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

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A2020-26106

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** December 30, 2020
- **Citation:** 85 FR 86656

## Text

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
4

A. Statutory Background
4

B. Final Rule's Updating of the PURPA Regulations
10

C. Summary of Changes to the PURPA Regulations Implemented by the Final Rule
11

II. Discussion
23

A. Threshold Issues
24

1. Whether the Commission Appropriately Consulted With Representatives of Relevant State and Federal Agencies
24

a. Requests for Rehearing
24

b. Commission Determination
25

2. Whether the PURPA Regulations Continue To Encourage QFs
27

a. Requests for Rehearing
27

b. Commission Determination
39

B. QF Rates
46

1. Overview
46

2. LMP as a Permissible Rate for Certain As-Available Avoided Cost Rates
53

a. Requests for Rehearing
60

b. Commission Determination
63

3. Tiered Avoided Cost Rates
66

a. Request for Clarification
66

b. Commission Determination
72

4. Providing for Variable Energy Rates in QF Contracts Is Consistent With PURPA
74

a. Whether the Current Approach Has Resulted in Payments to QFs in Excess of Avoided Costs
84

i. Requests for Rehearing
95

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)
1

adopting revisions to its regulations (PURPA Regulations)
2

implementing sections 201 and 210 of the Public Utility Regulatory Policies Act of 1978 (PURPA).
3

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;
4

(2) Electric Power Supply Association (EPSA); (3) Northwest Coalition;
5

(4) One Energy Enterprises; (5) Public Interest Organizations;
6

(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.

1

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).

2
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.

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

4
California Utilities consist of Pacific Gas & Electric Company; San Diego Gas & Electric Company; and Southern California Edison Company.

5
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.”

6
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
v.
FERC,
7

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),
8

however, we modify the discussion in the final rule and continue to reach the same result in this proceeding, as discussed below.
9

7
964 F.3d 1 (D.C. Cir. 2020) (en banc).

8
16 U.S.C. 825
l
(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.”).

9

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
v.
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).
10

PURPA section 210(b) sets out the standards governing the rates purchasing utilities must pay to QFs.
11

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.”
12

10
16 U.S.C. 824a-3(a).

11
16 U.S.C. 824a-3(b).

12

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.
”
13

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

13

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.
14

14
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.”
15

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.”
16

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.

15
16 U.S.C. 796(17)(A)(ii).

16
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.
17

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.

17

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.
18

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.
19

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.”
20

18

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
v.
FERC,
550 F.3d 1179 (D.C. Cir. 2008) (
AFPA
v.
FERC
).

19
18 CFR 292.309(d)(1).

20
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.
21

21
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),
22

the record evidence cited in the Notice of Proposed Rulemaking (NOPR),
23

and the comments submitted in response to the NOPR.
24

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

22
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.

23

Qualifying Facility Rates and Requirements,
84 FR 53246 (Oct. 4, 2019), 168 FERC ¶ 61,184 (2019) (NOPR).

24
Order No. 872, 172 FERC ¶ 61,041 at P 56.

12.
First,
the Commission granted states
25

the flexibility to require that

energy rates (but not capacity rates) in QF power sales contracts and other LEOs
26

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.
27

25
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).

26
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.

27
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.
28

28

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.
29

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.
30

29
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).

30
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.
31

31

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.
32

32

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.
33

33

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.
34

34

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.
35

35

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.
36

36

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.
37

37

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.
38

38
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).
39

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.
40

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.
41

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.
42

Public Interest Organizations contend that this lack of consultation has hamstrung the Commission and prevents the Commission from crafting informed policy.
43

39
Public Interest Organizations Request for Rehearing at 6, 12-14.

40

Id.
at 13.

41

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

42

Id.
at 13-14 (citing 50 CFR 402.14;
Cooling Water Intake Structure Coal.
v.
U.S. Envtl. Prot. Agency,
905 F.3d 49, 78 (2d Cir. 2018)).

43

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,
44

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).
45

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.
46

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
.
47

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

44

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).

45
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).

46
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).

47
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.
48

48
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.
49

49
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.
50

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.
51

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.

50

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

51

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.
52

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.
53

52
Public Interest Organizations Request for Rehearing at 43-45.

53

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.
54

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.
55

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.
56

54

Id.
at 46-60.

55

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

56

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.
57

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.
58

57

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.
v.
FERC,
675 F.2d 1226 (D.C. Cir. 1982),
rev'd in part sub nom. Am. Paper Inst., Inc.
v.
Am. Elec. Power Serv. Corp.,
461 U.S. 402 (1983) (
API
)).

58

Id.

33. Public Interest Organizations claim that the Commission ignored evidence in the record.
59

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.
60

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.
61

59

Id.
at 49-57.

60

Id.
at 49.

