Qualifying Facility Rates and Requirements Implementation Issues Under the Public Utility Regulatory Policies Act of 1978

Federal RegisterDec 30, 2020

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 292

[Docket Nos. RM19-15-001 and AD16-16-001; Order No. 872-A]

Qualifying Facility Rates and Requirements Implementation Issues Under the Public Utility Regulatory Policies Act of 1978

AGENCY:

Federal Energy Regulatory Commission.

ACTION:

Final rule; Order addressing arguments raised on rehearing and clarifying prior order in part.

SUMMARY:

In this Order, the Federal Energy Regulatory Commission addresses arguments raised on rehearing and clarifies, in part, its final rule adopting revisions to its regulations implementing sections 201 and 210 of the Public Utility Regulatory Policies Act of 1978 (PURPA). These changes will enable the Commission to continue to fulfill its statutory obligations under sections 201 and 210 of PURPA.

DATES:

This rule is effective February 16, 2021.

FOR FURTHER INFORMATION CONTACT:

Lawrence R. Greenfield (Legal Information), Office of the General Counsel, Federal Energy Regulatory Commission, 888 First Street NE, Washington, DC 20426, (202) 502-6415,

lawrence.greenfield@ferc.gov

Helen Shepherd (Technical Information), Office of Energy Market Regulation, Federal Energy Regulatory Commission, 888 First Street NE, Washington, DC 20426, (202) 502-6176,

helen.shepherd@ferc.gov

Thomas Dautel (Technical Information), Office of Energy Policy and Innovation, Federal Energy Regulatory Commission, 888 First Street NE, Washington, DC 20426, (202) 502-6196,

thomas.dautel@ferc.gov

SUPPLEMENTARY INFORMATION:

Table of Contents

Paragraph

I. Background

A. Statutory Background

B. Final Rule's Updating of the PURPA Regulations

C. Summary of Changes to the PURPA Regulations Implemented by the Final Rule

II. Discussion

A. Threshold Issues

1. Whether the Commission Appropriately Consulted With Representatives of Relevant State and Federal Agencies

a. Requests for Rehearing

b. Commission Determination

2. Whether the PURPA Regulations Continue To Encourage QFs

a. Requests for Rehearing

b. Commission Determination

B. QF Rates

1. Overview

2. LMP as a Permissible Rate for Certain As-Available Avoided Cost Rates

a. Requests for Rehearing

b. Commission Determination

3. Tiered Avoided Cost Rates

a. Request for Clarification

b. Commission Determination

4. Providing for Variable Energy Rates in QF Contracts Is Consistent With PURPA

a. Whether the Current Approach Has Resulted in Payments to QFs in Excess of Avoided Costs

i. Requests for Rehearing

ii. Commission Determination

104

b. Whether the Proposed Change Would Violate the Statutory Requirement That the PURPA Regulations Encourage QFs and Do Not Discriminate Against QFs

114

i. Requests for Rehearing

118

ii. Commission Determination

134

c. Effect of Variable Energy Rates on Financing

145

i. Requests for Rehearing

159

ii. Commission Determination

172

d. Requested Clarification of the Final Rule

178

i. Commission Determination

179

5. Consideration of Competitive Solicitations To Determine Avoided Costs

181

i. Requests for Rehearing

203

ii. Commission Determination

214

C. Rebuttable Presumption of Separate Sites

232

1. Need for Reform

235

a. Requests for Rehearing

236

b. Commission Determination

238

2. Distance Between Facilities

246

a. Requests for Rehearing

250

b. Commission Determination

255

3. Factors

261

a. Requests for Rehearing

265

b. Commission Determination

273

D. QF Certification Process

280

1. Requests for Rehearing

290

2. Commission Determination

306

E. Corresponding Changes to the FERC Form No. 556

327

1. Requests for Rehearing

330

2. Commission Determination

331

F. PURPA Section 210(m) Rebuttable Presumption of Nondiscriminatory Access to Markets

334

1. Requests for Rehearing and Clarification

354

2. Commission Determination

360

G. Legally Enforceable Obligation

374

1. Requests for Rehearing

381

2. Commission Determination

384

III. Information Collection Statement

389

A. Request for Rehearing

392

B. Commission Determination

393

1. QFs Submitting Self-Certifications

403

a. Small Power Production Facility Greater Than 1 MW, and Less Than One Mile From an Affiliated Small Power Production QF

404

b. Small Power Production Facility Greater Than 1 MW, and More Than One Mile but Less Than 10 Miles From an Affiliated Small Power Production QF

405

c. Small Power Production Facility Greater Than 1 MW and 10 Miles or More From an Affiliated Small Power Production QF

406

2. QFs Submitting Applications for Commission Certification

407

a. Small Power Production Facility Greater Than 1 MW, and Less Than One Mile From an Affiliated Small Power Production QF

408

b. Small Power Production Facility Greater Than 1 MW, and More Than One Mile but Less Than 10 Miles From an Affiliated Small Power Production QF

409

c. Small Power Production Facility Greater Than 1 MW and 10 Miles or More From an Affiliated Small Power Production QF

410

3. Calculations for Additional Burden and Cost

411

IV. Environmental Analysis

412

A. No EIS or EA Is Required

412

1. NEPA Analysis Is Not Required Where Environmental Impacts Are Not Reasonably Foreseeable

414

a. Requests for Rehearing

420

b. Commission Determination

425

2. A Categorical Exclusion Applies

436

a. Exception to Categorical Exclusion

443

i. Requests for Rehearing

443

ii. Commission Determination

444

b. Applying a Categorical Exclusion for Clarifying and Corrective Actions Is Appropriate

445

i. Requests for Rehearing

445

ii. Commission Determination

449

3. That the Commission Prepared NEPA Analyses for the Promulgation of the Original PURPA Rule and Other Prior Rulemakings Does Not Mean That Such Analysis Was Possible or Required Here

455

a. Requests for Rehearing

462

b. Commission Determination

465

V. Regulatory Flexibility Act Certification

469

VI. Document Availability

471

VII. Effective Dates and Congressional Notification

474

1. On July 16, 2020, the Federal Energy Regulatory Commission (Commission) issued its final rule (final rule or Order No. 872)

adopting revisions to its regulations (PURPA Regulations)

implementing sections 201 and 210 of the Public Utility Regulatory Policies Act of 1978 (PURPA).

Those regulations were promulgated in 1980 and have been modified in only specific respects since then. On August 17, 2020, the Commission received requests for rehearing and/or clarification of the final rule from the following entities and individuals: (1) California Utilities;

(2) Electric Power Supply Association (EPSA); (3) Northwest Coalition;

(4) One Energy Enterprises; (5) Public Interest Organizations;

(6) Solar Energy Industries Association (Solar Energy Industries); and (7) Thomas Mattson. On September 1, 2020, California Public Utilities Commission (California Commission) filed a response to California Utilities' request for clarification.

Qualifying Facility Rates and Requirements Implementation Issues Under the Public Utility Regulatory Policies Act of 1978,

Order No. 872, 85 FR 54638 (Sep. 2, 2020), 172 FERC ¶ 61,041 (2020).

18 CFR part 292. In connection with the revisions to the PURPA Regulations, the Commission also revised its delegation of authority to Commission staff in 18 CFR part 375.

16 U.S.C. 796(17)-(18), 824a-3.

California Utilities consist of Pacific Gas & Electric Company; San Diego Gas & Electric Company; and Southern California Edison Company.

Northwest Coalition consists of Northwest and Intermountain Independent Power Producers Association; the Community Renewable Energy Association; the Renewable Energy Coalition; IdaHydro; Oregon Solar Energy Industries Association; and NewSun Energy LLC. Excluding IdaHydro and NewSun Energy LLC, the entities comprising Northwest Coalition filed comments referred to in Order No. 872 as “NIPPC, CREA, REC, and OSEIA.” For ease of reference, in some instances below, we refer to Northwest Coalition below interchangeably with “NIPPC, CREA, REC, and OSEIA.”

Public Interest Organizations consist of Alabama Interfaith Power and Light; Appalachian Voices; Center for Biological Diversity; Environmental Law and Policy Center; Gasp; Georgia Interfaith Power and Light; Montana Environmental Information Center; Natural Resources Defense Council; North Carolina Sustainable Energy Association; Sierra Club; South Carolina Coastal Conservation League; Southern Alliance for Clean Energy; Southern Environmental Law Center; Southface Institute; Sustainable FERC Project; Tennessee Interfaith Power and Light; Upstate Forever; and Vote Solar. Some of these entities filed comments as “Southeast Public Interest Organizations” and some of these entities filed comments as “Public Interest Organizations.” For ease of reference, we refer below to these organizations on rehearing as “Public Interest Organizations,” however, but when referring to the separate groups' comments in this rulemaking proceeding, we refer to their separate comments.

2. Pursuant to

Allegheny Defense Project

FERC,

the rehearing requests filed in this proceeding may be deemed denied by operation of law. As permitted by section 313(a) of the Federal Power Act (FPA),

however, we modify the discussion in the final rule and continue to reach the same result in this proceeding, as discussed below.

964 F.3d 1 (D.C. Cir. 2020) (en banc).

16 U.S.C. 825

(a) (“Until the record in a proceeding shall have been filed in a court of appeals, as provided in subsection (b), the Commission may at any time, upon reasonable notice and in such manner as it shall deem proper, modify or set aside, in whole or in part, any finding or order made or issued by it under the provisions of this chapter.”).

Allegheny Def. Project,

964 F.3d at 16-17. The Commission is not changing the outcome of the final rule.

See Smith Lake Improvement & Stakeholders Ass'n

FERC,

809 F.3d 55, 56-57 (D.C. Cir. 2015).

3. Specifically, we either dismiss or disagree with most arguments raised on rehearing. We also provide further clarification on (1) states' use of tiered avoided cost pricing; (2) states' use of variable energy rates in QF contracts and availability of utility avoided cost data; (3) the role of independent entities overseeing competitive solicitations; (4) the circumstances under which a small power production qualifying facility (QF) needs to recertify; (5) application of the rebuttable presumption of separate sites for the purpose of determining the power production capacity of small power production facilities; and (6) the PURPA section 210(m) rebuttable presumption of nondiscriminatory access to markets and accompanying regulatory text, as further discussed below.

I. Background

A. Statutory Background

4. PURPA section 210(a) requires that the Commission prescribe rules that it determines necessary to encourage the development of qualifying small power production facilities and cogeneration facilities (together, QFs).

PURPA section 210(b) sets out the standards governing the rates purchasing utilities must pay to QFs.

Sections 210(b)(1) and (b)(2) provide that QF rates “shall

be just and reasonable to the electric consumers of the electric utility and in the public interest” and “shall not discriminate against qualifying cogenerators or qualifying small power producers.”

16 U.S.C. 824a-3(a).

16 U.S.C. 824a-3(b).

Id.

5. After establishing these standards, Congress then imposed statutory limits on the extent to which the PURPA Regulations may encourage the development of QFs pursuant to PURPA section 210(a), and also placed bounds on how the PURPA Regulations may implement the statutory provisions in PURPA section 210(b) governing QF rates.

6. The first such statutory limit appears in the final sentence of PURPA section 210(b). There, Congress established a cap on the level of the rates utilities could be required to pay QFs: “No such rule prescribed under subsection (a)

shall provide for a rate which exceeds the incremental cost to the electric utility of alternative electric energy.

”

As the Conference Report for PURPA (PURPA Conference Report) explains:

Id.

(emphasis added). The statute defines an electric utility's “incremental costs” as “the cost to the electric utility of the electric energy which, but for the purchase from such cogenerator or small power producer, such utility would generate or purchase from another source.” 16 U.S.C. 824a-3(d);

see also

18 CFR 292.101(b)(6) (implementing same and defining such “incremental costs” as “avoided costs”).

[T]he utility would not be required to purchase electric energy from a qualifying cogeneration or small power production facility

at a rate which exceeds the lower of

the rate described above, namely a rate which is just and reasonable to consumers of the utility, in the public interest, and nondiscriminatory, or the incremental cost of alternate electric energy. This limitation on the rates which may be required in purchasing from a cogenerator or small power producer

is meant to act as an upper limit on the price

at which utilities can be required under this section to purchase electric energy.

H.R. Rep. No. 95-1750, at 98 (1978) (Conf. Rep.) (emphasis added).

7. Another way in which Congress set boundaries on the Commission's ability to encourage development of QFs was to define small power production facilities, one of the categories of generators that is to be encouraged under the statute. This statutory definition of small power production facilities applies to almost all renewable resources that wish to be QFs, requiring that those facilities have “a power production capacity which, together with any other facilities located at the same site (as determined by the Commission), is not greater than 80 megawatts.”

In order to comply with this statutory requirement that the capacity of all small power production facilities “located at the same site” not exceed 80 MW, the Commission is required to define what constitutes a “site.” In 1980, the Commission determined that, essentially, those facilities that are owned by the same or affiliated entities and using the same energy resource should be deemed to be at the same site “if they are located within one mile of the facility for which qualification is sought.”

This approach, known as the “one-mile rule,” interpreted Congress's limitation of 80 MW located at the same site to apply to those affiliated small power production qualifying facilities located within one mile of each other that use the same energy resource.

16 U.S.C. 796(17)(A)(ii).

18 CFR 292.204(a)(ii).

8. Finally, Congress amended PURPA in 2005 to place further limits on the extent to which the PURPA Regulations may encourage QFs. Congress amended PURPA section 210 to, among other things, add section 210(m), which provides for termination of the requirement that an electric utility enter into a new obligation or contract to purchase from a QF (frequently described as the “mandatory purchase obligation”) if the QF has nondiscriminatory access to certain defined types of markets.

This amendment reflected Congress's judgment that non-discriminatory access to these markets provided adequate encouragement for those QFs, such that the mandatory purchase obligation could be lifted.

See

16 U.S.C. 824a-3(m).

9. Congress directed the Commission to amend the PURPA Regulations to implement this new requirement, which the Commission did in Order No. 688. In that order, pursuant to PURPA section 210(m), the Commission identified markets in which utilities would no longer be subject to the PURPA mandatory purchase obligation because QFs have nondiscriminatory access to such markets.

Although not required by PURPA section 210(m), the Commission also established a rebuttable presumption for small QFs, which the Commission determined at that time were QFs at or below 20 MW, because they may not have nondiscriminatory access to such markets.

In creating this rebuttable presumption, the Commission made clear that “we are not making a finding that all QFs smaller than a certain size lack nondiscriminatory access to markets.”

New PURPA Section 210(m) Regulations Applicable to Small Power Production and Cogeneration Facilities,

Order No. 688, 117 FERC ¶ 61,078, at PP 9-12 (2006),

order on reh'g,

Order No. 688-A, 119 FERC ¶ 61,305 (2007),

aff'd sub nom. Am. Forest & Paper Ass'n

FERC,

550 F.3d 1179 (D.C. Cir. 2008) (

AFPA

FERC

18 CFR 292.309(d)(1).

Order No. 688, 117 FERC ¶ 61,078 at P 74.

