California Market Update

California Market Update

CALIFORNIA PUBLIC UTILITIES COMMISSION UPDATE

CPUC Issues Proposed Decision in Direct Access Reopening Proceeding

In early October, the California Public Utilities Commission (CPUC) took a very encouraging step forward in the Direct Access Reopening Proceeding. The Proposed Decision (PD) adopts a plan to facilitate the removal of the Department of Water Resources (DWR) from its role of supplying electric power to retail customers through the contracts they entered into on behalf of the utilities during the 2000-2001 “energy crisis.” The plan outlines having this accomplished within the next 15 months, calling for a reopening of the market by Jan. 1, 2010.

This just-issued PD is part of phase two of a three-phase process to reopen direct access. In this phase, the CPUC is addressing the condition of lifting direct access suspension. The criteria that the CPUC must meet in order for them to lift the suspension is to remove the DWR from the role of supplying electric power.

The following excerpt summarizes Administrative Law Judge (ALJ) Pulsifer’s basic finding as outlined in the PD:

“As explained below, we find it to be in the public interest to expedite the final phase out of DWR’s remaining involvement in supplying electric power to retail utility customers, and to return full responsibility to the IOUs. We accordingly set a target goal for the final removal of DWR from the role of supplying power by January 1, 2010. We shall pursue this goal by supporting a process to implement replacement contracts between the IOUs and the suppliers under the DWR contracts, thereby relieving DWR of further supply obligations under its existing contracts.”

Phase 3 of this proceeding is next on the regulatory schedule. In Phase 3, the Commission will determine market structure, including customer eligibility and other switching rules.

Direct Energy Business (DEB) filed joint comments with the Alliance for Retail Energy Markets (AReM) and CASES on this PD at the end of October, focusing on expeditiously moving forward with DWR contract novation. A Final Decision is expected to be issued by the CPUC in early November. To view a previous article on this topic, click here.

Workshop Kicks Off Phase II of Resource Adequacy Proceeding

In mid-October, the CPUC’s Energy Division held a workshop to tee up the issues that will be at play in Phase II of the 2008 Resource Adequacy (RA) Refinements proceeding. The most pertinent topics discussed and included in the proceeding are:

Load Serving Entity (LSE) Load Forecasting for RA: This is to address the supposed “persistent under-forecasting of some LSEs” for RA purposes. DEB believes this is a very limited issue and will be advocating for no change to the current “best estimate” policies.
Standard Capacity Product (SCP)
Allocation of Demand Response (DR) Credits: This is currently done based on load ratio share but it may be more appropriate to base it on customer participation in DR programs.
Monthly Local RA to Address Load Migration: This is an important issue, but one DEB has been advocating be addressed after the implementation of a SCP
MCM (Modified Centralized Market) Buckets: DEB will be advocating on behalf of doing away with this element of the program.
Trigger for Monthly Cost Allocation Methodology (CAM) Allocation: This is currently being done on a quarterly basis, but DEB has advocated in the past that it move to a monthly allocation to better provide our customers the “benefits” associated with the CAM costs.
Local Capacity Requirements for 2010
Net Qualifying Capacity Calculations: This will be a key component of this phase II of the proceeding

This schedule for this proceeding is as follows:

Jan. 9, 2009: Proposals due on any issue in the Scoping Memo

Week of Jan. 19, 2009: Workshop to discuss the proposals

Feb. 13, 2009: Comments due

One to two weeks later: Reply due

Pre-hearing Conference Held for Utilities’ DR Programs and Budgets for 2009-2011

Direct Energy Business (DEB) regularly monitors the Demand Response (DR) programs instituted by the utilities since our Direct Access (DA) customers can and do participate in these programs. As such, DEB takes extensive steps to ensure equality from both a participation and payment perspective for these programs.

Below are highlights from the pre-hearing conference for the proceeding on the Pacific Gas & Electric (PG&E), Southern California Edison (SCE) and San Diego Gas & Electric (SDG&E) applications for approval of demand response (DR) programs and budgets for 2009-2011:

The first topic of discussion was the Investor Owned Utilities’ (IOUs’) joint motion for “bridge funding” of current DR programs, using leftover funds from 2008, and “ramping up” Market Redesign and Technology Update-related Participating Load (PL) pilot programs, either by using leftover funds or, in SDG&E’s case, by requiring new funds.

