UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION ) ) ) MOTION FOR LEAVE TO ANSWER AND ANSWER OF THE CALIFORNIA UTILITIES

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1 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION Southern California Edison Company Pacific Gas and Electric Company San Diego Gas & Electric Company ) ) ) Docket No. EL MOTION FOR LEAVE TO ANSWER AND ANSWER OF THE CALIFORNIA UTILITIES Pursuant to Rule 213(a) of the Federal Energy Regulatory Commission s ( FERC or Commission ) Rules of Practice and Procedure, 1 Southern California Edison ( SCE ), Pacific Gas and Electric Company ( PG&E ), and San Diego Gas & Electric Company ( SDG&E ) (together, the California Utilities ) file this Motion for Leave to Answer and Answer in the above-referenced docket. For the reasons discussed below, the Commission should grant the California Utilities January 31, 2011 Enforcement Petition relating to the California Public Utilities Commission s ( CPUC ) AB 1613 Decisions C.F.R (a) (2010). 2 The AB 1613 Decisions consist of the following CPUC decisions issued in rulemaking docket R : (1) Decision Adopting Policies and Procedures for Purchase of Excess Electricity Under Assembly Bill 1613, D (Dec. 21, 2009) ( D ), (2) Order Dismissing Motion for Stay of Decision (D.) , Modifying D , and Denying Rehearing of D , as Modified, D (Apr. 26, 2010) ( D ), and (3) Decision Granting, in Part, and Denying in Part, Joint Petition of Pacific Gas and Electric Company, Southern California Edison Company, and San Diego Gas & Electric Company for Modification of Decision , D (Dec. 17, 2010) ( D ), rehearing pending. Page citations to CPUC Decisions are to the.pdf versions posted on the CPUC website.

2 I. MOTION FOR LEAVE TO RESPOND Although Commission Rule 213(a)(2) generally prohibits responses to answers or protests, the Commission will waive this Rule and allow a response when it ensures a complete and accurate record in the case. The Commission also permits responses that assist the Commission in addressing the issues raised in the answers or protests. 3 The California Utilities Answer achieves all of these goals. II. THE COMMISSION SHOULD CONSIDER THE ENFORCEMENT PETITION BEFORE THE CALIFORNIA UTILITIES ARE COMPELLED TO SIGN AB 1613 CONTRACTS A. FERC Policy Is that Challenges to PURPA Implementation Be Filed Prior to the Execution of Contracts In a prior case involving challenges to the CPUC s implementation of PURPA, the Commission indicated that it is extremely reluctant to upset the settled expectations of parties to, and to invalidate any of their obligations and responsibilities under, executed PURPA purchase contracts. 4 The Commission has reinforced this policy in several cases, noting that [t]he appropriate time to challenge a state-imposed rate is up to or at 3 See, e.g., Carolina Power & Light Co., 93 FERC 61,032 at 61,068 (2000) (allowing an answer to a protest where the answer would assist in the Commission s understanding and resolution of the issues raised ); Int l Transmission Co., 92 FERC 61,276 at 61, (2000) (accepting an answer to a protest where the answer assists in the Commission s understanding and resolution of the issues in this proceeding ). See Potomac-Appalachian Transmission Highline, LLC, 122 FERC 61,188 at P 23 (2008) (answer accepted because it assisted decisionmaking process); S. Cal. Edison Co., 122 FERC 61,187 at P 19 (2008) (answer assists decision-making process). 4 S. Cal. Edison Co., 70 FERC 61,215, reconsideration denied, 71 FERC 61,269 at 62,079 (1995) ( SoCal Edison ). In the SoCal Edison proceeding, SCE and SDG&E were able to delay filing their petition for enforcement until well after the CPUC issued its relevant rehearing order because they had yet to be compelled to execute QF contracts. 2

