Updating the Year in Review on Legally Enforceable Obligations (LEO), FERC issued an Intent Not to Act on New Mexico Public Regulation Commission’s (NMPRC) LEO standard, which was challenged by a QF’s (Great Divide) Petition for Enforcement under PURPA. It is not remarkable that FERC decided not to bring an enforcement action against the NMPRC
The Legally Enforceable Obligation (LEO) concept is a construct of FERC that is used in one of FERC’s avoided cost pricing regulations, i.e., 18 CFR § 292.304(d)(2)(ii). The date a LEO is formed is the date a QF is entitled to have its avoided cost rate determined, if it so elects. Through the decades, state utility commissions have adopted a quite broad array of standards for when a QF has established a LEO with a purchasing electric utility. In providing non-binding guidance on the topic, FERC has had relatively little to say about the LEO standard other than that the purchasing utility cannot control LEO formation by its own action or inaction, such as a refusal to sign a contract. For example, FERC has opined that the LEO standard cannot depend on the willingness of the purchasing utility executing a contract with the QF, whether it be a power purchase agreement. In 2016, FERC expanded on that view, opining that a state may not require that a purchasing utility sign an interconnection agreement before a LEO is formed. In 2018, several states examined their LEO standards.
Early in the year, the Vermont Public Utility Commission upheld its rule that a LEO cannot be formed until regulatory approval of a proposed power purchase agreement by the Vermont PUC.
As a result of various legal actions, the Colorado Public Service Commission eventually changed its regulations to ensure that a QF could obtain a LEO without winning a competitive solicitation.
In a case before the Minnesota Public Utilities Commission, the state commission looked for a QF to have made a “substantial commitment” and found that one had been made (and a LEO formed) when a QF: (1) had paid for the Facility Study, which established how interconnection could be achieved, (2) had executed a Land Lease and Wind Easement, (3) had obtained necessary approvals from government entities, (4) had wind study results, (5) had reserved equipment, and (6) had filed the Complaint with the Commission.…
Over the last several weeks, a variety of entities have filed Petitions for Declaratory Order (PDO) or Enforcement Petitions relating to PURPA that may prove interesting to watch.
Sunrun asked FERC to make an exception for the need to self-certify (through Form 556) QFs under common ownership that total in aggregate more than 1 MW of capacity if all the QFs are located with one mile of one another, but only if such aggregation includes only QFs that are under 20 kW residential solar systems where the customer has a purchase option. (Sunrun often leases solar systems with an option to buy, thus its desire to avoid the complexities of trying to determine when the 1 MW minimum for self-certification is met.) This PDO may prove less controversial than some of the others recently filed.
Redlake Falls challenged a Minnesota PUC decision regarding what a utility’s avoided cost was at the time the legally-enforceable obligation (LEO) was formed, in a dispute that involves which rate proposed by various entities best represents avoided cost at the time the LEO was established. This is not the type of PURPA Enforcement case that FERC is likely to bring an enforcement action itself, but a request was made for a PDO, so some non-binding guidance may be issued.
The two-decade battle between the Swecker family and Midland Power Cooperative and its supplier (Central Iowa Power Cooperative) continues unabated. This case cannot been deemed controversial, as the very same PURPA arguments have now been made and rejected repeatedly by any number of venues. The most interesting issue to watch in the latest proceeding is whether Midland will finally obtain a suspension of the Sweckers’ rights to bring enforcement actions against Midland and CIPCO that raise the same avoided cost rate scheme.
Finally, in perhaps the most interesting case of the lot, NorthWestern petitioned FERC for a declaratory order determining that:
- in periods when a utility has excess generation and cannot back down its generation, the avoided cost paid by the utility for energy to QFs should be zero; and
- nothing in PURPA, including the rule against “non-discrimination” in pricing of avoided cost, permits setting a QF purchase rate above the utility’s avoided cost.
