III. Positions of Parties Recommending SRAC Refunds
Regarding Application of the Modified SRAC Formula
Edison, PG&E, ORA and TURN recommend refunds of SRAC amounts paid during the Remand Period.26 Edison asserts that SRAC prices during the Remand Period exceeded the lawful rate permitted under PURPA for two reasons. First, the factor for intrastate gas transportation costs used in the formula to calculate SRAC decreased during this period, yet this decreased cost was not reflected in the delivered gas cost paid by Edison. Second, Edison contends the border index gas prices were not "robust" as contemplated by D.96-12-028, and that gas prices were artificially inflated by market power abuse, affiliate self-dealing, and other misconduct by gas marketers and suppliers. Edison points to evidence that was emerging in early 2003 indicating manipulation of the gas market and unreliability of reported prices during the Remand Period.27 For these reasons, Edison argues that since the Topock index used in the transaction formula was based on manipulated and flawed gas prices, the SRAC prices during the Remand Period were also flawed, and, consequently resulted in unlawful SRAC prices.
Edison advocates that the Commission revise the SRAC formula for the Remand Period, by incorporating the revision to the Factor adopted in D.01-03-067 as of December 2001, and revise the gas index methodology used in the formula. Edison does not recommend the use of a specific gas index in the formula, but offers several alternative proposals.28 Edison's first proposal, "Competitive Topock," is based on gas prices at producing basins plus interstate transportation costs (basin plus transport), a method recommended in the FERC staff report for purposes of determining competitive gas costs in the Refund Proceeding.29 Edison derives its Competitive Topock estimates using variations of gas producing basin prices and interstate transportation costs. Edison's second method uses a weighted cost of gas (WACOG) based on Southern California Gas Corporation (SoCalGas) tariffs plus gas costs derived by Competitive Topock, or gas costs from recorded Topock indices. Edison believes that the Competitive Topock plus WACOG is the preferred method if WACOG is used in calculating gas costs in the transition formula.
Edison argues that regardless of the method chosen to estimate avoided fuel costs, the Commission must implement changes to SRAC during the Remand Period to fulfill its duty under PURPA that QF prices equate to Edison's avoided costs. Edison explains that even if § 390 conflicts with PURPA, PURPA as Federal law controls. Edison contends that a narrow construction of § 390 to permit only the use of certain gas border indices would not comply with PURPA, and that the phrase "based on" as used in § 390(b) affords the Commission latitude in implementing the transition formula. Edison argues that the term "border price indices" used in § 390 is not specific, and that Edison's alternative methods for deriving gas costs meet the definition of border price indices.
Edison also contends that the Commission may lawfully implement alternative proposals not expressly permitted by § 390(b), and that the legislature was aware of the implications of PURPA when Section 390 was enacted. Edison asserts that Article III, § 3.5 of the California Constitution30 does not constrain the Commission in its implementation of alternative gas indices, as it ignores the effect of § 202, which limits the scope of the legislature's enactments affecting interstate commerce, to ensure that they do not violate federal law. Edison concludes that the Commission may enforce the will of the Legislature, as expressed in § 390, only to the extent that it is consistent with avoided cost principles. Accordingly, Edison asserts that nothing in § 390 indicates any intent on the part of the Legislature to act other than pursuant to its delegated authority to implement FERC's avoided cost standards.
Edison recommends that applying a retroactive adjustment to the Remand Period should exclude those QFs that have non-standard contracts, and exclude QFs that have entered into contract amendments and other various forms of agreements that provide releases from retroactive SRAC adjustments. Edison notes that there is a relatively small group of QFs (which serve Edison) that have not entered into these release agreements, and in addition, any retroactive adjustment should only apply to those QFs whose payments were based on SRAC.
Finally, Edison cautions that if FERC determines that natural gas prices were too high during the Remand Period, and awards damages, QFs should not be unjustly enriched by these damages. Edison requests that the Commission establish a mechanism to ensure that if any QF receives such damages, those benefits should flow to ratepayers.
