In its initial orders implementing the sections of the Energy Policy Act of 2005 ("EPAct") applicable to Qualifying Facilities ("QFs"), the Federal Energy Regulatory Commission ("FERC") adopted rules that allow utilities to file to eliminate the mandatory purchase and sale obligation to QFs. Those rules have now been affirmed by a federal court of appeals. Recent FERC decisions now signal more clearly how the agency intends to address important issues impacting QFs. Below we examine several cases which, taken together, indicate that FERC appears to be taking a balanced approach as it seeks to fulfill its mandate under the Public Utility Regulatory Policies Act ("PURPA") to encourage cogeneration and small power production while conforming to the requirements of EPAct to reduce QF rights in certain circumstances.

The SPP Decision

In a decision issued in mid-December 2008,1 FERC rejected a proposal by the Southwest Power Pool, Inc. ("SPP") that would have required QFs to participate in the Energy Imbalance Market, with potentially significant regulatory and financial consequences to them. Specifically, SPP proposed that it be allowed to register QFs over 10 MW in size and to require QFs to become market participants taking transmission service and selling into SPP's Energy Imbalance Services Market. Opponents argued that SPP's requirement conflicted with QF rights under PURPA to sell 100% of their output to their host utility.2 FERC agreed with the opponents: "[N]othing in SPP's tariff filing can supersede the rights of QFs under PURPA to make sales to host utilities." More specifically, FERC found that "[t]o the extent SPP's [proposal] triggers any charges that change what a QF recovers under PURPA's purchase obligation ... that requirement is unjust and unreasonable."3 FERC specifically noted, for example, that if, under SPP's proposal, a QF was required to purchase and sell power into SPP's Energy Imbalance Market, and failed to meet its scheduled generation level by under-generating, the QF could be forced to purchase power in the Energy Imbalance Market to make up for the shortfall. In reaching its decision, FERC cautioned that state commissions would not be precluded from finding that registration in an imbalance services market should be factored into their avoided cost analysis.

The Ausra Decision

In another recent decision issued in mid-January 2009,4 FERC took an expansive view of the types of facilities that may be considered small power production qualifying facilities under PURPA. Ausra CA I, LLC ("Ausra") had sought FERC certification of a 3.2 MW solar-powered facility as a QF where the facility would be operated using solar power exclusively as the primary energy source during certain times of the day. The novel twist in this case was that the facility would be using a steam turbine owned and operated by an unaffiliated company that was not a QF, and the unaffiliated company would use the steam turbine at other times of the day to produce electricity using natural gas as the primary energy source. The steam turbine could not be used physically to simultaneously produce steam from solar power and natural gas. Also, the production of energy using solar power would not be dependent on operation of the unit on natural gas to produce energy. In granting the application, FERC phrased the issue as whether the facility "satisfies the statutory and regulatory requirement that it produce energy solely from a permitted fuel as a primary energy source."5 In finding that the facility did satisfy this requirement, FERC appeared to be persuaded by the fact that the major components of the facility (including the steam turbine) during specified hours would produce power solely using solar energy, that it was physically impossible to produce power using both solar energy and natural gas simultaneously, and that the solar-fired facility was able to operate, in effect, on a stand-alone basis.

FERC's Regulations Implementing EPAct Changes to PURPA Upheld

In late December 2008, the U.S. Court of Appeals for the D.C. Circuit upheld, in American Forest & Paper Ass'n v. FERC, FERC's regulations implementing Section 210(m) of EPAct.6 Section 210(m)(1)(A) of the statute mandated elimination of the purchase obligation where (among other scenarios) QFs have "nondiscriminatory access" to "wholesale markets for long-term sales of capacity and electric energy."7 FERC incorporated this statutory language verbatim in Section 292.309(a)(1)(ii) of its regulations.8 Appellants argued that the phrase "wholesale markets" should refer to "competitive"9 markets. FERC disagreed, reasoning that adopting regulations requiring wholesale markets for long-term sales of capacity and energy to be competitive would be to ignore the fact that Congress had not used the term "competitive" in describing those markets, whereas it had used the term "competitive" in Section 210(m)(1)(B) and (C) to describe other markets.10 The court found that FERC's regulatory approach was reasonable.

Analysis

The SPP and Ausra decisions indicate that FERC continues to be mindful of its regulatory obligation under PURPA to "encourage" cogeneration and small power production notwithstanding EPAct. These cases suggest that FERC does not believe EPAct should be read to reduce historic QF rights under PURPA, except to the extent mandated by EPAct.11 FERC intends to implement EPAct faithfully according to its view of congressional intent, as demonstrated by FERC's defense of its Section 210(m) regulations in the American Forest & Paper Ass'n proceeding. FERC has established rules, now upheld by a federal appellate court, allowing utilities to obtain an exemption from QF purchase obligations where the exemption fulfills a requirement of EPAct. In short, FERC seems to be taking a balanced view of its obligations under PURPA as it was amended by EPAct, i.e., to effectuate the limitations on PURPA rights in EPAct while continuing to implement the goal of PURPA to encourage cogeneration and small power production where EPAct does not call for a different result. Thus, FERC has apparently concluded that EPAct did not signal a general congressional intent to repeal PURPA, but rather reflects a congressional purpose to reduce some specific rights QFs previously enjoyed. This is a delicate balancing process that will bear continued monitoring, especially in light of changes at the Commissioner level anticipated to occur in the coming months.

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