In a proposal that the author concedes could be made moot by federal regulatory action this summer, the California state Senate’s energy committee Tuesday passed to another standing committee a proposal to set new limits and criteria for energy price indices used by state regulators in setting rates for qualifying facility (QF) power producers and others.

If an appropriate price index regulated by the Commodity Futures Trading Commission (CFTC) cannot be found, the state regulators are authorized to set the prices QFs are paid.

Despite opposition from independent energy producers, including the QFs, and the state’s largest power users, Sen. Debra Bowen, the energy committee chairperson, and the bill’s (SB 173) author, Sen. Joe Dunn, argued that existing natural gas price indexes have been “manipulated and are unreliable,” so a replacement for them at the California Public Utilities Commission has to be found.

If an objective national index subject to CFTC oversight is going to be found, the New York Mercantile Exchange will have to add a California border price, something the state lawmakers agree is not available now, but which they think could be put in place “in the next six months.” Industry opponents to the measure argued that it will be worse to replace the use of existing indices with “no index at all.”

Dunn, the chairman of the Senate Select Committee to Investigate Wholesale Energy Price Manipulation, gathered information last summer from a former price index director for Platt’s Gas Daily who testified to past attempts at manipulation of the national price indices by Enron Corp. traders.

Lack of confidence in the competitive market also is a driver for the bill’s backers. In a separate interview with Power Market Today, Bowen’s chief aide said there is the desire to return to more “avoided-cost” bases for the QF power pricing in keeping with 1978 Public Utility Regulatory Reform Act principles.

Dunn later indicated he intended to continue working with all interested parties. “We are continuing to work with many of the folks who have an interest in this bill (SB173), including those in opposition. The thrust of the opposition is that they simply don’t have any other alternative, other than — but not quite saying it — that we ought to stay connected [keep using the indices].”

Commenting on the possibility of action on price indices by the Federal Energy Regulatory Commission, Dunn said “if FERC acts by mid-summer, this bill is not going to make it through the entire (state legislative process) by then, although I am a little doubtful that FERC will act that quickly. But if they do, obviously that means this bill may be rendered moot at that time, and certainly we’ll consider it if FERC should act before the end of the [California] legislative process.”

In response to questions about whether CPUC already has authority it needs to move away from indexes, Dunn said the legislation wants to make clear that state regulators don’t have to rely on “a knowingly unreliable source.”

Some industry representatives, including one from California-based power plant developer/operator and QF generator, Calpine Corp., said the CPUC probably has sufficient authority now to set a more reliable index, but the regulators may “need some help” from the legislature in beefing up that authority. “We don’t want to revisit 2001 when the QFs were either offline or not being paid and operating at a loss,” the Calpine representative told state senators in a hearing Tuesday.

Aside from the debate of whether an index meeting the bill’s stringent standards will actually surface from Nymex, a representative for the Western States Petroleum Association (WSPA) urged that any index used by the CPUC “reflect natural gas supplies that are both commercially and physically available to QF generators in California.

“The concern that we have is when the CPUC previously was allowed to change one factor in (their gas-pricing) formula, they moved from Topock indices to Malin whether it was available to QF generators or not.”

Bowen countered that the way to solve “all of these problems is to repeal [an existing state law, SB 390] and require the CPUC to establish avoided costs under PURPA.” The WSPA representative said that was the old way of setting QF prices, which was “extensive, expensive and called for a lot of litigation.” Nevertheless, the senator intimated that if the industry doesn’t come up with a compromise on the index issue, the lawmakers may ban their use entirely, leaving the PURPA model as the only alternative.

The old, PURPA-driven pricing system is “better than relying on manipulated indexes in my opinion,” Bowen said.

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