II. Procedural Background
PURPA3 requires utilities to purchase energy from QF at a rate which does not exceed the utility's avoided costs.4 Payments to QFs are governed by orders of this Commission establishing standard rates for purchases that are just and reasonable to utility consumers, consistent with Federal Energy Regulatory Commission (FERC) regulations. In 1996, as part of the legislation for restructuring California's electric industry, the Legislature enacted Pub. Util. Code § 390.5 Pursuant to the requirement of § 390(b),6 the Commission issued D.96-12-028,7 which adopted a transition formula for each utility to calculate its SRAC energy payments to QFs. The transition formula included a utility-specific "factor" which was designed to relate SRAC prices to gas border prices for each utility. Transition formulas were adopted for Edison, San Diego Gas & Electric (SDG&E) and PG&E. Each transition formula uses a starting energy price, and is adjusted monthly to reflect changes in assumed utility fuel costs, as reflected in percentage changes to certain border gas price indices. The transition formulas include incremental energy rates (IER) for each utility, a variable operations and maintenance (O&M) adder, and average interstate and intrastate gas transportation costs. Edison and SDG&E made SRAC payments based on published gas border indices at Topock,8 while PG&E relied on a 50/50 weighting of gas indices at Topock and Malin.9 The transition formulas were expected to be of relatively short duration until energy payments could be based on California Power Exchange (PX) prices. (See Pub. Util. Code, § 390 (c).) The PX ceased market operation at the end of January 2001 while the transition formula continues to be in use, over eight years later.10
Beginning in May 2000, gas spot prices at the California border began to increase significantly above gas prices in the producing gas basins (basis differentials). These basis differentials increased significantly into Fall 2000, reached a maximum in December 2000, and continued at significant levels through May 2001. Because SRAC prices paid during the Remand Period were adjusted monthly based on border price indices, the increased border indices resulted in a corresponding increase in SRAC prices.
In July 2000 Edison petitioned the Commission to modify its transition formula to respond to ever-increasing basis differentials. Office of Ratepayer Advocates (ORA) supported Edison's petition and questioned whether Topock indices were reliable and valid. ORA cited a complaint filed by the Commission at FERC which sought to rescind certain contracts that the Commission contended permitted natural gas suppliers and their affiliates to increase gas prices through the withholding of capacity. On August 31, 2000, Edison filed an emergency motion to suspend SRAC posted prices while its July petition was pending. That motion was denied. However, on November 28, 2000, Edison filed a second emergency motion that sought an order modifying D.96-12-028.
On March 27, 2001, the Commission adopted D.01-03-067 responding to Edison's second motion, and modifying the transition formulas. D.01-03-067 modified Edison's factor,11 and replaced the Topock gas index with the Malin gas index, plus intrastate transportation, for Edison, PG&E and SDG&E.
On April 27, 2001, Edison and PG&E filed applications for rehearing.12 Edison asserted in its rehearing application that the Commission: 1) failed to order retroactive application of the modified SRAC formula; 2) needed to clarify why the Malin indices were adopted; and 3) needed to clarify the accelerated payment provisions and elimination of the penalty provision for failing to make timely payments to QFs.
PG&E contended that: 1) the Commission unlawfully amended its contracts with QFs by accelerating the payment schedule; 2) the Commission needed to specify that the "benchmark" Consumer Transition Price did not represent rates that PG&E must actually pay to QFs; and 3) because Federal bankruptcy law prohibits payments for any pre-petition liability without approval of the Bankruptcy Court,13 the Commission could not assess a penalty should it fail to make timely payments on deliveries it received from the QFs between March 27, 2001, and April 6, 2001.
D.01-12-025, adopted December 11, 2001, rejected Edison's and PG&E's applications for rehearing.14 D.01-12-025 found there was no legal error in only applying the modified SRAC formula prospectively. The Commission stated that nothing in the record supported a retroactive application and that the Commission had previously declined to allow retroactive downward adjustments of posted prices.15 Additionally, D.01-12-025 found that FERC's regulations provide that "[i]n the case in which the rates for purchases are based upon estimates of avoided costs over the specific term of the contract or other legally enforceable obligation, the rates for such purchases do not violate this subpart if the rates for such purchases differ from avoided costs at the time of delivery." (18 C.F.R. § 292.304(b)(5).) The Commission determined that this language suggested that the Commission could provide for avoided costs that differed from the utility's avoided costs and still be consistent with PURPA, so long as those costs were derived from consistent application of a formula.
