On June 16, 2016, the Federal Energy Regulatory Commission (FERC or the “Commission”) issued an order that is anticipated to increase the ability of electric cooperatives and municipally owned utilities to purchase power from renewable resources that are qualifying facilities (QFs) under the Public Utility Regulatory Policies Act of 1978 (PURPA). By precluding existing power suppliers from imposing additional costs on cooperatives and municipalities due to their purchases from QFs, the FERC order will likely have the effect of facilitating increased demand for renewable power by those public power entities and, correspondingly, new opportunities for renewables developers to supply power in their territories.
Under Section 210(a) of PURPA, electric utilities are generally required to purchase all energy and capacity made available from QFs with which the electric utility is directly or indirectly interconnected. This requirement is commonly referred to as the “mandatory purchase obligation.” QFs generally include renewable resources of 80 MWs or less, as well as certain cogeneration facilities.1
Delta-Montrose is an electric cooperative located in Colorado. Tri-State, a generation and transmission cooperative with facilities in Arizona, Colorado, Nebraska, New Mexico and Wyoming, provides electric service to 44 member cooperatives, including Delta-Montrose. Tri-State’s wholesale supply contract with Delta-Montrose, which is in effect until December 31, 2040, provides for Tri-State to meet at least 95 percent of Delta-Montrose’s needs for capacity and energy. Delta-Montrose may elect to obtain up to 5 percent of its requirements from other sources. Many cooperatives and municipalities obtain wholesale power under similar arrangements.
In February 2015, after receiving a request to purchase power from a QF that would put Delta-Montrose’s third-party purchases in excess of 5 percent, Delta-Montrose filed a petition for declaratory order requesting that the Commission find, among other things, that (1) Delta-Montrose’s obligation to purchase power from QFs under PURPA supersedes any conflicting provisions in Delta-Montrose’s requirements contract with Tri-State (i.e., the contractual limitation on Delta-Montrose’s ability to obtain more than 5 percent of its power requirements from other sources); and (2) Delta-Montrose can negotiate with a QF for a purchase price based on its own avoided costs and reduce the amount of energy it purchases from Tri-State. In June 2015, FERC issued an order finding that Delta-Montrose is obligated to purchase power from QFs under PURPA and FERC’s implementing regulations irrespective of conflicting contractual provisions and that such purchases may be made at negotiated rates.
In response to the June 2015 order, Tri-State developed a fixed-cost recovery proposal, pursuant to which member cooperatives, such as Delta Montrose, would be required to pay Tri-State for all unrecovered fixed costs associated with a member’s QF power purchases that exceed the 5 percent contract limitation. In February 2016, Tri-State filed a petition for declaratory order requesting that the Commission find that its fixed-cost recovery proposal is consistent with PURPA. Tri-State argued that its proposal was necessary to prevent Tri-State from losing revenue due to its members’ QF purchases and from having to allocate such losses to its other members (which would increase their rates). Tri-State also argued that its proposal was consistent with FERC precedent from 1980 (Order No. 69), which provided that a power supplier could recover lost revenue directly from a customer when that customer purchases power from a QF and reduces the amount of power it is otherwise obligated to purchase from the supplier.
In the June 16 order, FERC denied Tri-State’s petition for declaratory order. FERC found that Tri-State’s proposal sought to undermine the Commission’s June 2015 order in Delta-Montrose by imposing financial burdens on Delta-Montrose that could affect its purchases from QFs above the 5 percent limitation in its contract with Tri-State. FERC also found that Tri-State’s proposal would limit a QF’s ability to sell its output at negotiated rates, further undermining the Commission’s prior order. FERC rejected Tri-State’s argument that Order No. 69 provided for the type of cost recovery that Tri-State sought, noting that Order No. 69 was issued in 1980 in the wake of the enactment of PURPA and that its discussion of the issue was in the context of pre-existing (i.e., pre-PURPA) all-requirements contracts that could not have anticipated PURPA. FERC noted that the Tri-State/Delta-Montrose contract postdates PURPA and expressly provides for QF purchases by Delta-Montrose.
The June 16 order underscores FERC’s commitment to enforcing the PURPA mandatory-purchase obligation, including in the context of wholesale power supply agreements entered into by municipalities and cooperatives that might otherwise restrict their ability to make QF purchases. By affirming that the PURPA mandatory-purchase obligation takes precedence over wholesale contract limitations, and by denying attempts to impose costs on municipalities and cooperatives who enter into QF contracts, FERC’s order will likely incent additional interest from municipalities and cooperatives in purchasing renewable power from both community-scale and utility-scale QF projects. This increased demand is anticipated to lead to new opportunities for renewables developers seeking to serve this burgeoning market.
1 In some geographic markets, the mandatory purchase obligation applies to only QFs with a capacity at or below 20 MW.