On July 16, 2020, the Federal Energy Regulatory Commission (FERC) issued Order No. 872, adopting major revisions to its regulations implementing the avoided cost rate setting and other requirements of the Public Utility Regulatory Policies Act of 1978 (PURPA). The highly anticipated final rule reflects FERC’s objective of “modernizing” its PURPA regulations to address changing energy markets and recent growth in renewable energy resources both utilizing as well as outside of PURPA. The order also highlights the need to evolve FERC’s regulations encouraging development of qualifying facilities (QFs) to better protect ratepayers from subsidizing QFs, as first described in the June 2016 PURPA Technical Conference held in Docket No. AD16-16-000.
The prospective changes adopted in the final rule become effective 120 days after the final rule’s publication in the Federal Register and are anticipated to significantly affect PURPA implementation for vertically integrated utilities in traditionally regulated jurisdictions, as well as in regional transmission organizations/independent system operators (RTO/ISOs) and other regions with organized markets that have been granted exemptions from the obligation to purchase from certain larger QFs. The changes adopted in the final rule will, therefore, have significant implications for utilities required to purchase the output of QFs and for renewable energy developers and other generators that rely on PURPA rates and obligations to support their projects.
Major Reforms Adopted in Final Rule
Order No. 872 adopts the bulk of the reforms introduced in the September 2019 notice of proposed rulemaking (NOPR), while modifying and evolving certain proposals, based upon FERC’s consideration of comments submitted in response to the NOPR and with the stated goal of issuing final rules that more closely adhere to the goals and statutory language of PURPA.
Major reforms adopted in the final rule include the following:
New Flexibility for States and Utilities in Structuring Avoided Cost Rates
The final rule provides state regulatory authorities significant new flexibility in determining the avoided cost rates to be paid to QFs. FERC’s regulations have long provided QFs the right to deliver power “as available” or over a specified future term and to fix the avoided cost rates for both capacity and energy either at the time a legally enforceable obligation (LEO) is established or at the time power is delivered. As described in the Order, the final rule attempts to rebalance PURPA’s goals of encouraging QF development with the potential for subsidization of QFs by ratepayers. In support of the changes adopted in the final rule, FERC recognizes the risk — as well as recent experience in many states across the country with significant PURPA development — that forecasting future avoided energy costs over longer periods of time has led to significant overpayments to QFs in excess of the utility’s actual avoided costs. To address these challenges, the final rule adopts new flexibility to enable states and utilities to more accurately set future avoided energy cost rates under LEOs as well as for purposes of calculating as-available avoided energy rates.
- Variable Avoided Energy Rates for QF Sales Under Contracts or LEOs: The final rule provides state regulatory authorities new flexibility to structure future avoided energy rates to compensate QFs at the variable or “as available” rate calculated at the time of delivery over the term of the contract. Alternatively, state regulatory authorities can retain a QF’s ability to fix energy rates for the term of the contract at the time the obligation is incurred, but to require that such fixed rates be based on estimates of forecasted energy prices at the time of delivery over the contract term. Where the utility has a future capacity need that can be met by the QF, however, FERC’s final rule continues to allow the QF to fix the rate for avoided capacity over the full term of the contract at the time it establishes its LEO.
- New Flexibility for Setting “As-Available” Avoided Energy Rates: The final rule creates new options for state regulatory authorities to determine the value of QF energy delivered as available both within and outside organized markets. In RTO/ISO regions, the final rule establishes a rebuttable presumption that the locational marginal price (LMP) in effect at the time of delivery accurately reflects the utility’s avoided cost of QF energy delivered “as available.” Outside organized markets, the final rule allows state regulatory authorities to set the rates for as available QF energy at a “competitive price” based on energy prices at liquid trading hubs or by utilizing formulas based on natural gas price indices and a proxy heat rate for an efficient natural gas combined-cycle generating facility or other technologies. In each instance, FERC’s regulations leave implementation to the states to determine that such rates accurately represent the purchasing utility’s avoided energy costs at the time of delivery.
Option to Use Competitive Solicitation for Setting Full Avoided Cost Rates
Order No. 872 recognizes broad support from the National Association of Regulatory Utilities Commissioners, Edison Electric Institute as well as solar industry advocates for the use of competitive solicitations to provide a fair and transparent method to establish full avoided cost rates, especially in regions without organized markets. The final rule expressly permits state regulatory authorities to use competitive solicitations to determine avoided cost rates for future QF energy and/or capacity purchases, and establishes “minimum criteria” for the design and administration of such competitive solicitations. These minimum criteria include oversight by an independent administrator, compliance with FERC’s Allegheny principles, as well as certification by the state regulatory authority that the solicitation complies with FERC requirements. The final rule requires future solicitations to be conducted pursuant to these transparent and non-discriminatory procedures to comply with PURPA and provides that the solicitation process may be subject to challenge on this basis. Importantly, these requirements apply prospectively and do not affect competitive solicitations completed prior to the effective date of the final rule.