D.01-12-025 affirmed the Commission's finding in D.01-03-067 that the Topock indices were not sufficiently robust to meet the market-based pricing requirement under § 390, and therefore could not be used prospectively in the SRAC formula. The Commission concluded that although it had the authority to retroactively adjust SRAC prices, it declined to do so in this instance, citing concerns over the QF market, and the uncertainty of continued QF operation given the then current problems with non-payment by utilities. The Commission also stated the need for pricing certainty for QFs and that retroactive adjustment would not be in the public interest.16 D.01-12-025 also rejected Edison's request to clarify the use of the Malin indices, and modified D.01-03-067 to eliminate references to utility penalties for QF payments.
On February 7, 2002, the Commission adopted D.02-02-028, which addressed the rehearing applications filed by QF parties. QF parties contended that D.01-03-067 denied due process by not holding evidentiary hearings prior to adopting the modified SRAC formula, violated § 390, violated PURPA, and violated FERC regulations implementing PURPA.17 In D.02-02-028, the Commission rejected QF parties' applications for failing to demonstrate good cause for granting rehearing, and modified D.01-03-067 to correct certain errors and ambiguities. The Commission found that evidentiary hearings were not required under § 1708.5(f), and that there was sufficient evidence to support a finding that the Topock index was not sufficiently robust. D.02-02-028 also found that due process was not violated as a result of a shortened comment period for D.01-03-067, and that the Malin indices could serve as a proxy for Topock and reflect utility avoided costs. D.02-02-028 clarified D.01-03-067 to add findings of fact and conclusions of law regarding use of the Malin index change from Topock to Malin. In addition to rejecting QF arguments regarding PURPA violations, the Commission pointed out that § 390(b) did not specify a specific transitional formula. Instead, § 390(b) broadly proscribed the main components to be included in the formula, and that to ensure compliance with PURPA, the Commission revised the formula to reflect utility avoided costs. The Commission also determined that the modified formula did not apply to non-standard contracts, or to non-standard amendments to contracts between QFs and utilities.18
Edison and several QF parties sought judicial review of D.01-03-067, D.01-12-025, and D.02-02-028.19 On September 4, 2002, The Court, Second The Court affirmed the majority of the determinations in D.01-03-067, and D.01-12-025 and D.02-02-028.20 Most importantly, The Court held the Commission had discretion under § 390(b) to determine which indices "or any combination thereof" should be used for setting SRAC.21 However, The Court did find that the Commission violated PURPA by declining to consider Edison's request to apply the modified SRAC formula on policy grounds.
"In declining to even consider the request, the Commission erred. In enacting PURPA, the Congress declared that the transmission of electrical power was of national interest and that FERC was to have jurisdiction over the sale of electrical energy in interstate commerce. (16 USCA § 824.)22
By not considering the issue during the proceeding, no record was developed to support a determination on this matter. Thus, the Court remanded this issue back to the Commission and ordered:
"It may be that the evidence will show the SRAC prices were correct for the period of December 2000 through March of 2001. If the Commission makes this determination and it is based upon substantial evidence, that will end the matter. However, if the evidence shows that the formula in D.01-03-067 should have been applied retroactively to arrive at a more accurate SRAC, then it is the Commission's duty to apply it retroactively. The Commission does not have the power to thwart Congressional intend by having a policy inconsistent with that set forth in PURPA."23
On January 14, 2003, the assigned Administrative Law Judge (ALJ) issued a ruling requesting comments and reply comments to questions involving the remand regarding SRAC prices and natural gas indices used between December 2000 and March 2001.24 On February 7, 2003, comments were submitted from Edison, SDG&E, PG&E, CCC, IEP, CalWEA, Tractebel Power, Inc. (Tractebel), Central Hydroelectric Corporation (CHC) and ORA. On March 7, 2003, reply comments were submitted from Edison, SDG&E, PG&E, CCC, IEP, Tractebel, The Cogeneration Association of California and the Energy Producers and Users Coalition (CAC), and the California Department of General Services (DGS).
On November 7, 2003, a Prehearing Conference (PHC) was held to consider receipt of recent relevant information from the FERC, the Commodity Futures Trading Commission (CFTC), and other sources, and to discuss the need for evidentiary hearings. Parties at the PHC generally agreed that the recent information should be updated through additional comments and reply comments, and that evidentiary hearings were unnecessary. Additional comments were submitted by PG&E/ORA/The Utility Reform Network (TURN), CalWEA, IEP, CCC and CAC on February 17, 2004. Additional reply comments were submitted by PG&E, ORA and TURN, CCC and IEP on March 17, 2004. Edison filed a joiner supporting the reply comments of PG&E, ORA and TURN.
