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Fifteen Texas cogeneration facilities ("QFs") filed a petition with the Federal Energy Regulatory Commission ("FERC") for a declaratory order asking FERC to declare that, under the Public Utility Regulatory Policies Act of 1978 ("PURPA"), the utility holding companies that will be formed as a result of Texas restructuring legislation will continue to satisfy the PURPA definition of "electric utility" and will, therefore, continue to be obligated to purchase power from QFs. In response to the QFs’ filing, the Public Utilities Commission of Texas ("PUCT") filed a petition with FERC requesting a waiver of FERC regulations promulgated according to PURPA. The PUCT argued that the PURPA purchase requirements will hinder the development and function of the competitive market. The PUCT also argued that the PURPA purchase requirements are unnecessary because the competitive market will accommodate the QF generation. The QF and PUCT petitions, along with numerous interventions, were consolidated. The petitions and interventions were the subject of the May Stateline article. On May 17, 2001, FERC issued a declaratory order granting the QF petition, to the extent that the petition requested FERC declare that companies meeting the definition of "electric utility" under PURPA will continue to have an obligation to purchase power from QFs. The intervening Texas utilities acknowledged that entities which meet the definition of "electric utilities" will continue to have an obligation to purchase QF power under PURPA after Texas implements its restructuring legislation. The utilities also acknowledged that two of the three types of subsidiary companies which will be formed under the state restructuring plan (i.e., the generating company and the retail electric service company) will meet the PURPA definition of "electric utility." The FERC order denied the PUCT request for waiver of PURPA’s mandatory purchase requirements. In denying the PUCT’s request for waiver, FERC stated that the PUCT’s request "is essentially a complete waiver of the PURPA purchase obligation for all Texas utilities." FERC also stated the PUCT’s request for waiver under 18 C.F.R. §292.402 of FERC regulations is not consistent with either the regulations or the precedent for waiver. 18 C.F.R. §292.402 requires that a state regulatory authority demonstrate that compliance with the requirements it seeks to waive is: 1) not necessary to encourage cogeneration and small power production; and 2) is not otherwise required under section 210 of PURPA. FERC quoted section 210(b) of PURPA, stating that the rates for utility purchases "shall be just and reasonable to electric consumers of the electric utility and in the public interest, and … [n]o such rule … shall provide for a rate which exceeds the incremental cost to the electric utility of alternative electric energy." The FERC avoided cost rule states that purchase rates will satisfy section 210(b) if the rate is set at the utility’s avoided costs. In an attempt to satisfy the demonstration requirements of 18 C.F.R. §292.402, the PUCT argued that compliance with the regulations would not be necessary in a competitive market because retail competition would provide incentives for large electric consumers to construct their own cogeneration facilities. The PUCT also argued that, in the competitive marketplace, all producers have access to the market, prices will be driven by market forces, and avoided cost is a proxy for the market price. Notwithstanding these arguments, FERC found that an adequate market for QF power will not exist in Texas after restructuring takes place without application of PURPA requirements. Even the PUCT’s suggestion that QFs could sell their power to an ISO was not found to be a sufficient substitute for mandatory purchase requirements because that market for potential sales is much smaller than that which is provided under the PURPA purchase obligations. Further, FERC stated the opportunity to make sales is inferior to having an electric utility purchaser with a mandatory purchase obligation. FERC concluded its order by stating that, while they shared the PUCT’s concern that administratively determined avoided cost may be inconsistent with an effective competitive market, the PUCT has the flexibility to solve the problem and still satisfy PURPA avoided cost based rate requirements without resorting to the waiver of mandatory purchase requirements. FERC suggested the PUCT could adopt a more "market-oriented method" of determining avoided costs.
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