Procedural Background

On August 9, 2000, SDG&E filed an emergency motion seeking authorization to enter into bilateral power contracts. SDG&E also seeks approval to establish a sub-account to track related costs within the Purchased Electric Commodity Account (PECA). SDG&E seeks similar authority to that granted to Southern California Edison Company (SCE) and Pacific Gas and Electric Company (PG&E) in Decision (D.) 00-08-023.

Commission should not compromise future long-term solutions by affording SDG&E greater purchasing authority than is needed to address the current emergency situation. However, we believe SDG&E requires greater purchasing authority to address the current emergency situation, and that a future reasonableness review can adequately deal with potential stranded costs. We are loath to grant SDG&E, whose rate freeze has ended, lesser contracting authority than PG&E and SCE whose rate freezes have not ended. Today's decision should not be considered to be precedential as to future proceedings. We will grant SDG&E authority to enter into bilateral contracts with delivery occurring on or before December 31, 2005. I.00-08-002 will still investigate, on a going forward basis, whether long-term contracts are consistent with SDG&E's ongoing procurement responsibilities.

Reasonableness Standards

In approving SDG&E's request to enter into bilateral contracts, the Commission must establish clear rules regarding reasonableness standards to prevent abuse of this new authority. As described by City, in D.00-08-023, we "adopted different reasonableness standards for PG&E and Edison. PG&E's was a `prospective' approach wherein PG&E will identify to the CPUC Energy Division specific sources of prices offered in the market that will be used to price bilateral transactions. Any purchases made by PG&E within this approved range `will be reasonable per se' (citation omitted) although the Commission does not state a specific range. For Edison, the Commission adopted a two-part review mechanism depending on contract term. For near-term contracts (defined as power delivered through December 31, 2002), there is a reasonableness review of bilateral contract prices `if the average price of bilateral transactions exceeds SCE's corresponding portfolio of transactions delivered or requiring deliver[y] over the same period.' (Citation omitted.) For medium-term contracts (delivery occurs after December 31, 2002), Edison would submit an Advice Letter seeking pre-approval of any contracts. Energy Division review is to occur over a 30-day period. (Citation omitted.)" (City Response, pp. 2-3.)

"ORA recommends that the Commission establish a forum for addressing the development of a comprehensive method of evaluating the reasonableness of these contracts that is equitable and fair and does not create a inappropriate regulatory burden for all three California utilities. Furthermore, ORA recommends that this forum be established as part of OII 00-08-002, the Commission's investigation into the functioning of the wholesale electric market and associated impact on retail rates. Absent such a forum, under SDG&E's proposal, the Commission will essentially have no basis to determine the reasonableness of any bilateral contracts." (ORA Response, pp. 3-4.)

We agree that a more comprehensive framework for evaluating reasonableness is appropriate and that I.00-08-002 provides a clear forum to establish such a framework. For now, we adopt the same reasonableness standard for near-term contracts as we did for SCE. If the average price of SDG&E's bilateral transactions, delivered or requiring delivery, over the course of an annual period exceeds the average price of SDG&E's corresponding portfolio of transactions, delivered or requiring deliver over the same period, by more than 5%, then the Commission will initiate a reasonableness review. Reasonableness reviews, to the extent needed, will take place as part of SDG&E's Annual Transition Cost Proceeding.

Experience with PG&E and SCE approval mechanisms set forth in D.00-08-023 convinces us that for medium-term bilateral contracts there is no workable method to provide meaningful Energy Division review as a condition precedent to granting front end reasonableness protection while enabling SDG&E to deal with the commercial realities of a rapidly moving market.¹ Delays attendant to obtaining such Commission approvals will mean that opportunities will be lost. Sellers have no incentive to hold offers open to accommodate regulatory lag. The utilities have a duty to act prudently on behalf of ratepayers. That means making prudent decisions to buy or not to buy through medium-term bilateral contracts without prior reasonableness protections. Contracts of these durations will not be completely covered by the SDG&E rate ceilings adopted by this Commission. Thus, ratepayers bear more risk as to them. In order to gain the ability to act quickly in today's competitive generation markets, SDG&E must take the risk of its financial decisions. It cannot have it both ways.

As noted in D.00-06-034, we deferred the mechanism for ensuring ratepayers receive the best price to an appropriate proceeding. (Id. at 32.) I.00-08-002 is just such a proceeding. Also as declared in D.00-06-034, "the utilities should still have the incentive implied by the requirement to charge just and reasonable rates (PU Code § 451)." (Id., at fn. 12.)

