Because LSEs must still offer fixed capacity prices under Order No. 872, and given the trend in decreasing prices for renewables, the Final Rule’s impacts on LEO formation may actual be fairly significant, particularly in states viewed as hostile to QFs. In the Final Rule, FERC adopted a “minimum standard” for LEOs, amending its regulations to provide that: “A qualifying facility must demonstrate commercial viability and financial commitment to construct its facility pursuant to criteria determined by the state regulatory authority or nonregulated electric utility as a prerequisite to a qualifying facility obtaining a legally enforceable obligation. Such criteria must be objective and reasonable.” 18 C.F.R. § 292.304(d)(3).

FERC provided examples of factors a state could reasonably require a QF to demonstrate: (1) taking meaningful steps to obtain site control adequate to commence construction of the project at the proposed location and (2) filing an interconnection application with the appropriate entity. A state could also require that the QF show that it has submitted all applications, including filing fees, to obtain all necessary local permitting and zoning approvals. FERC also ruled that obtaining a PPA or financing cannot be required. Also not permitted are requirements that: a utility execute an interconnection agreement (or likely any agreement at all); a QF file a formal complaint with the state commission; the QF being capable of supplying firm power; and, the QF being able to deliver power in 90 days.

These changes will largely be felt in the very few states that historically have effectively required a QF to have been constructed prior to it obtaining a LEO, i.e., Texas, and more recently, New Mexico. These states have found a LEO can formed only if the project is 90 days away from operation. Such requirement, permitted by the Fifth Circuit, now has been determined to be illegal, effectively reversing Power Resource Group, Inc. v. Public Utility Comm’n of Texas.

Texas suffered a second loss, one that was perhaps unexpected, the overturning of Exelon Wind 1, L.L.C. v. Nelson, which held that an intermittent resource that was not firmed up could not form a LEO. The NOPR’s discussion of LEOs made no mention that FERC was considering overturning this decision. That said, storage price decreases could reduce the significance of this loss for Texas.

Otherwise, the new LEO guidance is not likely to have a very significant effect, as states retain the ability to adopt a range of LEO standards. As to those states that had LEO standards that were quite easy to meet, the issue arises as to whether the new standard will in fact compel QFs to expend perhaps somewhat more funds than under prior standards without knowing what price that they may receive, at least for capacity. States can address this issue, if so inclined, with standard tariffs and contracts. PURPA regulations do not prohibit states from adopting standard tariffs/contracts for QFs larger than 100 kW. States that had low very LEO bars (or none at all) may be more likely to adopt such an approach.

One curious aspect of the Final Rule is the tension between the FERC requirement that a QF be able to demonstrate commercial viability and financial commitment and the fact that it appears that a state may not require that an interconnection study be completed. For a QF, interconnection costs may be an overriding factor in commercial viability and its willingness to make any financial commitment. It will be interesting to see how this tension plays out.