3. PURPA and Other Legal Requirements

3.1. Federal Law

Sections 201 and 210 of PURPA encourage resource competition and the development of cogeneration and renewable energy technologies by non-utility power producers called qualifying facilities, or QFs. PURPA requires the Federal Energy Regulatory Commission (FERC) to prescribe and periodically revise rules that "require electric utilities to offer to . . . purchase electric power¹³ from [QFs]."¹⁴ "PURPA does not permit either FERC, or the States in their implementation of PURPA, to require a purchase rate that exceeds avoided cost."¹⁵ Rates paid by utilities for purchases of electric energy may not exceed "the incremental cost to the electric utility of alternative electric energy."¹⁶ PURPA defines avoided 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."¹⁷

The FERC CFR regulations implementing PURPA 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]. . . "¹⁸ Section 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. . ."¹⁹ While rates may not exceed avoided costs,²⁰ 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."²¹ Paragraph (e) provides a list of factors to be taken into account in determining avoided costs, "to the extent practicable."

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."²² Whether to implement standard rates for qualifying facilities "with a design capacity of more than 100 kilowatts" is discretionary.²³

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."²⁴ 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.²⁵

3.2. State Law and the Commission's
Implementation of PURPA

PURPA, and related FERC regulations, delegate the implementation of the pricing provisions to the states.²⁶

In the early 1980's, this Commission developed a series of standard offers²⁷ which required the IOUs to purchase alternative sources of power from QFs by entering into contracts with QFs pursuant to the terms and conditions contained in the standard offers.²⁸ The standard offers were extremely successful in terms of the amount of QF capacity developed in California, but were much less successful in accurately reflecting the IOUs avoided cost as the electricity market evolved and large numbers of QFs came on line. As a result, in the mid-1980s, the Commission was forced to suspend all of its fixed forecast standard offers due to oversubscription .²⁹

In D.95-12-063, as modified by D.96-01-069, the Commission envisioned a major shift in the Commission's mechanisms used to price and acquire QF power. In particular, the restructuring decision directed that short-run QF prices would be based on the market clearing prices developed through the Power Exchange, or PX.

Consistent with this new direction, D.96-10-036 terminated as of January 1, 1998 any requirement that utilities enter into the remaining standard offers. For "grandfathered" QFs, i.e., those with contracts entered into prior to December 20, 1995, pricing would continue to be based on the contract terms, which almost universally set price at SRAC for energy. The bulk of the remaining SO contracts are due to expire over the next decade. Attachment A to this decision summarizes the various standard offer types.

In September 1996, as part of the legislation for restructuring California's electric industry, the Legislature enacted Pub. Util. Code § 390. Pub. Util. Code § 390 sets forth certain elements to be included in setting SRAC, pending a shift to the use of California Power Exchange (PX) prices to establish SRAC. Section 390(b) requires the Commission to calculate SRAC energy prices using a formula that links SRAC energy prices to California border natural gas prices. Pursuant to the requirements of § 390(b), the Commission issued D.96-12-028, which adopted a "Transition Formula" for each utility to calculate SRAC energy payments to QFs. In response to the energy crisis of 2000 and 2001 and the associated rise in natural gas prices, on March 27, 2001, the Commission adopted D.01-03-067, which, among other things, revised SCE's Transition Formula by replacing the fixed factor with a dynamic factor. D.01-03-067 also replaced the Topock³⁰ gas index used in the SRAC Transition Formula of all three utilities with a gas index based on Malin,³¹ plus intrastate gas transportation. No changes were adopted for the factors used to calculate SRAC for PG&E or SDG&E. SCE's revised Transition Formula is more commonly known as the Modified Formula.³²

In addition, on June 13, 2001, the Commission adopted D.01-06-015, which pre-approved three voluntary QF contract amendments, including the 5.37 cents per kilowatt (kW) five-year, fixed energy price amendment. Subsequently, numerous contract amendments were approved by the Commission between IOUs and QFs, primarily adopting the fixed energy price amendment, and in some instances, different values for the IER and O&M adder.³³

Beginning in 2002, the Commission issued a series of decisions directing the IOUs to resume responsibility for procuring energy resources. An interim procurement policy for expiring QF contracts was part of that effort, as adopted in D.02-08-071³⁴ and D.03-12-062 and modified and extended in D.04-01-050, and D.05-12-009. During interim procurement, D.02-08-071 and D.03-12-062 required utilities to enter into SO1 contracts of one year in length. Pricing for these contracts would be at posted SRAC, pursuant to the Modified Formula in D.01-03-067.

Under the revised interim policy adopted in D.04-01-050, the IOUs were required to offer five-year contract extensions to QFs that wished to provide power at posted SRAC prices as an incentive to encourage existing QFs to continue providing power and to make efficiency upgrades. D.04-01-050 also put parties on notice that certain renewed contracts would be subject to subsequent changes in pricing methodologies that may result from this rulemaking.

Effective January 1, 2006, D.05-12-009, continued the interim relief provided in D.04-01-050 for QFs with expired or expiring contracts until the Commission issues a final decision in the combined dockets, R.04-04-003 and R.04-04-025. We issue that final decision today. In part because the development of our prospective QF Program has taken longer than we anticipated, we opt to make it available to QFs that are, or were, on contract extensions approved in D.02-08-071, D.03-12-062, D.04-01-050, and D.05-12-009.

3.3. Energy Policy Act of 2005

On August 5, 2005, Congress enacted the Energy Policy Act of 2005 (EPAct 2005). Section 1253 of EPAct 2005 added Section 210(m) to PURPA. Under Section 210(m)(1), FERC will exempt a utility from entering into new QF contracts or obligations if it finds that QFs have non-discriminatory access to one of three market conditions. (16 U.S.C. §824a-3, subd. (m)(1).)

On January 19, 2006, FERC issued a Notice of Proposed Rulemaking (NOPR)³⁵ regarding PURPA Section 210(m) which "provides for termination of an electric utility's obligation to purchase energy and capacity from qualifying cogeneration facilities and qualifying small power production facilities (QFs), if FERC finds that certain market conditions are met."³⁶ This rulemaking, also referred to as the Obligation NOPR, proposed a framework for FERC's determination of whether electric utilities will be exempt from the PURPA mandatory purchase obligation as otherwise provided in PURPA Section 210.³⁷

In response to the Obligation NOPR, the IOUs argued that the potential end of the PURPA mandatory purchase obligation under EPAct 2005 should cause the Commission to be very cautious and limit any new contracts to very short duration (e.g., one year). In contrast, the QF parties suggest that the Commission should do the opposite, noting that the only jurisdiction that the Commission has to set wholesale power prices is the jurisdiction that the Commission derives from PURPA. As such, the CCC argues that the Commission should view the continuing purchase obligation as a "window of opportunity" within which to secure the benefits of cogeneration by making long-term contracts with avoided cost pricing available to cogenerators whose contracts expire and to new cogenerators.

On October 20, 2006, FERC issued New PURPA Section 210(m) Regulations Applicable to Small Power Production and Cogeneration Facilities (Order 688)³⁸ to amend its regulations governing small power production and cogeneration in response to Section 1253 of EPAct 2005 and Section 210(m). In Order 688, FERC provided for, among other things, the termination of the requirement that an electric utility enter into a new contract or obligation to purchase electric energy from QFs if the FERC finds that the QF has nondiscriminatory access to:

(1)(i) Independently administered, auction-based day ahead and real time wholesale markets for the sale of electric energy; and

(ii) Wholesale markets for long-term sales of capacity and electric energy; or

(2)(i) Transmission and interconnection services that are provided by a Commission-approved regional transmission entity and administered pursuant to an open access transmission tariff that affords nondiscriminatory treatment to all customers; and

(ii) Competitive wholesale markets that provide a meaningful opportunity to sell capacity, including long-term and short-term sales, and electric energy, including long-term, short-term and real-time sales, to buyers other than the utility to which the qualifying facility is interconnected. In determining whether a meaningful opportunity to sell exists, the Commission shall consider, among other factors, evidence of transactions within the relevant market; or

(3) Wholesale markets for the sale of capacity and electric energy that are, at a minimum, of comparable competitive quality as markets described in paragraphs (a)(1) and (a)(2) of this section.³⁹

With respect to the California market, FERC determined that it would be premature to find that the CAISO had met the criteria of Section 210(m)(1)(A)⁴⁰ once its ongoing market redesign becomes effective.⁴¹ Further, while FERC determined that CASIO was a "regional transmission entity" and thus, met the requirements of Section 210(m)(1)(B)(i), it did not make any determinations with regard to Section 210(m)(1)(B)(ii).⁴² Thus, FERC determined that:

electric utilities that are members of the CAISO seeking relief from the mandatory purchase requirement will need to file an application pursuant to section 210(m)(3) and § 292.310 of the Commission's regulations with the Commission and make the showings required by section 210(m)(1)(B)(ii) in order to be relieved of the PURPA purchase obligation.⁴³

Order 688 further establishes a "rebuttable presumption that the requirement that an electric utility enter into new contracts or obligations to purchase from a QF remains in effect, in all markets, for QFs sized 20 MW net capacity or smaller."⁴⁴ This presumption, however, could be rebutted upon demonstration by the electric utility "with regard to each small QF that it, in fact, has nondiscriminatory access to the market."⁴⁵

Today's decision addresses the QF Program as it exists today, in accordance with the modified mandatory purchase obligation. Therefore, our policy determinations must ensure that QFs continue to have opportunities to provide power to the utilities under terms and conditions that offer mutual benefit to utilities, consumers and QFs consistent with our long standing policies to encourage co-generation projects.⁴⁶ While these determinations must take into consideration the changes that have occurred in the PURPA program and California's ongoing market redesign, we cannot ignore the fact that the California IOUs have not yet been relieved of their mandatory purchase obligation. Consequently, the prospective QF Program balances the need to ensure that existing obligations under PURPA are met with the anticipated changes that will occur upon a determination by the FERC that QFs have nondiscriminatory access to wholesale energy markets.

