Details for: 4046-E-A (Part 1 of 1).pdf

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Gary A. Stern, Ph.D.
Managing Director, State Regulatory Operations

August 30, 2019
(U 338-E)
Supplement to Advice 4046-E, AB 57 Bundled Procurement
Plan Compliance Report: Second Quarter 2019


Southern California Edison Company (SCE) hereby submits this advice letter to
supplement in part Advice Letter (AL) 4046-E, submitted on July 26, 2019. SCE
attaches four documents supplementing its Second Quarter 2019 Quarterly Compliance
Report (QCR).
These changes are made in accordance with General Order (GO) 96-B, General Rule
7.5.1, which authorizes utilities to make additional changes to an advice letter through
the submittal of a supplemental advice letter. This advice letter supplements in part and
does not change the substance of the original Advice 4046-E.
On July 26, 2019, in compliance with Ordering Paragraph (OP) 8 of Decision
(D.)02-10-062, and OP 19 of D.03-12-062, SCE submitted AL 4046-E demonstrating that
SCE’s electric and natural gas procurement activities during the period April 1, 2019
through June 30, 2019 were in conformance with the upfront standards and criteria set
forth in its Commission-approved 2014 Assembly Bill (AB) 57 Bundled Procurement
In AL 4046-E, SCE reported in Attachment G that “Merrimack Energy Group, Inc. is the
Independent Evaluator (IE) for SCE’s electronic solicitation for Resource Adequacy
Capacity (RA) Purchases and Sales (2020-2023 RA e-Solicitation). This e-solicitation
was ongoing at the end of the second quarter of 2019, and ultimately closed out July 11,
2019. Merrimack monitored the e-solicitation process as required. Now that the


Advice 3349-E, submitted January 20, 2016, and approved by the California Public Utilities
Commission (Commission) on February 16, 2016 in its Dispostion Letter to SCE.

P.O. Box 800

8631 Rush Street

Rosemead, California 91770

(626) 302-9645

Fax (626) 302-6396


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ADVICE 4046-E-A (U 338-E) -2- August 30, 2019 e-solicitation has recently concluded, Merrimack will prepare and present its IE Report to SCE, and SCE will in turn submit the IE Report in its Q2-19 QCR supplemental advice letter, as well as the Q3-19 QCR original submittal.” This AL 4046-E-A provides both the public portion and the confidential portion of the aforementioned IE Report. The public portion of the IE Report is presented in the file “SCE 2020-2023 RA e-Solicitation IE Report.” The confidential portion of the IE Report is comprised of three files: “SCE 2020-2023 RA e-Solicitation IE Report - Confidential Appendix A”, “Attachment A - Initial Offer Summary_e-sol - Confidential”, and “Attachment B - Offers Selected_e-sol - Confidential”. CONFIDENTIALITY The revised documents attached hereto contain confidential protected material subject to the protections adopted in D.06-06-066, D.08-04-023, and D.14-10-033. The information included in this AL 4046-E-A for which SCE is seeking confidential treatment, including the length of time for which the information should remain confidential, was previously identified in AL 4046-E. Pursuant to D.08-04-023, SCE refers back to that initial showing for this submission of the same type of information. The file named “Declaration for Confidential 2020-2023 RA e-Solicitation IE Report” attached hereto provides the required showing to support SCE’s confidentiality designations for the confidential portion of the Independent Evaluator (IE) report pertaining to SCE’s 2020-2023 RA e-Solicitation, which is attached. The confidential information for this compliance advice letter will be made available to appropriate parties consistent with applicable law upon execution of the required non-disclosure agreement. Parties wishing to obtain access to confidential information for this compliance advice letter may contact Mario Dominguez in SCE’s Law Department at or (626) 302-6522. SAFETY AND COST INFORMATION No cost information is required for this advice letter. This advice letter will not increase any rate or charge, cause the withdrawal of service, or conflict with any other schedule or rule. SCE is strongly committed to safety in all aspects of its business. No impacts to safety are anticipated as a result of this advice letter. Sellers of electricity products are responsible for the safe construction and operation of their generating facilities and compliance with all applicable safety regulations.
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ADVICE 4046-E-A (U 338-E) -3- August 30, 2019 TIER DESIGNATION Pursuant to General Order (GO) 96-B, Energy Industry Rule 5.2, this AL 4046-E-A is submitted with a Tier 2 designation, which is the same Tier designation as AL 4046-E. EFFECTIVE DATE SCE requests that AL 4046-E-A become effective on August 25, 2019, the same date as requested in AL 4046-E. PROTESTS SCE asks that the Commission, pursuant to GO 96-B, General Rules 7.5.1, maintain the original protest period and comment period designated in AL 4046-E and not reopen the protest period. NOTICE In accordance with General Rule 4 of GO 96-B, SCE is serving copies of this supplemental advice letter to the interested parties on SCE’s GO 96-B service list, participants in its Procurement Review Group, R.01-10-024, R.13-12-010, and R.11-10-023 service lists. Address change requests to the GO 96-B service list should be directed by electronic mail to or (626) 302-3719. For changes to all other service lists, please contact the Commission’s Process Office at (415) 703-2021 or by electronic mail at Further, in accordance with Public Utilities Code Section 491, notice to the public is hereby given by submitting and keeping the supplemental advice letter at SCE’s corporate headquarters. To view other SCE advice letters submitted with the Commission, log on to SCE’s website at For questions, please contact Selene Willis at (626) 302-3329 or by electronic mail at Southern California Edison Company /s/ Gary A. Stern Gary A. Stern, Ph.D. GAS:sw/cr:cm Enclosures
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ADVICE LETTER SUMMARY ENERGY UTILITY MUST BE COMPLETED BY UTILITY (Attach additional pages as needed) Company name/CPUC Utility No.: Southern California Edison Company (U 338-E) Utility type: ELC GAS PLC HEAT ELC = Electric PLC = Pipeline WATER Contact Person: Darrah Morgan Phone #: (626) 302-2086 E-mail: E-mail Disposition Notice to: EXPLANATION OF UTILITY TYPE GAS = Gas WATER = Water HEAT = Heat (Date Submitted / Received Stamp by CPUC) Tier Designation: 2 Advice Letter (AL) #: 4046-E-A Subject of AL: Supplement to Advice 4046-E, AB 57 Bundled Procurement Plan Compliance Report: Second Quarter 2019 Keywords (choose from CPUC listing): Compliance, Procurement AL Type: Monthly Quarterly Annual One-Time Other: If AL submitted in compliance with a Commission order, indicate relevant Decision/Resolution #: Decisions 02-10-062 and 03-12-062 Does AL replace a withdrawn or rejected AL? If so, identify the prior AL: Summarize differences between the AL and the prior withdrawn or rejected AL: Confidential treatment requested? Yes No If yes, specification of confidential information: See Attachment 1 Confidential information will be made available to appropriate parties who execute a nondisclosure agreement. Name and contact information to request nondisclosure agreement/ access to confidential information: Mario Dominguez, or (626) 302-6522 Resolution required? Yes No Requested effective date: 8/25/19 No. of tariff sheets: -0- Estimated system annual revenue effect (%): Estimated system average rate effect (%): When rates are affected by AL, include attachment in AL showing average rate effects on customer classes (residential, small commercial, large C/I, agricultural, lighting). Tariff schedules affected: None Service affected and changes proposed1: Pending advice letters that revise the same tariff sheets: None 1 Discuss in AL if more space is needed. Clear Form
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Protests and all other correspondence regarding this AL are due no later than 20 days after the date of this submittal, unless otherwise authorized by the Commission, and shall be sent to: CPUC, Energy Division Attention: Tariff Unit 505 Van Ness Avenue San Francisco, CA 94102 Email: Name: Gary A. Stern, Ph.D. Title: Managing Director, State Regulatory Operations Utility Name: Southern California Edison Company Address: 8631 Rush Street City: Rosemead Zip: 91770 State: California Telephone (xxx) xxx-xxxx: (626) 302-9645 Facsimile (xxx) xxx-xxxx: (626) 302-6396 Email: Name: Laura Genao c/o Karyn Gansecki Title: Managing Director, State Regulatory Affairs Utility Name: Southern California Edison Company Address: 601 Van Ness Avenue, Suite 2030 City: San Francisco State: California Zip: 94102 Telephone (xxx) xxx-xxxx: Facsimile (xxx) xxx-xxxx: (415) 929-5544 Email: Clear Form
