Does FERC Have the Authority to Radically Change PURPA Regulations?

October 8, 2019

On September 19, 2019, the Federal Energy Regulatory Commission (“FERC”) announced a proposal to significantly change its regulations governing Qualifying Facilities pursuant to the Public Utility Regulatory Policies Act of 1978 (“PURPA”).  FERC’s Notice of Proposed Rulemaking (“NOPR”) outlined regulatory changes that were so significant that Commissioner Glick’s dissent in part characterized the proposed regulation changes as to “effectively gut” PURPA. 

Congress passed PURPA in 1978, although FERC did not issue implementing regulations until 1980.  PURPA was intended to ensure a reasonable market and fair rates for electricity produced by small power plants, in order to increase competition and to encourage new power sources. PURPA regulations enabled non-utility generators to produce power for use by customers attached to a utility’s grid and break the prior monopoly that utilities had in generation.  This was accomplished, in part, by establishing a new type of Qualifying Facility (“QFs”) under PURPA: qualifying small power production facilities and qualifying cogeneration facilities that would be entitled to receive special rate and regulatory treatment. (A small power production facility would only be able to qualify as a “cogeneration facility” if the facility could “show that they are intended primarily to provide heat for an industrial, commercial, residential or institutional process rather than fundamentally for sale to an electric utility”, according to the NOPR.) 

Many of the changes proposed in the NOPR would adversely impact the ability of QFs to enter into long-term, economic contracts with utilities to sell the electricity from their facilities, including, but not limited to: (1) granting state commissions the right to approve utility contracts with a QF that contain variable (rather than fixed) electricity rates; (2) granting state commissions the right to approve contracts with QFs which reflect “market factors”, rather than just reflect a utility’s avoided costs (basically the costs that a utility would have to pay for incremental new generation resources); (3) reducing the current exemption for qualifying small power production facilities from 20 MW to only 1 MW; (the exemption for cogeneration facilities would remain at 20 MW); (4) modifying the “1 mile rule” for small power production facilities so that a utility could argue that QF facilities located between 1 and 10 miles from a QF facility should be treated as a single facility (thereby exceeding the MW exemption limit); and (5) allowing  a utility to protest a QF self-certification filing without paying the $28,990.00 fee for filing a Petition for a Declaratory Order.

The principle reason for FERC’s revised regulations, according to FERC Chairman Chatterjee, is that the electric industry has significantly changed during the past 39 years.  In an accompanying press release, the Chairman said: “[A] lot has changed since 1980. We have seen tremendous technological advancements in renewables, increasing sophistication in competitive electric power markets, and abundant supplies of domestic natural gas. It’s time to modernize the Commission’s implementation of PURPA to reflect those significant developments.”

It is indisputable that the electric industry has experienced seismic changes since the PURPA regulations were first adopted.  In fact, there have been such significant changes in the electric generation industry that Congress has attempted to modify PURPA on dozens of occasions.  For example, Congress passed the Energy Policy Act of 2005 which, in part, enabled FERC to terminate electric utilities’ obligation to make new purchases from QFs that have nondiscriminatory access to the RTO/ISO markets and markets of comparable competitive quality. (See, Section 210(m) of FERC’s PURPA regulations).

Commissioner Glick summarized the attempts by Congress to modify PURPA as follows: “Indeed, almost from the moment PURPA was passed, Congress began to hear many of the arguments being used today to justify scaling the law back. Yet Congress only on one occasion—in 2005—significantly amended the statute. After a lengthy debate, which included proposals to repeal PURPA, Congress adopted the Energy Policy Act of 2005 (EPAct 2005), which left in place PURPA’s basic framework but added a series of provisions that relieved utilities of their requirements in regions of the country with robust wholesale energy markets. Over the course of the last fourteen years, Congress has continued to consider a wide range of proposals to reform PURPA, some of which would have enacted into law many of the proposals advanced in this NOPR.  But Congress did not enact any of these reforms.” (Emphasis added) (Citations omitted).  Based upon Congress’ failure to significantly modify or repeal PURPA, Commissioner Glick argued in his partial dissent that “A policy debate about the continuing relevance of PURPA—which, make no mistake, is what this NOPR is really about—is an issue for Congress to resolve.” 

Commissioner Glick is particularly concerned with changes to FERC’s regulations that would impair the ability of a QF to enter into a competitive, long-term contract with utilities.  (FERC’s current PURPA Regulations establish a rebuttable presumption that a QF with a net power production capacity at or below 20 MW lack nondiscriminatory access to such markets and thus a utility would be required under PURPA to enter into a long-term, fixed price contract to purchase that QF’s production.)  Commissioner Glick stated in his partial dissent that: “[R]eferencing the words “competitive” and “market” over and over again [in the NOPR] is not the same thing as proof that there is sufficient market competition. Many regions of the country—often the same regions where the debates about PURPA are most heated—have not established competitive markets, let alone non-discriminatory access to those markets for independent generators, even if there are liquid market hubs for spot energy purchases.”

In contrast, Chairman Chatterjee believes that FERC has the responsibility (and the necessary legal authority) to substantively modify PURPA by administratively changing the implementing regulations.  Chairman Chatterjee stated in a press release, for example, that “It’s clearly time for FERC to revisit its PURPA policies . . . [because] Congress told us to review our policies from time to time to ensure that our regulations continue both to protect consumers and to encourage the development of QFs. That is precisely what we are doing here.”

Similarly, Commissioner McNamee’s NOPR comments recognized that Congress had encouraged FERC to address changing conditions: “As part of the Energy Policy Act of 2005, Congress amended PURPA section 210(m) to recognize that PURPA’s requirements should take into account the success of competition in wholesale electric markets. And in the original statute, Congress recognized that circumstances could change over time and directed the Commission to revise its PURPA implementing regulations ‘from time to time.’”

FERC will accept comments on this NOPR through December 3, 2019.  It will be interesting to evaluate the Comments and Protests that are filed by parties representing QFs attempting to sell power to electric utilities, as well as the pleadings from utilities that are responsible for paying for the electricity from such QFs.  Both sides will likely be in significant agreement that the electricity generation environment (including the rapid expansion of renewable generation resources) is clearly unlike the environment when Congress originally enacted PURPA.  On the other hand, there will not be consensus among the commenters regarding FERC’s authority to make extensive changes to PURPA through its regulations, in the absence of Congressional action to revise PURPA.           

This Eckert Seamans Energy Blog is intended to keep readers current on matters affecting businesses and is not intended to be legal advice. If you have any questions, please contact Rick Drom at (202) 659-6645 – rdrom@eckertseamans.com, or Charles Zdebski at (202) 659-6605 – czdebski@eckertseanans.com.

© Eckert Seamans Cherin & Mellott, LLC, 2019.  All rights reserved.

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Richard A. Drom Photo Washington, D.C.

Richard A. Drom

Member - Washington, D.C.

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Charles A. Zdebski Photo Washington, D.C.

Charles A. Zdebski

Member - Washington, D.C.

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