Rulemaking 17-06-026 ALJ Anne E. Simon ALJ...

Rulemaking 17-06-026 ALJ Anne E. Simon ALJ Stephen C. Roscow April 23, 2018

REBUTTAL TESTIMONY OF RON PERRY

ON BEHALF OF COMMERCIAL ENERGY

TABLE OF CONTENTS

Page

-i-

I. INTRODUCTION ..................................................................................... 1

II. CURRENT PCIA METHODOLOGY ....................................................... 2

III. PROPOSALS FOR GOING-FORWARD IOU PORTFOLIO OPTIMIZATION ....................................................................................... 3

IV. PCIA ALTERNATIVES ........................................................................... 5

A. PROPOSALS FOR PCIA ALTERNATIVES ........................................... 5

1. The Joint Utilities GAM Proposa .................................................. 5

2. The Joint Utilities PMM Proposal ................................................. 7

3. Joint Utilities’ Cost Recovery and Rate Design Proposals ............ 9

4. CalCCA PROPOSALS ................................................................ 10

5. AReM/DACC PROPOSALS ....................................................... 13

B. CONSISTENCY OF PROPOSALS WITH OVERALL GOAL AND THE GUIDING PRINCIPLES....................................................... 14

1. Transparent and Verifiable with Open and Easy Access to Input Data While Maintaining Confidentiality ............................ 17

2. Reasonably Predictable Outcomes That Promote Certainty and Stability for All Customers Within a Reasonable Planning Horizon ......................................................................... 20

3. Accuracy and Stability in the face of Significant Changes in the Number of Departing Load Customers or a Return of such Customers to Bundled Service ............................................ 24

4. Creation of Unreasonable Obstacles for Customers of Non-IOU Energy Providers.................................................................. 26

5. Consistency with California Energy Policy Goals and Mandates ...................................................................................... 30

6. Allowing Alternative Providers to be Responsible for Power Procurement for their Customers ...................................... 32

7. Allowing Alternative Providers to Elect to Pay for Their Share of Above Market Costs in a Manner than Compliments the CCAs Particular Procurement Needs and Goals ............................................................................................ 34

8. Including Only Legitimately Unavoidable Costs and Prudent Management by the IOUs to Minimize Above Market Costs ................................................................................ 36

-ii-

9. The Value of Benefits that Departing Customers Impart to Remaining Bundled Service Customers ...................................... 38

10. Accurately Reflecting and Preserving the Short, Medium and Long Term Value of Resources Procured by the IOUs ........ 40

11. Respecting the Terms of PPAs between Power Suppliers and the IOUs ................................................................................ 42

V. PCIA CAPS AND SUNSET PROVISIONS ........................................... 43

VI. FORECASTING COST RESPONSIBILITY FOR FUTURE PERIODS ................................................................................................. 44

VII. CONCLUSION ........................................................................................ 44

-1-

1 REBUTTAL TESTIMONY OF RON PERRY 2 ON BEHALF OF COMMERCIAL ENERGY 3

4 I. INTRODUCTION 5

Q: Are you the same Ron Perry who submitted Direct Testimony on behalf of 6 Commercial Energy in this proceeding? 7

8 A: Yes. My name is Ron Perry. I prepared the Direct Testimony served by 9

Commercial Energy on April 2, 2018. I should note that all of my Direct Testimony is 10

responsive to Section IV.A. of the Common Testimony Outline, addressing parties’ 11

Proposals for Alternatives to the PCIA. Commercial Energy did not offer direct 12

testimony addressing Sections II, III, V, or VI of the Common Testimony Outline, but 13

will address issues related to those portions of the outline in response to the direct 14

testimony of other parties. 15

Q: Do you have a general reaction to the Direct Testimony submitted by the 16

parties in this proceeding, and the compatibility of Commercial Energy’s Voluntary 17

Allocation & Auction Clearinghouse (VAAC) proposal with such testimony? 18

A: Yes. Commercial Energy finds itself in a unique place as an energy advocate in 19

this proceeding. In previous cases addressing the introduction of competitive options into 20

the gas or electric retail markets we often found that parties’ positions were so 21

contradictory that they could not co-exist. But the Guiding Principles adopted in this 22

case have forced parties to move toward a certain degree of consensus on key issues. 23

When combined with the legislative mandate to preserve customer indifference, the 24

Guiding Principles have induced most parties to suggest some form of the same general 25

set of solutions. Strikingly, many of the proposed solutions offered by the parties 26

actually coincide, rather than contradict, with each other. Some do not go far enough, 27

-2-

others go too far, or unrealistically expect to reach their goals sooner than is practical. 1

Some clearly recognize the value of using allocations or auctions of the existing 2

generation resources held by the IOUs, but don’t fully acknowledge the additional value 3

that is realizable through a more robust process. The challenge for the Commission in 4

this proceeding is to distill the optimal combination of proposals for reforming the PCIA 5

mechanism. Given that objective, we believe that our VAAC process is the most 6

efficient and practical version of the allocation and auction proposals offered to date. At 7

the same time, the VAAC does not conflict with other parties’ recommendations to 8

reduce the excess resources in the IOU’s portfolios, as discussed in Section III. below. 9

Such programs can be pursued on a parallel track while an allocation and auction process 10

such as the VAAC can be quickly implemented to address the immediate need for an 11

improved PCIA methodology. 12

Q: Please explain which Direct Testimony you seek to respond to with your 13

Rebuttal Testimony. 14

A: My Rebuttal Testimony addresses the Direct Testimony of the Joint Utilities 15

(IOUs), CalCCA, and AReM/DACC. The Rebuttal Testimony is organized to conform 16

to the Common Testimony Outline. In the discussion of the Alternatives to the PCIA, 17

each of the parties’ proposals are compared to the Guiding Principles adopted in this 18

proceeding. 19

II. CURRENT PCIA METHODOLOGY 20

Commercial Energy does not dispute the assertions of Pacific Gas & Electric 21

Company (PG&E), Southern California Edison Company (SCE) and San Diego Gas & 22

Electric Company (SDG&E), collectively the Joint Utilities, and other parties, that the 23

current methodology for determining the PCIA does not prevent cost shifts between 24

-3-

bundled customers and departing load customers (customers of ESPs and CCAs). This 1

leads directly to the question of what can be done to improve the PCIA calculation and to 2

reduce the overall level of excess generation at above market prices in the IOUs’ resource 3

portfolios. It also raises the question: “At what time do we measure the cost shift?” I 4

discuss this issue below. 5

III. PROPOSALS FOR GOING-FORWARD IOU PORTFOLIO 6 OPTIMIZATION 7

Commercial Energy agrees that the IOUs’ portfolios should be optimized going 8

forward to mitigate the costs that would otherwise be passed on to departing load 9

customers. At the same time the IOUs should continue to use reasonable efforts to 10

manage their portfolio of contracts to renegotiate, modify or terminate Power Purchase 11

Agreements (PPAs) when appropriate to better match their anticipated reductions in 12

demand due to departing load. The array of proposals made in parties’ opening 13

testimony can be reduced to a basic concept: the IOUs cannot keep their current 14

generation portfolios intact. How the reallocation, modification or divestment should be 15

accomplished, and to what extent, are the questions on which the parties do not agree. 16

CalCCA’s proposal to securitize utility owned generation, to hold reverse RFOs 17

that would depend on the willingness of generators to voluntarily reduce the contract 18

price of existing PPAs, and to allow CCAs or ESPs to buy out their customers’ PCIA 19

obligations in a single payment transaction would require significant time—potentially 20

years—to negotiate and implement. AReM/DACC also propose, among other things, 21

that DA providers be able to buy out their PCIA obligations and propose a third phase of 22

this proceeding to determine how excess IOU portfolio resources can be sold off. 23

-4-

The proposals of CalCCA and AReM/DACC are not inherently inconsistent with 1

the Commercial Energy VAAC proposal. Commercial Energy supports the use of these 2

tools to reduce the overall excess costs to be recovered from departing load customers. 3

However, Commercial Energy recommends that Phase II of this proceeding be focused 4

on reaching a decision on a mechanism for a market-based, voluntary allocation and 5

auction methodology to determine a net PCIA charge based on robust market prices that 6

can be implemented in the near term. The proposals of CalCCA and AReM/DACC for 7

securitization, buy-downs of PPA prices, and buy-outs of PCIA liability could be pursued 8

simultaneously with Commercial Energy’s VAAC proposal. This would allow relatively 9

prompt implementation of an improved PCIA methodology while giving the parties time 10

to properly implement more complex structural changes to the IOUs existing portfolios. 11

The VAAC proposal, on the other hand, will optimize the IOUs’ and 12

LSEs’ current portfolios and will do so in a timely manner. By placing the IOUs’ PCIA-13

eligible resources, including all the valued attributes, into a marketplace and allowing 14

