By Robert Mullin

In a major setback for developers of small power projects, FERC on Thursday launched a rulemaking to overhaul its regulations under the Public Utility Regulatory Policies Act, the 1978 federal law enacted to spur competition in the U.S. electricity sector (RM19-15, AD16-16).

Thursday’s Notice of Proposed Rulemaking signals the commission is aiming for top-to-bottom changes to PURPA, including elimination of a fundamental principle of the rules: fixed-price contracts for qualifying facilities (QFs).

In seeking the changes, FERC is responding to longstanding complaints about PURPA by utilities and the state commissions that regulate them. But the commission has also roused the objections of PURPA supporters and its lone Democratic member, Commissioner Richard Glick, who in a partial dissent said the NOPR would “effectively gut” the regulations.

In a statement accompanying the NOPR, FERC called the effort its “first comprehensive review” of the regulations since they were implemented 39 years ago.

“It’s clearly time for FERC to revisit its PURPA policies,” Chairman Neil Chatterjee said. “Congress told us to review our policies from time to time to ensure that our regulations continue both to protect consumers and to encourage the development of QFs. That is precisely what we are doing here.”

But in his dissent, Glick said the NOPR suggested that FERC “no longer believes that PURPA is necessary” and warned that it is encroaching on Congress’ authority.

“Whether PURPA’s goals remain relevant is a decision for Congress, not an administrative agency. The commission should not be seizing the reins from Congress in order to isolate an important debate about national energy policy within an independent regulatory agency,” Glick said.

Avoiding Avoided Cost

Chatterjee’s words of assurance about QFs notwithstanding, QF developers appear to have much to lose from the outcome of the NOPR. The proposal closely aligns with a set of PURPA recommendations that the National Association of Regulatory Utility Commissioners floated nearly two years ago after complaining about the time and expense of administering PURPA projects. Many commissions have long sought to rein in the volume of PURPA projects, particularly in Western states. (See NARUC Calls for PURPA Reforms, Outlines Proposed Changes.)

Reflecting one of NARUC’s key priorities, the NOPR zeroes in on what is sacred ground for QF developers: PURPA’s requirement that utilities contract with small projects at a fixed “avoided cost” rate — or the incremental cost a utility would have to pay to generate power itself.

QF developers say that requirement is vital to their financial viability, ensuring they receive ample and predictable compensation for their output over a contract period. But utilities and regulators complain that the avoided-cost calculations currently used to set contracts increasingly exceed the steadily declining costs of power available in open markets, unjustly adding to the bills of ratepayers.

While the NOPR wouldn’t erase PURPA’s avoided-cost provision, it would upend the current rules by eliminating the notion of fixed-cost contracts. FERC says it would provide “flexibility to state regulatory authorities so they can accommodate recent wholesale power market developments.” That flexibility would extend to granting states the ability to:

• Require that energy rates — but not capacity rates — in QF power sales contracts vary according to changes in the purchasing utility’s avoided costs at the time the energy is delivered.
• Allow QFs to retain their rights to fixed energy rates, but to base them on projections of what energy prices will be at the time of delivery during the term of a QF’s contract.
• Set energy and capacity rates based on competitive solicitations conducted in a transparent and nondiscriminatory manner.

The NOPR also proposes to allow state regulators to use LMPs to set the “as available” QF energy rates for resources selling into RTOs/ISOs — or to use competitive prices from liquid hubs to set those rates in areas without organized markets.

In his dissent, Glick expressed concern that elimination of fixed-price contracts “will make it more difficult — or in some cases impossible — for QFs to obtain financing. The option to enter a contract with a fixed or known price has played in essential role in encouraging QF development.”

Glick also contended that the contracts “have played an important role in ensuring that QFs receive nondiscriminatory rates, especially in areas of the country with vertically integrated utilities that are guaranteed to recover the costs of their prudently incurred investments through retail rates. Neither the record nor the rationale in this NOPR addresses these concerns in a manner that is even remotely convincing.”

