2. Background

After the passage of the Public Utilities Regulatory Policy Act of 1978 (PURPA), California integrated a large fleet of non-utility owned generators into its portfolio. Facilities that qualified under this program, known as Qualifying Facilities (QFs) typically fell into two types of resources: 1) cogeneration/Combined Heat and Power (CHP) and 2) small renewable facilities. In fact, much of the state's initial renewable procurement occurred through the QF program. QFs are paid short run avoided cost (SRAC), which is determined by this Commission. By statute, SRAC is tied to the price of natural gas; while this can be an appropriate pricing mechanism for natural gas fired QFs, it is not always the best pricing mechanism for non-natural gas based projects. Existing renewable QFs delivering under the terms of a standard offer power purchase agreement (PPA) from the 1980's are sometimes referred to as "Legacy QFs." Many of Pacific Gas and Electric Company's (PG&E's) Legacy QFs are paid a fixed energy price under the terms of a settlement between PG&E and the Independent Energy Producers (IEP) that was approved in Decision (D.) 06-07-032, which approved 121 identical contract amendments. With one exception, those amendments expired in August of 2011, whereupon, under the terms of the settlement, the Legacy QFs energy price reverted to variable short run avoided cost (variable SRAC).

Variable SRAC is the product of a heat rate multiplied by the price of natural gas and also includes variable operation and maintenance costs. Variable SRAC is tied to multiple publicly available indexes, and thus the price itself is updated monthly. PG&E contends that while this pricing strategy makes sense for facilities that have variable inputs, some renewable QFs have at various times desired to avoid the price fluctuations inherent in the fossil-fuel based variable SRAC. The Commission has agreed with this sentiment on multiple occasions, including the approval of D.06-07-032.

The current variable SRAC methodology was approved in December 2010. D.10-12-035 approved the Qualifying Facility and Combined Heat and Power Program Settlement (QF/CHP Settlement) which provided, among other things, (in Section 11.1) that QFs with existing standard offers or other PPAs at the time of the effective date of the QF/CHP Settlement will be paid for energy based on the updated SRAC formula (unless the QF PPA specifies a different price). Section 11.3 provides that the Seller under an existing QF PPA shall make a good faith effort to provide forecasting information to the investor-owned utility (IOU) so that the IOU can more accurately schedule QF generation in the California Independent System Operator (CAISO) markets.

PG&E filed the Application on August 3, 2011. There were no protests or responses.