PURPA at 35: At a Crossroads?

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In March 2013, and for the first time in the 35-year history of the Public Utility Regulatory Policies Act of 1978 (PURPA), the Federal Energy Regulatory Commission (FERC) initiated an enforcement action in federal district court against a state public service commission for alleged violations of FERC’s PURPA regulations. Congress enacted PURPA to promote the development of certain cogeneration and non-fossil fuel–fired generation facilities. The legislation accordingly specified certain generation facilities that would “qualify” (the “QFs”) for the right to compel an electric utility to purchase any power made available by the QF at the utility’s “avoided cost” (the cost the utility would have incurred to obtain the power from alternative resources).

PURPA is a unique federal law in that it provides responsibilities and rights in both FERC and state commissions, with FERC to determine the facilities that qualify as a QF and state commissions to determine the purchasing utility’s avoided cost. As a result, there has always been potential for jurisdictional disputes. In the event of a dispute, however, PURPA provides FERC superior rights through its ability to initiate enforcement actions against state commissions.

This statutory scheme has worked well historically. States have generally restrained themselves from encroaching on FERC’s authority, and FERC has given states wide latitude in implementing avoided cost pricing protocols. Until now, the initiation of enforcement action was viewed as something akin to a “nuclear option” that FERC had not hitherto seen fit to exercise.

FERC v. Idaho Commission

The genesis of the March 2013 dispute lies in FERC’s regulations implementing PURPA, which offer each QF the option of providing energy to the utility on an “as available” basis—in which case the QF is paid the purchasing utility’s avoided cost calculated at the time of energy delivery—or under a so-called “legally enforceable obligation” (LEO), which the QF may unilaterally elect at the outset to have avoided cost calculated at the time the LEO is established. Giving QFs the ability to elect the LEO option to secure long-term pricing based on upfront calculations of avoided cost is intended to promote financing of wind and solar projects. Fixing payments at the contract’s inception insulates the project’s revenue stream from the vicissitudes of the power market.

FERC’s enforcement action alleges that the Idaho Commission violated FERC’s regulations in rejecting certain power purchase agreements involving three Idaho QF wind developers. The Idaho Commission had adopted a cap on the size of wind QFs that would be eligible to receive certain avoided cost rates and rejected the QF agreements on grounds that they exceeded the size eligibility requirement.

FERC alleges that the Idaho Commission denied the QFs the FERC-given right to establish LEOs unilaterally. It did so, according to FERC, by failing to recognize that, before the size limitation had become effective, the QFs had each taken certain actions that should have been sufficient to establish a LEO.

The Idaho Commission contends that it, not FERC, has jurisdiction to determine when a LEO was created, and that, in these instances, no LEO was timely created.

The Tip of the Iceberg?

FERC’s case against the Idaho Commission may prove to be just the tip of the iceberg. In the relatively short time since FERC announced its action against the Idaho Commission, petitions requesting FERC action to enforce alleged LEOs have been filed by QFs in Minnesota, Vermont, Montana, and Texas. Most notably, the Texas QF issue involves state regulations that generally preclude intermittent resources, both wind and solar, from being able to establish a LEO. The Texas commission’s rules limit wind and solar generators to selling power on an “as available” basis and thus deny them the potentially more favorable “firm” pricing opportunities available to a LEO. The Texas commission claims its restrictions on LEO pricing are fully within the state commission’s discretion in implementing FERC’s PURPA regulations and defends further that California, Florida, Kentucky, Louisiana, Montana, and Oregon have adopted similar limitations.

Avoiding Armageddon

These actions by state commissions to deny QFs the ability to establish a LEO are testing the legislative balance PURPA created, as evidenced by FERC believing it necessary to bring its first enforcement action. Will FERC’s action have the adverse consequences of deploying a true nuclear option? Will it precipitate a prolonged state/FERC dispute over respective PURPA rights and create uncertainty that is harmful to all constituents in the energy industry? Or will it simply help wind and solar projects obtain more favorable pricing and secure financing?

Any such possible PURPA Armageddon can be avoided if:

■ States respect that their PURPA responsibilities are generally limited to implementing FERC’s regulations, such as by setting avoided cost;

■ FERC views its action against the Idaho commission as an extraordinary, once-in-a-generation initiative, not an everyday regulatory tool; and

■ The courts issue timely and consistent rulings that are sensitive to, but clearly delineate, the respective roles PURPA provides FERC and the state commissions. ■

Glenn S. Benson (glennbenson@dwt.com) is a partner in Davis Wright Tremaine LLP’s Energy Practice Group.