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ENERGY Advice Letter Keywords Affiliate Direct Access Preliminary Statement Agreements Disconnect Service Procurement Agriculture ECAC / Energy Cost Adjustment Qualifying Facility Avoided Cost EOR / Enhanced Oil Recovery Rebates Balancing Account Energy Charge Refunds Baseline Energy Efficiency Reliability Bilingual Establish Service Re-MAT/Bio-MAT Billings Expand Service Area Revenue Allocation Bioenergy Forms Rule 21 Brokerage Fees Franchise Fee / User Tax Rules CARE G.O. 131-D Section 851 CPUC Reimbursement Fee GRC / General Rate Case Self Generation Capacity Hazardous Waste Service Area Map Cogeneration Increase Rates Service Outage Compliance Interruptible Service Solar Conditions of Service Interutility Transportation Standby Service Connection LIEE / Low-Income Energy Efficiency Storage Conservation LIRA / Low-Income Ratepayer Assistance Street Lights Consolidate Tariffs Late Payment Charge Surcharges Contracts Line Extensions Tariffs Core Memorandum Account Taxes Credit Metered Energy Efficiency Text Changes Curtailable Service Metering Transformer Customer Charge Customer Owned Generation Mobile Home Parks Name Change Transition Cost Transmission Lines Decrease Rates Non-Core Transportation Electrification Demand Charge Non-firm Service Contracts Transportation Rates Demand Side Fund Nuclear Undergrounding Demand Side Management Oil Pipelines Voltage Discount Demand Side Response PBR / Performance Based Ratemaking Wind Power Deposits Portfolio Withdrawal of Service Depreciation Power Lines Clear Form
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Attachment 1
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DECLARATION OF RAAFAY AHMED REGARDING THE CONFIDENTIALITY OF CERTAIN DATA I, RAAFAY AHMED, declare and state: 1. I am a Power Origination Advisor in the Southern California Edison (SCE) Energy Procurement & Management (EP&M) Operating Unit. As such, I supervised the preparation of the SCE 2020-2023 Resource Adequacy (RA) Capacity Electronic Solicitation Independent Evaluator’s (IE) Report, Confidential Appendix and Confidential Attachments. I make this declaration in accordance with Commission Decisions (D.) 06-06-066 and D.08-04-023, issued in Rulemaking 05-06-040 and D.1410-033 issued in Application 13-08-002 et al. I have personal knowledge of the facts and representations herein and, if called upon to testify, could and would do so, except for those facts expressly stated to be based upon information and belief, and as to those matters, I believe them to be true. 2. I have reviewed the confidential appendix and attachments to SCE’s 2020- 2023 RA Capacity Electronic Solicitation IE Report. Listed below are the data for which SCE is seeking confidential protection and the categories of the Matrix of Allowed Confidential Treatment Investor-Owned Utility (IOU) Data (Matrix) appended to D.0606-066 to which these data correspond. Data Location Matrix Category SCE 20202023 RA Capacity Electronic Solicitation IE Report Confidential Appendix and Attachments Files named:  SCE 2020-2023 RA Capacity Electronic Solicitation IE Report Confidential Appendix A  Attachment A Initial Offer Summary Confidential  Attachment B Offers Selected Confidential VIII.B. Competitive Solicitation (Bidding) Information – Electric. Specific quantitative analysis involved in scoring and evaluation of participating bids. 1 Limitations on Confidentiality Specified in Matrix Evaluation guidelines should be public. Other Information confidential for three years after winning bidders selected.
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3. I am informed and believe and thereon allege that the data in the table in paragraph 2 above cannot be further aggregated, redacted, summarized, masked or otherwise protected in a manner that would allow partial disclosure of the data while still protecting confidential information. 4. I am informed and believe and thereon allege that the data in the table in paragraph 2 above have never been made publicly available. I declare under penalty of perjury under the laws of the State of California that the foregoing is true and correct. Executed on August 21, 2019, at Rosemead, California. __________________________ RAAFAY AHMED 2
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Southern California Edison Company Electronic Solicitation for Resource Adequacy Purchases, Sales and Buy-Sells For 2020 - 2023 Resource Adequacy Compliance Final Report of the Independent Evaluator On the Offer Evaluation and Selection Process July, 2019 Prepared by Merrimack Energy Group, Inc. Merrimack M Energy
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Table of Contents I. Introduction …………………………………………………………………………. 1 II. Description of the Role of the IE……………….………………………………….….5 III. Outreach Efforts ………………………..……………………………………………8 IV. Description of SCE’s Bid Evaluation and Selection Process ……..………….…….10 V. Administration of the Solicitation Process…..……………………………………….13 VI. Fairness of the Solicitation Process………………………………………………….16 VII. Contract Negotiation Process…....…………………………………………….……19 VIII. Safeguards and Methodologies Employed .. ..…….…..…………………………..19 IX. Recommendations for Contract Approval…………………………………………. 20 X. Conclusions and Recommendations….....…………………………………………....20
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Final Report I. Introduction Overview of the Request for Offers for Resource Adequacy Purchases, Sales, and Buy-Sells On May 8, 2019, Southern California Edison Company (“SCE” or “Company”) issued its Electronic Solicitation for Resource Adequacy (“RA”) Purchases, Sales, and Buy-Sells (“2020-2023 RA e-Solicitation” or “RA e-Solicitation”) seeking to buy from, sell to, and/or buy-sell with, responding market participants and all supply sources (“Respondents”), which are eligible to provide Resource Adequacy (“RA”) Capacity products for the entire 2020-2023 delivery periods. SCE issued this e-Solicitation to assist in meeting its 2020-2023 Year-Ahead and Month-Ahead RA Capacity obligations. Through this e-Solicitation it was anticipated that the above noted products would be bought, sold, and/or bought-sold, so as to meet SCE’s Compliance Obligations while also minimizing the procurement cost impact for SCE’s Bundled Customers. The products solicited within SCE’s 2020-2023 RA e-Solicitation are for RA Capacity. The RA Capacity must be from specific identified generating units that have a Net Qualifying Capacity (“NQC”) assigned by the CAISO and must be able to count toward SCE’s RA requirement. Such RA Capacity must be eligible for inclusion in both YearAhead and Month-Ahead compliance filings with the California Public Utilities Commission (“CPUC”). Each generating unit specified by a Respondent must generally have a corresponding monthly Net Qualifying Capacity (“NQC”) value assigned to it by the CAISO for each year the Respondent proposes an offer. Respondents may submit multiple offers with varying delivery periods, including varying volume options and various delivery terms. The RA e-Solicitation sought offers for the procurement of the following products as listed in Table 1: Table 1: Products Solicited (2020-2023 RA e-Solicitation Products) PRODUCT System & Local RA Capacity SCE SEEKING TO: Buy, Sell, or Buy/Sell* DELIVERY POINT CAISO MINIMUM VOLUME 1 MW PRICING Flat price ($/kwmonth) CONTRACT DELIVERY PERIOD EARLIEST LATEST SHOWING END DELIVERY MONTH DATE PERIOD 01/01/2020 12/31/2023 Monthly Q3 Year-Round RA AREA ATTRIBUTES North System South System LAB Local BCV Local As noted in Table 1, SCE solicited offers to both sell to and buy from SCE a specified quantity of qualifying and deliverable RA capacity that is approved for inclusion in the respective Compliance Showings. This is a capacity-only product and does not include energy or ancillary services associated with any unit. Respondents offering to sell RA Merrimack Energy Group, Inc. 1