Further, the final rule clarifies that competitive solicitations may be used as an electric utility’s exclusive vehicle for acquiring QF capacity, where the solicitation is open to all sources (both QF and non-QF capacity providers) and is designed to fully meet the utility’s future capacity needs (versus parallel self-building programs or purchasing power from other sources outside the solicitation). Where a utility administers a PURPA-compliant competitive solicitation as the exclusive vehicle for procuring new capacity, QFs that do not receive an award in the competitive solicitation are still entitled to sell energy at the utility’s as-available avoided cost rate.
Limiting Mandatory Purchase Obligation Where QFs Have Non-Discriminatory Market Access
In response to Congress’s enactment of PURPA Section 210(m) in the Energy Policy Act of 2005, FERC determined in 2006 that that QFs in organized markets with a capacity greater than 20 MW should have non-discriminatory access to wholesale markets, while establishing a rebuttable presumption that QFs 20 MW or less do not have such non-discriminatory access. Based upon the maturation and development of wholesale power markets since 2006, the NOPR proposed to drastically limit the rebuttable presumption for small power production (SPP) QFs to a capacity of 1 MW or less, while retaining the 20 MW threshold for cogeneration facilities.
In the final rule, FERC determines that the rebuttable presumption of non-discriminatory access should be reduced to SPP QFs with a capacity of 5 MW or less. The final rule also provides that QFs above 5 MW can challenge the presumption that they have nondiscriminatory access to wholesale markets based upon a non-exhaustive list of factors prescribed in the final rule, including specific barriers to connecting to the transmission grid, the time of interconnection studies and length of the interconnection queue, a lack of affiliation with entities participating in RTO/ISO markets, a predominant purpose other than selling electricity, operational characteristics that prevent participation in a market, and transmission constraints. For cogeneration QFs, the final rule retains the existing presumption that QFs with a capacity of 20 MW or less lack non-discriminatory access to wholesale markets.
The final rule also addresses two other issues related to determining whether an exemption from the mandatory purchase obligation should be established where a QF has non-discriminatory access to wholesale markets. First, the final rule does not adopt the NOPR proposal to reduce a utility’s mandatory purchase obligation in states with retail choice. Instead, the final rule clarifies that FERC’s existing PURPA regulations already require that states, to the extent practicable, must account for reduced loads in setting QF capacity rates. The final rule does, however, adopt the NOPR proposal to provide new guidance to utilities outside RTOs/ISOs and organized markets regarding the option to seek termination of their purchase obligation by showing “comparable competitive quality” to markets under PURPA section 210(m)(1)(C), including by implementing competitive solicitations or showing liquid market hubs.
Legally Enforceable Obligation
Under FERC’s regulations and precedent, QFs may unilaterally commit via a legally enforceable obligation or “LEO” to deliver capacity and energy to a utility over a specified term prior to the QF and utility agreeing to a binding power purchase contract. By establishing an LEO, the QF can also fix the utility’s avoided costs to be paid to the QF as of the time that the LEO is incurred. FERC’s pre-existing regulations did not prescribe when or how QFs may establish LEOs, which, historically, had been primarily determined by state regulatory authorities (subject to guidance from FERC as well as the state and federal courts). The NOPR proposed to require QFs to meet objective and reasonable criteria to demonstrate commercial viability and financial commitment to construction before a QF is entitled to a contract or legally enforceable obligation. Representative criteria identified by FERC in the NOPR included QFs showing meaningful steps have been taken to obtain site control adequate to commence construction of the project at the proposed location, filing an interconnection application and securing local permitting and zoning approvals.
In the final rule, FERC adopts the NOPR’s new LEO provision, while also providing certain clarifications of its intent in implementing the objective “commercial viability” and “financial commitment” standards. FERC initially clarifies that its goal in requiring QFs to meet objective criteria to establish LEOs is to ensure that an electric utility’s purchase obligation is not triggered by speculative QF projects that are not sufficiently advanced in their development and for which it would be unreasonable for a utility to include in its resource planning, while at the same time ensuring that the purchasing utility does not unilaterally and unreasonably decide when its obligation arises. FERC reiterates its prior guidance that factors that a state regulatory authority may require to demonstrate commercial viability must be factors that are within the control of the QF.
FERC also clarifies that requiring permits to be “secured” to establish commercial viability may be unreasonable in some regions where the permitting and zoning process can be lengthy, while also clarifying that demonstrating financial commitment does not require a demonstration of the QF having obtained financing. FERC ultimately recognizes that states are in the best position to determine the factors that best suit the specific circumstances of each state, so long as the criteria are objective and reasonable, noting that the suggested prerequisites discussed in the order (and that are not prescribed in the final rule) present examples of objective and reasonable factors.
