Discussion

The Independent System Operator (ISO) has declared emergencies this year, leading to rolling blackouts. California consumers will likely face continued curtailments and rolling blackouts during the peak summer season. California ratepayers should therefore benefit from additional generation entering the market, especially at less than market prices. Due to the current shortages of electricity in California, the unprecedented levels of generation plants which are not producing and the unreasonably high wholesale market prices caused by flawed federal pricing policies, it is necessary for the Commission to take action to ensure that QFs generate as much electricity as reasonably possible, and at reasonable prices. In this order we will address partial payment of amounts owed, notwithstanding the existence of bona fide disputes over the amounts owed, in order to improve the financial condition of QFs so that they can resume production. We will also address contract modifications to provide incentives to maximize QF production.

A. Contract Modifications

The Commission is not at this time modifying the SRAC methodology adopted in D.01-03-067. The Commission will continue to investigate reasonable changes to that methodology. However, at this time the Commission reiterates its support for the use of non-standard contract modifications that can provide benefits to both ratepayers and QFs. In addition, the Commission will give clear guidance to utilities by specifying three such potential non-standard contract modifications that the Commission would find reasonable. Any such modifications, consistent with this guidance, which are made prior to July 15, 2001 are deemed reasonable by the Commission:

The first approved modification is to replace the standard SRAC energy price terms with a fixed price for five years of 5.37 cents/kWh, as proposed in the comments of the Independent Energy Producers (IEP), dated March 23, 2001 in this proceeding. The Commission believes that this option could provide ratepayers with significant near term savings compared to current prices, as well as protecting ratepayers against price volatility for the next five years. QFs that are interested in such a non-standard pricing arrangement should be afforded the opportunity to modify their existing contracts. Contractual capacity payments will continue without modification.

The second modification that the Commission finds reasonable is allowing supplemental payments above the specified SRAC for up to one year for QFs that demonstrate to the Commission's Energy Division1 that the current SRAC is insufficient to recover the QF's actual fuel costs for producing electricity. As discussed in the report on the April 19 workshop, a number of QFs assert that the current SRAC provides insufficient reimbursement to cover all of the QF's fuel and operating costs. The contract modification approved today would ensure that for any QF so situated, sufficient compensation will be made to allow the QF to continue in operation. We invite parties to submit proposals on the criteria for demonstrating need.

Such supplemental payments should be capped so that the total energy price made to a QF does not exceed the lesser of the QF's actual fuel price or a price equal to what the SRAC would be if set using the price of gas at Topock. The workshop report indicates that a Topock-based SRAC price is the highest price indicated as being necessary to fully cover QFs' operating costs. This option will help ensure that all QFs are able to produce their full contract amount of power, which is vital to ensuring the reliability of the electric system in California during this time of shortages.

The third approved modification addresses payments for excess QF generation. As the Commission did last year in D.00-08-022, we again find reasonable a modification to the standard SRAC pricing to provide a financial incentive for QFs to increase generation above their normal operating (baseline) levels. The eligibility requirements, eligible hours, baseline calculations and payment terms approved today are the same as those adopted in D.00-08-022.

However, since the California Power Exchange (PX) no longer exists, the payment terms and eligible hour criteria approved today shall reflect 125% of an SRAC price based on the Topock gas price index, rather than 70% of the PX price as adopted in D.00-08-022 for QFs selling to SCE and SDG&E. We adopt an incentive price for QFs selling to PG&E that reflects 125% of an SRAC price based on an average of the Malin and Topock gas price indices. This approved contract amendment provides an incentive to QFs to provide as much additional generation as possible during these times of need.

B. Back Payments

Through its investigative audits in the Rate Stabilization Proceedings, Application (A.)00-11-038 et alia, the Commission is aware that utilities did not make payments to QFs for deliveries for a number of months, while accumulating cash. As addressed by the Federal Energy Regulatory Commission (FERC) in its Order dated May 16, 2001, such failures to obtain payments may result in QFs being unable to continue to provide generation to serve customers in California. (FERC Docket No. EL00-95-020) To ensure the ability of all QFs to provide needed generation this summer, the Commission will require utilities to make payments of 15% of all amounts owed upon demonstration to the Commission's Energy Division by an individual QF that such back payments are necessary for the QF to remain in operation in a safe and reliable manner due to credit, cash-flow or other financial problems.2 We invite parties to submit proposals on the criteria for demonstrating need.

