FERC Affirms a Utility’s Obligation to Purchase Electricity from QFs
August 8, 2016
On July 21, 2016, the Federal Energy Regulatory Commission (“FERC”) issued a declaratory order confirming some of a qualified facility’s (“QF”) rights under PURPA. FERC held that: (1) a utility may not require a QF to transfer RECs, as a condition of purchasing the QF’s electricity and capacity; and (2) a utility may not require a QF to win a competitive solicitation, as a condition for a QF contract. This declaratory Order, Windham Solar LLC, et al., 156 FERC ¶ 61,042 (2016), is significant because it signals that FERC remains committed to upholding the intent of PURPA.
The Public Utility Regulatory Policies Act of 1978 (“PURPA”) was passed during the Carter Administration to encourage national energy independence. Some state commissions have enacted regulations since then to try to limit a utility’s obligation to purchase energy and capacity from QFs (e.g., cogeneration facilities, small power production facilities, etc., as defined under PURPA). One reason for this “push back” is that PURPA mandates that utilities acquire energy from all QFs under long-term contracts, at the utilities’ “avoided cost”. Utilities are, in essence, required to pay QFs the same incremental rate as their most expensive alternate energy source (the rate that would be “avoided” by the QF contract).
Some state commissions (trying to reduce electricity costs for rate-payers) have attempted to minimize or to avoid PURPA’s requirements. In many instances, these challenges to PURPA contracts have been indirect (i.e., attempting to unnecessarily delay execution of contracts through redundant qualification requirements).
For example, state commissions have developed Renewable Energy Credits (“RECs”) programs during the last decade to meet renewable energy requirements. As RECs have become more valuable, utilities and QFs have contested the ownership of RECs associated with a QF’s operations. FERC has confirmed that states have the authority to determine who owns RECs in the initial instance, and also how RECs are transferred. In short, the transfer of RECs within a sale of wholesale QF power must find its authority in state law, not PURPA.
On the other hand, FERC rejected in the Order the notion that a utility complying with PURPA is automatically entitled to receive the RECs associated with QF power production, as follows:
[A] state regulatory authority may not assign ownership of RECs to utilities based on a logic that the avoided cost rates in PURPA contracts already compensate QFs for RECs in addition to compensating QFs for energy and capacity, because the avoided cost rates are, in fact, compensation just for energy and capacity. See, 156 FERC ¶ 61,042 at 3.
In other words, a “QF has the right to sell its output pursuant to a legally enforceable obligation” pursuant to PURPA, whether or not the QF has previously sold its RECs under a separate contract. Id. This holding is consistent with prior orders regarding QF contracts, which have emphasized a utility’s obligation to enter into QF contracts without unreasonable restrictions.
Some state commissions also have attempted to restrict PURPA obligations by requiring a QF to compete and then to win in a competitive solicitation with other electricity suppliers, as a condition to entering into a PURPA agreement with a utility. FERC rejected such PURPA barriers in the Order. FERC held that “regardless of whether a QF has participated in a request for proposal, that QF has the right to obtain a legally enforceable [PURPA] obligation.” Id. at 4.
The subject Order is useful, therefore, because it reminds state commissions that FERC will continue to enforce PURPA requirements, by reiterating federal law governing QF contracts.
Unfortunately, FERC has repeatedly declined to initiate many requested PURPA enforcement actions. Instead, FERC has directed QFs to bring an enforcement action against a state commission in the appropriate court. In fact, FERC supported the QFs’ positions in the Order regarding unfair PURPA conditions, but simply issued a declaratory order addressing the restrictions. Rather than enforcing PURPA directly, FERC only suggested that the impacted QFs could bring an enforcement action in the appropriate court.
This Eckert Seamans Energy and Utilities Blog is intended to keep readers current on matters affecting businesses and is not intended to be legal advice. If you have any questions, please contact Charlie Zdebski at (202) 659-6605 – czdebski@eckertseamans.com.