BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA ) ) ) ) ) ) ) )

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1 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA Order Instituting Rulemaking to Promote Policy and Program Coordination and Integration in Electric Utility Resource Planning. Order Instituting Rulemaking to Promote Consistency in Methodology and Input Assumptions in Commission Applications of Short-Run and Long-Run Avoided Costs, Including Pricing for Qualifying Facilities. Rulemaking (Filed April 1, 2004 Rulemaking (Filed April 22, 2004 SOUTHERN CALIFORNIA EDISON COMPANY S (U 338-E MOTION TO CLARIFY THE RECORD FRANK J. COOLEY BERJ K. PARSEGHIAN LAURA I. GENAO Attorneys for SOUTHERN CALIFORNIA EDISON COMPANY 2244 Walnut Grove Avenue Post Office Box 800 Rosemead, California Telephone: ( Facsimile: ( Berj.Parseghian@sce.com Dated: April 13, 2006 LAW# v5

2 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA Order Instituting Rulemaking to Promote Policy and Program Coordination and Integration in Electric Utility Resource Planning. Order Instituting Rulemaking to Promote Consistency in Methodology and Input Assumptions in Commission Applications of Short-Run and Long-Run Avoided Costs, Including Pricing for Qualifying Facilities. Rulemaking (Filed April 1, 2004 Rulemaking (Filed April 22, 2004 SOUTHERN CALIFORNIA EDISON COMPANY S (U 338-E MOTION TO CLARIFY THE RECORD Pursuant to Rule 45 of the Commission s Rules of Practice and Procedure, Southern California Edison Company (SCE hereby moves to clarify the record in this proceeding in response to certain arguments raised by the Cogeneration Association of California and the Energy Producers and Users Coalition (collectively, CAC/EPUC in their March 17, 2006 reply brief (Reply Brief. I. INTRODUCTION In the Reply Brief, CAC/EPUC improperly rely on material outside the record to accuse SCE of making a false statement about the 20 percent dispatch markup factor used by CAC/EPUC in their AURORA production simulation modeling. Not only is the use of information outside the record inappropriate, the assertion for which it is proffered in itself is very misleading. Therefore, SCE files this motion to clarify the record. In both its rebuttal testimony and opening brief, SCE stated that the CAC/EPUC s decision to use a 20 percent dispatch markup factor inflated the prices and heat rates generated LAW# v5-1 -

3 by AURORA by 20 percent. SCE believed these statements to be accurate at the time they were made. Indeed, both logic and intuition would lead a reasonably knowledgeable person to conclude that increasing the running cost of every resource by the same 20 percent markup should not affect either the commitment or dispatch decisions made by the model and, therefore, should correspondingly inflate prices and heat rates by 20 percent. 1 Prior to the time that SCE submitted its rebuttal testimony and briefs, neither CAC/EPUC nor EPIS, the vendor of the AURORA model, were able to provide a credible explanation for why the 20 percent dispatch markup factor would not produce a proportional 20 percent price increase. 2 In response to accusations in the Reply Brief, however, SCE conducted additional analysis in an effort to get to the bottom of this issue. Unfortunately, EPIS refused to cooperate with SCE. Therefore, SCE hired a consultant licensed to use the AURORA model and who actually had participated in the development of the AURORA model. This consultant identified fixed interregional wheeling charges which are not affected by the dispatch markup factor as a likely reason why a 20 percent dispatch markup factor might not produce a one-for-one increase in market clearing prices. The consultant also performed a sensitivity analysis which shows that the 20 percent dispatch markup factor used by CAC/EPUC inflated the prices and heat rates generated by the AURORA model by an average of nine percent in SP-15, not 20 percent as SCE originally expected. While the effect on clearing prices is not as dramatic as anticipated, the unexplained and apparently arbitrary 20 percent dispatch markup factor nevertheless produces a significant, and inappropriate increase of almost 10 percent in SP-15 market clearing prices. CAC/EPUC s attempt to deflect attention from its unsupported use of a 20 percent dispatch markup factor by leveling accusations at SCE is highly misleading and the record needs to be clarified. In bringing this additional information to the Commission s attention, SCE does not concede that a 1 See SCE/Silsbee, Tr. Vol. 19 at 2712: SCE was told that transmission constraints caused the effect of dispatch markup to be less than a one-for-one impact. However, as further explained in footnote 16 below, this does not appear to be a likely explanation. LAW# v5-2 -

