FERC Focus: A Quad (4) of Quick Qualifying Facility (QF) Updates

by Carolyn Elefant on May 17, 2012

in Renewables, QFs & Green Tech

Back in October 2011, when I released Reviving PURPA’s Purpose , commissioned by the Southern Alliance for Clean Energy, I was hard-pressed to find any scholarly works or FERC decisions discussing methodologies for setting avoided cost rates for qualifying facilities that had been published more recently than five years ago. And no wonder. To paraphrase Thomas Hobbes , the avoided cost ratemaking process is nasty (as in frequently contentious), brutish (as in extremely complicated) and anything but short (except perhaps in those jurisdictions with statutes establishing avoided cost rates as the market price for energy and capacity transactions in regional markets).

Yet, lately, there’s been a small rush of QF activity. Though I’d like to credit my paper for “reviving” discussion on QF ratemaking, in my view, the conversation finds its genesis back in the 2010 California PUC feed-in tariff case. There, FERC determined that the Federal Power Act preempts states from setting feed-in tariffs for wholesale transactions but that states may set avoided cost rates pursuant to PURPA. Subsequently, FERC overruled earlier precedent that required states to base avoided cost rates on all power sources and held that states could establish resource-specific avoided cost rates. In addition, FERC reaffirmed that states may establish QF rates to reflect verifiable costs associated with avoided transmission construction or environmental compliance resulting from the purchase of QF power.

FERC’s California CPUC ruling represents the first step to making PURPA more relevant in today’s markets. Allowing states the ability to set technology-specific rates can help boost QF rates even at a time of declining natural gas prices. Likewise, with utilities now subject to more stringent EPA emissions requirements, environmental compliance costs are verifiable and can be included in QF rates as well. Still, the California CPUC ruling does not force states to revise their avoided cost methodologies but merely provides an option for them to do so.

As summarized below, the most recent quad of FERC orders and pronouncements continue in the same vein — interpreting PURPA in a manner favorable to QFs, but stopping short of interfering with states’ avoided cost practices:

Projects One Mile Apart Are Separate Facilities for QF Certification
Potential New FERC Policy Directive on Avoided Cost for DG
According to this summary, FERC Chairman Jon Wellinghoff announced at a March 2012 ACORE-sponsored webinar that he has directed FERC lawyers and policy experts to research whether QF avoided cost rates should include additional compensation for distributed generation in light of avoided transmission costs and other value provided to consumers.

Chair Wellinghoff’s initiative could possibly boost rates for smaller or newer green technologies that have been left out of carve-out programs. Though some types of DG like solar are the beneficiaries of carve-outs and favorable REC programs, others such as marine hydrokinetics (for which I have a soft spot) are not. Therefore, Chair Wellinghoff’s proposal could potentially boost revenues for new and emerging QF technologies.

QFs Can Smile if Separated by A Mile
In Pioneer Wind issued March 15, 2012, FERC rejected a petition seeking to strip two wind park facilities developed and owned by the same entity of QF status because collectively,the two 46.8 MW projects which had each been self-certified as a QF exceeded the 80 MW size ceiling for QF eligibility under PURPA and FERC’s regulations. The challengers contended that because the two facilities were developed at the same time and owned by the same entity, they should have been treated as a single unit for purposes of PURPA eligibility. While agreeing that the projects were developed and owned by the same entity, FERC nevertheless, found that the because the projects were located more than a mile apart from each other, they were each properly certified separately as QFs under FERC’s regulations. FERC also emphasized that the “one-mile rule” is not a presumption that can be rebutted by a showing of common ownership or operation, but rather, is a bright-line test that FERC must abide irrespective of the relationship or operational dependency of the project units.

RECs Are Separate from Avoided Cost Rates
Ever since its ruling in Am-Ref Fuel Co., American Ref-Fuel, 105 FERC ΒΆ 61004 (2003), FERC has taken the position that avoided cost rates do not include compensation for renewable energy credits (RECs). FERC reasons that avoided cost rates compensate only for energy and capacity and not the environmental attributes reflected in the RECs. Thus, states are free to assign ownership of RECs associated with QF power to the utility or the QF, or to allow the parties to negotiate ownership by contract. What the state is preempted from doing under PURPA, however, is to adopt a policy or rule, holding that avoided cost rates include compensation for RECs – or any costs other than those associated with avoided energy and capacity.

