Discussion
We initiated a reconsideration of our previous decisions addressing bilateral contracting in order to provide better guidance to the utilities about what the Commission might consider per se reasonable. Without adequate guidance, our current reasonableness review procedures require the utilities to assume the risks of ratemaking disallowances without providing any corresponding opportunity to benefit, even if utility contracting decisions are sound. On the other hand, absent regulatory oversight, the utilities may not have adequate incentive to drive hard bargains, a matter of particular concern in the current market where prices are extraordinarily high and unregulated utility affiliates have entered California electricity markets.
We issue these guidelines to promote additional utility confidence that the Commission will not unfairly second guess contracting decisions. Previous decisions may not have induced the kind of utility response we intended, that is, their aggressive pursuit of low cost, reliable bilateral contracts. The parties' suggest a variety of ideas intended to encourage utility contracting while protecting the interests of those customers who will ultimately assume the liabilities imposed by those contracts. In addition to these objectives, the framework we adopt should be simple for the utilities to administer in the short term and relatively easy for the Commission to oversee.
The utilities' proposals for our advance determination of the characteristics of a reasonable portfolio requires a complex calculation that will undoubtedly change as the market changes and regulatory oversight evolves. Such a determination would require more information than we have with the filing of a single set of comments by the parties and is a more complex regulatory exercise than is required. Similarly, endorsement of changes to QF contracts and gas hedges would be premature on the basis of the record before us.
We reject any approach that requires us to determine the reasonableness of a total portfolio on the basis of an average price, partly because we have not yet determined the ratemaking treatment for the utilities' entire portfolio of assets and other commitments. We also reject a monetary benchmark for the reason that a benchmark could become a price floor for bids.
Instead, we establish guidelines using the procedures the utilities already use and find that, subject to certain conditions, contracts signed under those procedures would be reasonable per se. Specifically, the utilities should conduct periodic solicitations for competitive contract proposals. They have been conducting these solicitations for many months and are therefore familiar with their administration and the kinds of offers they motivate. We will presume the least expensive 30% of power offered in these solicitations to be per se reasonable, subject to the following conditions:
a. The average contract price will not exceed a ceiling of 6 cents for contracts with terms up to three years or the average contract price will not exceed 5.5 cents for contracts with terms up to five years;
b. Contracts signed with the unregulated affiliate of any California investor-owned utility will not be considered reasonable per se under any condition;
c. The presumption of reasonableness adopted in this decision will lapse for contracts signed after 180 days of the effective date of the decision unless the utility receives approval to extend the 6 cent ceiling or receives approval for a different ceiling.
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In Resolutions E-3618, E-3620, E-3658, E-3666, E-3672, and E-3683 we authorized PG&E, SDG&E, and SCE to utilize the PX BFM products subject to certain limits. We do not need to remove or modify the limits on forward contracts and BFM tools that were previously adopted in D.00-08-023 and D.00-09-075 and the resolutions listed above. These decisions and resolutions allow the utilities to procure their net-short position, which constitutes the entirety of the utility load in excess of utility controlled supply (i.e., retained assets and existing contracts). Therefore, the adopted limits do not constrain the utilities' flexibility to serve its loads by entering into forward contracts.
The record in this proceeding provides very little evidence with regard to anticipated contract prices or the costs of merchant generators. We nevertheless adopt a 6¢/kWh price ceiling for a limited period on the basis of the parties' insights and recognize the ceiling price may change in the months ahead. The criteria for per se reasonableness may be applied to contracts that are not backed by physical generation assets in order to maximize the resources subject to the adopted guidelines. The average contract price is defined as the nominal (not escalated) contract cost over the life of the contract divided by the contracted for deliveries.
The utilities may file for pre-approval of contracts that do not meet the criteria we adopt here. The Commission will use its existing advice letter process for pre-approvals. Contracts that do not meet the criteria for per se reasonableness adopted here, and that do not receive Commission pre-approval will be subject to subsequent reasonableness reviews. In the event of such reasonableness review, the Commission will not necessarily scrutinize every contract or every contract element. The Commission does, however, retain its authority and obligation to assure liabilities the utilities would have ratepayers assume are reasonable.
We do believe that a total generation portfolio cost benchmark, as recommended by TURN, has merit as a longer term solution. This approach should be investigated in the context of the composition of utilities' retained asset portfolios and the ratemaking mechanisms adopted for them.
