United States: FERC Proposes Major Changes To PURPA Regulations Impacting Qualifying Facility Rates And Requirements; Throwing Roadblocks In The Path Of Renewable Energy Development

The Federal Energy Regulatory Commission ("FERC") requested comments on a proposed rulemaking to revise its regulations under the Public Utility Regulatory Policies Act of 1978 ("PURPA"). The Notice of Proposed Rulemaking ("NOPR"), among other things, would diminish benefits that have been afforded to Qualifying Facilities ("QFs"), including the availability and value of the "PURPA-put." The proposed changes also could potentially block certain wind and solar projects that previously would have qualified as small power production facilities from receiving that designation. The NOPR presents uncertainty for renewable developers, as well as other non-utility generators. Adoption of the proposed changes may hinder the development of some renewable energy projects. Comments on the proposed rulemaking are due within 60 days of its publication in the Federal Register.

The NOPR was not supported by the full commission. In support of the NOPR, Commissioner McNamee stated that, "the proposed rules will provide state utility regulators more flexibility to rely on market pricing when determining the rates utilities pay to QFs, provide more transparency to interested stakeholders, and extends the benefits of competition to a greater number of consumers." Commissioner Glick dissented, arguing that the NOPR "would effectively gut" PURPA, ignores FERC's statutory responsibilities and instead of expanding opportunities for new competition, would reduce them.

Background

PURPA was enacted to encourage the development of electric generation facilities fueled by alternative energy resources, such as wind and solar power. Pursuant to PURPA, FERC developed rules defining QFs, exempting certain QFs from specific requirements under the Federal Power Act, and obligating electric utilities' purchases from QFs (the "PURPA-put").

Consistent with PURPA and FERC's regulations, state regulatory agencies are responsible for, among other things, determining electric utilities' avoided costs. Pursuant to PURPA's "must take" provision, an electric utility must purchase all the energy tendered to it by a QF (subject to certain exceptions) at the electric utility's "avoided cost." Pursuant to FERC's existing regulations, QFs are provided with the option of selecting a rate based on the utility's "avoided costs" at either the time the QF enters the contract with, or delivers its energy to, the utility. "Avoided costs" equal the costs a utility would have incurred but for the purchase from a QF, either by purchasing the energy from some other source or by generating the energy itself.

How the Proposed Changes Effect FERC's PURPA Regulations

FERC's proposed changes to its PURPA regulations mainly involve (1) the definition of a QF, (2) electric utility purchase obligations, (3) the rate at which electric utilities make purchases from QFs, and (4) the procedures by which QFs are certified before FERC.

Definition of Qualifying Facilities

Currently, when FERC determines whether a facility meets its size requirements for QF status, FERC provides an irrebuttable presumption that affiliated small power production facilities using the same energy resource are separate facilities if the "electrical generating equipment" of such facilities are more than one mile apart (i.e., the "one-mile rule"). FERC proposes to alter this rule. The irrebuttable presumption would only apply to facilities located one mile or less (presuming such facilities are the same), or ten miles or more (presuming such facilities are separate), apart. Facilities separated by more than one mile but less than ten miles only would be provided a rebuttable presumption that they are not the same facility. A state regulatory authority or other interested party could challenge that presumption and attempt to show that facilities within the one to ten mile range are in fact a single facility. A successful challenge could have implications in terms of the facilities'/facility's qualification for QF status dependent on the combined capacity of the units. An inability to qualify as a QF would (i) deprive a facility of the ability to exercise the PURPA-put, (ii) deprive a facility of certain exemptions from the Federal Power Act and the Public Utility Holding Company Act, and (iii) alleviate electric utilities of the obligations they have vis-a-viz QFs under PURPA.

FERC also proposes to define "electric generating equipment" and specify how to measure the distance between facilities that have multiple sets of "electric generating equipment" (such as wind and solar generators).

