Eighth Circuit Upholds FERC Rule on Co-op Avoided Cost Rates

Eversheds Sutherland (US) LLP

The U.S. Court of Appeals for the Eighth Circuit has upheld the long-standing determination by the Federal Energy Regulatory Commission (FERC) that the avoided cost rate paid by a distribution cooperative for energy purchased from a qualifying cogeneration or small power production facility (QF) is the same as the avoided cost rate of the distribution co-op’s generation and transmission (G&T) all-requirements supplier. In doing so, the Eighth Circuit did not break any new ground. Swecker v. Midland Power Cooperative, Case No. 14-2186 (8th Cir. Oct. 6, 2015).

A dissenting opinion concluded that FERC’s interpretation was inconsistent with FERC’s Order No. 69, which first adopted the regulations to implement the Public Utility Regulatory Policies Act of 1978 (PURPA). In the dissent’s view, if the all-requirements distribution cooperative’s avoided cost rate is always the same as the all-requirements G&T supplier’s avoided cost rate, then there would be no reason in the FERC PURPA implementation regulations to allow a QF to transmit its output to another utility with a higher avoided cost rate.

But the dissent ignores FERC’s explanation in Order No. 69 of why, in the all-requirements context, the avoided cost rate is the same for the all-requirements customer and the supplying utility: Order No. 69 acknowledges that a QF may want to sell to an all-requirements customer if that customer’s wholesale price from its supplying utility is higher than the supplying utility’s avoided cost rate, but then explains that, in the all-requirements context, the supplying utility can allocate to the all-requirements customer any lost revenues resulting from the customer’s purchase of the QF energy. The customer, in turn, can deduct that cost from the QF sales price, thereby effectively rendering the customer’s avoided cost rate the same as the supplying utility’s rate.

Because the dissent ignores this explanation, and because FERC has consistently upheld this determination, it is unlikely that the dissent’s conclusion will result in any changes to FERC’s avoided cost rate rule in the all-requirements context.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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