Comments of the Independent Energy Producers Association (IEP)

On Energy Procurement Practices In the State of California

 

Hearing of the
Senate Energy, Utilities and Communications Committee

November 19, 2003
Presented by
Jan Smutny-Jones
Executive Director

The Independent Energy Producers Association (IEP) is pleased to have the opportunity to discuss energy procurement practices in the state of California. IEP has been an active party in the on-going CPUC general procurement rulemaking. In that proceeding as well as elsewhere, we have stated that the overarching goal of the state’s policies regarding resource procurement should be the timely and cost-effective creation of diverse portfolios that meet consumers’ energy demand and reliability needs consistent with State policies regarding resource preferences.

IEP believes that a properly functioning, competitive energy marketplace, coupled with positive regulation, provides the necessary elements to foster innovative and least-cost products to match consumer demand. IEP believes this is consistent with the California Energy Action Plan (EAP) endorsed by the CPUC, the CEC, and the CPA earlier this year.

At this time, IEP wants to discuss two foundational elements of an effective and efficient procurement mechanism for the state of California:

It is critical that energy procurement be conducted in an open, transparent, and competitive manner.

Load Serving Entities (LSEs) must be held accountable against an appropriate Resource Adequacy Requirement (RAR) to ensure a prudent level of planning and operating reserves.

I. Effective Energy Procurement

An open, competitive, transparent procurement is a foundational element of any process designed to realize the greatest value for ratepayers and consumers. Individually, openness, competitiveness, and transparency fail to deliver to consumers the greatest value; collectively, they ensure that consumers obtain this value.

How does the state ensure an open, competitive, transparent procurement process? To achieve this goal, the state must implement a procurement process that accomplishes the following:

• Establishes Up-front Criteria for an Effective, Open, Transparent, Competitive Procurement Process; and.
• Protects Against Potential Self-Dealing Between The Utility And Its Own Generation Interests (i.e. IOU-Owned Generation)

The state through the Public Utilities Commission (the Commission) and the other entities involved in procurement must articulate the basic criteria for an effective, open, transparent, competitive procurement process. To accomplish this goal, IEP in its filed Testimony at the Commission has focused on the need for the following critical elements:

1. Regulatory certainty,
2. Utility procurement flexibility and associated accountability for its plan,
3. A appropriate resource adequacy requirement (RAR),
4. The alignment of ratepayer and shareholder interests,
5. Effective procurement bidding protocols and rules.

Regarding the issue of the potential for self-dealing, we seek a competitive procurement process where all potential bidders are treated in a fair, non-discriminatory manner.

Importantly, IEP is not saying that IOU Affiliates and IOU-Owned Generation should be prohibited for competing; rather, we are simply saying that this competition must occur in an open, transparent, and competitive manner to ensure consumers realize the best value. The perception that a competitive procurement model is fair and non-discriminatory will be undermined if the utilities are allowed to build, own, and operate generation to meet consumer needs on a preferential basis.

If IOU-Owned Generation proposals are permitted to participate in the utility’s own procurement, IEP believes that the only way to ensure trust in an open, transparent competitive procurement process is a regulatory overlay to protect against the potential for "self dealing" and to ensure the greatest value to consumers. This model would require carefully developed and distinct rules and procedures to ensure that: (1) the IOU-Owned Generation proposal participates in the utility’s own solicitation it does so on a non-discriminatory or preferential basis; (2) ensure comparable access to important procurement/planning information among IOU-Owned Generation interests and other potential suppliers; and, (3) ensure bidding and evaluation protocols are designed and implemented in a fair and competitive manner vis-à-vis IOU-Owned Generation interests and other suppliers.

II. Prudent Resource Adequacy Requirement

In the wake of the regional market upheaval, resource adequacy has surfaced as a primary ingredient to a successful market design. As generation resource adequacy impacts wholesale power as well as transmission grid reliability, it is important that the state and federal entities coordinate the verification of having achieved resource adequacy. Adding additional "planning" or "economic" reserves above a utilities’ projected monthly peak demand and operating reserves is conceptually the same as the LSEs obtaining "insurance" to ensure adequate supplies, maintain grid reliability, and foster a healthy competitive regional wholesale marketplace.

IEP recommends the state adopt the following Principles related to resource adequacy:

• A state resource adequacy requirement (RAR) should be applied to all Load Serving Entities (LSEs) and each LSE should be held accountable for meeting the RAR requirement...
   
• Each LSE must demonstrate (using appropriate criteria) how it will achieve a level of Dependable Capacity (as defined by the California Power Authority in its Rulemaking) in an amount equal to no less than 17% of its peak needs, a number that includes the WECC requirement for operating reserves, as measured against its projected monthly peak.

In addition, IEP recommends the Commission initiates the following actions related to an RAR requirement for its jurisdictional entities:

• Direct the IOUs to procure 17% Dependable Capacity (as defined by the CPA noted above) for 100% of IOU load.
   
• Determine an appropriate methodology for applying comparable resource adequacy requirement on all LSEs in California.
   
• Determine a preferred mechanism for verifying compliance with the RAR, specifically the procurement of Dependable Capacity sufficient to meet resource adequacy requirement on their own initiative.
   
• Determine an appropriate and reasonable "ladder approach" whereby jurisdictional LSEs face increasing verification standards/obligations to show that required reserves are in place as they move closer to real-time.
   
• Develop a preferred methodological approach for verifying "deliverability" and the "firmness" of the resources identified by jurisdictional LSEs as meeting the resource adequacy requirement to assure it is available if required as real-time approaches.
   
• Design clear, known and reasonable penalties for non-compliance that dissuade jurisdictional LSEs from inappropriately relying upon spot market and/or real-time purchases.

Finally, with regard to designing and implementing an effective RAR statewide, IEP urges the Commission to conduct the following:

• Advocate for a specific RAR requirement as a foundational element of the CAISO’s market redesign effort.

Delay in establishing minimum standards may well delay the timely investment in the energy infrastructure (generation, transmission, DSM) necessary to ensure that consumers are protected from supply disruptions during the next economic expansion, low hydro-year, and/or hot summer. Resource adequacy requires a meaningful planning horizon, as well as strict standards and reporting to be consistent with that horizon. (e.g., 3-7 years and then updates at intervals closer to real-time: perhaps 1 year, monthly, weekly, and daily intervals. Annual, monthly, daily standards/obligation levels should be set as a percentage of expected monthly peak load).

IEP looks forward to working with the legislature and the various state agencies in implementing effective and timely open, competitive and transparent procurement process as well as an effective resource adequacy requirement.