March 2006

Quick QF Quiz Show

by Roger Feldman  --   Bingham, Dana L.L.P.
(originally published by PMA OnLine Magazine: 2006/04/01)
 

In our wacky wi-fi world, game show formats have gained increasing currency. The trend has now spread to this column.

Question. Is FERC:

(1) Dispensing regulatory candy to RTOs?
(2) Appeasing Congressional legislative authors as to its interpretive abilities?
(3) Selling out to the utilities by effectively trimming future QF development?
(4) All of the above

These are the unhappy questions that are being increasingly asked after review of FERC’s recent Order No. 671. The answer to this “Quick QF Quiz” is found in italics at the end of this column.

In the process of implementing the amendments to PURPA, enacted by Section 1253 of the Energy Policy Act of 2005 (“EPACT”), the FERC may be slamming the door on any kind of “competition” except some dimly remembered fossilized version of Standard Market Design to which the FERC is clinging vainly. In doing so, FERC will jeopardize the surge of innovation which renewables now promise and the significant addition to national reliability which distributed generation could provide - each of which is important to national security. From a broader commercial standpoint, the costs and time required to be created for merchant undertakings of projects of these types will re-erect the very barriers to entry which Congress has declined to endorse, despite utility industry pressure. In fact, barriers to which FERC has in fact been sensitive to in other contexts such as market power. Here are some clues to the answer to this Quick QF Quiz.

FERC has promulgated Docket No. RM0G-10-000, implementing new PURPA Section 210(m) with respect to those “new” qualifying cogeneration facilities under the significantly modified Section 210 of the Federal Policy Act, which Congress was willing to allow to keep standing. For the most part, in that regard, FERC was doing its duly: Congress moved to quash “PURPA machines” without justifiable thermal load purposes. FERC complied. It eliminated the utility ownership requirements, and shortly hedged the arguably abused self certification requirements.

However, FERC also construed EPACT’s direction to review the broad exemptions of QFs under Section 210(e) of PURPA, which included PUHCA (no small matter at the time of PURPA’s enactment), the Federal Policy Act and state laws. At the time, FERC asserts, these exemptions worked to remove the disincentives to utility type regulations”; now, however QF sales should be subject to Sections 205 and 206. Why? Because then there was no market for electricity generators but now such new wholesale markets have developed to the point that they are unnecessary. Policing market power impacts in this supposedly crisp new standardized world will not require a showing to FERC that QFs - even the bobtailed type still permitted post - EPACT - lack “market power” (a demonstration which is an expensive and time consuming proposition). Only a fragment made up of state jurisdictional sales and perhaps really smaller QFs (under 5 MW) escape this filing requirement.

FERC’s related Order No. 671 goes further – paradoxically by making a contrary assumption. Even after Section 205 filing has been made by a QF, there remains the matter of rates: the crux of the business model for QF development . Order No. 671 implements the new PURPA statutory requirement that removes the mandatory purchase obligation which provides in essence that no utility mandatory purchase obligation exists either (i) in mandatory day ahead auction markets exist or (ii) where an RTO exists and FERC determines that meaningful opportunity to sell within that RTO “exists, taking into account evidence of transactions within the relevant market”.

From this base, the FERC made a terrific leap: a preliminary finding that QFs inter - connected with certain named ISOs or RTOs were not entitled to benefit from PURPA’s mandatory requirements. No market power there. A ringing SMD - like endorsement of RTOs, at the very time in its recently issued Notice of Inquiry regarding transmission the Commission is raising concerns about continued discriminatory behavior. In effect the message to utilities is: join an RTO, and your problems with QF sales are ended. In addition to scrapping the mandatory purchase programs, FERC offers no assurance as to how just and reasonable nature of backup rates to QFs will be set, in this market-rate driven paradise.

Quick QF Quiz Answer:

Overall, the presumption that QFs have non-discriminatory access to long term contracts in organized markets - which, thereby, of course restricts evidence of discriminatory utility behavior against them - is regulatory candy to the utilities in exchange for modest relative RTO enhancement. It also has the appearance of FERC appeasement of Congressional critics after the lambasting it took for showing creativity in the new PUHCA rules.

The winning answer therefore is “All of the Above”.

Now for some “Instant Jeopardy”.

The answer is: a wide range of cost effective, energy efficient QF applications.

The question is: Who is the loser here?

ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon Markets Group has practiced law related to the finance of environmental and energy projects and companies for 40 years.  In particular, he has analyzed and executed a wide variety and substantial value of project financings.  He chairs the American Bar Association’s Committee on Carbon Trading and Finance, serves on the Board of the American Council for Renewable Energy, and has been a senior official in the Federal Energy Administration.  He is a graduate of Brown University, Yale Law School and Harvard Business School.