Title: D-R-A-F-T
Author: Kerry Hattevik
Last saved by: Lynne Mosley
Company: CPUC

Resolution E-3658		March 16, 2000
PG&E AL 1960-E and 
SCE’s AL 1429-E / KTH

PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

ENERGY DIVISION					        RESOLUTION E-3658
								        MARCH 16, 2000

R E S O L U T I O N

Resolution E-3658. Pacific Gas and Electric Company (PG&E) and Southern California Edison (SCE) request authorization to include the costs of participation in the expanded Block-Forward market (BFM) in the PX Energy Charge. PG&E and SCE also request an increase in the authorized megawatt (MW) quantity limit and a term extension of Block-Forward Market participation.  Approved.
 
By SCE’s Advice Letter 1429-E, Filed on January 6, 2000 and PG&E’s Advice Letter 1960-E, Filed on January 19, 2000.

SUMMARY
On December 31, 1999, the California Power Exchange Corporation (PX) filed a proposal at the Federal Energy Regulatory Commission (FERC) to expand its Block-Forwards market (California Power Exchange Corporation, Docket No. ER00-951-000).  Southern California Edison Company’s (SCE’s) Advice Letter 1429-E and Pacific Gas and Electric Company’s (PG&E’s) Advice Letter 1960-E request authority to participate in the expanded Block-Forward market, when and if the FERC accepts the PX’s filing.

On February 24, 2000, after SCE and PG&E submitted their advice letters, the FERC conditionally approved the PX’s proposal.  California Power Exchange Corporation, 90 FERC ¶ 61,173 (2000).

In addition, SCE and PG&E request authorization to include the costs of participation in the expanded Block-Forward Market in the PX Energy Charge.  SCE and PG&E further propose to expand the limits on the amount of load allowed for transaction in the BFM and to extend authorization for participation until March 31, 2002. 
The Alliance for Retail Markets (ARM) protested SCE’s and PG&E’s proposals for expanded BFM participation, increased position limits, and extended term authorization.

The Department of General Services (DGS) also protested SCE’s and PG&E’s Advice Letters. DGS supports the utilities’ participation in the expanded product types but questions the increase of utility positions limits and extended term authorization through the Advice Letter process. 

By this resolution, we authorize SCE and PG&E to participate in, and to recover costs of participation in, the PX’s expanded Block-Forward market until the end of the rate freeze. The utilities have an incentive to achieve lower energy prices during their periods of stranded cost recovery.  Because we agree that the utilities require additional flexibility to insure against price spikes, we will authorize the utilities to trade as much as their net-short position in the Block-Forward Market. 

BACKGROUND
The FERC, by its Order of May 26, 1999 (87 FERC 61,203) approved a proposal to establish the Block-Forward Market (BFM).  The Order authorizes CalPX Trading Services (CTS), a division of the PX, to offer electric power on a block forward basis.  The approval contemplated Block-Forwards as an exchange that matches bids to buy power with offers to sell power more than one day in advance of the contracted delivery date. Energy is delivered during predefined hours of a delivery month, with delivery arranged through the PX’s day-ahead market.

On July 8, 1999, the Commission issued Resolution E-3618 approving revisions to PG&E’s and SCE’s Schedule PX to include costs of trades in the BFM. Resolution E-3618 authorized SCE and PG&E to recover the costs of trades in the PX BFM for delivery through October 2000, subject to the outcome of the Post Transition Ratemaking Proceeding  (PTR)(A.99-01-016/A.99-01-019/A.99-01-034).  The approval was for limited term “in view of the innovative nature of the Block-Forward Market.” The October 2000 date was selected to “insure that the program will have a fair period of time to work, will not be interrupted during a peak season, and will allow time for analysis and the implementation of appropriate changes before the next peak season begins” (Resolution E-3618, Discussion. Paragraph. 9).
The Commission limited SCE and PG&E’s BFM transactions to one-third of their historical minimum hourly load. For PG&E that equates to a position limit of approximately 2,000 MW in July through September. For SCE, the position limit corresponds to between 1,800 and 2,000 MW.
Approval of cost recovery in Resolution E-3618 is confined to the PX market products authorized in the May 26, 1999 FERC order. The Commission determined that, should the PX introduce additional block-forward market offerings, SCE and PG&E must obtain authorization for recovery of the costs associated with the new products.