B. Final Rule's Updating of the PURPA Regulations

10. In the final rule, the Commission amended the PURPA Regulations, principally with regard to the three statutory provisions described above: (1) The avoided cost cap on QF rates; (2) the 80 MW limitation applicable to the combined capacity of affiliated small power production QFs that use the same energy resource located at the same site; and (3) the termination of the mandatory purchase obligation for QFs with nondiscriminatory access to markets. The Commission stated that it was modifying the PURPA Regulations, based on demonstrated changes in circumstances that took place after the PURPA Regulations were first adopted, to ensure that the regulations continue to comply with PURPA's statutory requirements established by Congress.

Order No. 872, 172 FERC ¶ 61,041 at P 20.

C. Summary of Changes to the PURPA Regulations Implemented by the Final Rule

11. In the final rule, the Commission revised the PURPA Regulations based on the record of this proceeding, including comments submitted in the technical conference in Docket No. AD16-16-000 (Technical Conference),

the record evidence cited in the Notice of Proposed Rulemaking (NOPR),

and the comments submitted in response to the NOPR.

These changes, including modifications to the proposals made in the NOPR, are summarized below.

Supplemental Notice of Technical Conference,

Implementation Issues Under the Public Utility Regulatory Policies Act of 1978,

Docket No. AD16-16-000 (May 9, 2016). The Technical Conference covered such issues as: (1) Various methods for calculating avoided cost; (2) the obligation to purchase pursuant to a legally enforceable obligation (LEO); (3) application of the one-mile rule; and (4) the rebuttable presumption the Commission has adopted under PURPA section 210(m) that QFs 20 MW and below do not have nondiscriminatory access to competitive organized wholesale markets.

Qualifying Facility Rates and Requirements,

84 FR 53246 (Oct. 4, 2019), 168 FERC ¶ 61,184 (2019) (NOPR).

Order No. 872, 172 FERC ¶ 61,041 at P 56.

12.

First,

the Commission granted states

the flexibility to require that

energy rates (but not capacity rates) in QF power sales contracts and other LEOs

vary in accordance with changes in the purchasing electric utility's as-available avoided costs at the time the energy is delivered. If a state exercises this flexibility, a QF no longer would have the ability to elect to have its energy rate be fixed but would continue to be entitled to a fixed capacity rate for the term of the contract or LEO.

Nonregulated electric utilities implement the requirements of PURPA with respect to themselves. An electric utility that is “nonregulated” is any electric utility other than a “state regulated electric

utility.” 16 U.S.C. 2602(9). The term “state regulated electric utility,” in contrast, means any electric utility with respect to which a state regulatory authority has ratemaking authority. 16 U.S.C. 2602(18). The term “state regulatory authority,” as relevant here, means a state agency which has ratemaking authority with respect to the sale of electric energy by an electric utility. 16 U.S.C. 2602(17).

The Commission has held that a LEO can take effect before a contract is executed and may not necessarily be incorporated into a contract.

JD Wind 1, LLC,

129 FERC ¶ 61,148, at P 25 (2009),

reh'g denied,

130 FERC ¶ 61,127 (2010) (“[A] QF, by committing itself to sell to an electric utility, also commits the electric utility to buy from the QF; these commitments result either in contracts or in non-contractual, but binding, legally enforceable obligations.”). For ease of reference, however, references herein to a contract also are intended to refer to a LEO that is not incorporated into a contract.

Order No. 872, 172 FERC ¶ 61,041 at P 57.

13.

Second,

the Commission granted states additional flexibility to allow QFs to have a fixed energy rate and provided that such state-authorized fixed energy rate can be based on projected energy prices during the term of a QF's contract based on the anticipated dates of delivery.

Id.

P 58.

14.

Third,

the Commission implemented a number of revisions intended to grant states flexibility to set “as-available” QF energy rates based on market forces. The Commission established a rebuttable presumption that the locational marginal price (LMP) established in the organized electric markets defined in 18 CFR 292.309(e), (f), or (g) represents the as-available avoided costs of energy for electric utilities located in these markets.

With respect to QFs selling to electric utilities located outside of the organized electric markets defined in 18 CFR 292.309(e), (f), or (g), the Commission permitted states to set as-available energy avoided cost rates at competitive prices from liquid market hubs or calculated from a formula based on natural gas price indices and specified heat rates, provided that the states first determine that such prices represent the purchasing electric utilities' energy avoided costs.

These are the markets operated by Midcontinent Independent System Operator, Inc. (MISO); PJM Interconnection, L.L.C. (PJM); ISO New England Inc. (ISO-NE); New York Independent System Operator, Inc. (NYISO); Electric Reliability Council of Texas (ERCOT); California Independent System Operator, Inc. (CAISO); and Southwest Power Pool, Inc. (SPP).

Order No. 872, 172 FERC ¶ 61,041 at P 59.

15. The Commission granted states the flexibility to choose to adopt one or more of these options or to continue setting QF rates under the standards long established in the PURPA Regulations.

Id.

16.

Fourth,

the Commission provided states the flexibility to set energy and capacity rates pursuant to a competitive solicitation process conducted under transparent and non-discriminatory procedures consistent with the Commission's

Allegheny

standard.

Id.

P 60 (referencing

Allegheny Energy Supply Co., LLC,

108 FERC ¶ 61,082, at P 18 (2004) (

Allegheny Energy

)).

17.

Fifth,

the Commission modified its “one-mile rule” for determining whether generation facilities are considered to be at the same site for purposes of determining qualification as a qualifying small power production facility. Specifically, the Commission allowed electric utilities, state regulatory authorities, and other interested parties to show that affiliated small power production facilities that use the same energy resource and are more than one mile apart and less than 10 miles apart actually are at the same site (with distances one mile or less apart still irrebuttably at the same site and distances 10 miles or more apart irrebuttably at separate sites). The Commission also allowed a small power production facility seeking QF status to provide further information in its certification (whether a self-certification or an application for Commission certification) or recertification (whether a self-recertification or an application for Commission recertification) to defend preemptively against subsequent challenges, by identifying factors affirmatively demonstrating that its facility is indeed at a separate site from other affiliated small power production qualifying facilities. The Commission added a definition of the term “electrical generating equipment” to the PURPA Regulations to clarify how the distance between facilities is to be calculated.

Id.

P 62.

18.

Sixth,

the Commission allowed an entity to challenge an initial self-certification or self-recertification without being required to file a separate petition for declaratory order and to pay the associated filing fee. However, the Commission clarified that such protests may be made to new certifications (both self-certifications and applications for Commission certification) but only to self-recertifications and applications for Commission recertifications making substantive changes to the existing certification.

Id.

P 63.

19.

Seventh,

the Commission revised its regulations implementing PURPA section 210(m), which provide for the termination of an electric utility's obligation to purchase from a QF with nondiscriminatory access to certain markets. Under the PURPA Regulations before the final rule becomes effective, there is a rebuttable presumption that certain small QFs (

i.e.,

those below 20 MW) may not have nondiscriminatory access to such markets. The Commission updated the rebuttable presumption threshold for small power production facilities (but not cogeneration facilities) from 20 MW to 5 MW and revised the PURPA Regulations to provide a nonexclusive list of examples of factors that QFs may cite to support an argument that they lack nondiscriminatory access to such markets.

Id.

P 64.

20.

Finally,

the Commission clarified that a QF must demonstrate commercial viability and a financial commitment to construct its facility pursuant to objective and reasonable state-determined criteria before the QF is entitled to a contract or LEO. The Commission prohibited states from imposing any requirements for a LEO other than a showing of commercial viability and a financial commitment to construct the facility.

Id.

P 65.

21. The Commission explained that these changes will enable the Commission to continue to fulfill its statutory obligations under PURPA sections 201 and 210. The Commission emphasized that these changes are effective prospectively for new contracts or LEOs and for new facility certifications and recertifications filed on or after the effective date of the final rule; the Commission stated that it does not by the final rule permit disturbance of existing contracts or LEOs or existing facility certifications.

Id.

P 66.

22. On August 17, 2020, (1) EPSA, California Utilities, Northwest Coalition, One Energy Enterprises, and Thomas Mattson filed timely requests for rehearing of the final rule; (2) One Energy Enterprises, Public Interest Organizations, and Solar Energy Industries filed timely requests for rehearing and clarification of the final rule; and (3) California Utilities filed a timely request for clarification of the

Final Rule. On September 1, 2020, California Public Utilities Commission (California Commission) filed an answer to California Utilities' request for clarification of the final rule.

Because California Utilities requested clarification, and not rehearing, of the final rule, we accept California Commission's answer to California Utilities' request for clarification of the final rule.

See

18 CFR 385.213(a)(3).

II. Discussion

23. In this order, we sustain the final rule. Specifically, we either dismiss or disagree with most arguments raised on rehearing. We also provide further clarification on (1) states' use of tiered avoided cost pricing; (2) states' use of variable energy rates in QF contracts and availability of utility avoided cost data; (3) the role of independent entities overseeing competitive solicitations; (4) the circumstances under which a small power production QF needs to recertify; (5) application of the rebuttable presumption of separate sites in PURPA 210(m) proceedings; and (6) the PURPA section 210(m) rebuttable presumption of nondiscriminatory access to markets and accompanying regulatory text, as further discussed below.

A. Threshold Issues

1. Whether the Commission Appropriately Consulted With Representatives of Relevant State and Federal Agencies

a. Requests for Rehearing

24. Public Interest Organizations state that the final rule is flawed because the Commission failed to consult with state and federal officials as required by PURPA section 210(a).

Public Interest Organizations argue that the Commission's actions to hold a technical conference and invite public comments, both of which involved participation from state and federal entities, are insufficient to meet this statutory requirement.

Public Interest Organizations aver that these actions satisfy the statutory requirement to provide “notice and reasonable opportunity for interested persons (including State and Federal agencies) to submit oral as well as written data, views, and arguments” but that the Commission failed to satisfy what Public Interest Organizations claim is a separate and distinct requirement: To “consult[ ]” with representatives of state and federal officials.

Public Interest Organizations argue that Congress included the word “consultation” in the statute to connote deliberations more formal and focused than the general notice and comment process and further assert that statutes and regulations routinely distinguish between the two.

Public Interest Organizations contend that this lack of consultation has hamstrung the Commission and prevents the Commission from crafting informed policy.

Public Interest Organizations Request for Rehearing at 6, 12-14.

Id.

at 13.

Id.

(citing 16 U.S.C. 824a-3(a)(2)).

Id.

at 13-14 (citing 50 CFR 402.14;

Cooling Water Intake Structure Coal.

U.S. Envtl. Prot. Agency,

905 F.3d 49, 78 (2d Cir. 2018)).

Id.

at 14.

b. Commission Determination

25. Public Interest Organizations' argument that the Commission failed to fulfill the consultation provision has no merit. First, we reemphasize the participation by state entities at the Commission's 2016 Technical Conference. Upon the Commission's open invitation,

several state entities participated in that conference and filed post-conference comments, including members of state regulatory authorities and the president of the national association representing state commissions (NARUC).

Second, several federal and state entities availed themselves of the opportunity to be heard via the NOPR's notice and comment process. More than 20 state entities, including state commissions, state consumer advocates, state attorneys general, governors, and others, submitted comments in response to the NOPR.

In addition, NARUC submitted several filings throughout this process, and a group calling themselves State Entities—a diverse group including eight attorneys general and two state commissions—filed a combined comment on the PURPA NOPR; the NOPR was published in the

Federal Register

Third, no state or federal entity has sought rehearing on this (or any other) basis.

See

Notice Inviting Post-Technical Conference Comments,

Implementation Issues Under the Public Utility Regulatory Policies Act of 1978,

Docket No. AD16-16-000 (Sept. 6, 2016); Supplemental Notice of Technical Conference,

Implementation Issues Under the Public Utility Regulatory Policies Act of 1978,

Docket No. AD16-16-000 (Mar. 4, 2016) (announcing preliminary agenda and inviting interested speakers).

Connecticut Public Utilities Regulatory Authority (Connecticut Authority) and Massachusetts Department of Public Utilities (Massachusetts DPU) Comments, Docket No. AD16-16-000 (Nov. 7, 2016); Idaho Public Utilities Commission (Idaho Commission) Comments, Docket No. AD16-16-000 (Nov. 7, 2016); Commissioner Paul Kjellander, Idaho Commission Comments, Docket No. AD16-16-000 (June 29, 2016); Commissioner Christine Raper, Idaho Commission Comments, Docket No. AD16-16-000 (June 29, 2016); Commissioner Travis Kavulla, Montana Public Service Commission (Montana Commission) and on behalf of NARUC Comments, Docket No. AD16-16-000 (June 29, 2016).

Commissioner Anthony O'Donnell, Montana Commission Comments, Docket No. RM19-15-000 (Dec. 3, 2019); Arizona Commission Comments, Docket No. RM19-15-000 (Dec. 3, 2019); California Public Utilities Commission (California Commission) Comments, Docket No. RM19-15-000 (Dec. 3, 2019); District of Columbia Public Service Commission (DC Commission) Comments, Docket No. RM19-15-000 (Dec. 3, 2019); Governor Brad Little (Idaho) Comments, Docket No. RM19-15-000 (Dec. 2, 2019); Idaho Commission Comments, Docket No. RM19-15-000 (Dec. 3, 2019); Kentucky Public Service Commission Comments, Docket No. RM19-15-000 (Dec. 3, 2019); Massachusetts Attorney General Maura Healey Comments, Docket No. RM19-15-000 (Dec. 3, 2019); Massachusetts DPU Comments, Docket No. RM19-15-000 (Dec. 3, 2019); Michigan Public Service Commission Comments, Docket No. RM19-15-000 (Dec. 3, 2019); Montana Commission Comments, Docket No. RM19-15-000 (Dec. 3, 2019); North Carolina Attorney General Comments, Docket No. RM19-15-000 (Dec. 3, 2019); North Carolina Public Service Commission Public Staff Comments, Docket No. RM19-15-000 (Dec. 3, 2019); Nebraska Power Review Board Comments, Docket No. RM19-15-000 (Nov. 22, 2019); Ohio Consumers Counsel Comments, Docket No. RM19-15-000 (Dec. 3, 2019); Oregon Public Utility Commission Comments, Docket No. RM19-15-000 (Dec. 3, 2019); Pennsylvania Public Utility Commission Comments, Docket No. RM19-15-000 (Dec. 3, 2019); Public Utility Commission of Ohio Federal Energy Advocate Comments, Docket No. RM19-15-000 (Dec. 3, 2019); South Dakota Public Utilities Commission Comments, Docket No. RM19-15-000 (Dec. 3, 2019).

State Entities Comments, Docket No. RM19-15-000 (Dec. 3, 2019) (filed on behalf of Massachusetts Attorney General, Delaware Attorney General, District of Columbia Attorney General, Maryland Attorney General, Michigan Attorney General, New Jersey Attorney General, North Carolina Attorney General, Oregon Attorney General, New Jersey Board of Public Utilities, Rhode Island Division of Public Utilities and Carriers); NARUC Comments, Docket No. RM19-15-000 (Dec. 3, 2019); NARUC Supplemental Comments, Docket No. AD16-16-000 (Oct. 17, 2018);

see also

NOPR, 168 FERC ¶ 61,184, (NOPR published in

Federal Register

26. In sum, throughout this process, the Commission repeatedly sought information and input from state and federal entities. As explained above, numerous state entities submitted comments or otherwise participated in the process and other state and federal entities had the opportunity to participate in the process. The Commission fully satisfied its consultation obligations.

