United States: Understanding Today's PURPA Before Negotiating a Power Purchase Agreement

After many years of waning significance, the Public Utility Regulatory Policies Act of 1978 ("PURPA") has reignited as a useful tool for renewable energy and cogeneration project developers.  Before negotiating a power purchase agreement of any type, developers, lenders, and investors should consider and understand their rights under PURPA, both to identify attractive opportunities, but also to avoid inadvertently waiving rights they may have under PURPA that may provide useful leverage.

As originally implemented, PURPA permitted a qualifying facility ("QF") to sell its output to an electric utility at the utility's "avoided cost."  During the 1980s, when many utilities were forecasting high rates for decades to come, developers were able to obtain power purchase agreements ("PPAs") under PURPA with advantageous rates.  In the 1990s, however, wholesale electricity price forecasts dropped, competitive power markets began to form, and PURPA PPAs at avoided cost rates became less favorable.  In many regions, that trend continued.  Recently, however, circumstances have changed.  Dropping project development costs for solar and wind projects, and low natural gas prices ideal for cogeneration development, have made PURPA PPAs, at least in some states, profitable for QF developers. 

Although many utility-scale solar and wind projects obtain PPAs without direct help from PURPA, such as through utilities complying with state-mandated renewable portfolio standard ("RPS") programs, PURPA still serves as a useful tool.  It can create an opportunity to obtain a financeable PPA in some states where no other options exist.  Even in states with additional PPA options, a QF developer can sometimes rely on its PURPA rights to negotiate better PPA terms and conditions, and provide additional options to consider.  Therefore, it is important for the parties involved with a QF to understand their PURPA rights before executing any type of PPA.  Understanding these rights can be particularly complex, due in part to PURPA's status as a federal statute that divides implementation between the Federal Energy Regulatory Commission (FERC) and (for regulated utilities) state utility commissions. 

This article identifies and briefly analyzes some of the key issues under PURPA to keep in mind before pursuing a particular project or executing a PPA.

Who is Entitled to Sell Output Pursuant to PURPA?

Only a QF can utilize PURPA.  QFs fall under two broad categories: (1) cogeneration facilities (with no size limit) and (2) facilities that are 80 MW or less in which the primary energy source is biomass, waste, renewable resources, or geothermal.[1] 

Who Must Purchase a QF's Output?

PURPA imposes a mandatory purchase obligation on each "electric utility," defined broadly as "any person, State agency, or Federal agency, which sells electric energy."[2]  This definition includes many electric utilities over which FERC does not have jurisdiction under the Federal Power Act, such as municipally-owned utilities and electric cooperatives (some of which are exempt from FERC's FPA jurisdiction).  This obligation is not limited to the interconnecting utility.  A utility is obligated under PURPA to purchase the output of a QF as long as the QF can deliver its power to the utility.[3]The Energy Policy Act of 2005, however, created an important exception that, in short, has resulted in FERC removing a utility's mandatory purchase requirement for most QFs over 20 MWs located in independent system operator ("ISO") and regional transmission organization ("RTO") regions.[4]  This exception is based on the theory that these QFs are presumed to have nondiscriminatory access to day-ahead and real-time energy markets and wholesale markets for long-term sales of capacity and energy.  QFs in this category with unique operating characteristics or transmission constraints, however, can try to get FERC to override this exception.[5] 

What Products Must a Utility Purchase?

PURPA requires a utility to purchase "all electric energy and capacity made available from [QFs]."[6]  FERC has interpreted this requirement broadly.  For instance, an "avoided cost" rate must account not only for the energy the QF will deliver, but also for the "capacity" that resource will provide when the purchasing utility is otherwise expected to be capacity short.[7]  FERC also has interpreted the requirement, as discussed further below, to severely limit the circumstances under which a utility can avoid purchasing a QF's energy due to scheduling requirements or curtailment decisions.

When is a Utility Legally Obligated to Purchase a QF's Output?