LSEs to choose the resources and MWs they are allocated or bid on at auction, every 15

energy provider in California will be able to optimize their portfolio and reduce their 16

costs, as they see fit. PG&E and its witnesses, and perhaps the other IOUs, are familiar 17

with the structure of the VAAC Allocation and Auction mechanisms because of their 18

participation in the natural gas capacity allocation and auction process in place in the 19

PG&E service territory. As I stated in my direct testimony, despite the fact that the 20

number of participants and resources in the electricity market is different than in the 21

natural gas market, the number of total transactions to be expected in the VAAC process 22

are about equal. The VAAC is straightforward, allows LSEs to control their portfolios, 23

-5-

and can be implemented sooner and with less uncertainty than the more complex long-1

term proposals made by other LSE parties. 2

IV. PCIA ALTERNATIVES 3

Commercial Energy will address the alternative PCIA proposals of the Joint 4

Utilities, California Community Choice Association (CalCCA), and the Alliance for 5

Retail Energy Markets/Direct Access Coalition (AReM/DACC) and review how each of 6

their proposals conforms to the Guiding Principles adopted for this proceeding. In 7

addition, Commercial Energy will contrast the expected performance of its own VAAC 8

proposal in meeting the Guiding Principles with the recommendations of the other three 9

parties. Commercial Energy reserves the right to address the proposals of other parties in 10

its briefs. 11

A. PROPOSALS FOR PCIA ALTERNATIVES 12

1. The Joint Utilities GAM Proposal 13

Commercial Energy addressed the Joint Utilities’ Portfolio Allocation 14

Methodology (PAM) in its Direct Testimony. Now that the Joint Utilities have revised 15

their proposal by converting the PAM into two distinct elements, the Green Allocation 16

Mechanism (GAM) and Portfolio Monetization Mechanism (PMM), Commercial Energy 17

will address those proposals in this Rebuttal Testimony. However, there is sufficient 18

similarity between the PAM and the GAM/PMM that many of Commercial Energy’s 19

comments from the Direct Testimony are still pertinent in evaluating the new Joint 20

Utilities proposal. 21

The GAM is similar to the original PAM proposal in that it consists of a 22

mandatory allocation of the IOU’s resources. However, unlike the PAM, the GAM 23

-6-

allocates only RPS-eligible generation and large hydro-electric resources. The non-RPS 1

“brown” resources in the portfolio, such as nuclear, natural gas, other non RPS-eligible 2

resources and energy storage are to be sold through the PMM, which will be described 3

further below. 4

The mandatory nature of the GAM is key, as no customer has the option to refuse 5

its allocation, even if the resources it is allocated duplicate resources already in its 6

portfolio. This is a major flaw in the structure of the GAM. 7

For example, while the GAM will allocate Renewable Energy Credits (RECs) and 8

Resource Adequacy attributes to the customers who have received mandatory allocations, 9

not all of the valuable attributes and benefits of the IOU’s resources will be allocated. 10

The actual Energy produced by the resources allocated to the Load Serving Entity (LSE) 11

as well as the Ancillary Services (A/S) will be retained by the IOU and sold into the 12

market. The IOU will simply credit the revenues from these attributes to the LSEs in 13

proportion to their allocation of the resources; The LSEs will not be able to schedule the 14

energy produced by resources themselves, or use the A/S to meet their obligations to the 15

California Independent System Operator (CAISO). The IOUs will continue to manage 16

the resources and bid or sell their generation into the energy markets.1 Withholding these 17

important attributes reduces the value of the allocation to the LSEs. 18

The IOUs contend that it is impractical to allow LSEs to actually receive a pro 19

rata allocation of the energy from an IOU portfolio contact, and that it is more consistent 20

with existing utility obligations to allow them to continue to dispatch the energy.2 21

However, a generalized obligation to “dispatch …energy in a least-cost manner” is not a 22

1 Joint Utilities’ Prepared Testimony, April 2, 2018, Ch. 4, p. 4-9. 2 Id., pp. 4-9 to 4-10, and fn. 22.

-7-

barrier to the adoption of new allocation and auction procedures in this proceeding that 1

permit LSEs to accept an allocation of energy and all related attributes through a 2

Commission-approved allocation or auction process. 3

The GAM proposal does provide that RECs allocated to the LSEs are to retain 4

their long term attributes in the hands of the new owner. This is critical for the RECs to 5

retain their true value for the LSE and their customers, and to prevent duplication of the 6

resource buildout. The proposed REC Allocation process appears reasonable.3 7

The Joint Utilities proposal to allocate RA also appears reasonable and can be 8

modified to allocate RA to LSEs who accept a voluntary allocation or purchase resource 9

energy and attributes in an auction, as proposed in the VAAC.4 The Joint Utilities 10

proposal suggests that it is too difficult to sell local RA, as it is too hard to identify and 11

split into smaller segments for sale. The Joint Utilities may be correct, in which case 12

LSEs participating in the VAAC process will not take their Allocation or bid very much 13

in the subsequent Auction. The merit of using the VAAC is that it provides a mechanism 14

to verify the IOUs’ claims. Although ignored by the IOUs in their Direct Testimony, the 15

Modified NDA approved in this proceeding provides a tool to break out assets locally if 16

five or more generators can be aggregated into the resource pools in any given 17

geographic area. Nothing in the record establishes that this type of aggregation is not 18

viable. 19

2. The Joint Utilities PMM Proposal 20

The Joint Utilities PMM proposal addresses the resources not allocated through 21

the GAM, including nuclear and gas-fired generation, as well as energy storage. The 22

3 Joint Utilities’ Prepared Testimony, pp. 4-22 to 4-24. 4 Id. at pp. 4-24 to 4-29.

-8-

IOUs propose to hold a Request for Offers (RFO) to sell multi-year forward RA capacity 1

from the non-GHG resources in their portfolios, specifically two types of RFOs, one for 2

an annual long term RA auction, and another short term auction for intra-year periods.5 3

The IOUs admit there has been little interest in such non-renewable sales to date.6 4

The IOUs propose that they be allowed to bid in the auctions as well, with “CAM 5

style protections.” The IOUs propose to forecast the costs and revenues from the GAM 6

and PMM in their annual ERRA Forecast proceeding, and then implement a true up at the 7

end of the year. This is one of the greatest failings of the Joint Utilities proposal as it 8

ensures significant uncertainty for the LSEs as to the true cost of the resources they have 9

been allocated (either directly in the GAM, or their share of the net unrecovered cost of 10

non-RPS eligible resources auctioned in the PMM). While the IOUs will forecast the 11

result of the GAM and PMM in their ERRA filings, this will not be a number upon which 12

the LSEs can rely. This forecast will be altered by the true-up mechanism proposed by 13

the IOUs, which will occur a year after the initial forecast and GAM allocation. Thus, 14

LSEs will have no certainty as to their total portfolio cost when they attempt to absorb 15

their mandatory allocation and decide whether and how to bid in the PMM auction. This 16

significant risk and uncertainty will discourage bidding in the auction and reduce the 17

reliability of the market price determined in the auction. 18

The IOUs propose to eliminate the previous policy adopted by the CPUC that 19

UOG and storage costs were to be recovered for a 10 year period and recovery would end 20

at that point. IOUs want permanent cost recovery for such assets until the last of their 21

5 Joint Utilities’ Prepared Testimony, pp. 4-30 to 4-32. 6 See id., Ch. 3, p. 3-8 (lines 4–19).

-9-

long term contracts expire.7 This could potentially extend the PCIA for a very long and 1

indeterminate time, which will introduce more uncertainty and less transparency into the 2

PCIA during that period. 3

3. Joint Utilities’ Cost Recovery and Rate Design Proposals 4 5

The IOUs, with no prior notice or discussion at any point in this proceeding, have 6

proposed eliminating the Top 100 hour calculation in their rate design allocation under 7

the new GAM/PMM proposal. This affects non-residential cost allocation in a significant 8

way. This was not disclosed by the IOUs in the PCIA workshop, and has not been the 9

subject of discovery or negotiations by the parties while the main focus of the proceeding 10

has been on cost recovery of above-market resource costs and the avoidance of cost shifts 11

due to departing load.8 The IOUs have not demonstrated that relying on the supposedly 12

“consistent allocation factors”9 across all three IOUs is any more fair than the current Top 13

100 calculation. Commercial Energy recommends that this question be tabled for future 14

discussion in a more appropriate forum; it is a distraction in the current proceeding. 15

Given the compressed hearing schedule in this case, the parties do not have time for a 16

protracted rate design fight at this stage. At the very least it should be deferred to a 17

subsequent phase of this proceeding or another proceeding. 18

The IOUs’ proposal to monetize the RA and energy from gas, nuclear, and non-19

pumped-hydro energy storage (the “PMM”), without actually allocating to the LSEs’ 20

their proportional share of the energy or related benefits, and to force mandatory 21

allocations of the attributes of RPS-eligible and hydroelectric resources (the “GAM”) on 22

LSEs, fails to meet most of the Guiding Principles. The GAM mandatory allocations will 23 7 Joint Utilities’ Prepared Testimony, pp. 4-18, 4-21. 8 Id. at pp. 4-63 to 4-65. 9 Id. at p. 4-63, fn. 93.