2. Whether the PURPA Regulations Continue To Encourage QFs

a. Requests for Rehearing

27. Solar Energy Industries and Public Interest Organizations state that the Commission is required under PURPA section 210 to apply its regulations in a manner that encourages QFs and that it has failed to do so.

Public Interest Organizations Request for Rehearing at 8, 43-60; Solar Energy Industries Request for Rehearing and/or Clarification at 2-4, 4-6, 8-9, 42-45.

28. Solar Energy Industries argue that, in the final rule, the Commission failed

to meet this statutory requirement in the following ways:

(1) Terminating a Qualifying Facility's right to elect a long-term energy rate when delivering energy under a long-term contract; (2) revising the long-standing regulations providing that a Qualifying Facility is not “at the same site” so long as the facilities are located more than one mile apart; and (3) allowing utilities within the boundaries of [Regional Transmission Organization or an Independent System Operator (RTO/ISO)] to seek a waiver of the [obligation] to purchase from small power production Qualifying Facilities larger than 5 MW despite the fact that few, if any, of such facilities have meaningful access to organized wholesale markets.

Solar Energy Industries Rehearing Request at 4, 8-9.

29. Solar Energy Industries claim that the Commission's assertion that the final rule “continue[s] to encourage the development of QFs consistent with PURPA” is unsupported by the record and erroneous.

Solar Energy Industries argue that requiring utilities to interconnect with QFs and allowing QFs to purchase station power services is not new and is part and parcel of a utility's obligation to provide open access service today.

Solar Energy Industries add that maintaining existing exemptions from the FPA and similar state and federal regulations is not helpful because other rule changes serve as severe obstructions to QF development in the first place.

Id.

at 6 (citing Order No. 872, 172 FERC ¶ 61,041 at P 78).

Id.

30. Public Interest Organizations assert that the Commission incorrectly framed this issue as a set of false choices between encouraging QFs or violating statutory limits and encouraging QFs or never modifying its 1980 regulations.

Public Interest Organizations argue that the Commission has inappropriately focused on whether the final rule eliminates all encouragement, rather than whether the final rule advances the goal of encouraging QFs in comparison to a suite of alternatives that could be more favorable to QFs. Public Interest Organizations add that the Commission must give effect to every relevant clause and use the significant space between encouraging and exceeding other statutory mandates, rather than following the conclusion in the final rule that PURPA itself limits the extent to which PURPA Regulations can encourage QFs, which would create a false dichotomy between meeting the mandate that QFs be encouraged and violating Congressionally defined limits.

Public Interest Organizations Request for Rehearing at 43-45.

Id.

at 44-46 (citing Order No. 872, 172 FERC ¶ 61,041 at P 72).

31. Public Interest Organizations contend that the Commission is acting arbitrarily and capriciously because the record fails to support the Commission's claim that the changes in the final rule encourage QFs.

Public Interest Organizations point to the Commission's statements in the final rule that these revisions will “lower payments from certain electric utilities to certain QFs,” will result in additional filing burdens, and may result in more protests being filed in opposition to QF filings.

Public Interest Organizations argue that the Commission implicitly admitted that the majority of the changes do not encourage QF development when the Commission stated that “several of the changes” in the final rule provide encouragement.

Id.

at 46-60.

Id.

at 46 (citing Order No. 872, 172 FERC ¶ 61,041 at PP 553, 584, 587, 746).

Id.

at 46-47 (citing Order No. 872, 172 FERC ¶ 61,041 at P 78).

32. Public Interest Organizations argue that the final rule is not the product of reasoned decision-making because the Commission's assertions that these revisions encourage QFs are insufficient, even if true.

Public Interest Organizations state that in Order No. 69 the Commission identified three major obstacles and crafted its rules to address these barriers. Public Interest Organizations aver that, in contrast, the Commission conducted no such inquiry here to identify whether those barriers persist or new ones exist.

Id.

at 48-49 (citing

Small Power Production and Cogeneration Facilities; Regulations Implementing Section 210 of the Public Utility Regulatory Policies Act of 1978,

Order No. 69, 45 FR 12214 (Feb. 25,1980), FERC Stats. & Regs. ¶ 30,128, at 30,863 (cross-referenced 10 FERC ¶ 61,150),

order on reh'g,

Order No. 69-A, 45 FR 33958 (May 21, 1980), FERC Stats. & Regs. ¶ 30,160 (1980) (cross-referenced at 11 FERC ¶ 61,166),

aff'd in part & vacated in part sub nom. Am. Elec. Power Serv. Corp.

FERC,

675 F.2d 1226 (D.C. Cir. 1982),

rev'd in part sub nom. Am. Paper Inst., Inc.

Am. Elec. Power Serv. Corp.,

461 U.S. 402 (1983) (

API

)).

Id.

33. Public Interest Organizations claim that the Commission ignored evidence in the record.

Public Interest Organizations state that the Commission dismissed as beyond the scope of the rulemaking evidence that the PURPA Regulations in place since 1980 fail to encourage QFs, yet at the same time rely on the strength of those rules to support its claim that the PURPA Regulations continue to encourage QFs.

Public Interest Organizations argue that the Commission avoided consideration of this evidence by making the following three claims: (1) Relaxing some standards may actually induce some states to more robustly implement the rules; (2) evidence claiming that existing rules fail to encourage QF development should be dismissed as overstated; and (3) any lack of implementation of PURPA speaks to states' failures to implement, rather than gaps in the PURPA Regulations themselves.

Id.

at 49-57.

Id.

at 49.

Id.

at 49-50 (citing Order No. 872, 172 FERC ¶ 61,041 at PP 43-46).

34. Public Interest Organizations argue that examples of the Commission's failure to fully consider the record were that one of the commenters described the amendments to the Public Utility Holding Company Act of 1935 (PUHCA) in 2005 that effectively repealed that statute and that interconnection procedures stymie QF development. Public Interest Organizations argue that the Commission did not sufficiently consider this information in the record and, if it had, it would not have mistakenly asserted that related regulatory exemptions provided in the 1980 rules are sufficient to encourage QF development.

Id.

at 51-52 (citing Harvard Electricity Law Initiative (Harvard Electricity Law) Comments, Docket No. RM19-15-000, at 19-21 (Dec. 3, 2019); Solar Energy Industries Supplemental Comments, Docket No. AD16-16-000, at 16 (Aug. 28, 2019)).

35. Public Interest Organizations contend that, because the Commission explicitly considered broad changes from Order No. 69 and addressed a broad range of topics in the final rule, the Commission improperly excluded consideration of evidence of barriers faced by QFs when it found that such evidence is outside the scope of this proceeding.

Id.

at 52-53.

36. Public Interest Organizations argue that the Commission was misguided in its reliance on U.S. Energy Information Administration (EIA) data showing that some states with the highest rates of QF penetration are located in non-RTO regions to support the claim that evidence of barriers to QFs in such regions are overblown.

Public Interest Organizations aver that three states (North Carolina, Idaho, and Utah) skew the data with successful outcomes for QFs, while PURPA remains largely irrelevant in the 47 other states. Public Interest Organizations add that reliance even on these three states is in error because these states saw significant QF penetration due to long-term fixed energy rates, which the Commission is

now no longer requiring, claiming that, even in Idaho, barriers have since been erected with a subsequent cessation in QF development.

Id.

at 53.

Id.

at 54.

37. Public Interest Organizations assert that the Commission inappropriately dismissed barriers to QF development as matters only relevant to state implementation or PURPA enforcement dockets.

Public Interest Organizations add that the Commission's claim that more relaxed standards will lead to more robust state implementation is speculative, internally contradictory, and ignores relevant evidence.

Id.

at 55.

Id.

at 56.

38. Public Interest Organizations argue that, even if the Commission properly considered the full record, the Commission's finding that the revised rules encourage QFs is arbitrary and capricious.

Public Interest Organizations restate their concern that providing more flexibility will not lead to more robust PURPA implementation by states. Public Interest Organizations contend that the changes adopted in the final rule overwhelmingly cut in favor of utilities and against encouraging QFs and that none of the revisions require regulators to strengthen incentives or eliminate burdens on QF development.

Public Interest Organizations aver that these changes amount to lowering the federal floor, therefore reducing QF bargaining power, even if state regulators implement the rules in good faith. Public Interest Organizations add that, contrary to the Commission's assertions in the final rule, leaving intact the requirement for full avoided costs is insufficient to continue to encourage QFs, especially in the face of new barriers erected by the final rule.

Id.

at 57.

Id.

at 58-59.

Id.

at 59-60.

b. Commission Determination

39. Contrary to claims that the PURPA Regulations as revised do not encourage QFs, the PURPA Regulations as revised in the final rule continue as a whole to encourage the development of QFs consistent with the statutory limits on such encouragement, as explained below.

In subsequent sections of this order, we address Solar Energy Industries' concerns that the PURPA Regulations, as revised, fail to encourage QFs due to the specific revisions (1) allowing states to set avoided energy costs using variable energy rates; (2) expanding the one-mile rule; and (3) lowering the threshold for presumptive nondiscriminatory access for facilities in competitive wholesale markets from 20 MW to 5 MW.

See infra

sections III.B.4, III.C, and III.F.

40. Public Interest Organizations improperly frame the encouragement analysis. In Public Interest Organizations' view, the encouragement standard should be analyzed on the basis that a revision is inadequate in encouraging QFs if there exist alternative revisions that are more favorable to QFs.

We reject this premise. PURPA requires the Commission's regulations to encourage QFs, but that is not all that PURPA says. PURPA also requires that the Commission prescribe no rule requiring that states set payments to QFs that exceed avoided costs and PURPA requires that qualifying small power production facilities do not exceed 80 MW. Furthermore, in the final rule, the Commission strikes a balance among the interests of

all

relevant stakeholders, including not just the selling QFs, but also the purchasing electric utilities and, moreover, consumers, consistent with PURPA.

See

Public Interest Organizations Request for Rehearing at 46 (footnote omitted) (“There is significant space provided within the confines of the limitations Congress established to encourage QFs. FERC's reasoning that because it cannot encourage QFs by exceeding the bounds set by Congress it need not fully encourage QFs within the bounds of the statute fails to give effect to Congress' command to encourage QFs. The Commission can, and must, issue rules that support QF development while complying with the other statutory requirements and limits on the form of that support.”).

41. Regarding QF rates, the final rule provides states further flexibility to better enable states to implement PURPA's statutory obligation that QF rates not exceed the purchasing electric utility's avoided costs. We acknowledge that different states have implemented PURPA differently, but such differences are not prohibited by the statute. If parties believe that a state has failed to implement the PURPA Regulations consistent with their terms, then these parties may bring an enforcement petition before the Commission or other fora.

But just because parties are unsatisfied with some states' implementation of PURPA to date

does not preclude the Commission from making the revisions to its PURPA Regulations adopted in the final rule.

Order No. 872, 172 FERC ¶ 61,041 at P 359 (citing

Policy Statement Regarding the Commission's Enforcement Role Under Section 210 of the Public Utility Regulatory Policies Act of 1978,

23 FERC ¶ 61,304 (1983)).

See

Public Interest Organizations Request for Rehearing at 37-39.

42. In the final rule, the Commission complied with PURPA's requirement that rates not exceed avoided costs by, for example, allowing states to implement variable avoided cost energy rates if they so choose.

The Commission also continued to fulfill its obligation under PURPA to encourage the development of QFs. Specifically, with the additions from the final rule, the PURPA Regulations continue to encourage QFs by combining elements that include, among other things: (1) Providing the potential for increased transparency of avoided cost determinations under competitive solicitations or competitive market prices; (2) continuing to provide the ability for QFs to be exempt from most of the provisions of the FPA and PUHCA and certain state laws and regulations; (3) continuing to grant QFs special rights to supplementary and backup power; (4) providing extra benefits and rights for QFs 5 MW or smaller and especially those smaller than 100 kW; and (5) clarifying that states may only impose objective and reasonable criteria, limited to demonstrating commercial viability and financial commitment, as prerequisites to QF LEO formation that states may impose, which ensures that the purchasing utility does not unilaterally and unreasonably decide when its obligation arises.

These elements of the PURPA Regulations, among others, will continue to provide rules that, as a whole, encourage QF development.

Order No. 872, 172 FERC ¶ 61,041 at PP 232-360.

In addition, the Commission in Order No. 872 kept intact the regulations issued to overcome the barriers to QFs identified in Order No. 69. Order No. 69, FERC Stats. & Regs. ¶ 30,128 at 30,863;

see also

Order No. 872, 172 FERC ¶ 61,041 at PP 10, 28-41, 78.

43. We disagree with Public Interest Organizations' assertion that there is insufficient evidence to support the Commission's conclusion that providing more flexibility to states may better enable states to encourage QF development. As one example, Idaho State Commissioner, Kristine Raper, stated during the 2016 Technical Conference that “[s]tate Commissions do not have enough tools in the toolbox” and that this lack of flexibility caused Idaho to amend its regulations to award only two-year standard contracts for QFs, rather than twenty-year standard contracts with periodic updates to the avoided cost rate.

Therefore, it was reasonable for the Commission to conclude that the new flexibility granted by the final rule may lead states to lengthen the contract period, which could encourage QF development. Additionally, the new competitive market price options should be less burdensome for all involved,

compared to the administrative determination of avoided cost rates, because the new options rely on transparent, publicly available competitive prices or transparent and non-discriminatory competitive solicitations.

QFs may spend less time and money pursuing their interests in a competitive market price environment than they previously did in the administrative determination process. Finally, to the extent energy prices rise at some point in the future, QFs with variable rates would necessarily benefit.

Technical Conference Tr. at 143-44 (Commissioner Kristine Raper, Idaho Commission).

See

Order No. 872, 172 FERC ¶ 61,041 at PP 30-32.

44. We disagree with Public Interest Organizations' claim that the Commission has failed to adequately consider the evidence that states have achieved various levels of PURPA implementation. Public Interest Organizations have overly relied on the examples of North Carolina, Idaho, and Utah, which they contend have unusually high levels of QF development. We are committed to promoting PURPA's central feature of cooperative federalism.

In the final rule, the Commission provided states further flexibility to implement this statutory obligation as most appropriate and consistent with the terms of the statute.

See FERC

Miss.,

456 U.S. 742, 767 (1982) (internal quotations omitted) (stating that PURPA is a “program of cooperative federalism that allows the States, within limits established by federal minimum standards, to enact and administer their own regulatory programs, structured to meet their own particular needs”).

