IV. Positions of Parties Opposed to SRAC Refunds
Regarding Application of the Modified SRAC Formula

All of the parties opposed to SRAC refunds are QFs,³⁷ and include CCC, IEP, CAC, Tractabel, CHC, DGS and CalWEA. IEP argues that the Commission was correct in denying Edison's request to apply the modified transitional formula retroactively for the Remand Period. IEP contends that sound regulatory policy favors establishment of stable pricing mechanisms such as prospective SRAC pricing changes only. IEP notes the Commission reaffirmed retroactive SRAC pricing adjustments in D.04-01-050, stating "We agree with IEP that PG&E's proposed true-up is inconsistent with established Commission precedent whereby QF prices have always been set prior to delivery." IEP also contends the Commission made determinations that SRAC prices equate to avoided costs, and therefore SRAC prices during the Remand Period were correct. IEP points out that there are many definitions of avoided costs, and thus no determination of SRAC could ever be correct as there are other alternatives. IEP notes Edison's comments do not recommend a specific determination of avoided costs, but rather provide alternative calculations of natural gas indexing mechanisms,³⁸ and reject the retroactive application of the Malin indices in the transition formula. IEP also maintains that SRAC is based on forecasts of future costs, and that these costs are expected to change over time as they did during the Remand Period. IEP also notes that SRAC prices may have been too low during the Remand Period as constrained availability of alternative energy sources would increase the transitional formula elements apart from gas prices.

CCC contends that SRAC prices during the Remand Period were correct, and based on a formula (the transitional formula) that matches avoided costs over time. CCC agrees with the Commission in D.01-12-025, that "the Commission can, consistent with PURPA, provide for avoided costs that differ from the utilities, so long as those costs are derived from consistent application of a formula."³⁹ In support of this position, CCC provides a series of price comparisons⁴⁰ over different time periods between April 1998 and March 2001, that CCC believes demonstrate SRAC prices were less than either the electric market prices based on border gas prices, or electric market prices using basin prices plus transportation (i.e., MMCP). CCC points out that even if the comparison is limited to the Remand Period, electric prices based on basin plus transportation were about 19% less than SRAC prices; while, electric market prices based on gas border prices were about 70% greater than SRAC prices.⁴¹

Although FERC did not use gas border prices in developing MMCPs, CCC points out that those generators, who actually paid such border prices, were allowed to use border prices in determining their refund amounts. Furthermore, CCC quotes SDG&E which states that "Even if the indices were proven incorrect, that would not automatically mean that SRAC prices based on those indices were also incorrect, if those prices reflected the utilities' avoided cost during the relevant period."⁴² In addition, CCC argues that SRAC prices may have been correct despite gas price manipulation given FERC's use of higher heat rates and O&M expenses in calculating MMCPs. CCC asserts that using higher heat rates and O&M expenses in the SRAC formula will mitigate the use of gas border prices. CCC adds that since utilities' avoided costs are driven by the same market gas prices, then SRAC prices based on those market gas prices are correct. Stated another way, CCC contends that QF avoided-cost payments must be set based upon the costs that the utilities actually avoid as a result of QF purchases, even if those costs resulted from a manipulated market. Thus, wholesale electricity prices during the Remand Period, which comprise at least a portion of the utilities' avoided costs, were based in substantial part upon the California border price indices. CCC points out that FERC permitted generators that actually paid these border prices in arm's length transactions to continue to employ these prices. By analogy, CCC contends, QFs that paid high border gas prices should not be subject to potential refunds during the Remand Period. CCC believes that FERC's determination regarding actual gas prices paid by QFs reflects the principle that electricity prices based upon border prices during the Remand Period can be just and reasonable to ratepayers, a PURPA requirement for SRAC prices.⁴³

CCC suggests that ratepayers are already being compensated under the El Paso Settlement, and as QFs are not entitled to any settlement proceeds, any retroactive adjustment would result in ratepayers receiving unwarranted windfalls, and double-exposure for certain QFs. CCC provides that a portion of the settlement proceeds was intended for ratepayers to reflect QF payments during the Remand Period. CCC explains that Edison expressly referred to increased SRAC payments as a portion of the harm suffered by Edison due to excessive border prices, as confirmed by Edison and PG&E.⁴⁴ CCC alleges that over $1 billion of the El Paso Settlement damages are allocable to inflated electricity prices, and a portion of these damages are intended to compensate for inflated SRAC payments. CCC calculates that PG&E's portion related to SRAC payments for the Remand Period is approximately $52 million, Edison's portion is approximately $60 million, and SDG&E's portion is approximately $3 million.

