Last week, the Federal Energy Regulatory Commission (“FERC”) issued a Notice of Proposed Rulemaking (“NOPR”) to modernize its regulations governing small power producers and cogenerators under the Public Utility Regulatory Policies Act of 1978 ("PURPA"). The proposed reforms contained in the NOPR are intended to reflect the significant changes that have occurred in the power sector since FERC first issued its regulations implementing PURPA almost four decades ago. According to FERC Chairman Neil Chatterjee, “[a] lot has changed since 1980,” including “tremendous technological advancements in renewables, increasing sophistication in competitive electric power markets, and abundant supplies of domestic natural gas.” The NOPR is FERC’s first comprehensive review of PURPA, and proposes the following reforms:

  • First, FERC proposes to grant states the flexibility to require that energy rates (but not capacity rates) in qualifying facility (“QF”) power sales contracts and other legally enforceable obligations ("LEO") vary in accordance with changes in the purchasing electric utility’s as-available avoided costs at the time the energy is delivered. Under this proposal, if a state exercises this flexibility, a QF would no longer be able to have its energy rate be fixed for the term of the contract or LEO.
  • Second, FERC proposes to grant states additional flexibility to allow QFs to have a fixed energy rate, but to provide that such state-authorized fixed energy rate can be based on projected energy prices during the term of a QF’s contract.
  • Third, FERC proposes to grant states the flexibility to set “as-available” QF energy rates: (1) for QFs selling to electric utilities located in organized electric markets, at the locational marginal price ("LMP"); and (2) for QFs selling to electric utilities located outside of organized electric markets, at competitive prices from liquid market hubs or calculated from a formula based on natural gas price indices and specified heat rates. Further, states would have the flexibility to set energy and capacity rates pursuant to a competitive solicitation process conducted pursuant to transparent and non-discriminatory procedures. In each case, FERC’s proposal would entail granting the states options to employ additional approaches in setting QF rates beyond those commonly employed today.
  • Fourth, FERC proposes to provide that an electric utility’s obligation to purchase from QFs may be reduced to the extent the purchasing electric utility’s supply obligation has been reduced by a state retail choice program.
  • Fifth, FERC proposes to modify its current “one-mile rule” for determining whether generation facilities should be considered to be part of a single facility for purposes of determining qualification as a QF. Specifically, FERC proposes to allow electric utilities, state regulatory authorities, and other interested parties to show that facilities between one and ten miles apart are actually are a single facility (with facilities one mile or less apart still considered a single facility, and facilities ten miles or more apart considered separate facilities). FERC also proposes to allow an entity seeking QF status to provide further information in its certification (whether a self-certification or FERC certification) to preemptively defend against subsequent challenges by identifying factors affirmatively demonstrating that its facility is indeed a separate facility at a separate site from other facilities.
  • Sixth, FERC proposes to revise its regulations implementing PURPA section 210(m), which provide for the termination of an electric utility’s obligation to purchase from a QF with nondiscriminatory access to certain markets. Currently, there is a rebuttable presumption that QFs with a net capacity at or below 20 MW do not have nondiscriminatory access to such markets. FERC proposes to reduce the rebuttable presumption for small power production facilities (but not cogeneration facilities) from 20 MW to 1 MW.
  • Seventh, FERC proposes to clarify that 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 LEO.
  • Finally, FERC proposes to allow a party to protest a self-certification or self-recertification of a facility without being required to file a separate petition for declaratory order and to pay the associated filing fee.

Industry reactions to the NOPR seem to vary, with some meeting the NOPR with skepticism and concern. Katherine Gensler, Vice President of Regulatory Affairs for the Solar Energy Industries Association ("SEIA"), stated that the NOPR “would have the effect of dampening competition and allowing utilities to strengthen their monopoly status, to the detriment of customers” and “is a move away from competition.” Further, FERC Commissioner Richard Glick dissented in part from the NOPR. In his opinion, a fundamental reform to PURPA should come from Congress and not an independent regulatory agency like FERC.

Commissioner Glick also expressed concern that the NOPR’s proposal to allow utilities to eliminate the fixed-price contract option will make it more difficult, or even impossible in some cases, for QFs to obtain financing and that the proposal may result in discriminatory rates. Though he supports certain aspects of the NOPR, such as the requirement that a qualifying facility demonstrate commercial viability before securing a LEO and allowing stakeholders to protest self-certification of qualifying facilities, he believes that the NOPR may not satisfy the basic requirements and statutory obligations the Commission has under PURPA, which include: (1) to encourage the development of QF; (2) to prevent discrimination against QFs by incumbent utilities; and (3) to ensure that the resulting rates paid by electricity customers remain just and reasonable and in the public interest. Glick stated that the NOPR “would effectively gut the [PURPA]” and that “focusing on expanding opportunities for genuine competition would far better serve the public interest than simply rebalancing the scales against qualifying facilities.”

It is not clear whether the NOPR will curtail opportunities for renewable resources or result in more competition long term. The details of any final FERC regulations related to implementing PURPA, and how states comply with them, will ultimately answer this question. The first step towards FERC establishing new regulations implementing PURPA will be in the form of public comments on the NOPR, which are due to FERC 60 days after the NOPR is published in the Federal Register.