45. We disagree with Public Interest Organizations that retaining the exemption from PUHCA is unimportant or that PUHCA has been repealed. While now more focused on record-keeping obligations,

PUHCA remains a regulatory obligation for entities, including entities that seek QF status retroactively. By granting QFs retroactive status when they had not yet certified but should have done so previously, the Commission has relieved those entities of PUHCA's record-keeping obligations (similar to other federal and state exemptions), thereby further encouraging the development of QFs.

Similarly, contrary to Public Interest Organizations' request for rehearing, alleged deficiencies in state-administered QF interconnection procedures are not within the scope of this rulemaking.

See

18 CFR 366.3(a)(1).

See, e.g., GRE 314 East Lyme LLC,

171 FERC ¶ 61,199 (2020);

Branch Street Solar Partners, LLC,

169 FERC ¶ 61,269 (2019);

Zeeland Farm Servs., Inc.,

163 FERC ¶ 61,115 (2018);

Minwind I,

149 FERC ¶ 61,109 (2014);

Beaver Falls Mun. Auth.,

149 FERC ¶ 61,108 (2014).

B. QF Rates

1. Overview

46. PURPA requires the Commission to promulgate rules to be implemented by the states that “shall insure” that the rates electric utilities pay for purchases of electric energy from QFs meet the statutory criteria, including that “[n]o such rule . . . shall provide for a rate which exceeds” the purchasing utility's “incremental cost . . . of alternative electric energy.”

Under PURPA, such rates must (1) be just and reasonable to the electric consumers of the electric utility and in the public interest; (2) not discriminate against qualifying cogenerators or qualifying small power producers;

and, as noted above, (3) not exceed “the incremental cost to the electric utility of alternative electric energy,”

which is “the cost to the electric utility of the electric energy which,

but for

the purchase from such cogenerator or small power producer, such utility would generate or purchase from another source.”

The “incremental cost to the electric utility of alternative electric energy” referred to in prong (3) above, which sets out a statutory upper bound on a QF rate, has been consistently referred to by the Commission and industry by the short-hand phrase “avoided cost,”

although the term “avoided cost” itself does not appear in PURPA.

16 U.S.C. 824a-3(b).

16 U.S.C. 824a-3(b)(1)-(2).

16 U.S.C. 824a-3(b).

16 U.S.C. 824a-3(d) (emphasis added).

See

18 CFR 292.101(b)(6) (defining avoided costs in relation to the statutory terms);

see also

Order No. 69, FERC Stats. & Regs. ¶ 30,128 at 30,865 (“This definition is derived from the concept of `the incremental cost to the electric utility of alternative electric energy' set forth in section 210(d) of PURPA. It includes both the fixed and the running costs on an electric utility system which can be avoided by obtaining energy or capacity from qualifying facilities.”).

47. In addition, the PURPA Regulations in effect before the final rule provide a QF two options for how to sell its power to an electric utility. The QF could choose to sell as much of its energy as it chooses when the energy becomes available, with the rate for the sale calculated at the time of delivery (frequently referred to as a so-called “as-available” sale).

Alternatively, the QF could choose to sell pursuant to a LEO (such as a contract) over a specified term.

18 CFR 292.304(d)(1).

18 CFR 292.304(d)(2)(i)-(ii);

see also

18 CFR 292.304(b)(5) (“In the case in which the rates for purchases are based upon estimates of avoided costs over the specific term of the contract or other legally enforceable obligation, the rates for such purchases do not violate this subpart if the rates for such purchases differ from avoided costs at the time of delivery.”);

Entergy Servs., Inc.,

137 FERC ¶ 61,199, at P 56 (2011) (“Many avoided cost rates are calculated on an average or composite basis, and already reflect the variations in the value of the purchase in the lower overall rate. In such circumstances, the utility is already compensated, through the lower rate it generally pays for unscheduled QF energy, for any periods during which it purchases unscheduled QF energy even though that energy's value is lower than the true avoided cost.”).

Order No. 69, FERC Stats. & Regs. ¶ 30,128 at 30,880.

50. In the NOPR, the Commission proposed to revise its PURPA Regulations to permit states to incorporate competitive market forces in setting QF rates. Specifically, the Commission proposed to revise its PURPA Regulations with regard to QF rates to provide states with the flexibility to:

• Require that “as-available” QF energy rates paid by electric utilities

located in RTO/ISO markets be based on the market's LMP, or similar energy price derived by the market, in effect at the time the energy is delivered.

• Require that “as-available” QF energy rates paid by electric utilities located outside of RTO/ISO markets be based on competitive prices determined by (1) liquid market hub energy prices, or (2) formula rates based on observed natural gas prices and a specified heat rate.

• Require that energy rates under QF contracts and LEOs be based on as-available energy rates determined at the time of delivery rather than being fixed for the term of the contract or LEO.

• Implement an alternative approach of requiring that the fixed energy rate be calculated based on estimates of the present value of the stream of revenue flows of future LMPs or other acceptable as-available energy rates at the time of delivery.

• Require that energy and/or capacity rates be determined through a competitive solicitation process, such as a request for proposals (RFP), with processes designed to ensure that the competitive solicitation is performed in a transparent, non-discriminatory fashion.

NOPR, 168 FERC ¶ 61,184 at PP 32-33.

51. Although the Commission proposed to modify how the states are permitted to calculate avoided costs, it did not propose to terminate the requirement that the states continue to calculate, and to set QF rates at, such avoided costs.

Order No. 872, 172 FERC ¶ 61,041 at P 101.

52. In the final rule, the Commission adopted these proposals, with certain modifications.

2. LMP as a Permissible Rate for Certain As-Available Avoided Cost Rates

53. In the final rule, the Commission revised 18 CFR 292.304 to add subsections (b)(6) and (e)(1). In combination, these subsections permit a state the flexibility to set the as-available energy rate paid to a QF by an electric utility located in an RTO/ISO at LMPs calculated at the time of delivery.

Id.

P 124.

54. The Commission adopted with one modification the NOPR proposal to allow LMP to be used as a measure of as-available energy avoided costs for electric utilities located in RTO/ISO markets.

Id.

P 151.

55. The Commission found that (1) LMPs reflect the true marginal cost of production of energy, taking into account all physical system constraints; (2) these prices would fully compensate all resources for their variable cost of providing service; (3) LMP prices are designed to reflect the least-cost of meeting an incremental megawatt-hour of demand at each location on the grid, and thus prices vary based on location and time; and (4) unlike average system-wide cost measures of the avoided energy cost used by many states, LMP should provide a more accurate measure of the varying actual avoided energy costs, hour by hour, for each receipt point on an electric utility's system where the utility receives power from QFs.

See id.

P 153 (citing NOPR, 168 FERC ¶ 61,184 at PP 44-45 (citing

SMUD,

616 F.3d at 524;

FERC

Elec. Power Supply Ass'n,

136 S. Ct. at 768-69 (describing how LMP is typically calculated);

Offer Caps in Markets Operated by Regional Transmission Organizations and Independent System Operators,

Order No. 831, 81 FR 87770 (Dec. 5 2016), 157 FERC ¶ 61,115, at P 7 (2016),

order on reh'g and clarification,

Order No. 831-A, 82 FR 53403 (Nov. 16, 2017), 161 FERC ¶ 61,156 (2017))).

56. The Commission recognized that an LMP selected by a state to set a purchasing utility's avoided energy cost component might not always reflect a purchasing utility's actual avoided energy costs. Accordingly, the Commission found that it is appropriate to modify the option for a state to set avoided energy costs using LMP from a per se appropriate measure of avoided cost to a rebuttable presumption that LMP is an appropriate means to determine avoided cost.

Id.

P 152.

57. The Commission disagreed with the arguments made by Union of Concerned Scientists,

NIPPC, CREA, REC, and OSEIA,

100

and Public Interest Organizations

101

that LMP should not be used as a measure of avoided energy costs because LMP prices are depressed in many markets where self-scheduling rights and state cost-recovery mechanisms for fuel and operating costs create the opportunity for market participation at a loss. The Commission recognized that, all other things being equal, self-scheduling of resources may impact market clearing prices. The Commission found that this potential price effect, however, does not mean that the LMP is not an accurate measure of avoided energy costs. The Commission stated that, while self-scheduling or other factors may impact LMPs, in any case, an electric utility's purchases during periods when these price impacts are occurring would be made at the resulting LMPs, whatever those LMPs may be. Therefore, the Commission found that LMPs meet the Commission's long-standing definition of avoided costs for a purchasing electric utility, even if they happen to reflect price impacts from self-scheduling or other factors.

102

Union of Concerned Scientists Comments, Docket No. RM19-15-000, at 3-8 (Nov. 15, 2019).

100

NIPPC, CREA, REC, and OSEIA Comments, Docket No. RM19-15-000, at 52 (Dec. 3, 2019).

101

Public Interest Organizations Comments, Docket No. RM19-15-000, at 52-64 (Dec. 3, 2019).

102

Order No. 872, 172 FERC ¶ 61,041 at PP 155-56.

58. The Commission rejected the related request for clarification made by Solar Energy Industries,

103

i.e.,

that the flexibility to set QF payments for as-available energy at the applicable LMP should require an on-the-record determination that the purchasing utility procures incremental energy from the identified LMP market at those prices. The Commission found that, unless an aggrieved entity seeks to rebut this presumption in a state avoided cost adjudication, rulemaking, legislative determination, or other proceeding, that state would not need to make such an on-the-record determination before it decides to use LMP.

104

103

Solar Energy Industries Comments, Docket No. RM19-15-000, at 27-28 (Dec. 3, 2019).

104

Order No. 872, 172 FERC ¶ 61,041 at P 158.

59. The Commission rejected the arguments made by NIPPC, CREA, REC, and OSEIA that, more generally, prices for long-term QF contracts should be set by reference to long-term price indices or other indicators that genuinely reflect the long-term costs of generation avoided by the purchasing utility.

105

The Commission stated that it only addressed as-available energy and as-available energy prices by definition are short term.

106

105

NIPPC, CREA, REC, and OSEIA Comments, Docket No. RM19-15-000, at 53 (Dec. 3, 2019).

106

Order No. 872, 172 FERC ¶ 61,041 at P 160.

a. Requests for Rehearing

60. Public Interest Organizations argue that it was erroneous for the Commission to make a “rebuttable presumption” that the state or nonregulated utility can use the LMP as “a rate for as-available qualifying facility energy sales to electric utilities located in a market defined in [18 CFR] 292.309(e), (f), or (g).”

107

Public Interest Organizations claim that the Commission acted contrary to precedent that limits an administrative agency's authority to establish presumptions by creating a rebuttable presumption that LMP is the avoided cost price “for as-available qualifying facility energy sales to electric utilities located in” an organized market.

108

Public Interest Organizations claim that the

presumption unlawfully shifts the burden under the statute and is not based on record evidence showing that avoided cost energy prices are necessarily the same as the LMP, adding that there are no alternative explanations for a utility ever to incur energy prices that exceed the LMP.

109

107

Public Interest Organizations Request for Rehearing at 60-72 (citing 18 CFR 292.304(b)(6)).

108

Id.

at 62.

109

Id.

61. Public Interest Organizations argue that, because the final rule stated that “an LMP selected by a state to set a purchasing utility's avoided energy cost component might not always reflect a purchasing utility's actual avoided energy costs,” the Commission cannot make the necessary finding under the statute that the LMP is, per se, the full avoided energy cost.

110

Public Interest Organizations contend that, to create the LMP presumption lawfully, the Commission must have substantial record evidence showing that “a sound and rational connection between” the LMP and the full avoided cost of each utility (as necessary to ensure full encouragement and nondiscrimination) is “so probable that it is sensible and timesaving to assume” it unless disproven, arguing that there are no alternative explanations for a conclusion contrary to the presumption.

111

Public Interest Organizations maintain that the record contains numerous examples of instances in which a utility in an organized market incurs costs greater than the LMP.

112

110

Id.

at 64 (citing Order No. 872, 172 FERC ¶ 61,041 at P 52).

111

Id.

at 66 (citing

Cablevision Sys. Corp.

FCC,

649 F.3d 695, 716 (D.C. Cir. 2011) (

Cablevision

);

Nat'l Mining Ass'n

Dep't of Interior,

177 F.3d 1, 6 (D.C. Cir. 1999));

Sec'y of Labor

Keystone Coal Min. Corp.,

151 F.3d 1096, 1100-01 (D.C. Cir. 1998)).

112

Id.

at 68 & n.200 (citing Public Interest Organizations Comments, Docket No. RM19-15-000, at 47-54 (Dec. 3, 2019)).

62. Public Interest Organizations claim that the Commission relies on an implicit and absolute connection between price and cost by repeatedly conflating the cost to buy in the day ahead market with the cost of energy to the utility.

113

Public Interest Organizations maintain that, even when a utility is simultaneously selling into and buying energy from the day ahead market, the utility's costs for energy are the higher of the market price or the cost to produce or procure the power it sells into the market. Public Interest Organizations refer for example to a utility that dispatches its own generation at $35/MWh, sells into the market at $20/MWh, and then buys back at $20/MWh to meet load; the LMP price is $20, but the cost to the utility for energy is $35.

114

113

Id.

at 69.

114

Id.

at 69-72.

b. Commission Determination

63. We reject the arguments against establishing the rebuttable presumption that LMP reflects avoided costs for as-available energy. We disagree with Public Interest Organizations that the relevant precedent prohibits establishing a rebuttable presumption. Indeed, the courts have made clear that “[u]nder the APA, agencies may adopt evidentiary presumptions provided that the presumptions (1) shift the burden of production and not the burden of persuasion . . . and (2) are rational.”

115

The final rule did not shift the burden of persuasion, only the burden of production. We emphasize that LMP typically reflects a purchasing utility's actual avoided energy costs.

116

115

See Cablevision,

649 F.3d at 716 (citing 5 U.S.C. 556(d)).

116

See

Order No. 872, 172 FERC ¶ 61,041 at PP 153, 156.

64. However, we also acknowledged in the final rule that there may be instances when LMP does not reflect a purchasing utility's avoided cost and that is why the Commission allowed the presumption to be challenged. Requiring an entity challenging the state's use of the presumption in the first instance to show why the state was wrong does not negate the legal requirement that, unless the parties agree to another rate, the rates for purchases in a QF contract must equal a purchasing utility's avoided costs. If so challenged, a state would need to address the challenging entity's arguments in order to demonstrate that LMP represents the purchasing utility's avoided costs. Therefore, the Commission did not change the burden of persuasion.

117

Moreover, in the final rule, the Commission appropriately established a rebuttable presumption to frame how it (and, potentially, reviewing courts) would evaluate challenges to states setting avoided costs at LMP.

118

117

See id.

P 152.

118

See AFPA

FERC,

550 F.3d at 1183 (permitting Commission to establish rebuttable presumption via rulemaking rather than case-by-case adjudication in PURPA section 210(m) context).

65. We also disagree with Public Interest Organizations' assertion that the Commission failed to provide adequate support for why the presumption is rational in organized markets. As explained in the final rule, the Commission relied on a variety of supporting facts, including the fact that LMP definitionally reflects the true marginal cost of production of energy, taking into account physical system constraints, and other listed benefits of LMP.

