On February 7, 2024, at the request of the U.S. Department of Energy (DOE), NAESB held a kick-off meeting for the development of a standard model contract to facilitate purchases by distribution owners of “distribution services” from DER aggregators. The idea is for NAESB to develop a standard contract that could be used by distribution
Back in March of 2023, FERC issued a seemingly logical compliance order regarding one aspect of PJM’s Order No. 2222 compliance filing. This blog noted that “FERC acknowledged that DER owners in full retail NEM programs actually are compensated for ancillary services that they do not even provide and that paying them for ancillary services, assuming they could provide them, would be double counting. … Although further clarity will result on compliance, the decision reflects a breakthrough of sorts …. The fact that the Pennsylvania PUC expressed concern over double counting as to ancillary services in particular perhaps swayed FERC into recognizing the level of compensation offered by some NEM programs.” Perhaps this reading, that FERC might prohibit double compensation for the same service, was too optimistic.
That March 1, 2023 order also stated that:
PJM’s proposed tariff requires an assessment of whether the “same product is not also credited” rather than whether, as the Commission discussed in Order No. 2222, the same service is being provided by the Component DER. Being credited for a product may not be the same as providing a service. This difference may be relevant because a Component DER participating in a net energy metering retail program, for example, may be credited for a product or service that it does not actually provide.Continue Reading Double-Provision Versus Double-Compensation of Ancillary Services Under PJM’s Order No. 2222 Compliance Filing
PJM has long permitted generators to collect revenues for the provision of reactive power and voltage support (reactive power) under Schedule 2 of the PJM Tariff. Innumerable generating facilities have availed themselves of this opportunity. Nearly every such reactive revenue requirement case has settled. Although the vast majority of PJM transmission owners (TOs), whose ratepayers pay the majority of the reactive power rates, have divested their generation, few Transmission Owners (TOs), and fewer state commissions/consumer advocates representing such retail ratepayers, challenge these reactive revenue requirement filings. For some years, this left FERC Trial Staff as the only adverse participant, as regardless of the lack of protests in such cases, FERC usually suspends the revenue requirements and sets it for settlement and hearing. In recent years, however, PJM’s Independent Market Monitor (IMM) has taken the role of the Protestor-in-Chief for reactive revenue requirements filed by PJM generating facilities.
In response to the filings of several facilities seeking Schedule 2 compensation, starting in 2020, the IMM decided to challenge whether facilities connected to the distribution systems of TOs or Distribution Owners (i.e., DERs) actually were entitled to reactive rate revenue under PJM Schedule 2. Before such time, an unknown number of DERs had filed and settled cases involving their reactive revenue requirements. Unsurprisingly, given the all or nothing stakes, the parties could not settle and a hearing was held on the threshold issue of eligibility for compensation, resulting in an Initial Decision in July 2022. FERC reviewed that I.D. and has now issued Opinion No. 583, (Whitetail Solar 3, LLC, et al.) rejecting the compensation claims.
FERC held that to be eligible for compensation under Schedule 2, a facility must be: “(1) under the control of PJM, and (2) operationally capable of providing voltage support to PJM’s transmission facilities such that PJM could rely on that facility to maintain transmission voltages.” FERC elaborated that to qualify, “a generation facility must be operationally capable of providing voltage support to PJM’s transmission facilities such that PJM can rely on that generation facility to maintain transmission voltages.” Simply being capable of injecting VARs at the point of interconnection was deemed insufficient to meet this criterion.
In applying the two-part test above, there was no dispute that the facilities at issue were under PJM operational control as they were market participants. In assessing whether the facilities in question had the operational capability to provide reactive power, FERC found PJM’s views warranted substantial weight. PJM “credibly explained that it is unable to rely on the Facilities for voltage support because they are not directly connected to the transmission system” and “nothing in PJM’s responses suggests that it would be able to rely on the Facilities for voltage support during an emergency.” Other rulings on the various technical bases for finding the facilities unable to meet the operationally capable criterion that were affirmed included: 1) voltage regulation conflicts would arise if PJM were to call on the facilities for voltage support because PJM stated that it was industry practice to direct voltage regulation to the nearest electrical interconnection in order to avoid voltage regulation conflicts, and the nearest interconnections were with distribution buses that it did not control; 2) the electrical distance between the facilities and transmission system may dissipate any voltage support provided by the facilities; and 3) power flow models that showed “some” impact on transmission were insufficient and flawed.
