California PUC proposes utilities pay QFs $79/Mw-hr

By the OGJ Online Staff

HOUSTON, Mar. 21�After months of nonpayment, California regulators have proposed the state's utilities pay for electricity purchased from small generators.

The controversy over electricity produced by the so-called qualifying facilities (QF) boiled over after the California grid operator said the system will continue to be strained, unless the state finds a way to pay the QFs. A spokesman for the California Independent System Operator said nearly half of the 6,000 Mw owned by QFs were off line during Monday and Tuesday's rolling blackouts.

California Gov. Gray Davis blamed the utilities for precipitating the crisis. Responding, Pacific Gas & Electric Co. said it has been working with the QFs, legislative leaders, and others to resolve the payment issues. While the company said it has paid QFs what it could, "it is unfortunate that the Governor also chose to criticize the company's actions with respect to QFs."

The QFs sell power directly to the utilities and have not been paid for 3 months. Nearly bankrupt Southern California Edison Co. and Pacific Gas & Electric Co. quit paying their purchased power bills after the PUC refused to raise retail rates high enough to cover their wholesale power costs.

Recently, some QFs have hinted they might force the utilities into involuntary bankruptcy, unless they get paid for the power they deliver. Some rely on wind and solar to generate power, but some are also gas-fired units.

With the political and financial pressure intensifying, the California Public Utilities Commission appears ready to order the utilities to pay the QFs. Commissioner Carl Wood has proposed a rate of $79/Mw-hr to be paid within 15 days of delivery of the energy, and set a comment period to end Friday.

The "commission is aware that utilities have not been paying QFs for deliveries for several months, while accumulating cash," Wood says in the order. Violation of the order would subject a utility to a "significant penalty."

Going forward, "the utilities have no reason to continue to withhold payment from QFs making energy deliveries to the utilities," the order says.

The proposed amount equals the average price of the electricity supply portfolio purchased by the California Department of Water Resources on behalf of California consumers for the next 5 years, according to the order. Alternatively, QFs and utilities can sign 10-year agreements with a fixed price option of $69/Mw-hr.

The proposed order caps the rate QFs can receive, although some QFs have argued the prices under consideration may not allow them to cover their operating costs and represent a unconstitutional taking. In the proposed order, Wood notes "QFs have never been absolutely entitled to a payment to cover their operating costs under any and all circumstances, only to a payment consistent with the utility's avoided cost."

He noted the commission never directed the QFs to enter into purchase agreements based on high-priced gas at the California border. "The fact that a QF may not have protected itself from pricing volatility is not a reason not to establish a cap on QF payments at utility avoided costs," according to the order.