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<title>California Court Permits Qualifying Facility to Resell Its Power</title>
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<p align="left"><strong><small><font face="Arial">About The Author:</font></small></strong></p>
<p align="left"><font face="Arial" style="font-size: 9pt">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.</font></p>
<p><small><font face="Arial"><font style="font-size: 9pt">He can be reached at:</font><br>
<br>
<b><font color="#0000FF">Brown, Olson & Gould, PC</font></b><br>
2 Delta Drive<br>
Suite 301<br>
Concord, NH 03301<br>
<a href="mailto:[email protected]">[email protected]</a><br>
(603) 225-9716<br>
<a href="mailto:[email protected]"></a></font></small></p>
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<img src="../images/statelin.gif" alt="STATELINE by Robert Olson" border="0" width="375" height="75">
</center><p align="left"><b><u><br>
April 2001</u>
<br>
<font face="Arial" size="6" color="#000000">California Court Permits
Qualifying Facility to Resell Its Power
On the Open Market <br>
</font><font face="Arial" size="4" color="#000000">California Public Utilities Commission</font><font size="4">
</font>
<font face="Arial" size="4" color="#000000">Follows by Ordering <br>
Utilities to Pay QFs
Within 15 Days of Future Deliveries<br>
</font>
</b><strong>by Robert Olson -- Brown, Olson and Wilson, P.C.<br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine Magazine:
200</em>1/05/06)</font></p><center></p>
<p ALIGN="JUSTIFY"><font face="Arial">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.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">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.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">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.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">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.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">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.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">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.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">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.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">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.</font></p>
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<blockquote>
<p align="left"><font face="Arial">
<small>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:</small></font><p align="center">
<font face="Arial"><small><font color="#0000FF"><b>Brown, Olson & Gould, PC</b></font><br>
2 Delta Drive, Suite 301<br>
Concord, NH 03301 <br>
<br>
<a href="mailto:[email protected]">[email protected]</a> | (603) 225-9716<a href="mailto:[email protected]"></a></small></font>
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