By Rich Heidorn Jr.

A House energy panel last week heard two alternate realities on the need for reforming the 1978 Public Utility Regulatory Policies Act (PURPA).

The solar energy industry told members of the House Energy and Commerce Committee on Sept. 6 that the law remains as important as ever, despite federal subsidies, competitive markets and falling PV prices. Utility witnesses, who contended the bill is obsolete and an albatross for consumers, cited abuses of FERC’s 1-mile and 20-MW thresholds for must-purchase requirements.

Rep. Fred Upton (R-Mich.) said the hearing would be “the first step in re-evaluating whether the intent and purpose of PURPA is still being met or if it has already been fulfilled.”

For PURPA critics who were hoping for quick legislative action following the hearing, Clearview Energy Partners analyst Timothy Fox had bad news. He reduced Clearview’s odds that Congress will enact changes to the law in 2017 from less than 30% to less than 10%.

“Yesterday’s hearing reinforced for us the lack of consensus on, and narrow congressional interest in, PURPA reform,” he wrote in an analysts’ note. “We consider its best prospects for enactment to be in the context of a broad energy or energy and infrastructure package that we don’t expect to see action on until 2018. In the meantime, we do not anticipate that the Federal Energy Regulatory Commission (FERC) will change its current light-handed approach to PURPA issues, allowing states to continue their efforts to modify their administration of the program.”

Sen. Lisa Murkowski (R-Alaska), chair of the Senate Energy and Natural Resources Committee, also cautioned against expectations of quick action. Following the confirmation hearing for FERC nominees Richard Glick and Kevin McIntyre on Thursday, Murkowski told reporters that PURPA reform is too complicated to be dealt with as an amendment to the broad energy bill she and ranking member Maria Cantwell (D-Wash.) are sponsoring. She added that FERC has leeway to address some of the concerns over the act.

New FERC Commissioners Neil Chatterjee and Robert Powelson said at their confirmation hearing in May that it was up to Congress to authorize any major changes in PURPA. (See No Fireworks for FERC Nominees at Senate Hearing.) PURPA was barely discussed at Glick and McIntyre’s hearing. (See related story, McIntyre to Senate: ‘FERC does not Pick Fuels’.)

Abuses Cited

The hearing by the Subcommittee on Energy was the committee’s fourth in its “Powering America” series of fact-finding sessions that began last year on potential revisions to the 1935 Federal Power Act. (See RTOs to Congress: Don’t Lose Faith in Markets.)

Several witnesses said PURPA, born out of the 1973 energy crisis, is no longer necessary in an era of bountiful natural gas supplies, low load growth and competitive wholesale energy markets.

The utilities invited to testify came with wind and solar generation bona fides to make the case that renewables have accomplished the competitiveness PURPA was intended to create.

Terry Kouba, vice president of operations for Alliant Energy in Iowa, said his company has more than 1,000 MW of wind capacity from its generation and power purchase agreements and plans to spend $1.8 billion to add another gigawatt of wind by 2020. “Despite the market-driven deployment of renewable energy in Iowa, Alliant Energy is still subject to PURPA’s mandatory purchase obligation, the federal implementation of which has increased electric costs for our Iowa customers,” he said. “The law, therefore, can result in the deployment of less economic renewable generation in lieu of more cost-effective renewable generation procured in an open market.”

Also testifying was Frank Prager, vice president of policy and federal affairs for Xcel Energy, the top wind generator in the U.S. with almost 6,700 MW operating and 3,400 MW under development. “Fully 65% of these existing and planned resources are owned by independent power producers,” said Prager. “We are also a leading solar provider and expect to add 900 MW of solar to our already growing solar portfolio.

“PURPA represents an energy policy from another time and is inconsistent with the realities of today,” Prager said. “PURPA incentivizes developers to build generation that is not needed and site it in locations where it provides no value to the grid. PURPA thwarts the opportunities of other independent power producers.”

Gaming FERC Thresholds

FERC has ruled that wind farms of 20 MW or larger within ISO/RTO regions are presumed to have access to competitive markets and thus ineligible to force PURPA’s must-purchase obligation on incumbent utilities. (See related story, EKPC Gets PURPA Exemption; Still on Hook for 2 QFs.)

But witnesses said qualifying facility (QF) developers are circumventing the 20-MW cap by creating separate corporate entities for individual turbines or small groups of turbines, or disaggregating large projects by siting turbines more than 1 mile apart. FERC has ruled that QFs located within 1 mile of each other are considered to be “located at the same site.”

Kouba cited a 30-MW wind farm in central Iowa that was broken into 10 separate limited liability companies each owning a 3-MW turbine; a 28-MW wind farm with 14 LLCs; and a proposed 24-MW farm operated by 11 LLCs. “In none of the above examples is Alliant Energy able to challenge the presumption that these QFs are separate because of the safe harbor provided by FERC’s 1-mile rule, which is irrebuttable,” said Kouba.

He said that the 30-MW project is charging customers a 20% premium over market rates on a 10-year contract, while the developer of the proposed 24-MW project is seeking a rate of $49.50/MWh for 25 years rather than Alliant’s avoided cost rate of about $25/MWh. “If they are successful, Alliant Energy’s customers will pay more than $45 million more for energy than if Alliant Energy were to enter into a PPA obtained through a competitive process,” he said.

Prager said Congress’ addition of Section 210(m) to the FPA in the Energy Policy Act of 2005, which allows utilities in RTO markets to obtain an exemption from PURPA if the QF has nondiscriminatory access to the market, has been “helpful” but “inadequate” to address gaming.

