BILL ANALYSIS 1
1
SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
SB 173 - Dunn Hearing Date: May 29, 2003
S
As Amended: May 20, 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 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.
This bill gives those renewable QFs currently under five-year,
fixed-price contracts the option to elect an additional five
years of fixed energy payments at a price to be determined by
the CPUC (Section 2 added in May 20 amendments).
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.
May 20 Amendments:
The majority of QFs, and virtually all renewable QFs, entered
into five-year contracts in 2001 to receive fixed energy
payments of 5.37 cents/kwh. Under the terms of their original
30-year power purchase contracts signed in the 1980's, the IOUs
are obligated to take energy from these QFs for at least another
10 years, at the "avoided cost" determined by the CPUC. Under
current law, when the five-year/5.37 cent deals expire in 2006,
energy prices and terms would be subject to re-negotiation
between the QFs and the IOUs and approval by the CPUC,
consistent with PURPA. Under this bill as amended, renewable
QFs would be entitled to opt for another five years (i.e.
2006-2011) of fixed energy payments at a CPUC-set price.
COMMENTS
1.Why has this bill returned to policy committee? The
provisions described above in bold (Section 2 of the bill)
were not contained in the bill or discussed when it was heard
in this committee on April 8, but were added to the bill in
the Senate Appropriations Committee. The Chairwoman asked to
return the bill to this committee so the amendments could be
reviewed by the appropriate policy committee.
2.Fixed prices for five more years. The QFs are entitled to
receive payments for energy from IOUs at avoided cost until
the expiration of their current contracts, which typically
extend for another 10-12 years. Within those contracts, many
QFs and IOUs have negotiated a fixed price for energy (5.37
cents) from 2001-2006. The issue before the committee in
these amendments is whether the Legislature should also
specify that renewable QFs are entitled to choose CPUC-set
fixed prices for an additional five years (2006-2011). The
author and the committee may wish to consider whether the term
(five years) should be specified in statute, whether the
provision should be limited to renewable QFs, and whether QFs
should retain the option to choose an alternative pricing
method (e.g. gas price index) if they don't like the fixed
price set by the CPUC, or be required to take the fixed price.
POSITIONS
Sponsor:
Author
Support:
Southern California Edison
Oppose:
Berry Petroleum Company
California Cogeneration Council
Calpine Corporation
Carson Cogeneration Company
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: May 29, 2003