The IOUs all stated how critical is was to get bridge funding since there was little if any chance of the CPUC issuing a final decision on their applications this year. The IOUs’ main concerns were that if funding is “cut off” for existing programs on Jan. 1, 2009, it would disrupt customer participation and could jinx the DR programs going forward and they need to start implementing the MRTU PL pilot programs in early 2009 to have them up and running when the MRTU is implemented.
These issues will be decided on in a decision issued late this year or early next year. However, the IOUs’ request to continue to have the ability to shift funds between programs, which was made in the motion in connection with the programs to receive bridge funding, may not be decided early unless the Division of Ratepayer Advocates (DRA) and the IOUs can resolve their differences. The DRA is concerned with the IOUs ramping up their MRTU pilot programs, which they believe will prejudice the outcome of the main proceeding.
San Francisco Community Power wants PG&E to use bridge funding to continue its small commercial aggregation pilot.
The Energy Division Staff have some outstanding data requests to the IOUs concerning their bridge funding requests, which the IOUs were directed to provide responses to by Oct. 21, after which time parties will have a week to submit comments on the IOUs’ responses.

The Assigned Law Judge reviewed a list of the issues that had been identified in the applications and programs:

What programs, including pilot programs, should be approved for 2009-2011
Whether the programs as proposed should be modified
The criteria for approving proposed programs, whether based on cost-effectiveness or some other factors
Pilots that do not start until 2010 will be addressed in the main decision
Whether programs the IOUs propose to discontinue should be retained
The issue of fund shifting and whether it can be done through he advice letter process
Whether the advice letter process is appropriate for modifying MRTU-related programs once more information about MRTU is available.
Issues about cost recovery mechanisms
The rules for participating in dual and multiple programs
The Direct Energy and AReM issues related to access to programs by DA customers and the rules for those customers’ participation

Joint Parties Oppose Modified Centralized Market Proposal

In early October, a large group of joint parties came together to oppose the CPUC's Resource Adequacy (RA) proposal and to advocate in favor of a forward capacity market. The Alliance for Retail Energy Markets (AReM), along with DEB; the California Forward Capacity Market Advocates (CFCMA), which includes Southern California Edison, San Diego Gas & Electric and several independent power producers (IPPs); the Independent Energy Producers Association; and several other IPPs jointly filed comments outlining their case.

The main issue that the parties have with the Modified Centralized Market (MCM) is that it creates a bifurcated structure with a preliminary capacity showing (PCS) and a centralized forward reliability market (CFRM). The utilities would be forced to use the PCS and its rigid procurement policies while electrical service providers would have to go to the illiquid and thin CFRM for their capacity needs.

Ruling Issued in the Community Choice Aggregation Proceeding

In early October, the CPUC issued a ruling in the Community Choice Aggregation (CCA) docket that amends the Assigned Commissioner’s Ruling and Scoping Memo issued on Dec. 3, 2003 to add a separate phase to address the bond or insurance to be posted by a CCA to ensure there is no cost-shifting in the event CCA customers are involuntarily returned to bundled service. This ruling has the potential to establish a precedent for similar rules to be applied to ESPs.

The ruling identified the issues to be considered in this phase of the proceeding and set a procedural schedule. It also set a workshop—to be held on Nov. 17 and 18 and facilitated by the assigned ALJ—relating to the costs to be included in a re-entry fee and the methodology for calculating the bond requirement. In preparation for the workshop, the CPUC has requested that interested parties file responses to a list of questions they drafted by Nov. 12.

