7. Treatment of Revenues from Sales of Surplus Energy
When the utilities resume the net short procurement function, there will be hours, particularly in the off-peak period, when each utility is long energy on a portfolio basis and will have to make system sales. As SCE explains:
"The reference point is the market price for power.... If the plant costs $20 a megawatt hour to operate and the market price is above that, then the plant will operate regardless of whether that power is needed to meet load or not. So we dispatch, as a first step, the generation against the market price. Then the next step is to look at how much generation we have relative to the load, and we're either long or short. At that point, if we're short, we need to buy additional power. If we're long, there needs to be a sale from the portfolio."50
At the time the sales are made, or decisions to back down resources are considered, the utility should perform such actions in a least-cost, economic manner. As discussed during workshops and subsequent comments, there is one additional step that needs to be taken after these decisions are made, i.e., the revenues resulting from sales of excess power must be credited to the corresponding revenue requirement.51
To do this, an accounting protocol needs to be established to determine whether these revenues (or what portion thereof) were generated from DWR contract quantities or from the utility's other resources. Prior to electric industry restructuring, there was no need to determine the source of the sale, because all revenues (retail sales to customers or sales of surplus power on the market at wholesale) from the utility's portfolio were credited to the revenue requirement of the utility. And during the time that DWR has been procuring electric power on behalf of utility customers, all sales have been made from DWR's contract portfolio and credited to its revenue requirement. However, with the allocation of DWR contracts to the utilities and their return to procurement activities, an accounting protocol now needs to be established to apportion the portfolio sales revenues between DWR and each utility that makes the sale.
In its July 30 comments, SCE reiterates a recommendation that it submitted with its procurement plan.52 Specifically, SCE recommends a protocol that would establish the following hierarchy to account for the sales of surplus power: (1) sales are first attributed to quantities dispatched from the utility's new supply obtained after it resumes procurement, (2) sales are next attributed to quantities dispatched from DWR contracts, and finally, (3) sales are attributed to the utility's existing supply resources. SDG&E endorses this hierarchy in its August 5 reply comments, and recommends that it be extended to curtailments of must-take contract quantities. Both argue that this hierarchy is reasonable because it reflects the sequence with which the various resources were acquired. PG&E prefers that this issue be deferred to DWR's revenue requirements proceeding.
While there is some appeal to SCE's and SDG&E's logic based on the sequence of historical events, their proposal imposes an artificial hierarchy to dispatched quantities, based on the timing of resource acquisition, that does not represent the way surplus power sales will be generated in an integrated utility portfolio. As described above, the utility will now dispatch all of the must-take quantities in its portfolio (including must-take DWR contracts) plus all of its dispatchable resources up to the market price for each product. Contrary to SDG&E's suggestion,53 there is no need to establish a sequential protocol for dispatch and curtailment among must-take contracts: By definition, the utility will need to "take" (dispatch) all of those quantities and then determine whether it makes more economic sense to sell excess power from its portfolio, ramp down utility-owned generating plants, or take some combination of these and other actions based on least-cost economic dispatch if it finds itself in a long position.
We prefer to account for sales revenues in a manner that better reflects the procurement process described above. Sales revenues should be accounted for based on the composite of resources that each utility dispatches from its portfolio, rather than the timing with which specific resources were acquired. Accordingly, we will prorate sales revenues between the utility's revenue requirements and DWR's revenue requirements based on the relative quantities dispatched from utility generating assets (including contracts and market purchases in the future) and the DWR contracts. We direct the utilities to work with DWR to develop specific accounting and reporting procedures consistent with this policy. These procedures should be developed in DWR's revenue requirements proceeding.
