7. Value of Capacity

CAC and IEP propose that the language of Section 390(d) be taken literally and illustrate, by reference to a graph in Exhibit 9, how such value is to be determined. SDG&E and PG&E have proposed to remove the value of capacity, if any, in accordance with the express language of Section 390(d). CCC proposes to adjust the PX day-ahead zonal market clearing price by "the value of capacity, if any, in the PX price as specified in Section 390(d)." (CCC Opening Brief, p. 21.)

Both ORA and SCE have criticized the method for determining the value of capacity in the clearing price as described in Section 390(d), arguing there is more capacity value in the clearing price than is reflected in the formula described in Section 390(d). As SCE testified, "[t]he price of capacity is typically associated with the fixed costs of operation. (Citation.) It is this formulation of "capacity value" which served as the basis for the capacity payments currently being made under standard offer contracts described in the first sentence of Section 390(d) and in Section 390(e). Such capacity payments are based on the fixed costs associated with the alternative of installing a combustion turbine peaker. (Citation.)" (SCE Opening Brief, p. 24, citations omitted.)

It is a factual determination whether there is capacity value in the PX clearing price separate from the statutory definition. As most parties have acknowledged, the definition of "value of capacity" contained in the state law has, at all times, yielded a value of zero. The record evidence, supports a finding that the PX day-ahead market-clearing price has routinely exceeded conservative administrative estimates of energy costs, and therefore includes non-energy value. "[H]istorical market-clearing prices have frequently contained a `value of capacity' as that concept was used to set capacity payments under the standard offers (S02 and S04) referred to in the statute. As stated by SCE witness Jurewitz:

Certainly, no credible expert today could maintain that the hourly market-clearing prices observed since the beginning of the new market structure in California have simply reflected the marginal operating cost of the least efficient generator clearing the market and, that therefore, these prices have never reflected any marginal capacity costs." (SCE Opening Brief, pp. 24-25.)

Indeed, under cross-examination, CCC witness Beach agreed that there are opportunities for PX suppliers to sell energy at prices above their marginal operating cost. (RT 657:23-659:14.) However, in determining the value of capacity for removal, consistent with Section 390(d), we must first look to the statutory language for direction.

7.1 Statutory Construction of Section 390(d)

After stating that capacity value should be removed from the PX-based price, Section 390(d) then describes capacity value. ORA argues that we should not interpret this statutory language to be a definition of capacity value and that we should liberally construe the language in order to adopt a different capacity value.

We addressed statutory construction in D.98-12-067, among others:

"In determining that intent, we first examine the words of the respective statutes: `If there is no ambiguity in the language of the statute, "then the Legislature is presumed to have meant what it said, and the plain meaning of the statute governs." [Citation.] "Where the statute is clear, courts will not `interpret away clear language in favor of an ambiguity that does not exist.' [Citation.]"' (Lennane v. Franchise Tax Bd. (1994) 9 Cal.4th 263, 268 [36 Cal.Rptr.2d 563, 885 P.2d 976].)" (pp. 18-19.)

Thus, it is well settled that we must turn first to the language of the statute, which must be read such that every word is given its usual import and significance. (Dyna-Med, Inc. v. Fair Employment & Housing Commission, (1987) 43 Cal.3d 1379, 1386-1387, 241 Cal. Rptr. 67, 70.) There is a presumption that words used twice or more in the same act will have the same meaning. (ICC Industries, Inc. v. United States (Fed. Cir. 1987) 812 F2d 694, 700.)

In its opening statement, ORA conceded "[t]he 390(d) formula's essential end-result is that PX market-clearing price will be paid as a short-run avoided energy cost to QFs. That exists if we take the express terms of Section 390(d) and apply it very, very strictly." (RT 21:16-20.) ORA witness Linsey testified that, in order to find ORA's proposals for the SRAC energy payment consistent with Section 390, the term "value of capacity" would have to be understood to mean different things in the first sentence of Section 390 and in the second sentence of Section 390. (RT 747:25-749:2)

SCE and ORA argue that because the Section 390(d) definition for value of capacity understates the true capacity value reflected in the PX price, Section 390(d) is inconsistent with PURPA's requirement that QF payments not exceed utility avoided cost. SCE and ORA argue therefore that the Commission cannot simultaneously implement Section 390(d) and PURPA. However, in discharging its obligations in this proceeding, the Commission must comply with Section 390(d), even if it believes that such law conflicts with PURPA.