Obtaining a PPA for any type of generating resource can be tricky, but obtaining a PURPA PPA can raise unique challenges when dealing with a utility purchaser that does not want to enter an agreement with a particular QF, and does so solely out of an obligation to comply with PURPA.  Some utilities, with a variety of rationales, have actively avoided executing a PPA with QF developers.  FERC has demonstrated a long history of concern over utilities taking different strategies to avoid having to purchase a QF's output, and has made clear that a utility's obligation to purchase a QF's output can arise at a point in time before the parties have executed a PPA.  Specifically, "once a QF makes itself available to sell to a utility, a legally enforceable obligation may exist prior to the formation of a contract."[8]  Nevertheless, each state may develop its own standard as to when a legally enforceable obligation forms, so long as it does not conflict with FERC's regulations.

What Special Rights Should QFs Try to Protect in their PPAs?

As mentioned above, a utility is not always a particularly willing buyer when executing a PURPA PPA.  As a result, a utility may propose a PURPA PPA with terms and conditions that are more onerous to the QF developer than those in a non-PURPA PPA.  Because FERC's regulations provide that, once a PPA is executed and effective, the QF may be viewed to have waived certain rights,[9] it is critical that a QF developer know and understand its PURPA rights prior to executing a PPA.

First, FERC requires a utility to purchase all scheduled and unscheduled energy delivered by a QF.[10]  Therefore, when a utility provides a PURPA PPA with scheduling requirements, the QF should be sure before executing the PPA that the provisions will not result in a QF failing to receive payment for unscheduled energy it delivers.  Scheduling restrictions can become particularly important for intermittent resources, such as wind and solar, that raise unique scheduling challenges. 

Second, FERC's regulations strictly limit a utility's ability to curtail energy delivered by a QF, and therefore not pay for the energy it would have otherwise received.  Specifically, FERC's regulations provide only two circumstances – one of which is rarely applicable for non-cogeneration QFs[11] – under which a utility may curtail a QF's output and not pay the QF for the output that it otherwise would have received but for the need to curtail.[12]  For most QF developers, a utility's key right to curtail is during a system emergency if energy purchases from the curtailed QF would contribute to that emergency.[13]  FERC's regulations define a "system emergency" narrowly to mean "a condition on a utility's system which is likely to result in imminent significant disruption of service to customers or is imminently likely to endanger life or property."[14]  A QF developer, therefore, should ensure before executing a PURPA PPA that it does not impose additional curtailment restrictions.

Third, although a QF is required to deliver its output to the purchasing utility in order to require the utility to pay for the product, a QF is not required to obtain transmission service from a purchasing utility in order to deliver its energy to that utility's load.[15]  Once the energy reaches the point of interconnection with the utility's system, it is the utility's obligation to address additional transmission needs.

Finally, state-created programs, such as requests for proposals ("RFPs") for renewable energy, can augment, but not eliminate, a QF developer's right to obtain a traditional avoided cost PURPA PPA.  These RFPs sometimes impose limitations not contained in PURPA or FERC's regulations, such as stricter size limitations, or a limit to the number of QFs or total generating capacity that may participate.  FERC has determined that such programs can constitute a method for a state to implement PURPA.  However, to the extent such programs impose participation limitations not contained in FERC's regulations, QFs must still be allowed to unilaterally obtain a legally enforceable obligation for the utility to purchase the output at avoided cost rates.[16]

Conclusion

The saying "knowledge is power" is unquestionably true when it comes to negotiating PPAs.  Because of PURPA's complexity, and the risk of inadvertently waiving rights and ceding negotiating leverage they might otherwise have, developers, lenders, and investors should familiarize themselves with their rights under PURPA – including its implementation by the applicable state – before they begin negotiating a PPA.  Otherwise, they may become all too familiar with the many traps for the unwary that lurk in PURPA's regulatory scheme.


For further information about Stroock POSITIVE ENERGY, or other Stroock publications, please contact Richard Fortmann,
Senior Director-Legal Publications, at 212.806.5522.


[1]  18 C.F.R. §§ 292.203-205.

[2]  PURPA § 3(4), 16 U.S.C. § 2602(4).