The applicants argued that they were eligible for compensation no matter their specific technical capabilities on numerous grounds that were all rejected. FERC rejected applicants’ reliance on their Interconnection Service Agreements (ISAs) as proof of eligibility, because the ISAs explicitly state that “payments … for reactive power shall be in accordance with Schedule 2.” Similarly, a detrimental reliance argument based on the ISA wording was rejected. FERC ruled that a PJM Technical Manual did not address compensation. FERC refuted an undue discrimination argument based on location on the grounds differing locations meant facilities were not similarly situated. Applicants asserted that a lack of eligibility will discourage DER deployment, but FERC countered that there was no evidence in the record that suggested doing so would adversely affect reliability in PJM or the deployment of renewable generation. FERC noted that MISO, before ending reactive compensation altogether last year, made DERs ineligible in 2013 without adverse impacts. The applicants used Order No. 2222 to claim eligibility, but FERC noted that it only removed barriers for market participation for facilities that are technically capable of providing ancillary services.
Perhaps the most difficult factual issue FERC faced in addressing eligibility is that for many years it routinely accepted settlements filed by DERs compensating them for reactive power under PJM Schedule 2. The applicants naturally pointed this fact out. FERC held that its approval of prior settlements which may have granted reactive power rate schedule treatment in PJM did not constitute approval of, or precedent regarding the issue before it. FERC, however, did not upset existing settlement agreements. Similarly, the applicants located a case where FERC accepted a reactive power rate schedule for a DER in PJM without suspension or hearing. FERC dismissed this argument as well, noting that the “detailed factual record developed at hearing in this proceeding supports a determination different than that reached in the delegated order referenced by Applicants.” Indeed, FERC’s greatest challenge, if a rehearing is submitted and the case appealed, likely will be that it is regulating similarly-situated entities differently, which the D.C. Circuit has found improper on several occasions. But, were an appellate case remanded on such grounds, FERC could take the opportunity to resolve any “discriminatory regulation” problem by issuing a show cause order applicable to all DERs receiving Schedule 2 compensation.
Unquestionably, the opinion raises the question as to whether any DER is entitled to reactive power compensation in PJM (or elsewhere) and whether and what action the IMM or others (i.e., state commissions, consumer advocates, TOs, or FERC itself) may take in light of the decision. There are several dockets in process where the same issue has been raised. In any case, the writing appears to be on the wall and further challenges to FERC policy may result in a more consistent application of this policy.
We previously indicated that “[t]he March 8, 2022 SEIA v. FERC oral argument on FERC’s PURPA reform rule – Order No. 872 – resulted in a somewhat unexpected lesson on the National Environmental Policy Act (NEPA).” The same can be said of the Ninth Circuit’s opinion on Order No. 872. Although the Final Rule was upheld in its entirety, it also was remanded because FERC violated the NEPA by failing to prepare an environmental assessment (EA) before issuing the Final Rule. The Final Rule will remain in effect during the remand. The EA is rather unlikely to result in changes to the Final Rule, as the court opined the order does not suffer from “fundamental flaws” and it had “no reason to believe that the agency would be unable to cure those deficiencies on remand.”
Although the opinion’s substantive rulings are relatively unremarkable, the opinion’s and concurrences’ discussions of Chevron were perhaps more remarkable and may provide a glimpse of a post-Chevron future. Two judges embraced Chevron deference as the law of the land, with the opinion relying on the premise that the court should “review an agency’s interpretation of a statute under the framework of Chevron.” In concurring with most of the opinion, the third jurist indicated that Chevron deference was unnecessary to uphold the Final Rule.
Under the two-step process of Chevron, a reviewing court first decides if the intent of Congress is unambiguous, or clearly stated, if so, then the inquiry must end. If, the intent of Congress is unclear, or if the statute lacks direct language on a specific point, the court decides whether the agency interpretation is based on a permissible construction of the statute, one that is not arbitrary or capricious or obviously contrary to the statute. The majority relies on Chevron deference because it remains the law of the land. Indeed, two members of the panel chastise their colleague for ignoring Chevron,in premature anticipation of “the Case-That-Must-Not-Be-Named” being overturned by the Supreme Court. Judge Bumatay, a Federalist Society member, is concerned about the future of Chevron and sees no reason to apply the second step of Chevron, as the statute provides FERC ample discretion to adopt the PURPA changes proposed given the statutory text. In any case, Judges Miller and Nguyen also find, in their own concurrence, that “the court’s opinion examines the plain text of the statute and concludes that Congress did not directly address the questions but instead left their resolution to FERC’s discretion.” In sum, even if the Supreme Court were to overturn Chevron, there is every likelihood that the non-NEPA issues would survive further judicial review because Congress provided such broad discretion to FERC in enacting PURPA.
Generally, the opinion found that the Final Rule, as a whole, was not inconsistent with PURPA’s directive that FERC “encourage” the development of QFs. The non-NEPA specific issues that were upheld were: the “Site Rule”; the “Fixed-Rate Rule”; the use of locational marginal energy (LMP) prices as a proxy for avoided cost; and, the reduction to 5 MW in size of the must-purchase rule for utilities requesting relief in certain organized markets. These issues, and the NEPA-based remand, are discussed below.
Consistency with “Encouragement” Requirement. The opinion asserts that petitioners analyzed Order No. 872 incorrectly, by merely arguing that Order No. 872 provides “less support” to QFs than the status quo under the prior PURPA rules. The court pointed out that the appropriate statutory test is for FERC to prescribe “such rules as it determines necessary to encourage” QFs and the statute even directs FERC to “from time to time thereafter revise” those rules. The statute thus gives “FERC broad discretion to evaluate which rules are necessary to encourage QFs and which are not” and the “discretion to reevaluate its rules and alter them in light of experience.” The court found that “PURPA does not require FERC to encourage QFs to the maximum extent possible, regardless of any countervailing interests.” It also held that FERC’s various exercises of discretion were not unreasonable simply because FERC balanced the need to encourage QFs against other competing interests.
Site Rule. In the Final Rule, FERC created a non-rebuttable presumption as to affiliated QFs within one mile of one another being located at the same site for determining size and allowed entities to seek to prove that affiliated QFs located within 1-10 miles of one another are at the same site. (It remains unclear whether the Site Rule impacts PURPA regulations beyond the 80 MW size cap on small power production QFs (Renewable QFs), such as the >1 MW rule for self-certification; the 5 MW and 20 MW purchase mandate limitations; and the FPA rate exemption for >20 MW QFs.) The court found that Congress gave FERC broad discretion to define the meaning of the phrase “located at the same site.” The court dismissed arguments that “site” had to reflect location and physical proximity, noting that the prior PURPA rule also took into account other factors such as fuel type and ownership. As to whether the choice of 10 miles was arbitrary, the court indicated that effectively any number selected would be arbitrary in some sense, but found that where an agency has to choose a number from a range, a court will uphold the number even if other reasonable figures exist. The court ruled that FERC had the authority to change its prior Site Rule policies and that it even mitigated the impacts on QFs relying on the old rules. Claims that the Final Rule was retroactive were readily dismissed on the grounds that a rule is not retroactive merely because it “upsets expectations based in prior law” or “is applied in a case arising from conduct antedating the statute’s enactment.”
Fixed Rate Rule (Energy Rate May Be Variable). In the Final Rule, FERC allowed the avoided energy cost portion of a QF’s contract to vary based on the as-available rate calculated at the time of delivery but continued to require that QFs be given the option to receive avoided capacity costs at fixed rates. Petitioners argued that this aspect of Order No. 872 was discriminatory and arbitrary and capricious. The court explained that the statute did not support this reading because it was so broad that FERC could have imposed a variable energy price for the very start of PURPA. As to the argument that QFs now must accept a variable, uncertain energy rate, whereas utilities are guaranteed the long-term recovery of their costs and a return on investment such that QFs now face financial risks that utilities do not, the court held that Congress never intended to impose traditional ratemaking concepts on QFs. “Order [No.] 872 requires that QFs receive a rate equal to full avoided costs, and that is sufficient to satisfy the nondiscrimination requirement.” The opinion holds that FERC explained its changed policy on energy rates by finding that its prior belief as to under- and over-recovery evening out over time was no longer supported by evidence and that “it is not necessarily the case that overestimations and underestimations of avoided energy costs will balance out.” This finding of regular, routine overestimations not balanced out by underestimations fully justified the change in policy. As to arguments that the change would make financing difficult, the court observed FERC’s finding that the variable energy rate/fixed capacity rate construct is the standard rate structure used throughout the electric industry for power sales agreements. The evidence of a 700 percent increase in independent renewable generation between 2005 and 2018, also supported FERC’s position that QFs would be financeable.
LMP for Energy in Organized Markets. In the Final Rule, FERC provided states the flexibility to use various market prices when calculating a utility’s avoided costs, allowing states to adopt a rebuttable presumption that, for utilities located within certain organized energy markets, the LMP reflects the purchasing utility’s avoided costs. Petitioners’ position, that some utilities procure energy outside auctions and may have avoided costs higher than the LMP, was rejected because a state’s use of LMP as a reasonable proxy for a utility’s avoided costs could be rebutted on a case-by-case basis, if and when a state adopted such approach.
Rebuttable Presumption of Market Access Set to 5 MW for Renewable QFs. In the Final Rule, FERC found that Renewable QFs with a net capacity above 5 MW will be presumed to have nondiscriminatory access to certain markets, such that utilities in those markets can submit filings to be relieved of buying from such Renewable QFs. The former size minimum for mandated purchases was 20 MW for both cogeneration and Renewable QFs. FERC cited changed circumstances since the issuance of Order No. 688 to justify its downward revision of the market-access presumption from 20 MW to 5 MW for Renewable QFs. The court reviewed FERC’s stated basis for that revision – more mature markets, an RTO requirement to allow100 kW resources to participate in markets, and evidence of under 20 MW QFs participating in markets – and found the explanation sufficient.
NEPA. In the Final Rule, FERC determined that Order No. 872 fell within a “categorical exclusion” to NEPA for rules that are “clarifying, corrective, or procedural” in nature and held that any downstream environmental effects were too uncertain and speculative to trigger NEPA review. The court disagreed with FERC that several of its policy changes were corrective, holding: “when an agency adopts broad, transformative, and substantive changes to its regulations, it cannot sidestep NEPA’s requirements by claiming that it was motivated by its desire to better conform to the statute and then applying a ‘corrective’ label. A regulatory change as significant as Order [No.] 872 is not corrective merely because the agency expresses some interest in better statutory compliance.” As to the foreseeability argument, FERC claimed both that its rule did not involve a particular project and that it was impossible to know what the states may choose to do and what impacts the changes would have. The court found that FERC misinterpreted the case law and ruled that an EA is required for a major agency action unless it normally does not have a significant effect on the human environment. The court found that it was “eminently foreseeable that a regulatory change of this magnitude could produce significant environmental effects” because it was a near-certainty that at least some QFs could lose their status under the Site Rule, or that at least some states would eliminate the fixed-rate option for the calculation of energy avoided costs. The court elaborated that “because many QFs rely on renewable power sources, it takes little imagination to see that a reduction in the incentives provided to QFs could, in turn, alter the mix of energy production, shifting production away from renewable production and toward fossil-fuel production.” Thus, the court remanded the Final Rule, requiring FERC to perform an EA.
