4. History of Qualifying Facility Contracts

The Public Utility Regulatory Policies Act of 1978 (PURPA) obligates utilities to purchase QF power:

"The purpose of PURPA was and remains, among other things, to reduce dependence on foreign energy supplies, to decrease reliance on fossil fuels, to foster the development of renewable technologies, and to encourage reliance on a more diverse mix of resources. To accomplish these goals, PURPA includes mandatory purchase and interconnection provisions governing power purchases by the utilities from QFs." (EWC, Opening Brief, p. 3.)

Under PURPA, the Commission establishes the avoided cost prices that utilities pay to QFs in California. The federal statute requires the Commission to balance the interests of utility ratepayers and QFs in setting avoided cost prices. As expressed in the Federal Energy Regulatory Commission (FERC) implementing rules: "Rates for purchases shall:

(i) Be just and reasonable to the electric consumer of the electric utility and in the public interest; and

(ii) Not discriminate against qualifying cogeneration and small power production facilities." (18 CFR 292.304.)

QF pricing must comply with both the requirements of PURPA, as implemented by FERC, and with the Public Utilities Code.

FERC's regulations under PURPA require that payments made to QFs reflect the full avoided costs of the utility purchasing the QF power. "Avoided costs" are defined by FERC as "the incremental costs to an electric utility of electric energy or capacity or both which, but for the purchase from the qualifying facility or qualifying facilities, such utility would generate itself or purchase from another source." (18 CFR 292.101.)

CAC/EPUC provide a good summary of the types of QF contracts.

"In addition to non-standard (negotiated) power purchase agreements, there are four categories of standard power purchase agreements between QFs and the three utilities, Pacific Gas & Electric Company (`PG&E'), San Diego Gas & Electric (`SDG&E'), and SCE. Standard Offer No. 1 (`SO1') contracts require the utility to purchase energy and capacity from QFs on an as-available basis. QFs with SO1 contracts receive an energy payment based on the adopted SRAC method for energy and an administratively determined as-available capacity payment. Under Standard Offer No. 2 (`SO2') contracts, the QF receives an energy payment based on the adopted SRAC method for energy and a separately determined firm capacity payment. These firm capacity payments were determined prior to contract execution based on forecasted avoided generation capacity cost. Standard Offer No. 3 is similar to SO1, but available only to QF projects of 100 kW or less. Standard Offer No. 4 (`SO4') contracts provide for the purchase of long-term firm capacity and energy. The capacity payments under these contracts are based upon an established fixed price. The energy payments are ultimately based upon the Commission determined SRAC of energy. Non-standard, negotiated power purchase contracts contain negotiated prices for energy and capacity which may be indexed to payments made under standard offer contracts." (CAC/EPUC Amended Opening Brief, June 9, 2000, p. 5.)

Historically, administratively determined SRAC energy payments were contentious. With the adoption of Section 390, the Legislature signaled its intent to move QF payments to market based pricing. At the same time, Section 390 states its intent to eliminate the possibility of double payment for capacity for those QFs with contracts that make firm, forecast as-available, or forecast as-delivered capacity payments.²