CPUC Issues Final Decision in Greenhouse Gas Proceeding

On Thursday, Oct. 16, the California Energy Commission (CEC) and the CPUC issued the Final Opinion in the greenhouse gas (GHG) proceeding. The Final Opinion provides recommendations to the Air Resources Board (ARB) on strategies to help reduce greenhouse gas (GHG) emissions and meet Assembly Bill (AB) 32 goals in the electricity sector, including:

a strategy for mandatory emission reduction measures based on energy efficiency, renewable energy and combined heat and power (CHP)
an increase in the state’s RPS to 33 percent by 2020
recommendations for structuring a market-based cap-and trade program to meet the goals set out in the ARB's Climate Change Scoping Plan (which expects the electricity industry to contribute at least 40 percent of the total GHG reductions from direct mandatory approaches and measures)

To learn more about the specifics of the Final Decision, please read the CPUC’s announcement.

The California Air Resource Board Releases AB 32 Scoping Plan
In mid-October, the The California Air Resource Board (ARB) released the latest AB 32 Scoping Plan draft. As part of AB 32 implementation, the ARB is responsible for developing this Scoping Plan which outlines a comprehensive set of actions to reduce greenhouse gas emissions to 1990 levels by 2020, improve the environment, reduce dependence on oil, diversify energy sources, save energy, create new jobs, and enhance public health.

The ARB will decide on a final Scoping Plan for AB 32 implementation on December 11 and the approved measures will be developed over the next two years and be in place by 2012. For more information on the ARB’s AB 32 Scoping Plan, click here.

CPUC Approves Long-Term Strategic Energy Efficiency Plan for California

The CPUC approved a long-term plan for energy efficiency strategy in California, a state that continues to make energy efficiency the cornerstone of its energy plans. In the expansion of current programs into the future, the state will focus on “zero net energy” homes and offices in the next two decades, improved programs for low-income homes and improved efficiency for HVAC systems. This plan does not implement specific programs, but it indicates the guidance that future programs and funding will encompass.

PG&E Files for Rate Increases

In early October, Pacific Gas & Electric (PG&E) issued its advice letter implementing D.08-08-011, the decision approving its Energy Resource Recovery Adjustment (ERRA) Trigger Filing (AL-3347). Generation rates will increase by 10.5 percent for all medium and large C&I rate classes. These increases will be in effect through the end of 2009.

In addition to the 2008 rate increase, PG&E also filed for another rate increase to be effective Jan. 1, 2009. The filing shows an additional 7 percent increase to generation rates.

SDG&E Files for Rate Increase

San Diego Gas & Electric (SDG&E) filed its 2009 Energy Resource Recovery Adjustment (ERRA) rate projections. It estimates a 0.67cents/kWh increase in generation rates (approximately a +7 percent increase) for medium and large C&I customers.

SCE Files for Rate Increases

SCE filed its 2009 ERRA application in which it is requesting an $881 million increase in its generation revenue requirement. This amounts to an approximate 13 percent increase, or about 1.2cents/kWh on average across all rate classes. SCE also proposes including $21.8 million for RA capacity that they expect would benefit all customers. This would be non-bypassable and will cost C&I customers approximately 0.02-0.03 cents/kWh.

CAISO UPDATE

CAISO Adopts Proposal to Reduce Unsecured Credit Limit to $100 million

Last month, the California Independent System Operator (CAISO) adopted an enhanced credit policy which reduces the maximum unsecured credit limit to $100 million. In addition, the CAISO will estimate default risk probabilities based on Credit Agency Issuer Ratings or KMV Moody’s spot credit and also accept an Affiliate Guaranty, where a Guarantor backing the liabilities of one affiliate must provide the same Guaranty for all affiliates in the CAISO market.

In light of the current credit crisis in the financial markets and the recent Lehman Brothers default in the CAISO, the proposed credit policy enhancements should provide more credit transparency and reduce systematic credit risk for all market participants in the CAISO market.

