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FERC Clarifies Feed-In Tariff Ruling, Allows Multi-Tiered Avoided Cost Rates


By Vincenzo Franco, John Frenkil, David Yaffe -- October 26, 2010 -- Three months after issuing its first major ruling on state feed-in tariffs (see Issue Alert of July 22, 2010), the Federal Energy Regulatory Commission (FERC) clarified how the California Public Utility Commission (CPUC) could implement its feed-in tariff program.  In an order issued on October 21, 2010 (October 21 Order), FERC ruled that when a utility is required under state law to purchase power from generators with specific characteristics-e.g. certain renewables or combined heat and power (CHP)-the state may establish multi-tiered rates for utility purchases from qualifying facilities (QFs) under the Public Utility Regulatory Policies Act of 1978 (PURPA).  FERC did not consider any specific offer price that the CPUC may adopt in its feed-in tariff program.

Summary On July 15, 2010, FERC issued a declaratory order on the CPUC's feed-in tariff program implementing California's Waste Heat and Carbon Emissions Reduction Act (July 15 Order).  The program would require utilities in California to offer to purchase, at a price set by the CPUC, electricity from CHP generators that meet certain efficiency and emissions standards and have a generating capacity of 20 MW or less.  California had adopted similar provisions for purchases from renewable generators.  In the July 15 Order, FERC ruled that the Federal Power Act (FPA) preempts the CPUC from establishing rates for the utilities' purchases of electricity, unless the selling generators qualify as cogeneration or renewable QFs under PURPA.  Such rates may not exceed the purchasing utility's avoided cost, i.e. the cost that the utility would incur, but for the QF purchase, by generating the electricity itself or purchasing it from another source.

In the October 21 Order, FERC considered the CPUC's request to establish different avoided cost levels for QFs depending on the characteristics of the generator.  When a state requires a utility to purchase a certain percentage of energy or capacity from generators with certain characteristics, FERC clarified that the avoided cost rates can reflect prices available from generators with those characteristics.  Such prices represent the utility's avoided cost, because only generators with those characteristics are in fact able to sell to the utility as a result of the state procurement requirements.  FERC concluded that a multi-tiered avoided cost rate structure, in which the avoided cost rate for QFs that meet state procurement requirements is different from the avoided cost rate for QFs that do not meet those requirements, can be consistent with PURPA. 

The October 21 Order also addressed whether the CPUC could include a 10% "adder" or "location bonus" to reflect the avoided costs of the construction of distribution and transmission upgrades for CHP systems located in transmission-constrained areas.  FERC explained that a determination of the costs of upgrades that a QF purchase would avoid can be part of the calculation of avoided cost.  However, no adder or bonus can be included beyond the calculated avoided cost.

Implications The October 21 Order provides the CPUC the flexibility necessary to implement its feed-in tariff program within the framework of PURPA avoided cost rates.  FERC's endorsement of a multi-tiered avoided cost rate structure paves the way for other states to adopt rates under feed-in tariffs or comparable structures that incentivize the development of generation resources necessary to meet state mandatory procurement requirements such as renewable portfolio standards. 

Van Ness Feldman regularly represents energy clients in FERC and state-level regulatory proceedings and provides counsel on cost-based and market-based generation tariff development.  If you are interested in additional information regarding FERC's ruling, please contact David Yaffe, Vincenzo Franco, or any other Member of the firm's Electricity Practice at (202) 298-1800 in Washington, D.C. or (206) 623-9372 in Seattle, WA.

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