[3]  Public Service Co. of New Hampshire v. New Hampshire Electric Cooperative, Inc., 83 FERC ¶ 61,224 at 61,998, reh'g denied, 85 FERC ¶ 61,044 (1998) ("[S]ection 210(a) of PURPA provides generally that electric utilities must offer to purchase electric energy from any QF that can deliver power to the utility.").

[4]  18 C.F.R. § 292.309 (interpreting PURPA § 210(m), 16 U.S.C. 824a-3).

[5]  18 C.F.R. § 292.309(e); see also 18 C.F.R. § 292.311 (providing procedures for a QF to seek to reinstate a utility's purchase obligation).

[6] Small Power Production and Cogeneration Facilities; Regulations Implementing Section 210 of the Public Utility Regulatory Policies Act of 1978, Order No. 69, FERC Stats. & Regs. ¶ 30,128, at 30,870, order on reh'g, Order No. 69-A, FERC Stats. & Regs. ¶ 30,160 (1980), aff'd in part & vacated in part on other grounds sub nom. Am. Elec. Power Serv. Corp. v. FERC, 675 F.2d 1226 (D.C. Cir. 1982), rev'd in part on other grounds sub nom. Am. Paper Inst. v. Am. Elec. Power Serv. Corp., 461 U.S. 402 (1983).

[7]  City of Ketchikan, Alaska, 94 FERC ¶ 61,293, at p. 62,062 (2001) ("[A]n avoided cost rate need not include capacity unless the QF purchase will permit the purchasing utility to avoid building or buying future capacity." ).

[8]  JD Wind 1, LLC, 129 FERC ¶ 61,148 at P 25 (2009), reh'g denied, 130 FERC ¶ 61,127 (2010).

[9] Specifically, FERC's PURPA regulations acknowledge that nothing in its regulations regarding arrangements between utilities and QFs limits the parties to agree to rates, terms, or conditions relating to the utility's purchase of QF output that differ from what those regulations would otherwise require. 18 C.F.R. § 292.301(b); see also Energy Producers and Users Coalition, 149 FERC ¶ 61,251, at P 17 (2014) (noting that a PPA pursuant to a state's implementation of PURPA may include a negotiated rate).

[10]  PáTu Wind Farm, LLC v. Portland General Electric Co., 150 FERC ¶ 61,032 at P 52, reh'g denied, 151 FERC ¶ 61,223 (2015) (noting that if a utility were permitted to escape its mandatory purchase requirement because a QF failed to comply with energy scheduling requirements, utilities "could routinely escape their PURPA mandatory purchase obligation ... by imposing overly restrictive or un-meetable scheduling requirements, or by the purchasing electric utility's failing to arrange the necessary transmission service to dispose of its purchase of the QF's entire net output once it has been delivered to the utility").

[11] The second curtailment right applies only to situations in which the QF does not elect a PPA that provides a specific rate – that is, the avoided cost rate was calculated when the PPA was formulated. When a QF is receiving an avoided cost rate that is calculated at the time of delivery (i.e., it is changing each hour depending upon the utility's marginal generating unit), a utility may curtail that QF when, due to operational circumstances, purchases from the QF would result in costs greater than if the utility had generated an equivalent amount of energy itself.
18 C.F.R. § 292.304(f). This pricing structure is occasionally selected by cogeneration QFs.

[12] Entergy Services, Inc., 137 FERC ¶ 61,199, at PP 54-57 (2011) (describing the limited circumstances in which, consistent with PURPA, a QF's energy may be curtailed, including system emergencies and light load periods, under sections 307(b) and 304(f) of FERC's PURPA regulations, respectively).

[13] 18 C.F.R. § 292.307(b).

[14] 18 C.F.R. § 292.101(b)(4).

[15] Pioneer Wind Park I, LLC, 145 FERC ¶ 61,215, at P 38 (2013).

[16] For example, if a state RFP proposal caps the number of bidders or total installed generating  capacity that may be selected, QFs not selected may still approach the utility unilaterally to obtain a long-term right to sell energy and capacity at the utility's avoided cost, regardless of the rates offered in the RFP process.  Hydrodynamics Inc., 146 FERC ¶ 61,193 (2014).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions