Background of the Transition Formula

D.96-12-028 described the history of the various methodologies used to establish short-run avoided costs (SRAC).

The index methodology has been used as a proxy for the gas rate [in SRAC]. In a series of decisions beginning with D.91109, issued in 1979, the Commission established a methodology for the electric utilities to follow in making the monthly posting. When the fuel on the margin was natural gas, the utility was to apply to the calculation its weighted average cost of gas (WACOG). If it included noncore gas in its UEG supplies, then the utility was to use the noncore WACOG for that portion.

In D.91-10-0239, the Commission adopted an interim methodology designed to replace the noncore WACOG. [Footnote omitted]. The noncore WACOG represented a bundled commodity and transportation price at the California border (or local distribution company city-gate) and the adopted methodology was intended to serve as a proxy for that price.

The index methodology represented a price for buying the commodity to which is added the utility's forecast cost of transportation to the California border. The index methodology prices gas purchased at a known supply basin at the weighted average cost of gas in that basin (according to indices derived from trade publications) plus the full tariffed cost of firm transportation to the California border. (D.96-12-028, mimeo., at 3-4.)

In 1996, Assembly Bill (AB) 1890 (Chapter 854, Stats. 1996) was signed into law. AB 1890 included § 390 of the Public Utilities Code, which addresses pricing for qualifying facility energy. Section 390(b) states:

Until the requirements of subdivision (c) have been satisfied, short run avoided cost energy payments paid to nonutility power generators by an electrical corporation shall be based on a formula that reflects a starting energy price, adjusted monthly to reflect changes in a starting gas index price in relation to an average of current California natural gas border price indices. The starting energy price shall be based on 12-month averages of recent, pre-January 1, 1996, short-run avoided energy prices paid by each public utility electrical corporation to nonutility power generators. The starting gas index price shall be established as an average of index gas prices for the same annual periods.

D.96-12-028 implemented § 390(b) through the adoption of a Transition Formula. The Transition Formula assumes a starting energy price for each utility, called Pbase. Pbase was calculated using 1995 values for the incremental system heat rate (the IER), average border gas prices and average interstate and intrastate gas transportation costs (collectively, the burnertip gas price), and a variable operations and maintenance ("O&M") adder. As specified in § 390(b), the Transition Formula provides for the starting energy price to be adjusted monthly to reflect changes in assumed utility fuel costs, as reflected in percentage changes to certain border gas price indices. The Commission also adopted a "factor" that, according to D.96-12-028, was "necessary to yield a fair representation of the historical values required by AB 1890." (D.96-12-028, p. 14.)