Once an Obscure Law, PURPA Now Drives Utility-Scale Solar. Regulatory Conflict Quickly Followed

When the Public Utility Regulatory Policies Act of 1978 was first enacted, it was a bit of an abstraction.

A response to the energy crisis of the early 1970s, and championed by renewable energy advocate President Jimmy Carter, PURPA was designed to encourage energy conservation and support domestic renewable energy sources.

PURPA compelled utilities to purchase energy produced by so-called Qualified Facilities (QFs) if they were developed at cost equal or below what a utility would have to pay for a traditional power plant — in PURPA parlance, that is what’s known as the utility’s avoided cost. 

From the late 1970s through even the past few years, solar and wind energy were so expensive that no utility had to worry about them matching or besting their avoided cost. But circumstances have changed dramatically, thanks to precipitous declines in the cost of renewables.

In many states, contracted solar prices have fallen below 5 cents per kilowatt-hour. The result: PURPA has become a significant driver in the development of utility-scale solar projects, particularly in states like Utah, Idaho and Montana, which have not traditionally been among the leaders in solar and wind deployment. 

Utilities’ PURPA pushback

Put simply, PURPA has become a big deal, particularly for utility solar. “We expect PURPA to be the No. 1 driver of utility solar in 2017, and we still expect it to drive significant new utility capacity additions in 2018,” said Colin Smith, a solar analyst with GTM Research. 

Now utilities in states such as North Carolina, Oregon, Utah and Montana are pushing back by proposing new contract lengths, rates and other changes that solar developers claim would make it impossible to finance projects.

“Utilities have to take these contracts. They can’t say no. There’s no legal pushback to say this is beyond the load forecast or more than they can handle on their transmission network,” said Smith. “There is no feedback mechanism to curb PURPA, which led to explosive growth in projects and, oftentimes, pushback from utilities.”

A PURPA battle in Montana: Changing the rules mid-game?

A contentious and ongoing PURPA squabble that erupted last spring in Montana has attracted considerable attention. Utilities and developers disagree over rates and terms that should apply to a number of solar projects in the state — resulting in a declaratory order from the Federal Energy Regulatory Commission (FERC), which has oversight over PURPA.

FERC issued its order last December, saying that the Montana Public Service Commission had ruled in a way that was inconsistent with PURPA. Nevertheless, FERC failed to go to court to enforce the law.

It’s a sequence of events that raises questions for GTM’s Smith.

“What is really interesting are the precedents being set by FERC in terms of how much they will intervene,” he said. “In a circumstance where FERC is saying the local utility commission has acted illegally but they’re not willing to intervene, there’s a big question around how they uphold PURPA and what happens moving forward.” 

Last May, Montana’s largest investor-owned utility, NorthWestern Energy, filed an application with the state’s public service commission to begin the process of revising QF avoided-cost rates. Almost everyone agreed that the rates, pegged at $66 per megawatt-hour, were out of date, having last been updated in 2013.

As NorthWestern explained in a filing, the rates did not reflect the utility’s current avoided costs for a number of reasons. “This inaccuracy is largely due to changes in market prices and forecasts and in NorthWestern’s resource portfolio,” the utility wrote. “First, there has been a substantial decrease in natural gas and electricity market prices and forecasts since the Commission set the rates in the 2013 Tariff. Second, NorthWestern acquired wind and hydroelectric resources after 2013 resulting in a decrease of the cost of the Company’s avoidable resources.”

Two weeks later, NorthWestern went back to the commission and filed an emergency motion, asking regulators for a complete suspension of QF rates for solar projects above 100 kilowatts. The utility expressed concern that because the avoided cost rate of $66 per megawatt-hour was so out of date, it would result in a flood of requests for new solar PPAs. NorthWestern’s case for an emergency motion was buttressed by the Montana Consumer Counsel, which argued that the state’s ratepayers were going to get buried by an avalanche of costly solar projects. 