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Final Report Capacity to SCE must either own or have contractual rights to the qualifying and deliverable RA Capacity for the delivery period specified in the applicable confirmation. SCE sought offers to buy or to sell the RA Capacity product on the terms described in the RA Capacity (SCE Buys or SCE Sells) confirmations included as part of the eSolicitation documents. SCE was not specifically seeking flexible capacity attributes for this e-Solicitation, although SCE encourages offerors to include local or flexible capacity attributes, if available. Respondents may offer to buy local or flexible capacity attributes from SCE and such request for local or flexible capacity attributes will be evaluated in accordance with the evaluation criteria set forth in the e-Solicitation Instructions. SCE sought offers to buy or sell the RA Capacity product through the terms described in the RA Capacity confirmation which is included as part of the overall e-Solicitation. In addition, SCE solicited offers to simultaneously buy from SCE and sell to SCE (collectively a “Buy-Sell” or “Swap”) the right to include a specified quantity of qualifying and deliverable RA Capacity that is approved for inclusion in Compliance Showings on two separate and distinct products as specified in the product table. These rights are CAISO intertie specific and do not include any capacity, energy, or ancillary services associated with any unit. In the e-Solicitation, SCE also provided guidance to Respondents regarding other considerations and requirements associated with the solicitation process. These considerations include: • Respondents are allowed and encouraged to submit Offers for more than one product and multiple Offers for the same product. • Respondent must state all volumetric limitations in the applicable Volume Limits tab of the Offer Forms. Except for setting volumetric limitations, Offers containing any contingencies will be considered nonconforming and ineligible for consideration. • Local and Flexible attributes associated with RA Capacity will become part of any transaction resulting from this e-Solicitation. • RA Products in Table 1 may be proposed in partial MW increments that are equal to or greater than the minimum volumes specified in Table 1, but have no more than two decimal places. For example, an offer of 1.23 MW would be acceptable, whereas an offer of 1.234 MW would not be acceptable. • Offers with respect to any Unit that employs Once-Through Cooling (“OTC”), as described in the California State Water Resources Control Board (“SWRCB”) policies, can offer, at Respondent’s discretion, delivery periods that end prior to such OTC Unit’s OTC compliance date (the “OTC Compliance Date”) in addition to delivery periods that end past the date that is such OTC Unit’s OTC Compliance Date. Any awarded contracts which are past such OTC Unit’s OTC Compliance Date must be submitted to the Commission for approval via a Tier 3 Advice Letter. OTC Unit’s OTC Merrimack Energy Group, Inc. 2
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Final Report Compliance Dates can be found on the SWRCB website at: cs/oncethroughcooling.pdf The e-Solicitation also lists eligibility requirements for all Respondents in order for the Respondent to participate in the process. The eligibility requirements listed in the eSolicitation include: • • • Any offer submitted by an eligible Respondent is a binding offer and cannot be withdrawn by Respondent. Such binding Offer shall be subject only to SCE’s acceptance, in SCE’s sole discretion; Respondents may enter into good faith negotiations to execute an agreement with SCE related to any Offer short-listed by SCE as a result of this e-Solicitation. Respondents are strongly discouraged to make any substantive changes to the form of Enabling Agreements or Confirmations. Extensive modifications to these agreements will not be accepted; Mutually inclusive offers across generating units of the same RA Area Attribute are allowed (e.g. Offer A for generating unit 1 (Big Creek – Ventura) and Offer B for generating Unit 2 (Big Creek – Ventura)). In making a mutually inclusive offer across generating units, Respondent must also submit discrete Offers for those generating units. SCE will have the option to either select the mutually inclusive Offer or the discrete Offers separately. The RA e-Solicitation includes several Exhibits that Respondents are required to provide with their proposal. Each Respondent must provide (1) a fully completed Offer Form; (2) an executed Confidentiality Agreement/NDA, unless Respondent already has in place an evergreen NDA with SCE; and (3) fully executed or minimally modified Enabling Agreements. In addition, Respondents are required to submit copies of their two most recent audited annual financial statements. The Offer Form includes a Respondent Information tab that each Respondent must fill out that includes basic respondent contact information. With regard to the Offer Form or Offer information tabs, Respondents are required to fill out the tab relative to the product offered, such as “2020 – SCE Buys”, “2020 – SCE Sells”, “2021 – SCE Buys”, or “2021 – SCE Sells.” The Offer form contains separate tabs for “SCE Buys” and “SCE Sells” through the year 2023. In each tab, the Offeror must include the monthly capacity they are offering to sell (or buy) along with the monthly contract price ($/kW-month), the start and end month for the Offer, the resource offered, the location of the resource, and inclusive/exclusive notes about the offer. While Respondents can vary the offer volume by month, the offer price is required to be fixed for each variation. SCE’s evaluation process was described in the RA e-Solicitation document. SCE proposed to utilize a one-stage process for this solicitation. All Offers will be initially assessed for conformance with the requirements set forth in the e-Solicitation Instructions. In addition, there will be both quantitative and qualitative considerations involved with evaluating Offers. Any Offer within this e-Solicitation will be a considered Merrimack Energy Group, Inc. 3
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Final Report a final Offer which cannot be withdrawn by Respondent and shall be only subject to SCE's acceptance The e-Solicitation Instructions included the original schedule which anticipated a slightly more than two-month timeframe for the solicitation process. Table 2 provides the original schedule as listed in the e-Solicitation Instructions. Table 2: RA e-Solicitation Proposed Schedule Event e-Solicitation Launch Deadline to Submit Binding Offers FRM WG Approval to Execute & Selection Notification Date May 8, 2019 May 13, 2019 May 17, 2019 PRG Consultation Execute RA Confirms & Close-Out eSolicitation May 20, 2019 May 24, 2019 Due to extended negotiations with counterparties, the e-solicitation did not close out until July 10, 2019. Through this RA e-Solicitation process, SCE entered into transactions with seven Respondents1. SCE purchased approximately 1,445 MW of monthly Q3 2020 RA capacity2, worth about $15.6 million, along with RA capacity in other months as well. Appendix B to this report contains a list of all individual offers selected which served as the basis for the transactions executed. As a result of these transactions, SCE has reduced its short Year-Ahead and Month-Ahead RA position for most months in 2020 to 2023. Pursuant to regulatory requirements of the California Public Utilities Commission, SCE retained Merrimack Energy Group, Inc. (“Merrimack Energy”) as the Independent Evaluator (IE) for this solicitation. This report provides Merrimack Energy’s perspective on the RA e-Solicitation solicitation process and includes our overall assessment of the process. Issues Addressed in this Report This report addresses Merrimack Energy’s assessment and conclusions regarding the following issues identified in the Commission’s CPUC Independent Evaluator Report Template: 1 Respondents awarded contracts included CXA La Paloma, High Desert Power Project, Blythe Energy, East Bay Community Energy, Peninsula Clean Energy, Silicon Valley Clean Energy, and San Jose Clean Energy. 2 SCE’s Q3 position, particularly August, is a focus of this solicitation report because the primary months in which SCE was expected to be short RA capacity was the Q3 summer months. Merrimack Energy Group, Inc. 4
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Final Report 1. Describe the role of the IE throughout the solicitation process. 2. How did the IOU conduct outreach to bidders, and was the solicitation robust? 3. Describe SCE’s bid evaluation methodology. Evaluate the strengths and weaknesses of the methodology. 4. Evaluate the administration of the solicitation process including the fairness of the IOU’s bidding and selection process (i.e. quantitative and qualitative methodology used to evaluate bids, consistency of evaluation methods with criteria specified in bid documents, etc.). 5. Describe project-specific negotiations. Highlight any areas of concern including unique terms and conditions. 6. If applicable, describe safeguards and methodologies employed by the IOU to compare affiliate bids or UOG ownership proposals. If a utility selected a bid from an affiliate or a bid that would result in utility asset ownership, explain and analyze whether the IOU’s selection of such bid(s) was appropriate. 7. Based on the complete bid process, is (are) the IOU contract(s) the best overall offer(s) received by the IOU? 8. If the contract does not directly reflect a product solicited and bid in an RFP, is the contract superior to the bids received or the products solicited in the RFO? 9. Is the contract a reasonable way of achieving the need identified in the RFP? 10. Based on your analysis of the RFP bids, the bid process, and the overall market, does the contract merit Commission approval? All these issues are addressed in this report, generally in the order included in the CPUC Independent Evaluator Report Template. II. Description of the Role of the IE throughout the Solicitation In compliance with the above requirements, SCE retained Merrimack Energy to serve as Independent Evaluator for SCE’s Request for Offers for Resource Adequacy Purchase, Sales, and Buy-Sells in April 2019. Merrimack Energy was retained to provide an independent evaluation of the appropriateness of SCE’s proposal evaluation methodology and selection process for product offers and bids and to provide SCE, SCE’s Procurement Review Group (“PRG”), and the Energy Division with periodic presentations, findings and other reports as requested. The objective of the role of the IE is to ensure that the solicitation process is undertaken in a fair, consistent, unbiased and objective manner and Merrimack Energy Group, Inc. 5
