Summary of NOPR
On September 19, 2019, the Federal Energy Regulatory Commission (FERC) issued a Notice of Proposed Rulemaking (NOPR) proposing to revise its regulations implementing Sections 201 and 210 of the Public Utility Regulatory Policies Act of 1978 (PURPA) in light of changes in the energy industry since 1978.
FERC’s NOPR includes a number of changes to its PURPA regulations, including the following:
- With respect to Qualifying Facility (QF) rates, the NOPR proposes to grant state regulatory authorities the flexibility to require that energy rates (but not capacity rates) in QF power sales contracts and other legally enforceable obligations vary in accordance with changes in the purchasing utility’s avoided costs at the time the energy is delivered. The NOPR proposes to grant states the flexibility to set “as-available” QF energy rates based on market factors or, at the state’s discretion, to continue setting QF rates under the existing PURPA Regulations.
- FERC’s NOPR proposes to replace the “one-mile rule” for determining whether generation facilities should be considered to be part of a single facility for purposes of determining whether it is a qualifying small power production facility. The NOPR proposes a tiered approach under which facilities one mile or less apart would be treated as the same facility, facilities more than one mile but less than 10 miles apart would be presumed to be different facilities, but that presumption could be rebutted, and facilities 10 or more miles apart would be treated as separate facilities.
- The NOPR also proposes to revise FERC’s regulations that provide for termination of a utility’s obligation to purchase from a QF with nondiscriminatory access to certain markets. The rebuttable presumption that QFs with a net capacity at or below 20 megawatts (MW) do not have nondiscriminatory access to those markets would be reduced to 1 MW for small power production facilities (but would remain unchanged for cogeneration facilities).
- The NOPR proposes to clarify that a QF is entitled to a contract or legally enforceable obligation when it is able to demonstrate commercial viability and financial commitment to construct its facility pursuant to objective and reasonable criteria determined by the state.
- Finally, the NOPR proposes to allow a party to protest a self-certification or self-recertification of a QF without being required to file a separate petition for declaratory order and to pay the associated filing fee.
- Commissioner Richard Glick dissented in part from the NOPR.
The NOPR seeks comment on these proposed reforms 60 days from the date of its publication in the Federal Register.
Summary of Proposed Revisions
A. QF Rates
FERC proposes to revise its PURPA regulations in two primary ways as a means to incorporate competitive market considerations into QF rate-setting. First, FERC proposes to allow states to exercise greater discretion in setting the energy (but not capacity) component of QF sales based on market indicators such as the locational marginal price (“LMP”) within RTOs/ISOs, or, in the case of non-RTO/ISO regions, based on liquid market hub prices or natural gas price indices and proxy heat rates. Similarly, FERC proposes to allow states flexibility in requiring energy rates for QF contracts and Legally Enforceable Obligations (“LEOs”) be based on as-available energy rates at the time of delivery, rather than fixed, and also proposes to allow states in RTO/ISO markets flexibility to use estimates of future LMPs, or other acceptable as-available energy rates as the fixed energy rate for QF contracts. Second, FERC proposes to clarify that states have flexibility to require that energy and/or capacity rates be determined through competitive solicitations, such as Requests for Proposals (“RFPs”).
1. As-Available QF Energy Sales
In the case of QFs selling their energy on an as-available basis, FERC proposes to allow states to exercise greater discretion in setting the energy (but not capacity) component of QF sales based on certain market indicators. First, FERC proposes to permit states the flexibility to set the as-available energy rate paid to a QF by an electric utility located in an RTO/ISO at the Locational Marginal Price (“LMP”) calculated at the time of delivery—an approach that some states have already taken, which FERC acknowledged. The Commission expressly requests comments on both this approach and also whether real-time prices established in the California Independent System Operator, Inc. (“CAISO”)-administered Energy Imbalance Market (“EIM”) is similar for these purposes as the LMPs established in RTOs/ISOs.
Second, FERC proposes to permit states to set the as-available energy rate paid to a QF by electric utilities located outside of RTO/ISO markets at a delivery-based competitive price (“Competitive Price”) determined either as (1) the energy established at liquid market hubs, such as Mid-C, (plus applicable transmission prices, if allowed by the state); or, if no such hub exists, then (2) calculated from a formula based on natural gas price indices coupled with proxy heat rates for an efficient natural gas combined-cycle generator. For each type of Competitive Price option, FERC set out a non-exclusive list of factors for states to consider. FERC also emphasized that the two options “are not intended to supersede the states’ existing ability to set as-available energy rates based on an electric utility’s avoided costs,” and that states remained free to establish avoided costs rates based on power purchase agreements, so long as all other necessary conditions were met.