“It does not apply to states in the West or South or other states that have not joined organized markets. Further, even in organized markets, FERC’s 20-MW safe harbor still allows relatively large resources to avoid the discipline of the market and put their energy to the utility.”

Impact on System Planning

In addition to imposing high-cost PPAs, critics say, QF developers also undermine system planning by connecting their generation at locations providing quick, cheap access, regardless of their impact on the grid. “The size and scale of these new PURPA projects often virtually guarantees the backflow of energy from the distribution system to the transmission system,” Kouba said.

Prager cited a QF developer planning 480 MW of wind and solar power in a remote area of Colorado. “All of the transmission capability in that area is already fully subscribed by five solar facilities that are already under contract. This developer’s QF projects could cause our customers to pay potentially hundreds of millions of dollars in transmission upgrades to deliver the QF’s energy and cause us to curtail the output from the five existing solar facilities already in this area.”

Utilities’ Recommendations

The utilities called for repealing PURPA Section 210’s must-purchase requirement, or expanding the exemptions from the requirement to non-RTO states with least-cost resource planning or competitive solicitation processes or where the utility does not need additional generation.

They also called for removing the 20-MW safe harbor or reducing it to 2 MW in organized markets. They said unsolicited QFs should be required to pay for transmission upgrades necessary to deliver their output.

And they said FERC should make it easier for utilities to challenge abuses of the 20-MW and 1-mile thresholds.

Idaho Public Utilities Commissioner Kristine Raper also was critical, saying PURPA contracts should be shorter to ensure avoided cost rates reflect changing energy prices and that FERC’s 20-MW threshold should be expanded to include the Western Energy Imbalance Market (EIM).

She also questioned the value of QFs. “Even with the addition of large QF resources, the QF energy rarely displaces the need for a utility-scale project because renewable QF energy is largely intermittent — requiring baseload resources to ensure reliable service,” she said. “So, the question must be asked: What costs are being avoided and how are ratepayers held harmless?”

She rejected developers’ demand that PURPA support financing of QF projects. “Neither PURPA nor FERC regulations mandate that the terms of a QF contract allow the project to be financeable,” she said. “If the market cannot support the cost of the project, then the project should not be built.”

Industrials: We’re Different

Testifying for the Industrial Energy Consumers of America, Stephen Thomas, senior manager of energy contracts for paper manufacturer Domtar, called on policymakers to “recognize the differences between the types of qualifying facilities and only alter PURPA in a way that supports how the manufacturing industry uses PURPA.”

Thomas said that even manufacturers with on-site power are net energy purchasers and thus worry about above-market avoided-cost contracts.

IECA said states should deduct the cost of natural gas back-up generation, transmission and other costs caused by renewable generators in developing QFs’ avoided-cost rates. It also said renewable energy QFs should not be allowed to include production tax credits or the value of renewable energy credits into their price-based energy bids because it creates unfair competition for unsubsidized generation.

Waste-to-Energy Concerns

The committee heard a very different story from Darwin Baas, director of public works for Kent County, Mich., who said utilities are violating PURPA to the detriment of waste-to-energy (WTE) facilities like the one run by his county.

There are 76 WTE plants with capacity of 2,547 MW nationwide. But Baas said only one new greenfield plant has opened in the last 20 years because utilities refuse to sign PPAs with QFs or to offer pricing and contract lengths WTE facilities need.

“PURPA’s purpose (and the FERC’s corresponding oversight authority) to ensure that small QFs continue to have access and fair compensation are as necessary today as when PURPA was first implemented,” Baas said. “The commission’s policies implementing PURPA should strive to increase the ability of small QFs to provide baseload renewable power to energy markets.”

Baas said his county’s utility is attempting to reduce its PURPA contract price by 24%. “This will not allow me the revenue necessary to make routine capital refurbishments, forcing me to seriously consider premature closing,” he said.

“Avoided costs paid to WTE QFs by utilities should incorporate short-run and long-run avoided costs for capacity and energy and include the value of other environmental and operational externalities such as the value of baseload renewable energy, diversity of generation mix, proximity to load centers for voltage and VAR support, [greenhouse gas] mitigation, landfill diversion, [and] reliable and resilient power.”

Baas said the 20-MW threshold should be raised to 80 MW for WTE QFs.

Solar Industry Weighs in

Attorney Todd G. Glass of Wilson Sonsini Goodrich & Rosati, who testified for the Solar Energy Industries Association, said PURPA remains “fundamental to the ability of independent power, including the solar industry, to compete.”

“Even under workable competition, some of PURPA’s goals may be lost if left solely to the marketplace,” he said. “As they seek to compete, independent developers are facing a return of the same tactics by the utilities and the state commissions as they experienced almost 40 years ago when the idea of independent generation was presented as a potential competitive solution to utility dominance.”

He said some utilities refuse to negotiate with IPPs and instead require them to participate in solicitations that occur infrequently and whose terms may be drafted to disadvantage the utility’s competitors. Utilities also can engage in discriminatory practices where they control the interconnection process, he said.

Glass disputed opponents’ claims that PURPA forced utilities to purchase overpriced energy, saying it is a misconception that arose “before current technological innovations and efficiencies of scale drove down solar power prices.”

He said PURPA remains essential to financing renewable projects. “Just as utilities can benefit from a 20-year depreciation schedule to finance the construction of their owned power plants, independent producers rely on the capital markets to provide long-term capital to support construction and development of generation projects. The PURPA backstop supports financing for almost every one of these projects, even projects that do not have a sales arrangement under the PURPA construct.”