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Power & Pipes

FERC, CFTC, and State Energy Law Developments

FERC has issued a final rule, Order No. 872, revising the Commission’s regulations governing qualifying small power producers and co-generators (collectively, qualifying facilities or QFs) under the Public Utility Regulatory Policies Act of 1978 (PURPA). The Commission stated that the rule addresses significant changes that have occurred in the US energy markets and the Commission’s desire to modernize its PURPA regulations to protect consumers and preserve competition while meeting the Commission’s statutory obligations. The revisions will have significant implications for all utilities required to purchase the output of QFs, as well as generators that rely on PURPA rates and obligations. The final rule takes effect 120 days after publication in the Federal Register.

The Commission affirmed its intention to continue to support the development of QFs, and clarified that the final rule does not change three key elements of its existing regulations that encourage QF development: (1) requiring electric utilities to provide backup electric energy to QFs on a nondiscriminatory basis and at just and reasonable rates; (2) requiring electric utilities to interconnect with QFs; and (3) providing exemptions to QFs from many provisions of the Federal Power Act and state laws governing utility rates and financial organization.

The Commission highlighted that the final rule only makes one change limiting QFs’ rights to sell electric energy or capacity under PURPA, which is a reduction of the net power production capacity level at which the presumption of nondiscriminatory access to a market attaches for small power production facilities (but not for co-generation facilities).

Increased Flexibility for States

The final rule provides state regulatory authorities with increased flexibility to establish avoided cost rates for QF sales inside and outside the organized electric markets. States are granted the ability to require energy rates in QF power sales contracts and other legally enforceable obligations to vary in accordance with changes in a purchasing utility’s avoided costs at the time the energy is delivered. However, this grant of authority does not extend to capacity rates. The final rule also grants states additional flexibility to allow QFs to retain their rights to fixed energy rates, and to allow such rates to be based on projected energy prices during the term of a QF’s contract.

The final rule also grants states the flexibility to set “as available” QF energy rates for QFs selling to electric utilities located in organized wholesale power markets at the locational marginal price (LMP) in those markets, subject to a rebuttable presumption that the LMP established in the organized markets represents the as-available avoided costs of utilities located in these markets. Under the final rule, and so long as this presumption is not rebutted, a state can at its option establish as-available energy avoided cost rates for QFs selling to such electric utilities at the LMP. For QFs selling to electric utilities located outside the organized electric markets, states have the option to set as-available energy avoided cost rates at competitive prices from liquid market hubs or calculated from a formula based on natural gas price indices and heat rates.

Finally, under the final rule, states may set energy and capacity rates based on competitive solicitations. The Commission stated that any such competitive solicitations must adhere to procedures consistent with the Commission’s principles set forth in Allegheny Energy Supply Co., LLC, 108 FERC ¶ 61,082 (2004). The Commission’s Allegheny standard requires transparency, precise definitions, standardized and equally applied evaluation criteria, and oversight by an independent third party.

One-Mile Rule

The Commission modified the “one-mile rule,” which is used to determine whether generation facilities are considered to be at the same site for purposes of determining whether a facility meets the 80 megawatt limit on qualifying small power production facilities. The Commission maintained the irrebuttable presumption that facilities one mile apart or less constitute a single facility. The final rule also establishes an irrebuttable presumption that facilities 10 miles apart or more are separate facilities. Pursuant to the final rule, parties will be allowed to demonstrate that facilities that are located more than one mile apart, but less than 10 miles apart, constitute a single facility.

Relatedly, the final rule allows a small power production facility seeking QF status to provide further information in its certification or recertification to defend preemptively against subsequent challenges, by identifying factors affirmatively demonstrating that its facility is indeed at a separate site from other affiliated small power production qualifying facilities.

Obligation to Purchase

The Commission revised its regulations that provide for termination of a utility’s obligation to purchase from a QF with nondiscriminatory access to certain markets. The Commission reduced the rebuttable presumption for nondiscriminatory access to power markets for small power production facilities (but not co-generation facilities) from 20 megawatts to 5 megawatts.

Self-Certification

The final rule provides that entities may protest a QF self-certification or self-recertification without having to file and pay for a declaratory order. In addition, the final rule states that while protests may be made to new self-certifications and applications for Commission certification, protests for self-recertifications and applications for Commission recertifications may only be made if the QF’s filing involves substantive changes to the existing certification.

Commercial Viability

The final rule requires QFs to demonstrate that a proposed project is commercially viable and that the QF has a financial commitment to construct the proposed project, pursuant to objective, reasonable, state-determined criteria in order to be eligible for a legally enforceable obligation. The Commission affirmed that states have flexibility as to what constitutes an acceptable showing of commercial viability and financial commitment, but that this flexibility is subject to the criteria being objective and reasonable.