5. Analysis of Party and Staff Price Recommendations

5.1. Market Price Referent without Adders

PG&E, SDG&E, TURN, and CUE support establishing a market price using the MPR adjusted for time-of-delivery factors. This has been the § 399.20 FiT Program's pricing methodology since the program's inception in 2007. A pricing methodology based on the MPR is an established tested methodology and would be familiar to the renewable energy industry. An MPR-based methodology would offer a high degree of transparency since market participants are well acquainted with the costs embedded within the MPR, such as certain environmental costs. DRA, however, finds the MPR sets an "unrealistically low/unachievable price point" for certain technologies and will fail to support the success of the § 399.20 FiT Program.

We agree with DRA in part. The MPR price may be too high or too low for different FiT product types. We also find using the MPR to set § 399.20 FiT Program price fails to achieve our first policy guideline: to "establish a feed-in tariff price based on quantifiable utility avoided costs that will stimulate market demand." The MPR is a price based on a natural gas-fired electric plant, and not a renewable generator. Instead, it reflects the costs of a different energy market, fossil fuels. Specifically, the MPR does not reflect ongoing changes within the renewable market and, as a result, could potentially result in a price either too low or too high. In addition, the renewable market has evolved since the Commission first established the MPR in 2003 at the beginning of the RPS program. Now the renewable market is sufficiently robust to serve as the point of reference for establishing the market price for small renewable projects rather than the very different market used for the MPR, the combined-cycle natural-gas power plant.

Therefore, because the renewable market is sufficiently robust to serve as a point of reference for the market price for the § 399.20 FiT Program price, we decline to adopt a pricing proposal that relies upon the MPR.

5.2. Market Price Referent with Various Adders

As discussed above, CALSEIA, Placer County, Silverado Power, the Solar Alliance, Vote Solar Initiative, Clean Coalition, and other parties support a pricing proposal based on adjusting the MPR with some type of adder, for example, an adder based on the attributes of a specific technology type, locational conditions, or environmental societal benefits. In the above discussion, we decline to adopt a pricing proposal based on the MPR because, in short, the renewable market is sufficiently robust to more accurately reflect generation costs of the FiT Program as compared to the cost reflected in the MPR, that of a natural gas plant. For this same reason, we decline to adopt the MPR aspect of these proposals.

Regarding the adders recommended by the above parties, we decline to adopt the following adders: solar adder, small forest biomass adder, and environmental adders. We decline to adopt these adders because we do not adopt the MPR as the basis for the § 399.20 FiT Program's price and, as described in more detail at Section 6, below, the basis for the pricing adopted today is the renewable market, which already reflects a value for these adders. In addition, the methodologies for these adders were generally based on avoided societal costs, and not ratepayer or utility costs, which might be argued to be inconsistent with the federal requirement under PURPA.

In addition, these adders were proposed in order to increase the FiT price above the MPR for technologies that may need higher prices. Given the price adjustment mechanism that is adopted in this decision, adders are not necessary. The FiT price should adjust to account for the market price of various resources. If we find that the adjustment mechanism does not reflect the market, including certain market segments that have additional ratepayer value, the Commission can consider adders in the future.

Furthermore, these adders are inconsistent with three of the policy guidelines: (1) establish a feed-in tariff price based on quantifiable utility avoided costs that will stimulate market demand; (2) contain costs and ensure maximum value to the ratepayer and utility; and (3) ensure administrative ease and lower transaction costs for the buyer, seller, and regulator. As stated above, many of the proposed adders are overly broad societal costs and not costs to utilities or ratepayers. In addition, these adders could increase the contract price above the resource's actual costs and lead to overpayment. As discussed below, market-based pricing calibrates the FiT price to market prices and to market demand, which leads both to reasonable ratepayer costs and prices that can work to stimulate market demand. Last, calculating adders for each technology or specific resource attribute increases the administrative complexity for the program and increases the burden on Commission's Staff to administer the program. For these reasons and the reasons articulated above, we do not adopt the requested adders for the § 399.20 FiT Program.

5.3. Technology-Specific Pricing

The parties advocating technology-specific pricing articulate a key challenge in implementing the § 399.20 FiT Program: establishing an avoided cost pricing methodology consistent with the provisions of state law and federal law that supports specific types of renewable technologies, which provide general societal benefits that cannot easily be quantified. We seek to create a pricing policy that supports a diversity of technologies. In doing so, we must balance a number of competing interests, and find that, at this time, unique prices for separate technologies is not consistent with state law or the best interest to ratepayers.

Regarding the state law issue, the parties do not address the fact that, as written, state law does not specifically direct the Commission to account for the unique cost of each technology. The plain language of § 399.20 neither directs nor suggests that technology-specific costs be included in a FiT Program price methodology.

Parties refer to § 399.20(d)(1)⁴⁶ to support their position on consideration of technology classifications. This subsection is addressed in a separate section in this decision.

Some parties suggested that federal law supports technology-specific prices. While federal law, as discussed above, provides the Commission with the latitude to take into account the state's legislative energy procurement mandates when establishing avoided costs, the state statute, as codified in § 399.20, does not direct the Commission to consider technology-specific costs when determining the § 399.20 FiT Program price.

We also find technology-specific pricing inconsistent with three of our policy guidelines: (1) Establish a feed-in tariff price based on quantifiable utility avoided costs that will stimulate market demand; (2) Contain costs and ensure maximum value to the ratepayer and utility; and (3) Ensure administrative ease and lower transaction costs for the buyer, seller, and regulator.

Technology-specific pricing does not establish a § 399.20 FiT Program price based on the renewable market and competitive pressures but rather would use an administratively-determined calculations to establish a price based on the costs plus a fair rate of return to build and operate a specific technology. Ultimately, we find this method of calculating price will weaken the ability for competition to control contract costs.

Next, this method does not ensure the maximum value to the ratepayer and utility. For example, if different technologies within a product type have the same value to the utility but different costs, the utility is going to overpay since the more expensive technologies have the same value as lower priced technologies.

Finally, determining the costs of each renewable technology increases the administrative complexity and the transaction costs for the regulator, who is responsible for calculating each technology's cost for the § 399.20 FiT Program.

Accordingly, we do not adopt technology-specific pricing as it fails to comply with federal and state law and with our policy guidelines for implementing the § 399.20 FiT Program. We do, however, seek to encourage a diversity of technologies through our adopted pricing methodology.

5.4. Net Surplus Compensation Rate

AB 920 amended § 2827 in order to pay net-energy metered customers for their excess generation over a one-year period. D.11-06-016 found that net surplus generation by net-energy metered customers has no capacity value because an individual net-energy metered customer has no obligation to provide energy to the utility. Net surplus generation is provided without a power purchase agreement on an intermittent, unpredictable, and as-available basis over a 12-month period. In addition, the Commission found that the only generation the utility avoids when a net-energy metered customer provides surplus generation is reduced electricity procurement from the short-term wholesale market.

Since renewable generators under the § 399.20 FiT Program are required to sign long-term power purchase agreements (a minimum of 10 years per § 399.20), generators under the § 399.20 FiT Program represent a different value than the net surplus compensation from net-energy metered customers and, accordingly, should not be paid the same rate. Finally, we find that the net surplus compensation rate violates our first policy guideline, to "establish a feed-in tariff price based on quantifiable utility avoided costs that stimulate market demand," since the rate is based on the hourly day-ahead electricity market price, or DLAP price, and not the market price for renewable electricity.

Accordingly, because the market served by net-energy metered customer is different than the market served by the § 399.20 FiT Program, we do not adopt a pricing methodology based on the net-surplus compensation rate.

5.5. CAISO Gen Hub plus REC with Adjustment Mechanism

We decline to adopt SCE's proposal to use the CAISO Gen Hub plus the REC as the § 399.20 FiT Program starting price for the same reasons we do not adopt the net surplus compensation rate. We find merit, however, in SCE's recommendation to rely on the market to set a starting price for the FiT Program and agree that a price set by the market avoids the need for a time-consuming and contentious examination of costs. A market-set price permits flexibility and responds to market demand. We also find merit in SCE's recommendation to adjust the § 399.20 FiT Program starting price based on market conditions since this mechanism will allow the starting price to adjust to renewable market prices if it is initially set too high or too low. Therefore, we adopt SCE's adjustment mechanism, in part, as articulated in its August and November 2011 comments.

5.6. RAM Pricing with Locational Adder and Adjustment Mechanism

As more fully discussed in Section 6, below, we adopt the component of the proposals by IREC, Silverado Power, Vote Solar Initiative, SunEdison, and Staff that relies on RAM contracts adjusted for time-of-delivery factors to set the § 399.20 FiT Program starting price. When combined with SCE's adjustment mechanism, using RAM contracts to set the FiT Program starting price is consistent with the three policy guidelines that relate to choosing a FiT price: (1) establish a feed-in tariff price based on quantifiable utility avoided costs that stimulate market demand; (2) contain costs and ensure maximum value to the ratepayer and utility; and (3) ensure administrative ease and lower transaction costs for the buyer, seller, and regulator. Section 6, below, more fully describes the adopted market-based pricing methodology, which is referred to as the Renewable Market Adjusting Tariff (Re-MAT), and includes an analysis of the adopted market-based pricing methodology under federal and state law.

We do not adopt other components of the Renewable FiT Staff Proposal, including the location adder or a transmission adder because we find these components either inconsistent with existing law or require more development. Regarding the transmission adder, we find that the record does not support a determination that the transmission costs for particular RAM contracts constitute the avoided transmission costs for renewable FiT generators under the law. As discussed previously regarding Clean Coalition's suggested location adder, we agree with the concerns expressed by SCE and the other utilities that additional scrutiny is needed before the Commission adopts a location adder. Furthermore, the requirement that projects in the § 399.20 FiT Program be "strategically located," as discussed separately in Section 6.9, addresses the concerns that parties and Staff sought to address through a locational adder, which is to provide an incentive to generators to locate in areas with load in order to avoid upgrades to the transmission system.

⁴⁶ This statute refers to certain costs that the Commission must consider in setting a tariff price and provides, in pertinent part, as follows: "The payment...shall include all current and anticipated environmental compliance costs, including, but not limited to, mitigation of emissions of greenhouse gases and air pollution offsets associated with the operation of new generating facilities in the local air pollution control or air quality management district where the electric generation facility is located."