New Load Should Be Clean, Green, and Transparent, CPUC Proposal Says

Investor-owned utilities must first use the least polluting resources to satisfy customer demand and requisite reserve requirements over the next 10 years, with new power supplies procured through an open and competitive solicitation, according to a draft long-term procurement decision by a California Public Utilities Commission administrative law judge. Under the 211-page draft decision, costs factored into bids would include ones related to debt equivalence?the risk credit agencies associate with third-party contracts, which would be capped?and those associated with greenhouse gas emissions from new plants. The tentative ruling by judge Carol Brown released November 17 also ties the next round of energy purchases to the issuance of the California Energy Commission?s updated Integrated Energy Policy Report expected in 2006. ?[I]t is our intention that many more categories of planning information will be open and will be considered so in our review? of utility long-term procurement plans, states the proposal. Requiring Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric bids to be open and transparent was a coup for the independent power producers, which had long complained about utility closed-door procurement, particularly with IOU affiliates. Mandating a transparent, competitive joint solicitation will ?create a level playing field,? said Steven Kelly, policy director for the Independent Power Producers. While consumer advocates were somewhat pleased with the ruling, they were less than thrilled with having bids for utility-owned plants evaluated alongside independent generator bids. Ratepayers would get stuck paying a ?risk premium? for every plant contracted, regardless of whether it is owned by the utility or an independent generator, said Mike Florio, senior attorney with The Utility Reform Network. ?Cost-of-service generation is effectively eliminated as an option going forward, which may be fine when market prices are low, but could be a disaster when prices are high,? he added. The three utilities were reviewing the draft ruling and not ready to provide comments by press time. They submitted their long-term plans to the CPUC last July ( Circuit , July 16, 2004). The IOUs and independent generators have sparred over debt equivalence, the risk?real or perceived?related to buying power from merchant generators ( Circuit , September 24, 2004). ?We believe the regulatory environment in California is improving,? the draft ruling states, adding that independent power sources should not be disadvantaged. Thus, a modified version of the Standard & Poor?s assessment of the financial risk of nonutility power is proposed, which would apply a 10 percent risk factor to power-purchase deals. Another new twist on future resource solicitations is that independent third parties would be used to evaluate deals involving IOU power projects, those proposed by utility affiliates, and turnkey projects?those built by merchant generators but run by utilities. One of the strengths and weaknesses of the long-term procurement ruling is that it aims to pull together several related proceedings, including ones on energy efficiency, debt equivalence, the renewables portfolio standard (RPS), transmission, and community aggregation. At the same time, it puts off thorny issues many expected to be addressed, including renewables commitments by PG&E and Edison and the upcoming expirations of the qualified facility contracts. After kicking over the decision on the RPS plans to the utility 2005 renewables plan ( R04-04-026 ), Brown added that the 20 percent renewables mandate is a floor, ?not a ceiling.? Hashing out the specifics of these and related issues could turn this matter into a complex regulatory morass. ?This could become the biggest regulatory proceeding in the world,? Kelly said. He and others fear there will be numerous hearings to hammer out agreed-upon rules, along the lines of what occurred with the RPS rulemaking. This would disadvantage many intervenors, who lack the resources to participate in various related hearings. IOUs would be allowed to recover their net stranded costs, including exit fees, but the proposal declines to factor in how a capacity market might reduce those costs. The proposal adopts a framework for recovery for turnkey projects. It finds that until 2010, PG&E and Edison generally have too much nonpeak power, but all three IOUs? capacity needs are expected to take off in 2011, when the Department of Water Resources contracts expire. It creates a presumption that after energy-efficiency and demand-side resources, IOUs will turn to renewables for future procurement and have to defend fossil energy purchases, in accordance with the state agencies? joint Energy Action Plan. IOUs are directed to make full use of existing plants at so-called brownfield sites before pursuing projects on undeveloped parcels. The proposed decision also includes the following: Approves a portfolio of contracts of different lengths to keep utilities from becoming supply-heavy. Declines to set a procurement cap because of uncertainties, including whether customer choice will be revived. Notes that a methodology for estimating the cost of transmission upgrades will be refined by the CPUC and the Energy Commission. Approves PG&E?s plan to add 1,200 MW of reserve capacity in 2008 and another 1,000 MW in 2010 via solicitations. Allows Edison to rely largely on short- and medium-term power contracts until 2010. Concludes that SDG&E has adequate power through 2009, assuming it meets the state renewables mandate. Maintains that regulators will address next year how to handle QF deals that expire in 2006. Insists that a plant?s location and its impact on transmission be factored into solicitations. Notes that the CPUC set demand response that provided financial incentives for the three IOUs of 3 percent of annual peak demand in 2005, and an additional 1 percent in 2006 and 2007 ( D03-06-032 ). Responses to the draft ruling are due at the commission December 6. ( R04-04-043 )

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New Load Should Be Clean, Green, and Transparent, CPUC Proposal Says

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