PG&E, ORA and TURN also support a refund of SRAC payments during the Remand Period, and in support of their position, filed a motion pursuant to Rules 45, 73, and 74 of the Commission's Rules of Practice and Procedure, requesting that the Commission take official notice of certain FERC and Commission documents.31 PG&E, ORA and TURN assert the documents show that California gas border prices, including prices at Malin, were misreported and manipulated during the Remand Period, and therefore are not robust, and are unsuitable for use in the SRAC transition formula. PG&E, ORA and TURN conclude that SRAC prices produced by the Transition Formula do not represent utility avoided costs and do not comply with the requirements of § 390(b).32 PG&E, ORA and TURN argue that the Court's decision obligates the Commission to modify the Transition Formula if it produced prices that were not a reasonable proxy of utility avoided costs. Relying on evidence produced during the Refund proceeding, PG&E, ORA and TURN contend SRAC prices were "incorrect" during the Remand Period because the utilities relied on inflated gas price indices to calculate SRAC prices. PG&E, ORA and TURN calculate an alternative set of SRAC prices derived from the FERC Refund Proceeding, for use in determining "correct" SRAC prices. This calculation, employing producing gas basin prices plus interstate transportation, is provided through the Declaration of Dr. Carolyn Berry (Attachment A). Dr. Berry recalculates SRAC prices for the Remand Period using gas prices based on testimony by Dr. Michael Harris.33 Dr. Harris proposed a Southern California border gas price based on average daily midpoint gas prices from the Permain and San Juan Basins, plus transportation to the California border, an El Paso fuel charge, and total intrastate transport charges. Northern California border gas prices were calculated by Dr. Harris using gas midpoint prices as reported in Gas Daily reported for the NOVA point at the Alberta Energy Company's hub in Southern Alberta where gas is purchased for delivery to Northern California. Northern California prices include interstate tariff and fuel charges and intrastate transportation and fuel charges. PG&E, ORA and TURN state that this methodology was adopted by FERC as an input to calculate the Mitigated Market Clearing Price (MMCP).34 Dr. Berry's SRAC calculations average Northern and Southern California border prices, and add interstate transportation charges, but do not use intrastate transportation charges in determining gas border prices. The resulting calculations show that retroactively applying the revised SRAC prices for the Remand Period results in overpayments by PG&E and its ratepayers to QFs of approximately $260 million.35
PG&E, ORA and TURN contend that the use of proxy gas border prices based on average basin prices plus interstate transportation meet the requirements of § 390, to develop appropriate gas indices. PG&E, ORA and TURN argue that avoided costs must be "just and reasonable to the electric consumers of the electric utility and in the public interest."36 As manipulated gas prices are not just and reasonable nor in the public interest, PG&E, ORA and TURN argue that proxy gas prices, which are reliable and accurate, are just and reasonable, and are in the public interest. PG&E, ORA and TURN recommend equitable accommodations for QFs that can demonstrate hardship related to actual gas payments during the Remand Period, and as provided under the agreement entered into between PG&E and the Commission to settle PG&E's bankruptcy case. (See D.03-12-035).
PG&E, ORA and TURN also argue that QF parties have not provided evidentiary support that SRAC prices complied with PURPA during the Remand Period. Alternatively, PG&E, ORA and TURN explain that as PURPA caps QF payments at full-avoided costs, and as QFs received more than full-avoided costs during the Remand Period, PURPA was violated. PG&E, ORA and TURN maintain that during the Remand Period SRAC prices exceeded the MMCP in most hours, and that even if the MMCP was comparable to SRAC, QFs should not receive MMCP rates for three reasons. First, PG&E, ORA and TURN note that QFs had an opportunity to switch to PX prices, but stayed with the transition formula. Thus, QFs that chose the transition formula should only be entitled to a transition formula price based on accurate gas prices. Second, the MMCP is a maximum price, and if the market-clearing price was less than MMCP, certain sellers would be paid the lesser price. Finally, PG&E's power purchases during the Remand Period include bilateral agreements and fixed-price QF contracts, and thus, these sources too, must be considered in determining avoided costs.
