Electricity Markets

Association, LPPC support FERC plans to reform PURPA

The development of competitive power markets and the dramatic growth of a renewable power sector now largely independent of the boost once provided by the Public Utility Regulatory Policies Act of 1978 (PURPA) justify significant changes in PURPA regulations, the American Public Power Association and the Large Public Power Council (LPPC) recently said in comments filed with the Federal Energy Regulatory Commission.

In their Dec. 3 comments submitted in response to a Notice of Proposed Rulemaking (NOPR) issued by FERC in September, the Association and LPPC also weigh in on specific proposals made by the Commission in the NOPR (Docket Nos. RM19-15-000, AD16-16-000).

Among other provisions, PURPA requires electric utilities (including public power utilities) to purchase power from certain cogeneration facilities and small power producers that are “qualifying facilities” or “QFs” under the statute.  The rates for these purchases are not supposed to exceed the cost that the utility would have incurred for the power if it generated it itself or obtained the power from another source – what FERC refers to as “avoided cost.”  State commissions generally have authority to determine these avoided costs, although public power utilities and electric cooperatives that do not have state-regulated rates (what PURPA calls “nonregulated electric utilities”) can usually set their own avoided cost rates for QF purchases.

The NOPR proposed to revise the Commission’s regulations implementing sections 201 and 210 of PURPA and incorporates the record of a FERC 2016 technical conference addressing issues involving PURPA’s implementation.

Association, LPPC comments

In their comments, the Association and LPPC said that they agree with FERC “that the transformation of the electric industry in the 40 years since promulgation of the PURPA regulations in 1980 justifies significant changes in the regulations.”

The trade groups said that an electric market dominated in 1978 by vertically integrated utilities and negligible renewable generation has been transformed substantially.

They noted that growth in the non-utility generating sector has been dramatic since 2005, with total nation-wide figures escalating from 51.7 TWh in 2005 to 340 TWh in 2018, spread across regional transmission organization and non-RTO regions.

The Association and LPPC said that with respect to renewable energy development, Energy Information Administration data show that in 2019, fully 65% of additional generating capacity will come from renewable resources, while 22% of installed capacity as of July 2019 comprised renewable resources (including hydroelectric capacity).

“While PURPA at its inception was certainly a substantial driver for the development of the Independent Power Producer (IPP) sector, its relevance in recent years has waned, with only 10-20% of all currently operating renewable resources classified as QFs,” the groups told FERC.

They pointed out that a 2018 EIA analysis reported that between 2008 and 2017, more than 103 gigawatts (GW) of renewable generating capacity entered service in the United States, of which only 14 GW was certified to have QF small power producer status under PURPA.

“This shift in factors driving renewable development is substantially attributable, as the NOPR recognizes, to state-mandated RPSs, along with other financial incentives and measures pressing for greenhouse gas reductions,” the Association and LPPC said.

These mandates have been supplemented by regional initiatives such as the Regional Greenhouse Gas Initiative and California’s Greenhouse Gas Initiative and as FERC notes, 29 states have mandatory RPS programs.

FERC is also correct in pointing out that an abundance of relatively inexpensive natural gas resources distinguishes the current environment from the one facing the Commission in 1980, the Association and LPPC said.

“The energy picture that animated the passage of PURPA in 1978 included gasoline and natural gas shortages leading Congress to conclude that alternative technologies were a critical factor in enabling the nation to meet its energy needs.  The shale revolution in the natural gas production industry very evidently alters that picture, again calling for a fresh view of the 1980 regulations.”

A dramatic drop in the cost of renewables and RTO/ISO expansion

This changing landscape also includes a dramatic drop in the cost of renewable generation, the groups went on to say.

“Recent reports indicate that over the past decade, the levelized cost of electricity on a megawatt-hour basis for onshore wind and photovoltaic solar has fallen, respectively, by 49 percent and 84 percent. These price drops substantially buttress the market position of renewable generation, and weaken the rationale for the current breadth of the purchase mandate,” the groups said in their comments.

(A recent report from Concentric Energy Advisors compared contract rates for solar and wind generation set pursuant to PURPA to contract rates set in the competitive market. The analysis examined a sample of contracts executed between utilities and solar and wind generation facilities that qualify QFs under PURPA).

