FERC on Feed-in Tariffs:
States' Incentive Prices for Alternative Energy Must Fall
Within Federal Caps

On July 15, 2010, the Federal Energy Regulatory Commission
(FERC) partly invalidated a California law that is
designed to encourage energy efficiency. See Cal. Pub.
Util. Comm'n, 132 FERC ¶ 61,047 (2010). The
California law requires electric utilities to establish
feed-in tariffs under which the utility must offer to purchase
the electrical output of small-scale generators that meet
specified fuel use, efficiency and environmental standards.
The law authorizes the California Public Utilities Commission
(CPUC) to establish offering prices under the feed-in tariffs,
at levels that (1) reflect system-wide demand at the time of
delivery, (2) are relative to the cost of natural gas,
and (3) leave the utility's customers indifferent to the
purchase. See Cal. Pub. Util. Code § 2841(b)
(2010). The CPUC sought FERC's determination that the
CPUC may set the offering prices notwithstanding FERC's
authority to regulate rates for wholesale sales of
electricity.
FERC held that federal law leaves the CPUC limited room to
set offering prices under feed-in tariffs. 132 FERC
¶ 61,047 at P 64-65. FERC reasoned that the Federal Power
Act establishes exclusive federal jurisdiction over wholesale
sales of electricity in interstate commerce, that offering
prices under feed-in tariffs are rates for the wholesale sale
of electricity in interstate commerce, and that, therefore,
the CPUC may act only when a sale is specifically exempted
from federal oversight or when federal law specifically
authorizes the states to act.
Accordingly, the CPUC may set offering prices under feed-in
tariffs when the generator is publicly owned or publicly
financed. Id. at P 71 Publicly-owned and publicly
financed sellers are exempt from FERC's ratemaking authority.
16 U.S.C. § 824(f). The CPUC also may set offering
prices when the generator is a "qualifying facility" under the
Public Utility Regulatory Policies Act (PURPA) – but only if
the offering price is within limits established by PURPA.
Under PURPA, electric utilities must purchase the electrical
output of qualifying generators at rates that reflect the
utility's "avoided cost," i.e., the utility's cost of
securing supply from other sources. PURPA authorizes the
states to determine avoided cost, using FERC-approved
methodologies. 16 U.S.C. §§ 824a-3(a), (b) and (f).
FERC suggested that the states' authority to determine avoided
cost includes authority to set rates for qualifying facilities
at a level up to avoided cost. 132 FERC ¶ 61,047 at
P 67. For all other generators, the CPUC may compel
utilities to offer to purchase the generator's output, but the
associated rate is subject to approval solely by FERC.
Id. at P 69.
On one hand, FERC's decision seems unremarkable. The
decision echoes a series of decisions by FERC since 1988, when
FERC held that New York could not compel electric utilities to
purchase from qualifying facilities at a rate that exceeded
the avoided-cost rate. FERC reasoned that Congress had chosen
to encourage cogeneration and small power production – but
only to the extent that projects would be viable under
avoided-cost pricing – and that this choice preempted the
states from using higher prices to encourage cogeneration and
small power production. See Orange &
Rockland Util., Inc., 43 FERC ¶ 61,067 (1988),
vacated as moot 70 FERC ¶ 61,014 (1995). See
also Midwest Power Syst., Inc., 78 FERC
¶ 61,067 (1997); So. Cal. Edison Co., 70 FERC
¶ 61,215, reconsideration denied, 71 FERC
¶ 61,269 (1995); Conn. Light and Power Co., 70
FERC ¶ 61,012, reconsideration denied, 71 FERC
¶ 61,035 (1995), appeal dismissed, Niagara
Mohawk Power Corp. v. FERC, 117 F.3d 1485 (D.C. Cir.
1997).
On the other hand, there have been important developments
since FERC last addressed a similar preemption question.
First, in many areas of the United States, avoided-cost rates
have fallen. Second, the states are taking ever-greater
interest in encouraging alternative forms of electrical supply
as a means of addressing local environmental problems. Some
state policy-makers believe that avoided-cost rates – as
determined using FERC-approved methodologies – do not
adequately reflect the environmental cost of using traditional
forms of supply. Against this backdrop, FERC's finding of
preemption puts pressure on the states to develop new means to
encourage the development of alternative sources of
energy.
FERC's July 15 decision leaves open important questions for
other regions. In 2005, Congress amended PURPA to
eliminate utilities' purchase obligation when a qualifying
facility has access to a competitive market.
See 16 U.S.C. § 824a-3(m). Utilities in California
remain subject to the purchase obligation, but utilities in
several other regions are no longer subject to that
obligation. See 18 C.F.R. § 292.309. It
remains to be seen whether PURPA preempts states in those
regions from imposing a purchase obligation and from setting
associated prices.
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