119

Because LMP is likely to reflect the true marginal cost of energy in the vast majority of cases for the reasons discussed in the final rule, it is “so probable that it is sensible and timesaving to assume”

120

that LMP for a particular utility is an appropriate measure of the utility's avoided costs for as-available energy, unless disproven in a particular case. We leave open for specific cases to determine the appropriateness of using a particular LMP such that a QF could rebut the presumption that LMP is appropriate.

121

Regarding Public Interest Organizations' claims that numerous examples in the record support their argument that utilities often incur costs greater than the LMP, we disagree. Public Interest Organizations' assertion is based on the evidence of self-scheduling they supplied in NOPR comments, and their assertion that this self-scheduling behavior is enabled by out-of-market subsidization through retail rate cost recovery.

122

However, Public Interest Organizations have provided no proof that such out-of-market subsidization takes place and there are legitimate reasons for self-scheduling that are consistent with rational market participant behavior. For example,

generation units with start-up and shut-down sequences longer than a single market commitment period may decide to self-schedule at a loss in one period in order to earn profits in other periods that they expect to exceed the temporary loss. Absent proof that retail rate subsidization is the dominant driver for self-scheduling behavior, there is little evidence in the record that purchasing utilities often incur costs greater than the LMP. Nevertheless, entities may seek to rebut the presumption if, for example, the RTO/ISO market is affected by persistent price distortions that are not the result of legitimate market participant behavior (such as persistent self-scheduling at a loss that is proven to be the result of out-of-market subsidization, and thus demonstrates that the utility regularly incurs costs that exceed LMP).

119

Order No. 872, 172 FERC ¶ 61,041 at P 153 (finding that “(1) LMPs reflect the true marginal cost of production of energy, taking into account all physical system constraints; (2) these prices would fully compensate all resources for their variable cost of providing service; (3) LMP prices are designed to reflect the least-cost of meeting an incremental megawatt-hour of demand at each location on the grid, and thus prices vary based on location and time; and (4) unlike average system-wide cost measures of the avoided energy cost used by many states, LMP should provide a more accurate measure of the varying actual avoided energy costs, hour by hour, for each receipt point on an electric utility's system where the utility receives power from QFs”) (citing NOPR, 168 FERC ¶ 61,184 at PP 44-45 (citing

FERC

Elec. Power Supply Ass'n,

136 S. Ct. 760, 768-69 (2016) (describing how LMP is typically calculated);

Sacramento Mun. Util. Dist.

FERC,

616 F.3d 520, 524 (D.C. Cir. 2010); Order No. 831, 157 FERC ¶ 61,115 at P 7).

120

Nat'l Mining Ass'n

U.S. Dep't of Interior,

177 F.3d at 6.

121

See

Order No. 872, 172 FERC ¶ 61,041 at PP 155-71 (discussing why LMP is presumptively an appropriate measure of avoided energy costs even if in particular circumstances it is not appropriate).

122

See

Public Interest Organizations Request for Rehearing at 71 (footnote omitted) (citing Public Interest Organizations Comments, Docket No. RM19-15-000, at 46-55 (Dec. 3, 2019)) (“[E]ven utilities that operate in organized markets acquire energy outside of the day ahead market or produce energy at variable costs that exceed the market price and sell at a loss to the day ahead market. Price suppression is thus one indicator of the larger problem that the day ahead market is not reflecting the actual cost of energy supply to utilities, which belies FERC's assumption that the LMP reflects all utilities' actual cost for all marginal energy.”).

3. Tiered Avoided Cost Rates

a. Request for Clarification

66. California Utilities request that the Commission clarify that it is no longer the Commission's policy or intent to permit states to subsidize QFs by the use of “tiered” avoided costs.

123

California Utilities request that the Commission find that avoided cost rates may not be based only on the costs of a subset of facilities from which a state has mandated purchases or only on facilities that meet state-determined characteristics such as the facilities' use of a renewable fuel. As such, California Utilities further request that the Commission find that the United States Court of Appeals for the Ninth Circuit decision in

CARE

CPUC

124

as well as certain aspects of the Commission's orders

125

are no longer valid precedent.

123

California Utilities Motion for Clarification at 1-2.

124

Californians for Renewable Energy

Cal. Pub. Utils. Comm'n,

922 F.3d 929 (9th Cir. 2019) (

CARE

CPUC

125

Cal. Pub. Utils. Comm'n,

133 FERC ¶ 61,059 (2010) (

CPUC

2010),

clarification and reh'g denied,

134 FERC ¶ 61,044 (2011) (

CPUC

2011).

67. According to California Utilities, Commission precedent on avoided costs for tiered resources is as follows for the following periods:

126

California Utilities Motion for Clarification at 3-8.

1978-2010:

All resources must be used to set avoided costs.

127

Id.

at 3 (citing

S. Cal. Edison Co.,

70 FERC ¶ 61,215 (

CPUC

1995 I),

reconsideration denied,

71 FERC ¶ 61,269 (1995) (

CPUC

1995 II)).

2010-2019:

States were permitted to adopt tiered avoided costs based on the costs of specific types of QFs, if the state had an unmet purchase mandate.

128

Id.

at 4 (citing

CPUC

2010, 133 FERC ¶ 61,059 at P 30).

April 2019-2020:

Tiered avoided costs mandated within the Ninth Circuit if state procurement mandates are unmet.

129

Id.

at 5 (citing

CARE

CPUC,

922 F.3d 929).

2020:

The Commission returns to an all-resource approach and rejects using PURPA to subsidize QFs that are not otherwise financeable.

130

Id.

(citing Order No. 872, 172 FERC ¶ 61,041 at P 123).

68. California Utilities request clarification for the following reasons: (1) The Commission's failure to state in the final rule that it is overruling the CPUC cases or

CARE

CPUC;

(2) the need for the Commission to defend a change in policy before an appellate court that will ask why the Commission no longer supports the policy it espoused in

CPUC

2010; (3) the regulation that lists the factors a state may consider in determining avoided cost (18 CFR 292.304, which have been moved to 18 CFR 292.304(e)(2)) have not changed, which leaves them open to misinterpretation; and (4) the words “taking into account the operating characteristics of the needed capacity”

131

regarding competitive solicitations, although clarified by Paragraph 433 of the final rule, could be misread as allowing avoided costs for QFs with “operating characteristics” such as renewable fuel, cogeneration technology, under a certain size, or at specific locations (

i.e.,

located on the distribution system).

132

131

See

new 18 CFR 292.304(d)(8)(i)(B).

132

California Utilities Motion for Clarification at 9-10.

69. California Utilities maintain that adding the following language after 18 CFR 292.304(b)(5) will ensure that states will not use tiered avoided cost rates under PURPA as a vehicle to subsidize certain state-favored resources: “(6) Rates for purchases may not be based on an avoided cost set by determining the cost of procuring energy and/or capacity to fulfill a State regulatory authority or non-regulated electric utility mandate to procure energy and/or capacity from resources using a specific fuel type, using a specific technology, of a particular size, and/or located only on local distribution systems.”

133

Id.

at 13-14.

70. California Commission disagrees that the final rule overrules

CPUC

2011 and the Commission's earlier precedent. California Commission contends that the Commission's 1995 precedent prohibits assuming that “the utility can provide the capacity and generate the energy itself (

i.e.,

through the establishment of the utility benchmark price), only to exclude the utility, cogenerators, and other resources from ultimately being able to supply the capacity and energy, by segmenting the portfolio and permitting only certain QFs to bid in certain segments against the benchmark and ultimately produce a higher-than-avoided-cost rate.”

134

California Commission interprets Commission precedent as permitting a state to determine what capacity a utility would be avoiding, to decide from which generators a utility could purchase to satisfy state programs, and to set tiered avoided cost rates based on those qualifying resources.

135

134

California Commission Answer at 4-5.

135

Id.

at 5-6.

71. California Commission asserts that the final rule's requirement that competitive solicitations be open to all sources was intended to prevent discrimination against QFs and did not preclude states from using tiered avoided cost rates.

136

California Commission argues that, contrary to California Utilities' assertion, the final rule does not treat tiered rates as impermissible subsidies to QFs. California Commission contends, instead, that the final rule permits states to continue recognizing non-energy benefits outside the context of PURPA payments.

137

California Commission requests that, with respect to

CARE

CPUC'

s holding that a state that uses QFs to meet a renewable portfolio standard (RPS) must set avoided cost only on resources that could satisfy that RPS, the Commission clarify that “operating characteristics that qualify a QF to meet a state's [RPS] are energy-related benefits that can be the basis for determining avoided costs and multi-tier pricing, as opposed to benefits unrelated to their production of energy—akin to renewable energy credits—that may not be compensated by rates under PURPA.”

138

136

Id.

at 7-9.

137

Id.

at 9-11.

138

Id.

at 11-12.

b. Commission Determination

72. We deny California Utilities' request for clarification. Although Commission precedent does not allow the use of non-operational externalities, such as environmental benefits, in setting avoided cost rates, PURPA neither requires nor prohibits states from establishing tiered procurement (and thus tiered pricing), such as California does. California's tiered supply procurement requirements reflect decisions regarding utility generation procurement (

e.g.,

by specific fuel type or technology) that are within the boundaries of a state's traditional authority. Once such tiered generation procurement requirements have been

established by a state, if a QF qualifies for a particular generation procurement tier, it is reasonable to assume that the mandatory QF purchase will displace resources otherwise in that tier; therefore, the rates for that tier are in fact the cost avoided by the purchasing utility when it instead purchases from that QF.

73. We cannot overrule a Court of Appeals decision, as California Utilities suggest. In addition, California Utilities have not adequately supported that there is any conflict between the final rule and the precedent they cite.

139

Therefore, we decline to add additional regulatory language to address the issues they raise.

139

The Commission in the final rule addressed arguments that QFs provide non-energy benefits. The Commission stated that such benefits may be addressed by states outside of PURPA. Because tiered QF rates result from tiered procurement not limited to QFs, and are therefore established outside of PURPA, nothing in PURPA prohibits such tiered rates.

See

Order No. 872, 172 FERC ¶ 61,041 at P 123;

see also

NOPR, 168 FERC ¶ 61,184 at P 64 n.101 (citing Alliant Energy Comments, Docket No. AD16-16-000, at 5 (Nov. 7, 2016) (“Current market-based wind prices in the Iowa region of MISO are approximately 25% lower than the PURPA contract obligation prices [Interstate Power and Light Company] is forced to pay for the same wind power for long-term contracts entered into as of June 2016. As a result, PURPA-mandated wind power purchases associated with

just one project

could cost Alliant Energy's Iowa customers an incremental $17.54 million above market wind prices over the next 10 years.”) (emphasis in original); Edison Electric Institute (EEI) Supplemental Comments, Docket No. AD16-16-000, attach. A at 3-4 (June 25, 2018) (“On August 1, 2014, a 10-year fixed price contract at the Mid-Columbia wholesale power market trading hub was priced at $45.87/MWh. On June 30, 2016, the same contract was priced as $30.22/MWh, a decline of 34% in less than two years. However, over the next 10 years, PacifiCorp has a legal obligation to purchase 51.9 million MWhs under its PURPA contract obligations at an average price of $59.87/MWh. The average forward price curve for the Mid-Columbia trading hub during the same period is $30.22/MWh, or 50% below the average PURPA contract price that PacifiCorp will pay. The additional price required under long-term fixed contracts will cost PacifiCorp's customers $1.5 billion above current forward market prices over the next 10 years.”); Comm'r Kristine Raper, Idaho Commission Comments, Docket No. AD16-16-000, at 3-4 (June 30, 2016) (“Idaho Power demonstrated that the average cost for PURPA power since 2001 has exceed the Mid-Columbia (Mid-C) Index Price and is projected to continue to exceed the Mid-C price through 2032. Likewise, PacifiCorp's levelized avoided cost rates for 15-year contract terms in Wyoming shows a decrease of approximately 50% from 2011 through 2015 (from approximately $60 per megawatt-hour to less than $30 per megawatt-hour).”)).

148

Order No. 872, 172 FERC ¶ 61,041 at PP 254-55.

78. The Commission found that the variable avoided cost energy rate provision is not based on any determination that the Commission's

rules no longer should encourage QF development. The Commission found, instead, that it was revising the PURPA Regulations by giving states the flexibility to require variable avoided cost energy rates in QF contracts and other LEOs in order to better comply with Congress's clear requirement in PURPA that the Commission may not require QF rates in excess of a purchasing utility's avoided costs.

149

Id.

P 256.

79. Opponents of variable avoided cost energy rates urged the Commission to continue placing this risk on the customers of electric utilities, as in the past, by retaining the option for QFs to fix their avoided cost energy rates in their contracts or LEOs notwithstanding record evidence that fixed energy rates compared to actual avoided costs have not balanced out over time. But, after consideration of the record, the Commission decided instead to allow states the flexibility to require variable avoided cost energy rates in QF contracts and LEOs and thereby reduce the risk to customers. The Commission found that its determination ensures that the PURPA Regulations continue to be consistent with the statutory avoided cost rate cap in PURPA section 210(b), coupled with the directive in the PURPA Conference Report that customers of utilities not be required to subsidize QFs.

150

Id.

P 258 (citing Conf. Rep. at 98 (emphasis added) (“The provisions of this section

are not intended to require the rate payers of a utility to subsidize

cogenerators or small power produc[er]s.”)).

80. The Commission found that there is no merit to the contention that the PURPA Conference Report expresses Congressional intent that QFs are entitled to long-term fixed energy rates. The Commission found that, while Congress recognized that the better measure of avoided cost in certain scenarios might be the cost of the alternative fossil fuel unit that would not be run at that later date,

151

nothing in the section of the PURPA Conference Report quoted by opponents of the variable energy rate proposal suggests that Congress intended the Commission to require that all avoided cost energy rates be fixed at the outset for the life of a QF contract or other LEO. The Commission further found that nothing in the revision being implemented in the final rule would prohibit a state from calculating a QF's avoided cost energy rate for a QF contract or LEO in the manner suggested in the PURPA Conference Report or, indeed, in the manner the Commission has long allowed, if a state determined that such an approach best reflects the purchasing electric utility's avoided costs.

152

151

Under the approach adopted in the final rule, with the flexibility granted to states to adopt—but not a mandate directing states to adopt—variable avoided cost energy rates for QF contracts and other LEOs, the Commission permitted states to adopt a pricing approach that best fits their circumstances, including adopting the pricing approach described by the PURPA Conference Report to address the circumstances described by the PURPA Conference Report.

Id.

P 260 n.409.

152

Id.

P 260.

81. The Commission described the variable avoided cost energy rate provision as not running afoul of the

Freehold Cogeneration

and

Smith Cogeneration

cases cited by Harvard Electricity Law.

153

The Commission described those decisions, which overturned state avoided cost determinations allowing for changes in QF rates, as based on the provision in the original PURPA Regulations giving QFs the option to select contracts with long-term fixed avoided cost rates.

154

The Commission explained that neither decision suggests that PURPA would prevent the Commission from revising its regulations to allow states the flexibility to require variable avoided cost energy rates.