According to a filing by FLS Energy/Cypress Creek earlier this month, the emergency motion came at a time when the developers were “on the verge” of entering into a total of 16 PPAs at the QF avoided cost rate of $66 per megawatt-hour.

“NorthWestern represented to Movants (FLS and Cypress Creek) prior to the hearing on the motion that the utility would execute the PPAs that had been tendered,” the filing read. That meant QF projects totaling 108.5 megawatts would have received the rate of $66 per megawatt-hour.

Case closed? Hardly.

By a vote of 3-2, the commission granted NorthWestern’s emergency motion and altered the terms under which projects between 100 kilowatts and 3 megawatts were allowed to receive the existing QF rate. It included only those that had a signed PPA and executed interconnection agreements by June 16, 2016. None of FLS/Cypress Creek projects in the pipeline met the standard of the commission’s order.

FERC weighs in

After efforts to get the Montana Public Service Commission to reconsider its ruling, FLS filed a petition with FERC last October. The company argued that both the commission and NorthWestern were not implementing PURPA in a way that was consistent with the law or FERC’s own regulations. The petition asked FERC to begin an enforcement action against both the utility and the commission.

FERC’s December response declined FLS’ request to launch an enforcement action, instead saying that FLS could pursue it in court. But FERC also weighed in on a declaratory order about the Montana commission’s decision to only grandfather in projects under the $66 per megawatt-hour QF rate that had both a signed PPA and an executed interconnection agreement before June 16, 2016.

Requiring both a signed PPA and an executed interconnection agreement was the commission’s legally enforceable obligation (LEO) standard, which basically ensures that a project is real and will deliver on its promises. But FERC said that standard was incompatible with PURPA because, essentially, they were terms that could be manipulated by the utility.

“Such a requirement allows the utility to control whether and when a legally enforceable obligation exists — for example, by delaying the facilities study or by delaying the tendering by the utility to the QF of an executable interconnection agreement,” wrote FERC. “Thus, the Montana Commission’s legally enforceable obligation standard is inconsistent with PURPA and our regulations under PURPA.” 

Back to the commission

With FERC’s declaratory order as ammunition, FLS/Cypress Creek filed a motion this month seeking relief from the previous QF rate suspension with the Montana commission, as part of the ongoing process of developing a new QF rate. The developers revised their request for projects they believed were eligible for the $66 per megawatt-hour rate, from 108.5 megawatts down to 40.2 megawatts.

Granting the request for relief would accord with NorthWestern’s original proposal for accepting grandfathered projects and fall well below the 54-megawatt cap commission staff had proposed, argued FLS/Cypress. The developer also called into question how much of an emergency Montana was actually facing with PURPA-driven solar projects.

“Granting Movants’ request for relief would not result in a huge influx of new solar capacity onto NorthWestern’s system — the purported ’emergency’ that led to Order 7500,” the companies wrote. “To the extent that there ever was the threat of a ‘flood’ of solar projects in Montana, Order 7500 effectively prevented that from occurring. The only remaining questions pertain to those projects that were under development at the time of the Commission’s June 16, 2016 decision.”

What happens now?

According to a spokesperson for the Montana Public Service Commission, interveners in the QF avoided-cost docket must submit briefs by March 10, and a final decision about a new rate should come by mid-April. The last time NorthWestern applied to change the rate in 2014, the commission declined to do so. That’s why the rate was so high.

It’s unclear whether the commission will rule on FLS/Cypress Creek’s request for their grandfathered projects to move forward. If the commission doesn’t rule, the developers can pursue their case in federal court. 

It’s also unclear what this means for PURPA solar projects. One legal expert interviewed for this story said it’s normal for FERC to decline pursuing PURPA enforcement actions, and that the declaratory order the commission issued was helpful to solar developers. But it’s also clear that PURPA is under attack on many fronts and will likely be tested further — perhaps even from within FERC itself, as President Trump changes the makeup of the regulatory body through new appointments.

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