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FERC's PURPA technical conference explores market access, avoided-cost issues

Whilealmost all the participants at FERC's technical conference looking at issuesrelated to the Public Utility Regulatory Policies Act of 1978 agreed that somechanges to the way the law is implemented are needed, suggestions on how itcould be improved were often completely contradictory.

Forinstance, insisting that PURPA over time has "morphed into a developmenttool" for qualifying facilities, Duke Energy Corp.'s Kendal Bowman said FERC shouldrevise its regulations implementing the law to "reassert the foundingprinciples of PURPA and the application of a needs-based approach."

AllisonClements with the Sustainable FERC Project, however, insisted that PURPAimplementation should not consider the need for a qualifying facility's powerbecause that power's availability should be "incorporated into utility andregional planning processes from the start."

Thetechnical conference was prompted, at least in part, by lawmakers' that FERC'spolicies implementing PURPA, which was designed to make sure that small ­— 80MW and under — renewable, combined heat and power and certain other nonutilitygenerators have a reliable means of selling the electricity they produce, bere-examined in light of recent market changes. In particular, they said FERCshould consider the continued need for the rebuttable presumption that aqualifying facility, or QF, of 20 MW or less does not have nondiscriminatoryaccess to markets and therefore still needs the protections afforded by PURPA'smandatory purchase obligation. (AD16-16)

Should 20-MW threshold bescrapped?

Duringthe June 29 event, Bowman suggested that in RTO/ISO regions, QFs indeed havedirect access to organized markets and they therefore should be required tosell directly into those markets to "ensure that no generator receivespreferential treatment." Representing the Edison Electric Institute,Alliant EnergyCorp.'s Joel Schmidt similarly said such QFs should have to provethat they do not have adequate access to RTO/ISO markets.

Incontrast, Michigan Independent Power Producers Coalition representative LauraChappelle vigorously disputed the assumption that organized markets create alevel playing field for QFs. The Midcontinent Independent System Operator Inc.'s marketswere not designed to ensure long-term resource adequacy needs because moststates within its footprint are still fully regulated, and they therefore"would not fully ... or fairly compensate QF generators for their resourceinvestments," Chappelle said.

Onbehalf of the California Cogeneration Council, attorney Jerry Bloom said themarkets operated by the CaliforniaISO likewise do not provide adequate compensation to QFs. Moreover,because cogeneration facilities are not in the business of producing andselling power, Bloom and others stressed the importance of retaining therebuttable presumption for those generators. "The most logical off-takeris the local utility that can easily integrate this as-available power intotheir mix," Irene Kowalczyk, with the Industrial Energy Consumers ofAmerica, said.

Respondingto a question from FERC Commissioner Cheryl LaFleur about whether"theoretically there's such a thing as too much" QF generation,Robert Kahn with the Northwest & Intermountain Power Producers Coalitionsaid he sees no problem with the nation experiencing a flood of PURPA power ifthat power is cheaper for ratepayers than the alternative. "Truth of thematter is that if we can beat them, we should be beating them," Kahn said.

Bowmandisagreed, insisting that too much of even a good thing is still too much."We don't want to have all of one type of resource — particularly onethat's intermittent," Bowman said. "That can definitely causeoperational and reliability impacts to your system."

Addressingthat point from a different perspective, Bloom said any changes should takeinto account the differences between renewable and cogeneration QFs, notingthat most of the problems being cited with having too much QF power relate toissues applicable primarily to wind and solar generators.

Are developers gaming thesystem?

Severalparticipants raised concerns about developers gaming FERC's 1-mile rule, whichspecifies that generating facilities located 1 mile or more apart areconsidered separate facilities for QF eligibility purposes. Paul Kjellander,president of the Idaho Public Utilities Commission, said that rule allowsdevelopers to disaggregate what is essentially one large project into numeroussmaller projects to ensure they eligible for QF status and, in some cases, morefavorable avoided-cost rates.

