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Archives: 2015-16 Legislative Session

November 19, 2003 Hearing Information

Informational Hearing

 

Subject 1: Overview of Energy Resource Adequacy
& Utility Procurement Activities

 

Subject 2: Report From California Parties On
Federal Energy Regulatory Commission Proceedings

 

State Capitol, California Room (4203)
November 19, 2003
10:00 a.m.

 


Overview of Energy Resource Adequacy & Utility Procurement Activities

 

I. Opening Comments
  • Senator Debra Bowen, Chairwoman
    Senate Energy, Utilities & Communications Committee
II. Witnesses

Report From California Parties On Federal Energy Regulatory Commission Proceedings
 
I. Opening Comments
  • Senator Debra Bowen, Chairwoman
    Senate Energy, Utilities & Communications Committee
     
  • Senator Joseph Dunn
    Senate Energy, Utilities & Communications Committee
II. Witnesses

 

 

Energy Resource Adequacy and Utility Procurement Activities
 

Background


The 2001 electricity crisis brought dozens of energy issues to the forefront for many California policymakers, one of which was the question of how best to secure electricity resources to meet the demands of electric utility customers at reasonable rates.

Current forecasts by the California Energy Commission (CEC) and California Independent System Operator (ISO) show California’s electric supply will be adequate for the next several years. The CEC believes, using conservative assumptions, adequate electric supplies should be available through 2006. The ISO’s recently released five-year assessment anticipates "adequate supply will most likely be available to meet peak demands for the next five years."

The investor-owned utilities (IOUs) have submitted their long-term procurement proposals to the California Public Utilities Commission (CPUC) for review and approval. Pursuant to AB 57 (Wright), Chapter 835, Statutes of 2002, these procurement plans must include energy efficiency and renewable resource elements. The IOUs’ obligations under the Renewable Portfolio Standard (RPS) established by SB 1078 (Sher), Chapter 516, Statutes of 2002, must also be integrated into their procurement plans. The CPUC is expected to adopt a decision governing IOU long-term procurement in December.

Confirming the CEC’s and the ISO’s relatively optimistic forecasts, the IOU proposals also indicate their belief that electric supplies will be adequate for the next several years, though the IOUs do propose to invest in some new power plants to assure the state’s supply of power will indeed remain adequate.

While building additional power plants or contracting for additional electric supplies is the conventional approach to ensure the demand for power won’t outstrip the supply, other strategies can be more cost-effective. As demonstrated in 2001, energy efficiency, conservation and load management measures can be implemented quickly and are often inexpensive compared to generation alternatives. Additional transmission lines can also help assure adequate resources by

making it easier to import electricity from other states and countries and get it to where it’s needed in California.

There are a number of other issues that will have a direct and indirect impact on the procurement plans of the utilities and the price ratepayers will pay for their electricity in the coming years. These include:

 
Process

 

To this point, the CPUC’s procurement process has been conducted in a highly secretive manner. In large part, the CPUC has relied on "procurement review groups" – non-market participant parties who agree to sign strict confidentiality agreements – as a substitute for public review of proposed procurement investments. The level of confidentiality afforded to IOUs procurement-related filings is unprecedented and, in some cases, clearly unwarranted.

The current process frustrates meaningful public review and participation, making it difficult to judge the performance of the IOUs, or even understand the policy objectives pursued by the CPUC.

Unlike the CEC, the CPUC is subject to little statutory direction regarding its treatment of information submitted under a claim of confidentiality, and the CPUC has provided little direction of its own, apparently accepting submitters’ claims of confidentiality with little scrutiny or attention to public access.

 

Renewable Portfolio Standard

 

While the IOUs have increased their renewable resources through purchases made on an ad hoc basis, the RPS law has not yet been implemented and already parties are recommending its deadlines be advanced, goals increased, and/or application extended to municipal utilities.

There’s little basis yet to determine feasibility issues, such as whether the stream of money currently dedicated to fund any above market costs of renewable investments will be sufficient to meet the existing standard or any higher standard. There’s also a question of whether additional renewable resources will be needed if other resource investments are chosen first.

 

New Generation Investments

 

Since the electricity crisis, major new power plants, or re-powering of existing plants, are financed only to the extent the recovery of their capital costs can be assured via contracts approved by the CPUC. Thus, whether power plants are developed by regulated utilities or non-utility generators, the CPUC must provide for rate recovery to assure they get built.

Southern California Edison and San Diego Gas and Electric recently have proposed to develop major new power plants in the procurement process. The proposals range from traditional utility ownership to contracting with an affiliate to contracting with a third party.

Questions have been raised about the appropriate ownership structure of new power plant investments, how proposed projects should be selected, how the CPUC should determine whether they are reasonable, and how they are reconciled with the RPS and other larger procurement objectives.

 

New Energy Efficiency Investments

 

While there is strong sentiment in favor of further improving the efficiency of California’s electric system, it’s not clear whether a clear strategy to make the desired improvements has been developed.