2. Establishing Fixed Energy Rates Based on Forecasts
In the NOPR, the Commission proposes to add a new section under § 292.304(d)(1)(iii) of its PURPA regulations permitting a QF to request a fixed energy rate for the entire term of the contract based on a forward price curve—i.e., forecasted energy prices at the times of delivery over the life of the contract. Under its proposal, the Commission recognizes that such fixed energy rates could be a single energy rate for the life of the contract, based on the amortized present value of the forecasted energy prices, or a series of specified rates that are different in future periods under the contract.
3. Providing for Variable Energy Rates in QF Contracts
The Commission proposes to revise its PURPA regulations to allow a state to limit a QF’s election to fix the energy rate for the entire length of its contract at the time the contract is entered into, and would permit QF energy rates to vary during the term of the contract. That is, under the Commission’s proposal, a state would be permitted to set a variable energy rate at the time the legally enforceable obligation is incurred. Notably, this proposed modification would not apply to a QF’s capacity rate; a QF would continue to be entitled to a contract with avoided capacity costs calculated and fixed at the time of contract.
In the NOPR, the Commission explains that its prior justification for allowing QFs to fix their rate at the time of contracting—i.e., to provide the rate certainty necessary for a QF to obtain financing—no longer applies. Specifically, the Commission preliminarily finds that, based on the testimony submitted at the Technical Conference and other comments received, fixed energy rates are not generally required in the electric industry in order for electric generation facilities to obtain favorable financing. Moreover, the Commission explains that permitting states to require variable energy rates over the life of a contract may result in longer QF contracts, and thus improve the financeabillity of QF projects, because states and utilities will no longer be incentivized to shorten the terms of contracts in order to limit their financial exposure.
4. Consideration of Competitive Solicitations to Determine Avoided Costs
In the NOPR, the Commission also proposes to amend its regulations to permit states to set avoided energy and/or capacity rates using competitive solicitations (i.e., RFPs). While the Commission does not propose to prescribe specific detailed requirements with respect to such competitive solicitations, it does propose to set forth certain minimum criteria to govern the RFP process. These minimum criteria includes, but it not limited to: (a) an open and transparent process; (b) solicitations open to all sources, taking into account the required operating characteristics of the needed capacity; (c) solicitations conducted at regular intervals; (d) oversight by an independent administrator; and (e) certification as fulfilling the above criteria by the state regulatory authority or nonregulated electric utility.
The Commission also seeks comment on whether it should provide further guidance on whether, and under what circumstances, and RFP can be used as a utility’s exclusive vehicle for acquiring QF capacity.
B. Relief from Purchase Obligation in Competitive Retail Markets
Under § 292.303(a) of FERC’s PURPA regulations, electric utilities are generally required to purchase “any energy and capacity which is made available from a qualifying facility.” Because some states having restructured their electricity markets to incorporate retail choice, electric utilities in those states may no longer be required to serve load that would otherwise be their native load. However, such electric utilities are still generally required to be Providers of Last Resort (“POLR”) and serve customers that are not obtaining electricity from competitive electric retail suppliers.
In the NOPR, FERC proposes to add regulatory text to § 292.303(a) of its PURPA regulations that would provide electric utilities relief from their PURPA capacity purchase obligations. The language provides that the purchase obligations of utilities may be reduced to the extent that the purchasing electric utility’s supply obligation has been reduced by a state retail choice program. The aim of the change is to provide state regulatory authorities and nonregulated electric utilities the flexibility to respond to the possibility that a utility’s POLR supply obligation may decrease or increase over time.
C. Evaluation of Whether QFs Are Separate Facilities (the “One-Mile Rule”)
Under FERC’s current PURPA regulations, there is an irrebuttable presumption that facilities owned by the same person(s) that use the same energy resource, but are more than one mile apart from each other, are located on separate sites and are therefore separate facilities. This is often referred to as FERC’s “one-mile rule.” Although Section 292.204(a)(2)(ii) of FERC’s PURPA regulations expressly requires facilities to be measured from the “electrical generating equipment” of the facility, there is little FERC guidance as to what exactly must be measured or how it must be measured, which has resulted in ongoing litigation.