3 the time the contract is signed, not several years into a contract which hereforto has been satisfactory to both parties. 5 The primary reason that the California Utilities filed their Enforcement Petition on January 31, 2011 was that they were compelled to file advice letters containing the tariffs and contracts that implement AB 1613 ( AB 1613 Tariffs ) on that day. The California Utilities were thus concerned that they would have to enter into AB 1613 contracts imminently. As noted by the CPUC, on February 18, 2011, the CPUC s Energy Division staff suspended the AB 1613 advice letters the CPUC had directed the California Utilities to file. Contrary to any implications otherwise, this suspension does not necessarily reflect an intention by the CPUC to delay implementation of the AB 1613 Program. Rather, suspension of an advice letter occurs whenever an advice letter cannot be deemed approved pursuant to CPUC regulations. 6 In this case, full CPUC review was requested for certain of the advice letters, and all of the advice letters were protested; thus, they could not be deemed approved. Further, CPUC rules concerning the suspension of advice letters themselves indicate that suspensions do not delay disposition of the advice letters (and implementation of the tariffs submitted therein). Rather, CPUC rules direct that For any advice letter so suspended, the reviewing Industry Division will proceed promptly with the disposition of the advice letter under General Rule or 7.6.2, as 5 Conn. Light & Power Co., 70 FERC 61,012 at 61,029, reconsideration denied, 71 FERC 61,035 (1995), appeal dismissed sub nom. Niagara Mohawk Power Corp. v. FERC, 117 F.3d 1485 (D.C. Cir. 1997). 3

4 appropriate. 7 As such, the CPUC Energy Division staff s suspension of the advice letters implementing the AB 1613 tariffs and contracts can be lifted at any time. Thus, while the CPUC is correct that [n]o contract may be executed until the tariffs are approved, 8 that approval could come at any time. 9 The possibility exists that the California Utilities would have to execute power purchase agreements under AB 1613 ( AB 1613 Contracts ) for months, and perhaps even years, before the CPUC rules on rehearing. 10 Indeed, it is because a rehearing request does not stay a CPUC decision, 11 that the California Utilities also sought a stay from the CPUC. As of this filing, the CPUC has not issued a ruling on the California Utilities Motion for Stay, although it was filed nearly two months ago, concurrent with 6 CPUC General Order 96-B, General Rule 7.5.2, available at 7 Id. (emphasis added). 8 Notice of Intervention, Motion to Dismiss, and Protest of the Public Utilities Commission of the State of California at 5, Dkt. No. EL11-19 (Feb. 22, 2011) ( CPUC Protest ). 9 SCE and PG&E have requested Tier 3 treatment of their AB 1613 advice letters, which would require disposition by the full CPUC. SDG&E has requested Tier 1 treatment of its AB 1613 advice letter, which allows the CPUC s Energy Division to dispose of the advice letter, and it is effective pending disposition. In any event, the Tier designation of the tariff requested by the filing utility is not binding on the CPUC it may dispose of advice letters in the manner it deems appropriate. 10 The CPUC does not have to abide by any particular deadline in ruling on the rehearing applications in Rulemaking Docket No Cal. Pub. Util. Code 1735 ( An application for rehearing shall not excuse any corporation or person from complying with and obeying any order or decision, or any requirement of any order or decision of the commission theretofore made, or operate in any manner to stay or postpone the enforcement thereof, except in such cases and upon such terms as the commission by order directs. ). 4

5 the California Utilities respective applications for rehearing. 12 Had the CPUC granted the stay requested, there would not have been any need to file the Enforcement Petition before the CPUC rules on the California Utilities respective applications for rehearing. Contrary to the CPUC s claim (CPUC Protest at 10), this Commission never ordered the California Utilities not to file an enforcement petition until the CPUC ruled on rehearing and the California Utilities are justified in seeking relief now. The Commission stated we find that the CPUC should first seek to implement the guidance provided; then, if the Joint Utilities or EEI believe that the CPUC s offer price for its AB 1613 Program, as implemented, does not comply with the Commission s avoided cost rate requirements, they have the option of filing a petition pursuant to section 210(h) of PURPA requesting the Commission to enforce its PURPA regulations. 13 The Commission said nothing about having to await a CPUC rehearing order. The offer price to which the California Utilities object has been implemented by the CPUC. The California Utilities were required to file tariffs and contracts to implement the AB 1613 Decisions, that obligation has not been stayed, the CPUC Energy Division is proceeding promptly to dispose of the advice letters, and those advice letters would require the California Utilities to purchase power from QFs at rates above their avoided cost. Moreover, given that a primary argument of the California Utilities is that the CPUC 12 The California Utilities actually first filed a Motion for Stay on January 6, 2011, but the CPUC ruled that the motion was premature because the California Utilities had not yet filed their applications for rehearing. Assigned Commissioner and Administrative Law Judge s Ruling Denying Motion, R (Jan. 12, 2011). Thus, the California Utilities re-filed their Motion for Stay on January 18, 2011 concurrent with their applications for rehearing. 13 Cal. Pub. Utils. Comm n, 134 FERC 61,044 at P 35 (2011) ( AB 1613 Rehearing Order ). 5