The PX, on behalf of CTS, has sought approval at the FERC of enhancements to the Block-Forward services available.  California Power Exchange Corporation, Docket No. ER00-951-000.  Proposed enhancements include the creation of contracts for “Super Peak” Energy and “Peak Shoulder” Energy. The Super Peak Energy contract would correspond to the hours from 12:00 p.m. to 8:00 p.m., Monday through Saturday. The Peak Shoulder contract would cover the hours from 6:00 a.m. to 12:00 p.m., and 8:00 p.m. to 10:00 p.m.  Other enhancements include the addition of new delivery points and the alteration of the PX’s tariff language to make possible forward contracts of a shorter-than-monthly duration.

On January 6, 2000, SCE filed Advice Letter 1429-E. On January 19, 2000, PG&E filed Advice Letter 1960-E.  Both SCE and PG&E request authorization to participate in the expanded BFM, and to include the costs of participation in the expanded BFM in the PX Energy Charge. In addition, SCE and PG&E propose to expand the limits on the amount of load allowed for transaction in the BFM and to extend authorization for participation until March 31, 2002. 

Proposals to Increase the BFM Position Limits
PG&E proposes that its Block-Forward megawatt transaction limit (position limit) be raised from 2000 MW to 3000MW. It argues that increasing its ability to transact in the BFM will increase its opportunity to hedge price risks. Using the same reasoning, SCE proposes to increase its BFM position limit from between 1,800 and 2,000 to between 2,200 and 5,200. SCE’s derives its position limits from its “net-short” position for the relevant quarter.

SCE states that the “net-short”  position in any hour is the amount by which the demand of SCE’s bundled customers exceeded the supply SCE provided in the hour, excluding SCE’s previous BFM purchases.  The net-short position for each quarter would correspond to the following BFM transaction quantities: Jan-Mar - 2,200MW; Apr-Jun. – 2,200 MW; Jul-Sep - 5,200 MW; Oct-Dec.- 3,000 MW.

Proposals to Extend the Term of Authorization
Both PG&E and SCE propose to extend the term of BFM participation from October 31, 2000 (as set forth in Resolution E-3618) to March 2002. They state the market is established and functioning in conjunction with other PX markets. SCE states that BFM cost recovery beyond the end of the rate freeze should be subject to its PTR Proceeding (Application A.99-01-034). 
 
Cost Recovery for Existing BFM Transactions
PG&E requests clarification regarding cost recovery of BFM costs in light of Decision (D.) 99-10-057, which states that no utility may carry over costs incurred during the rate freeze to the post rate freeze period. Resolution E-3618 authorized PG&E to recover costs for trades in the PX BFM for delivery through October 2000, subject to a determination in the PTR proceeding. Given the uncertainty of its rate freeze end-date, PG&E feels its ability to recover BFM is uncertain, particularly in the event that the rate freeze ends prior to the delivery date of energy purchased before that date. 

In PG&E’s Advice Letter 1960-E, it requests that post rate freeze, all BFM transactions be deemed prudent and reasonable without the need for reasonableness reviews. PG&E also requests that the cost recovery and oversight rules of D.99-10-057 apply on a prospective basis to BFM transactions for delivery after the end of the rate freeze. 

