Qualifying Facilities Seek Rehearing of Reliability Standards Applicability

The Cogeneration Association of California and the Energy Producers and Users Coalition and the Midland Cogeneration Venture Limited Partnership have sought rehearing of FERC's Order No. 696, which overhauled regulations governing small power production and cogeneration by eliminating previous exemptions of qualifying facilities (QFs) from compliance with the mandatory reliability standards of new section 215 of the Federal Power Act.

The rehearing requests contend that Order No. 696 discriminates against QFs by neglecting to assure QFs that they will be able to recover their costs of complying with the new standards.  In contrast, FERC did provide that assurance to traditional public utilities that own generation.  "[B]y saddling [QFs] with significant new reliability compliance costs without also providing a cost recovery mechanism," argue the challengers, the Commission is actually discouraging energy efficient cogeneration and renewable small power production technologies that FERC otherwise has a duty to promote under the Public Utility Regulatory Policies Act of 1978, section 210 of the Federal Power Act, and the Energy Policy Act of 2005.

The parties to the rehearing requests represent the interests of approximately 20 individual companies, including the likes of the El Paso Corporation,  BP West Coast Products, Inc., Chevron U.S.A. Inc., ConocoPhillips Company, ExxonMobil Power and Gas Services Inc., Shell Oil Products US, Kern River Cogeneration Company, Salinas River Cogeneration Company, and other additional small QFs in California.

Qualifying Facilities No Longer Generically Exempt from Reliability Standards

On May 18, FERC made good on its promise to extend reliability standards to Qualifying Facilities (QF).  Order No. 696 overhauls regulations governing small power production and cogeneration facilities by eliminating previous exemptions of QFs from compliance with section 215 of the Federal Power Act.  According to the final rule, FERC believes "there is not a meaningful distinction between QF and non-QF generators that warrants a generic exemption of QFs from reliability standards."  QF generators, FERC explained, affect the bulk-power systems as much as non-QF generators and should therefore be similarly subject to new mandatory reliability standards that become effective on June 4, 2007.  

Commenters during the Notice of Proposed Rulemaking process for Order No. 696 urged FERC to consider a number of factors in its evaluation.  FERC was not persuaded and denied generic exemptions, including exemptions for QFs below a certain size or ones serving only behind the meter load.  FERC instead directed that North American Electric Reliability Corporation (NERC) or Regional Entities could consider factors warranting specific exemptions when an individual QF is evaluated for registration (the general procedures for registration are outlined at Section 500 of NERC's Rules of Procedure).   FERC explained that, in this regard, Order No. 696 puts QFs and non-QFs on equal footing "to not be subject to reliability standards" since the registration process is designed to determine applicability of the standards on a case-by-case basis.  FERC also pointed out that QF's still have the opportunity to appeal to the agency if the QF believes its registration was in error.

FERC Signs Off on 83 Mandatory Reliability Rules

Putting into place for the first time mandatory standards to ensure reliability in the nation's electric transmission system, on March 16, FERC issued an order adopting 83 out of 107 reliability standards that were proposed by the North American Electric Reliability Corporation (NERC) last year.  Certified as the Electric Reliability Organization (ERO) contemplated in the Energy Policy Act of 2005, NERC will play a primary role in developing, monitoring, and enforcing the reliability standards.  Most of the standards take effect this summer; FERC rejected calls by some industry participants for a phase-in or transition period

FERC directed substantial changes to many of the standards, but approved them as mandatory and enforceable nonetheless.  NERC can iron out details through its stakeholder process, FERC advised.  Those standards that were not adopted were remanded back to NERC for further development or for NERC to provide additional information.  FERC declined to adopt a blanket waiver from the standards for small entities; rather, FERC approved the continued use of the existing NERC compliance registration process and Functional Model to register entities who must comply with the standards.  Under this process, NERC will register:  distribution providers or load-serving entities with a peak load of 25 MW or greater and are directly connected to the bulk electric system or that are responsible entities as part of a required demand management (load-shedding) program; individual generating units that are 20 megavolt-amperes (MVA) or greater; generating plants with an aggregate MVA above 75; and transmission owners and operators with 100 kV or higher facilities.

In a separate notice of proposed rulemaking issued the same day, FERC proposed to extend the reliability standards to Qualifying Facilities (QF) above 20 MW, despite the fact that QFs are exempt from most FERC regulation.  Comments in this proceeding are due April 17, 2007. 

FERC to Electric Utilities and Qualifying Facilities: Presume This!

