A recent order1 from the Federal Energy Regulatory Commission (“FERC” or “the Commission”) demonstrates the importance of timely compliance with the qualifying facilities (“QF”) regulations. The order denied requests filed by several affiliated companies requesting that FERC reverse its directive that the companies pay refunds for power sales during the period prior to filing QF self-certification notices. FERC’s rejection of this request emphasizes that timely filing for QF certification is as important as compliance with the technical criteria for QF status. Companies that own QFs should review the characteristics of their facilities to determine whether self-certification or recertification is required, and promptly complete the applicable forms to avoid or minimize the need for any refunds.

The Process for Certifying Qualifying Facilities Status

The Public Utility Regulatory Policies Act of 1978 (“PURPA”)2 provided for a class of generating facilities that receive special rate and regulatory treatment if they meet the criteria for QF status. Small power production facilities may obtain QF status if they produce 80 MW or less by using a primary fuel source of renewable, biomass, waste or geothermal resources. In addition, cogeneration facilities may obtain QF status if they efficiently produce electricity and one other form of useful thermal energy, such as heat or steam. Federal laws and regulations grant QFs three kinds of benefits: the right to purchase certain services from utilities, exemption from certain federal and state regulations, and a right to require a utility to purchase their energy or capacity.

FERC offers a generation facility owner the option to request a formal Commission determination of QF status or simply “self-certify” that the facility meets the applicable criteria by filing a notice of self-certification. The self-certification process does not entail a formal review by the Commission.

Originally, the notice of self-certification was not mandatory and was simply intended to provide FERC with information about the state of the QF market. A facility could qualify for the benefits available to QFs without making any filing, if the utility that purchased the facility’s power agreed that it met the QF criteria. However, after the Energy Policy Act of 2005,3 FERC revised the regulations to require a notice of self-certification to be filed to qualify for QF status and the associated benefits. The Commission’s regulations now require owners of QFs that are greater than 1 MW to either file a notice of self-certification or apply for a Commission certification in order to obtain QF status. Further, when a change occurs in the material facts or representations in the filing to obtain QF status, the owner must file a notice of self-recertification or an application for recertification.

The OREG Orders

In February 2011, a number of subsidiaries of Ormat Nevada Inc. (“Ormat”) informed FERC that they had commenced service at various dates between July 2006 and August 2010, and taken advantage of QF benefits without obtaining certifications. They asserted that the facilities met the criteria for QF status from the date that they began operation, but the companies had inadvertently failed to submit notices of self-certification. They requested a limited waiver from the QF filing requirements, citing two prior FERC decisions: Ashland Windfarm LLC, et al.4 (“Ashland”) and WM Renewable Energy, LLC (“WM Renewable”).5 In Ashland, FERC granted waiver to a number of individuals, trusts and charitable organizations that had inadvertently failed to follow the Commission’s QF certification process. In WM Renewable, FERC granted waiver to a facility that had operated for nine months before filing a self-certification.

Although FERC granted the Ormat companies waivers that would permit the facilities to remain QFs and qualify for most regulatory exemptions, it refused to waive Section 205 of the Federal Power Act, which requires the filing of rates, terms and conditions of service. QFs that are 20 MW or smaller are exempt from the requirements of Section 205. Generators that are not QFs need FERC authority, normally in the form of a market-based rate tariff, to make wholesale power sales. The Commission contrasted the lack of sophistication of the Ashland parties with Ormat’s experience in the energy industry. FERC also distinguished the nine-month noncompliance period in WM Renewable with the period of years that covered the noncompliance of some Ormat subsidiaries. Instead, FERC found the appropriate precedent in an earlier decision, LG&E-Westmoreland Southampton (Southampton),6 where it ordered refunds for a cogeneration facility that had failed to meet FERC operating standards for a period between 1991 and 1992.

Accordingly, FERC’s remedy for the Ormat companies’ noncompliance — the failure to file a notice of self-certification or a market-based rate filing — was to require refunds from the companies to the purchasers of power from these generating units equal to the time value of the revenues collected during the period of noncompliance (to account for the potential earning capacity of the money if it had not been collected), minus any variable costs, such as the cost of fuel or variable operation and maintenance expenses. Under FERC precedent, the “time value” of revenues is calculated by applying an interest rate specified in FERC regulations to the revenues received by the party required to make refunds.

Denial of Rehearing

The Ormat companies requested rehearing. Among other arguments, they made an equitable argument that the refunds amounted to a $1.6 million expense on top of $1.4 million net loss the facilities had suffered during the period of noncompliance. They also argued that they had no opportunity to monitor the Commission proceedings that established the general QF certification requirement.

In the recent order on rehearing, FERC upheld its prior ruling. It rejected the claim that the refunds were excessive, suggesting that it could have ordered even higher refunds. FERC specifically noted that “[e]very person or entity appearing before the Commission ‘is held responsible for being familiar with the agency’s regulations,’” and that “‘[t]he principle that ignorance of the law is no defense applies whether the law be a statute or a duly promulgated and published regulation.’”

FERC’s order clarifies that it will treat a failure to comply with QF certification requirements just as it treats a failure to comply with the QF operational criteria. The Commission’s decision to announce the order at a public meeting, a forum often reserved for matters of particular importance, indicates that it intended to raise awareness of this compliance policy. Although FERC’s order did not specifically address failure to file for recertifications, it seems likely that the refund policy could apply to these instances of noncompliance as well. Companies that own, acquire or develop QFs should review the current circumstances and certification status of their facilities and adopt procedures to ensure timely compliance with certification or recertification requirements.