Finally, FERC clarifies that the LEO rules do not preclude a utility from executing a PPA before a QF has demonstrated compliance with the LEO rules, suggesting that the formality of an administratively determined non-contractual LEO is not a pre-requisite to the utility and the QF negotiating a binding power purchase agreement.
Updated “One-Mile Rule” for Siting Affiliated SPP QFs
The final rule modifies and clarifies the “one-mile rule,” which determines whether multiple affiliated generating units using the same resource constitute the “same facility” located at the “same site,” and thus count toward the 80 MW size limitation for SPP QFs. Although FERC admitted that circumvention of its one-mile rule is not “an everyday occurrence,” it found that its modified regulatory text was reasonable to prevent developers from strategically siting facilities just over one mile apart.
The modified rule establishes two bright-line irrebuttable presumptions: (1) affiliated facilities located less than one mile apart that use the same energy resource will be presumed to be located on the same site, and (2) affiliated facilities located more than 10 miles apart that use the same energy resource will be presumed to be located on different sites. FERC establishes a rebuttable presumption that affiliated facilities located more than one mile apart but less than 10 miles apart are located on a separate site, and thus do not count toward the 80 MW limitation.
The distance will be calculated by measuring between the edge of the nearest “electrical generating equipment” at two affiliated facilities. FERC adopted “electrical generating equipment” as a new definition encompassing all boilers, heat recovery steam generators, prime movers (any mechanical equipment driving an electric generator), electrical generators (including each solar panel or wind turbine), photovoltaic solar panels, inverters, fuel cell equipment and/or other primary power generation equipment used in the facility, excluding equipment for gathering energy to be used in the facility.
As described below, interested parties will be able to challenge the rebuttable presumption by protesting self-certifications, and applicants will be able to include additional information in their self-certification applications to pre-empt such arguments. FERC provided examples of factors it would consider when evaluating facilities, including physical characteristics such as access and easements, infrastructure, and evidence of shared control systems or step-up transformers. FERC also explained that the siting limitations would be equally applicable to SPP QFs developed by unaffiliated developers and later acquired by a single entity. As before, separate, unaffiliated ownership of SPP QFs, no matter how closely located, will be deemed separate QFs located at separate sites.
Challenges to Certification and Recertification
FERC revised its regulations to permit interested parties to intervene in and file protests of certifications or any recertification that substantively changes the facts underlying the original certification (e.g., a change in electrical generating equipment that increases power production capacity by the greater of 1 MW or 5 percent of the previously certified capacity of the QF, or a change in ownership in which an owner increases its equity interest by at least 10 percent from the equity interest previously reported). The revised regulation eliminates the substantial hurdle of having to file a petition for declaratory order, along with a hefty $30,000 filing fee, to challenge the certification.
Under the new regulations, self-certifications will still be deemed effective as of the date of filing, even if a protest is subsequently filed. The status will be valid unless and until FERC issues an order revoking the certification. FERC will have 90 days to act on protests, with an option to toll the period for one additional 60-day period. FERC declined to grandfather existing QFs from future challenge. After the rule becomes effective, existing QFs that submit recertifications with substantive changes will be subject to the protest process.
Any FERC order revoking QF certification will be subject to rehearing and, ultimately, appeal.
Looking Ahead to State Implementation of the Final Rule
The prospective changes adopted in the final rule will become effective 120 days after the final rule’s publication in the Federal Register. Ultimately, however, as PURPA is directly implemented by state regulatory authorities and non-public utilities across the county, states will have the task of assessing when and how best to implement the new avoided cost rate setting flexibility established in the final rule, as well as to consider the additional guidance provided on long-disputed issues such as formation of LEOs and the “one-mile rule” siting limitations prescribed in the final rule. Each of these issues must now be implemented consistent with FERC’s new final rule, while at the same time utilizing the flexibility afforded in the final rule to accommodate local conditions and concerns.
It also remains to be seen whether FERC or the appellate courts will further consider and modify the new final rule. Similar to the Sept. 19, 2019, NOPR introducing PURPA reform, the order shows continuing policy disagreements within FERC over whether the significant changes to FERC’s PURPA rules continue to effectively implement the PURPA law, as enacted by Congress. Commissioner Richard Glick’s dissenting opinion argues that the proposed reforms overstep FERC’s administrative role, will no longer achieve PURPA’s mandate to encourage QF development and, in certain respects, are arbitrary and capricious. Thus, as states begin to implement the new final rule, it is possible that those efforts will be clouded by further consideration of the final rule due to regulatory action or on appeal.