FERC Proposes Reforms to 40-Year Old Power Purchase Law to Reflect Energy Market Changes

The Federal Energy Regulatory Commission announced a rulemaking to update provisions of the Public Utility Regulatory Policies Act 1978, or PURPA, which requires utilities to purchase power from small independent electricity generators at the avoided cost, or the cost the utility would spend to procure the electricity itself, according to a Sept. 19 press release. The reforms intend to provide flexibility to state regulatory authorities so they can accommodate recent wholesale power market developments, including incorporating market pricing into avoided cost energy rates.

The revisions would allow states to require energy rates, but not capacity rates, to change during the life of utilities’ power purchase contracts with qualifying facilities, or QFs. FERC proposes to lower the threshold presumption for nondiscriminatory access to power markets from 20 megawatts to 1 megawatt for small power production, but not cogeneration, facilities. The act was originally intended to reduce dependence on foreign oil and promote small renewable energy and cogeneration facilities from which utilities must buy power at administratively-set avoided costs the utility would incur to produce the power. PURPA authorizes the states to set how much a utility is obligated to pay QFs for the electricity they have produced.

Much has changed since the enactment of PURPA in 1978 given the development in wholesale markets and retail competition, and the shift from coal to natural gas and renewables, driven by economic forces and technological advancement. The declining cost of new generation has sparked a debate over avoided costs, prompting utility complaints that PURPA mandates have resulted in overpayments to solar and forced them to buy electricity even when they do not need it. The Energy Policy Act of 2005 revised PURPA by exempting utilities from the law’s mandatory purchase obligation if they had access to a competitive wholesale power market. In states not served by competitive wholesale markets, PURPA still has a significant impact.

Among other changes, the rulemaking seeks to modify the “one-mile rule,” which requires two or more facilities to be one mile apart to be considered independent, and calls for objective and reasonable standards for qualifying facilities to obtain obligations for the purchase of their power. The proposal allows protests of a facility’s self-certification or self-recertification without the need for a petition seeking a declaratory order.

The proposal opens a 60 day comment period.