-10-

force resources on the LSE’s while reducing their ability to plan their own procurement 1

strategy. The PMM would dispose of energy, RA, and related attributes in the spot 2

market but would withhold these elements from the LSEs, which would only serve to 3

complicate the LSEs’ efforts to meet their own procurement requirements and round out 4

their portfolios. It is more practical and more consistent with the Guiding Principles to 5

allow LSEs to take the portions of the IOUs’ portfolios that are compatible with the 6

LSEs’ customer demand and load shape, than to sell the component parts to other parties 7

and credit the revenues to the LSEs’ PCIA obligation, while leaving the LSEs to procure 8

what they need separately, either in the PMM auction or in a secondary market. 9

4. CalCCA PROPOSALS 10

CalCCA proposes several mechanisms to revalue the IOUs’ PCIA portfolios and 11

reduce the costs borne by customers: securitization of utility owned generation (UOG); a 12

voluntary “reverse auction” for existing PPA price reductions; a staggered portfolio 13

auction (SPA) of GHG-free UOG and RPS PPAs; and redistribution of supply in the 14

IOUs’ portfolios based on prudent portfolio management and risk mitigation. These 15

proposals could be effective in reducing the level of out-of-market resources in the IOU 16

portfolios, but they will require significant time and resources to implement, and will not 17

provide an immediate improvement in the calculation of PCIA charges. 18

Securitization of UOG resources will be accomplished through the sale of bonds 19

that will be used to pay off existing utility investment in their generating assets.10 20

CalCCA proposes to raise approximately $4.2 billion to pay down PG&E’s UOG and 21

$1.5 billion for SCE’s assets; the lower interest and principal payments on the securitized 22

bonds would replace the current rate base revenue requirement for the UOG assets. The 23 10 CalCCA Prepared Testimony, Ch. 3, p. 3-6.

-11-

reduction in generation revenue requirements will reduce the PCIA. The bonds would 1

require authorization by the State Legislature.11 In addition, the process of locating 2

financial institutions willing to participate in the bond sales and negotiating the terms of 3

the bond indentures will be a lengthy and complex process, with multiple stakeholders. 4

It is not clear how long the securitization process would take. However, with the 5

legislative prerequisite, it could take several years. In addition, there is additional risk 6

that full securitization on favorable terms could be difficult to obtain from lenders in light 7

of potential utility liability related to the 2017 wildfires. To the extent this process yields 8

lower costs, it can be pursued by the IOUs regardless of the PCIA proceeding as part of 9

their prudent asset management. 10

CalCCA also proposes that the revenues from the bonds can be used to pay 11

generators in exchange for PPA price reductions (contract buy-down).12 Generators may 12

be willing to reduce long-term contract costs if they place more value than the IOUs’ 13

ratepayers on an “immediate cash payment” over earning contracted revenues over 14

time.13 Negotiations would be limited to price reduction per kWh. CalCCA 15

acknowledges that the potential value in a buy-down program is unknown because 16

generators neither publish nor standardize their individual discount rates, and therefore 17

generators may not be able to offer discounts as deep as those in CalCCA’s preliminary 18

analysis14. Because this proposal would require voluntary renegotiation of long-term 19

contracts between the IOUs and generators, it is reasonable to assume that this process 20

11 CalCCA Prepared Testimony, Exh. 3-A (Sutherland), PDF page 4 (lines 24–26), PDF page 20 (lines 19–22) (document pages unnumbered). 12 CalCCA Prepared Testimony, pp. 3-6 to 3-7. 13 Id. at p. 3-8. 14 Ibid.

-12-

will also take considerable time. This is another aspect of prudent asset management that 1

the IOUs should pursue in the normal course of business. 2

The reverse RFO process proposed by CalCCA is equally likely to involve 3

lengthy negotiations and uncertain outcomes.15 4

The “Staggered Portfolio Auction,” or SPA, CalCCA proposes would place 100% 5

of the PCIA-eligible output of the IOUs’ RPS-eligible PPAs, GHG-free resources, and 6

energy storage up for auction in tranches over time.16 All LSEs, including the IOUs, 7

would be able to participate in the auction. RPS-eligible PPAs would be structured like 8

the original IOU contracts, and contracts providing over 50 MW of energy could be split 9

into multiple identical contracts to promote liquidity.17 The auction of GHG-free 10

resources and RPS-eligible resources would differ from the auction of RPS-eligible 11

PPAs.18 These resources would be auctioned as blocks of energy (e.g., 50 MW each) and 12

associated RA capacity. The first auction would be held in January 2020 to allow 13

sufficient time to develop the auction details.19 The Commission would have final 14

approval over agreements arising from the SPA.20 CalCCA proposes that either the 15

Commission or a third-party consultant implement and administer the auction; The 16

auction would be held quarterly for two years and then on an as-needed basis.21 The 17

benchmark components for the reformed PCIA will be applied to the residual IOU 18

portfolios remaining after the first two years, and any costs above the benchmark will be 19

15 CalCCA Prepared Testimony, p. 3-9. 16 Id. at p. 3-1. 17 Id. at Ch. 4, p. 4-4. 18 Id. at p. 4-5. 19 Id. at pp. 4-5 to 4-6. 20 Ibid. 21 Id. at pp. 4-7 to 4-8.

-13-

considered uneconomic and subject to a Residual PCIA paid by all customers, not just 1

departing load. 2

CalCCA’s proposals could be viewed as longer-term extensions of the VAAC 3

concepts. However, creating benchmarks repeats the same fundamental problems related 4

to bundled customer indifference that are present in the current PCIA methodology. 5

5. AReM/DACC PROPOSALS 6

AReM/DACC proposes that the IOUs be directed to liquidate, sell forward, or 7

otherwise take steps to address the above-market costs of their out-of-market resources in 8

excess of what is needed to serve bundled load. For resources that cannot be liquidated, 9

AReM/DACC recommends that aspects of the Market Price Benchmark be modified. In 10

order to determine how to sell the IOU resources, AReM/DACC proposes a third phase 11

of this proceeding.22 12

Additionally, AReM/DACC proposes Direct Access customers should be able to 13

pre-pay their PCIA obligation subject to the following terms: pre-payment would be 14

based on a mutually acceptable forecast of that customer’s future PCIA obligation; pre-15

payment could be one-time or a series of levelized payments over two-to-five years; pre-16

payment would not be trued up; the pre-paying customer would not receive any refunds if 17

it returns to bundled service; and once paid, the customer could switch among 18

competitive retail sellers without incurring any new PCIA obligation.23 19

AReM/DACC also proposes a cap on the PCIA similar to the Cost Responsibility 20

Surcharge cap that was in place during the mid-2000s. The PCIA cap would initially be 21

set at 2.2 cents/kWh. If a DA or CCA customer returns to bundled service while an 22

22 AReM/DACC Prepared Testimony (Fulmer), p. 7. 23 Id. at pp. 22–27.

-14-

under-collection balance exists, that customer would continue to pay a “PCIA under-1

collection amount” until its vintage’s PCIA under-collection is fully remitted. If the 2

PCIA exceeds the cap for three successive years, the IOU can request an increase in the 3

cap up to an amount such that the under-collection would be paid down in three years.24 4

AReM/DACC recommends that DA customers in the current pre-2009 vintage 5

tranche that have paid their stranded cost obligations should be permanently exempted 6

from any PCIA or successor tariff going forward.25 7

Finally, AReM/DACC proposes that the portion of the IOUs’ tariffs that address 8

the PCIA be updated and streamlined so that it is uniform, easily accessed, and readily 9

understood by customers. Specifically, the CRS tariff should be eliminated and replaced 10

with a PCIA tariff; the CTC or DWR bond charges can also be eliminated from the IOU 11

tariffs.26 12

B. CONSISTENCY OF PROPOSALS WITH OVERALL GOAL AND 13 THE GUIDING PRINCIPLES 14

As a guide to the Commission in evaluating the competing proposals submitted in 15

this proceeding Commercial Energy has prepared a table to indicate the extent to which 16

the proposals of the Joint Utilities, CalCCA, AReM/DACC and Commercial Energy 17

match the Guiding Principles. Following the complete table, Commercial Energy will 18

address each Guiding Principle in turn and compare the proposals. Assigning number 19

values to each proposal’s compliance with the Guiding Principles is necessarily a 20

subjective exercise, and Commercial Energy is under no illusions that all parties will 21

