New Direction for Future Resources

The California Public Utilities Commission adopted a long-term plan for utilities to buy new electricity supplies that makes way for a hybrid market over the next decade?with a few twists. Over the objections of the two outgoing members, CPUC president Mike Peevey and members Susan Kennedy and Geoffrey Brown reversed the regulatory ban on affiliate transactions, required that greenhouse gas costs be factored into bids for new power plants, and added a premium associated with debt equivalence for utility contracts with merchant power plants. ?This decision is the core of the California?s energy recovery plan,? Kennedy said before the December 16 vote. ?We?re finally getting beyond stopgap,? Peevey added. The final decision allows Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric to collect their stranded costs related to new generation?be it utility built and owned or from merchant generation contracts?over a 10-year period. ?By giving the utilities the ability to enter into long-term contracts, California will avoid being at the mercy of the spot market,? Governor Arnold Schwarzenegger stated. In April, the governor prodded the commission to implement new procurement requirements ( Circuit , April 30, 2004). The final decision doubled the original proposal for adding a debt equivalence factor to the price of contracts that utilities sign with third-party power producers from 10 percent to 20 percent. SDG&E and Edison had argued for 30 percent. The premium is supposed to balance out any risks the utilities take that their credit ratings may suffer when signing power-purchase agreements. ?I think the CPUC gave in to the utilities? whining about the debt equivalence adder, but on the other hand, utilities must compete with us for the right to build power plants, and the utilities? costs are capped by the accepted bid,? said Gary Ackerman, director of the Western Power Trading Forum. The order requires commission review of contracts with terms of five years or more. It also continues to put energy-efficiency resources and demand response at the top of the loading order PG&E and SDG&E were pleased that the commission adopted their resource plans. ?The decision properly recognizes and seeks to address some of the important financial impacts associated with long-term contracts,? said Ron Low, PG&E spokesperson. SDG&E?s Ed Van Herik added that utilities? power supplies include a mix of resources that reflects the commission?s loading order giving priority to efficiency, demand response, and renewables. Edison was still reviewing the decision at press time. Although commissioner Brown supported the decision, he had concerns about its cost-recovery provisions. ?Its cumulative effect,? he said, ?tips the balance too far toward supply acquisition? because of the generous cost-recovery guarantees. Brown worried that this would result in too much supply and thus stranded costs. He would have preferred the development of a capacity market to meet the 115-117 percent resource-adequacy requirement, meant to avoid blackouts on the hottest days, which was adopted by the commission. Commissioner Carl Wood slammed the decision for being significantly altered at the last minute and a product devoid of a ?collaborative process.? He characterized the vote ?as a rush to judgment? while saying it was still a step forward on the utility planning process front. Despite the short turnaround, consumer advocate The Utility Reform Network found the final decision positive because of its elimination of cost-of-service ratemaking. Mike Florio, TURN senior attorney, insisted that cost-based rates and market-based rates will counterbalance each other. The decision strives for ?least-cost? resources, but according to Florio, ?The fight will come when the new projects arrive.? Wood also noted that the commission is putting ?roadblocks? in the way of utility planning efforts by not deciding the fate of energy efficiency and renewables solicitations at the same time as long-term procurement. ?We have missed an opportunity to advance the planning process in a meaningful way,? he warned. While the fate of energy efficiency and renewables was postponed, the environment did claim a corner of the decision. Peevey said that the decision is proof the commission takes climate change seriously. In it, regulators ordered that the greenhouse gas costs of fossil fuel be accounted for in bids. Climate change and a future cap-and-trade program for greenhouse gas emissions will be discussed at an en banc hearing in early February, he added. ?It is cheaper to prevent carbon emissions today than it will be to clean up carbon emissions tomorrow,? said John Galloway, Union of Concerned Scientists senior energy analyst, lauding the CPUC?s order. The decision also does the following: Requires utilities to buy supplies in line with ?reasonable? forecasts. Those forecasts exclude known departing load to avoid unfairly slapping exit fees on community aggregators and others. Requires the use of an independent party to evaluate bids between utilities and affiliates as well as turnkey projects. The decision rejected the Office of Ratepayer Advocates? efforts to reject the third-party evaluator on grounds that it would add an unnecessary complication and would do part of ORA?s job. Questions of independence were raised over the matter of the evaluator?s fees being paid by utilities. Leaves qualifying facilities with expiring contracts without automatic renewals. Joe Karp, an attorney with White and Case, urged the commission during oral arguments earlier in the week to require utility procurement plans to reserve a place for the expiring QFs to prevent them from going off line. Fails to require firm capacity contracts, which could undermine reliability. Grant Rosenblum, California Independent System Operator regulatory counsel, urged regulators to require that capacity contracts be tied to identifiable resources to avoid double-counting that would weaken resource adequacy.

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New Direction for Future Resources

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