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Final Report that the best resources are selected and acquired consistent with the solicitation requirements. This role generally involves a detailed review and assessment of the solicitation documents, evaluation process, the results of the quantitative and qualitative (non-price) analysis, selection of the short list or preferred options, and monitoring and assessment of contract negotiations. For this solicitation, Merrimack Energy was retained prior to issuance of the RA e-Solicitation. Regulatory Requirements for the Independent Evaluator The requirements for participation by an Independent Evaluator (IE) in utility solicitations are outlined in decisions D.04-12-048 (Findings of Fact 94-95, Ordering Paragraph 28), D.06-05-039 (Finding of Fact 20, Conclusion of Law 3, Ordering Paragraph 8) of the California Public Utilities Commission (Commission or CPUC) and D.09-06-050. The role of IE’s in California IOU procurement processes has evolved over the past thirteen years. In Decision 04-12-048 (December 16, 2004), the CPUC required the use of an IE by investor-owned utilities (IOUs) in resource solicitations where there are affiliate, IOU-built or turnkey bidders. The CPUC generally endorsed the guidelines issued by the Federal Energy Regulatory Commission (FERC) for independent evaluation where an affiliate of the purchaser is a bidder in a competitive solicitation, but stated that the role of the IE would not be to make binding decisions on behalf of the utilities or administer the entire process.3 Instead, the IE would be consulted by the IOU, along with the Procurement Review Group (“PRG”) on the design, administration, and evaluation aspects of the Request for Proposals (“RFP”). The Decision identifies the technical expertise and experience of the IE with regard to industry contracts, quantitative evaluation methodologies, power market derivatives, and other aspects of power project development. From a process standpoint, the IOU could contract directly with the IE, in consultation with its PRG, but the IE would coordinate with the Energy Division. In Decision 06-05-039 (May 25, 2006), the Commission required each IOU to employ an Independent Evaluator regarding all RFOs issued pursuant to the RPS, regardless of whether there are any utility-owned or affiliate-owned projects under consideration. This was extended to any long-term contract for new generation in D.06-07-029 (July 21, 2006). In addition, the Commission directed the IE for each RFO to provide separate reports (a preliminary report with the shortlist and final reports with IOU advice letters to approve contracts) on the entire bid, solicitation, evaluation and selection process, with the reports submitted to the utility, PRG and Commission and made available to the public (subject to confidential treatment of protected information). The IE would also make periodic presentations regarding its findings to the utility and the utility’s PRG consistent with preserving the independence of the IE by ensuring free and unfettered 3 Decision 04-12-048 at 129-37. The FERC guidelines are set forth in Ameren Energy Generating Company, 108 FERC ¶ 61,081 (June 29, 2004). Merrimack Energy Group, Inc. 6
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Final Report communications between the IE and the CPUC’s Energy Division, and an open, fair and transparent process that the PRG could confirm. In 2007, the use of an IE was required for any competitive solicitation seeking products for a term of more than three months in D.07-12-052 (December 21, 2007). Also, the process for retaining IEs was modified substantially, with IOUs developing a pool of qualified IEs, subject to feedback and any recommendations from the IOU’s PRG and the Energy Division, an internal review process for IE candidates, and final approval of the IEs by the Energy Division. In 2008, in D.08-11-008, the CPUC changed the minimum term requirements from three months to two years, and reiterated that an IE must be utilized whenever an affiliate or utility bidder participates in the RFO, regardless of contract duration. In D. 09-06-050 issued on June 18, 2009 in Rulemaking 08-08-009, Order Instituting Rulemaking to Continue Implementation and Administration of California Renewable Portfolio Standard Program,4 the CPUC required that bilateral contracts should be reviewed according to the same processes and standards as contracts that come through a solicitation. This includes review by the utility’s Procurement Review Group and its IE, including a report filed by the IE. In D.10-07-042 issued on July 29, 2010, the Commission reaffirmed the role of the IE and required the Energy Division to revise the IE Template to ensure that the IEs focus on their core responsibility of evaluating whether an IOU conducted a well-designed, fair, and transparent RFO for the purpose of obtaining the lowest market price for ratepayers, taking into account many factors (e.g. project viability, transmission access, etc.). This report is filed consistent with the above requirements and is consistent with the requirements outlined in the CPUC’s Short Form IE Report Template. Description of IE Oversight Activities The IE was involved in a number of activities and completed several specific tasks in performing its oversight role in connection with development of SCE’s RA e-Solicitation, SCE’s evaluation methodology, and evaluation and selection process. The activities of the IE during the process are described below: • • • Reviewed and commented on the Draft RA e-Solicitation document, including the e-Solicitation Instructions and the RA Confirmation; Participated in a number of SCE internal RA e-Solicitation project team meetings during the process; Reviewed materials provided to the PRG and participated in PRG meetings prior to and during the solicitation process; 4 Decision Establishing Price Benchmarks and Contract Review Processes for Short-Term and Bilateral Procurement Contracts for Compliance with the California Renewable Portfolio Standard. Merrimack Energy Group, Inc. 7
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Final Report • • • • • • Reviewed and discussed SCE’s bid evaluation methodology prior to receipt of offers; Reviewed and commented on the Company’s responses to Respondent’s questions when applicable; Reviewed and summarized the offers received to ensure the Company and IE identified and assessed the same list of offers; Reviewed and assessed SCE’s evaluation of the offers received for purposes of selecting the offers that would be included in the final selection sets. Participated in weekly or more frequent conference calls with SCE’s project team to discuss the status of the offers and any revisions to the offer selection process and contract execution process; Monitored the contract execution process between the Respondents and SCE contract managers designated to negotiate and execute the Conformations and other required documents; Prepare the IE report for inclusion with SCE’s Quarterly Compliance Report (“QCR”) with the Energy Division. With regard to the role of the IE, our objective is to ensure that the solicitation process is undertaken in a fair and equitable manner, that the e-Solicitation documents and associated attachments are reasonably transparent and understandable, and that the results of the offer evaluation and selection process are reasonable and consistent with regard to meeting the Company’s objective while getting the best deal for customers. This report provides an assessment and review of SCE’s RA e-Solicitation procurement process from development of the e-Solicitation through selection of the final contracts. The role of the IE is also discussed as it pertains to specific activities identified in Section V of this report. III. How did SCE Conduct Outreach to Bidders and Was the Solicitation Robust Describe the IOU Outreach to Potential Respondents Outreach activities are important to the success of a competitive solicitation process. SCE’s outreach efforts targeted more than 1,800 contacts on its distribution list for this eSolicitation. This includes a list of companies which SCE contacts for other types of solicitations, companies who have participated in previous month-to-month and other RA solicitations as well as those companies with which SCE has executed agreements in the past. SCE’s initial outreach activities resulted in a larger response in terms of the number of respondents and the quantity of the proposals received compared to the 2019-2020 RA RFO completed earlier this year; however, the RA quantity offered was not sufficient to meet its Year-Ahead and Month-Ahead compliance target for all years solicited. In addition, there were several participants and generators who participated in previous RA RFOs that did not submit offers into this RA e-Solicitation. Merrimack Energy Group, Inc. 8
