6. Firm Capacity Pricing

In this rulemaking, CAC/EPUC, CCC, and IEP each respectively submitted long-run avoided cost (LRAC) contract and pricing proposals. The respective proposals are described in Party Positions, Section 7.2 of this decision. Although the QF parties proposed long-term contracting options, none of the QF parties proposed additional performance requirements beyond that in the existing standard offer contracts. For example, CCC recommends that "QFs should have the option to elect to extend their original firm capacity contracts on the same operating terms and conditions as specified therein, but subject to the contract lengths and LRAC contract prices that are approved for the new contract" (Testimony, 8/31/2005, p. 72). In contrast, the firm power contact option adopted in this decision establishes a higher level of performance by imposing penalties to the capacity payment for failure to deliver 95% of the contract power during on-peak months and 90% of the contract power during off-peak months (not counting scheduled outages).

Notwithstanding the fact that the QF parties have not proposed an increase in contract performance requirements, the LRAC contract pricing information, including capacity prices, proposed by CAC/EPUC, CCC, and IEP is shown in Table 8 below, along with the adopted firm capacity price and MIF heat rate figure issued today (CCC, p. 5), (CAC/EPUC, p. v), and (IEP, p. 85) (Testimony, August 31, 2005). Although the capacity prices and heat rates vary, the all-in power prices under the CAC/EPUC and IEP proposals are essentially the same as the adopted value.

With regard to the capacity price calculation, the CAC/EPUC and IEP base their respective price proposals on the cost of a CCGT, whereas CCC bases its capacity cost proposal on the cost of a CT. IEP states that it used "used the model adopted by the Commission to determine the MPR" to calculate its capacity price (Testimony, p. 85). CAC/EPUC briefly describe their use of a CCGT proxy plant calculation to arrive at a capacity price (Testimony, p. 5). The CCC capacity value based on a CT is significantly above our as-available capacity price of $65.78/kW-year, due in part to the fact that it is in levelized nominal dollars (see SCE Figure 5-1 above).

We agree with IEP that the MPR model adopted by this Commission should serve as the basis for calculating firm capacity. On December 14, 2006, we approved Resolution E-4049, which adopted 2006 MPR values for use in the 2006 Renewable Portfolio Standard (RPS) solicitations. Based on the MPR model in Resolution E-4049 and using a 10-year contract term, the capacity price would be $156.97/kW-year.¹⁰⁰ SCE recommends two adjustments to the all-in capacity price, (1) use of a 30-year assumed economic/operating life, consistent with a CCGT, and (2) reduction to reflect an economic value $55/kW-year. Reflecting a 30-year economic life for a CCGT reduces the price by $10/kW-year. Although the 2006 MPR is based on a 20-year economic life, we adopt SCE's recommendation because the MPR looks at future construction of CCGTs, while QFs are primarily existing stock. We also deduct from this value the savings gained from running in the energy market (inframarginal rents).

In its comments on this Decision, TURN pointed out that the $21 kW-year originally proposed in the draft decision for the economic value is the estimated value for a CT, not a CCGT. Based on the CAISO's 2004 Annual Report On Market Issues and Peformance, SCE proposes that these savings are $55.00/kW-year for a CCGT. We find this to be a reasonable estimate, and thus will deduct this amount from the MPR capacity payment as well, resulting in a capacity value of $91.97/kW-year ($156.97/kW-year - $10/kW-year - $55.00/kW-year).

Table 7 below compares the all-power price outcomes of the proposed and adopted firm capacity values and heat rates:. In addition, the pricing provisions for the PG&E/IEP Settlement are also shown for comparative purposes.¹⁰¹

Table 7 QF LRAC Pricing Proposals And All-In Payments
Pricing Provisions	CAC/EPUC	CCC	IEP	PG&E/IEP Settlement	Adopted
Capacity Price $/kW-year	$142	$110	$129	$50	$92
Based On	CCGT	CT	CCGT	CCGT	CCGT
Heat Rate (Btu/kWh)	7,500	8,895	7,400	8,700	8,887*
VOM ($/MWh)	$2.00	$2.70	$2.50	$2.00	$2.65
Illustrative Gas Price ($/MMBtu)	$7.50	$7.50	$7.50	$7.50	$7.50
All-In Power Price (cents/kWh)	7.4	8.2	7.3	7.3	8.0**

* This heat rate is illustrative for SCE only; the heat rate for PG&E and SDG&E will depend on the relevant administratively determined heat rate pursuant to D.96-12-028 and the market derived heat rate using NP15 prices for PG&E and SP15 prices for SDG&E.

** Because the adopted heat rate shown here applies to SCE only, the all-in power price shown in Table 7 will also apply only to SCE. The result for PG&E and SDG&E will depend on each utility's applicable heat rate.

The resulting all-in price is consistent with the 2006 MPR of 8.01 cents/kWh and the August 23, 2007 draft Resolution E-4118 proposing a 2007 MPR of 8.92 cents/kWh. It is also consistent with state and federal law on QFs, satisfied the direction given to this Commission by the court in Southern California Edison v. CPUC, and our own policies on co-generation.

¹⁰⁰ We rely on Resolution E-4049 as a useful starting point, but we do not intend to update that starting point in conjunction with future annual calculations of the SRAC. In addition, we adjust the 2006 MPR in this Decision as explained above; however, nothing in this Decision shall be interpreted to change the MPR methodology or future MPR calculations for the purposes of the RPS Rulemaking.

¹⁰¹ Note that CCC based its capacity price on a combustion turbine (CT), whereas CAC/EPUC and IEP each based their proposed pricing on combined-cycle gas turbines.