61

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.
62

62

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.
63

63

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.
64

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.
65

64

Id.
at 53.

65

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.
66

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.
67

66

Id.
at 55.

67

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.
68

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.
69

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.
70

68

Id.
at 57.

69

Id.
at 58-59.

70

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.
71

71
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.
72

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.

72

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.
73

But just because parties are unsatisfied with some states' implementation of PURPA to date
74

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

73
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)).

74

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.
75

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.
76

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

75
Order No. 872, 172 FERC ¶ 61,041 at PP 232-360.

76
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.
77

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.
78

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.

77
Technical Conference Tr. at 143-44 (Commissioner Kristine Raper, Idaho Commission).

78

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.
79

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.

79

See FERC
v.
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,
80

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.
81

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.

80

See
18 CFR 366.3(a)(1).

81

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.”
82

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;
83

and, as noted above, (3) not exceed “the incremental cost to the electric utility of alternative electric energy,”
84

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.”
85

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,”
86

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

82
16 U.S.C. 824a-3(b).

83
16 U.S.C. 824a-3(b)(1)-(2).

84
16 U.S.C. 824a-3(b).

85
16 U.S.C. 824a-3(d) (emphasis added).

86

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).
87

Alternatively, the QF could choose to sell pursuant to a LEO (such as a contract) over a specified term.
88

87
18 CFR 292.304(d)(1).

88
18 CFR 292.304(d)(2)(i)-(ii);
see also FLS Energy, Inc.,
157 FERC ¶ 61,211, at P 21 (2016) (
FLS
) (citing 18 CFR 292.304(d)). The LEO or contract is frequently referred to as a long-term transaction, when contrasted with an “as available” sale and rate.

48. If the QF chooses to sell under the second option, the PURPA Regulations in effect before the final rule provide the QF the further option of receiving, in terms of pricing, either: (1) The purchasing electric utility's avoided cost calculated at the time of delivery;
89

or (2) the purchasing electric utility's avoided cost calculated and fixed at the time the LEO is incurred.
90

89
18 CFR 292.304(d)(2)(i).

90
18 CFR 292.304(d)(2)(ii). Rates calculated at the time of a LEO (for example, a contract) do not violate the requirement that the rates not exceed avoided costs if they differ from avoided costs at the time of delivery. 18 CFR 292.304(b)(5).

49. In implementing the PURPA Regulations, the Commission recognized that a contract with avoided costs calculated at the time a LEO is incurred could exceed the electric utility's avoided costs at the time of delivery in the future, thereby seemingly violating PURPA's requirement that QFs not be paid more than an electric utility's avoided costs. The Commission reasoned, however, that the fixed avoided cost rate might also turn out to be lower than the electric utility's avoided costs over the course of the contract and that, “in the long run, `overestimations' and `underestimations' of avoided costs will balance out.”
91

The Commission's justification for allowing QFs to fix their rate at the time of the LEO for the entire life of the contract was that fixing the rate provides “certainty with regard to return on investment in new technologies.”
92

91
Order No. 69, FERC Stats. & Regs. ¶ 30,128 at 30,880;
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.”).

92
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.
93

93
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.
94

94
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.
95

95

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.
96

96

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.
97

97

See id.
P 153 (citing NOPR, 168 FERC ¶ 61,184 at PP 44-45 (citing
SMUD,
616 F.3d at 524;
FERC
v.
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.
98

98

Id.
P 152.

57. The Commission disagreed with the arguments made by Union of Concerned Scientists,
99

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

99
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.
v.
FCC,
649 F.3d 695, 716 (D.C. Cir. 2011) (
Cablevision
);
Nat'l Mining Ass'n
v.
Dep't of Interior,
177 F.3d 1, 6 (D.C. Cir. 1999));
Sec'y of Labor
v.
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
v.
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
v.
Elec. Power Supply Ass'n,
136 S. Ct. 760, 768-69 (2016) (describing how LMP is typically calculated);
Sacramento Mun. Util. Dist.
v.
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
v.
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
v.
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
v.
Cal. Pub. Utils. Comm'n,
922 F.3d 929 (9th Cir. 2019) (
CARE
v.
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

126
California Utilities Motion for Clarification at 3-8.

1978-2010:
All resources must be used to set avoided costs.
127

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

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

129

Id.
at 5 (citing
CARE
v.
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

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
v.
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

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
v.
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 CPUC
2010, 133 FERC ¶ 61,059 at P 31 (“[A]lthough a state may not include a bonus or an adder in the avoided cost rate unless it reflects actual costs avoided, a state may separately provide additional compensation for environmental externalities, outside the confines of, and, in addition to the PURPA avoided cost rate, through the creation of renewable energy credits. . . .”).