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Final Report Since this solicitation was an electronic solicitation, all solicitation documents were sent via email directly to SCE’s distribution list. The distribution list included previous participants among companies in the market. Identify the Principles Used to Determine Adequate Robustness of the Solicitation There are several principles generally applied to determine whether the robustness of the solicitation was adequate. These include: • • • • Did the amount of capacity offered for each product allow for a competitive process? Were offers submitted for all products requested? Were there a competitive number of Respondents for all products? Did the utility adequately market the solicitation? Was the Solicitation Adequately Robust Although SCE intentionally did not specifically identify the amount of capacity sought for each product, the overall result of this outreach activity resulted in moderate response from Respondents. SCE received offers on May 13, 2019. A detailed summary of the indicative offers received is provided as Attachment A to the Confidential Appendix. Attachment B to the Confidential Appendix provides a summary of the offers selected and executed with each of the counterparties. The IE concludes that while SCE’s initial outreach activities were adequate, the response of the market was fairly robust in terms of number of counterparties and offers submitted; however, the response was less robust in terms of product volumes offered. In order to meet SCE’s year-ahead and month-ahead compliance obligations in the coming years, SCE has continued to hold additional solicitations throughout the year, employing different strategies to engage more market participants and meet its short positions in the most economic manner possible. During team meetings after receipt of indicative offers, SCE’s project team and the IE held several meetings to discuss options to address the shortfall in capacity requirements for the years solicited, particularly 2020, and to discuss the factors that may be driving the limited market response. Some of the factors identified as potential reasons included: • The addition of Community Choice Aggregators vying for the same capacity to meet their obligations; • Uncertainty regarding the final load requirements for each utility; • Issues associated with the CAISO Capacity Market, including the limited revenues associated with short term offers via utility RA RFOs; • Potential retirements of existing generators due to poor market economics associated with low capacity values through short-term transactions; • Generator preference not to enter into short-term contracts. Merrimack Energy Group, Inc. 9
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Final Report IV. Description of SCE’s Proposal Evaluation Methodology Framework and Principles for Evaluating SCE’s Bid Evaluation Methodology This section of the report addresses the principles and framework underlying Merrimack Energy’s review of SCE’s methodology for the RA e-Solicitation offer evaluation and selection. Key areas of inquiry by the IE and the underlying principles used by the IE to evaluate the methodology and results include the following: • • • • • • Were the procurement targets, products solicited, principles and objectives clearly defined in the e-Solicitation documents? Is the bid evaluation based on the criteria specified in the bid documents? Do the bid documents clearly define the type and characteristics of products desired and what information the bidder should provide to ensure that the utility can conduct its evaluation? Does the methodology identify how qualitative and quantitative measures would be considered to be consistent with an overall metric? Are there differences in the evaluation method for different technologies that cannot be explained in a technology neutral manner? Does the price evaluation methodology allow for consistent evaluation of offers of different sizes and in-service dates? Evaluation Criteria and Methodology This section of the report provides a description of SCE’s Least Cost Best Fit evaluation methodology for evaluating offers for Resource Adequacy (RA) for 2020 - 2023 pursuant to the RA e-Solicitation. It also describes the manner in which SCE applied the evaluation methodology in its evaluation of the offers and selection of winning offers. First, SCE defined the products that it sought to purchase and those that it sought to sell. The RFO Instructions provide that all products associated with the e-Solicitation would be for RA Capacity for the 2020 through 2023 Resource Adequacy Compliance Year. The RA Capacity was required to come from specific identified generating units that have a Net Qualifying Capacity (“NQC”) assigned by the CAISO and must be able to count toward SCE’s RA requirement. The products that are the subject of the eSolicitation were specifically described in a table in the RA e-Solicitation.5 Table 1 of this report provides a listing of the products sought as defined by SCE in the eSolicitation Instructions. This RA e-Solicitation proposed to utilize a one-step pricing process where all initial offers were considered binding offers. Only offers that meet the eligibility requirements outlined in the RA RFO instructions would be considered. All offers would be initially assessed for conformance with the requirements set forth in these e-Solicitation instructions. 5 e-Solicitation Instructions page 4-5. Merrimack Energy Group, Inc. 10
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Final Report There would be both quantitative and qualitative considerations involved with evaluating offers. The e-Solicitation Instructions described both the quantitative evaluation and qualitative evaluation approach in general terms.6 The valuation of each offer would take into account cash flow components for both cost and revenue. For this solicitation, this included capacity payments for RA purchases by SCE as well as debt equivalence cost and potential credit and collateral adders. SCE also ascribed the RA benefits of each Offer.7 RA cost was based on the offer submitted including the offer price times volume. RA benefits are based on SCE’s forecast of local or system capacity value times the volume offered. These components were then netted and discounted to yield a Net Present Value (“NPV”) for each Offer. SCE indicated that for the quantitative evaluation, the valuation of each Offer would be based on a $/kW-month metric (either positive or negative). Offers would be ranked based on this metric. SCE would then select a set of offers with the goal of minimizing the cost to SCE’s customers while meeting SCE’s defined needs, counterparty volume limits, and pricing.8 SCE also indicated that in addition to the quantitative factors described above, there were qualitative factors that could impact offer selection. These may include among other factors: • Project viability; • Location within a Disadvantaged Community (“DAC”); • Adherence to the parameters for the solicitation; • Offers of flexible capacity; • Offers of local capacity; • Changes to the e-Solicitation Documents; • Counterparty concentration; • Creditworthiness; • OTC compliance considerations As noted, the solicitation process was originally designed as a single-staged process which included submittal of binding offers, contingent award selection, and final selection notification. Following the applicable confirmations and commercial lockdown of Offers, final execution would take place May 24, 2019. SCE developed the RA e-Solicitation which adequately defined at a high level the products required, the basis for the solicitation, key contract provisions, the evaluation criteria, quantitative and qualitative evaluation factors, and the information required from the respondents. As is typical in procurement processes, the e-Solicitation did not provide the detailed model, assumptions or methodology that SCE would use in the evaluation. However, the proposed methodology was discussed with the IE in advance of receipt of 6 e-Solicitation Instructions page. 12. SCE does not ascribe any benefits to Offers for any months in cases where it does not have an RA requirement. 8 With regard to pricing limits, SCE stated that it would not select any offers with a price that exceeds the Capacity Procurement Mechanism (“CPM”) cost designation. 7 Merrimack Energy Group, Inc. 11
