A Qualifying Cogeneration Facility (Cogen QF) that improves or restores its thermal offtake need not fear the loss of its legal status or impairment of its power sales contracts solely because of its compliance efforts and results, thanks to an August 24, 2018, ruling by the Federal Energy Regulatory Commission (FERC).
Cogen QFs are a class of generators regulated by FERC under the Public Utility Regulatory Policies Act of 1978 (PURPA), among other statutes. Like other FERC-regulated electricity producers, Cogen QFs typically sell electricity at wholesale (for resale); unlike other electricity producers, Cogen QFs are also required to deliver their thermal output—the steam produced as a byproduct of power generation—for bona fide consumption in industrial, heating, cooling, and similar applications. The PURPA requires a Cogen QF to use the same molecule of fuel twice – once to produce electricity, and once to produce thermal energy, in a single, sequential cycle.
A Cogen QF is sometimes entitled to sell its electrical output to utilities at rates up to the purchasing utility’s “avoided costs,” a term that has several different legal definitions but is typically higher than short-run market-clearing power prices (and power sales agreements subject to PURPA require that the generator maintain Cogen QF status). And a Cogen QF will customarily be exempt from numerous other FERC requirements (such as corporate, financial, and some rate regulation under the Federal Power Act, or FPA) and state utility commission regulation. But a Cogen QF can only enjoy these rights as long as it complies with PURPA’s requirements defining Cogen QF status.
When a Cogen QF fails to comply, for example by ceasing to deliver sufficient PURPA-required quantities of steam for bona fide use, the Cogen QF must timely prove to FERC that it was without fault, and that it is seeking diligently to restore compliance – or else the Cogen QF will face a loss of its status under PURPA, normally including the loss of the Cogen QF’s power sales agreement and PURPA pricing.
In 2005–06, FERC revised its Cogen QF regulations, consistent with new legislation, to make it more difficult for new generating plants to obtain Cogen QF status and to satisfy PURPA thermal production requirements. A “new” Cogen QF must deliver greater quantities of thermal energy (measured against the new Cogen QF’s total energy output), and the “new” Cogen QF’s thermal output is subject to more stringent usefulness requirements. Obtaining thermal offtake arrangements with bona fide commercial or industrial steam offtakers has always been critical to any Cogen QF, but the standards are even more taxing for “new” Cogen QFs.
In 2016, Saguaro Power Company (Saguaro), a Nevada Cogen QF, in business since 1990, experienced a loss of thermal offtake (an industrial steam customer terminated its steam offtake) that made it impossible for the Cogen QF to comply with PURPA thermal standards. The Cogen QF petitioned FERC for a limited, temporary waiver of those standards (the Waiver Petition), while seeking other industrial and commercial customers for its steam offtake to restore PURPA thermal compliance. In the Waiver Petition and related filings, Saguaro indicated that it was actively pursuing thermal sales that might include deliveries of distilled water derived from its steam production.
Saguaro’s power purchaser (the local interconnected utility) and Nevada’s state consumer advocate vigorously opposed the Waiver Petition. Following a half-year of pleadings, FERC found that Saguaro had satisfied the standards for waiver, and granted the Waiver Petition, subject to one limitation on Saguaro’s electric power rates during the waiver period. In December 2017, Saguaro filed a Cogen QF self-recertification notice with FERC, indicating that Saguaro had successfully restored its thermal compliance by adding new distilled water offtakers, consistent with the Waiver Petition and the FERC order granting the temporary waiver.
Several months later, the power purchaser and the state consumer advocate petitioned FERC (the Petition) to reject Saguaro’s December 2017 self-recertification and strip Saguaro of its Cogen QF status. The utility and the state claimed that Saguaro’s addition of distilled water offtake was a “sham” – in effect, a product of misleading or false reporting by Saguaro. The state consumer advocate claimed that the Cogen QF’s restored offtake was a “sham;” that the distilled water production was either not useful or not actually being used, or both; and that FERC should direct the Cogen QF to supply information such as health permits and building and zoning records—all of which are beyond the scope of PURPA—for general public examination. Both the utility and the state also claimed that the restoration of thermal offtake automatically made Saguaro a “new” Cogen QF that was subject to higher technical standards.
Following several rounds of pleadings, FERC denied the Petition in its entirety, affording the petitioner and the state none of the relief that they had requested. FERC instead determined that:
FERC’s order brings greater clarity to two scenarios that FERC has observed before: when a Cogen QF that preexisted the 2005 legislation increases or improves its thermal offtake utilization, the Cogen QF does not automatically become subject to the much more rigorous “new” PURPA requirements. In addition, when a pre-2005 Cogen QF receives a temporary FERC waiver of PURPA requirements, the Cogen QF may restore thermal compliance without becoming subject to the much more rigorous “new” PURPA requirements.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
 Nevada Power Company, Docket No. EL18-139-000, et al., 164 FERC ¶ 61,136 (August 24, 2018).