The Public Utility Regulatory Policy Act of 1978 (PURPA) was passed by Congress in order to support the conservation of energy supplied by electric utilities, optimal efficiency of electric facilities and resources, and equitable rates for electric consumers. Within PURPA a special class of Independent Power Producers called Qualifying Facilities (QFs) was created that have rights to purchase power from and sell power to the electric utility with which it interconnects (a host utility). The Federal Energy Regulatory Commission (FERC) was vested with oversight authority of PURPA, and enforces the purchase and sale obligations between a QF and a host utility. The Energy Policy Act of 2005 amended PURPA to excuse a host utility from its purchase and sale obligations if FERC determines the QF has access to a sufficiently competitive market in which to purchase and sell power. Absent a competitive market, the QF purchase and sale obligations apply to all U.S. electric utilities regardless of size or regulatory status before FERC.
Broadly, QFs are biomass, waste, renewable or cogeneration facilities that meet specific size and efficiency requirements and thereby gain federally-mandated access to the local distribution or transmission grid. Because QF installations are beyond the control of the utility but must interconnect and integrate with the utility, there is a wide spectrum of issues to address and therefore significant potential for conflict. As renewable and cogeneration technology continues to mature, the likelihood of utility/QF interaction only increases. In this article three basic steps are identified that utilities should take to prepare to successfully interface with a QF.
Know the Rules
The rules adopted by FERC address the requirements to purchase power from and sell power to QFs, the parameters by which rates for the purchase of QF power are to be developed, and how costs related to interconnection are to be allocated. The general premise of the rules is that while certain utilities are required to interconnect and purchase power from a QF, the resultant effect of interconnection should be financially neutral to the host utility’s customers. That is, utility rates should not be impacted by virtue of interconnecting to a QF, but the QF must be paid the full price of all costs that are avoided by the utility as a result of the interconnection.
While federal rules have uniform applicability, state utility commissions are the first line of interpreting and applying these standards. The manner in which these standards are applied can differ from state to state and therefore it is important to be familiar with the local rules and precedent. On rare occasion, FERC will overrule a state commission if FERC believes the state has misinterpreted or misapplied the federal standard.
Even if your utility has not yet interacted with a QF, it is important to prepare for the likelihood that a QF will seek to interconnect and sell power to or through your utility. One of the ongoing requirements for all electric utilities is to prepare and maintain a projection of the price the utility would pay for the purchase of energy and capacity from a QF over a five to ten year horizon. While not a binding standard-offer rate, the projection is a useful exercise for the utility and a valuable tool for a potential QF that is determining whether there is an adequate market for the construction of a project.
To stay ahead of the curve, a utility should consider: 1) having clear rules in place that address how a potential QF can request interconnection; 2) establishing the technical standards for interconnection that accommodate the unique characteristics of your system; 3) calculating and publishing rates for the purchase of energy and possibly capacity based on the nameplate capacity of the interconnecting QF; and 4) calculating and publishing rates for the sale of energy to QFs, including back-up, standby, emergency, and supplemental service.
As PURPA approaches its 40th anniversary, some utilities may find that their existing tariffs and policies designed to address PURPA requirements are a bit dated and do not reflect updated technology, technical standards, and operational experience. A thorough review of existing policies and their effectiveness can prevent significant disputes down the road.
Retain Necessary Flexibility
Creating a one-size-fits-all model in your tariff may be appropriate for smaller QF installations, but will become more challenging for both the utility and the QF as the size of the QF increases in proportion to the size of the utility. The cost of interconnection and the costs and benefits associated with integrating the facility can vary drastically based upon the nature of the power provided by the QF, the size of the QF, and the location of the QF on the system. While PURPA requires utilities to publish standard-offer energy rates for QFs with a nameplate capacity of 100 kilowatts or less, it is left up to state utility commissions and the utilities themselves to determine whether standard-offer rates are established beyond this threshold.
For larger utilities, it may make sense to establish standard-offer rates for larger QFs because the effects of integration are relatively insignificant. For smaller or islanded utilities however, a moderately-sized QF could create significant integration challenges that actually increase operational costs for the utility. The utility’s tariff should include language that allows for the development of unique rates for each installation by special contract when the size or location of the QF could create integration challenges that can’t be contemplated in a standard-offer rate.
By knowing the rules, being proactive, and retaining the necessary flexibility to develop power purchase rates and interconnection guidelines that are tailored for larger QFs, a utility can establish a fair and mutually beneficial relationship with QFs. Aldrich has experience working with our clients to navigate PURPA rules and developing utility-specific policies and rates applicable to QFs. We welcome the opportunity to enter into dialog about the specific needs of your utility or QF.
Meet the Author
Aldrich CPAs + Advisors LLP
James Keen has over 15 years experience as an engineering analyst and in complex regulatory proceedings, which includes electric, natural gas, oil and gas pipeline, water and wastewater, and refuse utilities. He focuses on revenue requirement, cost of service and depreciation studies as well as tariff filings, certificate issues and other financial analyses and regulatory…
- Public utility, regulatory matters and tariff administration
- Modeling and rate design studies
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