The NOPR takes up yet another NARUC recommendation in proposing to modify PURPA’s “1-mile rule,” which is used to determine whether affiliated QFs located proximate to each other should be considered part of a single larger facility. Regulators in the interior West have complained that large developers have “gamed” the rule by parceling large projects in such a way that they unjustly earn PURPA treatment. (See PURPA Critics Call for Reforms.)

While the commission proposes to maintain the “irrebuttable” presumption that facilities 1 mile apart or less constitute a single facility, it calls for giving states the latitude to determine that facilities located more than 1 mile apart, but less than 10 miles apart, could comprise a single facility. Facilities 10 miles apart or more would still benefit from the irrebuttable presumption that they are separate facilities.

The NOPR additionally proposes to eliminate the “rebuttable” presumption that QFs with a net capacity at or below 20 MW don’t have nondiscriminatory access to certain markets, replacing that threshold with 1 MW. One exception: The threshold for cogeneration facilities would remain at 20 MW.

FERC is also seeking to require states to establish objective and reasonable criteria to determine a QF’s commercial viability and financial commitment to construction before it is entitled to a contract or legally enforceable obligation. It would also allow an entity to protest a QF self-certification or self-recertification without having to file and pay for a declaratory order.

‘Meaningful Evolution’

FERC’s newest member, Commissioner Bernard McNamee, issued his own statement in support of the NOPR.

“The changes the commission is proposing through this Notice of Proposed Rulemaking are designed to protect consumers while also encouraging the development of alternative generation and cogeneration facilities,” McNamee said. “To achieve these ends, the proposed rules will provide state utility regulators more flexibility to rely on market pricing when determining the rates utilities pay to qualifying facilities under PURPA, provide more transparency to interested stakeholders, and extend the benefits of competition to a greater number of consumers.”

Support came from other corners of the power sector as well.

“We applaud FERC Chairman Chatterjee for his leadership and for prioritizing PURPA reform,” Edison Electric Institute President Tom Kuhn said. “By initiating this important NOPR, Chairman Chatterjee has reaffirmed that there are concrete steps FERC can take to better protect electricity customers from unnecessary energy costs and drive additional investments in renewable energy, all while meeting the commission’s responsibilities under the act.”

American Public Power Association CEO Sue Kelly said the electricity sector has undergone a “meaningful evolution” in its resource mix since PURPA’s enactment. “We applaud FERC for recognizing the need to ensure that PURPA’s implementation is aligned with today’s energy landscape,” she said.

“Today’s vote was a much-needed first step in the process of modernizing PURPA,” National Rural Electric Cooperative Association CEO Jim Matheson said. “FERC’s rules implementing PURPA today promote the uneven, unplanned and uneconomic development of facilities and provide subsidies that promote these facilities at the expense of our members, system reliability and other more affordable resources.”

The Electricity Consumers Resource Council (ELCON) was more measured in its endorsement of the NOPR, saying that it supports “thoughtful reform” of the 1-mile rule and “improving avoided cost estimates,” while applauding FERC for recognizing that cogeneration facilities are “unique” among QFs. But the group also emphasized that PURPA still plays an “essential” role in encouraging competition.

“The majority of states remain under cost-of-service regulation, where industrial self-supply and competitive power generation face uncompetitive conditions both within and outside of organized wholesale electricity markets,” ELCON CEO Devin Hartman said. “It is imperative that FERC proceed in a manner that enhances competition and reduces barriers to self-supply in regulated states, whereas loosening PURPA implementation would run counter to FERC’s stated intent of protecting consumers and preserving competition.”

Renewable advocates expressed disappointment in Thursday’s development.

“Rather than focusing on PURPA’s goal of ensuring competition, this proposed rule will have the effect of dampening competition and allowing utilities to strengthen their monopoly status,” said Katherine Gensler, vice president of regulatory affairs for the Solar Energy Industries Association. “The proposed rule is a move away from competition, and we hope FERC rethinks the most harmful portions of this proposal. We will continue to push for PURPA reforms that increase competition, transparency and enforcement.”

Comments on the NOPR will be due 60 days after its publication in the Federal Register.