In the intense debate over electric service to large co-located loads, i.e., loads behind the meters of generators, occasionally participants will remark that co-location is not new, that large retail loads have been co-located at QFs for many decades. Indeed, unaffiliated retail loads, which buy electric power (as opposed to the steam or heat) from QFs are sometimes located behind a QF's meter. Retail loads co-located with QFs should have something to teach us about how FERC should deal with other co-located loads, although factual differences and similarities must be considered. As with the retail load served by QFs, the discussion below applies to co-located load that would be served by the "grid," if the co-located generator stops providing sufficient energy to satisfy the co-located load at any moment in time. Much of the co-located load debate involves loads that allegedly would never be served by the grid, but the record remains unclear whether technology sophisticated enough to ensure this result 100% of the time actually exists. In any case, unless the generator serving co-located load is not connected to the grid at all, the QF analogy is still relevant.
Not surprisingly, given FERC's lack of jurisdiction over retail sales, FERC lacks authority to dictate whether a QF can make a retail sale, whether behind its meter or in front of it. Congress actually included a prohibition on FERC authorizing QF retail sales in PURPA Section 210(a)(2). Specifically, PURPA prevents FERC from enacting rules allowing QFs to make retail sales of electricity. But, states may permit retail sales by QFs, as Congress's Conference Report on PURPA explained: "The conferees do not intend that this limitation on the Commission's authority will limit the States from allowing such sales [for purposes other than resale] to take place. The cogenerator or small power producer may be permitted to make retail sales pursuant to state law." S. Rep. No. 95-1292, at 97 (1978) (Conf. Rep.). If FERC lacks authority to allow QFs to make retail sales even behind-the-meter, there is no question it lacks such authority as to non-QFs.
States have long had authority to dictate who may make retail power sales. State laws typically allow investor-owned, municipal, cooperative, and other forms of utilities to sell retail power. A significant number of states that have opined on the issue, allow QFs to sell at retail, at least behind-the-meter; and, some states allow non-QFs to make behind-the-meter retail sales (size limits may apply). States, however, have prevented QF retail sales. For example, in 1988, the Supreme Court of Florida explained that if a QF was allowed to serve a retail customer:
other ventures could enter into similar contracts with other high use industrial complexes on a one-to-one basis and drastically change the regulatory scheme in this state. The effect of this practice would be that revenue that otherwise would have gone to the regulated utilities which serve the affected areas would be diverted to unregulated producers. This revenue would have to be made up by the remaining customers of the regulated utilities since the fixed costs of the regulated systems would not have been reduced.
In sum, whether a co-located load configuration is lawful if a utility is not the energy supplier is dependent on state law. Only in states where such laws do not restrict retail sales behind the meter, should some of the more contentious issues being debated today even arise. The entire co-located load conflagration before FERC started in Pennsylvania, a state where a retail sale that does not use the facilities of electric distribution company arguably does not subject the energy supplier to regulation as a utility and is lawful. In FERC Docket No. ER24-2172, involving Talen-owned Susquehanna Nuclear, LLC, the co-located generator itself was selling power at wholesale, not retail. That said, a separate entity was selling power to the co-located load at retail, without significant concern that such sale would be deemed unlawful under state law or subject the retail seller to state regulation as a utility. No Pennsylvania public utility argued to FERC in that docket that the existing retail sale violated state law.
In sharp contrast, in Docket No. EL24-149, state service area laws came to the forefront, although it is unclear if FERC can or will address such issues. The cooperative (SMECO) in whose retail service area Calvert Cliffs nuclear plant sits argued in that docket that a co-located load is a retail electric customer and that "only an 'electric company' with relevant franchise rights and other necessary approvals is authorized to serve 'retail electric customers' in Maryland." The response of Constellation invoked Maryland's law regarding electric service as between landlords and tenants. In any case, it is not for FERC to interpret a state's tenant/master-meter law as to whether a third party can serve a SMECO retail customer. Master-meter laws both ensure that landlords do not become state-regulated public utilities and that they pay retail rates to the local utility (rather than wholesale rates exempt from state-imposed charges). The Exelon utilities who filed the Petition in Docket No. EL24-149 have informed Constellation that state laws preclude Constellation's efforts to serve retail co-located load in both Illinois and Maryland.