Historically, California has invested in energy efficiency via programs funded by fixed ratepayer surcharges and primarily administered by the utilities. While these programs have delivered stable levels of energy efficiency, there are likely other opportunities to increase cost-effective energy efficiency investments. For example, AB 57 requires IOUs include demand reductions in their procurement portfolio. The CPUC has attempted to prioritize energy efficiency investments in the procurement process, and the IOUs have proposed additional investments in energy efficiency, beyond what is required by the fixed surcharges, in their procurement plans.

It remains to be seen how well various demand reduction measures can be integrated with one another, and then with supply alternatives, to create the most efficient and cost-effective mix. In addition, strategies are needed to expedite other measures to improve the efficiency and environmental performance of the electric system, such as modernizing, displacing, or replacing aging gas-fired power plants.

 

New Reserve Requirements

 

According to CPUC staff, the forthcoming procurement decision will establish minimum electricity reserve requirements applicable to IOUs and other load-serving entities on the ISO-managed grid. This excess capacity is intended to ensure reliability and ease market volatility, but it also may increase costs to ratepayers.

Beyond directing the California Power Authority to determine an appropriate statewide reserve level as part of its mandate, the Legislature has not provided specific guidance on the reserve issue. There is little in the CPUC record on the issue. While the appropriate level, and acceptable costs, of reserves depends on the objective (e.g. to spur investment, assure reliability, facilitate competition, and/or insure against manipulation) the exact objective of a mandatory reserve has not been well defined. As reserve policies are formulated, controversy will arise over who is responsible for procuring, and paying for, any mandated reserves.

 

Transmission Planning and Permitting

 

In its recent Integrated Energy Policy Report, the CEC said the process for planning and permitting new electric transmission projects is fragmented and unresponsive and suggests consolidating the process at the CEC as the solution. On the other hand, the CPUC says it can address shortcomings in the transmission permitting process and there’s no need to strip jurisdiction from the CPUC.

The CPUC staff also suggest transmission planning and investments will be integrated into the IOU procurement plan process, although there’s no statutory direction to support its inclusion or much indication yet how this will work.

Adding to the jurisdictional intrigue, the federal energy bill currently pending in Congress would confer eminent domain authority on the federal government to build transmission lines it determines are needed to meet its objectives, which aren’t necessarily the same as state or local objectives.

 

Department of Water Resources Contracts

 

A variety of issues have been raised regarding the integration of the DWR energy contracts into the IOUs’ portfolios. While the resources under DWR contract are now managed by the IOUs as part of their resource mix, financial and legal responsibility remains with DWR. While many of the contracts have been renegotiated to increase their "dispatchability," many still contain "take or pay" provisions, vague delivery requirements, or other features which make them inflexible and difficult to manage.

Since ratepayers are bound to pay the costs of the DWR contracts for their duration, it is important that they are managed to deliver the best value to ratepayers. In addition to ensuring they are well managed by the IOUs, an issue has been raised regarding the impact on the value of the contracts of proposed changes to the ISO’s management of the transmission. DWR has estimated implementation of "locational marginal pricing," as proposed by the ISO, could increase the costs of managing the DWR contract portfolio by between $1 to 10 billion.

 

Direct Access, Distributed Generation & Municipal Alternatives

 

Current high utility electricity costs create a substantial incentive for customers to try to buy their electricity elsewhere, whether through the reopening of the direct access option for some customers (now referred to as "core/non-core"), distributed generation, or municipal utility alternatives.

These alternatives add uncertainty to long-term planning and investment decisions, particularly if they are structured as a way for customers to escape costs incurred by utilities on their behalf. The manner and extent to which any of these alternatives are permitted or encouraged must be decided and reconciled with utility procurement planning.

These alternatives must also be reconciled with larger energy policy objectives. For example, the Legislature, the Governor, the CPUC and/or the CEC have enacted or announced the following energy policy objectives:

  • Decrease reliance on spot markets, buy electricity on a long-term basis, require utilities to purchase excess capacity, and make major new additions to the electric system infrastructure.
  • Expedite and increase investment in renewable resources beyond what the RPS requires.
  • Increase energy efficiency, decrease per capita energy consumption, and implement other measures to reduce electricity demand.

These measures, on top of existing ratepayer obligations for utility generation, qualifying facilities, and DWR contracts, will make the utilities’ portfolios fairly inflexible.

At the same time, existing and proposed policies permit, and even subsidize, customers to leave utility service for direct access and distributed generation alternatives. Unless California policymakers can figure out how to have it both ways, they will have to carefully choose among the current mix of energy proposals to avoid perpetuating stranded costs and high rates well into the future.

Committee Address

1021 O Street, Room 3350
Sacramento, CA 95814
Phone: (916) 651-4107
Fax: (916) 642-8979

Staff

Chief Consultant:
Nidia Bautista

Consultant:
Sarah Smith

Committee Assistant:
Melanie Cain

 

Minority Consultant

1020 N Street, Room 234
Sacramento, CA 95814
(916) 651-1501