California Public Utilities Commission Proposes Reforms to Renewables Portfolio Standard Procurement Process

by Wilson Sonsini Goodrich & Rosati

On October 5, 2012, Commissioner Mark Ferron of the California Public Utilities Commission (CPUC or Commission) issued a ruling proposing reforms to California's Renewables Portfolio Standard (RPS) procurement process. These proposals would streamline the CPUC's approval process for certain power purchase agreements (PPAs) between utilities and renewable energy developers under California's RPS, change the standard by which such PPAs are reviewed, and create a clear timeline for approvals. The goal of these changes is to promote greater certainty in the California renewable energy market. The ruling requests input from interested parties by November 15. This represents a significant opportunity for project developers and financiers who currently participate or are interested in participating in the California renewable energy markets to address shortcomings in the RPS procurement process and suggest improvements.

This new ruling follows Commissioner Ferron's April 2012 ruling, which also sought to reform California's RPS procurement process. Changes proposed under the April ruling included establishing a two-year procurement authorization process (i.e., annual RPS solicitations would not be required), changes to the "Least-Cost, Best-Fit" (LCBF) methodology for evaluating RPS-eligible PPAs, requiring an Independent Evaluator (IE) report earlier in the procurement process, efforts to minimize transmission upgrade costs, and other actions.

The second ruling summarizes the major changes that have taken place in the California renewable energy markets over the past couple of years, observing a 250 percent increase in the number of bidders and a 150 percent increase in the number of developers in the 2011 RPS solicitation as compared with the 2009 solicitation. According to the ruling, the total amount of renewable energy generation bid into the 2011 RPS solicitation was 4.5 times greater than the total compliance need under the RPS. The ruling notes that in light of this increased supply and the decrease in the cost of many renewable energy technologies over this time period, the average bid price of projects decreased by approximately 30 percent between the 2009 and 2011 solicitations.

In light of these significant changes in the California renewable energy markets and modifications to the RPS program implemented in response to Senate Bill 2 (1X) (Simitian, Stats. 2011, ch.1) (SB 2(1X)), the ruling concludes that the following changes to the procurement process are needed to increase transparency, efficiency, and market certainty:

  • Shortlists to Undergo Tier 3 Advice Letter Review. Of the PPAs submitted in response to an RPS solicitation, the Investor Owned Utilities (IOUs) create a shortlist of bids that meet their CPUC-approved evaluation criteria. Currently, the shortlists are approved by the CPUC Energy Division at the staff level. The proposal would require review and full Commission approval of the IOUs' shortlists by resolution.
  • Defined Timeline for Contract Execution and Approval. Under existing regulations, there are no deadlines that determine when RPS PPAs must be executed and when the IOUs must request CPUC approval of the PPAs they execute. This has led to lengthy delays in the procurement process, Commission review of PPAs long after market conditions have changed, and uncertainty for project developers. The proposal set forth in the ruling would reform the California RPS procurement process by requiring PPAs to be executed within one year of Commission approval of the IOU shortlist and filed with the CPUC for approval within one month of the date such contracts are signed.
  • Tier 1 Advice Letter Approval for PPAs of Less Than Five Years. Currently, all PPAs executed by IOUs must be approved for cost recovery by the full Commission by resolution in order to comply with the RPS. The ruling proposes that PPAs with terms of less than five years be approved by the CPUC's Energy Division at the staff level via an expedited Tier 1 Advice Letter if certain conditions are met (i.e., generation quantity consistent with IOU's net short, contract selected from competitive solicitation or bilateral negotiations and has equivalent or better market value than recently executed similar contracts, use of pro forma contract, and delivery within one year of execution).
  • Tier 2 Advice Letter Approval for PPAs Greater Than Five Years. As proposed in the ruling, PPAs with terms of greater than five years that use commercially proven technologies would be approved by CPUC Energy Division staff via an expedited Tier 2 Advice Letter if certain conditions are met (i.e., generation quantity consistent with IOU's net short, contract selected from competitive solicitation, use of pro forma contract, delivery consistent with procurement need in IOU's RPS procurement plan, and project viability criteria).
  • Changes to RPS Standard of Review for Tier 3 Advice Letter Review. For PPAs that do not meet the new conditions for expedited Tier 1 or Tier 2 review summarized above (which must therefore undergo full Commission review via Tier 3 Advice Letter), the ruling proposes three new standards of review for three types of PPA cost recovery approval: (1) PPAs selected from a competitive solicitation, (2) PPAs negotiated bilaterally with the IOUs, and (3) amendments to PPAs. The detailed standards of review proposed in the ruling are specific to each of these three types of approvals and are organized by the following categories of criteria: portfolio need; price reasonableness; project value; project viability; and consistency with CPUC decisions, rules, and laws.
  • Applications for PPAs Not Meeting the RPS Standards of Review. The ruling proposes that if a PPA does not meet the standards of review for Tier 3 Advice Letters (e.g., unproven technology, project will provide greater than 1 percent of an IOU's total bundled sales in first year of delivery, or contracts with other extenuating circumstances), the PPA must be submitted for approval to the CPUC as an application and subject to a different review criteria.
  • New Standard of Review for Unbundled REC Contracts and IOU Sales of Excess Procurement. The ruling proposes a new standard of review for contracts for the purchase of renewable energy credits (RECs) procured separately from the underlying energy used to satisfy RPS procurement requirements. This standard also would apply to IOU sales of excess RPS-eligible procurement that do not qualify for the expedited Tier 1 or Tier 2 approval processes outlined above.
  • New Independent Evaluator Report Template. The Commission's RPS procurement approval process involves the use of IEs hired by the IOUs to evaluate the solicitation and procurement selection process. The ruling proposes specific evaluation criteria that would be included in the IE report template.
  • Least-Cost, Best-Fit Methodology. SB 2(1X) requires that the criteria for the rank ordering and selection of "least-cost and best-fit" resources eligible for compliance with the RPS take into account estimates of integration costs and costs of procurement, project viability, and workforce recruitment, training, and retention efforts, including the goals of recruiting and training women, minorities, and disabled veterans. The ruling requests input from parties on how to implement the new LCBF criteria required the statute.
  • Potential Revisions to "Green Attributes" Standard Term and Condition. Form PPAs under California's RPS currently contain a standard term and condition (STC) regarding "Green Attributes" (i.e., RECs, offsets, allowances, avoided pollutants, etc.). The STC defines "Green Attributes" and requires the seller to convey all Green Attributes to the buyer. The ruling invites input from parties on whether this STC is still necessary and useful.

The ruling requests comments and input from interested parties and poses specific discussion questions for each of the proposals. We encourage market participants to weigh in on these reforms and suggest ways to improve California's RPS procurement process. Comments are due November 15, 2012, and reply comments must be submitted by December 7, 2012. If your company is interested in filing comments or would like more information on the proposals contained in the ruling, please contact Todd Glass or Sheridan Pauker in the firm's energy and clean technology practice.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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