On July 16, 2020, FERC issued a Final Rule modernizing its regulations under the Public Utility Regulatory Policies Act of 1978 (PURPA) that apply to qualifying small power production facilities, including many renewable energy facilities, and qualifying cogeneration facilities (QFs). The Final Rule affords states more flexibility in determining rates for QFs and, as a result, provides less price certainty to QFs. This could affect financing terms and conditions for these projects. The Final Rule adopts the following revisions to FERC’s PURPA rules:
- Mandatory Purchase Obligation: There is currently a rebuttable presumption that QFs with a capacity greater than 20 MW have non-discriminatory access to organized wholesale electric markets, and that utilities that are members of RTOs/ISOs should be relieved of the obligation to purchase from such QFs. The Final Rule lowers that threshold from 20 MW to 5 MW for small power production facilities including renewables but leaves it unchanged for cogeneration facilities. By lowering the threshold, small projects are no longer guaranteed to receive mandatory compensation from interconnected utilities.
- Rates: The Final Rule grants states more flexibility with respect to the rates to be received by QFs, including the ability to: (a) require that energy rates (but not capacity rates) in QF contracts vary in accordance with changes in the purchasing utility’s avoided costs at the time the energy is delivered; (b) set QF fixed energy rates on projections of what energy prices will be during the term of a QF’s contract; (c) set as-available QF energy rates: (i) if the QF is selling to a utility in an organized wholesale power market, at the locational marginal price in that market, or (ii) if the QF is selling to a utility outside of an organized wholesale power market, at competitive prices from liquid market hubs or calculated from a formula based on natural gas price indices and heat rates; and (d) set energy and capacity rates based on competitive solicitations (such as RFPs) conducted in a transparent and non-discriminatory manner.
- One-Mile Rule: While maintaining the irrebuttable presumption that facilities one mile apart or less constitute a single facility, parties will now be able to challenge whether multiple facilities that are located more than one mile apart, but less than 10 miles apart, are separate facilities. The Final Rule also adopts an irrebuttable presumption that facilities located 10 miles or more apart are separate facilities.
- Legally Enforceable Obligation (LEO): Historically, FERC has allowed the states to determine when a LEO is formed (i.e., the date that the QF may fix its avoided cost rate). The Final Rule now requires states to establish objective and reasonable criteria to determine a QF’s commercial viability and financial commitment to construction before a QF is entitled to a contract or LEO.
- Challenging QF Certifications: Parties may now protest a QF’s self-certification (or-recertification) without the need to file and pay for a separate petition for declaratory order.
On November 20, 2020, FERC issued an order denying requests for rehearing filed by parties to the proceeding, but clarifying certain issues.
Appeals of the Final Rule are currently pending in the U.S. Court of Appeals for the Ninth Circuit. The Solar Energy Industries Association (SEIA) filed an appeal on September 18, 2020 (prior FERC’s rehearing order, but after its notice that rehearing may have been deemed denied under Allegheny Def. Project v. FERC, 964 F.3d 1 (D.C. Cir. 2020) (en banc)). SEIA’s press release on its appeal states that the Final Rule “eliminates the right of QFs to enter long-term, fixed-rate contracts and arbitrarily extends the ‘one-mile rule,’ creating several new provisions that thwart solar development. These actions are unlawful and directly contradict the intent of the PURPA statute.” On November 16, 2020, a group of environmental organizations also filed an appeal in the Ninth Circuit, which remains pending.
ABOUT BAKER BOTTS L.L.P.
Baker Botts is an international law firm of approximately 700 lawyers practicing throughout a network of 13 offices around the globe. Based on our experience and knowledge of our clients' industries, we are recognized as a leading firm in the technology, energy, and life sciences sectors. Since 1840, we have provided creative and effective legal solutions for our clients while demonstrating an unrelenting commitment to excellence. For more information, please visit bakerbotts.com.