December 1999
California PUC Permits QFs A One-Time Election To Base Payments On The PX Market Price
by Robert Olson  --   Brown, Olson and Wilson, P.C.
(originally published by PMA OnLine Magazine: 2000/01)

On November 4, 1999, the California Public Utilities Commission (CPUC), by a 3 - 2 vote, granted with modifications a motion by several qualifying facilities requesting the CPUC to permit short-run avoided cost (SRAC) energy payments to be based upon the California Power Exchange (PX) market-clearing price for qualifying facilities (QFs) who elect this option. Under California law, SRAC energy prices paid to QFs are based upon a benchmark energy price which is adjusted for changes over time by a gas index. California law, however, also permits QFs to make a voluntary, unilateral, one-time election to choose SRAC payments based upon the PX market-clearing price rather than the benchmark price. Considering this motion in the context of a more comprehensive proceeding related to nonutility generators in the context of electricity restructuring (the restructuring proceeding), the CPUC’s approval was granted on an interim basis, pending the adoption of a permanent methodology based on the market-clearing price, and is subject to true-up for possible inclusion of capacity value in the market-clearing price.

The CPUC ruling applies to QFs in the service territories of Pacific Gas and Electric Company (PG&E), Southern California Edison (SCE), and San Diego Gas & Electric Company (SDG&E). These QFs may elect to receive PX market-clearing price-based payments rather than the benchmark price under California statute. The PX market-clearing price is the hourly energy price by zone as published by the PX for its day-ahead energy market. The applicable zone is determined by the location of the QF.

Utilities and QFs differed on whether the PX market-clearing price includes capacity value. Under California law, QFs under certain power purchase contract provisions cannot receive capacity value from both the contract and the PX-based pricing. The CPUC stated it needed more time to study the inclusion of capacity value, and will address any adjustments in a true-up mechanism. The CPUC also stated it will study the impact of line losses on the PX-based price, but will not include line losses in the true-up mechanism.

The CPUC intends to initiate a proceeding in the near future to consider the issues raised by a switch from SRAC pricing to PX pricing. This proceeding may conclude with the establishment of a permanent pricing methodology based on PX pricing, which may be used for purposes of the true-up. If that proceeding has not produced a permanent pricing methodology by December 31, 2000, then the CPUC will adopt one at that time to avoid multiple true-ups or no true-up for an indefinite period. The CPUC found that, in comparison with the price methodology it may adopt in the comprehensive restructuring proceeding, payments using the interim market-clearing price should not over-compensate or under-compensate QFs. Utilities are to track payments made under the interim PX-based pricing and separate capacity payments made to QFs. If a particular price is adopted in the restructuring proceeding, the tracking information is to be compared with the data from the PX for true-up. True-up adjustments are to earn interest at the short-term commercial paper rate.

The CPUC ruled that a QF’s election to switch to PX-based pricing will be irrevocable, with the exception that QFs which have provided notice to their purchasing utilities prior to October 20, 1999 of their election to switch to PX-based pricing may revoke their election if notice is provided within ten days of the CPUC’s order. QFs who provided notice prior to the CPUC’s decision may specify that the date the election takes place commences on the date of the CPUC’s order or at any later date the QF specifies. The CPUC determined that the election to invoke the option may not take place prior to the effective date of the CPUC’s order, which takes effect immediately.

The CPUC also determined that a QF must provide at least 15 calendar days’ advance notice to its purchasing utility of its election to convert its payments for SRAC energy to a PX-based market-clearing price. This advance notice period was deemed adequate to allow the utility time to modify its billing and payment systems. The CPUC stated, however, that it may make future adjustments to the notice period in the restructuring proceeding.

The CPUC further determined that the payments made pursuant to PX-based market-clearing prices are reasonable and therefore are recoverable by the utilities in rates. However, the order does not provide for utilities to recover in rates the costs that they will incur related to the one-time switch-over. The CPUC, however, will address that issue in the more comprehensive restructuring proceeding. Specifically, the CPUC must determine whether such costs are already covered in the rates recovering the cost of annual proceedings conducted to review the reasonableness of administrative costs associated with QF contracts. The CPUC’s order directs PG&E, SCE, and SDG&E to file within fifteen days compliance advice letters reflecting the necessary tariff and preliminary statement changes required by the decision.

Robert A. Olson is a partner in the law firm of Brown, Olson & Gould P.C. which maintains a nationwide practice in energy law, public utility law and related commercial transactions. He can be reached at:

Brown, Olson & Gould, PC
2 Delta Drive, Suite 301
Concord, NH 03301

rolson@bowlaw.com | (603) 225-9716