California PUC Adopts New Standard-Offer Contract for Small PURPA Projects

Responding to the Ninth Circuit’s rejection of its program to implement the Public Utility Regulatory Policies Act of 1978 (PURPA) in Winding Creek Solar LLC v. Peterman, the California Public Utilities Commission on May 7 adopted a new program providing Standard Offer Contracts for “Qualifying Facilities” with a capacity of 20 megawatts (MW) or less. The new Standard Offer Contract provides for terms of up to 12 years with pricing set by reference to Locational Marginal Prices (LMP) in California. The new program creates a potentially attractive option for renewable project developers seeking to sell power in California. 

Background

Enacted as part of the Carter Administration’s response to the recurring energy crises of the 1970s, PURPA aimed to increase the production of power by small renewable generation and co-generation projects (termed “Qualifying Facilities” or “QFs”). PURPA’s most important feature in this regard is Section 210, referred to as the “must-take” provision, which imposes a mandatory purchase obligation on electric utilities, requiring them to purchase power from QFs at “avoided cost” rates. The Federal Energy Regulatory Commission’s (FERC) regulations implementing PURPA give QFs the option of selling power at an avoided cost rate fixed at the time the QF enters into a contract with the purchasing utility or else to sell power at prevailing market rates as the power is produced by the QF. Responsibility for implementing these regulations falls primarily on state utility regulators. 

California has a long and, at times, difficult history in implementing PURPA and using PURPA as a tool to build out its fleet of renewable generation. The Winding Creek litigation addresses the most recent iteration of California’s PURPA implementation, finding that California has not met its PURPA obligations. Specifically, Winding Creek challenged certain aspects of the California Public Utilities Commission’s (CPUC) Renewable Market Access Tariff (ReMAT), which set an initial price for renewable power based on an auction, then adjusted that price upward or downward in increments of $4 per megawatt-hour (MWh), depending on the results of periodic auctions. ReMAT also limited the amount purchased in each bi-monthly auction period to 5 MW and imposed an overall limit of 750 MW on acquisitions by California’s Investor-Owned Utilities (IOUs), with that limit further subdivided among the three IOUs and among different types of generation. 

In response to Winding Creek’s attacks on the ReMAT, California argued that it could offer an alternative path to PURPA compliance in the form of its “Standard Offer Contract,” which allows QFs with 20 MW or less of capacity to enter into CPUC-approved form contracts with the California IOUs. But the prices for Standard Offer Contracts were set based on a Short-Run Avoided Cost formula including several factors that vary from day to day based on short-run market conditions, including spot natural gas prices and LMP prices.

The Ninth Circuit rejected California’s position, concluding that PURPA’s must-take obligation “requires utilities to purchase all of the energy a QF provides.” Hence, the Court found, the quantitative caps on ReMAT clearly violate PURPA’s must-take requirement. Further, because the ReMAT price is “arbitrarily adjusted every two months,” it fails to satisfy PURPA’s requirement that QFs be paid avoided cost rates – that is, the rates that the utility would pay but for the purchase from the QF. 

The Ninth Circuit likewise concluded that the Standard Offer Contract violates PURPA. Because “PURPA mandates that QFs be given a choice between calculating the avoided cost rate at the time of contracting or at the time of delivery” and, because SRAC pricing “relies on variables that are unknown at the time of contracting,” there was no fixed-price option available to QFs.

The CPUC's Revision of the Standard Offer Contract

In response to the Ninth Circuit’s decision, the CPUC suspended the ReMAT program and opened a proceeding to revise its Standard Offer Contract. Last week’s order is the result. The major features of the new Standard Offer Contract are:

• Project Capacity: The Standard Offer Contract is available to QFs with a capacity of 20 MW or less. For larger QFs, individual contracts will have to be negotiated with the purchasing utility, although the Standard Offer Contract is likely to influence these negotiations.
• 12-Year Term: Although the utilities and some other parties argued for much shorter contract lengths and others argued for terms of 20 years or more, the CPUC concluded that new projects should have terms of 12 years and existing projects should have 7-year contracts, with shorter terms at the seller’s option. The CPUC reasoned that contracts of this length are necessary for these projects to obtain financing.
• Fixed-Price Contracts: To meet PURPA’s requirement, and the Ninth Circuit’s mandate based on that requirement, that QFs have the option for a contract with a price fixed at the time of contract execution, the CPUC concluded that the avoided cost prices for fixed contracts should be calculated based on a five-year historical average of energy prices at the LMP node relevant to the QF, with capacity prices calculated based on a five-year average of historical resource adequacy prices paid by California utilities, with a 2.5% annual escalation. 
• As Available Contracts: For QFs opting for prices set at the time of energy delivery, rather than at the time of contracting, avoided-cost energy prices will be set by reference to day-ahead prices at the relevant LMP node, while avoided-cost capacity prices will be set by the same method as for fixed-price contracts, except that the price will be adjusted annually based on the most-recently reported resource adequacy prices.

Not the Last Word

FERC has launched a rulemaking that could fundamentally alter the rules California and other states must follow in implementing PURPA. Hence, it is possible that the Standard Offer Contract could again be revised in response to the final rule adopted by FERC, which is expected later this year. If, for example, FERC allows states greater discretion to use short-term market prices, such as the day-ahead LMP, to establish avoided cost prices for long-term PURPA contracts, the CPUC might revise the Standard Offer Contract. In fact, the CPUC order explicitly recognizes this as a possibility. In addition, it is possible that one or more parties may challenge the CPUC order in court. Finally, there has been considerable ferment in Congress for changes to PURPA.

While the new Standard Offer Contract may not endure, it should be given serious consideration by any project developer seeking access to the California markets as long as it lasts.

Beveridge & Diamond's Renewable Energy industry group supports and enables successful and sustainable renewable energy projects, helping clients overcome a number of environmental regulatory and transactional hurdles. We help developers, energy companies, manufacturers, and other participants with issues such as construction and land use impacts, endangered species, stormwater management, hazardous materials, and waste. For more information, please contact the author.