24 AReM/DACC Prepared Testimony (Fulmer), pp. 28–31. 25 Id. at pp. 32–33. 26 Id. at pp. 33–34.

-15-

agree with its numerical assignments, but there is value in examining which proposals 1

comply fully, partially, or not at all with each of the Guiding Principles. 2

Each of the four parties’ proposals addressed below are generally consistent with 3

the Overall Goal of this proceeding. Simply stated, the two part Goal seeks to ensure that 4

bundled retail customers do not experience cost increases due to the departure of other 5

customers to other providers, including CCAs, and that departing customers should not 6

experience cost increases as a result of costs not incurred on their behalf. Each of the 7

proposals seeks to allow recovery of the portion of the IOU’s portfolio costs that are 8

either not paid for by an LSE through an allocation or auction process, or cannot be 9

revalued, reduced in price, sold, or otherwise removed from the IOU portfolio. 10

The following table summarizes consistency of the four selected proposals with 11

the Guiding Principles. 12

13

-16-

Guiding Principles Comparison Table 1

Guiding PrincipleFull compliance = 10No compliance=0Not Assessable = NA

JointIOU

Proposals

CommercialEnergyVAAC

CalCCAProposals

AReM/

DACC

Transparent/Verifiable Access to Input Dataw/Confidentiality

4 10 NA NA

Predictable Outcomes/Stability in a ReasonablePlanning Horizon

2 8 NA NA

Accuracy/Stability with Varying Returns ofDeparting Load

8 8 5 5

Avoid Creation of Unreasonable Obstacles fornon IOU LSEs

2 10 4 4

Consistency with Calif. Energy Policy Goals &Mandates

4 8 7 7

Allow non IOU LSEs to Procure Power for theirCustomers

2 10 5 5

Allow non IOU LSEs to Pay Above Market Costs tocomplement their Procurement Needs

2 8 5 5

Include Only UnavoidableCosts/ Use PrudentManagement to Minimize PCIA

1 8 5 5

Value of Benefits that Departing Load Imparts ToBundled Customers

0 6 4 4

Accurately Reflect Short, Medium, and Long termValue of IOU Resources

3 10 6 5

Respecting Terms of PPAsHeld by the IOUs

10 10 5 5

Total Scores 38 96 46 45

2

-17-

1. Transparent and Verifiable with Open and Easy Access to 1 Input Data While Maintaining Confidentiality 2

3 4

a. IOU Proposals 5

The IOU’s Proposal does not provide LSEs and their customers with transparent 6

and verifiable access to the key input data. As with the current PCIA methodology, the 7

IOUs propose to forecast the costs and offsetting market revenues in their annual ERRA 8

flings. Eventually, annual true up proceedings will reveal actual portfolio performance 9

and market settlement data. While the GAM and PMM mechanisms provide only limited 10

choices for LSE’s (mainly deciding whether to purchase non-RPS resources in the PMM) 11

verifiable data will not be made available until the true up proceeding which will occur 12

long after the LSE’s must make procurement decisions. The IOU proposals for a 13

forecasting methodology maintain confidentiality of procurement data, and only permit 14

LSEs to have access to publicly available data.27 The IOUs will prepare forecasts, which 15

they admit are “inherently uncertain.” Essentially, the LSEs will be given a black box 16

forecast of both the GAM and the PMM prepared by the IOUs, with no real opportunity 17

to test the forecast against actual data. 18

19

27 Joint Utilities’ Prepared Testimony, Ch. 6, p. 6-1.

Guiding PrincipleFull compliance = 10No compliance=0

Joint IOUProposals

CommercialEnergy VAAC

CalCCAProposals

AReM/DACC

Transparent/VerifiableAccess to Input Data w/Confidentiality Protection

4 10 NA NA

-18-

1

b. CalCCA Proposals 2

The greatest concern with the CalCCA proposals is that in large part they are 3

fundamentally dependent upon bi-lateral or multi-lateral negotiations involving the LSEs, 4

the IOUs, the counterparties to the PPAs, and the major financial institutions who would 5

be essential for the creation of bonds to securitize the UOG assets. This means that other 6

market participants who are not party to the negotiations will have little or no access to 7

information about how the PCIA eligible resources will be reduced or repriced until the 8

negotiation process is complete. As such it is difficult to assess whether or not other 9

CCAs, or ESPs or their customers will have any meaningful access to key resource data 10

before they have to decide whether to pursue one or more of the negotiated options 11

proposed by CalCCA. The CalCCA Direct Testimony states that the SPA will provide a 12

transparent mechanism with improved transparency, but there are few details on how this 13

will be accomplished.28 For that reason, we assign a “Not Assessable” rating to the 14

CALCCA proposals at this time. 15

c. Commercial Energy’s VAAC Proposal 16

The VAAC was designed to be fully consistent with this principle, as 17

LSEs will have access to current contracted prices and volumes of the resources available 18

for both allocation and auction through the use of aggregated pools of resources, 19

assembled by resource type and with a minimum of 5 or more contracts in each pool so 20

that the prices of any individual contract cannot be reverse engineered. This process was 21

used by Commercial Energy in developing its exemplary allocation/auction spreadsheet 22

(Exhibit A in the Commercial Energy Direct Testimony) and is in full compliance with 23 28 CalCCA Prepared Testimony, Ch. 4, p. 4-11.

-19-

the negotiated aggregation principles approved by the ALJ.29 The resource pools will 1

provide LSEs current and accurate information about the resources they may wish to 2

obtain via allocation or auction, and this level of access to market information is critical 3

for the development of a market that will attract willing participants who are motivated to 4

commit their resources to acquire energy and other valuable assets from the utility 5

portfolios. The more information a bidder has about the product being auctioned, the less 6

risk the bidder must assume. Lower risk encourages the bidding of higher prices and will 7

help maximize the revenue to offset the eventual PCIA charges to be calculated from the 8

unsold or unallocated IOU resources. As for confidentiality, the VAAC ensures that the 9

utility retains ownership of the assets and preserves the existing the PPAs. With 10

appropriate aggregation individual asset information remains fully confidential. 11

d. AReM/DACC Proposals 12

AReM/DACC propose a continuation of PCIA mechanism with modifications to 13

the Market Price Benchmark. This does not provide market participants with real price 14

discovery, as is the case with the actual aggregated contract information provided in the 15

VAAC. For example, the modified Capacity Adder proposed by AReM/DACC is still 16

merely an artificial regulatory value, not a market price for a specific contract. Similarly, 17

the prepayment proposal, like the CalCCA proposal, has merit in terms of reducing the 18

ultimate cost for an LSE, but it is difficult to predict the results of a bi-lateral negotiation 19

for a buyout. Such a buy-out requires a “mutually acceptable forecast”, which may be 20

very difficult to achieve. Another AReM/DACC proposal, the use of a PCIA Cap, 21

actually reduces transparency, by creating an undercollection that must be amortized in 22

29 Assigned Commissioner and Assigned Administrative Law Judge Ruling Granting Relief Sought in December 8, 2017 Supplemental Joint Report on Data Issues (December 20, 2017).

-20-

the future, creating less price transparency, increasing risk for market participants, and 1

discouraging participation by LSEs. 2

2. Reasonably Predictable Outcomes That Promote Certainty 3 and Stability for All Customers Within a Reasonable Planning 4 Horizon 5

6

Guiding PrincipleFull compliance =10No compliance=0

Joint IOUProposals


CalCCAProposals

AReM/DACC

Predictable Outcomes/Stability in a ReasonablePlanning Horizon

2 8 NA NA

7

a. Joint Utilities Proposals 8

The annual true up mechanism contained in the IOU’s PMM proposal will not 9

promote certainty and stability in the market as it will increase uncertainty for purchasers, 10

who will not know the actual cost to buy such resources until after the true up. Statutory 11

mandates for cost recovery do not prohibit the Commission from adopting ratemaking 12

principles that support certainty for market participants. If the Commission adopts a 13

PCIA ratemaking mechanism that allows the IOUs an opportunity to collect above-14

market costs as they are calculated at a given point in time, it may also determine that the 15

calculation of bundled customer indifference takes place at that same time. There is no 16

requirement that a subsequent true up must revisit the indifference calculation multiple 17

times. 18

Equally cumbersome is the specific design of the PMM proposed by the IOUs. 19

The sale of the non-RPS, non-GHG resources in the PMM mechanism produces revenue 20

to offset PCIA costs, but does not allow LSEs to obtain the energy or other valuable 21

