On Aug. 16, 2010, the California Public Utilities Commission (CPUC) filed a request for clarification or rehearing of the Federal Energy Regulatory Commission’s (FERC) July 15, 2010 Declaratory Order that rejected feed-in tariffs which the CPUC had developed pursuant to California’s AB 1613 legislation.

In California Public Utilities Commission, 132 FERC ¶61,047 (Docket Nos. EL10-64-000 and EL10-66-000), FERC ruled that the CPUC’s proposed feed-in tariffs constituted wholesale ratesetting by the CPUC and were preempted by the Federal Power Act (FPA). However, in its Order FERC found that the CPUC’s program would not be preempted by the FPA or the Public Utility Regulatory Policies Act (PURPA) as long as the program meets certain requirements: (1) the combined heat and power (CHP) generators from which the CPUC is requiring the utilities to purchase energy and capacity are Qualifying Facilities (QF) pursuant to PURPA; and (2) the rate established by the CPUC does not exceed the avoided cost of the purchasing utility.

Utilities and other entities should be mindful of developing federal issues as they consider implementing feed-in tariffs, making investments, or entering into transactions involving the sale or purchase of electricity at wholesale from small solar and other renewable energy facilities.

In its request for clarification or rehearing, the CPUC explained that it intends to “reexamine grounding its implementation of AB 1613 on the CPUC’s authority under PURPA.” The CPUC is asking FERC to provide additional guidance on two general issues: (1) whether the CPUC can require retail utilities to offer different contracts that include different factors in the avoided cost calculation in order to promote development of more efficient CHP facilities; and (2) whether “full avoided cost” need not be the lowest possible avoided cost and should properly take into account real limitations on “alternate” sources of energy imposed by state law. According to the CPUC, the answers to these questions are necessary to determine whether, consistent with PURPA, the CPUC can establish a feed-in tariff with a two-tiered rate structure, wherein QFs that meet the higher state efficiency standards set forth in AB 1613 get higher long-run avoided cost rates reflecting the more stringent efficiency standards and non-AB 1613 compliant QFs get the lower short-run avoided cost rates.

If FERC does not grant clarification on these issues, the CPUC has requested rehearing of the FERC Order. The CPUC alleges several errors in the FERC Order, including FERC’s failure to address the issues for which the CPUC seeks clarification and FERC’s finding that the CPUC’s feed-in tariffs set rates for wholesale sales in interstate commerce and were therefore preempted by the FPA.