Therefore, we do not view favorably SDG&E's request that we state in this decision that it is reasonable for it not to enter into any of these bilateral products. We will not make such a statement at this time. Until an affirmative decision is made on the issue of the ongoing role of utilities in energy procurement, SDG&E has an obligation to supply energy to its bundled service customers on just and reasonable terms. We expect that SDG&E will fulfill this obligation diligently. I.00-08-002 will include a review of SDG&E's procurement practices, as well as an examination of reasonable and prudent strategies for minimizing the cost of providing energy to its bundled service customers for the future. We will not prejudge at this time whether or not it is reasonable to enter into bilateral contracts. We do state we will not tolerate SDG&E refusing to enter into medium-term contracts because there is no per se reasonableness standard attached to them. We will review SDG&E's procurement mix for reasonableness.

SDG&E argues that we should adopt the same reasonableness standard for it as we did for PG&E. Rather than establish a preapproved reasonableness standard for SDG&E's bilateral contracts, we prefer to compare how SDG&E's procurement practices overall compare to their bilateral procurement practices. This is consistent with our prior orders where we discuss that we will continue to oversee procurement practices to ensure just and reasonable rates.

Affiliate Rules Exemption

SDG&E seeks the Commission's waiver of an applicable affiliate transaction rule should SDG&E decide to pursue a bilateral contract with one of its affiliates. TURN argues that if affiliates are eligible for bilateral transactions, then at the very least, strict compliance with Rule III.B. is called for, so that there is comfort that the price paid to the affiliate is the product of an open, competitive bidding process. TURN Response, pp. 7-8. City and ORA agree.

We agree that no exemption from the affiliate rules is warranted. Consistent with D.00-08-023, within five days of the effective date of this decision, SDG&E should file an advice letter to inform the Commission of any markets in which its affiliates or subsidiaries operate in which it intends to procure electricity or ancillary services.

Ratemaking

TURN urges the Commission to reject SDG&E's request to limit the ratemaking impacts of the bilateral contracts to its residential and small commercial customers. TURN argues that if the Commission allows SDG&E to pursue bilaterals, the potential risks and benefits should be spread among all customers. WPTF supports this aspect of SDG&E's motion. From a practical standpoint, it is unclear to us how the benefits of downward prices caused by bilateral contracts would not accrue to all ratepayers. Therefore, we do not believe it prudent to limit the cost exposure for these contracts solely to residential and small commercial customers. This aspect of SDG&E's motion is denied. In comments, SDG&E and WPTF argue that costs and benefits of bilaterals should accrue only to residential and small commercial customers because they are the subject to a bill stabilization plan. We make no change to this aspect of the decision as a result of this argument. The question of whether SDG&E should be able to enter into bilateral contracts is separate from whether a bill stabilization plan was adopted because SDG&E retains a responsibility to procure electricity on behalf of all bundled customers.

Tariff Issues

Based on our review of the proposed tariff revisions, it does not appear that SDG&E has actually proposed a separate sub-account in the PECA to record these costs as described in the motion. Within 5 days, SDG&E should file tariffs that establish a separate memorandum account to track the costs associated with any bilateral contracts it enters into. Because we adopt a reasonableness standard similar to that of SCE, SDG&E should model its proposed tariff language after that adopted for SCE. Costs incurred for participation in bilateral options will be recorded as set forth in the tariff. We also approve the adjustments to Schedule PX proposed by SDG&E with the exception of the cost/benefit allocation language in Special Condition 9. SDG&E should file a revised Schedule PX within five days. To the extent that reasonableness reviews based on the standards adopted herein reveal imprudent procurement activities, rates will be subject to refund. In its comments on the draft decision, SDG&E states that, because of the adoption of D.00-08-037, no memorandum account or revisions to Schedule PX are required. The fact that undercollections associated with the bill stabilization plan will be tracked through the Transition Cost Balancing Account has no bearing on whether a memorandum account or revisions to Schedule PX are required. SDG&E should file the appropriate tariffs as described herein.

SDG&E should disclose all bilateral transactions to the Energy Division on a confidential basis in a monthly report. WPTF and ARM argue that additional transparency of bilateral transactions is required, compared to that proposed by SDG&E. We adopt consistent disclosure standards for SDG&E bilateral contracts as that adopted in D.00-08-023 for PG&E and SCE. This issue may be revisited on a going forward basis in I.00-08-002.