Calif. PUC Issues Draft Harmonizing Treatment of Cost Allocation Mechanism with SB 695

April 5, 2011
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The California PUC has issued a draft decision to harmonize its nonbypassable Cost Allocation Mechanism (CAM) rules, which assign costs of generation built or procured for reliability, with the language of SB 695 (R. 10-05-006).

The language of SB 695 expressly requires that the Commission "shall ensure that" under certain conditions, the net capacity costs of the required generation resources, "are allocated on a fully nonbypassable basis" to bundled utility customers, direct access customers, and community choice aggregation customers. Such conditions include when generation resources in question, "are needed to meet system or local area reliability needs for the benefit of all customers in the electrical corporation's distribution service territory."

This language, the proposed decision finds, requires the use of the CAM when the above conditions are met. Under the current PUC rules, utilities may make an election of whether or not to seek CAM treatment for the generation.

The draft states that the criteria that the Commission will use to determine whether the above conditions are met will be developed in a later proceeding.

SB 695 expressly provides that utility-owned generation is eligible for the CAM in the event that the Commission "orders" an electrical corporation to obtain such generation "to meet system or local area reliability needs for the benefit of all customers in the electrical corporation's distribution service territory." This requires, the draft finds, the PUC to modify its current prohibition on the use of the CAM for utility-owned generation.

The draft would decline to adopt several conditions on the use of the CAM for utility owned generation proposed by the Alliance for Retail Energy Markets. Among other things, AReM said that the CAM should not apply to generation that the utility developed on its own initiative.

However, the proposed order finds that such a limitation could preclude the Commission from ordering CAM treatment for generation initially proposed by the utility, but later ordered to be built by the PUC for reliability needs.

Regarding the use of an auction to calculate net capacity costs of generation built under the CAM, the draft concludes that SB 695 gives the Commission, not the utilities, the discretion of whether or not to use an auction process. The draft acknowledges that the existing energy auction mechanism adopted in D.07-09-044 may need to be revised, and states that consideration of non-auction processes and revisions to the auction methodology will occur in later phases of the proceeding or in a successor proceeding.

Current PUC rules limit the CAM nonbypassable charge to 10 years, but this limitation must be removed per SB 695, the draft states. The CAM would instead last for the entire duration of any contract for generation eligible for CAM treatment.

The draft concurs with AReM that SB 695 does not address the length of the CAM charge for utility-owned generation. "The simplest approach, and clearly allowable under SB 695, is to allow cost allocation for utility-owned generation for as long as it meets the statutory requirements. Whether or not this is a good approach, however, is not clear, nor is it clear whether this approach results in outcomes consistent with the statutory intent of providing equivalent treatment of utility and non-utility-owned generation resources," the draft finds.

"Accordingly, it is essential that we develop a methodology to properly compare and evaluate PPAs versus utility-owned generation bids in a competitive solicitation, as well as developing a method for applying the CAM to utility-owned generation," the draft states, leaving such action to a later decision.

The draft establishes issues that remain to be resolved in later proceedings as including:

1. The development of policies and processes for distinguishing between system and bundled resource needs, and related cost allocation.

2. Whether there should be a test of "who benefits" under SB 695, and if so, the construction of such a test.

3. The further refinement of the energy auction process.

4. The development of policies and processes to compare and evaluate PPA versus utility-owned generation bids in a competitive solicitation.

5. The development of policies and processes for applying the CAM to utility-owned generation.

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