Thus, in Morgantown Energy Associates , the Commission found inconsistent with PURPA the Public Service Commission of West Virginia’s reasoning that a utility is entitled to REC ownership where a contract with a QF is silent because avoided cost payments compensate the QF for avoided capacity and energy and also RECs. The aggrieved QFs argued that under PURPA and the AmFuel precedent, avoided cost compensation does not include payment for RECs. In response, the utilities argued that the case is not about PURPA but rather, the state’s ability to determine which party owns RECs when a contract is silent. Because RECs are a creature of state law, the state can assign ownership, contend the utilities.

Significantly, FERC did not find that the West Virginia Commission’s determination that the utilities owned the RECs in violation of PURPA. Rather, FERC deemed the West Virginia Commission’s reasoning – that avoided cost payments include compensation for RECs, inconsistent with PURPA. Still, FERC did not initiate an enforcement action against West Virginia as requested by the QFs, and instead ruled that the parties could bring an action in federal court.

Two factors militate against a FERC enforcement action, in my view. For starters, the parties sought review of the West Virginia Commission’s decision in the West Virginia Supreme Court which must determine whether state law supports utility ownership of RECs where the contract is silent. FERC is unlikely to intercede in these matters without first giving the state an opportunity to sort out matters of state law. Second, if it turns out that state law unequivocally deems utilities owners of RECs where the contract is silent, then West Virginia Commission’s statement that avoided cost rates include QF payments amounts to little more than dicta and doesn’t warrant a full on enforcement action by FERC. Still, that FERC went the extra mile to issue an order essentially to correct a statement by the West Virginia Commission that may not even be material to the ultimate outcome shows commitment to ensuring that PURPA’s role is not compromised by inaccuracies.

PURPA Not State Law Defines Date of Firm Obligation to Purchase
Just as it did with a West Virginia Commission ruling, FERC took issue with a decision by the Idaho Commission in n Rainbow Ranch, finding that the Idaho Commission’s ruling that the utility was not legally obligated to purchase power from two QFs was inconsistent with PURPA.

The arises out of the Idaho Commission’s decision in February 2011 to reduce the size cap for QF rates from 10MW for wind and solar to 100kw, effective retroactively to December 14, 2010. Meanwhile, on December 10, 2010, Idaho Power and 2 QFs, Rainbow Ranch Wind and Rainbow West Wind submitted to the Idaho Commission two 20-year power purchase agreements for approval. In February 2011, the Idaho Commission rejected the contracts, finding that the projects exceeded the 100 kwh eligibility cap, and that the parties did not formally execute the contracts before the December 14, 2010 reductions in the cap size.

The aggrieved QFs asked FERC to initiate an enforcement action against Idaho Power for PURPS violations. The QFs argued that the Idaho Commission decision is inconsistent with FERC’s rules which hold that a utility’s legally enforceable obligation to purchase attaches when the parties filed the agreement even if it was not formally executed. Thus, FERC’s rules on the meaning of “legally enforceable obligation” under PURPA preempt the Idaho Commission’s contrary interpretation.

Again, FERC took no enforcement action here – albeit for different motivations than in Morgantown Associates. As I described, the West Virginia Commission’s ruling didn’t (in my view) violate PURPA; rather, a potentially immaterial statement by the West Virginia Commission was inconsistent with FERC’s PURPA precedent. By contrast, in Rainbow Associates, the Idaho Commission’s finding of no legally enforceable obligation to purchase is not only directly contrary to FERC precedent, but was also dispositive of the question of the QF’s eligibility for PURPA based rates. In addition, whereas state law governed the question of REC ownership in Morgantown, PURPA preempts state law on the question of whether a legally enforceable obligation has been created.

Even so, FERC declined enforcement action. Most likely, it’s because the Idaho Commission had already stated to take steps to comply with PURPA. FERC noted that since the issuance of the Cedar Creek decision, in which FERC resolved an identical issue, the Idaho Commission had gone back and reinstated many contracts. Given that the Idaho Commission was willing to abide FERC’s initial ruling, FERC have decided against enforcement in this matter to allow for a comparable amicable resolution.

So there’s my quick run down of the recent quad of QF actions and initiatives by FERC. If you have any questions, you can put them in the Q (queue, get it?) by dropping me an email at carolyn@carolynelefant.com.

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