteria in Attachment 1. APX recommends that we clarify that we are eliminating the requirement in D.95-12-063 that utilities buy all supplies out of the PX. APX does not believe that D.00-12-065 corrects the ambiguity of D.00-08-023 and D.00-09-075. APX promotes using auctions to enter into bids and does not support pre-approval of contracts. APX also asks whether the benchmarks we propose apply only to forward contracts or to the whole generation portfolio.