In the NOPR, FERC proposes to amend its PURPA regulations to define “electrical generating equipment” and specify how to measure the distance between facilities that have multiple sets of “electrical generating equipment” such as wind and solar farms. FERC also proposes to establish a new rebuttable presumption that facilities that are more than one mile apart and less than ten miles apart are separate facilities. Under this proposal, the irrebuttable presumption that facilities less than a mile apart are separate facilities will remain and the new rebuttable presumption that facilities more than one mile and less than ten could be challenged
FERC proposes to define “electrical generating equipment” to include all boilers, heat recovery steam generators, prime movers, electrical generators, photovoltaic solar panels and/or inverters, fuel cell equipment and/or other primary power generation equipment, but excluding equipment used for gathering energy to be used in the facility. FERC expressly noted it would expect each wind turbine on a wind farm and each solar panel in a solar facility to be considered “electrical generating equipment” because it is independently capable of producing electric energy. FERC proposes measuring the distance between “electrical generating equipment” so that for facilities to be considered irrebuttably separate, all such equipment of one QF must be at least ten miles away from all such equipment of another QF. FERC noted that it may also consider amending the definition of “affiliate” in section 35.36(a)(9).
FERC also proposes several physical and ownership factors that would inform the rebuttable presumption of separate facilities between one and ten miles apart. Factors pertaining to common physical characteristics include: infrastructure, property ownership or leases, access and easements, interconnection agreements or facilities, control or collector facilities, motive force or fuel source, off-take arrangements. Factors pertaining to ownership characteristics include: whether facilities are owned and controlled or operated and maintained by the same person(s), sell to the same utility, use common debt or equity financing, were constructed by the same entity within 12 months, manage a power sales agreement executed within 12 months of a similar facility in the same location, placed into service within 12 months of an affiliated project’s commercial operation date, or share engineering or procurement contracts. The NOPR seeks comments as to whether FERC should rely on these factors and/or others for its new “one mile rule” regulations.[28
D. PURPA Section 210(m) Rebuttable Presumption of Nondiscriminatory Access to Markets
In accordance with PURPA Section 210(m), PURPA regulations permit an electric utility to file an application with the Commission requesting relief from the requirement to enter into new contracts or obligations to purchase electric energy from a QF if the Commission finds that the QF has nondiscriminatory access to certain markets. PURPA Section 210(m) was added by the Energy Policy Act of 2005, and was intended to reflect the fact that organized electric markets provide alternative markets for sales by QFs. Section 292.309(d)(1) of the Commission’s PURPA regulations currently establishes a rebuttable presumption that QFs with a net power production capacity at or below 20 MW lack nondiscriminatory access to such markets.
In the NOPR, FERC proposes to revise Section 292.309(d) to reduce the net power production capacity level at which the presumption of nondiscriminatory access to a market attaches for small power production facilities from 20 MW to 1 MW (the proposed revision does not apply to cogeneration facilities). FERC explained that when it originally adopted the 20MW and below demarcation in 2006, organized electric markets had been in existence for only a few years and were not well understood by all market participants. The Commission reasoned that now, twelve years later, the markets are more mature, better understood, and that it fair to expect that small power production facilities above 1 MW can acquire the administrative and technical expertise necessary to obtain nondiscriminatory access to a market. FERC also pointed to steps taken to ease both interconnection and market access for small generation since PURPA section 210(m) was first adopted.
In addition, in response to a proposal from the National Association of Regulatory Utility Commissioners (NARUC”), the NOPR seeks comments on any specific factors that FERC should consider in determining how a utility may satisfy PURPA section 210(m)(1)(C) (permitting electric utilities to terminate their mandatory purchase obligation by demonstrating that a particular market is of comparable competitive quality to markets described in PURPA section 210(m)(1)(A) and (B).