153

Id.

P 261 (citing Harvard Electricity Law Comments, Docket No. RM19-15-000, at 29 (Dec. 3, 2019) (citing

Freehold Cogeneration Ass'n

Bd. of Regulatory Comm'rs of State of N.J.,

44 F.3d 1178, 1193 (3d Cir. 1995) (

Freehold Cogeneration

);

Smith Cogeneration Mgmt.

Corp. Comm'n,

863 P.2d 1227, 1227 (Okla. 1993) (

Smith Cogeneration

))).

154

Id.

(citing

Smith Cogeneration,

863 P.2d at 1241 (emphasis added) (holding that allowing reconsideration of established avoided costs “makes it impossible to comply with PURPA

and FERC regulations requiring established rate certainty for the duration of long term contracts

for qualifying facilities that have incurred an obligation to deliver power”);

Freehold Cogeneration,

44 F.3d at 1193 (emphasis added) (relying on

Smith Cogeneration

analysis that “that PURPA

and FERC regulations

preempted the State Commission rule”)).

82. The Commission found that it was not subjecting QFs to the same type of examination that is traditionally given to electric utility rate applications (

e.g.,

cost-of-service rate regulation).

155

Indeed, the Commission found that the regulation it adopted does not subject QF rates to any examination whatsoever of the costs incurred by QFs in producing and selling power. Rather, the Commission stated that the variable avoided cost energy rate provision applicable to QF contracts and other LEOs that the Commission adopted in the final rule sets QF rates based on the avoided costs of the purchasing utility. The Commission stated that this variable avoided cost energy rate provision cannot be characterized as imposing utility-style regulation on the QFs themselves.

156

155

Id.

P 262.

156

Id.

P 263.

83. Finally, the Commission determined that state regulators may not change rates in existing QF contracts or other existing LEOs.

157

The Commission explained that, by its terms, the variable avoided cost energy rate provision applies only prospectively to new contracts and new LEOs entered into after the effective date of the final rule. The Commission emphasized that nothing in the final rule should be read as sanctioning the modification of existing fixed-rate QF contracts and LEOs.

158

157

Id.

P 264 (citing Harvard Electricity Law Comments, Docket No. RM19-15-000, at 23 (Dec. 3, 2019) (citing

API,

461 U.S. at 414)).

158

Id.

a. Whether the Current Approach Has Resulted in Payments to QFs in Excess of Avoided Costs

84. In the final rule, the Commission gave states the flexibility to require variable energy pricing in QF contracts and other LEOs, instead of providing QFs the right to elect fixed energy prices, based on the Commission's concern that, at least in some circumstances, long-term fixed avoided cost energy rates have been well above the purchasing utility's avoided costs for energy and that this was a result prohibited by PURPA section 210(b). The Commission found that the record evidence demonstrates that QF contract and LEO prices for energy can exceed and have exceeded avoided costs for energy without any subsequent balancing out. In addition to the examples presented in the record of the Technical Conference that were cited in the NOPR, the Commission noted that commenters have provided additional examples of such overpayments.

159

The Commission explained that such evidence persuaded it that it is necessary to give states the flexibility to address QF contract and LEO rates for energy that exceed avoided costs for energy, while at the same time still allowing states the flexibility to continue requiring long-term fixed avoided cost energy rates in QF contracts and other LEOs when such treatment is appropriate.

160

159

Id.

P 283 (citing Duke Comments, Docket No. RM19-15-000, at 6 (Dec. 3, 2019); Idaho Power Comments, Docket No. RM19-15-000, at 10-11 (Dec. 3, 2019); Portland General Comments, Docket No. RM19-15-000, at 5 (Dec. 3, 2019); NOPR, 168 FERC ¶ 61,184 at P 64 n.101).

160

Id.

85. In the final rule, the Commission found, as acknowledged in Harvard Electricity Law's NOPR comments, that the examples of QF contract rates that exceed avoided costs that are in the record illustrate the general proposition that “energy forecasts have a manifest

record of failure.”

161

The Commission explained that it was this “manifest record of failure” including evidence in the record that the failure has been at the expense of consumers that motivated the Commission to make the change adopted in the final rule.

162

161

Id.

P 284 (citing Harvard Electricity Law Comments, Docket No. RM19-15-000, at 24 (Dec. 3, 2019) (citing Vaclav Smil,

Energy at the Crossroads: Global Perspectives and Uncertainties,

Mass. Inst. Tech., 2003, at 121, 145-49)).

162

Id.

86. The Commission also found that challenges to the idea that fixed avoided cost energy rates in QF contracts and other LEOs have exceeded actual avoided costs largely either conceded that overestimations have occurred while arguing that such overestimations impacted purchasing electric utilities just as much as QFs or attempted to argue that such overestimations were temporary or unusual.

163

Id.

P 285.

87. First, the Commission determined that the record evidence demonstrates that, contrary to the Commission's finding in 1980, overestimations and underestimations of future avoided costs may not even out.

164

Consequently, the Commission found that its determination in 1980, based on the record at that time, does not preclude the Commission from relying on new record evidence showing a change in circumstances since 1980 to revise the 1980 rule.

164

Id.

P 286 (citing Duke Comments, Docket No. RM19-15-000, at 6 (Dec. 3, 2019); Idaho Power Comments, Docket No. RM19-15-000, at 10-11 (Dec. 3, 2019); Portland General Comments, Docket No. RM19-15-000, at 5 (Dec. 3, 2019); NOPR, 168 FERC ¶ 61,184 at 64 n.101).

88. The Commission agreed with Public Interest Organizations that the recent electricity price overestimations were not unique to QFs and can be explained by general declines in natural gas prices since the adoption of hydraulic fracturing and the 2007-2009 recession.

165

But the Commission explained that these overestimations are precisely why the estimates of avoided costs reflected in the QF contracts and LEOs were incorrect and why the resulting fixed avoided cost energy rates reflected in such QF contracts and other LEOs resulted in QF rates well above utility avoided costs in violation of PURPA section 210(b); the precipitous decline in natural gas prices caused a corresponding reduction in utilities' energy costs, and thus in their avoided energy costs but this decline was not reflected in the QFs' fixed contract rates that remained at their previous levels.

166

165

Id.

P 287 (citing Public Interest Organizations Comments, Docket No. RM19-15-000, at 47-50 (Dec. 3, 2019)).

166

Id.

89. Similarly, the Commission found that arguments that electric utilities also based resource acquisitions on incorrect forecasts of natural gas prices

167

ignore a key distinction between utility rates and fixed QF rates. As the Commission explained, electric utilities may have relied on incorrect natural gas price forecasts to justify the timing and type of their resource acquisitions, as commenters assert. However, the Commission found that, once an electric utility resource decision was made, electric utilities' cost-based rate regimes typically obligated them eventually to pass through to customers any energy cost savings realized as a result of declining natural gas and other fuel prices, as well as any energy cost savings due to lower purchased power rates resulting from the decline in natural gas prices. The Commission found that, by contrast, once QF avoided cost energy rates were fixed based on now-incorrect (and now-high) natural gas price forecasts, those energy rates remained fixed for the term of the QFs' contracts and LEOs. Therefore, unlike fixed avoided cost energy rates in QF contracts and LEOs, the Commission determined that cost-based electric utility energy rates declined as the cost of natural gas and other fuels and purchased power declined.

168

167

Id.

P 288 (citing Electricity Consumers Resource Council, American Chemistry Council, and American Forest and Paper Association (ELCON) Comments, Docket No. RM19-15-000, at 22 (Dec. 3, 2019); North Carolina Commission Staff Comments, Docket No. RM19-15-000, at 2-3 (Dec. 3, 2019); NIPPC, CREA, REC, and OSEIA Comments, Docket No. RM19-15-000, at 31 (Dec. 3, 2019); Public Interest Organizations Comments, Docket No. RM19-15-000, at 40, 43 (Dec. 3, 2019); Solar Energy Industries Comments, Docket No. RM19-15-000, at 36-38 (Dec. 3, 2019)).

168

Id.

90. The Commission also disagreed with Public Interest Organizations' assertions that it was improper to have used competitive market hub prices to determine whether fixed QF contract and LEO prices resulted in overpayments as compared to electric utilities' actual avoided costs.

169

The Commission recognized that the competitive market hub prices used in the comparisons may not have precisely reflected the avoided energy costs of all electric utilities located in the same region as the competitive market hub. However, the Commission found that competitive market prices in general should reflect the marginal avoided energy costs of utilities with access to such markets and that those markets generally reflect the marginal cost of energy in the region.

170

The Commission further found that the magnitude of the differences between the market hub prices and the QF contract and LEO prices provides solid evidence that the QF contract and LEO prices used in the comparison were well above actual avoided energy costs at the time the energy was delivered by the QFs, even if the exact magnitude is unclear.

171

169

Id.

P 289 (citing Public Interest Organizations Comments, Docket No. RM19-15-000, at 40-41 (Dec. 3, 2019)).

170

Id.

The Commission stated that a review of recent Mid-C Hub daily spot prices (from Intercontinental Exchange (ICE)

https://www.eia.gov/electricity/wholesale/,

indicates that they reflect the marginal cost of energy in that area since they are usually the result of a significant number of trades (averaging 54 per day), counterparties (averaging 16 per day), and trading volume (averaging 26,714 MWh/day), which usually exceed those of the NP-15 trading hub, an active Western trading hub in Northern California in the CAISO footprint (averaging 6 trades per day, 4 counterparties per day, and 2,756/MWh per day). The Commission described prices for Mid-C as ranging between an average of approximately $16/MWh high price and $13/MWh low price during the recent spring (Mar 19-Jun 20, 2020). During this period the index was reported for 65 trading days for Mid-C and 9 trading days for NP-15.

Id.

171

Id.

91. The Commission acknowledged that energy prices may increase in the future but explained that giving states the flexibility to require variable avoided cost energy rates in QF contracts and in other LEOs will allow states to better ensure that avoided cost energy payments made to QFs will more accurately reflect the purchasing utility's avoided costs regardless of whether energy prices are increasing or declining. The Commission also noted that, if energy prices do in fact increase, variable avoided cost energy pricing would protect and even benefit the QF itself because it would not be locked into a fixed energy rate contract or LEO that would be below the purchasing electric utility's avoided energy cost.

172

Id.

PP 290-91.

92. The Commission noted that, although many commenters agreed that fixed QF energy rates were higher than actual avoided energy costs in at least some instances, challenges were raised against both Duke Energy's estimate that its fixed QF contract rates were $2.6 billion above market costs and the Concentric Report's comparison of QF fixed rates for wind and solar facilities with the cost of wind and solar projects with competitive, non-PURPA contracts.

173

Id.

P 291.

93. The Commission found that the expert testimony cited by the SC Solar Alliance, that the witness “wouldn't put a whole lot of weight in [Duke's

estimate],”

174

does not address Duke's calculation of past overpayments. Rather, the Commission described the witness as answering a question regarding the potential for overpayments “[f]or going forward solar,”

i.e.,

future overpayments as a result of the new fixed avoided cost rates being considered by the South Carolina Commission that were the subject of the expert witness' testimony.

175

The Commission noted that the same witness acknowledged the past overpayments made by Duke Energy, which he attributed to “drops in natural gas prices that no one could've foreseen.”

176

The Commission explained that it was these overpayments due to unforeseen declines in natural gas prices that formed an important basis for the Commission's determination in the final rule to now give states the flexibility to require variable avoided cost energy rates in QF contracts and LEOs.

177

174

Id.

P 292 (citing SC Solar Alliance Comments, Docket No. RM19-15-000, at 7 (Dec. 3, 2019)).

175

Id.

(citing Public Service Commission of South Carolina, Docket No. 2019-185 & 186-E, Hearing Transcript Vol. 2, Tr. 596: 3-4 (Horii Test.) (attached as Appendix 1 to SC Solar Alliance Comments, Docket No. RM19-15-000 (Dec. 3, 2019))).

176

Id.

(citing Horii Test. 593:21-22).

177

Id.

94. The Commission also emphasized that it did not rely on the Concentric Report to support the variable energy avoided cost provision adopted in the final rule. The Commission determined that it is not clear that the difference in costs identified by Concentric can be ascribed to the fixed rates in the QF contracts or rather to the fact that the avoided cost rates in the QF contracts were based on more expensive non-renewable capacity that was avoided by the purchasing utilities.

178

Id.

P 293.

i. Requests for Rehearing

95. EPSA argues that the Commission erred in relying on the idea that overestimates and underestimates have not balanced out because the Commission has neither validated these allegations, nor assessed whether the overestimations of avoided cost have, in fact, balanced out.

179

Public Interest Organizations argue that the Commission's determination to permit variable energy rates to mitigate the risk of alleged overpayments to QFs is arbitrary and capricious and unsupported by substantial evidence.

180

Likewise, Solar Energy Industries assert that there is a lack of evidence to conclude that protecting electric consumers warrants terminating the QF's right to elect long-term fixed energy rates.

181

EPSA argues that over- and under-estimations over time is irrelevant absent evidence that avoided cost forecasts are inherently less accurate than the cost estimates used to set the purchasing utilities' own rates.

182

179

EPSA Request for Rehearing at 10.

180

Public Interest Organizations Request for Rehearing at 9, 84.

181

Solar Energy Industries Request for Rehearing and/or Clarification at 19.

182

EPSA Request for Rehearing at 10.

96. Public Interest Organizations contend that the Commission incorrectly defined avoided costs and incorrectly defined avoided costs with short run prices.

183

Public Interest Organizations assert that the Commission did not respond to arguments that historic avoided cost rates “have likely underestimated utilities' actual `but for' avoided costs, resulting in underpayment rather than overpayment to QFs.”

184

They also assert that “there is no evidence in the record showing that utilities would have—as the Commission assumed—relied on short term energy markets rather than entering into long-term contracts based on similarly speculative avoided cost estimates or building new generating resources,” and that “utilities often build and operate generating resources at costs well above their purported avoided cost rate.”

185

Public Interest Organizations argue that the Commission incorrectly assumed that the cost for energy that a utility would incur “but for” a QF is the short run cost and that utilities never lock in energy costs by constructing their own energy resources, executing long term fuel contracts or executing long term energy supply contracts. Public Interest Organizations claim that, if a utility ever locks in energy costs instead of relying on the short run energy or fuel markets for supply, a QF can displace those long-run costs rather than the short run cost, adding that, contrary to the Commission's assertions, avoided energy rates paid to QFs are significantly lower than utilities' true generation costs.

186

183

Public Interest Organizations Request for Rehearing at 84.

184

Id.

at 85.

185

Id.

186

Id.

at 86.

97. Public Interest Organizations argue that the overestimations upon which the Commission relied “were incorrectly calculated based on long-run contract prices and short-run costs, rather than the long-term QF price and the cost of the resource that the utility would have acquired but for the QFs.”