Supplemental Comments in Docket No. AD 16-16
In testimony before the Senate Energy and Natural Resources subcommittee as well as other venues, FERC Chairman McIntyre has made clear his desire to update PURPA, which has led to several entities submitting supplemental comments to FERC in Docket No. AD16-16. Supplemental comments have been filed by ELCON, et al., North American BioFuels LLC (BioFuels), EEI, and NARUC. Largely, these comments reiterate prior positions taken by these parties. EEI and NARUC continue to be focused on, among other issues, several areas of reform that would accrue to the benefit of utility purchasers (and presumably their ratepayers) such as competitively-determined avoided cost, the one-mile rule and other economy-of-scale issues, lowering the MW threshold for eliminating the must-purchase obligation. ELCON reinforced its position on standard contracts, FERC’s inappropriate focus on QF size, and the need for more public documentation on avoided cost.
Although the focus of these trade associations on a limited number of big picture issues is understandable, the reality is that FERC’s PURPA regulations could use an even more comprehensive overhaul. For example, a good start would be for the Commission’s PURPA regulations to assume that open access exists, to reconcile (or reconsider) the Commission’s “better than firm” transmission policy for QFs with the reality of the terms of open access tariffs, and to codify the FP&L policy on interconnection jurisdiction. If fast action is desired, two separate rulemakings could be opened: 1) a narrow rulemaking to deal with more pressing issues; and 2) a rulemaking that is broader in scope and focuses on eliminating the vestiges of the 1970s vintage FERC PURPA regulations and case precedent set in the 1980s.
In contrast to the trade associations discussed above, BioFuels, is seeking to solve a particular problem that arose when FERC issued Order No. 671 and Order No. 732 which together require QFs over 1 MW to file self-certifications through Form 556. In its most recent set of supplemental comments, BioFuels is asking FERC to: 1) provide an amnesty period for QF-eligible entities that do not have a Form 556 on file in order to allow them to get into compliance; 2) require that a purchasing utility has received a Form 556 or the equivalent before a power purchase agreement (PPA) becomes effective or a purchase is initiated; 3) require that a purchasing utility not purchase energy from a QF without having received Form 556 or the equivalent; 4) place an obligation on the purchasing utility to provide FERC a copy of any PPA with a QF (whether or not the PPA is entered into pursuant to PURPA) and documentation that the purchase is from a QF; 5) impose possible penalties (albeit under 15 U.S.C. § 797, rather than the Federal Power Act) on purchasing utilities for violation of this last regulations; and/or 6) simplify Form 556 by creating a small power production-specific form.…
In a recent article, the well-respected Ari Peskoe, director of the Electricity Law Initiative at the Harvard Law School Environmental and Energy Law Program, was quoted as saying that FERC does not have the authority to rewrite the goal of encouraging the development of qualifying facilities (QFs) because “[t]hat goal is embedded in the law.” PURPA Section 210(a) requires FERC to set rules “as it determines necessary” to encourage QFs. In other words, FERC, led by Chairman Kevin McIntyre, has significant discretion to determine what rules are necessary to encourage QFs beyond the basic purchase/sale obligation, as modified by the Energy Policy Act of 2005. QFs may be sufficiently encouraged by policies such as state renewable portfolio standards, state greenhouse gas reduction targets, net energy metering programs, community solar, and the like, such that FERC could find certain existing regulations and policies are no longer necessary or that new policies and regulations are merited.
