ALJ/MSW/jt2 Date of Issuance 12/21/2010

Decision 10-12-035 December 16, 2010

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Application of Southern California Edison Company (U338E) for Applying the Market Index Formula and As-Available Capacity Prices adopted in D.07-09-040 to Calculate Short-Run Avoided Cost for Payments to Qualifying Facilities beginning July 2003 and Associated Relief.

Application 08-11-001
(Filed November 4, 2008)

And related matters

Rulemaking 06-02-013
Rulemaking 04-04-003
Rulemaking 04-04-025
Rulemaking 99-11-022

DECISION ADOPTING PROPOSED SETTLEMENT

Table of Contents

Title Page

DECISION ADOPTING PROPOSED SETTLEMENT 2 2

1. Summary 2 2

2. Background 3 3

2.1. Overview of Proceedings 3 3

2.2. Policy Background 5 5

2.2.1. PURPA and the Commission's QF Program 5 5

2.2.2. State Policy Favoring Combined Heat and Power (CHP) 7 7

2.2.3. Climate Change Scoping Plan 7 7

2.3. Settlement Process Overview 8 8

2.4. Procedural History 10 10

3. Summary of the Proposed Settlement 12 12

3.1. Goals and Objectives 13 13

3.2. Settlement Periods 13 13

3.3. Transition PPA 14 14

3.4. CHP Procurement Process 14 14

3.5. MW Targets 16 16

3.6. GHG Emissions Reduction Targets 16 16

3.7. GHG Emission Accounting Methodology 18 18

3.8. Commission Jurisdictional Entities' Reporting Requirements 19 19

3.9. CHP Auditor 19 19

3.10. SRAC Energy Pricing Structure 19 19

3.11. Legacy PPA Matters for Existing QFs 20 20

3.12. CAISO Tariff Compliance 21 21

3.13. IOU Cost Recovery for CHP PPAs 21 21

3.14. Settlement of Pending and Anticipated Litigation 22 22

3.15. FERC Section 210(m) Application 23 23

3.16. Conditions Precedent and Settlement Effective Date 24 24

3.17. Glossary 25 25

3.18. Attachments to the Settlement 25 25

4. Discussion 26 26

4.1. Standard of Review of Settlements 26 26

4.2. Process Issues 28 28

4.2.1. Compliance With the Settlement Rules 28 28

4.2.2. Shortened Comment Period 29 29

4.2.3. Adequacy of the Comment Process 31 31

4.2.4. Scope of the Consolidated Proceedings 33 33

4.2.5. Staff Involvement in the Settlement Process 34 34

4.3. Review of the Proposed Settlement 35 35

4.3.1. Overview 35 35

4.3.2. Elements of the Proposed Settlement 37 37

4.3.2.1. CHP Goals and Objectives 37 37

4.3.2.2. GHG Emissions Reductions from CHP Facilities 38 38

4.3.2.3. Competitive Procurement 39 39

4.3.2.4. Energy and Capacity Prices 41 41

4.3.2.5. QF/CHP Targets 42 42

4.3.2.6. Reporting and Auditing 43 43

4.3.2.7. Pro Forma PPAs and Legacy of QF PPA Amendment 44 44

4.3.2.8. Operationally Flexible Resources 45 45

4.3.3. Contested Issues 46 46

4.3.3.1. Introduction 46 46

4.3.3.2. Commission Jurisdiction Regarding ESPs and CCAs 46 46

4.3.3.3. Cost Allocation Issues 50 50

4.3.3.4. CMUA's Requested Modifications 52 52

4.3.3.5. Federal Preemption Claims 53 53

4.3.3.6. FERC Review of PURPA 210(m) Application 54 54

4.3.4. Alternatives for Cost Allocation to ESPs and CCAs 55 55

4.3.5. Conclusion 56 56

5. Disposition of Proceedings 59 59

6. Comments on the Proposed Decision 59 59

7. Assignment of Proceedings 60 60

Findings of Fact 60 60

Conclusions of Law 64 64

ORDER 67 67

Appendix A - Links To Joint Motion and Attachments, Including Settlement Agreement, Term Sheet, And Exhibits

DECISION ADOPTING PROPOSED SETTLEMENT

1. Summary

After more than a year and a half of intensive negotiations, three investor-owned utilities, four representatives of qualifying facilities (QFs), and two ratepayer advocacy groups have developed, and now propose for our consideration, their "Qualifying Facility and Combined Heat and Power Program Settlement Agreement" (Proposed Settlement). In this decision the Commission reviews the Proposed Settlement, finds that it meets established criteria for approval of settlements, and therefore approves it.

The Proposed Settlement is comprehensive. It would resolve numerous outstanding QF issues involving disputes in several Commission, and provide for an orderly transition from the existing QF program to a new QF/Combined Heat and Power (CHP) program. This new program is designed to preserve resource diversity, fuel efficiency, greenhouse gas (GHG) emissions reductions, and other benefits and contributions of CHP. The Proposed Settlement is also designed to promote new, lower GHG-emitting CHP facilities and encourage the repowering, operational changes through utility-pre-scheduling, or retirement of existing, higher GHG-emitting CHP facilities. Additionally, the Commission finds that the Proposed Settlement provides for an appropriate allocation of the costs of the QF/CHP program to all customers in California who benefit from the CHP portfolio. The Proposed Settlement is comprehensive, but it does not resolve issues in numerous Commission proceedings implementing recent statutory requirements that pertain to QFs of 20 MW or less, such as new CHP systems under Assembly Bill 1613 (codified as Pub. Util. Code sections 2840-2845), except to acknowledge that the megawatt (MW) and GHG reductions will count toward the investor-owned utilities' MW and GHG reduction targets.

While the Proposed Settlement is the result of compromise and agreement among representatives of diverse interests, several parties strongly object to aspects of it. Foremost among their concerns is the Proposed Settlement's establishment of procurement and reporting requirements for community choice aggregators and electric service providers. We review the opponents' arguments for either rejecting the Proposed Settlement or approving it only with modifications. We conclude that the Proposed Settlement meets the Commission's standards for approval of settlements - it is reasonable in light of the record, consistent with the law, and in the public interest.

In approving the Proposed Settlement, we set in motion a series of steps that should lead to eventual closure of each of the captioned proceedings. However, we find that it is premature to close the proceedings. Accordingly, the proceedings will remain open at this time.