6. Short Run Avoided Cost of Energy

Our first task is to develop a PX-based short run avoided energy cost. Five proposals were advanced in this proceeding.

6.1 Options

6.1.1 QFs-In/QFs-Out

CAC and IEP³ propose to establish SRAC energy payments by adjusting the day-ahead PX clearing price to reflect what the price would have been after removing a specified group of QFs from the resource mix. The CAC and IEP proposals reflect the costs utilities would incur "but for" the presence of QFs in the resource mix, drawing on the Commission's historical "QFs-In/QFs-Out" method of determining avoided cost. Under a historical comparison, the CAC and IEP methodologies would result in payments to QFs that exceed the PX day-ahead clearing price. (CAC, Ex. 15; IEP, Ex. 18.)

6.1.2 New Entrant

SCE and ORA both propose to base SRAC energy payments upon the energy-related costs of a hypothetical new market entrant. "The new market entrant is the generator employing the most efficient available technology that can recover its capital and operating costs under current market conditions." (SCE, Ex. 50, 44:9-11.) SCE and ORA would look to the siting cases pending before the California Energy Commission to determine the operating characteristics of the new market. Using historical data, the new entrant proposals of SCE and ORA, would result in QF payments below the PX day-ahead clearing price for the zone in which the QF is located. (SCE, Ex. 67; ORA, Ex. 103.)

6.1.3 Heat Rate Cap/Collar

ORA offers a secondary proposal to determine SRAC energy payments using the PX price capped by the heat rate of the least efficient unit in the market being applied to the Section 390(b) transition energy price. ORA states that implementation of this approach relies on administrative determination of certain elements. (See ORA, Ex. 100, 43:13-15.) In hours when the PX price is below the cap, QFs would receive the PX price, the cap would set the upper bound for the energy price. Drawing on ORA's "heat rate cap" proposal, on brief, SCE proposes an alternate methodology that would establish a heat rate "collar" to derive an "energy only" value with a cap and a floor price.

6.1.4 PX Day-Ahead Price

A fourth SRAC energy pricing proposal was advanced by CCC, SDG&E, and PG&E and joined by IEP on brief. These parties propose to set SRAC energy payments equal to the PX day-ahead clearing price for the zone in which the QFs are located. Possible adjustments for the value of capacity are discussed in Section 7. Adoption of the PX day-ahead price, assuming zero capacity value, would have historically reduced QF payments for SCE and SDG&E and increased them for PG&E compared to the Section 390(b) formula.⁴

6.1.5 Intermittent Resources

FPL argues for a different SRAC energy payment for intermittent resources because of their special operational characteristics. "Intermittent QFs as used in this case refers to wind and run-of-river hydro resources--i.e., those QF resources that cannot control the timing of their output." (FPL Opening Brief, p. 1.) FPL argues that as renewable resources, wind and run-of-river hydro generators are environmentally preferable to most other types of generation, because neither produces carbon dioxide, NOx, SOx, or particulates, major contributors to various pollution problems. (See FPL Opening Brief, p. 7.)

According to FPL, "(i)f the Commission were to adopt an hourly pricing mechanism . . . for intermittent resources, these resources would be at a significant disadvantage to other generators. Other generators can, to at least some extent, manage the timing of when they supply electricity to the grid . . . . Those generators can maximize production during high-price periods and ramp down during low-price periods, whereas intermittent resources are at the mercy of the wind and the water." (FPL Opening Brief, p. 4.)

FPL proposes that the Commission retain the current SRAC methodology for intermittent resources. In the event the Commission moves to a PX-based price, FPL recommends use of a monthly weighted-average PX price for intermittent resources. As FPL describes, under the current SRAC transition formula, avoided cost is calculated using several time-of-use periods: peak, partial peak, off peak, and super off peak. Within each time-of-use period, QFs are paid a monthly weighted-average avoided cost. FPL points out that, "no one has asserted that this feature of the current transition formula violates PURPA. Thus, FPL's proposal to base SRAC payments to intermittent QFs on a monthly weighted-average PX-based price also complies with PURPA." (FPL Opening Brief, p. 9.)

FPL prepared an exhibit to calculate the costs to ratepayers of its proposal. Exhibit 20 shows increased costs to ratepayers in SCE's service territory of $5.7 million and $3.9 million in PG&E's service territory for the period December 1998--November 1999, compared to an hourly PX-based SRAC. Since SDG&E has no intermittent QFs resources, FPL's proposal has no impact for SDG&E ratepayers.