6 lacks record evidence that the AB 1613 Price reflects their actual avoided costs, particularly in light of contrary evidence on their actual avoided costs, there is even less reason to delay review of the relevant CPUC orders. B. The California Utilities Are Willing to Withdraw the Enforcement Petition Until the CPUC Acts on Rehearing, if the CPUC, in Turn, Stays any Requirement that They Execute AB 1613 Contracts Pending Rehearing and Federal Review of These Issues Assuming their applications for rehearing are denied, the California Utilities intend to pursue relief from the Commission and/or federal court, not through an appeal to the California Court of Appeal. 14 Thus, assuming the CPUC denies rehearing, that order will be final and the Enforcement Petition would no longer be premature in the CPUC s view. See CPUC Protest at 4-5. The Commission must act on any PURPA enforcement petition in 60 days. The CPUC claims that the CPUC s AB 1613 Tariff approval process will require several months, implying that no contracts will be signed during that timeframe. Id. at 5. The CPUC can, if it chooses to, rule on rehearing relatively quickly. These facts indicate that there may be room for a procedural compromise. Were the CPUC to commit to issuing a stay such that the California Utilities did not have to sign AB 1613 Contracts pending rehearing and FERC disposition of an enforcement petition (a mere 60 days), the California Utilities would be willing to withdraw their current Enforcement Petition at this time, without prejudice to refiling it 14 The California Utilities understand that they have no obligation to appeal to a state court in order for FERC to consider an enforcement petition. In Metropolitan Edison Co., 72 FERC 61,015 at 61,052 (1995) ( MetEd ), QF developers asked that the Commission adopt a policy under which FERC would decline to review state commission decisions where the state appeal has been waived. The Commission found it not necessary to limit our review of section 210 cases in such an absolute manner. 6

7 seven days after the CPUC s rehearing order. Assuming the CPUC issues a denial of rehearing in one to two months, and in light of FERC s 60-day clock, this stay would only be in effect days. If the CPUC can issue a rehearing decision in a few months, this proposal will not impact combined heat and power facilities ( CHP ) developers. This approach should also appeal to any Protestors who would prefer to have the Commission opine on these issues, rather than to require the parties to address this matter in federal district court, which is the alternative. Several Protestors suffer from the misimpression that the Commission can dismiss the Petition as premature and later revisit the substantive issues after state remedies are exhausted. 15 In the cases where FERC has indicated a petition was filed prematurely, however, the Commission did not dismiss the Petition, as this is not an option under the relevant law. 16 In response to an enforcement petition, the Commission must either bring an enforcement action or decline to act, and allow the aggrieved parties to seek redress in federal district court. C. The Case Law Does Not Support the Position that State Remedies Must Be Exhausted for FERC to Act If the CPUC does not accept the proposed procedural compromise, the Commission will face the dilemma of balancing two often conflicting policies the 15 See CPUC Protest at 13 (arguing that the Commission should consider the petition after the CPUC has ruled on rehearing); Joint Motion to Intervene, Protest and Motion to Dismiss of FuelCell Energy, Inc. and California Clean DG Coalition Regarding Petition for Enforcement Pursuant to Section 210(h) of the Public Utility Regulatory Policies Act of 1978 at 13, Dkt. No. EL11-19 (Feb. 22, 2011) ( FuelCell Protest ) (indicating that FuelCell will respond in greater detail in response to a later-filed petition). Also, SJR (Motion to Intervene and Protest of San Joaquin Refining Co., Inc. at 8, Dkt. No. EL11-19 (Feb. 22, 2011) ( SJR Protest )) and the CPUC (Protest at 13) somewhat confusingly asks that the Commission deny the Enforcement Petition, which also is not an option. 16 See 16 U.S.C. 824a-3(h)(2)(B) (2006). 7