CAISO moves forward with implementation of a Standardized RA Capacity Product

The CAISO has begun to move forward with a process to implement a Standard Resource Adequacy Capacity Product (SCP) into its tariff language. In late October, the CAISO held a stakeholder workshop that put forth a framework for moving forward and included the following proposed schedule that would allow an SCP to be implemented in time for 2010 RA Compliance year procurements:

Nov. 6, 2008 — CAISO straw proposal

Nov. 18, 2008— stakeholder meeting

Nov. 26, 2008— comments due

Dec. 4, 2008— CAISO draft final proposal

Dec. 11, 2008— MSC/stakeholder meeting

Dec. 19, 2008— comments due

Jan. 26-27, 2009— Board decision

Feb. 2009— FERC filing

A Standard Capacity Product for Resource Adequacy is a critical step toward a more liquid and tradable Resource Adequacy market and is one that Direct Energy has been advocating for several years. This is the first time the CAISO has put forth a solid timeline and commitments to moving forward. If the FERC filing date is pushed back by a month or two to accommodate stakeholder processes and get the best SCP possible, there is still time for it to be implemented for the 2010 compliance year procurements, which will begin in early summer 2009.

Direct Energy has been aggressively participating in the CAISO process and filed comments in late October endorsing the process and schedule. DE will seek internal feedback as needed on the CAISO straw proposal to be released in early November.

FERC Approves Interim Capacity Procurement Mechanism

CAISO Prepares to File 60-day FERC Filing for MRTU Go Live Date

CAISO notified the Board of Directors that it intends to file the 60-Day FERC filing for a Jan. 31, 2009 MRTU “Go Live” date. If approved by the Board and filed, it would decrease the likelihood of a delayed MRTU start date. Direct Energy is on track to operate under the MRTU environment on Jan. 31.

FERC issued an order approving Interim Capacity Procurement Mechanism (ICPM) in California, which will go in effect at the start of Market Redesign and Technology Upgrade (MRTU). Currently, the MRTU is scheduled to go live Feb. 1, 2009. The ICPM is a capacity procurement backstop that prices capacity at $41/kw-yr with no peak energy rent (PER) deductions. Resources that are procured via ICPM will be subject to a 30-day minimum designation. Resources also have the option of rejecting an ICPM designation.

The pricing of ICPM is fairly reasonable considering that previous proposals used the Cost of New Entry (CONE) as a pricing benchmark. ICPM is an important reliability tool that the CAISO has at its disposal to maintain reliability, assuming it uses the designation power judiciously. The ICPM may have a slight impact on resource adequacy (RA) pricing though since it pegs backstop capacity at $41/kw-yr.

CAISO Holds Stakeholder Meeting on Allocate Uplift Costs from Convergence Bidding

The CAISO held a stakeholder meeting on how to allocate uplift costs as a result of convergence bidding. Virtual bidding of demand and supply may cause uplift in the Integrated Forward Market (IFM) and Residual Unit Commitment (RUC)markets, therefore a mechanism to allocate the costs of uplift needs to be in place for both physical and virtual bids. The CAISO is proposing a 2-tier system to allocate Bid Cost Recovery uplift to physical and virtual bids. The Federal Energy Regulatory Commission (FERC) has order the CAISO to have a system for convergence bidding in place one year after the start of MRTU, which is set to take effect on Feb. 1, 2009.

Virtual bidding of supply and demand has both the impact of increasing uplift costs or decreasing uplift costs. Virtual bidding will likely create more liquidity in the market but will also create a complicated cost allocation problem. Policy and design issues related to convergence bidding at this point are still in the preliminary stages but by next summer the CAISO hopes to file a robust proposal for implementing convergence bidding with FERC.

LEGISLATIVE UPDATE

DEB Participates in RPS Task Force

The Speaker of the Assembly has initiated a Renewable Portfolio Standards (RPS) Task Force to address reform of current and future RPS obligations. Under the current rules, California has unattainable RPS goals of 20 percent by 2010 and the Governor will increase this mandate to 33 percent by 2020. In order to accomplish these goals however, the rules and compliance standards must be reformed.

DEB has been invited to participate on the Task Force and will have future opportunities to advance our position and express our concern with the current compliance obligations. If and when RPS compliance reform takes place and the reform initiatives allow renewable markets to develop, it will eventually serve to provide more/better opportunities for customer investment in renewable technology/resources as well as provide for more liquid and transparent pricing for voluntary and involuntary renewable procurement. We anticipate that this task force and the topics related to RPS reform will fold into the 2009 legislative session in which DEB will be actively participating.

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