In a move aimed at reinvigorating the state\u2019s moribund co-generation industry, the California Public Utilities Commission approved a settlement agreement that sweeps away numerous disputes plaguing the relationship between independent industrial power producers--like oil refiners, food processors, and hospitals--and the utilities that buy their electricity under a federal mandate. The commission Dec. 16 voted 5-0 to approve the comprehensive agreement. The state\u2019s utilities, co-generators, and ratepayer advocates worked out the settlement over the past 16 months. The deal is aimed at increasing California\u2019s co-generation--or combined heat and power--capacity to improve energy efficiency and reduce greenhouse gases. Right now, the state has 6,000 MW of co-generation capacity. Commissioner Dian Grueneich said the deal should help the state take \u201cfull advantage of the opportunities\u201d for co-generation. The California Air Resources Board envisions adding co-generation in the decade ahead as a greenhouse gas reduction strategy. CPUC president Mike Peevey said the settlement should help reach the goal by resolving \u201call\u201d the disputes that have been before the commission for decades. He noted the disagreements became so acute three years ago they virtually shut off new investment in the technology. \u201cOut of the mud grows the lotus,\u201d remarked commissioner John Bohn, heralding the agreement. Since the federal government enacted the Public Utility Regulatory Practices Act of 1978, utilities have had to buy power made by co-generators--also known as combined heat and power facilities--and pay them based on the avoided cost of building new power plants to make the same amount of electricity. Under PURPA, those co-generators are known as qualifying facilities. The settlement is expected to change that in California. As it is carried out, the deal basically will release the state\u2019s investor-owned utilities from the federal program and place them under the newly devised state program embodied in the agreement and sanctioned by the CPUC. The deal is set to cover a wide variety of facilities that commonly practice co-generation, generally companies that need to produce steam and other forms of heat to process food, chemicals, oil, and carry out other industrial processes. Co-generation facilities use excess power plant heat for their industrial processes in order to increase energy efficiency. Without cogeneration much of the energy they would use to make process heat would be lost, rather than harnessed to feed power to the grid. Since the federal law passed--amid ever changing energy policies and energy prices--utilities, co-generators, and ratepayers have squabbled about how much utilities--and ultimately consumers--should have to pay for power produced by co-generators, resulting in a backlog of litigation. Peevey noted there have been continual legal battles over a variety of other contract terms as well that have clogged the CPUC docket. Ultimately, though, California\u2019s climate change law, AB 32, proved to be a game changer for co-generation. To carry out the law, the California Air Resources Board is calling to increase the amount of power produced from co-generation facilities by 4,000 MW by 2020. The Air Board\u2019s plan envisions not only new cogeneration plants, but also re-powering existing facilities to make them more efficient. The plan provided impetus for the parties in the industry to set aside their differences and develop a wholly new program to govern the business relationship between co-generators, utilities, and ratepayers. After the Air Board identified more co-generation as a strategy in its greenhouse gas reduction plan, Peevey said that early in 2009 the CPUC staff convened a \u201csummit\u201d meeting of those involved in the industry to try to negotiate a new program. Under the terms of the settlement, the state\u2019s investor-owned utilities agree to purchase a total 2,949 MW of power from co-generators by 2015. Southern California Edison is to buy 1,402 MW, Pacific Gas & Electric 1,387 MW, and San Diego Gas & Electric 160 MW. SDG&E is to purchase another 51 MW by 2020 bringing the combined total of new co-generation capacity to 3,000 MW. The utilities are supposed to phase out old contracts and enter new power purchase agreements through a competitive request for offers. Overall, their purchase of the power is supposed to cut annual greenhouse gases by 4.3 million metric tons by 2020. The agreement also ends payments for the power based on the avoided cost of building new power plants and transitions the sales transactions to prices based on market factors.