BILL ANALYSIS 1
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SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
MARTHA M. ESCUTIA, CHAIRWOMAN
SB 431 - Battin Hearing Date:
April 19, 2005 S
As Amended: April 11, 2005 FISCAL B
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DESCRIPTION
Existing federal law , the Public Utility Regulatory Policies Act
(PURPA):
1. 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)."
2. Provides QF rates shall not exceed the utility's
"avoided cost" - the cost the utility would otherwise pay
to generate or buy power from another source - but leaves
determination of avoided cost to state regulatory
commissions.
Existing state law:
1. Establishes procedures for determining "avoided cost"
according to two alternative formulas, one relying on gas
price indices at the California border and the other
relying on Power Exchange (PX) energy prices. QFs have a
one-time option to switch from the gas index formula to the
PX formula.
(P.U. Code Sec. 390, added by AB 1890 (Brulte), Chapter
854, Statutes of 1996)
2. The "Renewables Portfolio Standard" (RPS), requires
electric utilities and certain other retail sellers to
increase their existing level of renewable resources by one
percent of sales per year, sets a deadline of 2017 for
achieving a 20 percent renewable portfolio, and establishes
a detailed process and standards for renewable procurement.
(SB 1078 (Sher), Chapter 516, Statutes of 2002)
This bill requires electric utilities, to encourage
"re-powering" of existing renewable energy generators, to offer
the following:
1. New or amended contracts or contract extensions of up to
10 years.
2. Flexible interpretation of existing contract terms,
including allowing adjustments to project size and
location.
3. Pricing options, including CPUC-determined fixed prices,
that will result in lower prices than current standard
offer contract terms.
BACKGROUND
Enacted in 1978 as part of the National Energy Act, PURPA was
designed to encourage efficient use of fossil fuels by allowing
non-utility generators (known as QFs) to enter the wholesale
power market. PURPA designated two main categories of QFs:
co-generators, which use a single fuel source to either
sequentially or simultaneously produce electric energy as well
as another form of energy, such as heat or steam; and
independent power producers, which use renewable resources
including solar, wind, biomass, geothermal and hydroelectric
power as their primary energy source.
Although intended to be an environmental statute, a primary
effect of PURPA was to introduce "competition" into the
generation sector of the electricity marketplace.
Implementation of PURPA required California's electric utilities
to buy power from QFs under long-term contracts at avoided cost.
Approximately 25% of the electricity demand of electric utility
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 utility 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
California Public Utilities Commission (CPUC) according to the
estimated cost to the utility of running an additional gas-fired
power plant. AB 1890 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
utilities and potential for dramatic rate increases, made paying
QFs according to border gas price indices unaffordable and
undesirable. This led to negotiations in 2001 in which the
majority of QFs, and virtually all renewable QFs, entered into
five-year contracts 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 utilities are obligated to
take energy from these QFs for several more 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 QFs and
utilities and approval by the CPUC, consistent with PURPA. This
bill requires utilities to offer contract extensions of up to 10
years to support the capital investment necessary to re-power
existing QFs. In the case of wind generators, re-powering
entails replacing existing turbines with larger, more efficient
turbines.
COMMENTS
1. Question of REC ownership should be addressed. In 2003,
the Federal Energy Regulatory Commission (FERC) ruled that
long-term PURPA contracts do not necessarily result in the
conveyance of Renewable Energy Credits (RECs), which
represent the renewable attributes of renewable energy, to
the purchasing utility. FERC reasoned that its "avoided
cost regulations did not contemplate the existence of RECs
and that the avoided cost rates for capacity and energy
sold under contracts entered into pursuant to PURPA do not
convey the RECs, in the absence of an express contractual
provision."
FERC left determinations regarding ownership to the states,
noting that "states, in creating RECs, have the power to
determine who owns the REC in the initial instance, and how
they may be sold or traded; it is not an issue controlled
by PURPA."
This bill presents an opportunity to address the REC
ownership issue teed up by FERC for the states. Since the
bill is intended to result in the extension of existing QF
contracts for as much as 10 years beyond their current
termination dates, it seems reasonable to ensure that, in
exchange for being required to extend QF contracts,
utilities and their customers are assured they will get
credit for the renewable output they are forced to
purchase. The author and the committee may wish to
consider adding a provision to assure renewable power from
contracts executed pursuant to this bill count toward the
RPS obligations of the purchasing utility.
2. QFs should be permitted to take advantage of this offer
only once. Since this bill is intended to promote
extension of current QF contracts to support re-powering of
current QF facilities, it should be drafted so that QFs can
take advantage of its provisions only once. To accomplish
this, the author and the committee may wish to consider
sunsetting the bill within 5 years or specifying that a QF
may only execute a contract pursuant to this bill one time.
3. How much bigger can the new projects be? This bill
requires utilities to allow "reasonable adjustments" to
project size and location in new or extended contracts.
Adjustments to the project size specified in the original
contract may be needed to accommodate re-powering. For
example, if a wind facility re-powers by replacing a bunch
of small turbines with a smaller number of larger turbines,
the total size of the project might not exactly match the
size specified in the original contract. The author and
the committee may wish to consider whether the allowable
size adjustment should be capped at a specified percentage
to accommodate this type of minor variation, while
preventing significant expansion of project size.
POSITIONS
Sponsor:
California Wind Energy Association
Support:
San Gorgonio Farms, Inc.
Sierra Club California
The Utility Reform Network
Whitewater Energy Corporation
Whitewater Maintenance Corporation
Oppose:
None on file
Lawrence Lingbloom
SB 431 Analysis
Hearing Date: April 19, 2005