FERC recently clarified federal preemption issues involved with state feed-in tariff programs in an order denying a rehearing request by several California utilities and the Edison Electric Institute (EEI) regarding California's proposed feed-in tariff program. The decision confirms that states can combine their authority to set avoided cost rates with their authority to set energy procurement requirements for state utilities. This combination allows states to set avoided cost pricing with reference to a specific class of generators, essentially permitting the development of certain types of feed-in tariffs.

The California utilities argued that no notice was provided to the public that avoided cost pricing and/or the effect of purchase mandates on such pricing would be the subject of the case. The California utilities also objected to FERC's determination that the concept of a multi-tiered avoided cost rate structure could be consistent with the avoided cost rate requirements set forth in the Public Utility Regulatory Policies Act (PURPA) and the FERC regulations.

FERC denied rehearing and rejected the arguments proposed by the California utilities and EEI. FERC confirmed that it was only providing guidance on the approaches the California Public Utilities Commission (CPUC) proposed to take, and was not ruling on whether the CPUC's actual offer price under the proposed program was, in fact, consistent with the avoided cost requirements of PURPA.

FERC noted that it was not required to proceed by rulemaking on this issue, but had the discretion to proceed by case-specific adjudication, which both the CPUC and the California utilities requested.

On the issue of whether appropriate notice had been given, FERC stated that the utilities themselves had previously raised arguments in the proceeding pertaining to avoided cost rates, and thus those utilities “cannot persuasively claim that they did not have notice that issues pertaining to avoided cost rates may be addressed … .”

FERC reaffirmed its previous decision and held that because avoided cost rates are defined in terms of costs that an electric utility avoids by purchasing capacity from a qualifying facility (QF), and because a state may determine what particular capacity is being avoided, the state may rely on the cost of such avoided capacity to determine the avoided cost rate. Thus,

guidance provided by [FERC] in this proceeding simply reflects the reality that states have the authority to dictate the generation resources from which utilities may procure electric energy. Just as, for example, an avoided cost rate may reflect a state requirement that utilities must ‘scrub' pollutants from coal plant emissions, so an avoided cost rate may also reflect a state requirement that utilities purchase their energy needs from, for example, renewable resources.

By reaffirming its previous decision, FERC's actions provide clarity to states seeking to develop and implement feed-in tariffs as a way to encourage renewable energy generation development. Though FERC has not yet ruled on the specifics of California's proposed program, this proceeding provides states with guidance to construct their own programs in a way that avoids preemption by federal law.