FERC Moves to Require Rate Filings by QFs

FERC Moves to Require Rate Filings by QFs

March 01, 2006

Owners of some US power plants — called “qualifying facilities” or “QFs” — will have to make rate filings with the federal government under new rules issued by the Federal Energy Regulatory Commission on February 2.

The requirement affects all new QFs and all existing QFs that are not selling all their output under existing contracts.

QFs whose existing contracts expire will have to make rate filings for wholesale sales even if they renew their contracts or sign new ones.

QFs are two kinds of power plants whose construction the US government encouraged under a 1978 law called the Public Utility Regulatory Policies Act or “PURPA.” The two are cogeneration facilities that produce two useful forms of energy from a single fuel — an example is a power plant that produces steam and electricity by burning coal — and small power plants of up to 80 megawatts in size that use renewable or waste fuels.

The immediate effect of the new rule is that QFs that are not selling all of their output under contract will have to make a FERC filing for market-based rate authorization promptly. The rule takes effect 30 days after publication in the Federal Register.

FERC also made it harder for cogeneration facilities to qualify in the future as QFs.

Rating Filings

The requirement that QFs make rate filings was not dictated by the new Energy Policy Act that President Bush signed last August. The fact that the FERC took this action, which removes the QF exemption from rate regulation that was contained in FERC’s original rules implementing PURPA, serves as additional evidence that the commission intends to do what it can to dismantle the PURPA program.

In other respects, the new rules issued by FERC on February 2 merely implement what FERC was directed to do by Congress.

FERC claimed that eliminating the QF exemption from rate regulation would not “cause undue uncertainty or upset the legitimate expectations of QF owners and lenders.” FERC reasoned that, since the exemptions were always subject to revision, QFs “had no justifiable expectation that, no matter the change in circumstances, changes in the regulatory regime would not occur.” Notwithstanding FERC’s argument, FERC appears to have ignored the US Supreme Court’s finding in FERC v. Mississippi that the principle reasons for reluctance to develop alternative energy facilities were the developers’ fear of traditional rate regulation and the utilities’ refusal to buy power from developers.


FERC also argued that removal of the exemption from rate regulation does not affect QF status or a utility’s purchase obligation. This response is disingenuous at best since, while technically true, it ignores the fact that FERC, in another rulemaking, has proposed to eliminate the QF purchase obligation in four key regions and QF status is of little value if there is no assured market and if a QF’s rates must be filed just like every other private utility in the country.

There is also a serious question whether the application to existing QFs of a new rule eliminating regulatory exemptions violates the rule against retroactive rulemaking. FERC has chosen not to explain why it believes a QF developer had no reasonable basis to believe it could rely on the ratemaking exemption in making its decision to invest in a QF project, particularly in light of the Supreme Court’s pronouncement in FERC v. Mississippi.

Small QFs will not be subject to this new rate regulation. FERC determined that QFs that are 20 megawatts or smaller in size will remain exempted from rate regulation. In addition, a QF selling energy pursuant to a state regulatory authority’s implementation of PURPA will be exempted from FERC rate regulation.

Even QFs with existing contracts, who will therefore be exempted from rate regulation while the contracts are in effect, will be subject to new Federal Power Act requirements banning market manipulation and mandating market transparency rules.

New Cogenerator Standards

The other important component of the new rules issued on February 2 involves the new criteria for new cogeneration facilities. A facility is “new” if it was not certified as a QF before February 2, 2006.

Under the new Energy Policy Act, the output from the QF must be used “fundamentally for industrial, commercial, residential or institutional purposes” and not be intended fundamentally for sale to an electric utility. The QF must show this on a case-by-case basis.

However, FERC established a “safe harbor” — that creates an irrebuttable presumption — that the “fundamental” test is satisfied if at least 50% of aggregate annual energy output of the facility is to be used for industrial, commercial, residential or institutional purposes. If the new QF does not meet the safe harbor test, then it must provide support for its claim that it meets the “fundamental” test.

FERC will also require new cogeneration facilities to demonstrate in their filings that the thermal output will be used in a productive and beneficial manner. Among the factors FERC will look at include whether the product produced by the thermal energy is needed and whether there is a market for the product. Further, if the cogeneration facility is five megawatts or smaller in size, then there will be a rebuttable presumption that the thermal output from the new cogeneration facility is used in a productive and beneficial manner.

FERC also declared that there will be a rebuttable presumption that an existing QF does not become a new cogeneration facility merely because it files for recertification of QF status. However, FERC cautioned that a change to an existing cogeneration facility could be so great that the applicant claiming to be an existing facility should, in fact, be considered a new QF. (As an example, FERC suggested that an increase in capacity from 50 megawatts to 350 megawatts would qualify as a new QF.) The creation of only a rebuttable presumption raises the question whether a QF’s loss of its steam host and replacement with a new thermal use would risk a finding by FERC that the existing QF was transformed into a new one.

FERC resisted requests by some utilities that the commission impose the new QF criteria on existing QFs.

FERC also decided not to revise the operating and efficiency standard percentages on QFs or to impose an efficiency standard on coal-fired QFs. In addition, the criteria for qualifying small power production facilities — projects fueled by renewable energy or waste — remain unchanged.

Finally, FERC will require all QFs, existing or new, to file a self-certification notice or application for certification.

An existing QF that has never filed either one must do so within 60 days of publication of the new rules in the Federal Register. Previously, QF status attached to a project if it met the requirements of the QF rules, whether or not it filed for QF status. In addition, notices of self-certification will be published in the Federal Register. The new rules also codify the elimination of the restriction on utility ownership of QFs as required by the new Energy Policy Act.