8 policy to resolve PURPA implementation issues before a state commission compels contracts to be signed versus the policy of non-interference with matters pending in state fora. The California Utilities fully recognize that the Commission has declined to act when a state proceeding was ongoing, as is its prerogative. 17 Here, however, the Commission should bring an enforcement action because the state s implementation of AB 1613 has progressed to such an extent that the California Utilities could be required to execute contracts imminently, and FERC enforcement will avert the need to file in district court. Given the dueling policies, the Protestors naturally focus on cases in which the Commission declined to act on the grounds that state remedies were not yet exhausted. However, the circumstances of those cases are easily distinguishable, as the state s processes were not nearly as far along as they are here. For example, in MetEd, cited by many of the Protestors, the Commission rejected various aspects of the petition for enforcement on several different grounds. First, some claims were deemed to be as applied claims subject to state court jurisdiction. Second, certain claims were deemed too late because FERC expects challenges before a contract is signed. Third, some claims were deemed to be premature because the state administrative law judge ( ALJ ) had not even set the relevant avoided cost rate and a state appeals court was reviewing a lower court s decision to throw out the very avoided cost approach the ALJ was tasked with implementing. This latter situation is a far cry from the situation here, where the CPUC 17 E.g., Mass. Inst. of Tech., 74 FERC 61,221 at 61,750 & n.15 (1996). 8

9 has issued several decisions, including a rehearing order that it claims is final as to the avoided cost issue. 18 California Cogeneration Council v. California Public Utilities Commission, 95 FERC 61,357 (2001) and Calpine Corp. v. California Public Utilities Commission, 95 FERC 61,430 (2001), are similarly distinguishable. There, the enforcement petitions were filed in the midst of the energy crisis. The CPUC had just convened an investigation of QF operations, and there were two short-run avoided cost rate formula cases pending before the CPUC. Again, the status of the relevant proceedings at the state level there was far different than is the case here. Notably, in Midwest Power Systems, Inc., the Commission declined to await the exhaustion of state remedies holding that while the Commission is reluctant to interfere with ongoing state consideration of PURPA implementation issues, it should act now in light of the Iowa Board s directive to Midwest Power to enter into the challenged power purchase agreements, and to commit to purchase power from the alternative facilities at the state-mandated rate, by February 9, It explained that it is in the interest of all parties to resolve this dispute before these contracts are executed. 20 Midwest Power Systems is far more analogous to this case than the authorities cited by the Protestors. 18 In Decision , the CPUC stated: The Joint Utilities Application for Rehearing of D was denied in D and both decisions are now final. D at 35, Finding of Fact 14 (Dec. 17, 2010). The CPUC further stated that D further clarified that the price established in D is an avoided cost. Id. at FERC 61,067 at 61,247 (1997). 20 Id. 9

10 D. SJR s Position that the California Utilities Have Raised an As Applied Claim Is Unsupported by Relevant Precedent SJR alleges that only the state courts, not the Commission and/or federal court, have authority to determine if the AB 1613 Program complies with PURPA. SJR Protest at 7 (claiming that an allegation that an avoided cost price is unsupported must be pursued in state court). This position is based on a gross misreading of federal case law and a FERC Policy Statement. Such precedent delineates PURPA claims into two categories as applied claims and implementation claims. An as applied claim is one involving a contention that the agency s implementation plan is unlawful, as it applies to or affects an individual petitioner. 21 This case does not involve the application of PURPA to an individual petitioner, as required for a claim to be considered an as applied claim that is properly heard in state court Mass. Inst. of Tech. v. Mass. Dep t of Pub. Utils., 941 F. Supp. 233, 237 (D. Mass. 1996) ( MIT v. Mass. DPU ) (emphasis added). Similarly, in Occidental Chemical Corp. v. Louisiana Public Service Commission, 494 F. Supp. 2d 401, (M.D. La. 2007) ( Occidental Chemical Corp. ), the court distinguished as applied cases from implementation cases by noting that the state order in question applied to a broad scope of entities rather than a single QF. 22 Occidental Chemical Corp., 494 F. Supp. 2d at

11 The Commission itself has advised that allegations that a state has adopted a rate contrary to the PURPA rate standard is an implementation issue, as explained by a recent district court decision: Federal jurisdiction under 210(h) exists whenever a state regulatory authority has adopted requirements that include a purchase rate standard contrary to existing [FERC] regulations. Policy Statement Regarding the FERC s Enforcement Role Under 210, 23 FERC 61,304 at 61,644 (1983). Federal circuits recognize that a state regulatory body s failure to ensure that utilities pay QF s for energy at a rate equal to the utilities full avoided cost is a failure to comply with a regulation implementing PURPA, and that a challenge against the state commission may be brought in federal court. See e.g., New York State Elec. Gas Corp., 117 F.3d at The United States Court of Appeals for the D.C. Circuit also has confirmed that a claim that a state commission rate exceeds avoided cost is an implementation claim: The failure of a state commission to ensure that a rate does not exceed a utility s avoided cost is a failure to comply with a regulation implementing the PURPA. See 16 U.S.C. 824a-3(f) (requiring each State regulatory authority [to] implement [Commission rules promulgated under 210(a) of the PURPA] for each electric utility for which it has ratemaking authority ); 18 CFR (b)(2) (declaring that a rate for purchases satisfies the requirements [of the statute] if the rate equals the avoided costs determined after consideration of the factors [herein] set forth ). The alleged failure of the PSC to set the contested rates at NYSEG s avoided cost would ordinarily be challenged through an enforcement action brought in district court under 210(h). See 824a-3(h)(2) (state compliance with 210(f) ensured by bringing enforcement action in district court) Id. at N.Y. State Elec. & Gas Corp. v. FERC, 117 F.3d 1473, 1476 (D.C. Cir. 1997) (emphasis added); see also Conn. Valley Elec. Co., v. FERC, 208 F.3d 1037 (D.C. Cir. 2000). 11