FERCCommissioner Tony Clark said he takes very seriously state commissioners'concerns regarding gaming, since those regulators are charged with protectingthe public interest and otherwise have no reason to favor either maintaining orchanging the status quo. When he asked participants whether anyone wished totry to defend the 1-mile rule, no one spoke up.

Butsome still stressed the importance of distinguishing between developers thatare engaging in gaming and those that are simply making good businessdecisions. Chappelle said that some existing projects have "real reasonsfor being a mile or less apart," and Todd Glass, an attorney representingthe Solar Energy Industries Association, warned FERC not to "eliminate thevalue of economies of scale."

Respondingto participants' concerns regarding the proliferation of 4.99-MW facilities inregions that have established 5-MW maximums for QFs receiving publishedavoided-cost rates, Kahn said he does not understand why behavior that complieswith a set ceiling is automatically seen as gaming. Bloom agreed, saying,"That's not gaming the system, that's looking at the rules andparticipating based upon" those rules.

Do shorter contract termsthwart QFs?

Anotherconcern participants raised centered on the trend by states to significantlyshorten the length of contracts eligible for published rates, with somesuggesting that FERC adopt minimum standards to give QFs a measure ofcertainty. "Two years is not a financeable term," Glass said."There is no [QF] generation that is being financed on a merchant basis."

Glassnoted that PURPA's goal is to encourage the development of small powerproduction facilities and that FERC's initial order implementing the lawspecified that QFs must be able to enter into long-term contracts for theirpower. Glass said 15 to 20 years is a long term but two years is not.

However,Charles Bayless from the NorthCarolina Electric Membership Corp. noted that some of hisorganization's members are very small cooperative utilities, and thereforeentering into such long-term contracts would "tie up a significant amountof their assets."

IdahoPUC member Kristine Raper said her state recently limited QF contract lengthsto two years because allowing QFs to fix their rates for longer terms "resultsin rates which will eventually exceed ... avoided-cost rates into thefuture." She said that while the two-year contracts allow for a periodicadjustment of the rates, they "in all other ways ... are functionallyequivalent to the 20-year contract that those QFs had" previously.

Kjellandersuggested that the Idaho contract term limits were a direct response to gamingand the resulting flood of small QF projects that impose "an extraordinarycost" on ratepayers. But Bloom said the problem lies with PURPA'simplementation and not the law itself, since potential QF windfalls would notbe an issue if those generators were receiving their host utilities' trueavoided cost — the amount they would have to pay to buy that power from othergenerators or produce it themselves.

What constitutes avoidedcosts?

Onbehalf of EEI, NorthWesternEnergy's Al Brogan said states should be allowed to consider thecosts of needed transmission upgrades or network integration transmissionservices in the rate paid in a QF contract. A "but-for" approach tocalculating avoided costs will ensure that customers are not saddled with coststhey would not have to pay absent the QF purchase, he said.

QFsshould not be able to lock in prices based on long-term projections of avoidedcosts, Southern Co.'sJeff Burleson said, insisting that those generators "should be situated nobetter nor any worse" than other independent power producers. In thealternative, he suggested that long-term locked-in prices could be set belowthe avoided cost rate or that a portion of a QF's rate could be locked in basedon long-term projections and the remainder made variable.

FERCstaff should issue guidance for states to use when developing their methodologyfor determining those costs, according to John Hughes of the ElectricityConsumers Resource Council. He also said FERC should require RTOs and ISOs todevelop standard tariffs that QFs may use to more easily access "the bewilderingarray of energy and capacity services that are available in the organizedmarkets."

MichaelWise with Golden Spread ElectricCooperative said a utility's avoided cost for energy should be thecost that utility would otherwise have to pay for the energy at the time ofdelivery — the locational marginal price. But Elizabeth Whittle, counsel forthe New England Small Hydropower Coalition, said LMPs do not work as a proxyfor avoided costs because they sometimes are negative.