In making this directive, the Commission does not purport to decide the precise amount owed by utility buyers to QF sellers. We recognize that there are disputes about the precise amounts owed and the basis for computing them. This partial payment directive is premised on the Commission's obligation to assure adequate service by the retail utility. (Public Utilities Code § 451)

C. Reporting Requirements

As with all non-standard contract provisions, QFs have the discretion to opt for such changes. The Commission encourages the utilities to act expeditiously to enact any such changes requested by QFs. By giving the utilities guidance as to the reasonable nature of the modifications specified above, we hope that the utilities will not delay in making such modifications that provide benefits to ratepayers as well as QFs. While we invite utilities to file proposed standardized contract amendments to simplify the negotiation process, we do not wish the utilities to wait until such standardized amendments are approved by the Commission before modifying contracts at the QFs' request.

To evaluate the usefulness of the guidance provided today, the Commission will require each utility to provide a report on July 31, 2001 identifying the number of QFs requests for modifications to their existing contracts, the number of contracts the utilities have agreed to modify, and the number of requests the utility has not agreed to. These reports shall also state the number of QFs seeking back payments, the number of back payments the utility has agreed to make and the number of such requests that the utility has not agreed to. To the extent that there are any such requests for back payments or contract modifications that have not been agreed to by the utility, the utility should also state the reasons why the utility has not agreed to the QF's request.

D. Need for Expedited Consideration

Rule 77.7(f)(9) of the Commission's Rules of Practice and Procedure provides in relevant part that:


"...the Commission may reduce or waive the period for public comment under this rule...for a decision where the Commission determines, on the motion of the party or on its own motion, that public necessity requires reduction or waiver of the 30-day period for public review and comment. For purposes of this subsection, "public necessity" refers to circumstances in which the public interest in the Commission adopting a decision before expiration of the 30-day review and comment period clearly outweighs the public interest in having the full 30-day period for review and comment. "Public necessity" includes, without limitation, circumstances where failure to adopt a decision before expiration of the 30-day review and comment period...would cause significant harm to public health or welfare. When acting pursuant to this subsection, the Commission will provide such reduced period for public review and comment as is consistent with the public necessity requiring reduction or waiver."

We balance the public interest in quickly resolving QF pricing and payment issues against the public interest in having a full 30-day comment cycle on the proposed amendment. We conclude that the former outweighs the latter. We must respond quickly to provide additional assurance that as much QF generation is available as possible this summer.

Findings of Fact

1. California consumers will likely face continued curtailments and rolling blackouts during the peak summer season.

2. California consumers should benefit from additional generation, especially at less than market prices.

3. The Commission has a long-standing policy of supporting beneficial non-standard contract provisions.

4. Non-standard energy price terms of 5.37 cents/kWh fixed for five years are less variable than SRAC prices and will provide QFs with greater predictability of revenues.

5. An energy price based on the Topock price index is the highest price necessary to ensure that QFs recover their fuel costs.

6. Some QFs may not be able to continue in operation due to financial problems resulting from the lack of payment by utilities for prior months.

Conclusions of Law

1. California ratepayers should benefit from additional generation entering the market, especially at less than market prices.

2. Non-standard energy price terms of 5.37 cents/kWh fixed for five years should allow for greater price certainty and less volatility for ratepayers.

3. Non-standard supplemental payments for QFs which are unable to recoup all of their fuel costs from SRAC prices should allow for greater amounts of generation to be provided by QFs.

4. Non-standard incentive payments for excess generation should allow for greater amounts of generation to be provided by QFs.

5. Partial payments of money owed to QFs should allow for QFs with financial problems to continue in operation, allowing for greater amounts of generation to be provided this summer.

6. Payment for excess generation at 125% of a Topock-based SRAC price for SCE and SDG&E, and 125% of an SRAC price based on the average of Malin and Topock prices for PG&E, should provide a strong incentive for QFs to produce compared to posted QF prices.

7. SCE, PG&E, and SDG&E should file reports on the contract amendments made and rejected subsequent to this decision by July 31, 2001.

8. SCE, PG&E, and SDG&E should be authorized to recover all costs associated with payments made under the approved contract amendments subject to their prudent administration of the amendments.

ORDER

Therefore, IT IS ORDERED that:

1. The non-standard contract amendments specified herein are approved as reasonable.

2. Southern California Edison Company (SCE), San Diego Gas and Electric Company (SDG&E), and Pacific Gas and Electric Company (PG&E) are authorized to enter into such amendments with eligible Qualifying Facilities (QFs), including affiliated QFs, without further Commission concurrence.

3. SCE, SDG&E, and PG&E shall be authorized to recover all payments made under the amendments subject to their prudent administration of the amendments.

4. Payment of a portion of money owed to QFs as specified herein is approved as reasonable.

5. SCE, SDG&E, and PG&E shall report on the status of all such amendments no later than July 31, 2001.

This order is effective today.

Dated ___________________ at San Francisco, California.

1 Such demonstrations may be kept confidential under the Commission's Rule 583. 2 Such demonstrations may be kept confidential under the Commission's Rule 583.

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