BILL ANALYSIS 1
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SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
SB 173 - Dunn Hearing Date: April 8, 2003 S
As Amended: April 3, 2003 FISCAL B
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DESCRIPTION
Existing federal law , the Public Utility Regulatory Policies Act
(PURPA), requires electric utilities to offer to buy power from
certain non-utility co-generation and small power production
facilities, known as qualifying facilities (QFs), at rates that are
"just and reasonable?and in the public interest" and that do not
"discriminate against (QFs)."
PURPA provides these rates shall not exceed the utility's "avoided
cost" - the cost the utility would otherwise pay to generate or buy
power from another source.
PURPA leaves determination of avoided cost to state regulatory
commissions.
Existing state law (Public Utilities Code Section 390) establishes
procedures for determining "avoided cost." Section 390 contains two
alternative formulas for determining avoided cost - one of which
relies on gas price indices at the California border and one of
which relies on Power Exchange (PX) energy prices. QFs have a
one-time option to switch from the gas index formula to the PX
formula.
This bill requires the California Public Utilities Commission
(CPUC), when determining prices to be paid to QFs, as well as
certain natural gas benchmarks applicable to CPUC-regulated gas
corporations, to use only the gas price indices it finds reliable
and verified according to criteria specified in the bill.
This bill requires the CPUC, if it determines no reliable and
verifiable gas price index exists, to determine QF prices in a
manner that's equitable and consistent with PURPA.
Existing state law prohibits acts of unfair competition under
Business and Professions Code Section 17200 et. seq. Remedies and
penalties for a violation of Section 17200 include injunctive relief
and damages or restitution and/or civil penalties of up to $2,500
per violation.
This bill clarifies that "making a false statement or report for use
in an energy price index" is unfair competition and establishes a
higher maximum civil penalty of $25,000 per violation for making
such a false statement.
BACKGROUND
PURPA was enacted in 1978 to encourage competition in the power
generation market through the creation of a class of non-utility
co-generation and small power production facilities known as QFs.
Implementation of PURPA required California's investor-owned
utilities (IOUs) to buy power from QFs under long-term contracts at
the IOUs' avoided cost. Approximately 25% of the electricity demand
of IOU customers is now met by QFs. QF facilities include gas-fired
co-generators, small hydroelectric, and renewable resources
including wind, biomass, geothermal and solar.
Avoided cost is intended to reflect the cost the IOU would otherwise
pay to generate or buy power, not the QF's actual cost. The
standard is based on a hypothetical gas-fired power plant buying gas
on the margin. Many QFs are not fueled by natural gas and the QFs
that do burn gas don't necessarily buy their fuel on the spot market
and may be more efficient than the hypothetical gas-fired power
plant.
Prior to electric restructuring, avoided cost was set by the CPUC
according to the estimated cost to the IOU of running an additional
gas-fired power plant. AB 1890 (Brulte), Chapter 854, Statutes of
1996, codified an interim avoided cost standard in Section 390 which
relies on California border gas price indices. Under Section 390,
once specified conditions were met, avoided cost was to be based on
"competitive" prices established through the PX.
Since the PX is now defunct, the PX formula intended by Section 390
is irrelevant. Wildly high and volatile border gas prices during in
2001, combined with the financial insolvency of the IOUs and
potential for dramatic rate increases, made paying QFs according to
border gas price indices unaffordable and undesirable. This led to
negotiations in 2001 that resulted in the majority of QFs entering
five-year contracts at a fixed energy payment of 5.37 cents/kwh.
However, around 25% of QFs still have contracts tied to gas price
indices.
Recent investigations indicate border gas price indices have been
subject to manipulation and false reporting, which suggests these
indices are not a reliable indicator of either just and reasonable
wholesale gas prices or legitimate gas transactions.
The criteria in this bill the CPUC must use to determine whether a
given gas price index is "reliable and verified" track
recommendations made in a recent Federal Energy Regulatory
Commission (FERC) report "Price Manipulation in Western Markets."
According to the FERC report, "the process for reporting natural gas
price indices was fundamentally flawed and must be fixed. Traders
had the ability and incentive to manipulate the published indices
and they did so." The fixes recommended by FERC staff are based on
practices employed by the New York Mercantile Exchange (NYMEX).
Retail electricity prices can be directly (through contract prices
or reasonableness benchmarks based on indices) or indirectly
(through generation costs of electricity suppliers) influenced by
natural gas price indices. In addition, retail natural gas prices
are affected by natural gas price indices to the extent contract
pricing terms are tied to indices or indices serve as a benchmark
for the reasonableness of a gas utility's procurement.
COMMENTS
1.Are California border gas indices are a good proxy? Given the
demise of the PX and evidence of manipulation of gas indices, it
seems appropriate to reevaluate the formula mandated by Section
390. It doesn't seem to be in the public interest to make
consumers pay electricity and natural gas rates based on indices
which are known to be subject to manipulation.
If the avoided cost formula must be based on border gas indices,
it makes sense for those indices to be "reliable" according to
some accepted standards and "verified" by an authoritative third
party. However, the author and the committee may wish to consider
whether border gas indices, even if reliable and verified, are the
appropriate and exclusive indicator of avoided cost. Is a
statutory formula for avoided cost necessary in the first place or
should the Section 390 formula be repealed entirely, and the CPUC
permitted to set avoided cost on its own, consistent with PURPA's
mandate?
2.Is it possible to comply with this bill and Section 390 at once?
It appears the only exchange currently meeting the criteria laid
out in this bill is NYMEX. However, NYMEX does not indicate
California border gas prices. The existing Section 390 formula
requires the use of a California border gas index.
Under this bill, if no "reliable and verified" index is available,
setting avoided cost defaults to the CPUC. In this case, the CPUC
would be faced with an apparent conflict with the Section 390
formula. To resolve this conflict, the author and the committee
may wish to consider adding "Notwithstanding Section 390" to the
beginning of subdivision (d) of Section 391.x.
3.Double referral. This bill has also been referred to the Senate
Judiciary Committee.
POSITIONS
Sponsor:
Author
Support:
Southern California Edison
Oppose:
Berry Petroleum Company
California Cogeneration Council
Calpine Corporation
Independent Energy Producers
Pacific Gas and Electric
Sempra Energy
Sithe Energies
Smurfit-Stone Container Corporation
Western States Petroleum Association
Lawrence Lingbloom
SB 173 Analysis
Hearing Date: April 8, 2003