The finding in the Allco decision – that 18 C.F.R. Section 292.304(d)(2)(ii) does not permit a utility to impose a formula rate on a QF (see Part I) – should and can readily be eliminated, even if the decision has had only a limited impact to date, as discussed in Part II of this series.
The strongest fix would come from Congress, but whether or not Congress takes action, FERC is free to re-write its regulations to specifically state that a formula rate does meet the requirement. Indeed, FERC is free to eliminate the regulation altogether, as the regulation (in its current form) is not mandated by Congress’ PURPA legislation. All PURPA requires is that the rate for purchases be at avoided cost. A rulemaking on this subject is certainly a possible course of action, whether initiated by state commissions, utilities, or FERC itself. Calls for reform already have been submitted to FERC, and there is little reason for FERC to ignore such calls.
Certainly, a revised rule could face potential challenge in the courts (assuming Congress does not directly address the issue). FERC could argue – and in our view successfully – that a final rule that a formula rate satisfies 18 C.F.R. Section 292.304(d)(2)(ii) is not a change in policy, and even if it is a change, it is defensible. One primary defense would be that PURPA regulations were drafted in an era where renewables were largely non-competitive economically and the risk of fluctuations in energy prices in both directions (up and down) were extreme. At such time, fixing prices in a contract for a long term placed equal risk on both the utility and QF. Given the near total elimination of oil as a fuel source, efficiency advances in renewable and fossil technology, the stability of U.S. natural gas supply and prices, and an increased focus on demand reduction, the fixed price risk has been shifted almost entirely to the utility.
Even without FERC action, state commissions concerned that fixed (not formula) rate contracts are preferable can take action on their own to ensure purchasing utilities are not locked into long-term fixed-rate contracts that prove to be over-priced. The most obvious solution – shortening the contract term – already has been adopted by some commissions such as Idaho’s, which adopted a two-year contract length for certain types of QFs. Idaho is not alone in shortening contract length in recent years.