4 properly functioning model would produce the result observed by SCE s consultant. As discussed further below, SCE continues to view the result with skepticism. In any event, CAC/EPUC s conduct in this proceeding is extremely disappointing. The Commission s rules placed the burden on CAC/EPUC not SCE or the Commission to properly validate the functioning of any model and the database it utilizes. By failing to supply any validation results or sensitivity analyses as required by the rules, or in response to timely data requests from SCE, CAC/EPUC have caused an uninformed record on AURORA, a problem compounded, rather than corrected, by their inappropriate reference to matters that are clearly not part of the record. II. SCE MADE STATEMENTS REGARDING THE IMPROPER 20 PERCENT DISPATCH MARKUP FACTOR USED BY CAC/EPUC IN GOOD FAITH In its August 31, 2005 opening testimony in this proceeding, CAC/EPUC used the AURORA production simulation model to forecast market-clearing prices and heat rates for 2006 through SCE served CAC/EPUC with data requests seeking, among other things, all documents, studies, analyses, spreadsheets, work papers and reports relating to the AURORA model runs, information that would allow the Commission to validate the AURORA model, and any sensitivity analysis performed by CAC/EPUC. 4 CAC/EPUC provided SCE with its AURORA input, output, and project files on or about September 6, 2005, and provided data request responses on or about September 14, In its data request responses, CAC/EPUC clearly stated that it only performed QFs-in and QFs-out runs and that [n]o sensitivities were run for purposes of establishing the reference case for [its] testimony. 6 3 CAC/EPUC Opening Testimony, Ex. 134 at See Ex See id. 6 Id. at 13. LAW# v5-3 -

5 In its October 28, 2005 rebuttal testimony, SCE identified numerous flaws in CAC/EPUC s AURORA analysis. Among other things, SCE stated that: CAC/EPUC has set a parameter in the model, the dispatch mark-up factor, to 20%. SCE has contacted the Aurora model vendor to determine the meaning of this parameter and understands that the dispatch cost of each resource in the model is increased above its modeled incremental cost by the amount of this parameter. For example, a 10,000 Btu/kWh gas plant would be marked up to a heat rate of 12,000 Btu/kWh as a result of the dispatch mark-up parameter. Thus, it appears that all of the results reported by CAC/EPUC have been inflated by 20% above the model-based incremental energy rates. 7 SCE also noted that CAC/EPUC used an inflated 18 percent real rate of return, which is well above current utility nominal rates of return, and used a modeling scenario that is starved for new resource additions. As SCE s witness, Carl Silsbee, explained during cross-examination, SCE checked the accuracy of its understanding of the AURORA model logic with EPIS before submitting its rebuttal testimony. 8 SCE contact[ed] the model vendor to make sure that we were understanding the questions we were asking of the model. 9 In addition, during hearings on January 24, 2006, SCE specifically asked EPIS if the effect of the 20 percent dispatch markup factor was one-for-one such that remov[ing] the markup [] [w]ould reduce the cost results from the model by 20% EPIS confirmed to SCE s representative that the statement was accurate and the adjustment is accurate. 11 Therefore, Mr. Silsbee reasonably believed that the 20 percent dispatch markup factor inflated the prices and heat rates generated by AURORA by 20 percent. Instead of providing information to validate the AURORA model at the time its testimony was filed, as required by Article 17.1 of the Commission s Rules of Practice and 7 SCE Rebuttal Testimony, Ex. 2 at See SCE/Silsbee, Tr. Vol. 19 at 2710: :5, 2712: Id. at 2710: :5. 10 See SCE January 24, documenting conversation with EPIS representative Debbie Smith, a true and correct copy of which is attached as Attachment A. 11 Id. LAW# v5-4 -

