FERC's Revised PURPA Regulations Give States More Flexibility

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Order 872, issued by the Federal Energy Regulatory Commission (FERC) on July 16, 2020, makes some significant modifications to its regulations for Qualifying Facilities (QFs) under the Public Utility Regulatory Policies Act of 1978 (PURPA).

The principal thrust of the changes:

  • Provides state commissions with more flexibility for implementing PURPA, including the avoided cost rates that electric utilities pay to QFs under the mandatory purchase obligation;
  • Revises the "one-mile rule" used to determine if QF facilities under common ownership must be aggregated to apply the QF size limits; and
  • Revises the rules for electric utilities to be relieved of their mandatory purchase obligations.

Order 872 does not change the QF interconnection rules or the regulatory exemptions that FERC provides to QFs.

Additional Flexibility Provided to State Commissions

Order 872 offers states additional flexibility in implementing the PURPA rules, particularly when setting the avoided cost rates electric utilities pay QFs. In general, Order 872 ratifies methodologies already in use in various states while also providing guiding criteria.

Market Pricing for Energy Sales

Under Order 872, states can incorporate market pricing into the rate for utility purchases of a QF's energy priced at the time of delivery, both with respect to energy sold on an as-available basis and energy sold pursuant to a contract or other legally enforceable obligation (LEO). With respect to as-available sales, the benchmark price for these purchases will depend on whether a utility is located within a Regional Transmission Organization or Independent System Operator market.

Order 872 establishes a rebuttable presumption that the locational marginal price in an organized electric market represents the as-available avoided costs, while a state outside an organized electric market has the option to set these avoided cost rates at prices from liquid market hubs or calculated on a formula based on natural gas indices and specified heat rates, provided that the state first determines that those prices are representative of avoided costs.

A QF can choose to sell energy and capacity under the terms of a LEO, such as a long-term contract, priced at the purchasing utility's avoided cost calculated at the time of delivery or priced at the utility's avoided cost calculated and fixed when the LEO is incurred. Order 872 allows fixed energy rates established through a LEO to be based on future price projections. It will also permit states to require that the QF energy component of a LEO, but not the capacity prices, vary during a contractual term and be set at the utility's avoided cost of energy at the time of delivery.

Competitive Solicitations

Some states currently use competitive solicitations to establish the prices utilities pay to QFs. Order 872 now expressly allows a state to have the flexibility to set avoided cost energy and/or capacity rates using competitive solicitations, but establishes some minimum criteria. The order clarifies that a competitive solicitation must be conducted under the principles of transparency, definition, evaluation, and oversight set forth in FERC's 2004 order in Allegheny Energy Supply Co.

These include: having an open and transparent process; having solicitations open to all sources to satisfy the purchasing utility's capacity needs; conducting solicitations regularly; employing the oversight of an independent administrator; and using a state or nonregulated utility to certify these criteria.

LEO Prerequisites

Order 872 revises the PURPA regulations to require QFs to demonstrate that a proposed project is commercially viable and that the QF has a financial commitment to construct it, pursuant to objective, reasonable, state-determined criteria, as a prerequisite to obtaining a LEO. The order, however, sets parameters on the state commission's discretion so that such requirements are within the control of the QF developer and do not become barriers to financially committed developers.

Revision of the "One-mile" Rule

PURPA requires that the capacity of all small-power production facilities seeking QF status must be located at the same site and cannot exceed 80 MW. The existing regulations provide that facilities located within one mile that are owned by the same or affiliated entities and use the same energy resource are to be aggregated for purposes of applying the size limit for QFs.

Order 872 revises the "one-mile rule" that has long been difficult to apply to modern wind and solar facilities. Order 872 clarifies that the measurements are taken between the electric generation equipment (such as a wind turbine or solar panel). If the distance between generation equipment owned by affiliates is more than one mile but less than 10 miles, and they use the same energy resource, there will be a presumption that they are at separate sites, but this can be rebutted by electric utilities, state commissions, or others.

Relevant evidence to rebut this presumption would be such factors as shared control systems, common permitting and land leasing, and shared step-up transformers. If such facilities are located 10 miles or more from each other, the presumption that they are not at the same site will be irrefutable and, conversely, if the facilities are located within one mile of each other, the irrefutable presumption will be that they are at the same site.

To facilitate the ability of electric utilities, state commissions, and others to challenge the presumption that facilities are located at separate sites, the order lowers the barriers for contesting a QF certification or recertification by establishing procedures to protest the QF's filing. However, a self-certification or recertification will continue to be effective upon filing and will remain effective if a protest is filed until FERC issues an order revoking the certification.

Revised Rules for Termination of Electric Utility Mandatory Purchase Obligation

Under PURPA, an electric utility's mandatory purchase obligation can be terminated under rules established by FERC. The current regulations make the transmission access of QFs to certain defined types of organized electric markets the fundamental criterion for an electric utility to be relieved of its mandatory purchase obligation.

Currently, the regulations contain a rebuttable presumption that a QF of 20 MW or below does not have nondiscriminatory access to such markets. Order 872 reduces this presumption to QFs at or below 5 MW, but this change only applies to small power production facilities and does not apply to cogeneration facilities. Small-power production facility QFs with capacity over 5 MW can seek to rebut the presumption that they have access to the markets, and Order 872 adds to the regulations various factors that would rebut the presumption.

Order 872 preserves the rights or remedies of any party under any existing contract or obligation in effect or pending approval before the appropriate state regulatory authority or non-regulated electric utility, on or before the effective date of the order, to purchase electric energy or capacity from or sell electric energy or capacity to a small-power production facility QF between 5 and 20 MW. Order 872 will become effective 120 days after it is published in the Federal Register.

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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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