As CCC points out, "[T]he California Constitution, Article III, section 3.5 specifically provides that, `[a]n administrative agency, . . . has no power . . . [t]o declare a statute unenforceable, or to refuse to enforce a statute on the basis that federal law or federal regulations prohibit the enforcement of such statute unless an appellate court has made a determination that the enforcement of such statute is prohibited by federal law or federal regulations.' Cal. Const. Art III, § 3.5(c); Reese v. Kizer, 46 Cal. 3d 996, 998 (1988). The purpose of this portion of the California Constitution is `to prevent agencies from using their own interpretation of the Constitution or federal law to thwart the mandates of the Legislature.' Reese, 46 Cal. 3d at 1002. No appellate court has ruled, or even reviewed, the potential preemption of Section 390(d) by PURPA as asserted by Edison and ORA.⁶" (CCC Opening Brief, p. 26.) We agree that this Commission has no authority to refuse to implement Section 390(d).

We find that the plain reading of Section 390(d) provides a definition for the value of capacity which we must rely on to adjust the PX price for purposes of paying QFs who receive firm, forecast as-available, or forecast as-delivered capacity payments. We will refer to the statutorily prescribed definition for the value of capacity as the "capacity subtracter." When the law is unambiguous, the Commission has no discretion and must simply apply the law.

It gives us no pleasure to reach this conclusion because, as the record makes clear, the capacity subtracter, defined in Section 390(d), will rarely, if ever, be a number other than zero. The record also makes clear that if a generator can only sell into the PX market, then it must recover all its costs from the PX price, making the PX price an "all-in" price that includes both energy and capacity. Because QFs are must-take resources, scheduled exclusively through the PX, it follows that the PX price includes both energy and capacity value, and that the capacity value is likely to be nonzero in many hours. Therefore, the PX price, adjusted by the Section 390(d) capacity subtracter, will still reflect some capacity value.

Were we not constrained by the statutory definition in the second sentence of Section 390(d), we would adopt a different measure of capacity. We will first address as-available capacity payments and then discuss other measures of capacity.

7.2 As-Available Capacity Payments

In the Scoping Memo, the Assigned Commissioner expanded the scope of this proceeding to review the methodology for setting as-available capacity payments. The utilities and ORA argue that the PX price is an "all-in" price that includes value for both energy and capacity. CCC argues that the PX price is an "all-in" price when bidders trade exclusively in the PX. (See CCC Opening Brief, June 1, 2000, p. 46.) CCC argues that because generators may also sell into California Independent System Operator (ISO) markets, other measures of capacity are available. We agree that the PX all-in price does not represent the only measure of capacity when generators can sell their power into other markets. However, because of their must-take status, QF power is bid exclusively into the PX. Utilities must still purchase energy for their full requirements customers from the PX. Under CCC's logic then, the PX price represents an all-in price for QF generators. For this reason, we will eliminate administratively determined as-available capacity payments in favor of the all-in PX price, once this Commission has made the required findings under Section 390(c).

QFs that continue to sell power to utilities under as-available contracts will be paid the day-ahead zonal PX market clearing price only, without adjustment for the value of capacity, once the Commission has determined the PX is functioning properly under Section 390(c).

