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.

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