In comments, several parties have recommended that the Commission either delay adopting a new QF program until after MRTU is implemented or limit the applicability of various portions of the program to a set period of time in anticipation of the IOUs being relieved of their mandatory purchase obligation. These recommendations essentially recommend that the Commission maintain the status quo. We decline to do so, as such an action would only perpetuate uncertainty with respect to our policy and intent concerning QFs. Further, even after the IOUs are relieved of their mandatory purchase obligation, we will still retain jurisdiction over small QFs. Therefore, it is imperative that not delay adoption of this decision, or limit implementation of the program in any manner.

¹³ The term electric power, as used in this decision refers to electric energy, electric capacity, or both.

¹⁴ 16 U.S.C. § 824a-3(a).

¹⁵ Southern California Edison v. Pub. Util. Comm'n, 101 Cal. App. 4th 982, 998 (2002); reh'g denied, 2002 Cal. App. LEXIS 4728 (2002), review denied, 2002 Cal. LEXIS 8129 (2002). (Edison II.)

¹⁶ 16 U.S.C. § 824a-3(b).

¹⁷ 16 U.S.C. § 824a-3(d). PURPA also requires that the cost to the utility be "just and reasonable" to electric consumers while not discriminating against QFs. (16 U.S.C. § 824a-3(b)(1) and (2).)

¹⁸ 18 CFR § 292.303(a).

¹⁹ 18 CFR § 292.304(a)(1).

²⁰ 18 CFR § 392.304(a)(2).

²¹ 18 CFR § 392.304(b)(2).

²² 18 CFR § 392.304(c).

²³ 18 CFR § 392.304(c)(2).

²⁴ 18 CFR § 392.304(d)(1).

²⁵ 18 CFR § 392.304(d)(2).

²⁶ 16 U.S.C. § 824a-3(f)(1).

²⁷ The Commission approved four standard offers. SO1 and SO3 are "as-available" contracts in which QFs are paid SRAC energy and capacity in the time periods they deliver energy. SO3 is only applicable to QFs less than 100 kW. SO1 and SO3 provide for termination upon notification by the QF only. SO2 and ISO4 are "fixed" price contracts. SO2 offered a fixed capacity price and SRAC energy prices and was available for a term of up to 30 years. ISO4 QFs could select several payment options, including fixed capacity prices, and a period of fixed energy prices. ISO4 contracts were also available for a term of up to 30 years.

²⁸ D.91109, 3 CPUC2d 1.

²⁹ See, D.85-07-021, 18 CPUC2d 315, and D.86-05-024, 21 CPUC2d 124.

³⁰ Topock is located at the California/Arizona border and is an entry point for gas into Southern California Gas Company's system.

³¹ Malin is located at the California/Oregon border and is an entry point for gas into PG&E's gas system.

³² See D.02-02-028.

³³ See for example, D.01-07-031 in R.99-11-022 and D.03-04-001 in A.02-01-035.

³⁴ See D.02-08-071, mimeo., p. 32.

³⁵ FERC Notice of Proposed Rulemaking, New PURPA Section 210(m) Regulations Applicable to Small Power Production and Cogeneration Facilities Docket No. RM06-10-000. (71 Fed. Reg. 4532 (January 27, 2006).)

³⁶ 71 Fed. Reg. 4532.

³⁷ The Obligation NOPR is procedurally separate from the NOPR concerning Revised Regulations Governing Small Power Production and Cogeneration Facilities, RM05-36-000 (Criteria NOPR). (70 Fed. Reg. 60456 (October 18, 2005).) The Criteria NOPR concerns new Section 210(n) and addresses the requirement that no new qualifying cogeneration facility can enter into a contract with an electric utility unless the cogeneration facility satisfies criteria for new qualifying cogeneration facilities.

³⁸ 18 C.F.R § 292, 71 Fed. Reg. 64342 (December 1, 2006).

³⁹ 18 CFR § 292.309, subd. (a) (emphasis added).

⁴⁰ This requirement is adopted as 18 CFR § 292.309(a)(1).

⁴¹ Order 688, 71 Fed. Reg. 64363.

⁴² This requirement is adopted as 18 CFR § 292.309(a)(2).

⁴³ Order 688, 71 Fed. Reg. 64363.

⁴⁴ Order 688, 71 Fed. Reg. 64352 (emphasis in original; footnotes omitted).

⁴⁵ Order 688, 71 Fed. Reg. 64352.

⁴⁶ These policies pre-date the EPAct of 2005, as evidenced by our Energy Action Plan I.