187

Public Interest Organizations contend that the Commission assumed without any evidence that those utilities would have built their own energy resources, executed long term fuel contracts, or executed non-QF power purchase agreements without the QF purchases. Public Interest Organizations assert that, while QF contracts entered into before 2007-2009 might not have accounted for declining natural gas prices, which caused these contracts to be higher than short term market prices, alternative long-term commitments those utility might have made without QF purchases might also not have accounted for those natural gas price declines. Public Interest Organizations reason that avoided costs therefore should be based on those alternative sources that a utility would have purchased but for QF purchases rather than short run market prices and the Commission lacked evidence to assert that “utilities' actual incremental cost of generating energy `but for' QF generation exceeds rates QFs have received through long-term fixed energy rate contracts.”

188

187

Id.

at 86-87.

188

Id.

at 87.

98. Public Interest Organizations maintain that the Commission lacked evidence to assert that natural gas price declines would have decreased the prices of utility power purchase agreements, energy supply investments, fuel contracts and other long-term energy supply commitments. Public Interest Organizations contend that the failure to predict natural gas price declines did not entail any energy cost savings, yielded energy price increases passed along to customers, and rendered uneconomic utilities' long-term coal plant investments, coal contracts, and power supply contracts to ensure long term energy supply. Public Interest Organizations assert that the Commission's conflating short-run market prices with utility supply costs excludes supply beyond the day-ahead market and costs above market price. Public Interest Organizations claim that the Commission did not address concerns that vertically integrated utilities' monopoly status ensures that utilities operate their own plants at above-market prices and would have added their own new generation but for QF purchases. Public Interest Organizations assert that, even though QF prices may have been higher than market prices, that simply reflects foregone utility windfall profits and not

costs that customers would otherwise have paid.

189

Id.

at 87-90.

99. Public Interest Organizations argue that the Commission was internally inconsistent in defending its decision to presumptively consider competitive market prices like LMP equal to full avoided cost in conjunction with its determination to allow states to eliminate fixed energy rate contracts.

190

Public Interest Organizations contend that, in permitting competitive market prices like LMP to set avoided costs, the Commission also inconsistently acknowledged that utilities incur long term energy costs that exceed those prices and that the competitive market prices are only being used to set the as-available short term avoided cost rates instead of long-run energy costs that can be avoided with long-term QF contracts.

191

Public Interest Organizations claim that the Commission permitted a price determined at the time of delivery to set the price for long-term contracts, even though the Commission acknowledged that long term QF energy supply avoids alternative long term energy supply commitments and costs that are not reflected in the short run LMP or market hub price.

192

190

Id.

at 9, 90.

191

Id.

at 90.

192

Id.

at 91-92.

100. EPSA argues that the Commission's regulations and precedent contradict reliance on the idea that overestimates and underestimates have not balanced out.

193

EPSA points out that 18 CFR 292.304(b)(5) expressly provides that, “[i]n the case in which the rates for purchases are based upon estimates of avoided costs over the specific term of the contract or other legally enforceable obligation, the rates for such purchases do not violate this subpart if the rates for such purchases differ from avoided costs at the time of delivery.”

194

193

EPSA Request for Rehearing at 14.

194

Id.

at 15 (citing 18 CFR 292.305(b)).

101. EPSA asserts that, because the final rule did not modify, much less eliminate, 18 CFR 292.304(b)(5), which allows states to retain the fixed energy rate contract option, it is impossible to claim that the fixed energy rate contract option conflicts with the avoided cost cap and that the Commission cannot take a position that is at odds with the terms of its own regulations.

195

Id.

at 14-15.

102. According to Solar Energy Industries, there is no indication in the record that any retail rates paid by electric consumers fluctuate based on the purchasing utility's obligation to purchase from QFs. Solar Energy Industries also argue that, for utilities with stated retail rates, there is no evidence to suggest that these rates will be reduced in any manner in the event the state utilizes the “flexibility” provided by revised Section 292.304(d), unless the Commission mandates otherwise.

196

Solar Energy Industries add that the evidence in the record of alleged overpayments was both flawed and not adequately supported and thus does not support the contention that overpayments and underpayments did not balance out for an extended period of time.

197

196

Solar Energy Industries Request for Rehearing and/or Clarification at 20.

197

Id.

at 21-23.

103. Solar Energy Industries argue that, to the extent that existing methodologies in some states have produced inaccurate forecasts of long-run avoided costs, the solution is better methodologies—not an abandonment of long-run marginal costs.

198

Id.

at 23.

ii. Commission Determination

104. As an initial matter, it is beyond any reasonable question that the Commission's determination to give the states the flexibility to require variable energy rates in QF contracts is within the Commission's authority under PURPA. By definition, such a rate compensates the QF at a rate reflecting the energy costs avoided by the purchasing utility as a result of its purchase of energy from the QF. Moreover, a utility's avoided purchased energy costs constantly change over the term of a contract as the utility's marginal resource changes due to changes in load, changes in the availability of alternative resources, and changes in the availability of the marginal resource. The avoided energy cost also changes with fluctuations in fuel use at different loading levels and with changes in fuel costs. Consequently, a variable energy contract rate by definition would more accurately reflect the utility's avoided energy costs than a fixed contract that does not vary over the length of a multi-year contract.

105. As a result, there is no question but that the Commission could have imposed a variable energy contract requirement when it promulgated the PURPA Regulations in 1980 instead of requiring fixed energy contract rates. The only question in this proceeding is whether the Commission has adequately supported its holding in the final rule to change the determination made in 1980 and instead give the states the flexibility to require variable energy contract rates.

199

In addition, because the Commission's revision to the fixed energy rate requirement is based on changed circumstances since the issuance of the PURPA Regulations in 1980, we must provide “a reasoned explanation . . . for disregarding facts and circumstances that underlay or were engendered by the prior policy.”

200

As we explain below, we disagree with assertions that we have not provided such an explanation.

199

See, e.g., Motor Vehicle Mfrs. Assn. of United States, Inc.

State Farm Mut. Automobile Ins. Co.,

463 U.S. 29, 42 (1983) (“An agency changing its course by rescinding a rule is obligated to supply a reasoned analysis for the change”).

200

FCC

Fox Television Stations, Inc.,

556 U.S. 502, 516 (2009).

106. We disagree with the arguments raised on rehearing that there was insufficient evidence of overestimations. The Commission explained in the final rule why overestimations and underestimations of avoided costs had not balanced out.

201

Broad price declines over time throughout the energy industry show that long-term fixed price QF contracts likely exceeded the avoided energy costs at the time of delivery for extended periods of time; thus, it is not necessary to confirm every allegation of a lack of balance in the past or every estimation of prices and costs.

202

But even had there been less evidence of lack of balance over time,

203

there was sufficient evidence for the Commission to conclude that the Commission's assumption in 1980 may not be the best way to ensure compliance with PURPA. Allowing a state to set a variable avoided cost energy rate could better avoid that outcome. In the context of long-term fixed QF rates, given evidence of overestimations, the statutory avoided cost cap may be better met if the rates may be varied over time to ensure they stay within the requirements of PURPA. Moreover, as stated in the final rule, to

the extent energy prices increase over time, QFs could benefit from that variability.

204

Therefore, it was well within the Commission's authority under PURPA, and the Commission had sufficient evidence, to provide a tool states can use to ensure that the avoided cost rates stay within the requirements of the statute and not be based on an assumption that over-recoveries balance out with under-recoveries.

201

See

Order No. 872, 172 FERC ¶ 61,041 at PP 285-92.

202

See id.

P 287 (footnote omitted) (“We agree with Public Interest Organizations that the recent electricity price overestimations were not unique to QFs and can be explained by general declines in natural gas prices since the adoption of hydraulic fracturing and the 2007-2009 recession. But that is precisely why the estimates of avoided costs reflected in the QF contracts and LEOs were incorrect and why the resulting fixed avoided cost energy rates reflected in such QF contracts and other LEOs resulted in QF rates well above utility avoided costs in violation of PURPA section 210(b); the precipitous decline in natural gas prices caused a corresponding reduction in utilities' energy costs, and thus in their energy avoided costs but this decline was not reflected in the QFs' fixed contract rates that remained at their previous levels”).

203

See, e.g.,

Public Interest Organizations Request for Rehearing at 85.

204

See

Order No. 872, 172 FERC ¶ 61,041 at P 290.

107. States previously had little ability to address the potential for overestimations over the term of a QF contract, which caused some states to respond by adopting shorter contract terms. In the final rule, the Commission did not determine that any particular QF contracts violated the avoided cost cap and did not change its prior determination that PURPA does not “require a minute-by-minute evaluation of costs which would be checked against rates established in long term contracts between qualifying facilities and electric utilities.”

205

Instead, the Commission acted reasonably to better ensure that, over the term of a contract, QF rates do not exceed a utility's avoided costs. The Commission achieved this goal by providing the states with a tool that allows them to address the potential that, over the term of a contract, contract rates may exceed a purchasing utility's avoided costs determined at the time of delivery. Providing this tool to the states ensures that they are not required to set rates that exceed avoided costs. Moreover, this tool gives effect to PURPA's requirement that rates paid to QFs be just and reasonable to the consumers of the electric utility and in the public interest.

206

205

Order No. 69, FERC Stats. & Regs. ¶ 30,128 at 30,880.

206

16 U.S.C. 824a-3;

see also Indep. Energy Producers Ass'n, Inc.

Cal. Pub. Utils. Comm'n,

36 F.3d 848, 850 (9th Cir. 1994) (“Section 210(b) requires that Commission to promulgate regulations that ensure that the rates for these purchases `shall be just and reasonable to the electric consumers of the electric utility and in the public interest.' However, these rates may not exceed the incremental cost to the utility of purchasing alternative energy.”);

Exelon Wind 1, L.L.C.

Nelson,

766 F.3d 380, 384 (5th Cir. 2014) (“While Congress sought to promote energy generation by Qualifying Facilities, it did not intend to do so at the expensive of the American consumer. PURPA thus strikes a balance between these two interests . . . PURPA requires utilities to purchase power generated by Qualifying Facilities, but also mandates that the rates that utilities pay for such power `shall be just and reasonable to the electric consumers of the electric utility and in the public interest.' ”);

Conn. Valley Elec. Co.

FERC,

208 F.3d 1037, 1045 (D.C. Cir. 2000) (“PURPA expressly requires the Commission to balance the interests of consumers against those of producers. . . . ”);

see also

Order No. 69, FERC Stats. & Regs. ¶ 30,128 at 30,865 (“If a qualifying facility offers energy of sufficient reliability and with sufficient legally enforceable guarantees of deliverability to permit the purchasing electric utility to avoid the need to construct a generating unit, to build a smaller, less expensive plant, or to reduce firm power purchases from another utility, then the rates for such a purchase will be based on the avoided capacity and energy costs.”).

112. As stated in the final rule, the difficulty in predicting prices necessarily also applies to predicting which costs a utility would incur from generating power itself or purchasing such power from another source over the term of a QF contract. Therefore, while there may be open questions over which costs a utility would incur from generating power itself or purchasing such power from another source in lieu of QF purchases, continuing to prohibit a state from allowing an energy rate to fluctuate would prevent states from choosing not to use unreliable price forecasts in setting avoided cost energy rates in QF contracts.

113. Public Interest Organizations' characterization of overestimated energy costs as “foregone windfall profits” due to utilities' monopoly status not only is inapt,

212

but it ignores that utility customers ultimately bore the cost of avoided cost estimates that ultimately exceeded avoided costs in a way that is inconsistent with PURPA's avoided cost cap. Likewise, Solar Energy Industries'

assertion that there is no evidence that states will lower retail rates if states require variable energy rates in QF contracts is irrelevant to whether the Commission may provide that flexibility under PURPA. The requirement found in PURPA is that the Commission cannot require that a rate paid to the QF exceed a certain amount.

212

As explained in the final rule, electric utilities almost always are required to pass decreases in energy costs through to their retail customers, whereas QFs with fixed energy contract rates are not obligated to reduce their rates as avoided energy costs decline. Order No. 872, 172 FERC ¶ 61,041 at P 122.

b. Whether the Proposed Change Would Violate the Statutory Requirement That the PURPA Regulations Encourage QFs and Do Not Discriminate Against QFs

114. In the final rule, the Commission determined, based on the record evidence, that it is not necessarily the case that overestimations and underestimations of avoided energy costs will balance out over time. The Commission concluded that a fixed energy rate in a QF contract or LEO potentially could violate the statutory avoided cost cap on QF rates.

213

Order No. 872, 172 FERC ¶ 61,041 at P 295.

115. The Commission found that the PURPA Regulations continue to encourage the development of QFs by, among other things, allowing a state to vary the rate paid to the QF over time but in a way that satisfies the rate cap established in PURPA section 210(b). In this way, over time, the QF can obtain a higher rate when the utility's avoided costs increase, and ratepayers are not paying more than the utility's avoided costs when prices decrease. Furthermore, the Commission explained that allowing the use of variable energy rates may promote longer contract terms, which would help encourage and support QFs.

214

The Commission concluded that it is consistent with PURPA section 210(b), as well as the obligation imposed by PURPA section 210(a), to revise the PURPA Regulations “from time to time,” to provide the states the flexibility to require that QF contracts and other LEOs implement variable avoided cost energy rates in order to prevent payments to QFs in excess of the purchasing electric utility's avoided energy costs. The Commission noted that PURPA section 210(b) prohibits the Commission from requiring QF rates above avoided costs even if, according to some commenters, a fixed avoided cost energy rate above avoided costs would provide greater encouragement to QFs than a variable avoided cost energy rate.

215

214

Id.

P 296.

215

Id.

116. The Commission described the discrimination claims as based on the incorrect assumption that electric utilities have not been required to lower their energy rates as prices have declined. The Commission found, to the contrary, that utilities typically charge their customers cost-based rates, and, as their fuel and purchased power costs have declined, they typically have been required to provide corresponding reductions in the energy portion of their rates to their customers. The Commission explained that requiring QF avoided cost energy rates to likewise change as purchasing electric utilities' avoided energy costs change does not create a discriminatory difference, but rather puts QF rates on par with utility rates.

216

Id.

P 302.

117. The Commission explained that it was not changing the requirement that QF avoided cost energy rates be set at the purchasing utility's full avoided energy costs. Rather, the Commission allowed the states the option to now choose to require QF avoided cost energy rates that vary with the purchasing utility's avoided costs of energy, rather than QF avoided cost energy rates that are fixed for the life of the QF's contract or LEO, to ensure the rates comply with PURPA.

217

Id.

P 303.

i. Requests for Rehearing

118. Solar Energy Industries argue that, by revoking the long-standing regulations that provide a QF with the right to elect to be paid a long-term energy rate in a contract for long-term energy delivery, the Commission is actively discouraging the development of QFs in contravention of the statutory direction to encourage the development of such facilities.

218

Solar Energy Industries describe as inaccurate the Commission's claim that this revocation is necessary to protect the consumers of electric utilities because inaccurate administratively-determined avoided costs can be fully mitigated when a state adopts the Commission's new competitive bidding framework.

219

218

Solar Energy Industries Request for Rehearing and/or Clarification at 10.

219

Id.

at 10-11.

