In the News: Recent Developments

Electric Power Daily
Thursday, March 22, 2001

PUC offers plan giving QFs choice of fixed payments, but does not address past debt

Dusting off an earlier proposal to meet the hurried demands of California Gov. Gray Davis to fix the payment problems that are threatening the financial viability of the state’s qualifying facilities, the Public Utilities Commission Wednesday floated a revised draft plan and has asked market participants to offer their comments by Friday afternoon. The commission intends to vote on the plan Tuesday.

Developed by Commissioner Carl Wood, the draft calls for QFs to choose between two fixed payments based on prices that mirror those contained in long-term contracts that larger generators are negotiating with the California Dept. of Water Resources. The plan also gives Pacific Gas & Electric and Southern California Edison, the two largest utility buyers of QF power, a deadline for making payments to QFs or risk fines.

The draft plan, however, does not provide a way for the QFs to recover the roughly $1.4-billion SoCal Ed and PG&E owe them for past power deliveries. Since November, SoCal Ed has made no payments to QFs, while PG&E has only managed to pay roughly 16 cents on the dollar.

The governor’s order to the PUC appears to have been prompted in part by the loss of roughly 3,000 MW of QF capacity, which has shut down over the past several weeks. Increasing numbers of QFs say they have ceased operations or soon will because the lack of utility payments has left them unable to pay for natural gas and other costs. Of the $1.4-billion owed, SoCal Ed is responsible for about $850-million.

The importance of the QF power-qualifying facilities represent about one-third of California’s in-state capacity-was driven home earlier this week when the California Independent System Operator was forced to call rolling blackouts Monday and Tuesday after temperatures rose and several large generating plants tripped off-line. ISO officials, however, said firm interruptions likely would not have been required had all the QF capacity been available. Woods’ draft assumes the state’s IOUs are not paying the QFs even as they are accumulating cash. SoCal Ed has indicated it now has $1.7-billion in cash on hand. “Effective with the approval of this order, the utilities are ordered to make payments to QFs for energy deliveries made on and after the effective date of the order, within 15 days after delivery of the energy.” The plan also proposes to impose a “significant penalty” on utilities that fail to make payments on schedule.

The proposal would apply to all QFs, including natural gas-fired cogenerators, which account for about 6,000 of the roughly 10,000 MW of QF capacity in California.

Simply put, the plan would offer QFs the choice of two price plans. Under the first, a QF agreeing to a five-year supply contract with its utility would receive 7.9 cents/kWh. Those willing to commit to a 10-year deal would be guaranteed a payment of 6.9 cents/kWh.

The plan also calls for the PUC’s Energy Division to study different alternatives for pricing natural gas, the key cost component for many of the QFs. Woods’ draft noted that “QFs have never received exactly the same price as other generators” and in fact have historically been paid above-market rates.

“Given the current status of the electricity market, it is not clear how, in the long run, the statutory requirement to base the energy portion of payments on gas prices alone must be modified. Many QFs do not use gas. We invite the Legislature to provide policy guidance and the procedural flexibility to carry out the policy and adapt it to changing circumstances.”

Under the current system, QF payments are tied directly to the price of natural gas. When gas prices hit record levels this winter, the cost of QF capacity rose to 17-18 cents/kWh.

Jan Smutny-Jones, executive director of California’s Independent Energy Producers Assn., which represents in-state generators, including QFs, Wednesday applauded Davis’ initiative, but said the plan is incomplete and assumes QFs will be able to obtain natural gas at below-market prices.

The governor “got it right,” but there are still “a number of ambiguities,” he said. According to Smutny-Jones, the proposal’s failure to address high natural gas prices, a key component of many QFs’ costs, must be fixed. Gas prices in the state are currently about $11/Mcf and QFs would likely be unable to turn a profit under either of the price levels contained in the plan. Smutny-Jones also said he has seen nothing in it that would address the issue of the roughly $1.4-billion PG&E and SoCal Ed owe QFs for past power deliveries.

Joseph Fichera, chief executive officer of New York-based Saber Partners, which is acting as a banker and advisor to Davis on utility restructuring, yesterday said determining how QFs should be paid for past power deliveries is a separate issue and is part of separate negotiations. “We have a problem in the past and we have a problem going forward, and we have a thing called summer coming up,” he said. Fichera said the state realizes there are range of problems with QFs, other generators and utilities and is working on a global settlement.

“But we also know we have an immediate problem and need to do something to get QFs on-line, while we resolve these other problems. If we can get them to be paid going forward and get them on-line that will help us prevent blackouts.”

“There are a lot of different moving parts in this and everyone who wants to see it from their one perspective misses the big picture. It’s just not probable to assume that everything can come together at once.”

Word of Davis’ plan was followed yesterday by the announcement that state lawmakers would introduce an emergency bill late Wednesday or early today to repeal the formula for calculating QF payments based on short-run avoided costs (SRAC). The bipartisan bill will repeal a provision in California’s 1996 electric restructuring bill that codified the PUC SRAC formula based on the monthly natural gas price index at the California border.

The bill would replace the SRAC formula with a requirement that the PUC follow the Public Utilities Regulatory Policies Act requirements for calculating SRAC payments to QFs, said Evan Goldberg, chief of staff to Democratic Sen. Debra Bowen, chair of the Senate Committee on Energy, Utilities and Communications.

The bill, which does not yet have an author, is expected to be referred to the Senate Energy Committee and will be sent to the Senate and Assembly floor under an expedited schedule. Lawmakers want to have the bill ready before the PUC votes Tuesday on Woods’ proposal.

The new bill would replace SB 47x, sponsored Republican Sen. Jim Battin. SB 47x would have established five-year fixed rates for payments to both natural gas and renewable QFs.

California also saw the following developments Wednesday:
–The House Government Reform Committee announced that it would hold three field hearings next month in California to look into the state’s energy crisis. The hearings will take place on April 10 in Sacramento, April 11 in San Jose, and April 12 in San Diego.

“The energy crisis in California has ramifications for the entire country, and it looks like it’s going to get worse before it gets better,” said Indiana Republican Rep. Dan Burton, committee chairman. “The problems are costing California’s economy billions of dollars, and that’s going to affect the economy of the entire country. We need to have a better understanding of why this happened and what can be done about it.”

“Our focus in these hearings is to examine what options exist to increase our energy supply and decrease demand,” said California Republican Rep. Doug Ose, a committee member. “This is a critical first step to helping all parties contribute to a permanent solution to our current crisis.”

Members of the committee will hear testimony from representatives of generators, utilities, government entities, and local organizations who are dealing with the energy problem.

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