NOTICE
In accordance with Section III, Paragraph G, of General Order No. 96-A, PG&E and SCE mailed copies of this Advice Letter to other utilities and interested parties. Public notice of this filing has been made by publication in the Commission's daily calendar
PROTESTS
The Alliance for Retail Marketers (ARM) and the Department of General Services (DGS) filed protests to SCE’s Advice letter 1429-E on January 26, 2000, and to PG&E’s Advice Letter 1960-E on February 8, 2000. 
ARM opposes PG&E’s and SCE’s proposals. It contends that PG&E and SCE should not have greater discretion to undertake speculative participation in the BFM. ARM contends that the UDCs should not be able to engage in riskier procurement practices, such as BFM trading, on the part of uninformed default service customers.  ARM states that the amount of risk customers are exposed to should be a conscious decision.  According to both DGS and ARM, bundled customers that do not elect riskier procurement alternatives should be limited to simple default energy service. 

DGS does not oppose utility participation in the new PX BFM products. DGS’ protest specifically questions whether the advice letter process is appropriate to expand the volumes traded by utilities as well as the term of Commission authorization. DGS supports some form of public report and dialogue regarding the efficacy of utility BFM participation during the rate freeze period prior to any expansion of the authority granted in Resolution E-3618.

ARM and DGS contend that no term extension or expansion of position limits should be considered prior to review of the current program and a published report is issued. ARM refers to Resolution E-3618 which provided for review and evaluation of UDC BFM participation.
Both ARM and DGS state that post rate freeze UDC procurement practices are currently a subject of the PTR proceeding and that the role of the UDC is currently being explored in the ongoing Rulemaking R.99-10-025. To allow expansion of BFM participation would constitute a piecemeal approach to or potentially prejudice the utility default service procurement policies that are better resolved in the ongoing proceedings. 
ARM disputes the applicants’ claims that increasing the BFM position limits will allow for improved shaping of purchases to meet peak demand.  ARM also disputes that increased position limits will increase the UDCs ability to manage price risk. It states that there has been no evidence that such a claim is true or accurate. 

SCE responded to ARM’s and DGS’s protests on February 3, 2000. PG&E responded to ARM’s and DGS’s protests on February 14, 2000. SCE states that approval of its proposal will not prejudge post rate freeze procurement issues that are currently being litigated in proceedings because its proposal is confined to the rate freeze period. PG&E states that it does not seek to determine the post rate freeze procurement structure, but merely wants to have the ability to hedge price risk today. 

SCE and PG&E refute ARM’s statement regarding the greater risks to bundled customer with increased BFM participation. SCE and PG&E argue that bundled customers are subjected to risks of price spikes in the spot market and that forward contracts allow the UDC to hedge that risk.  

The PX filed a letter of support for SCE’s Advice Letter 1429-E on January 26, 2000 and a letter supporting PG&E’s Advice Letter 1960-E on February 8, 2000. The PX supports the applicant’s proposals, stating that electric customers benefit from SCE’s and PG&E’s participation in the BFM. In addition, it states that the BFM does not impair price transparency, and that increased BFM participation enhances overall market efficiency. 

MIECO Trading Company filed a letter of support for Advice Letter 1429-E on January 31, 2000. MIECO supports SCE’s proposal, believing that increased trading flexibility through block-forward enhancements will aid the development of the California market.

DISCUSSION

Enhanced BFM Participation, Transaction Limits, and Term of Authorization 

We agree that SCE and PG&E should have the flexibility to participate in the enhanced BFM. This enhanced flexibility will allow the utilities to insure against volatile prices, especially in the summer months when electric prices increase. The need to mitigate price spikes is particularly acute in light of the Independent System Operator’s (ISO) price cap increase from $250 to $750. Considering these factors, we believe the utilities’ ability to hedge against price risks is in the best interest of ratepayers. 

Based on Energy Division’s analysis of the monthly reports submitted by PG&E and SCE, we conclude that the gain / loss from Block-forward Market trading has been negligible, with the price on average converging with the PX day-ahead. We conclude that the evidence to date suggests that Block-Forward trading can be a beneficial tool to mitigate potential prices spikes. This is because ratepayers are receiving insurance against price risk, while not experiencing the downside of significant losses from forward contracting.

