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Arizona sets 18-year contract terms for qualifying facilities

The Arizona Corporation Commission unanimously agreed that the state's investor-owned utilities must sign contracts of at least 18 years in length with renewable energy developers that qualify under federal law, and the commission refused to impose a cap on the amount of generation capacity each utility must acquire.

Arizona Public Service Co., Tucson Electric Power Co. and UNS Electric Inc. sought to limit commitments with developers requesting contracts to sell them renewable energy under provisions of the federal Public Utility Regulatory Policies Act. APS argued that the generating units, called "qualifying facilities," or QFs, are large merchant facilities backed by sophisticated developers and built solely to sell wholesale power for profit.

The act requires that utilities afford developers of QFs with standard, reasonable terms so each contract does not have to be negotiated individually. Otherwise, utilities could offer unfavorable terms and prolong negotiations. However, legislators and regulators in each state can impose limits on the size of QFs and the length of contracts.

The utilities wanted to limit power purchase agreements to two years in such "standard offer" contracts. An administrative law judge recommended a nine-year limit on those contracts and three-year limits on renewals. (Arizona Corporation Commission Docket No. E-01345A-16-0272)

The Sierra Club, which was an intervening party in all three proceedings involving the utilities, argued the utilities' proposal for two-year contract terms would have made QF project financing too risky for such capital-intensive projects, as they must be financed over many years. "Long-term contracts are therefore necessary to give renewable energy developers a reasonable opportunity to secure financing for these projects," the Sierra Club said in a statement.

Commissioners Sandra Kennedy and Lea Marquez Peterson introduced a joint amendment to the law judge's recommended order that not only extended the length of contracts but eliminated the caps the law judge wanted to impose on the amount of generation capacity each utility will have to acquire from QFs. Both commissioners indicated they wanted to encourage renewable energy development in Arizona.

The law judge and staff advised the commission to impose a 50-MW cap on standard offers for each utility. The staff also wanted to impose a 2-MW limit on the size of each QF but the law judge recommended QFs could be larger as long as in aggregate they did not exceed the 50-MW cap.

The commission on Dec. 11 decided to do away with all size and cap limits. As Kennedy's and Marquez Peterson's amendment stated, "We find no reason to discriminate between QFs between 100 kW and 2 MW and those 2 MW or larger, so we cannot support the 2 MW cap recommended by staff. We further find that there is insufficient support for imposition of a 50 MW cap per utility."

APS is a subsidiary of Pinnacle West Capital Corp., and both Tucson Electric Power and UNS Electric are subsidiaries of Fortis Inc.