Opinion ID: 2575983
Heading Depth: 1
Heading Rank: 5

Heading: avoided costs

Text: ¶ 20 A critical matter in controversy in this case is the Commission's calculation of PSO's avoided costs. Some background information is necessary for an understanding of the issues raised. The FERC rules recognize two categories of costs avoided by a utility when it purchases power from a QF: capacity costs and energy costs. [50] Capacity costs generally represent the fixed capital costs of a generating facility. These include the costs of constructing a plant, installing generating equipment, and the financial carrying costs of the utility's investment in the plant. These costs do not vary with changes in the plant's actual production. [51] Energy costs are the variable costs of operating, maintaining and providing fuel to the plant. Energy costs vary depending on actual generation, i.e. they increase or decrease according to the amount of fuel consumed and the cost of operating and maintaining the plant. [52] ¶ 21 Capacity and energy can be self-generated or purchased. They are self-generated when a utility builds a new generating unit and places its production on its own system. Capacity purchases occur when a utility buys the right to call on the resources of another generating entity if the purchasing utility's own ability to generate electrical energy is insufficient to satisfy its obligations. Energy purchases occur when a utility buys electricity from another generator. Energy purchases may be made to satisfy the purchasing utility's obligations or they may be made solely because it is more economical at a certain point in time for the utility to buy energy than to generate it itself. ¶ 22 A QF is only entitled to an avoided capacity payment from a utility if the purchase of the QF's capacity permits the utility to avoid building additional capacity of its own or purchasing it from another source. [53] The state regulatory authority must hence consider whether a utility needs additional capacity and, if so, what type of capacity is needed. In contrast, a QF is always entitled to a payment reflecting avoided energy costs. This is so because a utility can always avoid costs associated with the production of energy by decreasing the operation of one or more of its own units or by foregoing an energy purchase and replacing that energy with energy from the QF. ¶ 23 Implementation of the avoided cost standard has proved quite problematic. States use a variety of methodologies for calculating avoided costs and their results have often either overestimated or underestimated the costs utilities actually avoid by purchasing energy from a QF. In 1988 the FERC issued a Notice of Proposed Rulemaking entitled Administrative Determination of Full Avoided Costs, Sales of Power to Qualifying Facilities, and Interconnection Facilities [54] (the NOPR), in which it addressed some of the problems encountered in determining avoided costs. One of its proposals was to have wholesale purchases play a greater role in the avoided cost determination. The FERC terminated the NOPR in 1998 without adopting new rules based on the ideas it expressed. Nevertheless, in 1995 in Southern California Edison Co. [55] the FERC issued a ruling disapproving of an avoided cost determination that did not take into account all sources of generation capacity available to the purchasing utility. [56] ¶ 24 It is important to note that the FERC has never limited states to a single methodology for determining avoided costs. Each state regulatory authority continues to have its own rules and regulations and its own methodology for implementing PURPA. As long as the method employed both reasonably accounts for a utility's avoided costs and encourages cogeneration [57] it will be deemed in compliance with PURPA even if the avoided cost estimate differs from actual avoided costs at the time the energy is delivered. [58]