In a feat of legal gymnastics worthy of Cirque du Soleil, the Federal Energy Regulatory Commission in late October largely blessed in concept a proposed feed-in tariff in California for small cogeneration facilities that meet stringent operating and efficiency standards.

The order paves the way for other possible feed-in tariffs for renewable energy projects, including feed-in tariffs for solar facilities.

The California Public Utilities Commission filed a petition asking FERC to declare that its proposed feed-in tariff for cogeneration facilities of up to 20 megawatts in size does not violate federal law.

The CPUC was directed to establish a feed-in tariff under recent California legislation.

The regulated investor-owned utilities in California filed a separate petition asking FERC to find that the proposed tariff violates federal law because only FERC, and not a state, can set rates at which electricity is sold in the wholesale market, unless wholesale rates are established by the state to implement the Public Utility Regulatory Policies Act of 1978, a 1978 statute called “PURPA” that requires utilities to buy electricity from two kinds of power plants owned by independent generators. The two kinds are power plants up to 80 megawatts in size that use renewable or waste fuels and cogeneration facilities of any size. A cogeneration facility is a power plant that produces two useful forms of energy on a sequential basis—electricity and steam, for example—from a single fuel. These two kinds of power plants are called “qualifying facilities.” A utility must buy electricity from them at their “avoided cost,” or the amount a utility would pay if it built a power project itself or purchased equivalent power from an alternative source. The state utility commission determines avoided cost pursuant to FERC-established guidelines.

Even though the CPUC, in its declaratory order request to FERC, made it clear that it was not asking FERC to approve its feed-in tariff on the basis of compliance with PURPA, FERC decided, in an initial order, to respond as if it had, and informed the CPUC that it could set a tariff if use of the tariff was limited to projects that are qualifying facilities under PURPA, and reserved on the issue whether the rates in the tariff were consistent with “avoided cost.”

On October 21, 2010, in response to the CPUC request for “clarification” of FERC’s initial order, FERC decided to expound on permissible ways for the CPUC to price power for qualifying facilities under PURPA. In the process, it effectively overturned longstanding FERC precedent on PURPA implementation and temporarily avoided a potentially nasty jurisdictional federalstate conflict.

Background

In 1995, FERC invalidated the CPUC’s PURPA implementation directive in response to a petition by Southern California Edison Company. In the initial Southern California Edison order and in a rehearing order, FERC found that the CPUC implementation violated PURPA because its avoided cost determination “did not consider all sources” of alternative power available to the purchasing utility. The CPUC had limited a utility’s solicitation of power to qualifying facilities only, and FERC determined that, by excluding non-QFs, the resulting price could not necessarily result in a price at or below a utility’s avoided cost “because it excluded potential sources of capacity from which the utilities could purchase.” FERC also held that a state “may not set avoided cost rates or otherwise adjust the bids of potential suppliers by imposing environmental adders or subtractors that are not based on real costs that would be incurred by utilities.” Finally, FERC said that if the states wanted to encourage renewable resources, the states could use other incentives outside of PURPA, like tax incentives, direct subsidies or taxes on fossil fuels. But the main point was that a state could not monkey with the prices in a way that would cause the prices to exceed a utility’s avoided cost.

What FERC is Saying Now

Although FERC was careful to reiterate in its rehearing order in late October that it is not deciding whether the feed-in tariff was consistent with the PURPA avoided cost limitation, it offered “guidance” to the CPUC that makes clear that most of the restraints contained in the 1995 Southern California Edison orders have been considerably loosened.

First, FERC said that avoided cost does not have to include alternative costs of other technologies, like fossil fuel plants, if the state requires a minimum purchase from a specific technology. In reaching this conclusion, FERC said this is consistent with the Southern California Edison orders because FERC said in one part of those orders that in the process of determining avoided cost, the state must “reflect prices available from all sources able to sell to the utility whose avoided cost is being determined.” According to FERC, this means that “where a state requires a utility to procure a certain percentage of energy from generators with certain characteristics, generators with those characteristics constitute the sources that are relevant to the determination of the utility’s avoided cost for that procurement requirement.”

In other words, if the state says that a utility has to buy 10% geothermal power under PURPA, the avoided costs of a utility do not have to include the alternative costs of other technologies. Even FERC recognized that it is stretching on this one, so, for good measure, it overruled the Southern California Edison decision to the extent that it “can be read” to require all sources in the determination of an avoided cost rate. No explanation was provided as to why it is appropriate for FERC to overrule a 15-year-old interpretation of PURPA that has been relied upon by the industry since that time.

Second, even though FERC made clear in the 1995 decision that price “adders” are not consistent with avoided costs unless they are based on real costs to the purchasing utility, FERC found that the feed-in tariff could be based on a “10% location bonus” if the bonus is based “on the expected costs of upgrades to the distribution or transmission system that the QFs will permit the purchasing utility to avoid.” Given that the 10% bonus is a feature of the California legislation rather than an actual determination of cost, it is difficult to assess how FERC could support the view that the bonus represents a “real cost” avoided for a particular cogeneration facility or that the 10% figure is the right number.

Again, FERC was careful to say it was not blessing the actual tariff rate as being consistent with avoided cost under PURPA. However, FERC was also careful to point out what California could do to avoid preemption by federal law rather than address the aspects of the tariff that would not be consistent with federal law.

It should be noted that this issue of limitation on a state’s ability to establish a feed-in tariff based on principles consistent with PURPA is, jurisdictionally speaking, quite different from a state’s implementation of a state law renewable portfolio standard. Under a renewable portfolio standard, the state has determined that it wants a minimum percentage of generation to come from specific categories and sizes of renewable projects. Utilities undertake competitive solicitations to developers of renewable projects, and selections are made as a result of the solicitation. Because this is done under state law, not federal law, and because the state is not directing the purchasing utility to offer a specific wholesale rate to the bidder and the solicitation produces rates proposed by the bidder rather than the state, state RPS programs, now in place in more than 30 states, have not been challenged as violative of federal law.