Importantly, the court did not vacate the Final Rule due to the failure to prepare an EA. The Ninth Circuit test for vacatur weighs the seriousness of the agency’s errors against the disruptive consequences of an interim change that may itself be changed. Although the court found the EA omission serious, courts in the Ninth Circuit ask whether the agency would likely be able to adopt the same rule on remand and the court had no reason to believe that the agency would be unable to cure the deficiencies on remand. As to the disruption that a vacatur would cause, the court ruled it was significant. The court noted that FERC, various states, and regulated parties have all begun to implement the rule in various ways. The court, in an understatement, noted that “several” utilities have already applied for – and received – relief from their mandatory-purchase obligations when dealing with facilities between 5 and 20 MW in size. The “QM” PURPA relief dockets number is already about 50, with most filings by larger, investor-owned utilities.
Judge Bumatay, dissenting on the NEPA issue, found that the petitioners lacked standing to raise the NEPA issue because, despite their claims, the petitioners interests are not distinct from the interest held by the public at large and rest on speculation, or as more colorfully described: “To traverse the gap between FERC’s rule changes and their asserted injury, Petitioners layer conjecture on top of speculation on top of guesswork about how State governments, individual Qualifying Facilities, the broader energy market, and emissions will react to the rule changes. To credit their claim, we must accept that FERC’s new rules will lead to greater fossil-fuel consumption in some unspecified manner, in some unspecified location, to some unspecified degree, by the independent actions of third parties—all leading to an unspecified harm to Petitioners’ members.” As noted above, given many other factors (particularly including state clean energy policies), the tweaks to PURPA made by Order No. 872, likely have had minimal impacts on the country’s fuel mix since they were adopted.
Once the mandate is issued and the case remanded, the court’s prediction that FERC can cure any deficiencies is prescient. Indeed, given the amount of renewable resources in interconnection queues as opposed to fossil resources, the notion that a somewhat “stricter” PURPA would have environmental impacts that merit any further review is highly questionable. Voluntary and state-mandated renewable portfolio standards undermine the notion that the PURPA changes at issue here have, or would play, a meaningful role in the country’s resource mix. Perhaps the strongest argument that FERC’s PURPA rule changes are insignificant in terms of the overall resource mix is the fact that numerous states offer compensation through community solar, net metering, and other programs that allow Renewable QFs to flourish outside of the traditional constraints of PURPA. Actually, the Final Rule’s formal adoption of tiered avoided costs allows states to lawfully impose much higher avoided cost rates than they have historically. In the years since Order No. 872 became effective, the petitioners would be hard pressed to prove that the Final Rule hampered renewable development generally, even as such development likely was slowed to some degree by interconnection queue issues, COVID-19, tariffs, and supply chain issues. With the named Petitioner recently issuing a press release stating “due in part to the strong first quarter numbers and a surge in demand from the Inflation Reduction Act (IRA),” its consulting partner “expects the solar market to triple in size over the next five years, bringing total installed solar capacity to 378 GW by 2028,” proving that the Final Rule is having environmental impacts becomes all the more challenging. The dissent supports this view, relying on record evidence from Montana’s thriving renewables industry, which includes many projects too large for QF status.Continue Reading FERC’s PURPA Reform Rule Survives Judicial Review Intact, Subject to an Environmental Assessment, as the Majority of the Ninth Circuit Panel Continues to Embrace Chevron Deference
As noted in the most recent blog post, a challenge by Allco Finance Limited (Allco) to the Massachusetts Department of Public Utilities’ (DPU) and the Massachusetts Department of Energy Resources’ (DOER) (Massachusetts Agencies) implementation of Massachusetts’ seven-year old legislation – An Act to Promote Energy Diversity – has no obvious connection to PURPA, yet was submitted as a PURPA Petition for Enforcement (PFE) under PURPA Section 210(h)(2)(B). A Petition for Declaratory Order (PDO) arguably would have been a better, albeit costlier, choice. The few responses to the PFE shed a small amount of light on the relevancy of PURPA issue, but spread a brighter light on the need for state actors to retain FERC counsel before drafting and implementing laws concerning the sale for resale of electricity and transmission of electricity in interstate commerce.Continue Reading Is PURPA Relevant to Non-PUPRA State Procurement Mandates? Presumably Not, But There Is a Lesson To Be Learned From the Recent Allco Challenge