We are not concerned that forward contracting would allow the utility to assume unnecessary risks on the part of ratepayers. During the period of stranded cost recovery the utilities have an incentive to achieve the lowest possible energy prices for customers. This is because lower energy prices correspond to faster stranded cost recovery. Since we believe that the utilities should be able to insure against price risks and that they have the incentive to achieve the lowest energy prices during the rate freeze, the Commission authorizes the utilities to trade an amount equal to their net-short position in the block forward market. 

We define “net short position”  to mean the hourly amount of demand averaged over the quarter by which the utility’s bundled service exceeds the supply the utility provides in that hour, excluding previous block-forward purchases. For SCE the net-short position for each quarter corresponds to the following BFM transaction quantities: Jan-Mar - 2,200MW; Apr-Jun. – 2,200 MW; Jul-Sep - 5,200 MW; Oct-Dec.- 3,000 MW.

SCE and PG&E may recover the costs of transactions in the enhanced BFM until the end of each utility’s respective rate freeze. A determination on post rate freeze block forward market participation is a matter to be determined in the Post Transition Ratemaking Proceeding.

Cost Recovery and Procurement Oversight Post Rate Freeze
During the transition period all purchases through the PX are presumed reasonable. A post rate freeze modification of regulatory oversight for commodity purchases is a matter to be determined in Phase II of the Post Transition Ratemaking Proceeding. The Phase I Decision of that Proceeding [D.99-10-057] addresses commodity purchase oversight in the circumstance that the rate freeze ends before a determination in Phase II of the PTR proceeding. D.99-10-057 states:

In the unlikely event that PG&E will be able to take advantage of purchasing options before the matter is resolved, we state our intent to conduct reviews of such purchases until and unless we expressly adopt some other type of oversight (Mimeo, pp. 28-29).

D. 99-10-057 also states that no costs incurred during the rate freeze may be recovered once the rate freeze has ended (Mimeo. p 33; Conclusion of Law no. 4).

A determination on post rate freeze procurement oversight is a matter for the Phase II Post Transition Ratemaking Proceeding, which is to be completed in the first quarter of 2000. To make a determination regarding oversight of BFM purchases is not suited to an Advice Letter. In addition, such a determination would prejudge a matter that has been fully litigated in the Post Transition Ratemaking Proceeding. Therefore, in the unlikely event that PG&E ends its rate freeze before a Phase II decision is effective, it is bound by the provisions embodied in D.99-10-057. 

We determine that the costs of BFM trades are incurred at the time of delivery. At that time the costs are incorporated into the PX charge. The only exception is the volumetric fee that is charged to buyers and sellers at the time of trading. This fee is placed in the PX charge in the month that it is incurred. So long as costs that are incurred during the rate freeze are collected in that period, resulting in a corresponding reduction in transition cost recovery, there is no conflict with D.99-10-057.  

COMMENTS

The Energy Division mailed the draft resolution in this matter to parties in accordance with PU Code Section 311(g). Comments were filed by SCE on February 24, 2000, and PG&E, ARM, DGS, CalPX, Energy Users Forum (EUF),  ORA, and TURN on March 6, 2000. Energy Division provided parties the opportunity to address SCE’s February 24 comments since they were filed prior to the March 6 deadline for comments.

Position Limits and Term Authorization
SCE and PG&E state that the Draft Resolution’s authorization to participate in the enhanced BFM is of no value unless the position limits are raised. While SCE has not approached its position limits in winter months, SCE states that the draft Resolution errs in stating that the same is true in the summer months. SCE is within 10-15% of its maximum position limit in the summer months when price hedging is most critical.  PG&E argues that in observing that it has not reached its position limits the Resolution incorrectly assumes that it is good practice to hedge risk all at once at the beginning of trading. PG&E remarks that such a strategy would constitute a timing risk. 

SCE and PG&E argue that it is during the summer months when hedging products are needed most.  If the position limits are not raised it cannot insure against price spikes.  In addition SCE claims that since it is the largest participant in the BFM, the lower position limit hampers the development of the PX market. 