Purchase Obligation

Today, an electric utility may file an application with FERC demonstrating that a QF has nondiscriminatory access to certain markets and ask that the utility be relieved from the requirement to enter into a contract or purchase electric energy from the QF. However, FERC currently provides QFs with capacity of 20 MW or less with a rebuttable presumption that they lack nondiscriminatory access to such markets. FERC's proposed rule would decrease the capacity level at which the rebuttable presumption would apply, from 20 MW to 1 MW. Thus, under the proposed rule, FERC would provide a new avenue for utilities to potentially avoid contracting with small power production facilities.

FERC also proposed to require that QFs demonstrate, according to state-determined criteria, that a project is commercially viable and that the QF has a financial commitment to construct the proposed project before a QF is entitled to a contract or legally enforceable obligation. FERC explained that states could require a QF to show that it is (1) obtaining site control adequate to commence construction of the project at the proposed location, (2) filing an interconnection application with the appropriate entity, or (3) securing local permitting and zoning.

In states with retail choice, FERC also proposes to allow states to reduce an electric utility's capacity purchase obligation to the extent the utility's provider of last resort supply solicitation contracts have limited terms.

Rates

FERC proposed to permit states additional flexibility when specifying an electric utility's "avoided cost" rates for QF contracts. PURPA compliant rates would include both (1) variable energy rates, based upon the purchasing utility's avoided costs at the time the energy is delivered (fixed rate contracts would not be required), and (2) "fixed energy rates", based upon projections of what energy prices will be at the time of delivery during the term of a QF's contract.

In addition, FERC's proposed rule would provide states with more flexibility when determining the "as-available" energy rate paid to QFs by an electric utility. For utilities located in an Regional Transmission Organization ("RTO") / Independent System Operator ("ISO"), the as-available energy rate could be set at the locational marginal price ("LMP") at the time of the delivery by the QF. For electric utilities outside of the organized wholesale power markets, the as-available energy rate could be set at competitive prices from liquid market hubs or calculated from a formula based on natural gas price indices and heat rates at the time of delivery. The state would need to find that the price used for the "as-available" energy rate reasonably represents a competitive market price for the purchasing electric utility.

FERC also proposed to allow states to set avoided energy and/or capacity rates based on competitive solicitations (such as requests for proposals ("RFPs")) conducted in a transparent and non-discriminatory manner. FERC proposed to consider the following factors when reviewing RFPs: (a) whether there was an open and transparent process; (b) whether solicitations were open to all sources to satisfy that purchasing electric utility's capacity needs, taking into account the required operating characteristics of the needed capacity; (c) whether solicitations were conducted at regular intervals; (d) whether there was oversight by an independent administrator; and (e) whether state regulatory authority or a nonregulated electric utility certified that the above criteria have been met.

Procedural Changes

Under FERC's current regulations, an entity that meets QF criteria may file a self certification of QF status with FERC. Entities challenging a self-certification must file a petition for declaratory order and pay a fee. FERC has proposed to expand the means by which entities may challenge a self-certification. Under FERC's proposed rules, an entity may intervene and protest a self-certification or self-recertification of a facility without filing a separate petition for declaratory order and without paying the declaratory order filing fee. The protesting party would have the burden of proof on facts that make a prima facie demonstration that the facility at issue does not satisfy criteria for QF status.

QF self-certification is effective upon filing, and remains effective if a protest is filed, until FERC revokes that certification. FERC would issue an order within 90 days of the date the protest is filed, unless FERC sought more information from a QF proceeding participant, in which case FERC would have an additional 60 days (from the date such entity filed an answer) to make its decision.

How the Proposed Changes Impacts Renewable Developers

As noted earlier, the NOPR presents uncertainty for renewable developers, as well as other non-utility generators. Adoption of the proposed changes may hinder the development of some renewable energy projects.

To protect their interests, owners, operators and developers of QFs will need to apprise FERC of their concerns. If you need assistance in preparing a comment in response to the NOPR or have any questions or need assistance concerning the NOPR, contact the Energy, Infrastructure and Project Finance attorneys at Sheppard Mullin.

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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