V. Procurement of Renewables During the Transitional Period

There is a real concern, expressed by parties, that an interim contracting authorization might result in the foreclosure of all opportunities for the procurement of renewable resources this year, in 2003, and perhaps beyond. Such a result would clearly countermand the will of the legislature and the mandate of this Commission, as expressed in Public Utilities Code Section 701.3, and, tentatively, in AB 57. Accordingly, we have directed parties to respond to the May 6^th Edison motion with specific recommendations as to how renewable generation should be treated in this initial decision.

We will not allow the satisfaction of an otherwise legitimate need - the early and economic acquisition of energy and capacity to fill a portion of each utility's residual net short - to further hamper the development of renewable generation in California. While this decision does not enact the utility procurement plans for 2003, neither should it frustrate the development of renewable resources, a central feature of the Plans as contemplated in both AB 57 and the Scoping Memo Ruling for this proceeding.

We are, therefore, guided in the immediate instance by the specific language of Public Utilities Code Section 701.3, which reads in relevant part:

"The Commission shall direct that a specific portion of future generating capacity needed for California be reserved or set aside for renewable resources." (Emphasis added.)

In this decision, we focus on a specific portion of the unmet needs of the utilities, and in this context seek to encourage renewable generation to the fullest extent possible. We are aware that the size of the residual net short for each utility is influenced by contract allocation discussions, and that ongoing renegotiations of DWR contracts may result in the need for electrical products that are different from the peaking and dispatchable products the utilities currently seek to procure.

In any event, the emphasis in this instance is on presently identified need, and allowing renewable resources the opportunity to meet that need, even as we prepare for the considerably more substantial opportunity for renewable development in the next phase of this proceeding. Consequently, in this decision, we seek both to meet immediate resource needs and to anticipate new needs arising from ongoing contract discussions, and establish a process whereby these new needs can be met with renewable resources that are not placed under contract to help meet the present residual net short. We agree with parties that this interim procurement should not hamper the ability of the utilities to meet a potential mandatory increase in their renewable procurement in 2003. But we are also aware that the procurement needs of the utilities in this interim phase are particular, and that a blanket order to procure renewable generation irrespective of the nature of these needs will not do the job. This is the balance we attempt to strike now.

A. Authorized Interim Steps

In sum, we take three steps here that will allow renewable generators to compete for this authorized procurement, for procurement to meet unanticipated needs arising from ongoing negotiations with fossil generators under contract with DWR, and to allow this Commission to begin collecting the necessary information in furtherance of an optimal decision on the final Procurement Plans.

1. All-Source Solicitation With Preference for Renewables

We direct the utilities, in the all-source solicitation they conduct, to evaluate bids that are otherwise equal in terms of cost and electrical product offered so as to favor renewable generators. Bids from renewable generators that provide the required product, but at a cost above fossil generation, should be forwarded with the application for transitional procurement to the Commission for analysis.

The bid price of each renewable generator must clearly express the value of any Public Goods Charge (PGC) awards received, so that the cost equality of fossil and renewable bids can be accurately compared without this subsidy.⁷⁹ The utilities must be specific as to the products they seek to procure, so that renewable generators may seek to meet those needs in creative ways. Renewable generators that operate in tandem with fossil facilities to provide the needed products shall be eligible for this preference, provided that the net emissions of pollutants do not exceed those of the fossil bid that is superseded.⁸⁰ It is therefore essential that such combined renewable and fossil bidders document their emission profile in providing the desired product; such documentation will be scrutinized by the Commission in reviewing these bids, and will be subject to annual confirmation in the form of a compliance filing.⁸¹

We recognize that it will in many instances be difficult for renewable generators to provide the product the utilities seek in this interim procurement, and reiterate our requirement that utilities be as explicit as possible in describing their needs. We expect utilities to take into consideration in their resource selection the mandates of Section 701.3 and AB 57 with an eye to including renewables in their resource mix. To the extent that there are no renewables included in their transitional procurement, we will require the utilities to provide justification for their reliance solely on fossil resources.

While this authorization may not result in much, if any, new renewable generation under contract, neither will it reduce the amount of load that could be met by renewable generators under a mandatory renewables procurement framework. Thus, the concern expressed broadly by parties that this interim procurement not forestall the Renewable Portfolio Standard process is satisfied in this instance.

2. Determining the Least Cost/Best Fit

We further direct the utilities to collect in this all-source solicitation a range of information from renewable generators that presently operate without a contract or can be built and come online quickly, as discussed in hearings and in party briefs. Utilities should collect from all responding facilities, and potential facilities, the following information: renewable technology type, location, type of products available, bid price, production profile for 2001-2002, cost elements (fuel, O&M, debt/equity service, PGC), and, for facilities not presently on line, any potential interconnection or transmission issues that may impair their ability to begin generating in a timely manner. In the context of describing their cost elements, each renewable generator should provide an account of the capital pay-down schedule for their facility as it impacts their offer price. This will allow the Commission to understand the impact high capital costs have on renewable facilities, and the way in which these costs affect over time the price of electricity from renewable resources.

The purpose of the collection of information of renewables in the transition period is twofold. First, it will allow the Commission to better understand the present market for renewable generation in California, to inform the process of price benchmarking should it be pursued in later phases of this proceeding. Second, it will position the utilities and the Commission to meet any unexpected resource shortfalls, resulting from DWR contract allocation, renegotiation or other factors, with renewable generation that can be made available quickly. Parties have argued that there presently exists a substantial base of renewable generation, as much as twice what would be needed to meet a 1% mandatory increase for 2003, and suggest that this robust potential market would therefore yield competitive prices for power from renewable sources.⁸² This process will allow the Commission to assess more fully the likelihood of such an outcome. The utilities are directed to submit these responses, along with an analysis of the products and prices offered, to the Commission for review,⁸³ and respondents should consider their submissions to be binding offers to produce power.

We stress that the process of interim procurement to cover the RNS will not be delayed by this informational solicitation. We seek only to begin this process now in order to allow for a fully informed procurement decision in the next phase, and to further the widely shared goal of ensuring the "least cost/best fit" procurement of electricity from renewable sources.⁸⁴

3. Securing the Existing Base of Renewable Generation

These first two steps provide an opportunity for renewable generators to compete in the residual net short solicitation, and allow the Commission to get an early start on the process of including renewable energy in the full Procurement Plans. Finally, we seek to stabilize the base of existing renewable generation presently operating under short-term contracts.

First, we take notice of the recent success of both Edison and SDG&E (A.02-01-018 and A.02-03-010, respectively) in negotiating voluntary contract extensions and amendments with renewable generators, to continue or increase production of electricity at prices beneficial to ratepayers. By this decision we direct the utilities to further pursue such extensions and amendments. Increased production from existing contracts will count towards future requirements under a Renewable Portfolio Standard for 2003, and the contracts will be given expedited reasonableness review via the Application process.⁸⁵

Second, we take note of the Brief filed by the California Biomass Energy Alliance of July 12^th, in which CBEA describes its success in negotiating extension of expiring 90-day contracts between its members and DWR through the end of this year. We are aware, although no party provided exact information, that a number of renewable facilities may similarly face the expiration of such 90-day contracts with DWR. DWR has evidently exercised its authority to extend these contracts, and perhaps others, through the end of this year. While we do not encourage further such extensions, it appears that a concern expressed early on in this proceeding - that many renewable facilities were in danger of imminent shutdown - has been relieved by DWR's actions.⁸⁶

Third, we note that existing facilities with or without contracts are free to sell excess energy into the ISO spot markets. As we lay the groundwork for the Procurement Plan solicitations in the coming months, we encourage existing facilities to take advantage of this potential market for their output.

B. The Role of Public Goods Charge Funds in Renewable Procurement

As noted above, we anticipate that a number of the respondents to the solicitations hereby ordered will be recipients of PGC funds awarded by the CEC. These are funds that have been paid by utility customers over the past four years, with the intent that they cover the "above market costs" of renewable power in a competitive market. With the dissolution of the Power Exchange this competitive market benchmark is no longer available to us.

Nonetheless we are preliminarily directed by AB 57 to ensure that "above market costs" of renewable power are covered by the PGC, and as a policy principle we seek to render any such subsidies as transparent as possible, without stymieing entirely the process of new renewable procurement. The explicit information on PGC funding we seek to collect will allow us to evaluate the importance of this subsidy in California's renewable industry, and will aid us in developing, should the record compel us to do so, benchmark prices for renewable technologies.

The question of establishing appropriate market prices, above which subsidies from the PGC will be required, is a task for the next phase of this proceeding. The success of such an effort in the next phase, however, is largely dependent on legislative authorization of the CEC's financial plan for the future of the Renewable Energy Program. These funds represent the primary means of support for renewable generation; without them, the requirement in AB 57 that above-market costs of renewable generation be covered via the PGC represents an unfunded mandate. We anticipate that the legislature will have finalized the financial reauthorization of the PGC program when we turn to the full Procurement Plans in the next phase.

C. Bridging the Gap to AB 57 and the Full Procurement Plans

In closing, we reiterate that while AB 57 is not yet law, we are attempting to align our policy directives in a manner compatible with the bill's provisions, even as we stress that this Decision does not authorize the full Procurement Plans for the utilities. We take these steps regarding renewable resources to shore up the existing stock of generation to the fullest extent possible in the context of a targeted procurement, and to begin gathering information that will allow us to maximize the effectiveness of decisions authorizing the full Procurement Plan. Much of the work and opportunity lies ahead.