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Final Report offers and reviewed in detail. The proposed methodology was consistent given the type of products sought. Any issues associated with a consistent evaluation of different technologies, contract types, or variable in-service dates were not relevant for this solicitation which sought only RA products for 2020 through the end of 2023. Although the e-Solicitation identified specific qualitative factors9, SCE informed the IE that qualitative factors for the most part would be considered if there was a question about a proposal. SCE did not specify any specific weights associated with qualitative factors and did specify that offers would be ranked on the basis of price. Strengths and Weaknesses of SCE’s Evaluation Methodology for RA This section of the report provides an assessment of the strengths and weaknesses of SCE’s evaluation and selection methodology. First, the evaluation methodology utilized by SCE to evaluate the cost of offers submitted into the RA e-Solicitation to meet the required RA capacity subject to the constraints applied is generally reasonable and appropriate for the products sought in this RA eSolicitation. The methodology starts with the CPUC’s requirements to establish a YearAhead and Month-Ahead System Resource Adequacy Requirement for Load Serving entities. In addition, CAISO’s most recent study of Local Capacity Requirements (“LCR”) forms the basis for the Commission’s annual Local RA program requirements. SCE’s proposed methodology begins with these parameters and seeks to evaluate and select the combination of resources which provide the best overall value to SCE’s customers based on the relationship between the costs and benefits associated with each offer based on the entirety of offers received and evaluated at the same time. In our view, the proposed evaluation methodology, input assumptions, and application of the methodology was reasonable and consistent for this type of solicitation and met industry standards for this type of product. The methodology was capable of effectively and consistently evaluating the range of products solicited in the RA e-Solicitation, including different project structures and bid sizes. Although the methodology was not a true optimization process, the proposed methodology does allow for the opportunity to assess different combinations of offers to select a least cost portfolio of RA resources by calculating the total cost of each portfolio under the initial premise that all offers would be evaluated and considered at the same time under a consistent set of assumptions and market conditions. Recommendations for Future Improvements 9 The qualitative evaluation factors which may impact the selection of an Offer included project viability, location within a Disadvantaged Community (“DAC”), adherence to the parameters for this RFO, offers of flexible capacity, offers of local capacity, changes to the RFO documents, counterparty concentration, creditworthiness, and OTC compliance considerations. Merrimack Energy Group, Inc. 12
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Final Report This solicitation was originally conducted in an expeditious manner with a condensed timeline from the bid submission to final contract execution. Since SCE was soliciting RA to reduce their Month-Ahead short position within 2020 and the Year-Ahead and Month-Ahead positions for 2021 through 2023, SCE had to work quickly and execute contracts as soon as possible. While the evaluation process doesn’t take much time, the condensed timeline can cause issues if there are any concerns with the Pro Forma and doesn’t offer much time to conduct negotiations. Regardless, given the response during this solicitation and the previous solicitation, changes to the timeline likely wouldn’t produce additional offers that would allow SCE to completely fulfill its 2020 MonthAhead compliance obligations. In addition, since SCE has held two RA solicitations this year to procure RA in 2020 and hasn’t received enough volume to fulfill its RA obligations, changes to the timeline wouldn’t necessarily affect the apparent shortage in available RA in the market. One potential recommendation for future solicitations is to more specifically outline the months of need in the solicitation. While this may impact the pricing submitted, as the bidders would know which months are needed most, it could give bidders more insight so that they can structure bids accordingly. This may shorten the negotiation period and reduce total notional cost of offers selected because offers wouldn’t contain larger strips for months that aren’t needed. V. Administration of the Solicitation Process In performing its oversight role, the IE participated in and undertook a number of activities in connection with the solicitation including providing comments on the eSolicitation documents, discussing the bid evaluation and selection process and rationale for any constraints underlying the evaluation and selection, organizing and summarizing the offers received, monitoring the status of contract negotiations with counterparties, reviewing and commenting on the evaluation and selection process and results at each step of the evaluation and selection process, and participating in meetings with SCE’s Finance and Risk Management Committee (“FRM”) and the PRG. As will be discussed later, SCE was very inclusive with regard to the role of the IE and involved the IE in all primary decisions and discussions, including the weekly project team meetings and other required meetings and discussions. Merrimack Energy was retained by SCE prior to the final development and completion of the e-Solicitation documents and therefore had the opportunity to participate in and assess all steps in the process. The key project activities are listed in this section of the report in conjunction with the activities of the IE. Project Kick-off Meeting/Conference Call – May 6, 2018 SCE’s project team lead initiated a meeting with SCE’s internal project team members that was attended by the IE to discuss the proposed schedule and tasks required to implement the 2020-2023 RA e-Solicitation process. The purpose of the e-Solicitation would be to procure eligible RA capacity to meet, reduce, or optimize SCE’s RA position for 2020-2023. The meeting focused on several topics including the proposed RA Merrimack Energy Group, Inc. 13
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Final Report products to be solicited10, the proposed schedule for the solicitation process, SCE’s expected RA need for 2020-2023, the proposed shortlisting methodology, the RA solicitation team, the documents to be included as part of the e-Solicitation, and the next steps. The IE provided comments on the schedule and inquired about the evaluation methodology and shortlist selection based on the IE’s previous involvement with SCE RA solicitations as IE. Comments on the e-Solicitation Instructions Document The IE reviewed and commented on a draft of the RA e-Solicitation Instructions and Offer Workbook prior to completion. Since the same documents were to be used for this iteration of the RA e-Solicitation from the previous RA RFO, with only minor changes to the delivery period being solicited and the removal of Import Allocation Rights in the product tables, there weren’t many concerns or questions about the e-Solicitation documents. The IE concluded that the e-Solicitation Instructions addressed all the necessary components that the IE generally looks for in a transparent e-Solicitation and one which provides adequate information to facilitate Bidder response. These include: o Description of the products solicited o Identification of eligibility requirements o Description of the evaluation process and criteria o Schedule for undertaking the solicitation process o Reference to linkage with the Confirmation Template (“Contracts”) o References to linkage with the Offer Forms o Information required of Respondents when they submit their proposals o Description of the communication process with Respondents Weekly Team Calls SCE established a schedule for periodic team calls regarding the RA e-Solicitation to address any issues associated with the e-Solicitation development and implementation process. The IE was invited to attend all meetings. The IE requested that one of the weekly meetings should focus on a review of the offer evaluation methodology to be used for the RA e-Solicitation process. PRG Meeting – May 8, 2019 The first PRG meeting associated with the RA e-Solicitation was held on May 8, 2019. The objective of the meeting was to notify the PRG of the plans to launch the eSolicitation. At this meeting, SCE’s project lead identified that the purpose of the RA eSolicitation was to procure eligible RA capacity to meet, reduce, or optimize SCE’s RA position for 2020-2023. SCE provided tables in its slide deck presentation which 10 The products identified to be solicited included: System and Local RA Purchases and Sales (including Flex RA and non-Flex RA). Merrimack Energy Group, Inc. 14