-21-

assets from these resources. This will force those LSEs to bid in the PMM auction to 1

obtain resources to round out the specific requirements of their portfolios, or to seek such 2

resources in a secondary market. In either case, they will not have access to the 3

transparent and verifiable resource price data available under the Commercial Energy 4

proposal. 5

The mandatory allocation in the GAM does not permit ESPS and CCAs to tailor 6

their acquisitions from the IOU portfolio to meet their customers’ particular load shape 7

and demand or to meet a specific portion of their demand. Such a mandatory allocation 8

is “stable and predictable” but not at all responsive to the portfolio requirements of a 9

given LSE. Faced with a mandatory allocation of renewable resources that may duplicate 10

what is already in its portfolio, the LSE may, in fact, require recourse to the secondary 11

market to sell unwanted portions of their allocation. This enhances instability and 12

uncertainty in portfolio planning. It may also cause LSE’s to face an oversupply of 13

resources, just as the IOUs currently face, resulting in fire sale prices. 14

As a result of all these factors, Commercial Energy does not agree that the 15

allocation and auction mechanisms proposed by the IOUs support reasonably predictable 16

outcomes as well as the VAAC. 17


The CalCCA proposals include several complex modifications of the IOUs’ 19

portfolios. These include securitization of the sunk costs of the Utility-Owned 20

Generation (UOG) resources through the issuance of bonds, a one-time buyout of an 21

LSE’s PCIA obligations, a proposal for a reverse RFO to buy down the contract prices 22

contained in PCIA-eligible PPAs, and an auction proposal. These proposals do not create 23

certainty and stability in the marketplace for energy. The delays that would likely result 24

-22-

from securitization or negotiated buy-outs or buy-downs of existing PPAs could be 1

extensive. This raises a serious question as to whether uncertainty over the total PCIA 2

exposure will frustrate the implementation of reforms to the PCIA calculation. 3


The VAAC proposed by Commercial Energy is a practical and efficient means of 5

allocating excess IOU resources, while allowing LSEs to make voluntary decisions about 6

what resources to accept through allocation or to purchase through an auction. The 7

results of both processes can be quickly finalized and parties will have certainty and 8

predictability regarding their cost of energy and their PCIA obligation. The only 9

unknown will be the actual amount of energy generated in the period on an hour-by-hour 10

basis. The LSEs who accept an allocation or purchase resources in the auction will 11

voluntarily assume that risk in the balancing of their portfolio through the CAISO. At the 12

same time the IOUs are freed of the price risk that has previously been borne by their 13

customers. As demonstrated in the PG&E gas market, these mechanisms have been 14

validated in the marketplace as workable and efficient to a degree that exceeds the other 15

proposals in this proceeding. 16

Just as there is no true up in the allocation and auction for pipeline capacity and 17

storage in the PG&E core transport market, there is no need for a true up with the VAAC. 18

The LSEs will bid a price to win a bundle of resources in the auction. At the time of their 19

winning bid they know the price they have bid, and understand that they will receive the 20

revenues generated by the actual power dispatched by those resources from the CAISO. 21

In effect, the CAISO clears the market. The winning bidder consciously bears100% of 22

the risk of revenue variations due to CAISO dispatch in the face of variable demand. At 23

the same time, all the volumetric risk due to varying load and dispatch conditions is taken 24

-23-

off the bundled customers and the IOU. Thus, there is no need for a subsequent true up. 1

LSEs will evaluate the risk of variations in generation due to dispatch by the CAISO and 2

will account for that risk in making decisions to accept an allocation or bid in the auction. 3


As explained in Principle 2, by modifying the PCIA benchmarks with regulatory 5

forecasts and estimates, instead of actual contract data, the AReM/DACC proposal to 6

modify the PCIA calculation does not provide reliable market information, and cannot 7

provide predictable outcomes or a reasonable planning horizon that match those available 8

from the VAAC, which provides actual contract data to parties before they decide to 9

accept an allocation or decide to participate in an auction. Prepayment of PCIA 10

obligations, if settled by bi-lateral negotiations, can promote stability and predictability, 11

but the net price of such a buy-out is not easily predictable. Nor are PCIA rates, however 12

derived, if they are subject to future amortization of an undercollection due to the use of a 13

cap on PCIA charges. A cap such as that proposed by AReM/DACC promotes rate 14

stability in the short run, but not overall predictability or market stability which is the key 15

to a stable planning horizon. As a result, and for the same reason as described in 16

response to the CalCCA proposal, we propose to rate the AReM/DACC proposals as Not 17

Assessable at this time. 18

19

-24-

3. Accuracy and Stability in the face of Significant Changes in the 1 Number of Departing Load Customers or a Return of such 2 Customers to Bundled Service 3


Joint IOUProposals


CalCCAProposals

AReM/DACC

Accuracy/Stability withVarying Returns ofDeparting Load

8 8 5 5

4

a. Joint Utilities Proposals 5

CE agrees that the use of an allocation and auction methodology which preserves 6

IOU resources but allows other LSEs to obtain some or all of the attributes of those 7

resources does reduce the risk of negative consequences in the event of a mass return of 8

customers, as the resources are still potentially available to serve those customers if they 9

return to the IOU. This virtually eliminates the need for expensive bonds or other costly 10

mechanisms that impede the growth of customer choice. The GAM and PMM proposed 11

by the IOUs will result in the retention of the UOG and non-UOG resources by the IOUs, 12

thus preserving the ability to serve larger number of customers returning to bundled 13

service by simply reducing the amount of resources allocated or auctioned in the future. 14


The SPA auction process proposed by the CalCCA will preserve the RPS and 16

other green resources currently in the IOU portfolios. However, that only accounts for a 17

portion of the power needed to serve all customers. In the event of a significant return of 18

customers from the CCAs to bundled customers status, we have to determine where the 19

resources will come to serve such customers. It is difficult to assess how implementation 20

of the CalCCA proposals to restructure the IOU portfolios will affect the ability of the 21

-25-

IOUs to serve returning customers without knowing the results of efforts to buy-down 1

PPA prices, buy-out PCIA obligations, securitize UOG assets, and hold a reverse RFO. 2

Will the IOUs retain the same size portfolio after all these structural changes to the 3

current portfolio? Should a substantial amount of the IOU portfolio be bought-out or 4

bought-down in volume, it is unclear that the IOUs will retain sufficient resources to 5

serve all the bundled load in the event of a mass return of CCA customers. As a result, 6

Commercial Energy is unable to make an assessment of the CalCCA proposals’ impact 7

on this Guiding Principle. 8


The VAAC proposed by Commercial Energy ensures that the IOU portfolio 10

remains intact, and available for use in the event of a large return of departing customer 11

to bundled load. This insurance is available because under the VAAC the IOUs remain 12

the counterparty under all the PPAs, and retain ownership of the UOG resources, but the 13

energy and attributes of the resources are efficiently distributed to the LSEs who wish to 14

use them through both the voluntary allocation and the auction process. In the event of a 15

return of customers, the rights to allocated and auctioned resources can be returned by the 16

LSE along with the customers. 17


To the extent that AReM/DACC is endorsing proposals like those of CalCCA to 19

liquidate or sell forward above-market assets in the IOU portfolios, this will create 20

uncertainty as to whether sufficient resources will be retained in the IOU portfolios to 21

handle a mass return of customers. The AReM/DACC proposal to maintain the PCIA 22

calculation with a revised Market Price Benchmark would not likely result in a 23

significant reduction in the IOU portfolio, but until the results of efforts to buy-out or 24

-26-

buy-down the above-market resources is known, it is difficult to assess whether the 1

AReM/DACC proposal is fully consistent with this Guiding Principle. In addition, the 2

AReM/DACC proposal for prepayment of PCIA obligations raises questions about the 3

allocation and distribution of the benefits of the prepayment as between customers and 4

LSEs that have not been addressed in the testimony. Obviously any entity that executes a 5

prepayment would want assurance that its customers would receive a proportionate 6

reduction in their PCIA obligations, but the crediting of such a prepayment is not made 7

clear in the testimony. 8

4. Creation of Unreasonable Obstacles for Customers of Non-9 IOU Energy Providers 10


Joint IOUProposals


CalCCAProposals

AReM/DACC

Avoid Creation ofUnreasonable Obstaclesfor non IOU LSEs

2 10 4 4

11

a. IOU Proposals 12

Under the GAM proposal, the mandatory allocation of RPS-eligible and large 13

hydroelectric assets is a substantial burden on LSEs, as it intrudes on their ability to 14

design their own portfolios and to contract for those specific resources that meet their 15

particular load and demand requirements, or fit well with their existing renewable 16

portfolios. This is perhaps the greatest problem posed by the GAM proposal, and one 17

which creates severe constraints for the LSEs, whether CCAs or ESPs. The GAM 18

effectively deprives LSEs of the ability to create their portfolio on their own terms, and 19

they must begin their procurement efforts with an allocation of assets that may or may 20