PG&E, ORA and TURN point out that the El Paso Master Settlement Agreement (MSA) proceeds exclude QFs and preserves the rights of California parties to seek additional relief from sources other than El Paso. PG&E, ORA and TURN note that § 5.5 (c) of the MSA provides, in relevant part:
26 Although ORA submitted separate comments on January 31, 2002, ORA jointly filed comments, and reply comments, with PG&E and TURN on February 17, 2004, and March 17, 2004, respectively. Therefore, all of ORA's comments, and reply comments, are identified as the comments and reply comments of PG&E, ORA and TURN. 27 Edison cites the initial August 13, 2002, FERC staff report Initial Report on Company-Specific Separate Proceedings and Generic Reevaluations, Published Natural Gas Price Data, Enron Trading Strategies in FERC's Fact Finding Investigation of Potential Manipulation of Electric and Natural Gas Prices, FERC Docket No. PA02-2-000. This initial report was made final March 26, 2003. 28 Although providing alternative proposals, Edison specifically argues against use of the Malin indices adopted by D.01-03-067 as a proxy for Topock, as Edison believes the Malin indices also exhibited exaggerated prices during the Remand Period. 29 On March 26, 2003, FERC issued an order that addressed proposed findings of fact regarding the appropriate mechanism for determining the just and reasonable Mitigated Market Clearing Price (MMCP) to use for computing refunds for sales of electric energy in the California Independent System Operator Corporation and the Power Exchange markets for the October 2, 2000 through June 21, 2001 period. In addition to ruling on a number of technical issues relating to the calculation of the MMCP, the FERC March 26 order adopted a proposal that had been made as part of FERC staff reports to use a "basin plus transportation" proxy price for the natural gas price input into the MMCP formula. The alternative gas proxy prices are used for calculating the amount of refunds for Northern and Southern California. Subsequently, FERC confirmed the use of the proxy prices for determining MMCP, and adopted a gas price data series recommended by the Commission, PG&E, the California Attorney General and other parties (jointly the California Parties). (See San Diego Gas & Electric Company, et al., 102 FERC ¶ 61,317 (2003) (March 26 Order). 30 This constitutional provision provides : An administrative agency, including an administrative agency created by the Constitution or an initiative statute, has no power....(c) To 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. 31 These documents are: 1. SDG&E v. Sellers of Energy, 93 FERC ¶ 61,121 (Nov. 1, 2000); 2. SDG&E v. Sellers of Energy, 96 FERC ¶ 61,129 (July 25, 2001); 3. SDG&E, et al., 102 FERC ¶ 61,317; 4. SDG&E, et al., order on Rehearing, 105 FERC ¶ 61,066 (October 16, 2003); 5. California Parties' Comments on Method For Determining Natural Gas Prices For Purposes of Calculating Refunds, filed in FERC Docket nos. EL00-95-045 and EL00-98-042 on October 15, 2002 (includes Initial Report on Company-Specific Separate Proceedings and Generic Re-Evolutions; Published Natural Gas Price Data; And Enron Trading Strategies, FERC staff prepared in Docket No. PA-02-2-000 in August 2002); 6. Staff Final Report on Price Manipulation in Western Markets, Docket No. PA02-2-000 (March 2003); and 7. Prepared Testimony of Michael J. Harris, Ph.D., Econ One, On Behalf Of The California Parties, dated February 24, 2003, filed in FERC Docket Nos. EL00-95-045 and EL00-98-042. Commission Rule 73, of the Commission's Rules of Practice and Procedure, provides that official notice "may be taken of such matters as may be judicially noticed by the courts of the State of California." The motion of PG&E, ORA and TURN is unopposed and is granted. 32 § 390(b) requires the Commission to use a gas border price that serves as a reasonable proxy for the utilities' avoided costs (Southern Cal. Edison Co. v. Public Utilities Commission, supra, 101 Cal. App. 4th at pp. 992-993). 33 An initial set of basin plus transportation gas prices was submitted to FERC by Dr. Harris in California Parties' Comments on Method For Determining Natural Gas Prices For Purposes of Calculating Refunds on October 15,2002, filed in FERC Docket Nos. EL00-95-045 and EL00-98-042 on October 15, 2002. An updated set, filed with FERC on March 3, 2002, was subsequently adopted by FERC. 34 MMCP determined a cap to electric energy payments made to sellers in the ISO and PX energy and capacity markets for the period October 2, 2000 through June 20, 2001. 35 PG&E will flow through to ratepayers any net-after-tax amounts received from QFs. 36 16 U.S.C. § 824a-3(b)(1)(2003).However, except as necessary to participate in the specific Commission proceeding described in the next sentence and to defend such orders as The CPUC may make in that proceeding, no such Performance-based QF Claim between such parties shall rely upon or be based on a claim or defense that any of the conduct or matters released in Paragraphs 5.2 and 5.3 above either (i) wrongfully or improperly altered, influenced or otherwise affected the price applicable to energy sold under the QF Contract and/or (ii) extinguished, diminished or otherwise modified the Obligation of the utility to pay the contract price for power delivered by qualifying facility in accordance with the terms of the QF Contract. Nor does anything in this Agreement release any potential liability that any qualifying facility may have in connection with the Order instituting Rulemaking into Implementation of Pub. Util. Code 390, Docket No. R.99-11-022, which is currently pending before the CPUC.