A comparison of whether FERC could adopt all of the reforms that Senators Barrasso and Risch are proposing in their UPDATE PURPA Act (S. 2776) demonstrates the breadth of the power of FERC’s authority. Of course, changes to FERC PURPA regulations and policies can readily be “undone” by a new Commission, but legislative reform also can be reversed by a new Congress, and may be harder to achieve in the first place. …
In our series of posts on the need for PURPA reform targeted at the Allco decision, we identified Congress as one avenue of reform. Although the Congressional path to success may be arduous, the journey has begun. On May 3, 2018, Senators John Barrasso (R-WY) and James Risch (R-ID) introduced the “Updating Purchase Obligations to Deploy Affordable Resources to Energy Markets Under PURPA Act” (“UPDATE PURPA Act”). Although the UPDATE PURPA Act is quite broad in scope and will undoubtedly prove controversial, unlike Rep. Walberg’s (R-MI) PURPA Modernization Act of 2017, the new bill directly addresses 18 C.F.R. Section 292.304(d)(2)(ii) (as to renewable (small power production) qualifying facilities (QFs)) by requiring that Section 292.304(d)(2) be amended to provide that “a legally enforceable obligation for the delivery of electric energy or capacity from a qualifying small power production facility shall not require any electric utility to purchase energy or capacity from a qualifying small power production facility at a rate that exceeds the incremental cost of the electric utility of alternative electric energy or capacity, as calculated at the time of delivery.” In short, the bill effectively eliminates the requirement for a utility to pay for energy and capacity at a price other than the price at the time of delivery, eliminating the price risk for both buyers and sellers alike inherent in long-term contracts.
Given that the more modest reforms of the PURPA Modernization Act of 2017 have not been enacted (well over a year after introduction), FERC could speed the journey to “fix” Allco, by introducing a rulemaking that clarifies that rates set at the time of a legally-enforceable obligation can be formula rates. Even if such relief is later superseded by more comprehensive PURPA reform, this reform should be adopted sooner rather than later to stem litigation. Certainly, broader reform by FERC would be welcome by the utility industry, but reform of 18 C.F.R. Section 292.304(d)(2)(ii) is a priority reform.…
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.
The Allco court’s prohibition on the use of formula rates to satisfy 18 C.F.R. § 292.304(d)(2)(ii), discussed in Part 1 of this series, has not yet had a widespread impact. As long as a state commission permits the utilities that it regulates to negotiate fixed-price (non-formulaic) contracts, the Allco decision should not have a meaningful impact, absent a utility absolutely refusing to entertain any non-formula rate. Only where a state policy, rule, or regulation prohibits a non-formula rate (or a utility refuses to negotiate a fixed rate), is litigation at FERC and the courts likely to ensue. Our expectation is that some additional litigation, attacking the use of formula rates in QF contracts, will continue to occur absent a change in the FERC regulation.
In response to the Massachusetts District Court finding that its PURPA rules were unlawful in the Allco case, the Massachusetts Department of Public Utilities (DPU) opened a new rulemaking docket in March 2017 (DPU 17-54). The DPU solicited comments on proposals for complying with the court’s order in Allco. Comments were received, but no action has yet been taken by the DPU in the docket. Thus, even in Massachusetts, the ultimate impact of Allco is uncertain.
FERC’s PURPA regulations contain a rather serious anachronism. In this three-part series, we identify the problem, as reflected in a federal district court decision (Part I); discuss its impacts to date, which have remained relatively minimal (Part II); and explore whether FERC-led PURPA reform is coming and/or what states can do without federal help (Part III).
FERC’s PURPA regulations state that a qualifying facility (QF) is entitled to a contract (i.e., a legally enforceable obligation) that provides it the option of selling energy or capacity at a rate based on a purchasing utility’s avoided cost calculated at the time of delivery, or the avoided cost calculated at the time the obligation is incurred. The meaning of the latter subsection – “avoided costs calculated at the time the obligation is incurred” – was addressed by a Massachusetts federal district court in 2016 (affirmed by the First Circuit in 2017). The court indicated that a formula rate did not constitute an avoided cost calculated at the time the obligation is incurred as required by the regulation. Such ruling means that QFs (at least in the First Circuit) are entitled to an absolutely fixed price per MWh for their energy. In an era of markets, competition, FERC’s own preference for formula rates, and reduced fuel price fluctuation risk, this view is anachronistic.