PURPA Modernization Promises Sweeping Changes for Utilities

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More than 40 years ago, small power production facilities were germinated, fertilized, and have continued to blossom under the Public Utility Regulatory Policies Act (PURPA), a federal law passed in 1978 as a way to promote energy conservation and encourage development of small power generation projects known as qualifying facilities (QFs).

The Federal Energy Regulatory Commission (FERC) in September 2019 issued notice that it intends to "modernize" PURPA and requested comments from industry stakeholders. PURPA modernization could be among the most significant changes in the past four decades for utilities and renewable energy developers, and it could also have major impacts on storage technology investment and deployment.

COMMENTARY

PURPA was a response to the energy crises of the 1970s, aiming to increase domestic and renewable energy use, and lessen U.S. dependence on foreign energy. This required utility-controlled grids to permit QF grid connections, making concessions on regulatory burdens for QFs, requiring utilities to purchase QF-produced energy and capacity at "avoided cost" or negotiated fixed rates, and the right for QFs to purchase power from utilities at "just and reasonable" rates.

These new rules ushered in a new landscape for utilities, smaller producers, and most significantly, renewable energy providers. Notably, 2020 marks the first year that the U.S. will become a net energy exporter. Electricity from renewable sources accounts for about 20% of total U.S. generation. FERC has expressed the non-unanimous view that PURPA has accomplished its original purpose: encouraging domestic energy production.

Although not endorsed by all FERC commissioners, the agency proposes to change key components of PURPA in an effort to adjust to the current energy environment. Among the items are:

a- Placing more control in state regulators' hands. Those agencies could require QFs to offer variable rate contracts based on changes in the purchasing utility's avoided costs at the time of delivery.

a- Allowing states to set as-available QF energy rates based on market factors or allow QFs to continue setting QF rates based on current regulations.

a- Removing the "one-mile rule" for determining whether generation facilities are a single facility, into a tiered approach where facilities in the same mile count as one facility, facilities between one and 10 miles apart are presumed to be different (which can be rebutted), and facilities 10 miles apart are treated as separate with no rebuttable presumption available.

a- Revising guidelines to only require regional utilities to purchase from QF energy producers if the facilities produce 1 MW or less, rather than the current 20 MW.

a- Holding that a QF is only entitled to contract when it demonstrates commercial viability and financial commitment to construct a facility pursuant to state-provided criteria.

a- Allowing parties to protest a self-certification or recertification of QF status without being required to file a formal petition for declaratory order.

The main takeaway from these changes is that, if adopted, QFs will not have the same level of protections they have enjoyed for the past 40 years. FERC Chairman Neil Chatterjee thinks the changes are necessary. Commissioner Richard Glick has said this effort constitutes an attempt to administratively gut PURPA and goes beyond FERC's authority in expropriating Congress' role in attempting to revise PURPA. Stakeholders potentially affected by these changes have many opinions.

Utilities largely support the proposed changes; smaller producers and renewable energy developers oppose them. Utilities argue PURPA in its current form is unnecessary as renewable energy is competitive with traditional generation. Others argue the proposed changes fail to account for noncompetitive markets for energy in which QFs need the current PURPA protection. All sides have significant economic interest in the outcome.

Regardless of changes, it appears clear states will have increasing discretion and control over the future growth of QFs, and not all states will have similar views. Arizona in December 2019 openly expressed interest in promoting QF development when it adopted an 18-year minimum contract term for QFs under PURPA (an expressed effort to promote renewable energy development in Arizona). By comparison, Montana and Idaho appear to be in favor of the changes, with Montana passing a low avoided cost rate for QFs, and Idaho reducing the negotiable contract term to just two years. Increased state authority under the proposed changes to PURPA likely means an increasing diversity of policy agenda and goals across state lines.

The comment period has closed, and it appears changes to PURPA face an extended battle as the parties prepare to litigate. Eight attorneys general (Delaware, Maryland, Massachusetts, Michigan, New Jersey, North Carolina, Oregon, and Washington, D.C.) provided joint comments on the proposed changes, with states arguing FERC may only amend PURPA if it is consistent with PURPA's aims-and that FERC's power to regulate is not the power to destroy. They argue the proposed changes go beyond FERC's authority as an agency, and the states say FERC is frustrating their goals of achieving climate change objectives, reducing dependence on fossil fuels, undermining the statutory goal of supporting investment in renewable energy, and usurping the states' broad authority to innovate under PURPA.

It seems clear that although FERC seems determined to promulgate changes to PURPA, there are many parties on both sides that will seek to have a say in the eventual changes-with numerous legal battles along the way. a-

-Brad Thompson represents clients on a range of energy-related issues. He serves as a team lead for the Energy industry group at Duane Morris.

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