6 Procedure, CAC/EPUC waited until after Mr. Silsbee s cross-examination to attack SCE s analysis. CAC/EPUC s witness, Mr. Schoenbeck, contacted Mr. Silsbee to discuss the 20 percent dispatch markup factor shortly after Mr. Silsbee testified on January 18, Mr. Schoenbeck never contradicted or questioned Mr. Silsbee s correct conclusion that the dispatch markup factor did, in fact, inflate prices and heat rates by some amount. Nor did Mr. Schoenbeck provide a reasonable explanation of why the 20 percent dispatch markup factor would not inflate the prices and heat rates by 20 percent. Simple logic suggests that raising the running cost of every resource by the same 20 percent markup should inflate prices and heat rates by 20 percent. 12 Instead, it appears that Mr. Schoenbeck waited another ten days until January 27, 2006 to contact EPIS. The January 27, from EPIS to Mr. Schoenbeck directly contradicts EPIS previous confirmation to SCE, received three days prior, that its model behaved as expected. In addition, EPIS response fails to provide a logical explanation of why the 20 percent dispatch markup factor does not inflate the prices and heat rates generated by AURORA by 20 percent. EPIS does, however, confirm that the 20 percent dispatch markup factor used by CAC/EPUC exceeds the five percent default setting in AURORA. Neither CAC/EPUC nor EPIS have ever provided any explanation as to why EPIS set the default at five percent, or, more to the point, why CAC/EPUC increased the markup factor by another 15 percent to 20 percent. They have not justified whether the 20 percent markup was appropriate, or what effects it would produce. Indeed, despite CAC/EPUC s shrill assertion that SCE s statements concerning the dispatch markup factor and price increase are unfounded, CAC/EPUC themselves disingenuously fail to acknowledge that the markup factor does in fact produce an unanticipated and unexplained price increase of almost 10 percent. Although Mr. Schoenbeck testified during hearings that a one-for-one impact of the dispatch markup factor was flat wrong, CAC/EPUC never provided SCE or the Commission with any record evidence to substantiate this conclusory statement. CAC/EPUC did not provide 12 See SCE/Silsbee, Tr. Vol. 19 at 2712: LAW# v5-5 -

7 SCE with any sensitivity analyses in response to SCE s timely data requests. Other than the unsubstantiated statement at hearings by Mr. Schoenbeck, there is no record evidence that SCE s statements and conclusions regarding AURORA are incorrect in any way whatsoever. III. THE VENDOR OF THE AURORA MODEL HAS DISCLAIMED ALL OF ITS PRIOR STATEMENTS AND REFUSED TO COOPERATE In response to CAC/EPUC s accusations, SCE contacted EPIS once again to discuss the dispatch markup factor and its effect on CAC/EPUC s AURORA model runs. Remarkably, however, EPIS disclaimed all of its prior statements and refused to cooperate. 13 According to EPIS president Warren Winter: [i]f you have received statements (which I don't believe you have, for use in regulatory proceedings, from EPIS about how AURORA might respond, you can rest assured that our policy is that such statements are not given and any statements you have received to date cannot be relied upon as an official response from EPIS (emphasis added. 14 Moreover, Mr. Winter stated that EPIS will not tell you why AURORA behaves as it does in certain situations in what you know is a highly complex marketplace. 15 As a result, SCE was forced to hire an outside consultant to gain an understanding of the dispatch markup factor and its effect on CAC/EPUC s model runs. SCE engaged David LeVee, a former EPIS employee and one of the original developers of the AURORA model to do sensitivity analyses of the CAC/EPUC project file using dispatch markup factors of zero percent and 20 percent over the same time period examined by CAC/EPUC. Mr. LeVee s analysis indicates that the 20 percent dispatch markup factor used by CAC/EPUC inflated the prices and heat rates generated by AURORA by nine percent relative to a zero percent dispatch markup factor. 13 See EPIS to SCE dated March 22, 2006, a true and correct copy of which is attached as Attachment B. 14 Id. 15 Id. LAW# v5-6 -

