On June 20, 2011, the Federal Energy Regulatory Commission (“FERC” or the “Commission”) denied the joint request of Sempra Generation (“Sempra”) to make affiliate sales to San Diego Gas & Electric Company (“SDG&E”) pursuant to a competitive solicitation due to concerns over potential for affiliate abuse.  Both Sempra and SDG&E are subsidiaries of Sempra Energy.

On April 29, 2011, Sempra and SDG&E submitted a joint request to the Commission for Sempra to sell to SDG&E a limited quantity of system-wide Resource Adequacy (“RA”) capacity at market-based rates due to an expected SDG&E RA shortage in August and September 2011.  Under California’s RA capacity program, each load-serving entity under the jurisdiction of the CPUC is required to procure capacity to cover its forecasted annual peak demand plus a planning reserve margin of 15 percent and to maintain that capacity during all months of the year.  SDG&E commenced a Request for Offers (“RFO”) process on March 30, 2011, and although Sempra was not included in the original RFO distribution list, Sempra submitted an offer on April 7, 2011.   However, responses to the RFO were due on April 6, 2011.   SDG&E was eventually selected, and SDG&E used an independent evaluator to evaluate all responses to the RFO and determine if the choice of Sempra Energy was reasonable as required by the California Public Utilities Commission.   

FERC determined the proposed affiliate transaction did not meet the Transparency, Evaluation, and Oversight guidelines set forth in Commission precedent.  In noting how the competitive bid process was not sufficiently transparent, FERC was concerned with how Sempra was allowed to submit their offer late while other parties were not afforded the same opportunity.  The Commission also took issue with a phone call where Sempra asked if it was okay to submit a late bid without providing the other bidders an opportunity to refresh pricing.

Additionally, SDG&E did not publish the evaluation criteria for reviewing competing bids or how close/tied or partial offers would be evaluated.  FERC requires that price and non-price criteria for reviewing offers be known, and SDG&E should have ensured that the RFO does not give an advantage to an affiliate.  Again FERC noted the independent evaluator’s concern with “SDG&E retain[ed] the discretion, in its sole judgment, to… formulate and implement appropriate criteria for the evaluation and selection of Offers.”

In regards to oversight, although an independent evaluator was used, the Commission said it was insufficient because the evaluator did not design or administer the process.  Instead, the evaluator was brought in after the auction was closed, and this was not enough to satisfy FERC’s oversight requirements for affiliate sales.

A copy of the FERC order is available here.