FERC, states consider changes to PURPA

By Ben Inskeep, EQ Research

Rapid reductions in the cost of solar and wind energy have fueled renewed interest in recent years in the Public Utility Regulatory Policies Act (PURPA). In fact, over the past few years, EQ Research has tracked through its Policy Vista  database more than a dozen FERC proceedings and more than 180 state regulatory proceedings impacting PURPA implementation – and that’s excluding routine utility tariff filings and more generalized interconnection proceedings.

We’ve written about some of these PURPA developments before, perhaps unfairly besmirching its good name by characterizing these developments as, well, “boring” (er, twice). But this ain’t your grandaddy’s PURPA anymore. This law, originally enacted in 1978, is now on the cutting edge of the clean-energy transition and has become one of the top drivers of utility-scale renewable development. In brief, PURPA is the key federal law that guarantees that independent renewable energy projects (called Qualifying Facilities, or QFs) can interconnect to the grid, receive back-up power from the utility, and receive compensation from the utility for the output of the QF at the utility’s avoided cost. A lot of the important details – like how that compensation is calculated – are left up to the states.

Let’s dive into a few trends that will be key to shaping PURPA battles now and in the coming years.

FERC is conducting a review of key PURPA issues. At its May open meeting, FERC Chair Kevin McIntyre announced that the Commission would “re-energize” its review of PURPA. FERC had instigated a proceeding in 2016 but did not take action after holding a technical conference and receiving stakeholder comments. Since then, the National Association of Regulatory Utility Commissioners (NARUC) asked FERC to prioritize consideration of PURPA reforms. One key issue likely to be addressed by FERC is the “1-mile rule,” which is a presumption that QFs at least one mile away from each other are distinct facilities. Utilities have argued that QFs are “gaming” this rule by breaking up large renewable projects into multiple smaller projects that are sited just over 1 mile away from each other to benefit from PURPA. However, the format, scope and timing of FERC’s review have not yet been established.

Lawmakers have introduced legislation that would alter fundamental PURPA provisions. Republican lawmakers introduced bills in both the U.S. House of Representatives (H.R. 4476) and the U.S. Senate (S. 2776) that would neuter key provisions of the law that independent developers rely on to finance and build projects. In addition to changing the 1-mile rule, changes would allow states to relieve utilities of their obligation to purchase the output from QFs and reduce the threshold for QFs assumed to have nondiscriminatory access to wholesale electricity markets from 20 MW or larger down to 2.5 MW or larger.

Increasingly, developers are filing PURPA-based complaints against utilities. Developers have alleged a number of ways that utilities are frustrating both the letter and intent of the law, such as by outright refusing to negotiate or sign new contracts with QFs or by providing unfair avoided cost prices for purchasing the output of a QF. Oregon and North Carolina stand out as states that have historically seen a high volume of formal PURPA-related complaints filed, but they are certainly not alone. More recently, for example, Michigan has captured the attention of developers, thanks to a series of recent decisions improving the avoided cost methodology and terms and conditions in standard offer contracts. In the past couple months, solar developers have filed multiple complaints against DTE Electric that allege numerous delays and unreasonably high expenses related to interconnecting and refusal by DTE to compensate the QFs for their capacity despite the utility simultaneously seeking to build a new 1,100 MW natural gas plant.

Environmental and renewable advocates are challenging existing state PURPA practices. In one recent example, the Environmental Law and Policy Center and the Citizens Action Coalition challenged all five of Indiana’s investor-owned utilities’ PURPA-based tariffs. The two groups took exception to the utilities’ refusal to include long-term standard contracts in their tariffs, among other issues. State regulators ended up approving the utilities’ tariffs this month without ruling on the substantive issues raised by the groups, potentially leaving the door open for future challenges.

State regulators are opening proceedings to clarify key PURPA issues. For instance, an important question states including Washington, Montana, and Michigan, among others, are currently grappling with in regulatory proceedings is the creation of a legally enforceable obligation (LEO). The formation of an LEO is of paramount importance to developers because it affects terms and pricing that will be applicable to the QF. Oregon could be the next state to open a generic PURPA proceeding. In recent QF tariff filings, PGE and PacifiCorp both requested that the PUC open such a proceeding to reconsider the PURPA avoided cost methodology. Interestingly, PacifiCorp argued that methodological changes are needed because wind resources are now significantly more cost effective than the fossil fuel resources on which certain avoided cost prices are based.

Utilities are pushing for changes to to QF standard offer contract terms. In some states that are experiencing high volumes of QF applications, state policymakers have already made changes that reduce the attractiveness of standard offer contracts, such as by limiting contract term lengths or QF system size. For example, small solar QFs proliferated across North Carolina in recent years, thanks to its 15-year standard contract for facilities up to 5 MW. In 2017, the state enacted compromise legislation that essentially replaced the standard offer with a competitive solicitation process for most new QFs. Although the standard offer is now limited to 10-year contracts for QFs up to 1 MW (but only until a utility reaches an aggregate of 100 MW of new contracts; after that, the system size eligibility decreases to 100 kW or less), the new competitive solicitation process will still allow for gigawatts of solar to be built by independent developers over the next several years. In contrast, other states such as Idaho have rolled back key PURPA terms without providing new opportunities.

Not all recent changes have been unfavorable to QFs. For example, after years of study and debate, Michigan regulators recently overhauled the avoided cost methodology and standard offer contract terms, making them available to QFs up to 2 MW in size for terms as long as 20 years. Likewise, in ongoing proceedings in Colorado and Missouri, regulators are considering a number of PURPA issues, including increasing the system size for QF eligibility of standard offer contracts.

Utilities have slashed published avoided cost prices. In routine tariff filings, utilities have generally calculated significantly reduced avoided cost prices in recent years. For example, in its recently approved biennial QF tariff filing, Rocky Mountain Power proposed reducing resource-specific avoided cost rates by roughly 35-40% in Wyoming to account for lower wholesale prices and the falling cost of natural gas. States are also continuing to grapple with how to compensate QFs for capacity, with some utilities arguing that they should not have to pay for capacity if they do not forecast needing additional capacity in their planning horizon. For example, South Carolina regulators recently approved changes to SCE&G’s QF tariffs that sets the avoided capacity rate at zero.

As renewable energy continues to get cheaper and more abundant, both federal and state policy discussions surrounding PURPA will continue to proliferate. While the details are wonky and the policies can be complicated, PURPA remains one of the keys to the present and future success of renewable energy.

This article was first published on the EQ Research blog, and has been reprinted with permission.

Ben Inskeep is a Research Analyst at EQ Research. He specializes in distributed solar policies and trends, including net metering and rate design issues.