SCE states that the gains/ losses from BFM participation to date have been immaterial with the difference between the day-ahead price and the block-forward price being insignificant compared to the total value of the BFM hedging product. SCE states that it has not participated in energy price speculation and has yet to resell any forward market purchases. Although such reselling could occur due to the nature of the forward contract and the variability of changing load and resource conditions, SCE has no intention of becoming a net seller. It notes that any resale of power that may be necessary will be credited to ratepayers.

SCE has procured 6400 MW totaling 2.6 million MWh and the nominal value is approximately $300 million. SCE Comments p, 2.

SCE and PG&E reiterate the argument that the term of BFM participation should be extended until the end of the rate freeze. SCE and PG&E state that the Draft Resolution’s proposed reevaluation of the block forward market in October of 2000 would hamper their ability to participate in the BFM due time lags inherent in the Commission’s Advice Letter review process. Both utilities claim their possible inability to hedge prices during the period of regulatory lag could result in price spikes for ratepayers in the summer of 2001, which could be particularly severe due to the removal of ISO price caps, load growth, and increased buying requirements due to generation divestiture. SCE and PG&E also note their ability to purchase forward up to one year, making the October 2000 date unsuited to the reality of the contract timeframe.

ARM disputes many of the claims in SCE’s comments as unfounded and unsubstantiated. ARM disputes SCE’s claim that without increased position limits it cannot participate in the new BFM. ARM argues that since these are new markets, the utility could create a new market position within the existing volumetric limits by simply rebalancing its portfolio. ARM also disputes SCE’s claim that denial of increased position limits would constitute a hardship for its customers and hinder the development of PX markets. It argues that such assertions are unsubstantiated. ARM further argues that nothing in SCE’s claims regarding the success of the BFM to date is supported by documentation. ARM states that losses and gains from BFM trading being “immaterial” is not sufficient support for concluding that the program has been successful. 

ARM states SCE’s claim that it has at no time engaged in speculation is fallacious. It points out that forward contracting involves a process of making assumption about the future energy price. It argues that any forecast, estimate or guess of the future prices is speculation by its very nature. 

ARM reiterates its support for maintaining the October 31, 2000 BFM authorization date. It maintains that the arguments that regulatory lag would compromise the utilities’ ability to mitigate price spikes is fallacious noting that the Commission’s process for dealing with the expanded block forward market totaled two month from start to finish. ARM also disputes SCE’s claim that prices in 2001 could be higher than in 2000 due to divestiture of additional generation plants. ARM remarks that such a  claim is contrary to SCE’s application to retain its hydroelectric plants. 

ARM also reiterates its argument that Resolution E-3618 created the authorization timeframe in the anticipation of evaluating BFM efficacy after one year. ARM believes this is the most rational approach. ARM believes that such an analysis is important not only to evaluate the efficacy of the BFM, but also to evaluate the effect on the retail market. ARM further requests that aggregated data of the profit and loss from the utilities’ BFM trading be made public so that intervenors can develop more informed comments to help the Commission in its evaluation. 

ORA, TURN, and EUF request the draft Resolution be modified to expand the utilities’ position limits and extend the term of authorization until the end of the rate freeze. The PX reiterates its support for the approval of the utilities’ Advice Letters as filed. It notes that the Commission has consistently supported the BFM recognizing the benefits it offers electricity consumers in California.

DGS comments that it supports the utilities participation in the expanded BFM but simply questions the appropriateness of the Advice Letter process for assessing the UDCs’ proposal concerning the term of authorization and the expanded position limits. It suggests modifications to the resolution to reflect its position. DGS notes its supports for the Commission’s pro-competition policies and states that it supports BFM participation during the rate freeze because it believes that effective BFM market trading can reduce energy costs fostering a quicker end to the rate freeze. We agree to modify the Resolution to reflect DGS’s comments regarding its position on the utilities’ participation in the BFM.

In response to parties’ comments and Energy Division’s analysis, the draft Resolution has been modified to extend the term of authorization and expand the position limits for BFM participation as specified in the Discussion Section herein.

BFM Cost Recovery 
PG&E states that the Resolution misinterprets its request for cost recovery clarification. PG&E does not ask that post rate freeze all BFM transactions be deemed prudent and reasonable without the need for reasonableness reviews. PG&E only requests that BFM transactions made during the rate freeze be deemed prudent and recoverable without the need for reasonableness reviews whether the energy is delivered during the rate freeze or after. 

Since we have determined that costs are incurred at the time the power is delivered, we do not see why PG&E remains uncomfortable about cost recovery. If the costs are incurred at the time of delivery, there should be no need to carry over of costs into the post rate freeze period, which would conflict with D.99-10-057. To repeat, so long as costs that are incurred during the rate freeze are collected in that period, resulting in a corresponding reduction in transition cost recovery, there is no conflict with D.99-10-057.  

FINDINGS

1.	PG&E and SCE should have the flexibility to participate in the enhanced BFM. Among the proposed enhancements include the option of contracting for Super Peak Energy and Peak Shoulder Energy. 

2.	ARM’s protest requesting that the Commission reject SCE’s and PG&E’s proposal to participate in the enhanced BFM is denied. 

3.	DGS’s protest stating that term authorization and expanded position limits not be address through the Advice Letter process is denied.

4.	SCE and PG&E may recover the costs of BFM participation until the end of each utility’s respective rate freeze. A determination on post rate freeze block forward participation is a matter to be determined in the Post Transition Ratemaking Proceeding. ARM’s and DGS’s protests requesting that the term of authorization not be extended are denied. 

5.	During the period of stranded cost recovery SCE and PG&E have an incentive to achieve the lowest possible energy prices for customers. 

6.	Because the utilities should be able to insure against price risks and they have the incentive to achieve the lowest energy prices during the rate freeze, the Commission authorizes the utilities to trade in the BFM an amount equal to their net-short position. ARM’s and DGS’s protests requesting that the position limits not be extended are denied. 

7.	A determination regarding post rate freeze oversight of BFM purchases is not appropriate to an Advice Letter. Such as determination would prejudge a matter to be decided in the Post Transition Ratemaking Proceeding. 

8.	In the unlikely event that PG&E ends its rate freeze before a Phase II decision in the Post Transition Ratemaking Proceeding is effective, it is bound by the provisions embodied in D.99-10-057. 

9.	The costs of a BFM trade are incurred at the time of delivery. At that time the costs are incorporated into the PX charge. The only exception to these costs is the volumetric fee that is charged to buyers and sellers at the time of trading. This fee is placed in the PX charge in the month that it is incurred. 

10.	So long as costs incurred during the rate freeze are collected from PG&E and SCE during the rate freeze period, resulting in a corresponding reduction in transition cost recovery, there is no conflict with D.99-10-057.  

THEREFORE, IT IS ORDERED THAT:

1.	PG&E’s Advice Letter 1960-E and SCE’s Advice Letter 1429-E are approved with modifications. PG&E’s and SCE shall supplement their Advice Letters within 5 business days of the effective date of this Resolution to modify its proposed tariff language as follows:
 
i)	The term of authorization is extended until the end of each utility’s respective rate freeze. A determination on post rate freeze block forward market participation is a matter to be decided in the Post Transition Ratemaking Proceeding, A. 99-01-016, 99-01-019, 99-01-034.  

ii)	Block-Forward trading can equal an amount equal to the utility’s net-short position, as defined herein.

2.	The supplemental Advice Letter shall be effective upon filing.

3.	The protests to Advice Letters 1960-E and 1429-E are resolved as described in the findings of this Resolution.

4.	This Resolution is effective today.

I certify that the foregoing resolution was duly introduced, passed and adopted at a  conference of the Public Utilities Commission of the State of California held on March 16, 2000.  The following Commissioners voted favorably thereon:

_________________________
   WESLEY M. FRANKLIN     
       Executive Director

								    RICHARD A. BILAS
									  President
    HENRY M. DUQUE
    JOSIAH L. NEEPER
    CARL W. WOOD
    LORETTA M. LYNCH
          Commissioners