12 E. SJR s Claim that the California Utilities Are Barred from Collaterally Attacking the Rulings in the AB 1613 FERC Proceeding Reflects a Profound Misreading of Case Law As explained in Section III, through the Enforcement Petition, the California Utilities are challenging the CPUC s failure to properly implement a QF program, consistent with PURPA, even assuming the Commission s orders in Dkt. Nos. EL10-64, et al. (the AB 1613 FERC Proceedings ) stand. 25 In any case, the CPUC did not even set the AB 1613 Price based on the guidance provided by FERC in AB 1613 FERC Proceedings, as the price was set in orders issued in December 2009 and April 2010, before the FERC proceeding even began. Thus, the California Utilities strongly disagree with SJR s claim that they are launching an improper collateral attack on the Commission s holdings that the CPUC s AB 1613 rules permissibly implement PURPA insofar as they establish different avoided cost rates for different types of resources. SJR Protest at 8. SJR also claims that any FERC guidance cannot be challenged in a federal forum. Id. This statement is erroneous. Although the PURPA guidance provided in the AB 1613 FERC Proceedings is currently unappealable to a federal court, that guidance certainly remains subject to challenge in federal court through an enforcement proceeding. In Niagara Mohawk Power Corp. v. FERC, 117 F.3d 1485, (D.C. Cir. 1997), the D.C. Circuit explained that Commission guidance on PURPA can be challenged in a federal court only after it is implemented and an enforcement proceeding is initiated. 25 Cal. Pub. Utils. Comm n, 132 FERC 61,047 ( July 2010 AB 1613 Order ), clarified, 133 FERC 61,059 (2010) ( AB 1613 Clarification Order ), reh g denied, AB 1613 Rehearing Order,134 FERC 61,044 (2011) ( AB 1613 Rehearing Order ). 12

13 Congress cannot have intended that the courts of appeals review a declaratory order interpreting the PURPA when doing so would disrupt the elaborate enforcement scheme that the Congress created. 26 It also stated: in the framework established by the Congress it is the district court that has been given the task of deciding in the first instance whether to adopt or reject a position advocated by the Commission. The courts of appeals accordingly do not have pre-enforcement jurisdiction to review a declaratory order that merely announces the position advocated by the FERC. 27 In short, the appropriate way to attack the prior Commission decisions in the AB 1613 FERC Proceedings, were the California Utilities to decide to launch such an attack, would be to await implementation by a state of FERC s guidance, and then to challenge that guidance through an enforcement petition in federal court. III. THE AB 1613 FERC PROCEEDINGS DID NOT ADDRESS ANY OF THE ISSUES RAISED BY THE CALIFORNIA UTILITIES IN THIS ENFORCEMENT ACTION As for the Protestors that address the substance of the Enforcement Petition, their general theme is that the California Utilities are attacking Commission rulings made in the AB 1613 FERC Proceedings. Given that the Commission claimed in all of its orders that it was making absolutely no determination as to whether the AB 1613 Price met the avoided cost standard, 28 it is difficult to comprehend how the Commission could have F.3d at Id. at See also Xcel Energy Servs. Inc. v. FERC, 407 F.3d 1242 (D.C. Cir. 2005). 28 July 2010 AB 1613 Order at P 68; AB 1613 Clarification Order at P 25; AB 1613 Rehearing Order at P 8 ( In both the July 15 Order and the Clarification Order, the Commission explained that there was no record in these proceedings on which the Commission could determine whether the CPUC s offer price under its AB 1613 program was, in fact, consistent with the avoided cost rate requirements of section 210 of PURPA. ). 13

