In a case involving Allco, a frequent plaintiff in state and federal PURPA litigation, a state’s adoption of an alternative PURPA program was challenged. Vermont is a state with multiple PURPA programs, a situation FERC has held is perfectly reasonable. Parsing the existing FERC holdings on multiple programs, having two different PURPA programs is acceptable as long as two conditions are met: 1) there is one PURPA program that is fully compliant with PURPA and available to any QF (including a program that merely consists of a utility negotiating QF contracts on an individual basis) and 2) the additional program does not require purchasing utilities to involuntarily pay a price above avoided cost.
The Vermont PUC (VtPUC) has adopted what is referred to as Rule 4.100, which is effectively a “program” that applies to all contracts and obligations formed pursuant to the VtPUC’s PURPA-implementing authority, except standard-offer contracts formed pursuant to 30 V.S.A. § 8005a, and merely requires distribution utilities to purchase the generation output of QFs under an administratively-determined avoided cost rate. Basically, under Rule 4.100, any QF can obtain a PURPA contract at a “generic” avoided cost. The VtPUC has adopted a “standard offer contract” program as well that has evolved through the years. In its current iteration, the program has a capacity cap, varying technology requirements, and the VtPUC calculates avoided costs to serve as price caps for each technology category. In addition, the VtPUC is authorized to use a market-based mechanism, “such as a reverse auction or other procurement tool” to fill the capacity for each category of renewable energy and set the avoided cost on a market basis for a category.
Before the VtPUC and again on appeal, Allco argued that the market-based mechanism violated federal law because it compels wholesale sales of electricity in violation of PURPA where the reverse-auction based prices are less than the avoided costs as defined by PURPA. This very argument is rather odd in that PURPA never compels sales, it compels purchases. It also is odd in that the very point of the VtPUC standard offer contract and auction was to pay a technology-specific avoided cost above the avoided cost rate available under Rule 4.100. In any case, the VtPUC defended its alternative program on the grounds that its market-based pricing mechanism complied with PURPA because Vermont also offers a PURPA-compliant alternative to the standard-offer program under Rule 4.100. The VtPUC also argued, according to the court that Rule 4.100 “satisfies the requirements of PURPA, so the standard-offer program is not constrained by the PURPA restrictions on pricing.” The last statement is troubling in that any PURPA program is constrained by PURPA restrictions on pricing, if challenged by the compelled purchaser. That is, if the market-based mechanism was in fact resulting in a price above avoided-cost, a purchasing utility could successfully challenge the mechanism, recognizing that proving to a court that a price is “above avoided cost” can be quite challenging.
On appeal, the court discussed FERC precedent (or FERC dicta) as well as the Winding Creek line of cases at length, and concluded (correctly), that “assuming Rule 4.100 fully satisfies Vermont’s obligations under PURPA to give QFs an opportunity to sell power on a must-take basis at avoided-cost rates” an alternative PURPA program was permitted. The court’s holding that states “in rolling out its regulations implementing PURPA, FERC suggested that PURPA contemplates that states may establish auxiliary programs to promote the goals of PURPA in addition to their core programs implementing PURPA, and that those programs may depart from some of the parameters PURPA requires of the state’s core program implementing PURPA” is not particularly troubling. What is troubling, however, is the court stating “FERC interpreted PURPA to authorize states to establish or maintain additional programs compelling electric utilities to purchase electricity from QFs at rates other than the avoided-cost rates defined by PURPA.” (Emphasis added.) This statement is troubling in that it implies states may compel purchases at above avoided cost rates.
But, then the court said the VtPUC was not suggesting an avoided cost cap could be ignored. “The PUC has concluded that the standard-offer program, which offers some QFs the opportunity to secure contracts to sell new capacity at prices that exceed generic avoided-cost rates, but are capped by technology-specific avoided costs, is such a program authorized by PURPA as a complement to Rule 4.100.” This statement indicates that the VtPUC understands that it can have tiered, technology-specific avoided cost prices that are above an “all-resource” avoided cost price, rather than merely having a second PURPA program that is not constrained by avoided cost at all. Such a position reflects FERC’s rulings in Order No. 872.
The problem with the decision is that the court continues on, once again forgetting to mention this avoided cost constraint, ruling that:
Consistent with FERC’s own interpretation of PURPA, we accept the PUC’s conclusion that if Rule 4.100 satisfies the requirements of PURPA, its use of a market-based mechanism in the standard-offer program is authorized by PURPA, provided that its standard-offer pricing is otherwise “just and reasonable to the electric consumers of the electric utility and in the public interest, and … [does] not discriminate against [QFs].
(Emphasis added.) This sentence muddies the entire decision because it does not include the caveat that the market-based mechanism in the standard-offer program cannot compel a utility to pay above an avoided cost rate. There may well be two (or more) very different avoided cost rates, and the utility may be compelled to pay the higher of the two, but the higher rate is still constrained by PURPA and concept of avoided cost.
In sum, the case does not appear to be too worrisome in that the alternate PURPA program under review plainly was intended to result in a higher, technology-specific, but still avoided-cost, rate. Having multiple avoided costs is not problematic under FERC’s regulations allowing for tiered, technology-specific avoided cost rates. (Whether tiered, technology-specific avoided cost rates are lawful under PURPA is an issue no utility has chosen to raise to a court.) More careful wording, however, would have been helpful.