FERC Denies Rehearing, But Clarifies Various Aspects of the New PURPA Rules

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On November 19, 2020, FERC issued Order No. 872-A, an order denying rehearing and clarifying portions of Order No. 872, which revised the regulations implementing the Public Utility Regulatory Policies Act of 1978 (“PURPA”). In Order No. 872-A, FERC affirmed its previous PURPA regulation amendments in Order No. 872, but provided further explanation regarding six key reforms: (1) states’ use of tiered avoided cost pricing; (2) states’ use of variable energy rates in qualifying facility (“QF”) contracts and availability of utility avoided cost data; (3) the role of independent entities overseeing competitive solicitations that set avoided cost rates; (4) the circumstances under which a small power production QF needs to recertify; (5) the application of the rebuttable presumption of separate sites for the purpose of determining the power production capacity of small power production facilities; and (6) the PURPA section 210(m) rebuttable presumption of nondiscriminatory access to markets and accompanying regulatory text.

Order No. 872 significantly changed a number of key PURPA-related regulatory provisions, including: how avoided cost rates are set for QFs, the “one-mile” rule, the mandatory purchase obligation, establishing a legally enforceable obligation (“LEO”), and QF self-certification rules (see July 20, 2020 edition of the WER). Order No. 872, which then-Chairman Chatterjee categorized as “modernizing” FERC’s 1980s-vintage PURPA-implementing regulations, signaled a sea-change for PURPA project development and raised several requests for clarification and rehearing.

Stakeholders unsuccessfully argued that rehearing was appropriate because the new rules would not meet FERC’s statutory obligation to encourage QF development and that variable energy rates were not consistent with PURPA. Others suggested that FERC failed to “consult” with relevant state and federal agencies before issuing the rules. Stakeholders also questioned whether a locational marginal price (“LMP”) set a permissible rate in certain “as-available” scenarios and whether the prior implementation scheme resulted in QF payments in excess of avoided costs.

In Order No. 872-A, FERC denied all rehearing requests, but provided clarification in six areas. First, FERC confirmed that PURPA neither requires nor prohibits states from establishing tiered procurement and/or pricing when setting avoided cost rates. FERC explained that tiered rates have been the subject of litigation in California and the United States Court of Appeals for the Ninth Circuit, but stated it could not overrule a Court of Appeals decision and declined to add additional regulatory language to address the issue.

Second, regarding avoided cost rates, FERC declined to reconsider its decision to allow states to set variable energy rates. FERC explained that variable energy contracts would more accurately reflect a utility’s avoided energy costs and noted that the inability to address potential long-term overestimates had driven some states to respond by adopting shorter contract terms. FERC reiterated that while PURPA does not require QF rates to guarantee financing, FERC believes QFs will be able to obtain financing with variable avoided energy rates. FERC also clarified that utilities must fulfill the same obligations to disclose avoided cost data for fixed and variable energy rates.

Third, for avoided costs set by competitive solicitations, FERC found no merit in the arguments for rehearing, but clarified that independent entities must oversee the competitive solicitations. FERC also confirmed its previous determination that avoided capacity costs could be zero without violating the obligation to purchase capacity, when capacity is not needed by a utility.

Fourth, FERC affirmed the need to reform its previous “one-mile” rule and clarified the process around the list of example factors suitable for distinguishing facilities on the “same site”.  As FERC explained, PURPA defines small power production QFs as those with a capacity that “together with any other facilities located at the same site (as determined by the Commission), is not greater than 80 megawatts [“MW”].” In Order No. 872 and 872-A, FERC found that some QF developers were strategically locating such QFs slightly more than one mile apart to avoid being considered on the “same site” under FERC’s previously established “one-mile” rule. In Order No. 872, FERC changed its one-mile rule to, among other things, consider affiliated small power production QFs using the same resource to be rebuttably presumed to be on separate sites if located more than one but less than ten miles apart. FERC identified various factors that would be considered if a party wanted to rebut this presumption. In Order No. 872-A, FERC upheld its interpretation, and reforms surrounding its “same site” criteria, but clarified that the same factors could be used by QFs to preemptively defend against challenges to the new rebuttable presumption.

Fifth, FERC provided more details about the circumstances where a small power production QF needs to recertify. FERC modified the final rule to state that a QF evaluating whether it needs to recertify does not need to make an amendment due to a change in the information it previously reported in item 8a of FERC Form No. 556 regarding its affiliated QFs more than one mile but less than 10 miles from its generating equipment. FERC explained this modification would reduce the administrative burden on QFs. When a QF recertifies due to a change in material fact, however, it must update the information in item 8a for all its affiliated QFs within 10 miles. To QFs that strategically built facilities just over one mile apart in reliance on the old one-mile rule, FERC noted that rules can and do change, and that Congress specifically directed FERC to revise its PURPA rules from time to time.

Finally, FERC addressed concerns regarding its decision in Order No. 872 to reduce the size threshold from 20 MW to 5 MW for the rebuttable presumption that QFs have nondiscriminatory access to energy markets, which relieves utilities of PURPA’s mandatory purchase obligation for QFs above 5 MW. FERC rejected the argument that it erred in revising the rebuttable presumption for QFs between 5 MW and 20 MW by failing to demonstrate that QFs between 5 MW and 20 MWs have nondiscriminatory access to markets prior to shifting that burden. FERC affirmed its decision, reasoning that changed market conditions and more mature markets warranted the size reduction. FERC also clarified the list of factors available to QFs in ISO-NE, MISO, NYSO, PJM, and ERCOT in seeking to rebut the presumption of nondiscriminatory access to those markets.

A copy of the order is available here.

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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