14 possibly resolved any issues raised by the Enforcement Petition. In any case, as noted above, the California Utilities are not attacking FERC policy at this time; rather, they present valid challenges to the CPUC s faulty implementation of such policy. In fact, the new FERC policy was not articulated until after the CPUC first adopted the AB 1613 Price. Notably, the CPUC did not alter any aspects of the AB 1613 Price based on FERC s orders. Indeed, this price has not changed in any material respect since it was first adopted by the CPUC in December The CPUC just added a belated claim that the price was an avoided cost price. A. The CPUC Has Not Established an Avoided Cost Rate Based on an Assumption that the California Utilities Are Limited in Their Procurement Options The key issue presented to this Commission is whether the CPUC properly calculated the costs the electric utility is avoiding. The CPUC and other protestors claim that the AB 1613 price adopted by the CPUC is appropriate simply because FERC allows multi-tiered avoided costs. See, e.g., CPUC Protest at 12 n.32. With regard to the calculation of a multi-tier avoided cost, the Commission ruled in the AB 1613 FERC Proceedings that: where a state requires a utility to procure energy from generators with certain characteristics, generators with those characteristics appropriately constitute the sources that are relevant to the determination of the utility s avoided cost for that procurement requirement they are the sources that can sell to the utility, and thus the sources being avoided. It would be illogical to read SoCal Edison as authorizing consideration, for purposes of determining a utility s avoided 14

15 costs, of sources that are, in fact, not able to sell to that utility. 29 In other words, FERC stated that it would allow states to limit the determination of the capacity being avoided to resources from which the utility must purchase and to base the avoided cost rate on the typical costs for facilities with such relevant characteristics. The applicability of the FERC orders in the AB 1613 FERC Proceedings is unclear in the AB 1613 context, as there is no procurement quantity to be met. In any event, the CPUC did not develop an avoided cost based on the cost of purchasing from a CHP QF sized 20 MW or less that meets the characteristics listed in AB Rather, the CPUC assumed that, but for the purchase from an AB 1613 QF, the California Utilities would purchase from a new combined cycle gas turbine ( CCGT ). The Commission should not be deceived by statements of Protestors to the contrary. For example, the Cogeneration Association of California and the Energy Producers and Users Coalition state: The IOUs fail to note that AB 1613, enacted by the California Legislature, identifies a subset of CHP facilities with particular characteristics. The avoided costs set by the CPUC in implementing AB 1613 are based on those particular operating characteristics. 30 This statement is unsupported by any evidence. Even FuelCell does not agree with CAC/EPUC that the CPUC set the avoided cost based on the cost of a plant with all the AB 1613 characteristics, but rather claims that the CPUC identified a generator with 29 AB 1613 Rehearing Order at P 33 (emphasis added). 30 Motion to Intervene and Protest of the Cogeneration Association of California and the Energy Producers and Users Coalition at 4, Dkt. No. EL11-19 (Feb. 22, 2011) ( CAC/EPUC Protest ). 15

16 characteristics similar to AB 1613 generators. 31 Again, the CPUC made no such ruling. Rather, the CPUC only ruled that a CCGT and CHP can share an operating profile: 32 Staff asserts that a CCGT represents a reasonable proxy for the marginal unit of generation avoided by an eligible CHP facility. As SDG&E and SoCalGas note in their comments, the operating profile of a CHP facility most closely resembles that of a CCGT. We find that a CCGT is reasonable proxy for the marginal unit avoided by an eligible CHP facility. 33 On rehearing, the CPUC similarly explained that [e]vidence in the record supports that the operating profile of a CHP facility most closely resembles that of a CCGT. 34 The CPUC did not assume that a generator with the characteristics of an AB 1613 QF would be the alternative. The entire purpose of the CPUC Avoided Cost Proceeding, 35 was for the CPUC to determine from which resource energy and capacity would be obtained but for a purchase from a QF. The CPUC never explained why the California Utilities would not purchase from the proxy resource determined in the Avoided Cost Proceeding, or, in light of this Commission s recent Clarification Order, a similar CHP QF sized 20 MW or less. This is particularly baffling when the on-line date and efficiency of the generator the 31 FuelCell Protest at 11 (emphasis added). 32 The California Utilities do not agree that a fully dispatchable CCGT and AB 1613 QF share the same operating profile, but even assuming this to be true, there are many other operating characteristics of an AB 1613 QF. 33 D at D at CPUC Rulemaking Dkt. No. R

