XI. Do SRAC Prices as Determined by the
Transition Formula During the Remand
Period Meet PURPA Requirements?

In this instance, the Court has required us to determine whether SRAC prices were correct under PURPA, although one of the critical measures necessary to this determination is a calculation of avoided costs, as measured by the cost of energy supplied by non-QF generators. Therefore, although we are making a determination of avoided costs as required under PURPA, this determination should not in any way be construed as affecting or impacting the Commission's position elsewhere that electric prices from non-QF generators were unreasonable and unjust during both the Remand Period, and for other months of the 2000-2001 energy crisis. Our determination of avoided cost set forth in today's decision has limited application and purpose, namely for disposing of the issues during the Remand Period.

Parties recommending SRAC refunds focus on the effects of gas manipulation on SRAC prices, or refer to "avoided fuel costs," a term that is not defined in PURPA. These arguments conclude that manipulated gas prices result in incorrect SRAC prices, and thus SRAC prices need correction. Recommended correction methods include using basin plus transport or MMCP, WACOG, or other means to determine gas prices and apply these modified or corrected gas prices to the transition formula. However, it is not clear how these methodologies produce SRAC prices that equate to avoided costs as defined in PURPA.

In addition, PG&E, Edison and SDG&E argue that avoided costs during the Remand Period are best measured by using the MMCP as a maximum, a value calculated by FERC to determine energy prices in the California refund proceeding. PG&E, Edison and SDG&E reach this conclusion by noting that the MMCP sets a price, above which, any other price would be unjust and unreasonable. In addition, utilities argue that avoided costs should be measured not by spot market prices, but by MMCPs, mitigated prices that utilities will ultimately pay generators.60 However, the value of MMCP developed by FERC in its July 25, 2001 Order was to provide a price against which to determine refunds in the electric markets, not to set an avoided cost.

Alternatively, and as noted by CCC, avoided costs do not reflect what would have occurred under different market conditions than those that actually prevailed at the time of energy purchase. PURPA does not provide an alternate definition of avoided costs when a fuel component of energy costs, in this instance gas costs, is manipulated or otherwise incorrect. PURPA clearly states that avoided costs are incremental energy or capacity, or both, which but for the purchase from QFs, the utility would either generate itself or purchase from another source.

Furthermore, the information indicates that during the Remand Period spot market prices exceeded SRAC, including prices charged to DWR and the ISO.

Thus, the question before us is whether spot market prices or MMCP or perhaps a modification of either of these prices, is the reasonable measure of avoided costs for purposes of measuring SRAC prices under PURPA. In order to make this determination a careful reading of PURPA is required including a reading of the factors included in 18 C.F.R. § 292.304(e).61 We find that the "Factors Affecting Rates for Purchases" in PURPA do not include the manipulation of electric rates, or potential energy price changes after-the-fact. Simply, this appears not to have been a consideration when PURPA was adopted. Furthermore, as discussed above, the purpose of a MMCP was not to set avoided costs, but to establish a reasonable standard from which to determine the amount of refunds due to entities purchasing electricity during the 2000-2001 energy crisis, which includes the Remand Period. In this instance, we are determining whether SRAC prices were correct, and therefore we compare SRAC prices to the appropriate avoided costs. Although energy costs from non-QF sources during the Remand Period were exorbitant, and are the subject of the FERC refund proceeding, these are the energy costs that would otherwise have been incurred by utilities to replace QF power.

We also note that the exorbitant energy prices charged to utilities, the ISO and DWR, were a result of market manipulation by non-QF generators. Energy supplied by QFs during the Remand Period was not one of the direct factors affecting the electric market manipulation that resulted in the MMCP.

While Edison suggests that the prices paid by the ISO and DWR included capacity values that would tend to lower energy costs contained within these purchases, no party has provided information showing the value of capacity included in these prices, or that the differences in demand and supply curves for power indicate capacity value. Furthermore, CCC is correct that the Reliability Must-Run contracts paid by the ISO include capacity values within ancillary services which reduce any capacity value within ISO purchases.

Although we have determined that the appropriate measure of avoided costs are the actual spot market costs of energy charged to the utilities, the ISO, and DWR, we also have considered the effect of using MMCP for calculating avoided costs. However, we do not believe that the absolute MMCP is the correct value for this determination, as it is speculative that without QF power how the substitute power would have been purchased. It appears that under these extreme conditions, that without QF power, with utility power portfolios at full dispatch, the only option would have been for the utilities to procure from an increasingly scarce market supply that may have had to operate less efficient resources with relatively high heat rates. Notwithstanding this likelihood, power prices calculated at MMCP implied market heat rates (IMHR)62 at actual bidweek (monthly) border gas prices, yield energy prices in excess of posted SRAC energy costs.

