The FERC recently issued a Notice of Proposed Rulemaking (NOPR) to reform its regulations implementing the Public Utility Regulatory Policies Act of 1978 (PURPA), which encourages the development of certain small generation and cogeneration facilities. PURPA and FERC’s rules implementing it over the years establish a number of benefits to those facilities and set obligations for electric utilities to purchase electricity from them. FERC now concludes that, due to changes in the electric power industry over the last several decades, it is time to revise some of its PURPA rules. But FERC’s proposals are certain to be controversial. Notably, one of the three FERC Commissioners dissented from the NOPR.

The NOPR should be of interest to a wide range of electricity market participants, including utilities and investors in cogeneration and certain types of small scale generation facilities.

Background

PURPA established a framework to encourage the development of small power production facilities that do not rely on fossil fuel,[1] and cogeneration facilities, and directed FERC to set implementation rules. Generation resources that meet specified standards are deemed “Qualifying Facilities,” or QFs, and, among other benefits, have the right to sell electricity to a utility at the utility’s avoided cost or at a negotiated rate. QFs can choose to sell energy either “as-available” (i.e., as the QF determines such energy to be available) or as part of a legally enforceable obligation for delivery of electricity over a specified term.

Responsibility for implementing PURPA’s provisions is shared between FERC and the states. FERC establishes the standards for qualification and certifies QFs. FERC also sets the general standards for a utility’s avoided costs, but each state is responsible for determining the actual avoided costs of its utilities. Avoided cost is the incremental cost of electric energy or capacity which, but for the purchase from the QF, a utility would generate itself or purchase from another source.[2]

The NOPR notes that the electric power industry has changed quite a bit since FERC issued its rules to implement PURPA in 1980, when the industry was dominated by vertically integrated utilities that served customers from their own generation resources. Today, due to advances in technology and FERC’s transmission open access rules, there are wholesale markets where independent generators can sell power at competitive prices. According to FERC, these markets have supported the entry of renewable resources and there are other federal and state programs that provide incentives for renewable resource development. The NOPR states “the majority of renewable resources in operation today do not rely on PURPA.” Accordingly, FERC proposes to “rebalance the benefits and obligations of the Commission’s PURPA Regulations in light of the changes in circumstances since the PURPA Regulations were promulgated in 1980”.

FERC’s Proposals

FERC proposes to make changes in the following aspects of its PURPA implementation rules.

Flexibility for states to limit fixed energy rates

FERC’s current rules provide QFs the option of receiving the purchasing electric utility’s avoided cost calculated and fixed at the time the legally enforceable obligation is incurred. Allowing QFs to fix their rate for the entire term of a contract was intended to provide the certainty necessary for a QF to obtain financing, but, according to FERC, it has proved to be one of the most controversial aspects of the PURPA rules. FERC says data indicate that energy prices generally have declined over the years, leaving the fixed energy portion of QFs rates well above market prices that likely represent the purchasing utility’s actual avoided energy costs at the time of delivery. In addition, the NOPR observes that there is evidence that QFs may no longer need fixed energy rates for the term of their contracts in order to obtain financing.

NOPR Proposal: States may require that energy rates, but not capacity rates,[3] in QF contracts vary in accordance with changes in the purchasing electric utility’s as-available avoided costs at the time the energy is delivered.

NOPR Proposal: States may allow QFs to have a fixed energy rate, but may base the fixed rate on projected energy prices during the term of the contract based on the anticipated dates of delivery.

Flexibility for states in determining energy rates

Since FERC established its PURPA rules years ago, the electric industry has evolved from utilities generally setting rates on the basis of administratively-determined cost of service rates to rates now often based on competitive market forces. FERC proposes to allow states to rely on competitive forces, rather than administrative determinations, to set as-available avoided cost energy rates.

NOPR Proposal: States may set energy rates based on market prices instead of administratively-set avoided costs. Specifically:

  • For QFs selling to utilities located in organized electric markets, states may set as-available energy rates at the locational marginal price (LMP) or a similar market-determined price at the time energy is delivered.
  • For QFs selling to electric utilities located outside of organized electric markets, states may set as-available energy rates at competitive prices from liquid market hubs, or calculated from a formula based on natural gas price indices and specified heat rates at the time energy is delivered.
  • States may set energy and capacity rates pursuant to a competitive solicitation process.

This proposal would likely be significant. RTOs and ISOs with competitive wholesale markets serve two-thirds of electricity consumers in the United States.

Purchase obligation reform

FERC’s current rules allow a utility to terminate its obligation to enter into new contracts to purchase from a QF if the utility can show that the QF has nondiscriminatory access to certain defined competitive wholesale markets. There is a rebuttable presumption that QFs with a net capacity at or below 20 MW do not have such access because smaller QFs are thought to have substantially less ability to access wholesale markets than do larger QFs. The NOPR explains that at the time FERC set this presumption in 2006, the organized electric markets had been in existence for only a few years and were not well understood by all market participants. Now, in light of the maturation of organized electric markets and FERC actions to ease interconnection and market access for small generation resources, FERC believes smaller scale small power production facilities can acquire the administrative and technical expertise necessary to obtain nondiscriminatory access to a market.

