FERC Adopts Final Rule on PURPA Reform Putting Long-Term Renewable Energy Contracts at Risk

On July 16, 2020, the Federal Energy Regulatory Commission (FERC) adopted Order No. 872, its Final Rule comprehensively rewriting its regulations for implementing the Public Utility Regulatory Policies Act of 1978 (PURPA). The Rule adopts, with some significant modifications, FERC’s initial proposal, set forth in Notice of Proposed Rulemaking (NOPR), issued on September 19, 2019. We previously described the NOPR in detail, including the background and history of PURPA. If implemented by the states, the Final Rule will fundamentally alter the landscape for Qualifying Facilities (QFs) – small renewable energy projects and cogeneration facilities – and could greatly complicate the process of obtaining long-term contracts that can support the financing of QFs.

Key Takeaways

Key changes to FERC’s existing implementation regulations adopted in the Final Rule include:

• Variable Avoided-Cost Energy Rates: While requiring PURPA contracts to contain a fixed avoided-cost rate for the capacity avoided by the purchase of output from a QF, the Final Rule permits states to require variable energy rates. This aspect of the proposal has proved highly controversial, with renewable energy advocates contending that variable energy rates will imperil financing of PURPA projects because the revenues produced by a project cannot be predicted, and financiers therefore cannot be assured of repayment.

• Use of LMP and EIM: The Final Rule also permits states to use Locational Marginal Prices and prices reported in the Western Energy Imbalance Market as referents for avoided-cost energy prices, creating a rebuttable presumption that these prices represent utility avoided costs for energy. These prices are for short-term energy deliveries and can vary greatly over short periods with changes in system conditions such transmission availability, unit outages, and transitory transmission system constraints, as well as ordinary supply and demand factors, leading to fear among renewable energy advocates that pricing volatility will undermine project financing.

• Use of Market Hubs and Natural Gas Pricing: FERC has long permitted reported electricity market prices and natural gas prices, which are closely related to electricity prices in regions relying heavily on gas-fired turbines for their marginal energy supply, to be used as proxies for utility avoided costs. The Final Rule permits states to use short-term prices from liquid market hubs as a measure of avoided costs for the variable energy component of PURPA contracts.

• Use of Competitive Solicitations: The Final Rule also permits the results of competitive solicitation processes to be used as a measure of utility avoided costs, although the order imposes a number of restrictions on use of competitive solicitations intended to ensure that such processes are fair and do not unduly favor incumbent utilities.

• Section 210(m) Limit Lowered to 5 MW: Section 210(m) was added to PURPA in 2005 and permits utilities to avoid PURPA’s mandatory purchase obligation if QFs have access to “organized” markets administered by Independent System Operators or Regional Transmission Organizations, or to markets of similar competitive quality. FERC’s initial regulations implementing Section 210(m) concluded that QFs with a capacity of 20 MW or less were presumed not to have equal access to these markets because their small size prevented them from negotiating on a level playing field. The 2019 NOPR proposed to reduce this threshold to 1 MW. The Final Rule adopts a 5 MW threshold.

• Legally Enforceable Obligation: The Final Rule clarifies, and imposes some important limitations on, what may be considered a “Legally Enforceable Obligation” (LEO) triggering PURPA’s must-purchase obligation. The Final Rule makes clear that, while states have considerable latitude in determining what constitutes a LEO, they may not use criteria that are in the control of the utility. For example, the Final Rule makes clear that, while a QF may be required to file an interconnection application in order to secure a LEO, it cannot be required to have a completed interconnection agreement or a completed interconnection study, since both of these are in the control of incumbent utilities and could be unreasonably delayed.

• Changes to One-Mile Rule: The Final Rule retains the NOPR’s proposal to amend the “one-mile rule,” which holds that any generating facilities with affiliated owners within one mile of each other are considered to be a single project for purposes of calculating whether the facility exceeds the 80 MW statutory limit for becoming a QF. The Final Rule includes a rebuttable presumption that QFs owned by affiliates that are between one and ten miles apart are separate projects, but permits interested parties to challenge that status in an expedited proceeding at the time the QF submits its certification of its QF status. The Rule also includes several important clarifications concerning the definitions used in this determination, such as “generator,” and the manner in which the distance between two generators is calculated.

• Reduced Barriers to Challenging QF Status: The Final Rule also eliminates the requirement that an entity challenging a QF’s certification pay the large filing fee required to seek a declaratory order from FERC.

Next Steps

Although the procedural requirements to challenge a FERC order adopting implementation regulations under PURPA are not entirely clear, the likely next step will be to file Petitions for Rehearing of the Final Rule, which are due on August 17, 2020. Given the controversial nature of the Final Rule, it is likely that significant litigation will follow in the U.S. Courts of Appeal, and it is also possible that litigation will be brought in the U.S. District Courts. The level of controversy engendered by the Final Rule is suggested by the statement issued by FERC Commissioner Richard Glick, who dissented from the main aspects of the Final Rule, asserting that the Final Rule will “administratively gut” PURPA.

In addition, because the Final Rule sets forth the “rules of the road” for implementation of PURPA, but rules actually carrying out PURPA on the ground must be adopted by state utility commissions and the governing boards of publicly-owned utilities, the Final Rule is likely to presage significant controversy at the state level over whether the added discretion created by the Final Rule should be exercised by state regulators.

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