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Final Report provided details regarding each product sought. The products that would be solicited include: • Purchase and Sale of RA Capacity (could include system and local and can include flex or non-flex attributes for 2020 through 2023). SCE provided a description of SCE’s 2020 to 2023 Year-Ahead and Month-Ahead System and Local Capacity Position. SCE also provided a high-level description of its shortlisting methodology and its proposed schedule for the solicitation. With regard to the shortlisting methodology, SCE explained the following primary steps associated with the shortlisting methodology: 1. Ensure offers meet eligibility requirements; 2. Rank purchase offers according to cost11 ($/kW-month) for each delivery period and rank indicative sales offers according to revenue ($/kW-month) for each delivery period; 3. Identify natural breakpoints/materiality thresholds and consider additional qualitative criteria (based upon best offer by counterparty). SCE presented this draft plan to the PRG in the May 8, 2019 meeting. SCE sought and attained approval to launch with binding offers due within a week on May 13, 2019. E-Solicitation Instructions and Documents Issued – May 8, 2019 SCE sent RA e-Solicitation Instructions and related documents to market participants via email on May 8, 2019. The RA e-Solicitation included the following documents: • • • • • • • 2020-2023 SCE RA e-Solicitation Instructions EEI Master Power Purchase & Sale Agreement Cover Sheet Exhibit A – RA Capacity (SCE Buy or SCE Sell) Confirmation Exhibit B – Non-Disclosure Agreement Exhibit C – RA RFO Offer Workbook Exhibit D – EEI FTAA Special Provision Exhibit E – Guaranty Agreement Bidder’s Conference Call There was no Bidder’s Conference call held for this e-Solicitation due to the condensed timeline and very minimal changes to the e-Solicitation documents or process compared to the most recent solicitation. Receipt of Offers – May 13, 2019 Offers were received as required on May 13, 2019. Offers were submitted via email to the SCE RFO inbox with a copy to the IE. A total of twenty-three counterparties submitted offers. A majority of the offers submitted were SCE Sell offers. Out of the 348 11 Cost ($/kW-month) was the only metric used to rank indicative offers for shortlisting purposes. Merrimack Energy Group, Inc. 15
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Final Report equivalent offers (considering all multi-year strips, annual strips, monthly, and swaps), 53 offers were SCE Buys and 295 were SCE Sells. There was a larger range in pricing for SCE Sells offers, but the average price in $/kW-month was much lower compared to SCE Buys offers. Fifteen counterparties submitted SCE Sells offers, nine submitted SCE Buys offers, and two submitted swap offers. For 2020, seven counterparties submitted SCE Buys offers, fourteen submitted SCE Sells offers, and one counterparty submitted a swap offer. A total of 121 Offers were submitted for 2020, 86 offers for 2021, 84 offers for 2022, and 57 offers for 2023. Several counterparties submitted offers for multiple years or quantities for all four years. With regard to contract terms, SCE received Annual Product strips for a majority of the 2020 offers, with other offers for Q3 or individual months. The IE received the proposals at the same time as SCE. The IE downloaded the proposals and reviewed the proposals along with SCE’s project team. The IE prepared its own summary of the proposals received including high level summary information of the proposal quantities and pricing for each product. RFO Document Submittal Checklist Subsequent to receipt of the original offers, SCE and the IE reviewed the offers to ensure the offers conformed to the requirements listed in the e-Solicitation Instructions and that all required information was provided. As listed in the e-Solicitation Instructions, Respondents were required to provide a fully completed Offer Form Workbook, an executed Confidentiality Agreement/NDA unless Respondent already has in place an evergreen NDA with SCE, and a fully executed or minimally modified Enabling Agreement. In addition, Respondents were requested to submit copies of their two most recent audited financial statements. Activities associated with the offer receipt and the evaluation and selection process are described in detail in Confidential Appendix A, which also includes information regarding the offers evaluated and selected. VI. Fairness of SCE’s Offer Evaluation and Selection Process Principles Used to Determine Fairness of Process In evaluating SCE’s performance in implementing its RA e-Solicitation evaluation and selection process, Merrimack Energy has applied a number of principles and factors, which incorporate those suggested by the Commission’s Energy Division as well as additional principles that Merrimack Energy has used in its oversight of other competitive bidding processes. These include: • Were bidder questions answered fairly and consistently and the answers made available to all? Merrimack Energy Group, Inc. 16
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Final Report • Did the bid evaluation team maintain consistent scoring and evaluation among and across projects, including different products and price structures? • Did the evaluation methodologies result in a fair and equitable evaluation and selection process? • Were the requirements listed in the RA e-Solicitation applied in the same manner to all proposals? • Was there evidence of any undue bias regarding the evaluation and selection of different type of technologies, project structures, bid sizes, or contract terms that cannot be reasonably explained? • Were the bids given equal credibility in the economic evaluation? • Did SCE ask for “clarifications” that provided the bidder an advantage over others? • Did all bidders have access to the same information? • Were all cost factors treated in an equitable and consistent manner? • Did SCE consistently apply the requirements, procedures and criteria of the evaluation process as identified in the e-Solicitation documents to different bids and types of projects? • Was the evaluation and selection process based on complete information about each proposal and a thorough investigation by SCE’s project team? Merrimack Energy has the following observations about the process based on our role as IE: • • The response by Respondents to the RA e-Solicitation was robust compared to the response in previous solicitations, especially considering the very condensed timeline; Based on discussions, it appeared that there were several reasons to explain the low overall market response: o CCAs competing in the market to procure RA; o Retirements of existing gas-fired units reduces available supply; o Uncertainty associated with future load forecast and RA requirements; o Generators not interested in short-term contracts; o Significant drop in capacity value for solar and wind due to changes in the ELCC methodology; o Generators frustrated with CAISO market structure for capacity; Merrimack Energy Group, Inc. 17
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Final Report o SCE RA e-Solicitation process time consuming and uncertain for potential bidders. • In response to the tepid response in previous solicitations and concern over need to secure RA to meet Month-Ahead requirements, SCE revised its proposed solicitation process to be more flexible and to expedite selections and negotiations of RA contracts; • SCE has aggressively attempted to reduce short positions in Month-Ahead and Year-Ahead obligations in the coming years by holding solicitations on a rolling basis. While it seems like there may not be enough RA in the market in future years, SCE expanded the delivery term for the solicitation in order to gauge RA availability in the market in the future years. The expansion of the delivery term has also allowed market participants to seek awards for multiple years, which has been a concern for bidders in the past as many bidders are looking for multi-year contracts; • SCE focused on assessing “every MW” for both buy and sell opportunities; • Overall, the IE viewed the evaluation, ranking and selection by SCE as being reasonable, consistent, and fair to all respondents and generally consistent with the pre-specified evaluation protocols, albeit at a more expedited pace. SCE contacted other market participants to assess if they were willing to offer capacity; • After the original offer submission, SCE worked actively and closely with counterparties to engage in good faith negotiations and to work through issues raised. • SCE followed the same general evaluation process based on the same evaluation metric (i.e. NPV$/kW-month). The IE did not witness any cases where Respondents with lower valued offers were selected in place of higher valued offers. Even though the timing of selection may have varied, no offers with higher value were displaced; • Based on our assessment of the evaluation process relative to the above criteria, it is our opinion that all Respondents were treated fairly and consistently and all had access to the same amount of and quality of information at the same time via contact with contract managers. We also observed no difference in the treatment of Respondents regarding clarification questions for Respondents, correspondence and communications with Respondents, and follow-up contacts. SCE also developed a consistent message for all contract manager to convey to their counterparties when there were revisions to the process; Merrimack Energy Group, Inc. 18
