Consumer Transition Price

We must also harmonize our state statute with PURPA's requirements that rates for QF purchases "Be just and reasonable to the electric consumer of the electric utility and in the public interest". (18 CFR §292.304(a)(i).) We take official notice of FERC's December 15, 2000 order (93 FERC ¶ 61,294) where FERC found that California's market was yielding unjust and unreasonable rates. (93 FERC ¶ 61,294 at 7-8.) QF contracts represent long-term purchase commitments by utilities, on which sellers have been able to rely. These are precisely the type of commitments that FERC has recommended as a shelter from the pricing volatility and unreasonableness of short term wholesale markets, characterizing them as an element of the "fundamental remedy." Ibid. 24-25. In that order, FERC also found that an average of historical utility embedded cost of generation would represent an appropriate benchmark for determining the prudency of forward contracts. (93 FERC ¶ 61,294 at 27.) FERC goes on to state that negotiated prices below this historic level are just and reasonable.¹³

Reliance solely on §390(b) to calculate QF prices has recently yielded prices far in excess of this reasonableness benchmark. FERC has found that prices for short-term wholesale energy are unjust and unreasonable. PURPA requires that rates paid to QFs be just and reasonable. Therefore, although we conclude that, over time, setting avoided cost consistent with § 390(b) may have met the requirements of PURPA, at specific points in time, the § 390(b) Transition Formula may yield prices that exceed FERC's reasonableness benchmark. This constitutes another reason to address sec. 390. We will rely on the Transition Formula as a permissible QF pricing methodology but will establish a Consumer Transition Price (CTP) ceiling for prices posted under this methodology utilizing a reasonableness benchmark based on the CDWR portfolio to fulfill our obligations under PURPA that payments to QFs be just and reasonable for electric consumers.¹⁴

All commenters representing QFs oppose adoption of a price ceiling. They argue that the draft decision misinterprets and misapplies the FERC Order. QF commenters argue that adoption of a cap is inconsistent with PURPA and Section 390. We disagree. By setting a benchmark for reasonableness, FERC has identified a price level that it believes utilities should be achieving through their purchases. In this market, utilities own limited amounts of generation themselves and hence reliance on a statutory avoided cost payment structure based on mimicking utility gas purchases makes limited sense. It is logical to look to how the utility would meet its resource needs and what those resources would cost in order to establish the utility avoided cost. It would be entirely consistent, in attempting to reconcile PURPA and Section 390, to look to FERC's guidance about a reasonable price for purchases in establishing a cap on QF payments. The CDWR portfolio, on which we will rely, represents a current survey of the market for long-term supply comparable to that which is offered by QFs.

Some QFs argue that because the SRAC price offered may not allow them to cover their operating costs, adoption of a cap represents an unconstitutional taking. QFs have never been absolutely entitled to a payment to cover their operating costs under any and all circumstances, only to a payment consistent with the utility's avoided cost. As we have seen recently in both the gas and electricity markets, over-reliance on spot market purchases can lead to significant volatility in prices. The Commission has never directed QFs to enter into gas purchase arrangements based on California border indices; this decision is left to QFs. The fact that a QF may not have protected itself from pricing volatility is not a reason not to establish a cap on QF payments at utility avoided cost.

CCC/CAC argue in comments on the draft decision that adoption of a cap would violate the PURPA requirement that QF payments be nondiscriminatory because other sellers in the market might receive higher prices than the cap. QFs operate under long-term contracts for the entire output of the facility. To evaluate the discrimination argument, we must resort to contracts with similar duration and purchase commitments. The California Department of Water Resources has recently entered into a portfolio of long-term contracts, with terms and conditions in the aggregate much like the ensemble of QF arrangements which the commission deals with on an aggregate basis. The average portfolio price is $69 a megawatt hour for a fully articulated portfolio of resources over a ten year period, $79 over a five year period. The average portfolio price for the following five years is $61 per megawatt hour. The commission will establish the CTP at those levels during the period that the portfolio is in existence.