In its February 17, 2004 Comments, CCC compared actual posted SRAC energy prices during the Remand Period with two alternative measures of avoided energy costs: (1) Basin-Forward based MMCPs as advocated by PG&E/ORA/TURN, and (2) Border Gas based MMCPs as advocated by CCC.63 CCC observed that posted SRAC energy prices at $151/MWh were well below alternatively calculated avoided cost energy prices of $256/MWh, which CCC calculated using implied MMCP heat rates and average monthly border gas prices. We note however that SRAC energy prices are calculated at "bidweek"64 gas prices, not average monthly prices as suggested by CCC. Thus, a more accurate representation of CCC's avoided cost energy price would be the calculation of energy prices using MMCP heat rates and bidweek gas prices.

Given that the utilities fully dispatched their own resources, subject to operating constraints, a reasonable estimate of utility avoided energy cost during the Remand Period is an electric price calculated using bidweek border gas at MMCP heat rates, which conservatively reflect the market for available power purchases. This is a reasonable measure of avoided cost during the remand period, given that (1) the mitigated heat rates reflect the lower basin plus transportation gas prices, and (2) border gas at bidweek prices were significantly lower than average monthly gas prices. In the event the utilities had sought to replace QF power with alternative power purchases from market sources, the resulting electric prices would likely have reflected higher heat rates and gas prices, given the large block of QF power. In order to make this calculation, we begin by deriving the Basin Plus Transportation prices using information provided in CCC's February 17, 2004 comments adjusted for CCC's inclusion of a $6/MMBtu O&M adder. This calculation is shown in Table A. We then derive the implied market heat rate (IMHR) using Basin Forward MMCPs (Table B). Application of these heat rates, and the bidweek gas prices used in SRAC pricing calculates modified MMCPs (Table C). These modified MMCPs, have been added to Table 2 in CCC's February 17, 2004 comments (p. 9) in order to compare SRAC and MMCPs using the border gas prices used in SRAC calculations. These differences as shown in Table D are $105 using the monthly gas prices, and $60 when adjusted for the use of bidweek gas prices, further confirming that SRAC energy prices were lower than alternative energy purchase prices from other market sources.

Table A

Gas Prices

 

MMCP65

$/MWh

(1)

O&M Adder66

$/MMBtu

(2)

Actual MMCP67

$/MMBtu

(3)

IMHR68

Btu/kWh

(4)

Basin Plus69

$/MMBtu

(5)

 

A

B

C=A-B

D

E=C÷D

Dec-00

$128.30

$6.00

$122.30

12,729

$9.61

Jan-01

$160.60

$6.00

$154.6

15,818

$9.77

Feb-01

$105.60

$6.00

$ 99.60

14,265

$6.98

Mar-01

$ 96.40

$6.00

$ 90.40

14,744

$6.13

Average

$122.73

$6.00

$116.73

14,389

$8.11

60 PG&E argues that the costs paid by DWR are "irrelevant," since these are not PG&E's costs. While technically this may be correct, PG&E ignores the issue of who will pay DWR for its purchases, and more importantly, whether these high purchase prices provide some measure of avoided costs. Under the California Water Code, Sections 80000-80270, DWR buys and sells electric energy to PG&E ratepayers, and thus ratepayers do pay these costs, even if PG&E is bypassed. Similarly, SDG&E contends these costs were a direct obligation of SDG&E customers to DWR, although that obligation did not reduce the high energy prices paid by DWR. 61 Factors include availability of QF energy and capacity, ability of the utility to dispatch the QF, QF reliability, QF contract terms, scheduling of QF outages, usefulness of QF energy and capacity during system emergencies, value of QF energy and capacity on the utility system, relationship of QF energy and capacity to utility ability to avoid costs, and line losses. 62 IMHR = Power Price ÷ Gas Price x 1,000. For example, IMHR $60/MWh ÷ $5/MMBTU x 1,000 = 12,000 Btu/KWh. 63 CCC comments, February 17, 2004, p. 9. 64 Bidweek gas prices are based on gas price indices as required
by D.96-12-028, mimeo., p.8. 65 CCC comments, February 17, 2004, Table 2, p. 9, which include CCC's addition of $6.00/MWh. 66 CCC comments, February 17, 2004, Table 2, p. 12. 67 FERC MMCP values after removing CCC variable O&M of $6.00/MWh. Col. (A) - Col. B. 68 Implied Heat Rates in MMCP, CCC comments, February 17, 2004, Table 3, p. 13. 69 Basin Plus Transportation Gas Prices, [Col. (C ) ÷ Col. (D)] x 1,000. 70 CCC Comments, February 17, 2004, Table 2, p. 9. 71 Calculated values from Table A. 72 col. (3) = [col. (1) ÷ col. (2)] x 1,000. 73 col. (1) = [col. (3) x col. (2) / 1,000. 74 Border gas prices, plus intrastate transportation, from the respective monthly SRAC energy postings of PG&E, Edison, and SDG&E for December 2000 - March 2001. 75 IMHR from Table 1.

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