To address the energy shortages of the 1970s, the Public Utility Regulatory Policies Act was enacted to empower qualifying cogenerators or small power producers (from renewables) ― qualifying facilities or QFs ― to "put" their electric generation to an interconnected electric utility and charge the utility an avoided-cost rate, and also demand backup power from the utility.  Because the avoided-cost rate was often locked in at relatively high prices, utilities for years sough repeal or amendment of the "put."  In the Energy Policy Act of  2005, Congress agreed and directed FERC to end prospectively the "put" for post-October 8, 2005, power sales by QFs that are found to enjoy nondiscriminatory market access.

Responding to this directive, FERC originally proposed to end generically the "put" for all electric utilities participating in independent transmission system operations that offer auction-based day-ahead and real-time energy markets ― the so-called Day 2 markets of ISO New England, the Midwest ISO, the New York ISO and the PJM Interconnection.  But in an October 20 ruling, the agency retreated to a more nuanced approach that creates rebuttable presumptions as to when a QF enjoys nondiscriminatory market access and when it doesn't.

One presumption is that QFs of 20 megawatts or less do not have nondiscriminatory market access.  But for a QF larger than 20 megawatts the "put" presumptively ends if, on a utility purchaser's application, FERC finds the QF is connected to an open-access transmission system that can access a Day 2 market, a Day 1 (an auction-based real-time market only) RTO that also includes sufficiently competitive markets, or the functional equivalent of these.  New England, the Midwest, New York and PJM qualify as Day 2; pending implementation of scheduled new market redesigns, SPP and the California ISO will remain Day 1 (leaving to case-by-case determinations the question whether the markets are sufficiently competitive); and FERC deemed ERCOT a functional equivalent.  The larger QFs can rebut the presumption of nondiscriminatory access by showing that characteristics of how they operate ― for example erratic cogeneration available for sale or non-dispatchability, or where they operate ― for examples in proximity to a binding transmission constraint ― preclude market access.

The new rule provides not only for termination of the "put" in circumstances where a QF fails to rebut the presumption of nondiscriminatory market access, but also for its reinstatement where a QF later shows that the nondiscriminatory market access it once enjoyed is no longer accessible.   

Rule Narrows Universe of Qualifying Facilities, Widens Ownership

In a final rule issued February 2, FERC largely adopted its earlier proposed rulemaking implementing the Energy Policy Act of 2005’s (EPAct 2005) significant scaling back of the 1978 qualifying facility (QF) program of the Public Utility Regulatory Policy Act (PURPA).  As reported in an earlier entry, [Long-Term Transmission Rights Proposed for Organized Markets] FERC already has adopted a rule implementing EPAct 2005’s biggest change to the nearly 30-year-old QF program — prospectively terminating in organized electricity markets the mandatory purchase or "PURPA Put," which empowered qualifying cogenerators and small power producers to force traditional electric utilities to buy their electrical output at attractive, avoided-cost prices.  The February 2 rule further tightens the eligibility requirements for future cogenerator QFs, reduces the benefits accessible to QFs, and eliminates the prohibition against an electric utility owning more than 50 percent of existing and future QFs.

In addition to the now largely defunct PURPA Put, an important benefit of being a QF has been exemption from various state and federal regulatory laws.  For new (but not existing) QF contracts, the new rule eliminates one of the most valuable exemptions that removed QFs from price regulation under the statutory just and reasonable requirement of the Federal Power Act.  Going forward, QF contracts for cogeneration and small power production facilities of greater than 20 megawatts will be subject to price regulation, albeit probably pursuant to market-based rate schedules.   QFs retain their exemption of regulation as electric utilities under the new Public Utility Holding Company Act of 2005, but will be subject to the new market transparency and anti-fraud provisions that EPAct 2005 added to the Federal Power Act.

In order to qualify as a QF, PURPA required that the thermal energy that a cogenerator produces in tandem with electricity be "useful."  FERC implemented that requirement by simply presuming that the thermal output of a cogenerator was useful and making that presumption irrebuttable.  Much  to the consternation of utilities forced to by cogenerated electricity, this irrebuttable presumption, on occasion, countenanced thermal applications that were plainly not useful, such as distilling water only to dispose of the distilled water.  Responding to complaints that these thermal applications were a "sham," Congress directed in EPAct 2005 that FERC change its QF eligibility rules to require that a cogenerator’s thermal energy output be "productive and beneficial" and that its electrical, chemical and thermal output be used "fundamentally" for "industrial, commercial or institutional purposes" and not "fundamentally" to make electricity sales to an electric utility.   The February 2 rule adopts this language verbatim and requires and will require that an applicant for status as a cogenerator QF prove both that its thermal energy is productive and beneficial and that all of its ouput is fundamentally for purposes other than making electricity sales to an electric utility.  