-27-

not duplicate or conflict with resources they have already procured. In the IOU’s Direct 1

Testimony they emphasize that the GAM will help new CCAs by providing a ready-made 2

supply of renewable resources,30 but this merely ignores the more important point that 3

existing CCAs and ESPs with their own resource portfolios will be hamstrung by a 4

mandatory allocation. The IOUs claim this will avoid double procurement,31 when, in 5

fact, it may exacerbate that precise result. 6

Conversely, participation in the PMM auction is voluntary, but it deals mainly 7

with non-RPS “brown” resources that many of the CCAs are less interested in obtaining. 8

As a result, the IOU proposals must be rated very low in terms of compliance with this 9

Guiding Principle. 10


The CalCCA proposals are obviously intended to reduce the overall potential 12

above-market cost exposure for the departing load customers of the CCAs. However, 13

there are some aspects of the CalCCA proposals that can increase risk for such 14

customers. First, the potential for delay and lengthy negotiations in the implementation 15

of the CCA proposals to buy-out or buy-down current IOU portfolio resources, as well as 16

to securitize UOG assets, and potentially pre-pay PCIA exposure means there will be 17

uncertainty and friction in the market place for a significant period of time. This will 18

create a variety of risks and increase uncertainty for all LSEs, not just the CCAs. 19

Second, the CCAs have not clearly explained how pre-payment of PCIA 20

obligations will be accounted for, relative to the PCIA obligations of other departing load 21

30 Joint Utilities’ Prepared Testimony, Ch. 4, p. 4-37. 31 Ibid.

-28-

customers. The discussion in the CalCCA Direct Testimony32 does not explain the 1

accounting in any detail whatsoever. The same is true for the PCIA accounting resulting 2

from a buy-out or buy-down current IOU portfolio resources. Who will receive the 3

benefit of the reduced PCIA liability? Will it be the purchaser of the asset or will the 4

reduction in above-market cost exposure be spread to all departing load customers? This 5

is not specified in the CalCCA Direct Testimony.33 The uncertainty created by these 6

aspects of the CalCCA proposal results in the assignment of a lower value to CalCCA’s 7

compliance with this Guiding Principle. 8


Commercial Energy’s VAAC proposal uses tried and true mechanisms which 10

have been shown to work effectively and efficiently in the natural gas marketplace 11

without unduly disadvantaging competitive providers. The allocation and auction 12

procedures create voluntary options for LSEs, and provide opportunities instead of 13

creating obstacles and uncertainties. By providing market price visibility to all 14

participants through the use of actual contract pricing via aggregated resource pools 15

segregated by resource type, they give substantially better information to LSEs seeking to 16

evaluate an opportunity for an allocation or a bid in the subsequent auction, thereby 17

reducing risk and increasing LSEs’ willingness to participate. This will make the market 18

more robust and increase the revenues that can offset potential PCIA liability. 19

Importantly, the VAAC can be implemented relatively quickly (Commercial 20

Energy’s efforts in the discovery process has confirmed the viability of contract price 21

aggregation into resource pools) so that an improved PCIA process can be implemented 22

32 CalCCA Prepared Testimony, Ch. 7, pp. 7-6 to 7-7. 33 Id. at Ch. 3, pp. 3-7 to 3-9.

-29-

faster than the more complex, negotiation driven proposals to buy-down, buy-out or 1

securitize the existing IOU portfolios. By providing the best market information, and 2

providing for voluntary participation in a market that will set a fair price for the PCIA-3

eligible assets, the VAAC avoids creating obstacles for LSEs and is appropriately scored 4

highest in terms of compliance with this Guiding Principle. 5


To the extent that the AReM/DACC proposals would retain the PCIA mechanism 7

with a revised benchmark, such a proposal creates obstacles for LSEs that will have to 8

pay for above-market portfolio costs using forecasts instead of actual market prices. 9

Similarly, the use of a cap for PCIA costs creates uncertainty over the long and medium 10

term, as LSEs will be forced to absorb the costs of a future undercollection on top of 11

current procurement costs. Additional uncertainty is created by the procedures that 12

AReM/DACC proposes to liquidate, sell forward, or otherwise address above-market 13

costs through negotiated agreements.34 14

15

34 AReM/DACC Prepared Testimony (Fulmer), pp. 3, 7.

-30-

5. Consistency with California Energy Policy Goals and 1 Mandates 2


Joint IOUProposals


CalCCAProposals

AReM/DACC

Consistency with Calif.Energy Policy Goals &Mandates

4 8 7 7

3

a. IOU Proposals 4

The IOU proposals are clearly consistent with California energy policy in several 5

respects, including the mandatory indifference requirement for departing load customers. 6

The IOU proposals appear consistent with policies to enhance the use of renewable 7

resources, including the RPS standards. However, state energy policy also includes 8

facilitating the provision of direct access by ESPs and community choice aggregation by 9

CCAs. As explained in reference to several of these Guiding Principles, the IOU 10

proposals make it far more difficult for LSEs to have the freedom to procure their own 11

resources. Mandatory allocations, and the withholding of attributes that are allocated or 12

sold by auction further restrict LSEs options. To the extent that the IOU proposals are 13

heavily weighted to protect bundled customers, while restricting the service options of 14

other LSEs, their proposals are not fully compliant with state energy policy. 15


The CalCCA proposals for IOU portfolio reform or reduction do not conflict with 17

state energy policy so long as the reduced PCIA obligation is properly credited. As 18

explained in the previous section, there is some uncertainty in this regard. Securitization 19

-31-

and the SPA auction proposal do not appear to conflict with state energy policies that 1

foster renewable resources. While the CalCCA proposals are focused on reducing the 2

above-market portion of the IOU portfolios, they do not directly conflict with the 3

mandatory indifference standard, although the uncertainty related to the crediting of 4

reduced PCIA liability remains to be resolved. 5


Commercial Energy’s VAAC proposal is fully consistent with state energy policy. 7

It is designed to create indifference for bundled customers in the face of departing load, 8

while offsetting the above-market costs with either allocation at full cost, or an auction of 9

the IOU portfolio resources (complete with the full value of all their attributes) in a 10

competitive market with reasonable price disclosure to maximize the revenues from the 11

auction. The VAAC is fully consistent with state policy to enable ESPs and CCAs to 12

serve their respective customers without undue restrictions as a result of IOU mandatory 13

allocation. 14


The AReM/DACC proposals comport with state energy policy in much the same 16

way as the CalCCA proposals, as they are intended to preserve bundled customers 17

indifference. Once again, however, there is a lack of clarity as to how the credits will be 18

applied to the current PCIA cost responsibility. Will all departing load customers benefit, 19

or just the party involved in the buy-out or buy-down? 20

21

-32-

1 6. Allowing Alternative Providers to be Responsible for Power 2 Procurement for their Customers 3


Joint IOUProposals


CalCCAProposals

AReM/DACC

Allow non IOU LSEs toProcure Power for theirCustomers

2 10 5 5

4

a. IOU Proposals 5

The IOU proposals for the GAM and PMM do not provide LSEs with the option 6

to manage their own procurement. They must accept a mandatory allocation of 7

renewable resources, and only a financial credit for non-RPS resources sold in the PMM 8

auction. LSEs will likely have to engage in the PMM and perhaps also in secondary 9

market transactions following the PMM auction to finalize the missing elements of their 10

own resource needs. The IOU proposals are the least accommodating for LSE 11

procurement flexibility. 12


The CalCCA proposals present a complex matrix of portfolio reform concepts 14

which will not necessarily facilitate LSE procurement planning. The revaluation of IOU 15

Portfolio through buy-outs or buy-downs will be a lengthy and time-consuming process. 16

The securitization of UOG generation assets is also sure to be a lengthy process, 17

involving major financing uncertainty which will delay the determination of PCIA costs. 18

Equally uncertain is the proposal for prepayment of CCA obligations under PCIA, which 19

will require lengthy negotiations between the IOUs and the CCAs as well. While the 20

CalCCA proposal is designed to ultimately assist CCA procurement by reducing the 21

-33-

overall PCIA cost responsibility assigned to CCAs, in the early years significant 1

uncertainty and risk will remain. 2


The VAAC proposal is arguably the best option for all LSEs as it provides the 4

greatest flexibility to voluntarily assemble a power portfolio to match the demand and 5

load shape of an LSE’s customers, while also minimizing the remaining costs that are to 6

be recovered via the PCIA charge. The VAAC can be implemented more quickly than 7

many of the proposals of the CalCCA and AReM/DACC. That also reduces risk and 8

provides benefits in the short term. 9


The AReM/DACC proposals focus on modest revisions to the inputs for the PCIA 11

calculation and IOU portfolio reform using concepts very similar to those of CalCCA. 12

