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About The Author:

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
(603) 225-9716









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STATELINE by Robert Olson

April 2001

California Court Permits Qualifying Facility to Resell Its Power On the Open Market 
California Public Utilities Commission Follows by Ordering
Utilities to Pay QFs Within 15 Days of Future Deliveries
by Robert Olson  --   Brown, Olson and Wilson, P.C.
(originally published by PMA OnLine Magazine: 2001/05/06)

In an order of the Imperial County Superior Court, dated March 22, 2001, a group of Southern California qualifying facilities ("QFs") were temporarily released from their long term power contract obligation to sell their capacity and energy to Southern California Edison Company ("Edison"). The case originated as a collections action brought against Edison by the operators of eight geothermal power generating plants wholly owned by CalEnergy Operating Company ("plaintiffs"), and has its origins in the current California energy crisis. Edison had not paid the plaintiffs due to its inability to recover costs above the amount provided for in the state’s deregulation program.

The plaintiffs’ complaint, filed February 20, 2001, consisted of fifteen causes of action. Among other claims, two of the counts sought a declaration from the court that: 1) Edison is obligated to perform its obligations under the contracts and provide the plaintiffs with certain required statements and payments; and 2) plaintiffs are entitled to suspend delivery of energy and capacity until Edison pays what it owes, and may resell their energy and capacity to other purchasers as long as Edison fails to pay, and that such suspension of delivery does not result in a modification of the long term power contracts between the plaintiffs and Edison. The plaintiffs sought over $44 million dollars in compensatory damages, plus interest and attorney’s fees.

The court’s March 22, 2001 order only addressed and granted the plaintiffs’ Motion for Summary Adjudication of the Second Cause of Action for Declaratory Relief. The court entered a declaratory judgment stating that: 1) the plaintiffs have the right to temporarily suspend deliveries of energy and capacity to Edison; 2) plaintiffs are entitled to resell the energy and capacity to other purchasers; and 3) the temporary suspension and resale of energy and capacity will not result in a modification of the contracts.

Following the Imperial County Superior Court decision, the California Public Utilities Commission ("Commission") issued a decision on March 27, 2001 ordering the utilities to pay for QF energy deliveries, made on or after the effective date of the Commission’s decision, within 15 days of the end of the QF billing period. In addition, the Commission’s decision permits the QFs to establish a 15 day billing period and includes a penalty, equal to the amount owed the QF, if the utility fails to pay on time.

The Commission’s decision also modifies an earlier decision that established the price index by which the utilities’ short-run avoided costs ("SRAC") are calculated. In that earlier decision, the Commission created an index methodology, called the Transition Formula, to determine the pricing for QF energy. The Transition Formula created a base energy price for each utility using incremental system heat rate, a variable operations and management adder, a factor to address impacts between changes in border gas costs and the utilities’ calculated avoided cost (the "Factor"), and the "burnertip gas price" which consists of the average border gas prices and average interstate and intrastate gas transportation costs.

The Commission’s March 27 decision originated from Edison’s request that its SRAC Factor be modified because the difference between the Burnertip Gas Price and the border gas prices had decreased substantially. The Commission concluded that, while all elements of the Transition Formula should be updated, it would grant Edison’s request for a modified SRAC Factor now, based on this single comparison. The Commission did not modify the Factors of Pacific Gas & Electric Company ("PG&E") or San Diego Gas & Electric Company ("SDG&E") in this decision because those companies either failed to request a change or presented insufficient information for the Commission to determine whether a modification was necessary.

The Commission’s decision also included modifications to another element of the Transition Formula; the calculation of average border gas prices, which is a component of the Burnertip Gas Price. Border gas prices are published from certain entry points on California’s border where natural gas is piped into the state. The Commission’s decision changed the border location, and thus the related price used in Transition Formula. This change is expected to lower the price the utilities are required to pay QFs for their energy and capacity.

The Commission’s decision also established a Consumer Transition Price ("CTP") as a reasonableness benchmark for payments to QFs. The CTP will serve as a pricing goal for the average cost of QF production. The Commission recognized that sole reliance on the Transition Formula calculation of SRAC had resulted in prices which exceeded the reasonableness standard required by PURPA and FERC. The CTP established by this decision is $79 per megawatt-hour, but will not be used as a ceiling to prices paid to QFs.

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 | (603) 225-9716

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