On October 23, 2017, FERC approved San Diego Gas & Electric Company’s (“SDG&E”) and Sempra Gas & Power Marketing, LLC’s (“Sempra”; collectively, “Applicants”) request for authorization for SDG&E to purchase Resource Adequacy capacity at market-based rates from its affiliate, Sempra, pursuant to a competitive solicitation process. In doing so, FERC concluded that the solicitation did not unduly favor Sempra and thus satisfied FERC’s concerns regarding affiliate abuse.

On June 30, 2017, Applicants requested authority for Sempra to sell Resource Adequacy capacity at market-based rates to its affiliate, SDG&E, after SDG&E conducted a competitive solicitation process that resulted in the selection of a portfolio of resources, including Sempra. Applicants explained that the competitive solicitation was conducted in anticipation of the 2018 Local Resource Adequacy showing—an annual demonstration each load serving entity under the California Public Utilities Commission’s (“CPUC”) jurisdiction must make to establish that, under the CPUC’s rules, it has sufficient capacity for the following year. Applicants also represented to FERC that the competitive solicitation was overseen by an independent evaluator and that SDG&E received input from its Procurement Review Group, a standing advisory body comprised of both market and non-market participants, including consumer-interest groups.

In its order, FERC explained that it determines whether to approve affiliate market-based rate agreements based on whether the proposed transaction was a result of direct competition between affiliated and unaffiliated suppliers. To demonstrate that a competitive process satisfies FERC’s affiliate abuse concerns, an applicant must show that: (1) a competitive process was used and that no undue preference was provided to an affiliate; (2) the evaluation of bids did not favor affiliates; and (3) the selection process chose the affiliate based on a reasonable combination of price and non-price factors. FERC noted that the underlying principle when evaluating a competitive solicitation process is that the affiliate should not receive undue preference during any stage of the solicitation process. According to FERC, this underlying principle is satisfied if the competitive solicitation process: (1) is transparent; (2) precisely defines the products solicited; (3) evaluates bids in a standardized, equal manner across all bidders; and (4) involves oversight by an independent third party which designs the solicitation, administers bidding, and evaluates the bids prior to the company’s selection.

Applying this criteria to SDG&E’s solicitation, FERC first found that the competitive solicitation was transparent because SDG&E distributed the request for proposal (“RFP”) to numerous parties, provided notices of the RFP to trade publications, and established a website for the RFP, including a forum for questions and answers. Second, FERC determined that the solicitation precisely defined the products requested because it clearly indicated the product sought was SDG&E’s 2018 Local Resource Adequacy for the Imperial Valley area. Third, FERC found that the solicitation satisfied the evaluation guideline because it involved a discrete, standardized product and because SDG&E’s purchase decisions were made on the objective basis of procuring sufficient quantity at the lowest price. Lastly, FERC stated that oversight guideline was satisfied because SDG&E retained an independent evaluator to evaluate all bids received and monitor negotiations between SDG&E and Sempra, and because additional oversight was provided by SDG&E’s Procurement Review Group. Thus, FERC concluded that the solicitation satisfied FERC’s concerns regarding affiliate abuse.

The order can be found in Docket No. ER17-2046. A copy of the order is available here.