The former will not benefit LSEs as much as the VAAC proposal as it will not have the 13

benefit of actual contract price disclosure through the aggregated resource pools, and it 14

will still produce a regulatory forecast value for the PCIA instead of an actual market 15

value for the resources sold in the auction. In addition, as described above in the context 16

of the CalCCA proposals, the lengthy time required to negotiate and implement the 17

portfolio reform concepts will place significant risk on the LSEs during the 18

implementation period. 19

20

-34-

7. Allowing Alternative Providers to Elect to Pay for Their Share 1 of Above Market Costs in a Manner than Compliments the 2 CCAs Particular Procurement Needs and Goals 3


Joint IOUProposals


CalCCAProposals

AReM/DACC

Allow non IOU LSEs toPay Above Market Costsso as to complement theirProcurement Needs

2 8 5 5

4

a. IOU Proposals 5

The IOU proposals for the GAM and PMM do not provide LSEs with flexibility 6

in paying the above-market costs of the IOU portfolio. The LSEs must accept a 7

mandatory allocation of renewable resources, and only a financial credit for non-RPS 8

resources sold in the PMM auction. The IOU proposals do not contemplate large scale 9

buy-down, buy-outs of portfolio resources, nor a pre-payment of PCIA obligations, which 10

the CCAs have expressed the desire to utilize. The IOU proposals are the least 11

accommodating for LSE flexibility in satisfying their obligation for above-market 12

portfolio costs. 13


The CalCCA proposals present wide range of options by which LSEs could 15

satisfy all or a portion of their costs responsibility for above-market IOU portfolio costs. 16

However, these options will require a lengthy and time-consuming process. The 17

revaluation of IOU Portfolio through buy-outs or buy-downs, and the securitization of 18

UOG generation assets do provide optionality for LSEs. However, there is still 19

uncertainty regarding how to allocate the credits for PCIA eligible assets that have been 20

-35-

bought-down, bought-out, or securitized. Equally uncertain is the proposal for 1

prepayment of CCA obligations under PCIA, which will require lengthy negotiations 2

between the IOUs and the CCAs. While the CalCCA proposal is designed to ultimately 3

provide flexibility in addressing the PCIA cost obligations of their departing load, 4

implementation will clearly involve some challenges to make meaningful reductions in 5

the above-market portions of the IOU portfolios. 6


The VAAC proposal provides a great deal of flexibility for LSEs who wish to pay 8

off their PCIA cost responsibility. First, LSEs can use actual contract data to inform their 9

decision to accept an allocation or bid for utility resources in an auction. However, their 10

decision to choose either option is fully voluntary. If they choose not to participate in an 11

allocation or auction, their PCIA obligation will be calculated on the basis of actual 12

market value for the above-market assets. More importantly, if an LSE wants to engage 13

in any of the portfolio reform options proposed by CalCCA or AReM/DACC, they are 14

free to do so on a parallel track with the VAAC. 15


The AReM/DACC proposals similar options as the CalCCA proposals to make 17

revisions to IOU portfolio. AReM/DACC also proposes pre-payment of the PCIA 18

obligation, although it does not propose to use a market based allocation and auction 19

process to reduce the net PCIA exposure for departing load customers, as the VAAC 20

does. A PCIA cap proposed by AReM/DACC may produce short term relief for LSEs, 21

but the amortization of the undercollection will very likely result in cost increases in the 22

future that may be difficult to forecast. While providing options for LSEs, there are 23

additional risks from the solutions proposed by AReM/DACC. 24

-36-

1 8. Including Only Legitimately Unavoidable Costs and Prudent 2

Management by the IOUs to Minimize Above Market Costs 3


Joint IOUProposals


CalCCAProposals

AReM/DACC

Include Only UnavoidableCosts/ Use PrudentManagement to MinimizePCIA

1 8 5 5

4

a. IOU Proposals 5

The IOU proposal for the GAM provides for mandatory assessment of the 6

renewable resources that are the primary source of the above-market costs in the IOU 7

portfolios. This assures the IOUs that the LSEs will assume the costs of these resources. 8

Such a mechanism provides the IOUs with very little incentive to manage their portfolio 9

to reduce above-market costs. While the IOUs state that they will continue to use prudent 10

portfolio management to reduce the costs that drive the PCIA,35 there is little history to 11

suggest that this will result in significant reductions in above-market resources. 12

Furthermore, the mandatory assignment of renewable resources to LSEs and their 13

customers does not make use of true market pricing to determine the current value of 14

these resources. The IOUs only propose an auction solution with their “brown” 15

generation assets, and miss the opportunity to generate more revenue to offset the PCIA 16

by auctioning the more attractive renewable assets. Accordingly, the IOU proposals are 17

not ranked highly for conformance with this Guiding Principle. 18


35 See Joint Utilities’ Prepared Testimony, Ch. 3, passim.

-37-

The CalCCA proposals emphasize options to improve management of the IOU 1

portfolios and provide options to reduce the over PCIA cost responsibility. As indicated 2

before, these options will require a lengthy and time-consuming process. While the 3

CalCCA proposal does include the SPA auction mechanism, it does not include the 4

important features of the VAAC, including the use of actual contract data to improve cost 5

discovery for allocation and auction participants, and the inclusion of all IOU resources 6

in the auction, plus all of their attributes. The SPA auction is proposed to only include 7

RPS-eligible and green assets. 8


The VAAC proposal helps ensure that only unavoidable costs are recovered 10

through the PCIA by maximizing the value obtained from the IOU portfolio assets by 11

both allocation and auction. In particular the use of actual market data for price 12

discovery and the inclusion of the full IOU portfolio in the auction, with all the attributes 13

of the resources included will create the best opportunity to recover the full market value 14

of the assets to offset PCIA costs. While not specifically promoting other portfolio 15

management options, such as securitization or buy-downs of particular contracts, the 16

VAAC is compatible with such options, which can be pursued while the VAAC is 17

implemented to start reducing PCIA costs as soon as possible. 18


The AReM/DACC proposes options that are much like those recommended by 20

CalCCA to ensure that only unavoidable costs remain in the IOU portfolios. 21

AReM/DACC do not propose an auction to help reduce the overall PCIA exposure, 22

however, and this is a valuable means of removing avoidable costs through market 23

-38-

pricing proposals to make revisions to IOU portfolio. Nor does AReM/DACC make 1

specific recommendations for IOU portfolio management actions to minimize costs. 2

3 9. The Value of Benefits that Departing Customers Impart to 4

Remaining Bundled Service Customers 5

6


Joint IOUProposals


CalCCAProposals

AReM/DACC

Value of Benefits thatDeparting Load ImpartsTo Bundled Customers

0 6 4 4

7

a. IOU Proposals 8

The IOUs claim that there are no such benefits for bundled customers derived 9

from departing load.36 The IOUs are clearly opposed to a more competitive environment 10

for resource procurement, and would prefer to retain the traditional monopoly model for 11

utility service. 12


The CalCCA proposals, if successfully implemented within a reasonable period of 14

time, could help reduce the overall excess of above-market resources in the IOUs’ 15

portfolio. Shedding some of those assets does reduce risk for bundled customers, who 16

otherwise would also be obligated to pay for a portion of those resources. At the same 17

time, it is true that expanding CCA service to more customers exacerbates portfolio risk 18

for the IOUs and their bundled customers—but that risk is a fact of the current statutory 19

framework for the energy market, and affects all of the proposals equally. The fact is that 20 36 Joint Utilities’ Prepared Testimony, Ch. 4, p. 4-42.