17 only factors distinguishing AB 1613 QFs from other CHP QFs are not lawful factors in determining the costs avoided by the purchase of QF power. 36 B. FERC s Approval, in Principle, of Multi-Tier Avoided Cost Rates Does Not Justify Different Avoided Cost Rates for Generators with Identical Operating Characteristics CAC/EPUC states that [t]he IOUs also claim that the tariffs under AB 1613 discriminate against those QFs whose operating characteristics fall outside the range of characteristics identified in AB CAC/EPUC Protest at 4. Actually, the California Utilities are claiming that QFs with absolutely identical operating characteristics as AB 1613 QFs could end up being paid a different avoided cost rate based merely on vintage, which is discriminatory. The vintage of a generating plant is simply not an operating characteristic. For example, assume there are two absolutely identical plants, both of which are fully completed on December 31, AB 1613 section (b)(1) requires that to be an AB 1613 QF, the plant must first commence[] operation on or after January 1, Thus, if one commences operation on December 31, 2007 and one commences operation on January 1, 2008, they would not be paid the same avoided cost price under the CPUC mandates. Such an approach to avoided cost ratemaking is patently discriminatory and thus prohibited by FERC s PURPA regulations. SJR attacks the discrimination argument differently, claiming that the avoided costs rates established in the Avoided Cost Proceeding, which would be applied to non- 36 Indep. Energy Producers Ass n v. Cal. Pub. Utils. Comm n, 36 F.3d 848, 857 (9th Cir. 1994). See also 18 C.F.R (e). 17

18 AB 1613 QFs with identical operating characteristics, are the product of a negotiated settlement agreement, and the parties made many trade-offs to reach that agreement. Thus, application of the QF settlement rate to the AB 1613 Program would be inappropriate. SJR Protest at 11. SJR misunderstands the meaning of the QF Settlement and the CPUC s approval of it. The QF Settlement approved by the CPUC sets the avoided cost price for QFs paid at avoided cost, and it does not exempt any QFs paid at avoided cost from its terms. Thus, whether discussing the avoided cost rates in the QF Settlement or in D , the CPUC has determined the costs avoided when the California Utilities purchase power from QFs. And there is no explanation why such avoided costs differ from the costs the CPUC believes are avoided through the purchase of AB 1613 QF power. The existence of two different avoided-cost rates for generators with identical operating characteristics demonstrates that the CPUC is not setting avoided cost in a manner that complies with PURPA. C. The Commission Did Not Rule on the Legality of the 10% Location Bonus and GHG Cost Pass-Through in the AB 1613 FERC Proceedings 1. CAC/EPUC Despite the Commission explicitly and repeatedly disavowing that it reviewed any aspect of the AB 1613 Price against the avoided cost standard, CAC/EPUC remarkably claim that the Commission issued a final ruling on the legality of the 10% Location Bonus and GHG Cost Pass-Through. CAC/EPUC state (Protest at 3): most of the challenges to the AB 1613 tariff raised by the Petition are the same as were asserted by the California IOUs in their Petition for Declaratory Order related to AB 1613, in 18

19 EL This includes the IOUs arguments that the 10% location adder and the treatment of GHG benefits are not permitted under PURPA. The Commission has previously dealt with each of these arguments and should deny them, as an impermissible collateral attack on the Commission s decision in EL10-64 and EL CAC/EPUC does not explain this claim any further. Being that FERC specifically stated it was not ruling on the appropriateness of the Location Bonus or the calculation thereof, the California Utilities can only imagine that CAC/EPUC is referring to the Commission s discussion of other forms of compensation available to generators outside of the avoided cost calculation. The Commission did note that, under federal law, states can separately provide compensation for environmental attributes through the creation of renewable energy credits. However, the rather obvious flaw in CAC/EPUC s implicit claim that the 10% Location Bonus is outside of the avoided cost calculation is that the CPUC, as well as supporters, 37 characterized it as an avoided cost. The CPUC ruled that the figure reflected a proxy for transmission/distribution deferrals: This price also includes a location factor which [CPUC] staff had estimated to be approximately 10% to the extent it avoids congestion and the potential cost of upgrading transmission and distribution facilities if the CHP facility is in a congested area. 38 As to CAC/EPUC s implicit claim that the GHG Cost Pass-Through was found to be permitted by FERC, again, there are no findings in any of the Orders issued in the AB 37 Indeed, SJR claims that the CPUC has established a comprehensive record that includes a detailed summary, for all of the IOUs, of the investment-related transmission and distribution avoided costs that the CPUC has adopted for each of their systems. SJR Protest at 12. Although this SJR claim is unfounded, it demonstrates that the CPUC ultimately characterized the 10% Location Bonus as reflecting avoided costs. 38 See D at