CCC argues that recent Commission decisions on utility procurement⁴⁵ further support a finding the SRAC prices during the Remand Period were correct. CCC points out that these decisions indicate the importance of QFs to utility procurement, and encourage existing QFs to provide power over the longer term. CCC notes that in affirming QF power, and finding that the SRAC formula was in need of revision, the Commission did not conclude that the current SRAC pricing methodology violated PURPA. Finally, CCC cautions that if the Commission does not reaffirm SRAC prices during the Remand Period, Edison, and perhaps PG&E, may attempt to revisit SRAC prices determined under the revised SRAC formula adopted in D.01-03-067.⁴⁶

CAC states that it supports the positions of CCC and IEP, and argues that if the Commission does not sustain its earlier position that SRAC prices were correct during the Remand Period, then CAC requests evidentiary hearings and the right to audit utility records in order to determine avoided costs. CAC believes that SRAC prices over time represent a reasonable proxy for avoided costs, and that accurate avoided costs are represented by consistent application of the methodology (i.e. the transitional formula), and not by a minute-by-minute equivalence. CAC agrees with other parties that the Topock gas prices were manipulated, but states that QFs relied upon those prices in determining their fuel costs, and purchased gas at the Topock spot market prices. CAC further believes this proceeding is administratively wasteful and in conflict with the Commission's recent procurement orders, D.04-01-050 and D.03-12-062 regarding QF pricing methodologies. Finally, CAC notes that QFs continued to deliver power during the Remand Period, relying on adopted SRAC pricing, although QF payments for these deliveries were delayed.

CalWEA supports the position of CCC and argues that any retroactive adjustment of SRAC prices will have a significant economic impact on renewable QFs and California's Renewables Portfolio Standard program. CalWEA contends that wind energy QFs have already invested SRAC payments in project repairs and that QFs, including wind generators, provided power during the energy crisis despite the utilities' failure to pay for this power. CalWEA argues retroactive refunds could create uncertainty in the renewable resource market, and thus reduce adequate renewable resource financing of new projects. CalWEA also maintains that the FERC Settlement included damages due to inflated SRAC prices, and suggests that SRAC prices may have been correct despite manipulation of gas indices in the transition formula.

Tractabel argues that gas prices used in the SRAC formula during the Remand Period were those actual gas prices paid by QFs, and that QFs relied on posted SRAC prices to hedge against changes in gas prices. Thus, any retroactive refund would result in a loss to QFs using hedging arrangements. Tractabel states that QFs suffered losses as a result of the gas index change from Topock to Malin in the modified transition formula, and a retroactive adjustment would result in further losses. Tractabel also argues that Remand Period avoided costs, as defined by PURPA, were the power costs that would have been paid by utilities in the absence of QF power. Tractabel notes that these avoided costs are not measured by prices in a competitive market, but are the costs occurring at the time of measurement.

Tractabel also contends that § 390 provides that costs of gas for generation reflect gas costs available for incremental purchases when avoided costs were measured. Tractable asserts that the starting gas index price used in SRAC reflects "an average of current California natural gas border price indices." Tractabel argues that the existing border gas prices at Topock were the actual gas supply costs available to electric generators, including QFs. Tractable contends alternative calculations of gas prices, including basin plus transportation, were not available to electric generators during the Remand Period.

CHC and DGS also oppose SRAC refunds. CHC believes retroactive refunds would result in a taking of property, and argues that SRAC prices understated actual Remand Period incremental energy prices as measured by prices in the wholesale market. DGS, which operates three cogeneration facilities at California institutions, contends that the State would be harmed through changes in financial revenue streams, and potentially need to find new energy sources to replace existing cogeneration facilities.