E. Legally Enforceable Obligation
Section 292.304(d) of PURPA provides that QFs can choose to have their rates based on the avoided cost calculated at the time of delivery, or at the time a legally enforceable obligation (“LEO”) is incurred. However, PURPA regulations do not specify when or how a LEO is established. As a result, the NOPR proposes to amend Section 292.304(d)(3) of the PURPA regulations to require that QF demonstrate its commercial viability, and financial commitment to construct its facility through objective and reasonable state-determined criteria before being entitled to a LEO. These criteria might include a showing that the QF has obtained site control, filed an interconnection application, and secured local permitting and zoning. FERC explained that its proposal will allow electric utilities to reliably plan for their systems ensure resource adequacy while simultaneously encouraging QF development by providing more certainty as to when a QF will obtain a LEO. However, QFs already in operation with existing LEOs will not have to show commercial viability and financial commitment to obtain new LEOs.
F. QF Certification Process
Under the current PURPA regulations, QFs file a FERC Form 556 to certify that they meet the requirements for QF status. If a QF makes any material modification to its facility it cannot rely upon its certification and must re-certify with the updated information. FERC does not verify any of the information provided and has declined to make any changes to the self-certify process in past orders to provide any such verification.
In the NOPR, FERC proposes to change section 292.207(a) of its PURPA regulations to allow for timely, but thorough review of any challenges to QF self-certifications and re-certifications. Specifically, the new rules would allow a party to protest a QF’s self-certification without filing a petition for a declaratory order or paying any associated fees. If a party files any such protest, it would bear the burden of demonstrating that the facility does not satisfy the requirements for QF status, as a general claim that the QF does not meet the requirements would be insufficient. FERC proposes to issue an order on these protests within 90 days of their filing.
FERC also proposes changes to its Form 556 to allow QFs to proactively provide information that would be considered in any challenge pertaining to the changes to the “one-mile rule” regulations. See section C of NOPR for additional details.
G. Commissioner Glick Partial Dissent
Commissioner Richard Glick dissented in part from the NOPR, arguing that it “would effectively gut PURPA.” First, Commissioner Glick argued that although the energy landscape has changed since PURPA’s enactment, whether PURPA’s objectives are still important and whether PURPA requires reform are issues for Congress to resolve—not the Commission.
Second, Commissioner Glick had objections to certain aspects of the NOPR regarding avoided cost and reducing the 20 MW rebuttable presumption of non-discriminatory access to competitive wholesale markets within RTOs and ISOs. Specifically, Commissioner Glick contended that the NOPR’s proposal to eliminate the requirement that a utility must afford a QF the option to enter a contract at a fixed avoided cost rate will make it more difficult, or in some cases impossible, for QFs to obtain financing. In addition, Commissioner Glick questioned whether the NOPR’s proposal to determine that an LMP is a per se reasonable measure of an as-available avoided cost and the NOPR’s presentation of other potential competitive price indices would ignore other factors that states currently are required to consider, including reliability and the availability of the QF. Commissioner Glick believed that, when combined with the proposal to eliminate the fixed avoided cost rate option, QFs may be reduced to relying solely on some synthetic measure of what spot prices would be in a competitive market based on gas prices and heat rates. Regarding reducing the 20 MW rebuttable presumption to 1 MW, Commissioner Glick questioned whether a 1 MW resource can access and compete in complex markets on a similar footing as the resources in the portfolio of a large utility or merchant generator.
Third, Commissioner Glick argued that PURPA should be revised to create more competition, not less. To accomplish this goal, Commissioner Glick pointed to a whitepaper published by the National Association of Regulatory Utility Commissioners that proposed to allow FERC to terminate a utility’s PURPA purchase obligation based on QFs’ access to competitive wholesale electricity market, which Commissioner Glick reasoned would comport with PURPA’s pro-competitive objectives. Commissioner Glick also cited a proposal put forward by the Solar Energy Industries Association that would address competitive solicitations as a means of procuring energy and capacity from all new generation, including QFs. Commissioner Glick concluded that while competitive markets in RTOs and ISOs may obviate the need for PURPA in those areas, PURPA may still play a vital role in other parts of the country.
Lastly, Commissioner Glick noted his support for several aspects of the NOPR, including: (1) the NOPR’s reforms to the one-mile rule, which Commissioner Glick thought would prevent gaming; (2) the proposal to require QFs to demonstrate commercial viability before securing a legally enforceable obligation from a utility, which calculated Glick viewed as striking a reasonable balance between allowing QFs to secure a commitment for purchase early in their development cycle while preventing QFs from locking-in avoided cost rates too far ahead of their actual delivery of energy or capacity; and (3) the proposal to allow stakeholders to protest self-certification of QFs, because it would be unfair to require protesters to file a declaratory order to inform the Commission of their views.