CPUC Procurement Plans Endorse Hybrid Market, Ban Affiliate Deals

The California Public Utilities Commission envisions a hybrid market where merchant generators will vie with investor-owned utilities to supply electricity. That market, as well as other major changes to the way utilities operate in a post-energy-crisis world, was part of the commission?s proposed procurement plans released November 11. Two plans are on the table. In general, they both mandate that utilities contract for 90 percent of their capacity need one year in advance and would require electricity operating reserve levels between 15 percent and 17 percent. Affiliate transactions would be banned, transmission for new generating sources would be ensured, and funding for energy efficiency measures would increase. The plans endorse a hybrid market structure, saying that merchant power plants, energy service providers, and others rival investor-owned utilities to supply energy. For instance, about 13 percent of investor-owned utility load is supplied by direct access. Merchant plants supply power serving about one-fourth of the load for Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric. The CPUC proposals spell out ways to keep those third-party suppliers providing energy to utilities as their contracts expire. ?The utilities are the provider of last resort for all customers within their service territories,? conclude the plans. Utilities would need to contract for 90 percent of their capacity needs, including peak load and reserves, a year in advance under both plans. A five percent limit would be placed on spot-market energy purchases. Utilities are called on to compete for new generation facilities through a ?request for solicitations? process, because they?ve indicated they are not equipped to construct plants. The bids should seek ?turnkey? plants, in which third parties build ready-to-use utility-owned plants. If competitive bids don?t yield results, utilities may need to take on new construction. But the draft decisions stress that firm price caps would need to be in place. A standard already in place requiring that procurement is conducted in a ?least-cost? manner can help guard against utilities favoring their own capacity at the expense of other generators. Utilities would need to resubmit their long-term procurement plans next year, following the commission?s adoption of resource adequacy criteria to be ironed out in upcoming workshops. Next year, a procurement rulemaking would be opened to consider, among other things, incentive mechanisms for each utility, strategies to handle expiring merchant contracts, and review and adoption of revised long-term plans. As for short-term procurement, plans submitted by utilities would be modified to ensure upfront standards to prevent ratepayers from overpaying. Utilities would be able to sign multiyear contracts, with limits to prevent them from locking up needs to the exclusion of renewables and other resources. Under the proposed decision option by administrative law judge Christine Walwyn, investor-owned utilities would procure reserves at a 15 percent level for all load in their service area, including direct-access customers, by 2007. This reserve level is in line with joint recommendations on resource adequacy by investor-owned utilities, the California Energy Commission, The Utility Reform Network, and the Office of Ratepayer Advocates. Commission president Michael Peevey?s alternative plan would set reserve requirements of 17 percent for investor-owned utility load, with a 2 percent margin up or down, by 2005. The California Independent System Operator would be asked to implement reserve-requirements provisions for direct-access load to promote grid reliability. Steven Kelly, policy director for the Independent Energy Producers, called Peevey?s accelerated schedule for reserves ?forward thinking and reasonable.? Peevey?s plan would ?prevent the possibility of volatile pricing in 2006 if it?s hot or if we don?t have imports,? said Kelly. The commission president?s plan would also verify that energy tapped for reserves could actually be accessed. Factors that influence ?deliverability? include location and availability of transmission. On energy efficiency, the plans recommend earmarking an additional $245 million to reduce utility procurement needs. A related draft decision, also released this week, would authorize this funding on top of about $574 million in energy-efficiency programs for 2004-2005 disbursed to utilities, local governments, and other third-party implementers. Although a separate proposed decision would allow Edison to purchase and operate the Mountainview plant as a subsidiary (see story on page 7), both draft procurement plans would ban affiliate transactions. The current CPUC ban on affiliate transactions would be made permanent to prevent ?potential conflicts of interest at a level where we have less oversight and control.? The plans note that the majority of utility penalties between 1980 and 1996 stemmed from allegations of affiliate-transaction violations. Holding companies and affiliates of each utility ?should plan for future generation to be made outside of their utility?s service territory and sold to other load serving entities.? Robert Cagen, attorney for the Office of Ratepayer Advocates, said he could not reconcile inconsistencies and that ORA will ?certainly point out that conflict with other decisions.? The CPUC should ?not adopt decisions that conflict with other commission decisions adopted at the same time,? said Cagen. Mountainview and procurement decisions are up for a commission vote on December 18.

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CPUC Procurement Plans Endorse Hybrid Market, Ban Affiliate Deals

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