Importantly, FERC clarified that residential uses are subsumed within permissible "institutional" purposes, and rejected the demand of the Edison Electric Institute that formal economic and financial reports support any finding that thermal energy is productive and beneficial.   Also importantly, FERC instructed that thermal uses that were irrebuttably presumed useful under the old rule will be presumed rebuttably to be productive and beneficial under the new rule.  And once certified as a QF cogenerator, the owner will not lose that status even if the economics of its thermal energy output later reverse.  Cogenerators with 5 megawatts or less are also rebuttably presumed productive and beneficial.

 With regard to the new fundamental-use requirement, the February 2 rule adopts a straightforward safe harbor:  If 50 percent of the aggregated annual energy output of a facility is used industrially, commercially or institutionally and not sold to an electric utility, then the fundamental-use requirement will be presumed irrebuttably to be satisfied.   And again, cogenerators with less than 5megawatts or less are rebuttably presumed to satisfy this new requirement.

Pre-existing efficiency standards for oil- and gas-fired cogenerators are unchanged in the new rule, and FERC rejected demands that it establish efficiency standards for coal-fired cogenerators.  Also retained is the existing practice by which both cogenerator and small power QFs can self-certify and self-recertify.  The only difference is that such self-certifications will be publicly noticed in the federal register and can be challenged by the public or by FERC on it own initiative.

Proposed Rule Would End PURPA “Put” in Some Power Markets

Acting on a directive from the Energy Policy Act of 2005 (EPAct 2005), FERC has proposed new regulations that automatically would relieve some utilities of their nearly 30-year old obligation to purchase qualifying facility (QF) power. [New PURPA Section 210(m) Regulations Applicable to Small Power Production and Cogeneration Facilities, 114 FERC ¶ 61,043 (2006)].  Enacted as a provision of the Public Utility Regulatory Policies Act of 1978, the purchase obligation is known as the “PURPA put” because it enabled QFs — both cogenerators and small power producers — to put their output to traditional utilities operating in the vicinity.   EPAct 2005 directed FERC to end the PURPA put in “sufficiently competitive” markets that provide QFs with the ability to deliver their generation to buyers.  To be considered by the agency, public comments on the proposed regulations must be submitted by approximately the end of February. 

FERC would end the QF-purchase mandate generically for utilities operating in the organized markets that have so-called Day 2 markets — MISO, ISO-New England, PJM, and NYISO — because they offer transparent spot markets into which all generators can sell.  Utilities operating in the CAISO or SPP, as well as utilities operating outside of organized markets will have to establish their eligibility on a case-by-case basis.  To ease this burden somewhat, FERC suggests establishing a rebuttable presumption of eligibility for utilities providing nondiscriminatory open-access transmission under an Order No. 888 tariff or a reciprocity tariff.   

In a nod to wind energy advocates and others who harbor concerns that the proposed rule would disadvantage numerous small wind facilities that do not have meaningful market access, the proposed rule seeks comment on whether certain types of QFs should be exempted from the rule and retain their ability to force a sale of their power. 

Proposed Rules Will Cabin the Future Role of Qualifying Facilities

In its latest effort to implement the mandates of the Energy Policy Act of 2005 (EPAct 2005), FERC has proposed to amend several of its regulations concerning qualifying cogeneration and small power production facilities (QF).  The proposed changes would tighten the criteria used to evaluate the eligibility of cogenerators for QF designation, discontinue restrictions on QF ownership, and eliminate some exemptions that QFs have enjoyed from regulatory requirements.  To be considered by the agency, public comments on the proposed rulemaking must be received 21 days after publication in the Federal Register, likely sometime in mid-November. 

