This article, from law firm Paul Hastings LLP, is authored by William DeGrandis and Stephen Snyder.
Author William DeGrandis
Curtailment of renewable energy resources has significant financial impacts for projects that only generate
revenue when in operation. Do Federal Energy Regulatory Commission (“FERC”) regulations give utilities purchasing the output of renewable resources under Power Purchase Agreements (“PPA”) the right to curtail for reasons not specified in the PPAs? This Alert discusses a recent FERC case that addresses this issue and provides some practical considerations for PPAs in light of this case.
Synopsis
FERC recently confirmed a Declaratory Order 1 that protects Qualifying Facilities (“QFs”) from curtailment by
Coauthor Stephen Snyder
their host utilities. Under the Public Utility Regulatory Policies Act of 1978 (“PURPA”), electric utilities must purchase all energy and capacity made available by QFs, including small renewable generators like wind farms.2 FERC’s June 20, 2013 rehearing order3 confirmed the conclusions of its earlier September 20 Declaratory Order, issued in response to a petition by Idaho Wind Partners, LLC (“IWP”) regarding potential curtailment of certain wind QFs owned by IWP. As explained in its Petition for Declaratory Order (“Petition”), IWP is a partnership that owns projects totaling 183 MW of wind generation in Idaho, the output of which is sold to Idaho Power under several long term PPAs. IWP requested that FERC weigh in on potential curtailment authority that Idaho Power was seeking in a state proceeding based on Idaho Power’s interpretation of FERC regulations implementing PURPA. FERC determined that certain curtailment rights referenced in its regulations were not available to utilities purchasing QF power pursuant to long-term PPAs with rates established at the time the PPA was executed. Instead, curtailment rights of utilities would be governed by the terms of those PPAs. The Orders therefore held that a curtailment schedule proposed by Idaho Power and under consideration by the Idaho Public Utilities Commission (“Idaho PUC”) would violate PURPA if it authorized curtailment of QF purchases made pursuant to a PPA with fixed rates for reasons not included in the PPA.
PURPA Background
QFs have the statutory right to elect to sell their output to the host utility either on an as available basis or pursuant to a PPA. Under a PPA, QFs further may elect to either have the rates established at the outset for the term of the PPA, or to be paid the rates in effect at the time of the sale. IWP, for example, elected to sell to Idaho Power pursuant to long term PPAs and elected to establish the rates for those sales at the time the PPAs were executed. However, FERC anticipated periods of low demand during which purchasing QF power could force a utility to take its baseload generating units offline (“light loading” conditions). Because of the non-firm nature of some QF generation, this could increase the utility’s overall costs by forcing it to scramble to cover the period following a QF purchase but before baseload units could be brought back online with more expensive purchased power. To avoid this result, FERC included an exception in its regulations where a utility could curtail purchases from QFs if, due to “light loading” conditions, the purchases would result in an increase in overall utility costs and thereby overcharge the utility for the value of purchase.
Analysis
Idaho Power initiated an action at the Idaho PUC seeking approval of a new rate schedule (“Schedule 74”), which defines circumstances authorizing curtailment of QF purchases during “light loading” conditions. Schedule 74 makes no distinction between as available sales and sales made pursuant to a PPA (in FERC regulatory terms, sales pursuant to “legally enforceable obligation”). As discussed, PURPA and FERC regulations allow a QF to elect either structure, and for sales pursuant to a legally enforceable obligation, the QF can further elect for the purchase price to be the utility’s avoided cost rate at the time of the sale or to agree by contract to a forecasted avoided cost rate for the term of the legally enforceable obligation. It is this latter case under which IWP wind farms make sales to Idaho Power. Idaho Power took the position that the curtailment exception applied to any purchases from any QFs, even those with long term PPAs.
