The Federal Energy Regulatory Commission (FERC) revised its regulations under the Public Utility Regulatory Policies Act of 1978 (PURPA), in a July 16, 2020 Final Rule, Order No. 872, and made major changes to the statute’s implementation for the first time since the 1980s. FERC’s revised regulations implementing PURPA will give state utility regulators more flexibility to set rates based on wholesale markets for electricity produced by small generators that meet certain requirements as “Qualifying Facilities” (QF) and is intended to help the states preserve competition. Viewing the rule change as a win, traditional public utilities see the Final Rule as a step towards PURPA becoming a mechanism that no longer unfairly benefits renewable generation developers.
Congress enacted PURPA to encourage development of small, non-fossil fueled, power producers and cogenerators that meet the requirements to be deemed QFs. PURPA initially required traditional public utilities to provide back-up power to QFs, interconnect QFs to their utility distribution or transmission systems, and enter into long-term contracts to purchase the entire electricity output generated by the QFs in their service territory. PURPA gave QFs the right to sell their power to the interconnected utility at a rate that does not exceed the utility’s avoided cost of power that it either generated itself or could buy in the wholesale electricity market. FERC’s regulations implementing PURPA were later revised to relax the obligation of the public utility to purchase QFs’ output where QFs had not-unduly-discriminatory access to competitive wholesale markets, typically operated by Regional Transmission Organizations or Independent System Operators (RTOs/ISOs) for the electricity they generated.
The power industry has had mixed reactions to the revised regulations promulgated in Order No. 872, with traditional public utility trade associations applauding changes that they deem would lead to reduced costs for customers, and clean-energy groups and independent power developers concerned that the new rules will stifle open competition.
In Order No. 872, FERC provided state regulators wide latitude in shaping the contractual relationship between utilities and QFs. First, FERC granted state regulators additional flexibility in establishing avoided cost rates for QF sales inside and outside of the organized electric markets. Second, FERC provided state regulators the ability to require varying energy rates (but not capacity rates) based on wholesale markets throughout the duration of a QF contract; but, preserved the right of state regulators to allow QFs to continue to earn fixed energy rates that are based on projected energy prices during the term of a QF’s contract. Finally, FERC allowed state regulators, rather than the public utilities, to set transparent and non-discriminatory procedures for energy and capacity rates that are based on competitive solicitations, a modification that could result in a request for proposals (RFP) process that would provide more balance in locations that traditionally have substantial utility-owned generation.
FERC also modified two rebuttable presumptions under PURPA. First, under the original “one-mile rule,” FERC considered small power production facilities located more than one mile apart to be located at different sites. As a result, to stay under PURPA’s 80 MW capacity limit, a developer could split a larger project into smaller ones that were located a little more than a mile apart. In Order No. 872, FERC revised the “one-mile rule” so that a QF facility located one mile, or less, from an affiliated QF facility would be deemed to be at the same site as its affiliate; a QF facility located more than one mile, but less than ten miles, from an affiliated QF facility would be rebuttably presumed to be at a different site from its affiliate; and a QF facility more than 10 miles from an affiliated QF facility would be deemed to be at a separate site from its affiliate. This approach is intended to prevent QF facilities 10 miles or more apart from aggregating as one project.
Second, under the previous rules, utilities were not obligated to enter into new QF purchase contracts if FERC found that the QFs had non-discriminatory access to wholesale electric markets. FERC rebuttably presumed that QFs that are 20 MW or smaller do not have non-discriminatory access to the market. FERC’s revised regulations lowered this threshold to 5 MW.
Utility trade organizations consider the Final Rule to be a victory, as they may no longer have to purchase power via mandated QF contracts, at rates they say are typically higher than what is available on the market. Traditional public utilities argued that these contracts resulted in increased costs that were passed on to consumers. Renewable energy advocates claimed that the revised regulations will undermine PURPA’s intention to promote small clean generation, and stifle competition by paving a way for utilities to strengthen their monopolies and raise costs for customers. In a dissent to the Final Rule, FERC Commissioner Richard Glick echoed these concerns, stating that the rule changes will result in uncertain financing mechanisms and fluctuating prices for QFs, giving them an unequal playing field when compared to traditional public utilities’ own resources. FERC Chairman Neil Chatterjee expressed confidence that renewables can continue to compete in today’s markets because most renewable energy projects are developed outside of PURPA’s purview.
In a procedural change, entities may now file a protest to challenge a QF self-certification or self-recertification without having to file, and pay for, a declaratory order. The Final Rule will take effect around mid-November 2020, 120 days after publication in the Federal Register. To understand how the change in PURPA rules affects the rights and obligations of renewable developers or utilities in your state, and to develop a business strategy, please contact Roxane Maywalt, William Booth, or Uju Okasi.