FERC Proposes to Eliminate Long-Term Fixed Price Contracts Under PURPA

On September 19, 2019, the Federal Energy Regulatory Commission (FERC) issued a Notice of Proposed Rulemaking (NOPR) to dramatically revise the Commission’s rules implementing the Public Utilities Regulatory Policies Act of 1978, as amended (PURPA). Among other changes, the rules propose to eliminate the federal requirement that utilities must offer qualifying facilities under PURPA (QFs) the option to enter into a long-term fixed price contract for the sale of qualifying power. The rule also proposes to establish avoided energy costs for QF power based on the locational marginal price, or “LMP” in the ISO or RTO where the project is located. The proposed rule also relaxes some of the stricter purchase requirements imposed on utilities that do not participate in competitive wholesale markets by allowing them to establish a proxy purchase price based on LMP prices set in neighboring RTO/ISO’s.

The NOPR proposes six specific changes:

1. Grant state regulatory authorities the ability to eliminate fixed energy prices in long term PURPA contracts (but not capacity rates) and instead have the energy price be determined at the time the energy is delivered.
2. Grant states the ability to set “as-available” QF energy rates based on LMP prices or prices set at a “liquid market hub” irrespective of whether the QF is located in a region with an organized wholesale market (such as an RTO or ISO) or whether the local utility provides nondiscriminatory transmission access.
3. Replace the “one-mile rule” for determining whether small power production facilities are part of a single facility for purposes of meeting the size cap for certain facilities, and instead implement a rebuttable presumption that small power production projects located within ten miles of each other constitute a single facility.
4. Reduce the rebuttable presumption threshold for small power production facilities entitled to a contract under PURPA from 20 MW to 1 MW. 
5. Require QF’s to first demonstrate commercial viability and financial commitment to construct its facility pursuant to objective and reasonable criteria established by each state before being entitled to obtain a contract or legally enforceable obligation under PURPA.
6. Allow parties to protest a self-certification or recertification of a QF without being required to file a separate petition for declaratory order and to pay the associated filing fee.

PURPA was originally enacted by Congress in 1978 to decrease U.S. reliance on fossil fuels and foreign sources of fuel supply. The statute sought to encourage the development of alternative sources of electrical energy, such as cogeneration, solar, wind, and other renewable energy sources.

Among the rules adopted by FERC in implementing PURPA was the right of QFs, at their option, to sell their energy to the local utility under a long-term fixed price contract based on the utility’s “avoided cost” rates as calculated at the time the QF enters into the contract. The majority of contracts under PURPA have been entered into under this fixed price option, often referred to as the Legally Enforceable Obligation (LEO) option. Under FERC’s proposal, QF’s would no longer have the right to have their energy prices fixed for the term of the contract or LEO. The capacity prices, however, would remain fixed. States would also be permitted the flexibility to continue to make fixed price contracts available to QFs.

The Commission states that the NOPR is justified based on changes that have occurred in the energy industry since 1978, including deregulation, the existence of ISO/RTO-operated wholesale markets, and the availability of natural gas as a fuel.

FERC Commissioner Glick dissented in part, noting that the proposed changes would “effectively gut” PURPA and that the proposal does not satisfy the Commission’s basic obligations under the law. He emphasized that the question of whether the goals of PURPA to encourage cogeneration and small power production and reduce the nation’s reliance on fossil fuels, while relevant questions, are for Congress to decide, not FERC.

Comments on the FERC NOPR are due 60 days after publication in the Federal Register.

For questions or more information about this recent NOPR, or for any energy-related issue, please contact firm energy attorney Merrill Kramer.