Electricity Markets

NARUC calls for reforms to expand PURPA exemptions

The National Association of Regulatory Utility Commissioners has issued a report proposing that the Federal Energy Regulatory Commission reform its implementation of the Public Utility Regulatory Policies Act of 1978.

FERC should identity competitive practices in non-regional transmission organization areas, which states and utilities may voluntarily meet in order to obtain an exemption from PURPA’s mandatory purchase obligation, the white paper argues.

The report, "Aligning PURPA with the Modern Energy Landscape—A Proposal to FERC," was written by Montana Commissioner Travis Kavulla and Jennifer Murphy, senior counsel and director of energy policy at NARUC.

 The report’s authors noted that Congress enacted PURPA in 1978 in response to a national energy crisis. In order to fulfill its goals to improve the wholesale distribution of electric energy and the reliability of electric service, Congress promoted the development of renewable energy and cogeneration technologies as competitive alternatives to oil and other scarce sources of fuel.

PURPA required electric utilities to purchase power produced by qualifying facilities (QFs) that used renewable energy and cogeneration technologies, a requirement referred to as the mandatory purchase obligation.

Congress directed that the rates for such purchases be “just and reasonable to the electric consumers of the electric utility and in the public interest, and

not discriminate against qualifying cogenerators or qualifying small power producers.”  PURPA also provides that a utility’s rate for purchases from a QF may not exceed the incremental cost to the utility of alternative electric energy – what FERC’s regulations call “avoided cost.”

Energy Policy Act of 2005

In 2005, Congress amended PURPA through the EPAct ’05 to account for the development of wholesale electricity markets. Congress added Section 210(m) to PURPA, which allowed FERC to terminate the must purchase obligation if the Commission determined that a QF has nondiscriminatory access to one of three types of markets.

In response to EPAct ’05, FERC in 2006 finalized a rulemaking (Order No. 688) modifying the mandatory power purchase obligation for electric utilities under PURPA. The Commission determined that the Midwest Independent Transmission System Operator, PJM Interconnection, ISO-New England and the New York Independent System Operator provide wholesale markets which meet the statutory criteria for member utilities to qualify for relief from the mandatory purchase obligation.

FERC also established a rebuttable presumption that QFs above 20 MW net capacity have non-discriminatory access to these four markets and that electric utility members could be relieved of their mandatory purchase obligation in these markets. The Commission emphasized, however, that it was not terminating the purchase obligation of any utility with the final rule. Electric utilities must file applications for relief and QFs may be able to rebut the presumption of access to markets because of operational characteristics or transmission constraints.

 An altered energy development landscape

While much had changed since PURPA was originally enacted in the late 1970s until the passage of EPAct ’05, “the energy landscape has changed even more dramatically from 2005 to today,” the NARUC report said. “These dramatic changes necessitate reforms to modernize PURPA so that it aligns with the current realities of the energy sector.”

Throughout the U.S., not just in independent system operators and regional transmission organizations, “states have encouraged the growth of renewable energy through legislative enactments and state public utility commission decisions in the name of fuel diversity, lowering emissions, national security, and low-cost energy,” the white paper said.

As an example of the changed renewable energy landscape, the report notes that in the 1980s to the mid-1990s, PURPA projects made up the vast majority of renewable resource capacity, but from 1980 to 2000, the share of renewables that were QFs averaged 45%. Since 2000, the share of renewables that are QFs has declined to 18%. Seventy-nine percent of all renewables deployed since 1980 are not QFs, the report said, adding that wind and solar projects rely little on PURPA QF status.

In many situations, PURPA now works “at cross purposes with competition policy,” the authors said. As an example, the report noted that investor-owned PacifiCorp issued a solicitation for wind and solar resources that would add more than 1,100 MW of wind to its system, as well as repower 1,000 MW of existing wind farms. Since then, at least three developers have sought PURPA pricing for potential wind and solar projects that also competed in, but did not win, the most recent solicitation.

“PURPA is increasingly being used to attempt to sell energy production to places where customer load is flat, declining, or growing too modestly to absorb the production,” the report’s authors wrote. They noted that in Wyoming, QFs had requested pricing for 4,563 MW of supply, even though PacifiCorp’s integrated resource plan indicated “no need for any system resource until 2028.”

“QF developers have gamed the rules of PURPA to engage in a type of regulatory arbitrage that allows them to take advantage of PURPA price constructs, rather than engage in the routine procurement practices of utilities,” the report argues.

FERC urged to expand competitive practices

While noting the industry changes since PURPA was enacted in 1978, the NARUC white paper explains that FERC’s current implementation of section 210(m) still makes it difficult for utilities outside of RTO and ISO regions to obtain relief from the must purchase obligation. The paper urges FERC to revisit its regulations on this issue.

“FERC should identify competitive practices in non-RTO areas, which states and utilities may voluntarily meet in order to obtain an exemption from PURPA’s mandatory purchase obligation,” Kavulla said in a statement.

The white paper argues that FERC should determine that there are certain developments in the wholesale markets outside of RTOs that have provided QFs avenues to contract formation similar to those in RTOs/ISOs.

Under section 210(m), FERC can only relieve a utility of its mandatory QF purchase obligation if it finds that QFs in the region have non-discriminatory access to wholesale electric markets that meet certain criteria described in the statute. Generally speaking the criteria in the statute match up with the characteristics of organized RTO/ISO markets. Section 210(m)(1)(C) is broader, however, allowing FERC to lift the mandatory purchase obligation where a QF has non-discriminatory access to “wholesale markets for the sale of capacity and electric energy that are, at a minimum, of comparable competitive quality” as the RTO-type markets described in section 210(m).

Pointing to section 210(m)(1)(C) of PURPA, the NARUC white paper argues that FERC has the legal authority to declare  utilities in areas outside of RTOs/ISOs eligible to be relieved of the mandatory purchase obligation.

At the time EPAct ’05 was enacted, all seven of the RTOs/ISOs already existed. “By the broad language of Section 210 (m)(1)(C), Congress clearly meant to allow for other forms of wholesale markets to satisfy the requirements of the exemption, but instead of specifying what the characteristics would be, Congress left this to FERC to interpret. Congress gave FERC flexibility with subparagraph (C) to apply it to other areas, outside of the well-known RTO structures.”

The white paper said FERC should create a “yardstick” that signals to both the utilities and states what characteristics of a wholesale market would allow them to qualify under Sec. 210(m) (1)(C).

Competitive solicitations proposed

NARUC proposed that for long-term energy and capacity, this would mean that integrated resource plans (IRPs) or their equivalent identify additional energy and capacity needs and that to fill those needs competitive solicitations for energy and capacity would be conducted.

These competitive solicitations, or request for proposals (RFPs), would be open to all QFs and would be overseen by state commissions or administered independently of any individual market participant to mitigate anti-competitive behavior of the buyer. As it did for affiliate transactions, FERC could adopt advice or guidelines to ensure competitive solicitations are genuinely competitive.

For short-term energy and capacity, NARUC proposes that utilities could demonstrate that transactions routinely occur at one or more liquid trading hubs, and that load-serving entities engage in “off-system” transactions at these hubs.

The white paper is available here.