BILL ANALYSIS 1 1 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 1 7 3 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