Unfortunately, none of the parties' comments included actual energy prices paid during the Remand Period. Therefore, an ALJ ruling on June 23, 2004 requested these purchased energy costs during this period that the parties had failed to provide. SDG&E, Edison and PG&E provided energy purchase information, and later CCC commented on this information. Parties were provided an additional opportunity to address CCC's comments, and the responses of PG&E, Edison and SDG&E.25 On November 12, 2004, PG&E, Edison, SDG&E and IEP submitted comments to CCC's comments, and the utilities' responses. The matter was deemed submitted on November 12, 2004.
3 Code of Federal Regulations (C.F.R.) Part 292, subpart C. 4 Avoided Costs are the incremental costs to an electric utility of electric energy or capacity or both, which, but for the purchase from the QF or QFs, such utility would generate itself or purchase from another source. (18 C.F.R. § 292.101(b)(6).) 5 Unless otherwise specified, all statutory references are to the Public Utilities Code. 6 § 390(b) states: Until the requirements of subdivision (c) have been satisfied, short run avoided cost energy payments paid to non-utility power generators by an electrical corporation shall be based on a formula that reflects a starting energy price, adjusted monthly to reflect changes in a starting gas index price in relation to an average of current California natural gas border price indices. The starting energy price shall be based on 12-month averages of recent, pre-January 1, 1996, short-run avoided energy prices paid by each public utility electrical corporation to nonutility power generators. The starting gas index price shall be established as an average of index gas prices for the same annual periods. 7 SRAC payments prior to the adoption of the transition formula are described in D.96-12-028, pp. 3-4. 8 Topock is located at the California/Arizona border and is an entry point for gas into Southern California Gas Company's system. 9 Malin is located at the California/Oregon border and is an entry point for gas into PG&E's system. 10 We note that the conditions anticipated in § 390(c) have not been met. 11 Pending adoption of an updated Internal Heat Rate (IER) and Operational and Maintenance (O&M) adder, D.01-03-067 adopted an IER of 9,140 British Thermal Unit (Btu)/kWh and an O&M adder of 0.2 cents per kilowatt-hour (kWh). Subsequent to D.01-03-067 evidentiary hearings were held to address the IER and O&M adder. However, no modifications of the IER and O&M adder have been made. Instead, any future modifications of the SRAC formula will be considered in the Commission's rulemaking on avoided cost (R.04-04-025). 12 Applications for rehearing were also filed by Calpine Corporation, Caithness Energy, Mega Renewables, Mega Hydron I, Central Hydroelectric Corporation, Tracteble Power, Inc, et al, CE Generation, Customer Accounting and Collections (CAC), California Coastal Commission (CCC), Independent Energy Producers Association (IEP), and the County of Los Angeles (collectively, QF parties). 13 PG&E filed for Chapter 11 bankruptcy on April 6, 2001. 14 Because the applications filed by the QF parties raised different issues than the utilities, the QF parties' applications were addressed in a separate order. 15 See D.96-07-026 (1996) 66 CPUC 2nd 780, 784, and D.82-12-120 (1982) 10 CPUC 2nd 553, 621. 16 D.01-12-025, pp. 3-5. 17 See D.02-02-028, pp. 1-4. 18 D.01-06-015, adopted June 13, 2001, and clarified by D.01-07-031, adopted July 13, 2001, provided for non-standard contract amendments between QFs and utilities. The non-standard contract amendments accelerated QF payments, fixed energy prices, and allowed for supplemental payments above normal operating levels. D.01-06-015 and D.01-07-031 also provided an opportunity for Edison and QFs to resolve disputes and retain the benefits of long-term contracts for Edison, QFs, and ratepayers. 19 See Southern Cal. Edison Co. v. Public Utilities Com., (Edison) 101 Cal.App. 4th at p.982 (2002). 20 Id. at p. 999. 21 Id. at 992. 22 Id. at p. 999. 23 Id. 24 Three QF parties filed petitions for review of the Court's order in the California Supreme Court on October 15 and 16, 2002. These petitions were summarily denied on November 26, 2002, and The Court order became final on December 20, 2002. 25 See ALJ Ruling on October 21, 2004.