Moreover, the development and expansion of RTOs and independent system operators throughout much of the country, closely following the implementation of the open access framework under FERC Order No. 888, created competitive alternatives for the sale of QF power, the Association and LPPC said. “PURPA section 210(m) was crafted expressly to respond to these developments, though the Commission’s current regulations do not do so to the full extent permitted by the statute.”

The Association and LPPC pointed to language in PURPA and Supreme Court precedent supporting FERC’s authority to revise its PURPA regulations in response to changing market conditions, and they argued that significant industry changes justified FERC’s proposal to “rebalance” its PURPA rules for the modern energy landscape.

Association, LPPC weigh in on specific NOPR proposals

Turning to specific proposals laid out by FERC in the NOPR, LPPC and the Association said that they welcome the suite of proposed changes that would make clear that state regulatory authorities and nonregulated electric utilities are not limited to administratively determined avoided costs and may rely on market forces in pricing utility purchases from QFs. 

“To a substantial degree, the proposed changes have been presaged by Commission precedent over the past several years, with the widespread development of market alternatives for the purchase and sale of energy,” they told FERC.

The Association and LPPC said that FERC should make clear that, while the NOPR provides greater clarity as to ability of state regulatory authorities and nonregulated electric utilities to rely on competitively set prices as a measure of avoided cost rates, nothing in the proposed rule is intended to call into question their existing implementation of PURPA’s avoided cost requirements.

The groups said they also support FERC’s proposal that would specify that state regulatory authorities and nonregulated electric utilities have the flexibility to set QF energy rates for sales to electric utilities located outside RTO/ISO markets based on “Competitive Prices,” including prices set at a liquid market hub or  based on a proxy combined cycle generating unit.

LPPC and the Association said that where market alternatives are available to the purchasing utility, logic strongly suggests that they will meet the statutory definition of avoided cost – i.e., the incremental cost to the electric utility of alternative electric energy.

The trade groups also supported FERC’s proposal to allow state regulatory authorities and nonregulated electric utilities to limit a QF’s option to fix the energy rate for the entire length of its contract, and instead allow the states and nonregulated electric utilities to require QF energy rates to vary during the term of the contract.

Treatment of All-Requirements Customers  

The Association and LPPC said that in any final rule implementing the proposed revisions to the Commission’s regulations relating to avoided costs, the Commission should ensure clarity on a point of particular relevance to public power utilities. 

“Specifically, the Commission should confirm that an all-requirements customer may use the avoided cost methods adopted in the final rule when calculating the avoided costs of its all-requirements supplier to determine its avoided cost rates, consistent with longstanding Commission precedent,” they said. While the Association and LPPC said that they assume that this is the Commission’s intent, confirmation of this point would help avoid ambiguity.

Other proposed changes to FERC’s regulations

The Association and LPPC also supported other changes proposed by FERC in the NOPR, including the Commission’s proposal to modify the so-called “one-mile rule” that FERC has applied to determine whether a facility meets PURPA’s 80 megawatt size limit for small power production facilities. 

The trade groups also endorsed FERC’s proposal to reduce the size at which QFs in RTO regions are presumed to have non-discriminatory market access from 20 MW to 1 MW.  Where QFs in RTOs have nondiscriminatory market access, electric utilities may seek relief from PURPA’s must purchase obligation as to those QFs under PURPA section 210(m).  The Association and LPPC likewise supported FERC’s inquiry into factors relevant to determining when a market is of comparable competitive quality to RTO-type markets such that an electric utility could seek relief from the must-purchase obligation under section 210(m) in non-RTO regions.

Finally, the Association and LPPC supported FERC’s proposal to clarify when a QF is entitled to a contract or legally enforceable obligation under PURPA, and also endorsed changes to the FERC regulations to allow challenges to QF self-certifications or self-recertifications without the requirement to file a petition for declaratory order at FERC.

LPPC represents 27 of the largest state and municipally-owned utilities in the nation. LPPC’s members are located throughout the nation, both within and outside the boundaries of regional transmission organizations and independent system operators.