To ensure that cogeneration QFs' thermal output is used in a "productive and beneficial manner," FERC proposes to discontinue its essentially irrebuttable "presumptively useful" standard normally applied to its evaluations of cogenerators seeking QF status.  This presumption allowed "sham" QF designations where there was no real use for a facility's thermal output.  The presumption of usefulness would now be rebuttable, with FERC considering the uses a cogeneration facility makes of its thermal output.  FERC also must now ensure that the electrical, thermal, chemical and mechanical output of a new cogeneration facility is used fundamentally for industrial, commercial, or institutional purposes and is not intended for sale to an electric utility (rendering the facility a so-called "PURPA machine").  FERC proposes to require applicants for QF status to explain how the cogeneration facility meets this requirement, and review those explanations on a case-by-case basis.  FERC would also require applicants for new QF certification to describe how they are progressing in the development of efficient electrical energy generating technology, and seeks comment on its proposal to require new coal-burning cogeneration facilities to meet an efficiency standard similar to that applied to natural gas and oil-burning cogeneration facilities.  In light of these changes, FERC asks whether self-certification procedures should continue to be available to new applicants for QF status.

FERC also proposes to implement EPAct 2005's elimination of the existing restriction that a traditional public utility not own more than 50 percent of a QF.  That restriction is what invited new entry and competition into power generation in the 1980s and 1990s.  Removal of the ownership restriction will allow traditional utilities to own majority interests in a QF.

Historically, FERC has exempted most QFs from Sections 203, 205, 206, 208, 301 and 304 of the Federal Power Act (FPA).  Based on the elimination of the QF ownership restriction, as well as its reasoning that these exemptions are no longer necessary to encourage the development of cogeneration and small power production facilities, and that their continuation would remove many sales of generation from any regulatory oversight at all, FERC asks for comment whether these exemptions should be continued or eliminated.  FERC proposes to retain the exemptions only for smaller QFs and asks whether QFs that are independent of traditional utilities, transmission providers, and other power producers should continue to enjoy some or all of the existing exemptions.  QFs would not, however, be exempt from the new provisions that EPAct 2005 added to the FPA, such as the prohibitions against misreporting price and transmission-availability information, and market manipulation.

If adopted, these proposed changes to FERC's regulations, in combination with EPAct 2005's elimination of the PURPA mandate requiring traditional public utilities to purchase QF power at avoided-cost prices (which FERC proposes to address in another forthcoming rulemaking) would result in a more-limited future role for QFs.  [Revised Regluations Governing Small Power Production and Cogeneration Facilities, 113 FERC ¶ 61,020 (2005) NEW MATTER]

FERC Shoots Down First Public Utility to Seek Waiver of QF Purchase Requirement

On the same day that it proposed a rulemaking implementing many provisions of the Energy Policy Act of 2005 (EPAct 2005) regarding qualifying small power production and cogeneration facilities (QFs), FERC shot down the first request of a traditional public utility under EPAct 2005 for exemption from the requirement that it purchase the output of a QF at an avoided-cost price.

Alliant Energy was the first of several utilities to request FERC to waive its power purchase requirements with respect to QFs within the service territories of two of its operating utilities [See Alliant Becomes First to Try for EPAct Waiver, 9/22/2005], based on EPAct 2005's elimination of that requirement in certain cases.  This week FERC denied the request, without prejudice, on procedural grounds.  FERC did not engage Alliant's contention that proximity to markets administered by the Midwest Independent System Operator provides a "competitive market" for QFs, the existence of which is a prerequisite under EPAct 2005 for exemption from the mandatory purchase requirement.  Instead, FERC pointed to Alliant's failure to meet EPAct 2005's requirement that an applicant for exemption provide "sufficient notice to potentially affected qualifying … facilities."  According to FERC, mere publication of the notice of the application for waiver of the mandatory purchase requirement in the Federal Register did not satisfy the "sufficient notice" requirement.  FERC clarified that any entity seeking relief from this power purchase requirement must identify to FERC any QFs that would be affected, including both existing QFs and QFs under development.  FERC plans to establish a rulemaking in the near future to address the statutory elimination of the power purchase obligation contained in the EPAct.  [Alliant Energy Corporate Services, Inc., 113 FERC ¶ 61,024 (2005) UPDATE]

Alliant Becomes First to Try for EPAct Waiver QF Purchase Requirement

In mid-August Alliant Energy asked FERC to exempt two of Alliant's utilities, Interstate Power and Light Co. (IPL) and Wisconsin Power and Light Co. (WPL) from the QF purchase requirements contained in the Public Utility Regulatory Policy Act (PURPA).  The filing came just days after the passage of the Energy Policy Act of 2005 (EPAct 2005), and took advantage of a provision in the EPAct 2005 amending PURPA and providing for waiver of QF purchase requirements if FERC finds the service territory of the utility seeking exemption to be competitive.  The waiver is based on the reasoning that when QFs have access to other potential buyers, local utilities need not be forced to purchase the QFs' output.   