20 1613 Proceedings to support this statement. On the one hand, the CPUC did claim that the GHG Cost Pass-Through was a cost external to the avoided cost rate. 39 But, it also ruled that all the green attributes were being conveyed to the utility in the power price. 40 Thus, the GHG Cost Pass-Through is not compensation for environmental attributes. Rather, if CAC/EPUC are correct that the GHG Cost Pass-Through is separate compensation outside of the avoided cost rate, it appears to be payment for which no consideration is provided. If the CPUC seeks to provide a subsidy for which no consideration is given, that may be acceptable under federal law, but it is not acceptable under state law, which requires ratepayers to be indifferent to the existence of the AB 1613 tariff. 2. SJR Similar to CAC/EPUC, SJR alleges that the IOUs Petition is essentially a petition for a declaratory ruling on the CPUC s avoided cost scheme and that FERC has already decided these issues. SJR Protest at 11. As to the GHG Cost Pass-Through, it explains that environmental and other costs may be accounted for in a determination of avoided cost rates so long as the costs are real costs that would be incurred by the utilities. Id. at 12. This statement is true, but proves absolutely nothing. SJR points to no evidence as to how the GHG Cost Pass-Through reflects real costs that would be incurred by the utility. Nor can it. The GHG Cost Pass-Through reflects costs that are 39 See id. at D at 14 n.7 ( [I]t is the price offered under the AB 1613 program, and not the GHG compliance costs that includes certain green attributes such as RECs. (D , pp ) 20

21 incurred by the AB 1613 QFs, not the purchasing utility. There is no evidence in the AB 1613 proceeding that the seller s GHG compliance costs are identical to the GHG compliance costs the utility would avoid through the purchase of power from AB 1613 QFs. SJR claims that as to the 10% Location Bonus the CPUC has established a comprehensive record that includes a detailed summary, for all of the IOUs, of the investment-related transmission and distribution avoided costs that the CPUC has adopted for each of their systems. SJR Protest at 12. In actuality, the CPUC has never adopted an avoided cost rate for QFs that includes compensation for avoided transmission and distribution investment deferral costs. 41 Even assuming the CPUC has, in some other proceeding, collected some transmission and distribution cost data, this data would not likely support using a percentage of generation costs as reflective of avoided transmission/distribution costs. The fact remains that there is no relationship, let alone a one-to-one relationship, nor could there ever be, between avoided costs of transmission/distribution and the costs of a CCGT. Therefore, the Commission s allocation of any RECs associated with the power sold under the AB 1613 program is not relevant to its allocation of GHG compliance costs. ). 41 The avoided cost adopted by the CPUC in the QF Settlement does provide a Location Adjustment factor which takes into account congestion and line losses, but does not compensate for avoided T&D investment deferrals. The Location Adjustment adopted by the CPUC in the QF Settlement is based on the difference between the Locational Marginal Price ( LMP ) at the point of interconnection for the generating facility with the CAISO-controlled grid, and the LMP at the trading hub, and is not related to the costs of building and operating a CCGT. 21

22 IV. CONCLUSION The California Utilities have proposed a reasonable compromise that would provide for their petition to be withdrawn until the CPUC acts on rehearing, and, if still necessary, an Enforcement Petition could be addressed. If such compromise is not accepted, the Commission should act, as the CPUC should not be permitted to blithely ignore the dictates of PURPA by merely claiming that a price that it admitted never was intended to reflect an avoided cost price has miraculously morphed into an avoided cost price. Respectfully submitted on behalf of the California Utilties, Jennifer Dated: March 9, 2011 /Jennifer L. Key/ Key Steptoe & Johnson LLP 1330 Connecticut Ave., NW Washington, DC jkey@steptoe.com 22

23 CERTIFICATE OF SERVICE I hereby certify that I have this day served the foregoing document upon each person designated on the official service list compiled by the Secretary in this proceeding. Dated at Washington, D.C. this 9th day of March, /Jennifer L. Key/ Jennifer Key Steptoe & Johnson LLP 1330 Connecticut Ave., NW Washington, DC jkey@steptoe.com