SDG&E argues that "while FPL's proposal would benefit its particular market segment, it would harm others. FPL would have utilities overpay for wind energy. Wind QFs typically produce energy off-peak and therefore an averaged price will pay more over time than what wind energy is worth in the market. On the other hand, solar energy producers, for example, would likely be paid less than market value for their energy since they tend to produce during high peak times. Ex. 55, p. 3. QFs should get the value determined by the market for their power, not some administratively determined price that distorts market signals. And, Sections 381 and 383 already provide financial assistance for these types of QFs." (SDG&E Opening Brief, p. 18.)

6.2 Discussion

Section 390(c) requires that SRAC energy payments be based upon the PX clearing price. The QFs-in/QFs-out method proposed by CAC and IEP requires us to assume that a significant block of QF resources (400 average MW in CAC's proposal and 5000 MWh in IEP's proposal) act in concert to withhold their energy production from the market. We find these assumptions unrealistic because they overstate the expected impacts in the PX market when a single generator fails to produce. Therefore, the QFs-in/QFs-out methodology, using the PX market clearing price as a starting price, causes this PX-based price to exceed the utilities' avoided cost.

The SCE and ORA new entrant proposals rely on the expected operating costs of a hypothetical new entrant. Such proposals are long-run avoided cost approaches. Because we are attempting emulate short-run avoided energy costs, the long-run methodology proposed by SCE and ORA is not a reasonable proxy for SRAC. Indeed, the new entrant methodology is only marginally linked to the PX price, upon which Section 390 directs us to base the SRAC energy price. Likewise, the heat rate cap/collar secondary proposals by ORA and SCE are derived from hypothetical "efficient" and "least efficient" generators. The cap/collar establishes limits on the use of the PX price for SRAC energy payments. Although this approach will be PX-based in many hours, like the new entrant methodology, it relies on hypothetical generators to establish an energy value in lieu of the PX price. In many ways, the new entrant and heat rate cap/collar approaches are very similar to the administratively determined SRAC approaches used for many years. They are dependent on input assumptions that have typically been controversial.

The CCC, SDG&E, and PG&E SRAC pricing proposal clearly complies with Section 390(c), as it would set SRAC equal to the PX day-ahead clearing price. In addition, because the utilities are currently required to buy the majority of their electric energy from the PX,⁵ the PX day-ahead clearing price is a reasonable measure of utility avoided cost. While the utilities do employ more than one PX market and trade in the ISO's real-time market, more than ninety percent of utility energy purchases have been made from the PX day-ahead market since the market opened. (CCC, Ex. 3, at 23:4-5; SDG&E, Ex. 51, at 7:6-7; PG&E, Ex. 52, at 5.)

We agree that receiving SRAC payments based on an hourly market price could harm intermittent resources. As summarized by FPL, harm to intermittent QFs would arise from volatility of hourly prices because "(1) intermittent resources are not able to control the timing of the output of their facilities in order to maximize production during high-price periods, (2) hourly market prices are volatile, and (3) intermittent resource generation is also volatile, resulting in a more volatile revenue stream than current revenue streams." (FPL Opening Brief, p. 11)

In its critique of FPL's intermittent resource proposal, SDG&E argues that certain energy producers, specifically solar producers, would be paid less under FPL's proposal than if they were paid on an hourly price. QFs who produce power on peak could be disadvantaged if they were required to take a monthly weighted price. Although SDG&E's critique would have merit if we were to adopt FPL's proposal for all resources, FPL proposes that monthly weighted-average prices be available only to wind and run-of-river hydro resources.

We adopt the PX zonal day-ahead market clearing price as the energy price for QFs receiving SRAC energy payments. Not only does this price clearly comply with Section 390 directives, it is also an accurate representation of utility avoided cost under today's market structure and procurement policies. We find that the societal benefits associated with resource diversity and the environmentally-preferred energy production offered by intermittent resources outweigh the ratepayer cost associated with FPL's proposal. Therefore, we will allow wind and run-of-river hydro QFs receiving SRAC energy prices to elect, at their option, to receive a monthly weighted-average PX day-ahead price (adjusted consistent with Section 390(d)) in lieu of hourly pricing once the Commission has made the required findings under Section 390(c). We will not retain the current SRAC formula for intermittent resources because it is not a PX-based price. We focus next on how to remove the value of capacity from the PX zonal day-ahead market clearing price, consistent with Section 390(d).