The easiest means for a state to provide a subsidy to a preferred generation/resource type or class is to mandate purchases from that class at state-mandated rates. The typical reaction of a FERC attorney to such a claim should be, well that approach is simply illegal; states cannot compel utility purchases outside the bounds of PURPA. Indeed, in the last fifteen years, FERC has said so at least twice – when state -mandated purchase programs were challenged by California’s investor owned utilities and the New England Ratepayers Association. FERC resolutely held that mandated purchases were limited to purchases from QFs under PURPA at avoided cost rates. The Supreme Court rejected a (somewhat) less obvious means for states to mandate subsidized wholesale purchases in Hughes v. Talen. But, these cases do not mean that state programs that mandate purchases outside of the PURPA avoided cost construct have been eliminated, even where organized wholesale markets exist. Many such programs still exist, in any number of forms, including net metering programs that pay cash at the end of a time period at above an avoided cost rate and virtually all community solar programs. Most such programs are never challenged, but there is one entity willing to take on some state-mandated purchase programs that fall outside of PURPA, as evidenced by the latest challenge by Allco Finance Limited (Allco), this time to a Massachusetts program.
The Allco petition should be no surprise, as Allco has for over a decade led both the fight against state commissions compelling utilities to pay QF resources above PURPA avoided cost rates and compelling utilities to pay non-QF resources state-mandated rates. Although Allco’s success has been somewhat limited as discussed below, the outsized role Allco has played is not surprising. There are very few utilities willing to challenge a state regulator or legislature that requires the utility to buy from either a QF at above an avoided cost rate or from a non-QF, pursuant to a state-mandated price or process. As a result, some state-mandated programs can morph into a voluntary purchase programs, that are nearly impossible to challenge on legal grounds. One might expect that if a state program were too generous and caused ratepayers to pay unmerited subsidies, that consumer advocates would challenge such programs. However, traditional consumer advocates are often state actors themselves (i.e., independent offices of the state commission, state Attorneys General, etc.), also hesitant to challenge to state action. The result is that Allco has been the primary thorn in the side of state legislatures and commissions, representing neither consumer or utility interests, but the interests of QFs that are ineligible for the programs or are failed bidders in programs.Continue Reading Mandatory and Not So Mandatory Wholesale Purchases at State-Set Rates: Allco Leans In
FERC has issued its third and fourth orders on initial compliance attempts with Order No. 2222, covering PJM and ISO-NE. Many of the holdings reflected compliance policies similar to those adopted in the prior NYISO and CAISO orders (summarized previously Part 1, Part 2, Part 3, Part 4). This analysis…
Recently, the D.C. Circuit upheld FERC’s decision granting Broadview Solar’s application to become a QF in SEIA v. FERC. In doing so, the appeals court solidified FERC’s “send-out” capacity approach for determining QF status. The underlying case, Broadview, has been the subject of several prior blog posts, as the underlying FERC decisions…
Who will be paying for the impacts of on both distribution and transmission systems of widespread DER penetration, whether it is in the form of DER Aggregations under Order No. 2222, state-jurisdictional net energy metering (NEM), or stand-alone DERs (often PURPA facilities)? And, who will decide who bears such costs – FERC or state commissions?
Fifth and final post on the Order No. 2222 compliance filings issued on June 17, 2022: “CAISO 2222 Order” and the “NYISO 2222 Order.” The post covers the topics: Modifications to List of Resources in Aggregation; Market Participation Agreements; and Effective Date.
Topic 10: Modifications to List of DERs in Aggregation