7.3 Other Measures of Capacity

SCE and ORA, in lieu of developing an approach to remove capacity from the PX price, developed mechanisms designed to limit SRAC energy payments by attempting to establish an energy value, independent of the PX price. These approaches were described in Section 6.1 above. On brief, SCE proposed an alternative means to remove capacity value from the PX price, based on CCC's testimony endorsing a 50/50 weighting of hourly spinning and non-spinning reserve prices as the measure of as-available capacity. Under SCE's alternative, the 50/50 blend of the hourly spinning and non-spinning ISO reserve market prices would represent capacity value and would be removed from the hourly PX zonal day-ahead market-clearing price. Because other parties advocated for a strict interpretation of Section 390(d), no other measures of capacity were proposed.

The spinning reserve market clearing price and the non-spinning reserve market clearing price represent the prices paid by the ISO to generators (or load) to stand by or be available to meet load requirements. The spinning reserve and non-spinning markets are generally considered to be capacity reserve markets.

Only QFs receiving firm, forecast as-available, and forecast as-delivered capacity payments should have capacity value removed from the PX price pursuant to Section 390(d). We must therefore look to prior Commission decisions to determine how such capacity payments were calculated. D.82-01-103 states:

"The firm capacity payment discussed in this section is based on a short-run marginal costs methodology, in which the capacity payment reflects the costs of a shortage.

"Both the firm and the as-available capacity payments ordered by this decision are based on the shortage cost concept." (8 CPUC2d 20, 58.)

The same decision describes short-run marginal costs in this way:

"[T]he short-run marginal cost of utility electricity production is the highest variable operating cost per unit of electricity produced at a given time plus a shortage cost which reflects the effects of the added increment of production on reserve margins and reliability. As these costs are avoided through purchases of QF power, the purchase price paid to QFs . . . is tied to the short-run marginal cost. This will include an `energy payment' equivalent to the utility's marginal operating cost and a `capacity payment' equivalent to the utility's marginal shortage cost." (8 CPUC2d 20, 41-42.)

Therefore, the capacity payment is to reflect the effect of an added increment of production on reserve margins and reliability. In Exhibit 3, CCC presents its approach to establishing a value for as-available capacity using operating reserve prices in the ISO spinning and non-spinning reserve markets.

Q: Have the ISO and the FERC recognized that operating reserve prices are reasonable measures of the value of short-term, as-available capacity on the ISO grid?

A: Yes. In a recent order, the FERC approved an ISO proposal for the pricing of power that the ISO purchases when it goes outside the market to dispatch a generator, for example, to maintain reliability. For such `out-of-market' calls, the ISO's payment will include a capacity component equal to the average of the prices for spinning and non-spinning reserves in that hour. The FERC found that this capacity price represented a reasonable compensation to generators for the capacity value of power that the ISO calls on a short-term basis. (CCC, Ex. 3, 34:3-11.)

CCC proposed this 50/50 weighting as a proxy for as-available capacity to be paid in addition to the PX price. SCE instead proposes that we use this proxy to remove the capacity value from the PX price. Because we find that the PX price includes capacity value, we do not adopt CCC's proposal to make an additional payment for as-available QFs. The question then becomes, is the ISO reserve market a reasonable proxy for the value of capacity that the first sentence of Section 390(d) directs us to remove? In other words, does the average of the ISO spinning and non-spinning reserve prices reflect the addition of an added increment of production on reserve margins and reliability? The ISO's tariffs define operating reserve as the combination of spinning and non-spinning reserve required to meet Western Systems Coordinating Council (WSCC) and North American Electric Reliability Council (NERC) requirements for reliable operation of the ISO control area. Under WSCC criteria, the ISO must carry specific operating reserve margins based on the amount of generation on the system. We conclude that the prices paid for operating reserves reflects the addition of an added increment of generation on reserve margins and therefore is a reasonable measure of capacity value.

Based on the data submitted in CCC's comparison exhibit (Ex. 16), adoption of this capacity value measure as a subtracter would have resulted in an energy price between 12% and 59% lower than using the day-ahead PX price without adjustment. If Section 390(d) provided more flexibility regarding how to remove the capacity value from the PX price, a 50/50 weighting of the spinning reserve and non-spinning reserve prices would be an attractive option.