119. Solar Energy Industries request that the Commission clarify several portions of the final rule. First, Solar Energy Industries request that the Commission clarify that the circumstances that do not allow QFs to have nondiscriminatory access to buyers other than the host utility are largely the same today as in 1980 when the Commission first implemented its PURPA Regulations.

220

Second, Solar Energy Industries request that the Commission clarify that states must ensure that QFs receive comparable avoided cost calculations and rates, terms, and conditions.

221

Solar Energy Industries contend, for example, that utilizing a 20-year depreciation schedule for an avoided unit to calculate the long-run marginal cost rate and then offering a QF a two-year contract fails to ensure compatibility. Third, Solar Energy Industries request that the Commission clarify that it supports and renews its commitment to pursue enforcement actions when states discriminate against QFs.

222

220

Id.

at 42.

221

Id.

at 43.

222

Id.

at 43-44.

120. Northwest Coalition asserts that the final rule's change of the requirement that QFs be offered fixed prices for energy is arbitrary, capricious, and not in accordance with law. Northwest Coalition argues that, in a “reversal” of 40 years of precedent since enactment of PURPA, the final rule unlawfully “guts” the bedrock requirement that QFs be offered fixed energy rates, which have long been recognized as necessary for the development of QFs.

223

Northwest Coalition adds that the right to secure fixed energy prices supports the continued operation of existing QFs upon the expiration of their existing contracts when substantial interconnection and other capital upgrades must typically be undertaken and that elimination of fixed prices is likely to result in loss of substantial existing QF capacity.

224

223

Northwest Coalition Request for Rehearing at 8 (citing Order No. 872, 172 FERC ¶ 61,041 at P 232).

224

Id.

121. Northwest Coalition claims that, despite the final rule's assertion that nothing in PURPA requires the Commission to ensure financeability of individual QFs, PURPA “does require the Commission to encourage their development, which we have previously equated with financeability.”

225

Northwest Coalition argues that, under the final rule, QFs could face a world in which there is no minimum contract term, a payment of zero for their capacity, and an avoided cost energy price based on highly volatile and unpredictable short-term markets. Northwest Coalition contends that rendering many QFs not financeable or financeable only at extreme interest rates discourages QFs, which is contrary to what PURPA requires.

226

225

Id.

at 9-10 (citing Order No. 872, 172 FERC ¶ 61,041 (Glick, Comm'r, dissenting in part, at P 13)).

226

Id.

at 11.

122. EPSA argues that, although the Commission cannot, in the name of remedying discrimination, require QF

rates that exceed avoided cost, allowing states to eliminate the fixed rate energy contract option does not result in QF rates that are non-discriminatory to the maximum extent permitted by the avoided cost cap.

227

EPSA reiterates that the statutory requirement in PURPA section 210(b)(1) that QF rates “shall not discriminate against” QFs is more restrictive than the FPA's prohibition against “unduly discriminatory” rates.

228

EPSA asserts that this more restrictive requirement does not leave room for avoided cost rates that discriminate against QFs relative to purchasing electric utilities, even if the Commission finds the discrimination to be justified (

i.e.,

not undue).

229

EPSA argues that, subject to compliance with the avoided cost cap, the Commission cannot allow states to set discriminatory QF rates, even if the Commission determines those discriminatory rates are justified by differences between QFs and utilities or other policy goals, such as minimizing the burden of forecasting error on consumers.

230

227

EPSA Request for Rehearing at 5.

228

Id.

at 6.

229

Id.

230

Id.

123. EPSA claims that, in the final rule, the Commission does not adequately address these arguments, which it had raised in its NOPR comments.

231

EPSA contends that the Commission erred in relying on the idea that variable energy rate/fixed capacity rate contracts are standard in the electric industry because PURPA requires that avoided cost rates not discriminate against QFs relative to purchasing electric utilities, not that such rates conform to standard industry practices.

232

EPSA describes the Commission's argument that eliminating fixed energy price contracts is not discriminatory as unsupported because of its assumptions about how fuel and purchased power adjustment clauses operate. EPSA reasons that a franchised utility's rates will be set based on costs they actually incur to produce electricity for their customers and that such costs would be the same energy costs that are used in determining the electric utilities' avoided costs that will, in turn, set the as-available avoided cost rates to be charged by QFs.

233

In particular, EPSA claims that the Commission appears to assume that fuel and purchase power adjustment clauses will necessarily reflect short-term fluctuations in fuel and other energy-based costs, while, in a number of jurisdictions, these clauses also cover costs incurred under long-term contracts, including long-term fuel supply contracts, long-term power purchase agreements, and equivalent financial instruments.

234

EPSA argues that remedying alleged discrimination requires providing QFs with a degree of insulation from market volatility comparable to that afforded to utility investments with effectively guaranteed cost recovery in retail rates, which EPSA argues the fixed energy rate contract option accomplishes.

235

231

Id.

232

Id.

at 6-7.

233

Id.

at 7-8.

234

Id.

at 8-9.

235

Id.

at 9-10.

124. EPSA asserts that it was legally incorrect to claim that a QF rate equal to the purchasing utility's avoided cost at the time of delivery by definition could not be discriminatory because the Commission's regulations and precedent leave no room for claims that, for purposes of PURPA's avoided cost cap, there is a single measure of avoided cost.

236

EPSA claims that the Commission cannot avoid ensuring that QF rates are non-discriminatory on the basis that such rates are consistent with one measure of avoided costs if setting QF rates based on another permissible measure of avoided costs would eliminate some or all of the discrimination.

237

236

Id.

at 16.

237

Id.

at 17.

125. Public Interest Organizations argue that the Commission allowed states to set rates that discriminate against QFs in contravention of PURPA.

238

Public Interest Organizations maintain that allowing avoided costs to be set at short-run prices discriminates against QFs and does not reflect utilities' avoided costs because utilities incur long-term energy supply costs that exceed short run costs. Public Interest Organizations assert that the Commission incorrectly defined discrimination as comparing the standard across the electric industry instead of how a specific purchasing electric utility treats similar generation. Public Interest Organizations contend that the Commission assumes without evidence that contracts whose energy prices are linked to short-term prices in a competitive market at the time of delivery is “standard” in long term contracts. Public Interest Organizations argue that, on the contrary, non-QF renewable generators are paid long-term fixed prices, including a fixed energy rate.

239

238

Public Interest Organizations Request for Rehearing at 9, 92.

239

Id.

at 92-93.

126. Public Interest Organizations claim that the Commission interpreted the statutory term “discriminate” incorrectly.

240

Public Interest Organizations assert that, in the final rule, the Commission permitted states to deny QFs fixed energy pricing, “even if alternative energy the utility would acquire from its own generation or non-QF power producers would be at fixed costs, based on the industry `standard' followed by other utilities to limit the price for all alternative energy (owned and third party) to the short run market price.”

241

Public Interest Organizations contend that, while discrimination is generally defined as a “difference between the subject entity and a single similar entity that is more favorably treated,”

242

under PURPA, discrimination is not defined based on the industry standard but rather is defined “on how the specific purchasing utility treats QFs compared to how it treats one or more similarly situated non-QFs, including the utility's own generation.”

243

240

Id.

at 10, 92.

241

Id.

at 94-95.

242

Id.

at 94 (citing

FTC

Burton,

363 U.S. 536, 550 (1960);

Burton

District of Columbia,

153 F. Supp. 3d 13, 67 (D.D.C. 2015)).

243

Id.

(citing 16 U.S.C. 824a-3(b)).

127. Public Interest Organizations argue that the Commission lacked evidence to support its assertion that short-term rates are not discriminatory because they are the industry norm.

244

Public Interest Organizations contend that the Commission lacks evidence to assert that the electric industry standard entails variable energy prices in long term supply contracts, given that “utilities make long-term investments for energy resources, enter long-term contracts for fuel for their own generation, [and] enter long term power purchase agreements with long-run energy prices (or blended energy and capacity prices).”

245

Public Interest Organizations claim that the Commission lacked evidence to assert that that utilities recovering cost-based rates must exclude long-term commitment costs such as rate-based energy resources, fuel contracts, and power purchase contracts when the long term energy portion of those costs, such as power purchase agreement prices, later exceed short run energy costs like the hourly LMP of the delivered energy.

246

Public Interest Organizations assert that the rate-based generation of

Alliant Energy, upon whose data the Commission relied, receives “advanced ratemaking principles” that fix favorable rate treatment despite intervals when the short run price is less than the energy price assumed when long-term fixed price recovery for those the energy resources were approved. Public Interest Organizations contend that a QF displacing such utility investments causes the utility to avoid the long-term fixed cost of the utility investment rather than the short-term day ahead or market hub price at the time energy is generated from it.

247

244

Id.

at 10, 95.

245

Id.

at 95-96 & n.280 (citing National Association of Regulatory Utility Commissioners, Electric Utility Cost Allocation Manual, at 49-59 (July 1992)).

246

Id.

at 96-97.

247

Id.

at 96.

128. Public Interest Organizations argue that, contrary to the Commission's assertions that long-term utility energy cost commitments may be disallowed or modified due to short run energy price when the energy is delivered, rate recovery is usually required for the cost of supply contracts regardless of whether the contract price later appears too high compared to prices when the power is delivered. Public Interest Organizations therefore reason that non-QF energy supply that utilities own themselves or purchase from another source are not limited to short run energy market prices.

248

Id.

at 97 (citing

FPC

Sierra Pac. Power Co.,

350 U.S. 348 (1956);

United Gas Pipe Line Co.

Mobile Gas Serv. Corp.,

350 U.S. 332 (1956)).

129. Public Interest Organizations similarly assert that the Commission selectively quoted

Town of Norwood

FERC

for the proposition that long-term non-QF energy supply is limited to short-run market price at the time of delivery. Public Interest Organizations instead describe

Town of Norwood

as concerning a wholesale supply contract from a supplier's mix of resources to serve a retail utility instead of a power purchase agreement from a single generator comparable to a QF contract. Public Interest Organizations contend that the rate in

Town of Norwood

contained both energy pricing in two blocks “with the first priced at fixed embedded costs and charged based on a ratchetted demand and energy use, and the second block based on long run marginal costs.”

249

Id.

at 97-98 (citing

Town of Norwood

FERC,

962 F.2d 20, 21, 24 (D.C. Cir. 1992)).

130. Public Interest Organizations describe the Commission's justifications for its determination that Order No. 872 does not enable discrimination as poorly reasoned.

250

Public Interest Organizations argue that treating QFs without discrimination does not require subjecting them to cost-of-service ratemaking in violation of PURPA but rather should be the same as how the utility determines costs for other purposes. Public Interest Organizations claim that the Commission's argument that it is not discriminating against QFs when it subjects them to short run energy prices because they still receive full avoided costs is circular.

251

250

Id.

at 10, 98.

251

Id.

at 98-99.

131. Northwest Coalition asserts that the final rule authorizes a discriminatory framework by eliminating the certainty of a predictable revenue stream afforded by fixed prices. Northwest Coalition argues that electric utilities can still rate-base long-term investments, thereby ensuring that they can recover their capital investments plus an authorized return, and then also recover their actual operating costs under traditional cost-of-service ratemaking. Northwest Coalition contends that, in contrast, the final rule's new framework authorizing variable energy pricing deprives QFs of even a reasonable ability to forecast avoided cost prices from which they must recover their investment, much less guarantee such recovery provided to the typical utility. Northwest Coalition asserts that this outcome places QFs on unequal footing and ensures that utilities continue to dominate the generation market. Northwest Coalition argues that, in sum, the new regime is discriminatory because it permits utilities to make acquisition decisions based on long-term cost forecasts, which contain inherent forecast risk, but ties QFs to unpredictable future changes in markets.

252

Northwest Coalition Request for Rehearing at 12.

132. Northwest Coalition contends that the final rule fails to address the critical point that utilities obtain virtually guaranteed cost recovery and virtually absolute certainty that they will recover their costs plus a profit, whereas QFs now do not even receive certainty as to the prices they can rely upon if they are able to perform successfully under their contracts. Northwest Coalition claims that the discrimination is the failure to put QFs on reasonably equal footing to utilities by providing QFs with the certainty of the right to beat the utility's long-term marginal cost of generation, which typically is the same long-term cost estimate used to justify the utility's own rate-base acquisitions.

253

Id.

at 13.

133. Northwest Coalition argues that, although the discriminatory policy in

Environmental Action

254

regarded transmission access and not price certainty, the same principle applies equally here. Northwest Coalition asserts that the Commission's “effort to place QFs on an essentially equal competitive footing with competing suppliers, . . . by giving such suppliers the access it denies to QFs would effect an administrative repeal of this congressional choice; by definition, this is not in the public interest.”

255

Northwest Coalition contends that, in this case, the Commission's alleged effort to place QFs on equal footing with incumbent utilities by giving such utilities the certainty of return on investment that will be denied to QFs is plainly discriminatory.

256

Northwest Coalition adds that this interpretation of the anti-discrimination requirement is even supported by the Montana Public Service Commission in the context of price certainty and allocation of forecast risk, even though that state agency generally supported the Commission's proposed rule.

257

254

Id.

at 14 (citing

Envtl. Action

FERC,

939 F.2d 1057, 1061-62 (D.C. Cir. 1991) (

Environmental Action

)).

255

Id.

(citing

Environmental Action,

939 F.2d at 1062).

256

Id.

257

Id.

at 14-15.

ii. Commission Determination

134. We disagree with the arguments raised on rehearing. To begin, it is incorrect to state that the final rule eliminated fixed rates for QFs. The final rule gave states the flexibility, if they choose to take advantage of this flexibility, to require that the avoided cost

energy

rates in QF contracts vary depending on avoided energy costs at the time of delivery. In the final rule, as described above, the Commission retained the QF's right for capacity rates to be fixed, which together with the flexibility adopted in the final rule to allow states to set avoided cost energy rates using competitive market forces should provide a more transparent way of determining avoided costs. Those capacity rates would still need to meet the standards of 18 CFR 292.304(e), which together with more transparent energy rates determined pursuant to competitive market prices and the existing PURPA Regulations, encourages the development of QFs.

258

See supra

PP 42-43.

135. Further, in response to EPSA's and Public Interest Organizations' arguments that the final rule does not accurately describe how merchant generators are financed and protect QFs against volatility in fuel prices, the variable energy rate/fixed capacity rate construct is common among merchant generators for power sales agreements that include the sale of capacity, thus

demonstrating that other types of non-utility generation are able to raise useful financing under such an arrangement.

259

Order No. 872, 172 FERC ¶ 61,041 at PP 35-41, 336-45.

136. We also disagree with arguments raised on rehearing regarding discrimination. We reiterate our holding in the final rule that PURPA does not require, and indeed prohibits, subjecting QFs to the same rate structures and procedures as utilities.

260

Congress made this point clear when it enacted PURPA. “The conferees recognize that

cogenerators and small power producers are different from electric utilities,

not being guaranteed a rate of return on their activities generally or on the activities vis-a-vis the sale of power to the utility and whose risk in proceeding forward in the cogeneration or small power production enterprise

is not guaranteed to be recoverable.

”

261

And the Supreme Court relied on this legis

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