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Final Report • SCE notified all Respondents of revisions to the RA e-Solicitation process in a consistent and timely manner and clearly informed the Respondents of the proposed changes to the solicitation process; • SCE engaged the PRG on numerous occasions during the solicitation process, including at the time of selection of offers for selection. The implementation of the solicitation process highlights the challenges associated with conducting a solicitation process of this nature in a rapidly changing markets. VII. Contract Negotiations Process As noted, SCE’s original process involved a single-step process which consisted of the binding offer stage followed by negotiations of Confirms and other agreements with counterparties as required. The Confirmation and other agreements were included on the Company website for the RA Capacity e-Solicitation and shortlisted Respondents were required to communicate acceptance of SCE’s documents or minor modifications to documents. SCE also had to work with the selected counterparties to accept the Enabling Agreement. Parties were required to complete and finalize SCE’s applicable Confirmation and applicable Credit and Collateral documents shortly thereafter. The IE was of the opinion that the negotiation process was undertaken in a fair and impartial manner with all counterparties, with no undue preference afforded to any counterparty, which resulted in substantially similar agreements. VIII. Safeguards and Methodologies Employed The RA e-Solicitation requires Respondents to provide a fully executed Confidentiality Agreement with its indicative offer. Also, the e-Solicitation contains a clear statement of Confidentiality that is intended to limit or restrict Respondent’s ability to engage in communications with any other actual or potential participants in the e-Solicitation concerning this solicitation, price terms in offers and related matters. This language is designed to address situations in which respondents may be marketing agents for suppliers or provide credit on behalf of counterparties. The e-Solicitation also contains other sections which clearly describe Respondent’s waiver of claims and limitations of remedies and Respondent’s representations, warranties and covenants. The e-Solicitation also requires a clear statement that it will be bound by the terms and conditions of the e-Solicitation including the requirement that the Respondent is bound by the terms of its offer. No affiliates of SCE participated in the solicitation process. Merrimack Energy Group, Inc. 19
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Final Report IX. Recommendation For Contract Approval The CPUC IE Report Template requires that the IE address the question, “Based on your analysis of the proposals received and available, the bid process, and the overall market does the contract merit Commission approval? Explain.” In the context of the quarterly compliance report Commission approval is taken to mean the finding that the procurement was consistent with the IOU’s approved procurement plan. Through the RA e-Solicitation, SCE executed contracts for three SCE Buys offers and seven SCE Sells offers. Through these agreements, SCE was able to significantly reduce its Year-Ahead and Month-Ahead RA requirements, particularly in 2020. In addition, SCE was able to offset a portion of its RA purchase costs with sales of excess RA capacity in months in which SCE was long. SCE was able to acquire the RA capacity at a reasonable cost in light of the limited supply available in the market. The response to SCE’s RA eSolicitation highlighted the change in seller strategy from previous RA solicitations in which suppliers would generally offer multiple products for the same resource such as annual strip, monthly offers and quarterly offers. This provided more flexibility for buyers while suppliers were forced to compete aggressively for the market requirements available from primarily the three utilities. The limited products offered meant the buyers may be forced to purchase an annual product to meet a quarterly need. In addition, the prices of the RA proposals selected generally represent the lowest cost and highest valued available products given SCE’s RA requirements, based on the delivery point constraints and timeliness of securing RA to meet 2020 Year-ahead and Month-ahead requirements while also looking ahead to secure RA for the years 2021 through 2023. Overall, the IE concludes that the resulting contracts are reasonable and appropriate based on the conditions surrounding this solicitation process. X. Conclusions and Recommendations The results of the RA procurement process for 2020 - 2023 RA meet the goals and requirements of SCE within the RA e-Solicitation at a reasonable and appropriate cost based of the offers submitted, SCE’s outreach efforts to other potential suppliers, and SCE’s assessment of future market pricing. SCE selected the best offer for the products and delivery period required which led to a reasonable expenditure of costs to meet requirements. Second, the IE is of the view that all Respondents were treated fairly and consistently throughout the process, with no Respondent disadvantaged, even in spite of the lengthened the overall solicitation process. For the reasons stated herein, Merrimack Energy concludes that the offer selection decisions by SCE in this RA e-Solicitation were reasonable based on the requirements and evaluation criteria set forth in the e-Solicitation document. SCE generally followed Merrimack Energy Group, Inc. 20
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Final Report its identified protocols and methodology in evaluating and selecting resources. We believe the RA Confirmations are reasonable, and are in the best interests of customers. Recommendations The RA e-Solicitation process brought to light several potential dramatic changes to the RA procurement process in California. The presence of CCA’s in the RA procurement process, the potential for additional retirements of existing gas-fired generation units, and the limited revenues available to existing generators given the short-term nature of utility RA procurement processes may continue to create market uncertainty regarding RA availability and cost. The change in the RA market to a tighter, more supply-constrained market encourages shorter solicitation processes and quicker decision making than the utilities have generally implemented. SCE’s revision to the RA e-Solicitation process and the flexibility required to revise the timing of decision-making highlights the necessary changes. SCE may consider a more targeted solicitation in which SCE explicitly defines the months of need. While this may negatively impact pricing offered, it’ll allow Respondents the opportunity to provide higher valued offers so that SCE doesn’t need to select longer strips of RA when there is only a need for select months. Another option is for SCE to implement a requirement that anytime a respondent offers a strip of RA, the Respondent must also offer individual monthly pricing. Alternatively, SCE could consider a competitive negotiations process, whereby SCE could have the flexibility to seek to negotiate both price and volume provisions in the contract to better match supply with requirements. In conclusion, the lessons learned from this RA e-Solicitation are numerous and are likely to highlight issues which need to be addressed in future RA solicitations as the RA market becomes more uncertain with additional purchasers and potentially fewer lowercost supply options. Merrimack Energy Group, Inc. 21
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