Alliant contends that the operations of the Midwest Independent Transmission Operator (MISO) allow QFs in IPL and WPL's service territories to access alternative buyers.  On the other side of the debate, protestors, including the American Wind Energy Association (AWEA) and the Electricity Consumers Resource Council (ELCON), counter that the mere operation of an RTO such as MISO is insufficient proof of a competitive market for purposes of EPAct 2005.  In particular, protestors claim that Alliant failed to demonstrate that the QFs have access to long-term energy and capacity markets and pointed to MISO's still-developing resource adequacy program and formal capacity market.   

More generally, Alliant's opponents ask that FERC clarify that the determination of whether to exempt utilities from QF purchase requirements is a service territory-specific inquiry, some going so far as to ask FERC to issue a notice of inquiry into how to implement the new PURPA language.  How FERC rules on the requested exemption and interprets the new exemption provision of EPAct 2005 will be watched closely by industry participants on both sides. [FERC Docket No. EL05-143] [NEW MATTER]

Energy Policy Act of 2005 Hands FERC a Long To-Do List

The Domenici-Barton Energy Policy Act of 2005, signed into law on August 8, mandates that FERC issue several new rules and engage in other new initiatives over the next few months.  Milestones of particular significance to the power and natural gas industries are:

• Within 60 days:  Issue regulations on the National Environmental Policy Act pre-filing process for liquefied natural gas (LNG) projects. 
• Within 90 days: 
  • Consult with Departments of Interior, Commerce, and Agriculture, to establish procedures for trial-type expedited proceedings for mandatory conditions and fishways on hydropower licenses.
  • Issue a final rule exempting QFs, EWGs, and foreign utility companies from access requirements that take effect upon PUHCA repeal (PUHCA is repealed effective 6 months after enactment).
• Within 4 months: 
  • Issue rules to exempt from section 1275 any holding company whose public utility operations are confined to a single state and any other class of transactions FERC finds not relevant to jurisdictional public utility rates.
  • Issue any rules necessary to implement new PUHCA provisions.
  • Submit to Congress recommendations and conforming amendments to federal law necessary to carry out the new PUHCA subtitle.
• By Dec. 31, 2005:  Conclude California energy crisis proceedings and submit to Congress a report describing actions taken and timetables, if any, for further action.
• Within 180 days: 
  • Issue final rule implementing new reliability provisions.
  • Issue rule revising criteria for useful thermal output of QFs under PURPA.
  • Sign MOU with Commodity Futures Trading Commission on information under electric and gas market transparency provisions.
  • Report to Congress on progress in licensing and constructing Alaska natural gas pipeline.
  • With DOE, report to Congress on how to make available to all transmission owners and RTOs real-time information on the functional status of transmission lines within Eastern and Western Interconnections.
• Within 1 year:
  • By rule or order, establish how to meet the needs of load-serving entities.
  • Issue rules for incentive-based rate treatments for transmission in interstate commerce.
  • Convene regional joint boards to study security constrained dispatch, report to Congress.
  • Publish annual report assessing regional demand response resources.
  • As a member of a 5-member inter-agency task force, submit report to Congress assessing competition within wholesale and retail electricity markets.
  • Consult with DOE to conduct at least 3 LNG forums.
  • Enter MOU with other federal agencies to coordinate review and permitting of electric transmission facilities.
• Within 18 months:  Consult with DOE to submit report to President and Congress on benefits of cogeneration and small power production
• Within 2 years:  Consult with Agriculture, Commerce, Defense, Energy, Interior and states to identify corridors for pipelines and electricity transmission and distribution facilities on federal land in Western states, perform environmental reviews for those designations, and incorporate corridors into relevant agency land use plans
• Within 4 years:  Consult with Agriculture, Commerce, Defense, Energy, Interior and states to establish procedures to identify corridors for pipelines and electricity facilities for all other (i.e., non-Western) states.
• No deadline is set for these actions:
  • Issue rules governing national transmission corridor permits.
  • Adopt rules providing expedited procedures for processing FPA § 203 applications within 180 days.
  • Conclude MOU with Secretary of Defense to coordinate LNG facilities that may affect active military installations.
  • Consider New England states' objections to proposed locational installed capacity ("LICAP") requirement pending at FERC.
  • By rule or order, require non-regulated transmission entities to provide comparable open access.
  • Issue rules to permit recovery of prudently incurred costs of QF contracts.