FERC taking the same approach to non-QF co-located load as QF co-located load, i.e. indicating that the state can decide if someone other than the "franchised" utility or an authorized retail choice provider can sell at retail to the co-located load appears to be the quickest and least controversial path to resolving much of the co-located load debate. Any order from FERC that the decision does not rest with the state could lead to protracted jurisdictional litigation. And, it is rather difficult to envision how FERC could be victorious under the current FPA if it claimed jurisdiction. Indeed, states are plowing forward with arrangements for state-regulated utilities and suppliers to serve retail data center load without risking undue economic harm to other retail customers.
If state law does permit generators other than QFs to sell retail power to co-located loads, the issue remains, are there retail services that the interconnected utility provides and what should those services cost? Again, the issue appears to be one of state jurisdiction. The treatment of QF co-located load should not be ignored and can be informative. That said, states may be dealing with co-located loads many times greater in size than any co-located load served by a QF, such that a state may need to reconsider its policies. Additionally, reliability standards may come into play. There are still lessons to be learned, however, from QFs and co-located load.
FERC's own regulations provide that rates charged to QFs serving load cannot be discriminatory and "shall not be based upon an assumption (unless supported by factual data) that forced outages or other reductions in electric output by all qualifying facilities on an electric utility's system will occur simultaneously, or during the system peak, or both." States have overseen retail rates for QF-served loads over the course of the more than forty years since PURPA was enacted. Established rate methodologies for QF co-located loads should, at the very least, be informative as to rate methodologies for non-QF co-located loads, if permitted.
Because the Transmission Owner Tariffs of the California utilities include retail transmission rates, FERC also has opined on the setting of retail transmission standby rates for QF load under its own PURPA regulations. It has approved using probabilistic methods to allocate transmission costs to standby customers. For example, FERC approved Pacific Gas & Electric's method of setting standby rates based on the percentage of contract demand that the standby class was likely to use derived from historical use by the standby customers.
FERC also has opined on a related issue regarding the procurement of ancillary services for retail load served by QFs, which load is of course a portion of a load-serving entity's overall wholesale load. More than twenty years ago, the CAISO claimed that it was just and reasonable to procure ancillary services by including all QFs' gross behind-the-meter loads, as opposed to their net load. In Opinion No. 464, FERC held that the "judge's finding that the long-standing practice in the CAISO control area of scheduling, metering and procuring reserves on a net load basis should be permitted to continue, so long as a QF has contracted for standby service with a UDC, i.e., a contract that provides for the immediate replacement of energy in case of the QF's forced outage." In that case, various parties debated whether the relevant reliability council at the time (the WSCC) required reserves be procured based on gross load. FERC Staff and the CAISO argued gross load-based procurement was required. Others argued that, historically, reserves were never procured on a gross load basis, but by using an assumption that some behind-the-meter generation will not be operating. The ALJ, whose decision was upheld, could not readily discern the WSCC witness's position. Opinion No. 464's continued relevance may be impacted by the fact that it was issued before reliability standards were mandatory and the voluntary standard was open to varying interpretations.
Indeed, the issue of the "load basis" on which various ancillary services, capacity, and transmission all should be procured may become a major issue beyond co-located load, as DERs, net metering, virtual net metering, and other programs such as PJM's behind-the-generator meter program and ISO-NE's transmission netting policy result in a wide variety in the manner in which load is calculated. Co-located load has brought such issues to the forefront – how much of a service must be procured at wholesale; who should pay for such service at wholesale; and whether retail cost allocation should follow wholesale procurement rules and how. Even today, retail loads that are "counted" by RTOs for procurement purposes, may be excused from cost responsibility by state laws and policies. States thus will play a major role in cost allocation to co-located loads, as FERC has not historically preempted states from deciding who among retail customers should pay a FERC-approved wholesale charge, as long as the entire wholesale charge is recovered in retail rates.
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