8 This result is not intuitive, and it is still unclear why the AURORA model behaves in this manner. 16 In addition, another source of concern is that fixed wheeling charges used in CAC/EPUC s modeling effort appear to differ, in some cases substantially, from the default values supplied by EPIS. However, SCE requests that its prior statements be corrected to reflect that the 20 percent dispatch markup factor used by CAC/EPUC inflated the average SP-15 prices and heat rates generated by the AURORA model by nine percent rather than 20 percent. Even assuming that this adjustment is appropriate, there is still no record evidence to explain why a 20 percent dispatch markup factor would produce a nine percent increase in price or, for that matter, to justify any dispatch markup factor at all. Further, EPIS refusal to provide information also leaves the record silent as to why EPIS employs a default dispatch markup value of five percent. The curious and unexplained markup factor is, of course, not the only problem with CAC/EPUC s use of AURORA in the proceeding. SCE has identified numerous other modeling irregularities. For example, CAC/EPUC inexplicably included an inflated 18 percent real rate of return in its AURORA modeling and also starved the model for resource additions, both of which appear to have an upward effect on heat and price outputs, as described in SCE s reply testimony. Unfortunately, however, CAC/EPUC have simply failed to adduce sufficient evidence to allow the Commission to perform and independent evaluation of CAC/EPUC s use of the AURORA model. Thus, far from evidencing improper conduct on SCE s part, CAC/EPUC s accusations, which are based entirely or matters outside the record, should merely substantiate concerns raised by SCE and others in prepared testimony, at hearings and in briefs regarding 16 Without any dispatch markup, equilibrium prices in SP-15 should be equal to prices in the Pacific Northwest (for example on an as-delivered basis that is, after adding in the fixed wheeling charge. When the dispatch markup factor is set to 20%, the relative price of PNW power in SP-15 goes down slightly, since the dispatch markup factor is not applied to the fixed wheeling charge. This results in additional imports to SP-15 and a new equilibrium price in SP-15. However, since fixed wheeling charges are only 10% to 20% of power prices, the new as-delivered price of PNW power in SP-15 would be perhaps 18% or 19% higher as a result of the 20% dispatch markup factor, so the new equilibrium price would be close to the full dispatch markup. If there are transmission constraints between the PNW and SP-15, then the two regions would be economically isolated, and the 20% dispatch markup should have a one-for-one impact in SP-15. LAW# v5-7 -

9 CAC/EPUC s own use of the AURORA model. If anything, the Reply Brief demonstrates that the Commission must approach the results of the AURORA modeling performed by CAC/EPUC with caution, if not considerable doubt. IV. CONCLUSION For all the foregoing reasons, SCE respectfully requests that the Commission clarify the record in this proceeding as set forth above. Respectfully submitted, FRANK J. COOLEY BERJ K. PARSEGHIAN LAURA I. GENAO Dated: April 13, 2006 By: Berj K. Parseghian Attorneys for SOUTHERN CALIFORNIA EDISON COMPANY 2244 Walnut Grove Avenue Post Office Box 800 Rosemead, California Telephone: ( Facsimile: ( Berj.Parseghian@sce.com LAW# v5-8 -

10 CERTIFICATE OF SERVICE I hereby certify that, pursuant to the Commission s Rules of Practice and Procedure, I have this day served a true copy of the SOUTHERN CALIFORNIA EDISON COMPANY S (U 338-E MOTION TO CLARIFY THE RECORD on all parties identified on the attached service list. Service was effected by one or more means indicated below: Transmitting the copies via to all parties who have provided an address. First class mail will be used if electronic service cannot be effectuated. Placing the copies in sealed envelopes and causing such envelopes to be delivered by hand or by overnight courier to the offices of the Commission or other addressee(s. Placing copies in properly addressed sealed envelopes and depositing such copies in the United States mail with first-class postage prepaid to all parties. Directing Prographics to place the copies in properly addressed sealed envelopes and to deposit such envelopes in the United States mail with first-class postage prepaid to all parties. Executed this 13th day of April 2006, at Rosemead, California. Samantha Bertolone Project Analyst SOUTHERN CALIFORNIA EDISON COMPANY 2244 Walnut Grove Avenue Post Office Box 800 Rosemead, California LAW# v5

11 Berj K. Parseghian Attorney April 13, 2006 Docket Clerk California Public Utilities Commission 505 Van Ness Avenue San Francisco, California RE: Rulemaking and Rulemaking Dear Docket Clerk: Enclosed for filing with the Commission are the original and five copies of SOUTHERN CALIFORNIA EDISON COMPANY S (U 338-E MOTION TO CLARIFY THE RECORD in the above-referenced proceedings. We request that a copy of this document be file-stamped and returned for our records. A self-addressed, stamped envelope is enclosed for your convenience. Your courtesy in this matter is appreciated. Very truly yours, LAW# v5 Enclosures Berj K. Parseghian cc: All Parties of Record (U 338-E P.O. Box Walnut Grove Ave. Rosemead, California ( Fax (

12 LAW# v5 Attachment A

14 LAW# v5 Attachment B

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