-39-

both customers and local governments are sufficiently dissatisfied with the quality, price, 1

and safety of monopoly utility service that the trend toward CCA growth in more 2

jurisdictions is very likely to continue. 3


There is one significant benefit from the creation of competitive retail electric 5

markets that is as helpful for bundled customers as for customers of LSEs. Commercial 6

Energy’s VAAC proposal will foster the creation of a viable market for all of the 7

resources in the IOU portfolios, including energy and other valuable attributes such as 8

RPS and RA. The auction process that Commercial Energy proposes will be open for 9

IOU participation, and by establishing market values for IOU resources, both IOU and 10

LSE procurement will be made more efficient and allow better forecasting and 11

procurement planning. Part of the controversy surrounding the existing IOU portfolios 12

stems from the fact that much of the above-market renewable resources were procured as 13

a result of regulatory mandates at a time when no liquid markets for solar or wind 14

resources were available. Indeed, the highly controversial cases at the Commission 15

where the IOUs sought approval of these early renewable contracts reflected great 16

uncertainly about what was a reasonable price for such resources. After the 17

establishment of a voluntary allocation and auction process along the lines of the VAAC, 18

all prospective buyers will have substantially more robust and more accurate price 19

discovery to help them determine the current market value of energy, and other attributes 20

such as ancillary services, RPS and RA. In the long run this can be expected to help 21

avoid utility overpayment for resources. In addition, the VAAC proposal keeps the 22

resources with the IOUs so that in the event of a mass return, the utility does not have to 23

-40-

reconstruct a supply of energy to serve the returning customers. This is also a benefit to 1

bundled customers. 2


The AReM/DACC Proposals provide the same general benefits for bundled 4

customers as the CalCCA proposals, discussed above. 5

10. Accurately Reflecting and Preserving the Short, Medium and 6 Long Term Value of Resources Procured by the IOUs 7

Guiding PrincipleFull compliance =10No compliance= 0

Joint IOUProposals


CalCCAProposals

AReM/DACC

Accurately Reflect Short,Medium, and Long termValue of IOU Resources

3 10 6 5

8

a. IOU Proposal 9

The IOU decision to replace the PAM with the GAM and the PMM still creates 10

an artificial market because the IOUs do not propose to allocate the actual output from 11

the subject power plants. This may result in forced liquidations into the spot market. 12

That could create a glut on the spot power market, which will reduce prices obtained in 13

the PMM with the result of higher PCIA charges. The value of short, medium and long 14

term energy resources are best reflected and valued when they are fully available in the 15

marketplace, along with all the accompanying attributes of the resource. The IOUs 16

failure to make all such attributes available in a voluntary marketplace will necessarily 17

diminish their value. 18

-41-


As explained above with respect to the IOU proposals, the CalCCA proposals will 2

not fully capture all the value of the IOU portfolio resources because the CalCCA 3

proposes a limited partial market. Their SPA proposal does not permit the auction of all 4

IOU portfolio resources, but only the RPS-eligible, non-GHG resources, presumably 5

those most coveted by the CCAs. However, a partial market that excluded significant 6

non-renewable resources will not reflect the full value of the IOU portfolio, and will 7

“leave money on the table” that could be used to offset PCIA cost responsibility. 8


The VAAC proposal does the best job of preserving and disclosing value of short, 10

medium, and long term assets via voluntary (market driven) allocations and auctions. 11

Our pools of resources aggregated by resource type allows important price disclosure 12

while maintaining confidentiality, and this could be improved with hourly data. By 13

improved, we mean that the value received by the IOUs could be enhanced as 14

participants gain more certainty and confidence about projected outputs of various 15

generating sources as well as market value. 16


The AReM/DACC proposal is not based upon an auction of IOU portfolio assets, 18

let alone the full range of such assets with all their attributes. Accordingly, it will not 19

fully or accurately value short, medium or long term resources. By merely modifying the 20

current PCIA benchmark with different inputs, none of which are the result of actual 21

market transactions, it will produce only a simulation of the market value of the IOU 22

portfolio assets. 23

24

-42-

11. Respecting the Terms of PPAs between Power Suppliers and 1 the IOUs 2

Guiding PrincipleFull compliance = 10No compliance= 0

Joint IOUProposals


CalCCAProposals

AReM/DACC

Respecting Terms of PPAsHeld by the IOUs

10 10 5 5

3

a. IOU Proposals 4

The IOU proposals preserve their ownership of the existing PPAs, and preserve 5

their terms. The IOUs do consider the possibility of forward sales of contracts, but if 6

such sales are made, they would have to be made with the consent of the current 7

counterparties to the PPAs. 8


The CalCCA proposals contemplate significance changes to the IOU portfolios, 10

and the result of negotiations to implement these changes make it difficult to be certain 11

what if any effect they would have on the existing contract provisions. So long as any 12

sales or buy-downs of existing PPAs obtained the consent of the generation provider, 13

sanctity of contract would be preserved. However, such forward sales or buy-downs 14

would require the voluntary cooperation of the generation owner, and there is no 15

mechanism to force such cooperation. Indeed, generators may prefer the robust credit of 16

the IOUs to newly formed LSEs. As a result, with feasibility of such sales or buy-downs 17

remains uncertain. CalCCA does state that its auction proposal does not require 18

assignment or abrogation of existing contracts, apparently mirroring the PMM and 19

VAAC auction design. 20

-43-


The VAAC proposal of Commercial Energy also preserves IOU ownership of the 2

existing PPAs, and merely allows the energy and other valuable attributes to be allocated 3

or auctioned to other parties, while preserving the PPAs and all their important terms and 4

attributes, including price. 5


The AReM/DACC proposals suggest the same type of portfolio transactions as 7

CalCCA, which are subject to the consent of the generation owner, and are thus 8

uncertain. Uncertainty is also present with regard to prepayments of PCIA obligations, 9

which will require the consent of the IOUs and may or may not fully reflect the cost of 10

resources under existing PPAs depending on the negotiated buy-out price. 11

12

V. PCIA CAPS AND SUNSET PROVISIONS 13

Commercial Energy does not recommend that a cap or sunset date be imposed on 14

the PCIA. If PCIA-eligible resources are to become an active part of a viable energy 15

market through allocations or auctions, as many of the parties have proposed, capping or 16

imposing a sunset date does not make sense. Parties will be less inclined to participate in 17

the PCIA market as its sunset date draws near, which will result in a situation similar to 18

what we have today: the IOUs will calculate the LSEs’ proportional shares of the 19

stagnant PCIA-eligible portfolios and assign the costs. 20

Furthermore, if a cap is imposed on the PCIA, that will hinder the allocation and 21

auction process. The creation of a undercollection that must be amortized and collected 22

in the future will distort market prices. Any price increase due to an undercollection will 23

-44-

hinder the development of a true market price and distort current transactions. As a 1

result, many of the market-based benefits will be lost. 2

3

VI. FORECASTING COST RESPONSIBILITY FOR FUTURE PERIODS 4

Commercial Energy opposes the IOU proposal to forecast the PMM, using an 5

“agreed upon methodology.” To begin with, reaching agreement on such a forecast 6

methodology will not be simple. This can be demonstrated by looking at the myriad 7

suggestions for revising the PCIA mechanism itself. A far better basis for determining 8

prices is to refer to actual market transactions. The VAAC proposal calls for allocations 9

and auctions that are transparent, market-based and voluntary. The results of the auctions 10

can be forecasted with increasing accuracy as multiple auctions occur over time. 11

VII. CONCLUSION 12

Q. Please state your conclusions. 13

A. As demonstrated by the analysis of the competing proposals’ performance in 14

meeting each of the Guiding Principles, the Commercial Energy VAAC proposal 15

achieves the highest compliance score. The VAAC provides the most efficient means of 16

creating a market value for the excess IOU portfolio resources, while ensuring that full 17

cost indifference is achieved by revenues recovered through a combination of a voluntary 18

allocation, an auction of the full market value, including all the energy and attributes 19

from the IOU resources, and a PCIA charge to collect any residual costs that are not 20

recovered by the first two mechanisms. At the same time, the VAAC provides superior 21

optionality for LSEs to design their own portfolio procurement plans, and requires 22

voluntary participation in the allocation and auction process. 23

-45-

To the extent that the CCAs and the IOUs wish to engage in other extraordinary 1

efforts to reduce the above-market portions of the utility portfolios, via securitization, by-2

outs or buy-downs of existing PPAs, forward sales of resource contracts, or any other 3

such mechanism, Commercial Energy supports such efforts and there is no reason such 4

proposals cannot be pursued in tandem with the creation of the VAAC. As explained 5

above, the VAAC should be relatively straightforward to implement, as the practicality of 6

the aggregated pools of resources sorted by technology has already been demonstrated by 7

Commercial Energy in the data access process in this proceeding. Commercial Energy 8

believes that the negotiations required to securitize the UOG resources, or buy-out 9

significant PPAs that are priced above market will be complex and lengthy, so the 10

Commission should not delay the implementation of the VAAC mechanism. At the same 11

time parties should clearly be allowed to pursue the more ambitious portfolio reform 12

transactions. 13

The Commission should adopt a combined allocation and auction mechanism as 14

proposed by Commercial Energy, and direct the parties to attempt to reach a settlement 15

on a detailed implementation proposal within a relatively short time frame, such as four 16

months. If there is no agreement at that point, the Commission should order the utilities 17

to file joint Tier 3 Advice Letters, creating allocation and auction mechanisms that are 18

consistent across all three utility systems. Parties will have the opportunity to address 19

concerns about the proposed mechanisms through the process of commenting on the 20

Advice Letters. 21

Q: Does this complete your Rebuttal Testimony? 22

A: Yes, it does. 23

3418/010/X199104.v1 24

Rulemaking 17-06-026 ALJ Anne E. Simon ALJ...

Documents

Transcript of Rulemaking 17-06-026 ALJ Anne E. Simon ALJ...