While this proposal was under consideration before the Idaho PUC, IWP petitioned FERC for a Declaratory Order, seeking a determination that the curtailment exception in Section 304(f) did not authorize curtailment of purchases made under a long-term PPA where the avoided cost rate was established at the time the obligation was created. (Lawyers from the Firm’s Energy Regulatory Team represented IWP before FERC.) IWP argued that Section 304(f) was intended to apply to sales with rates determined at the time of the sale, and that for long term, forecasted rates, FERC regulations and orders provided that fluctuations in the value of the purchased power were already taken into account. Because utilities would therefore not be undercompensated during “light loading” conditions, FERC was urged to declare that curtailments of purchases from QFs with long term, fixed rate PPAs made by appealing to Section 304(f) would violate PURPA. IWP also argued, over the objections of Idaho Power and the Idaho PUC, that it was appropriate to issue a Declaratory Order before Schedule 74 was approved or implemented because FERC Declaratory Orders are intended to announce FERC policy and thereby reduce uncertainty, not to resolve live disputes among parties. IWP made clear that it was not seeking an enforcement action, but rather a declaration by FERC of interpretation of the PURPA issues raised in the Petition.
In the September 20 Declaratory Order, FERC endorsed IWP’s interpretation of regulations implementing PURPA, including that Section 304(f) curtailment authority does not apply to purchases pursuant to a PPA with rates established at the time the PPA was entered. In the Order on Rehearing, FERC reiterated that long term PPAs with rates established at the time the legally enforceable obligation was incurred, as a matter of law, take into account fluctuations in the value of the capacity and energy provided over the term. Therefore, the overcompensation concerns addressed by allowing curtailment during “light loading” conditions are not present. FERC also rejected the argument that issuing the September 20 Declaratory Order was premature because FERC acted before the Idaho PUC approved Schedule 74. FERC noted that IWP had not requested, and therefore FERC did not consider, an enforcement action against Idaho Power or the Idaho PUC. Instead, the Order Denying Rehearing reiterates that the purpose of the September 20 Declaratory Order was to remove uncertainty “regarding the direction the Commission would take in the event it would be presented with an enforcement petition.”
With its Order Denying Rehearing, FERC has affirmed that utilities purchasing pursuant to a legally enforceable obligation under PURPA need to ensure that they include all relevant terms, including circumstances justifying curtailment, in a PPA. On the other hand, QFs are protected in exercising their statutory rights to sell their output but need to make sure that they understand PPAs terms regarding curtailment, which FERC may enforce, statutory right to sell notwithstanding.
Practical Considerations
The Orders thus have important implications for both utilities and QFs. Utilities must be aware that FERC will limit curtailment rights to those negotiated in their PPAs with QFs, and that FERC considers long term rates to already account for periods during which QF generation is less valuable or even creates otherwise uncompensated costs for the utility. In negotiating PPAs, QFs should be mindful of proposed language in long term PPAs that broadens utility curtailment rights to cover “light loading” and similar rights, either directly or more circuitously by reference to FERC regulations related to curtailment during the operational conditions discussed below. Finally, these orders provide more evidence of FERC’s commitment to protecting and promoting the statutory rights of QFs in order to promote the goals of PURPA to encourage the development of renewable energy sources.
Conclusion
The Orders provide important clarification regarding when curtailment under FERC’s regulations for “light loading” conditions is appropriate and make clear that utilities may not curtail the output of a QF selling pursuant to a PPA for reasons not provided for in the PPA. If a utility wants the ability to curtail for “light loading” conditions, or any other reason, it must expressly reserve that right in the contract. It cannot merely invoke the FERC regulation after such a PPA is executed.
While disputes between utilities and QFs are not uncommon, there have been very few documented instances of curtailment under Section 304(f) in the more than 30 years since the enactment of PURPA and resulting FERC regulations, likely because there has not been sufficient QF generation to consistently force baseload generation offline. With growing use of renewable generation, there may be more occasions in which QF generation reaches levels where utilities believe Section 304(f) “light loading” may occur and the Orders will prove very relevant in those circumstances. The Orders are also significant in that FERC issued those Orders while the state commission process was still ongoing.
Paul Hastings LLP
www.paulhastings.com
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