IV. Qualifying Facilities

CCC proposes that the Commission once again require utilities to make Standard Offer 1 contracts (SO1) available to QFs with a design capacity greater than 100 kilowatts (kW). CCC additionally asserts that QFs are entitled to a "right of first refusal" (ROFR) with respect to all energy and/or capacity contracts that investor-owned utilities (IOUs) might enter into with non-QF suppliers.

A. The Statutory and Regulatory Framework Governing PURPA

1. Federal Law

The Public Utility Regulatory Policy Act of 1978 (PURPA), as codified in the United States Codes (USC) at 16 U.S.C. § 824a-3, requires the Federal Energy Regulatory Commission (FERC) to prescribe and periodically revise rules that "require electric utilities to offer to . . . (2) purchase electric energy from [QFs]."²² Rates paid by utilities for purchases of electric energy may not exceed "the incremental cost to the electric utility of alternative electric energy."²³ PURPA defines incremental cost with respect to electric energy purchased from a QF as "the cost to the electric utility of the electric energy which, but for the purchases from such [QF] such utility would generate or purchase from another source."²⁴

The FERC has complied with its PURPA obligation to "prescribe rules" by promulgating in the Code of Federal Regulations (CFR) 18 CFR § 292 et seq. The rules set forth therein provide in pertinent part that: "each electric utility shall purchase, in accordance with [18 CFR] § 292.304, any energy and capacity which is made available from a [QF]. . . "²⁵ §292.304, entitled "rates for purchases," establishes a pricing regime for purchases by IOUs from QFs. Consistent with 18 U.S.C. § 824a-3, § 292.304(a)(1) requires first that "rates for purchases shall: (i) [b]e just and reasonable to the electric consumer of the electric utility and in the public interest. . ."²⁶ While rates may not exceed avoided costs,²⁷ rates will satisfy the "just and reasonable" and non-discrimination requirements of § 292.304(a) "if the rate equals the avoided costs determined after consideration of the factors set forth in paragraph (e) of this section."²⁸ Paragraph (e) provides a laundry list of factors to be taken into account in determining avoided costs, "to the extent practicable." These are elaborated upon below.

The FERC's rules require that standard rates for purchases be put into effect only "for purchases from qualifying facilities with a design capacity of 100 kilowatts or less."²⁹ Whether to implement standard rates for qualifying facilities "with a design capacity of more than 100 kilowatts" is discretionary.³⁰

Purchases from "as-available" QFs are subject to special pricing rules. QFs may provide energy as it is available, "in which case the rates for such purchases shall be based on the purchasing utility's avoided costs calculated at the time of delivery."³¹ QFs providing electric energy or capacity under a contract are to be paid either avoided costs at the time of delivery, or avoided costs calculated at the time the QF entered the contract, whichever the QF chooses at the time it enters the contract.³²

2. State Law

PURPA also imposed an obligation on this Commission. "[E]ach State regulatory authority shall . . . implement [the FERC QF rules] for each electric utility for which it has ratemaking authority."³³ It falls to this Commission to implement the pricing provisions just elaborated. This Commission has a lengthy history of setting QF prices, which we need not elaborate here. For present purposes, it is sufficient to pick up the story with the Commission's D.96-10-036, which significantly revamped our handling of QF pricing, and which is central to any analysis of CCC's proposals. We will touch on the particulars of D.96-10-036 as it applies to CCC's proposals in more detail below, but will briefly summarize the decision here. In D.96-10-036, the Commission undertook to bring its QF implementation practices into the restructured world. Of particular significance to the issues in this docket, the Commission terminated as of January 1, 1998 any requirement that utilities enter SO1 or SO3 contracts with QFs. "QFs with design capacity 100 kW or less may negotiate non-standard agreements based upon the standard rates applicable to grand fathered USO1's and tariff Rule 21."³⁴

The Commission further provided that "utilities shall not recover in rates any portion of payments to as-available QFs holding non-standard agreements entered into after December 20, 1995, that, at the time of delivery, are greater than market prices."³⁵ The Commission explicitly migrated QFs towards full and equal participation in markets alongside other sources of generation, stating:

We therefore place QFs, with two limited exceptions, on notice that they cannot rely upon obtaining regulatory must-take status if the date of formation of their agreement with PG&E, Edison, or SDG&E is after December 20, 1995. No modification of our Restructuring Decision is involved: the plain meaning of "grand fathered" is consistent with this result. New QFs will be, as soon as the restructured market begins operation, "subject to the same protocols and prices regarding transmission access and treatment of transmission congestion." They will clear the power exchange if they bid low enough relative to all other sources to clear the market.³⁶

For "grandfathered" QFs, i.e., those with contracts entered prior to December 20, 1995, pricing would continue to be based on the contract terms, which almost universally set price at "short run avoided cost." (SRAC.) With respect to SRAC, the legislature took a hand when it enacted Public Utilities Code Section 390 as part of AB 1890. Generally speaking, Public Utilities Code Section 390 sets out components (most significantly, gas costs) to use in setting SRAC, pending a shift to the use of PX prices to establish SRAC. The Commission implemented R.99-11-022 to work out the particulars of SRAC pricing under Public Utilities Code Section 390. Events overtook this rulemaking, and the demise of the PX in January 2001 ended any chance of a universal migration of QFs to PX-based SRAC pricing. At present, SRAC is set using a formula based on gas prices.³⁷ Each utility has detailed QF pricing information (current and historical) on its respective website.³⁸

B. Treatment of QFs During the Transition Procurement Period

As a general proposition, we find that QF power provides significant benefits to the state, in the form of more efficient industrial processes, as well as electric power. QFs have continued to provide power to the state during difficult circumstances during the past several years. A consequence of not making provisions for continuing QF contracts would be more QF power going off-line, creating additional net short that the utilities would need to procure during the interim period.

Although the requirements of PURPA give us considerable discretion and do not obligate us to continue SO1 contracts, we nonetheless must comply with PURPA. Until such time as the Commission addresses a more complete strategy for procuring QF power, extending SO1 contracts during the interim represents a reasonable approach.

Therefore, we make the following requirements of the IOUs to purchase QF power during the interim procurement period. For any QF meeting two conditions, the utilities are required to offer SO1 contracts. These conditions are:

· The QF must have been in operation and under contract to provide power with an IOU at any point between January 1, 1998 and the effective date of this decision

· The QF contract must be set to expire before January 1, 2004 have already expired or have already been terminated.

Provided that these conditions are met, utilities should enter into SO1 contracts with a term to extend until execution of the IOUs' long-term procurement plans or until December 31, 2003, whichever occurs first. In other words, assuming that a provision is made for QFs to compete in whatever long-term procurement framework the Commission adopts, the QFs contracts we require today would extend until announcement of the winning bids under an IOU long-term procurement plan (if the QF offers a losing bid) or until a new contract is put into place under the long-term procurement plan (if the QF offers a winning bid) or until December 31, 2003, whichever occurs first. These requirements should maintain maximum flexibility for long-term procurement while not jeopardizing existing resources in the short-term.

The pricing terms for the SO1 contracts should be consistent with existing Commission SRAC policy established in D.01-03-067, as modified by D.02-02-028.

Establishing these rules obviates the need for granting QFs a right of first refusal under the interim procurement process, since all QFs will automatically have an opportunity to participate in the interim procurement process.

We also clarify, in response to comments from a number of parties, that the QF SO1 contracts required in this section are subject to the same procedural process outlined earlier in this decision, as well as contract provisions that allow the utilities to partner with DWR during this transitional phase.