NOPR Proposal: Reduce the rebuttable presumption for small power production facilities (but not cogeneration facilities) to 1 MW. The reduction is not applicable to cogeneration facilities because they are intended primarily to provide heat for process instead of electricity for sale, and their owners might not be familiar with energy markets and the technical requirements for sales.

FERC also proposes to recognize the impact of state retail access programs on a utility’s QF purchase obligation. Prior to the 1990s, electric utilities generally were responsible for serving all of the load within their franchised service territories. Now, some states have restructured their retail markets to allow customers to purchase from alternative electricity suppliers instead of the local utility. This may decrease electric utilities’ obligations to serve load. The NOPR states that it is “reasonable for electric utilities’ PURPA capacity purchase obligations to be reduced to the extent retail choice reduces their supply obligations.”

NOPR Proposal: A utility’s obligation to purchase from QFs may be reduced to the extent the utility’s supply obligation has been reduced by a state retail choice program.

Small power production facilities located up to 10 miles apart may be deemed a single QF.

A small power production QF is a facility that produces electric energy solely by using biomass, waste, renewable resources, and geothermal resources, and has a capacity “which, together with any other facilities located at the same site (as determined by the Commission), is not greater than 80 MW.” FERC now considers small power production facilities to be at the same site if they are located within one mile of each other (the “one-mile rule”). Thus, facilities within one mile of each other are all part of a single QF. The one-mile rule thus affects the size of the facility and whether it exceeds the 80 MW limit for QF status.

Arguments have been raised that some QF developers of small power production facilities are circumventing the one-mile rule by strategically siting facilities that use the same energy resource slightly more than one mile apart to qualify as separate small power production facilities.

NOPR Proposal: Establish a rebuttable presumption that affiliated small power production facilities located between one and ten miles apart are separate facilities at separate sites. Interested parties, as well as FERC acting sua sponte, may challenge a QF certification and rebut the proposed presumption by showing that the subject small power production facilities between one and ten miles apart actually are a single facility. Facilities located at distances one mile or less apart remain irrebuttably a single facility, and it is proposed that facilities located ten miles or more apart are irrebuttably separate facilities. The NOPR proposes physical and ownership characteristics to use in making determinations.

Commercial viability required for contract entitlement

As discussed earlier, FERC’s rules allow a QF to choose to have its rates based on the utility’s avoided cost calculated at the time of delivery or at the time a legally enforceable obligation is incurred. However, FERC’s PURPA rules do not specify when or how a legally enforceable obligation is established. According to FERC, states may determine the circumstances when a legally enforceable obligation arises but may not impose obstacles that make it unreasonably difficult to obtain a legally enforceable obligation. QF developers say they need the certainty of such obligation to obtain the financing.

NOPR Proposal: A QF must demonstrate commercial viability and financial commitment to construct its facility pursuant to objective and reasonable state-determined criteria before the QF is entitled to a contract or legally enforceable obligation. The NOPR suggests several indicia of commercial viability and commitment.

Self-certification protests allowed

QF certification may be obtained through either FERC certification or self-certification. Under the latter, an applicant certifies that its facility meets QF requirements. FERC staff reviews the application for completeness but does not evaluate the application. The self-certification is effective upon filing. An order is not issued. The only way to challenge the self-certification is to file a separate petition for declaratory order asking FERC to revoke QF status. The filing fee for such a petition is almost $30,000.

NOPR Proposal: A party may protest a self-certification without being required to file a separate petition for declaratory order and pay the associated filing fee. A party may intervene and protest a self-certification within 30 days of the filing.

Commissioner Glick’s dissent

Commissioner Richard Glick dissented on the general direction of the NOPR and with respect to specific proposals. He expressed concern that the Commission “has failed so far to show that certain aspects of its proposal satisfy our basic responsibilities under the law,” and that it “appears that the Commission no longer believes that PURPA is necessary.” Commissioner Glick notes that while he might disagree with the majority about PURPA and the importance of its objectives, a “policy debate about the continuing relevance of PURPA—which, make no mistake, is what this NOPR is really about—is an issue for Congress to resolve.”

Commissioner Glick expresses the following concerns with specific proposals in the NOPR:

  • Eliminating the fixed-price contract option will make it more difficult—or in some cases impossible—for QFs to obtain financing. The option to enter a contract with a fixed or known price has played in essential role in encouraging QF development.
  • Determining that a locational marginal price (LMP) is a reasonable measure of an as-available avoided cost for energy, and that several other “Competitive Prices” would also be sufficient, may reduce QFs to relying solely on a synthetic measure of what spot prices would be in a competitive market based on gas prices and heat rates. Many regions of the country have not established competitive markets, even if there are liquid market hubs for spot energy purchases.
  • Reducing the threshold from 20 MW to 1 MW for the rebuttable presumption of non-discriminatory access to competitive wholesale markets within RTOs and ISOs is not justified or supported with evidence. It “seems a stretch to suggest that a 1 MW resource can generally access and compete in markets as sophisticated and complex as, for example, PJM Interconnection, L.L.C., on a similar footing as the resources in the portfolio of a large vertically integrated utility or merchant power generator.”

Comments on the NOPR are due 60 days from date of publication in the FEDERAL REGISTER.