3. The Power Purchase Agreements
are Just and Reasonable

The power purchase agreements provide that PG&E provides the fuel for the facilities and decides when the facilities should be scheduled, based on availability schedules provided by the sellers. The power purchase agreements also limit scheduling so that the facilities are not operated as baseload facilities under Pub. Util. Code §§ 8340-8341. PG&E receives all of the energy from the facilities when they are scheduled, as well as the Resource Adequacy value associated with the facilities. PG&E acts as the CAISO Scheduling Coordinator for the facilities.

The power purchase agreements include several provisions that are not included in the existing QF contracts. For example, under the power purchase agreements, the sellers must comply with North American Electric Reliability Corporation and Western Electricity Coordinating Council requirements, as well as CAISO metering and scheduled maintenance outage requirements and restrictions. PG&E is permitted to conduct annual capacity tests to ensure that the facilities can operate and provide capacity as required under the power purchase agreements. If a facility does not pass its test, its capacity and corresponding contract payments can be adjusted. The power purchase agreements also include default and termination provisions, collateral requirements, limitations on liability, insurance provisions, record and audit requirements, and dispute resolution provisions as are typical for current power purchase agreements.

The sellers guarantee a certain capacity availability for the summer months and a lower capacity availability for non-summer months. Availability is determined based on a formula in the power purchase agreements and impacts the payments received by the sellers. The sellers are paid monthly fixed payments, as well as variable energy and operations and maintenance payments when the facilities are scheduled by PG&E. The power purchase agreements also address governmental charges and GHG compliance costs.

The term of the power purchase agreements is nine years and commences after Commission approval of the power purchase agreements, Commission approval of the QF/CHP Settlement, and approval by the Federal Energy Regulatory Commission (FERC) of PG&E's, Southern California Edison Company's and San Diego Gas & Electric Company's joint application for a waiver of their obligations under the Public Utility Regulatory Policies Act of 1978, as specified in the QF/CHP Settlement. To the extent that the power purchase agreements become effective before the existing QF contracts expire, the power purchase agreements will replace the existing QF contracts.

Under the QF/CHP Settlement, existing combined heat and power (CHP) QFs with an expiring standard offer contract may convert it to a transitional, must-take, Transition Power Purchase Agreement (Transition PPA) that will expire by no later than July 1, 2015. In addition, the QF/CHP Settlement establishes MW targets that the utilities must meet through CHP resources. The QF/CHP Settlement establishes the CHP procurement processes, which include the utilities' conduct of requests for offers exclusively for CHP resources as well as the ability to enter into bilaterally negotiated power purchase agreements with CHP resources. Eligible CHP facilities include qualifying cogeneration facilities, as well as any CHP facility that meets the federal definition of a qualifying cogeneration facility under 18 Code of Federal Regulations (CFR) § 292.205 as of September 20, 2007 and converts to a "utility prescheduled facility," even if the facility no longer meets the federal definition of a qualifying cogeneration facility.2

Under the power purchase agreements proposed in this application, the sellers will convert to utility prescheduled facilities, allowing PG&E to schedule the resources only when it is economic to do so. As a result of this scheduling flexibility, the power purchase agreements will provide approximately $12 million greater market value than the contracts that the sellers could receive in the event that they obtained must-take contracts under the QF/CHP Settlement.

The power purchase agreements give PG&E the right to schedule the facilities to operate when the energy is needed and when it is economic to do so. In addition, the power purchase agreements require the sellers to notify PG&E of available capacity and changes to it, so that PG&E is able to more accurately forecast and schedule the facilities' output. The Commission noted these benefits of converting an existing QF to a utility-dispatchable facility in its recent decision approving the QF/CHP Settlement. (D.10-12-035 at 45-46.)

The power purchase agreements also require the sellers to comply with all applicable CAISO tariff requirements, including interconnection, scheduling outages, and metering, consistent with the Commission's policy to better integrate QF resources into the CAISO tariffs and deliverability standards. (See, e.g., D.07-09-040 at 210-211.)

Because the power purchase agreements give PG&E the right to schedule the facilities, PG&E can schedule the facilities only when the system heat rate is greater than the power purchase agreements' guaranteed heat rate. This will reduce both the facility GHG emissions and overall system emissions, as the replacement electricity will be less GHG-intensive. This is consistent with Commission policy encouraging the utilities to consider GHG emissions and costs when making procurement and scheduling decisions (see, e.g., D.07-12-052 at 243-245) and its recognition, in the Commission's recent decision approving the QF/CHP Settlement, of the benefits of converting an existing QF to a utility-dispatchable facility to reduce GHG emissions (D.10-12-035 at 46.)

Under the Emissions Performance Standard adopted by the Commission in D.07-01-039, long-term (five years or greater) contracts for generating facilities designed and intended to provide electricity at an annualized capacity factor of 60% must provide for a maximum carbon dioxide emissions rate of no more than 1,100 pounds per megawatt-hour. The power purchase agreements comply with this requirement because they provide that PG&E will not schedule the facilities such that the annualized capacity factor of the facilities would be equal to or greater than 60 percent.

Section 4.8.1.2 of the QF/CHP Settlement provides that new power purchase agreements with utility prescheduled facilities count toward the MW targets if the existing QF power purchase agreement expires before the end of the transition period. Section 7.3.1.3 provides that CHP conversion to a utility prescheduled facility counts as a GHG credit. As the power purchase agreements are with utility prescheduled facilities, they count toward PG&E's MW and GHG emissions reduction targets.

In D.07-12-052, as modified by D.08-09-045, the Commission indicated its policy preference for utilities to maintain their current level of QF capacity through new or renewed contracts, subject to the limitations of the Public Utilities Regulatory Policy Act of 1978 (PURPA).3 One of the expressed purposes of the QF/CHP Settlement, which D.10-12-035 affirmed as consistent with state and Commission policy and law, is to encourage the continued operation of the state's existing CHP facilities. Consistent with QF/CHP Settlement, although going forward the facilities might not operate as QFs as defined by PURPA, the power purchase agreements allow for the continued operation of three existing CHP QF facilities that have provided reliable energy and capacity to PG&E since the 1980s. This is consistent with the Commission's policy preference that the utilities maintain currently existing QF capacity in their resource mix.

2 D.10-12-035, Appendix A, Term Sheet §§ 3.1, 4.2.2, and 4.8.

3 The United States Congress passed PURPA in 1978, as codified in the United States Codes (U.S.C.) at 16 U.S.C. Section 824a-3, and 18 CFR Sections 292.301 et seq.

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