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

74. As explained above, if a QF chooses to sell energy and/or capacity pursuant to a contract, the PURPA Regulations in effect before the final rule provide the QF the option of receiving the purchasing electric utility's avoided cost calculated and fixed at the time the LEO is incurred.
140

The Commission's justification in Order No. 69 for allowing QFs to fix their rate at the time of the LEO for the entire term of a contract was that fixing the rate provides certainty “with regard to return on investment in new technologies necessary for the QF to obtain financing”
141

The Commission stated that its regulations pertaining to LEOs “are intended to reconcile the requirement that the rates for purchases equal the utilities' avoided costs with the need for qualifying facilities to be able to enter contractual commitments based, by necessity, on estimates of future avoided costs.”
142

Further, the Commission agreed with the “need for certainty with regard to return on investment in new technologies,” and stated its belief that any overestimations or underestimations “will balance out.”
143

140
18 CFR 292.304(d)(2)(ii).

141
Order No. 69, FERC Stats. & Regs. ¶ 30,128 at 30,880 (justifying the rule on the basis of “the need for certainty with regard to return on investment in new technologies”).

142

Id.

143

Id.

75. In the NOPR, the Commission proposed to revise 18 CFR 292.304(d) to permit a state to limit a QF's option to elect to fix at the outset of a LEO the energy rate for the entire length of its contract or LEO, and instead allow the state the flexibility to require QF energy rates to vary during the term of the contract. However, under the proposed revisions to 18 CFR 292.304(d), a QF would continue to be entitled to a contract with avoided
capacity
cost rates (assuming there are avoided capacity costs) calculated and fixed at the time the contract or LEO is incurred. Only the
energy
rate in the contract or LEO could be required by a state to vary. Further, the NOPR did not propose to obligate states to require variable avoided cost energy rates; they would retain the ability to allow the QF's energy rate be fixed at the time the LEO is incurred.
144

144
NOPR, 168 FERC ¶ 61,184 at P 67.

76. In the final rule, the Commission adopted without modification the NOPR variable rate proposal. The Commission found that setting QF avoided energy cost contract and LEO rates at the level of the purchasing utility's avoided energy costs at the time the energy is delivered is consistent with PURPA, which limits QF rates to the purchasing utility's avoided costs. The Commission explained that a variable avoided cost energy rate approach is a superior way to ensure that payments to QFs equal, but do not exceed, avoided costs.
145

The Commission stated that it is inevitable that, over the life of a QF contract or other LEO, a fixed avoided cost energy rate, such as that used in past years, will deviate from actual avoided costs.
146

145
16 U.S.C. 824a-3(b)(1).

146
Order No. 872, 172 FERC ¶ 61,041 at P 253.

77. The Commission found that the record justifies its conclusions that long-term forecasts of avoided energy costs are inherently imperfect and that states should be given the flexibility to rely on a more reliable variable avoided cost energy rate approach. Further, the Commission pointed to instances where overestimates and underestimates have not balanced out.
147

The Commission found that, when that has occurred, consumers have borne the brunt of the overpayments, which subsidized QFs, in contravention of Congressional intent and the Commission's expectations. Given that PURPA section 210(b) prohibits the Commission from requiring QF rates in excess of avoided costs, the Commission explained that record evidence supports its decision to give the states the flexibility to require variable avoided cost energy rates in QF contracts and other LEOs to prevent QF rates from exceeding avoided costs.
148

147

See id.
(citing Duke Energy Comments, Docket No. RM19-15-000, at 6 (Dec. 3, 2019) (Duke's QF contracts cost $4.66 billion but its “actual current avoided costs” are $2.4 billion); Idaho Power Comments, Docket No. RM19-15-000, at 10-11 (Dec. 3, 2019) (“The cost of PURPA generation contained in Idaho Power's base rates, on a dollars per MWh basis, is not just greater than Mid-C market prices, it is greater than all the net power supply cost components currently recovered in base rates. Idaho Power's average cost of PURPA generation included in base rates is $62.49/MWh. At $62.49/MWh, the average cost of PURPA purchases is greater than the average cost of FERC Account 501, Coal at $22.79/MWh; greater than FERC Account 547, Natural Gas at $33.57/MWh; greater than FERC Account 555, Non-PURPA Purchases at $50.64/MWh; and significantly greater than what is being sold back to the market as FERC Account 447, Surplus Sales at $22.41/MWh.”); Portland General Comments, Docket No. RM19-15-000, at 5 (Dec. 3, 2019) (“for a typical 3 MW Solar QF project that incurred a LEO in 2016 and reaches commercial operations three years later, [Portland General's] customers would pay 67% more for the project's energy than if the 2019 avoided cost rate had been used. As a result of this lag, [Portland General's] customers would pay an additional $1.6 million more for the energy from the QF facility over the 15-year contract term.”));
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

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

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
v.
Bd. of Regulatory Comm'rs of State of N.J.,
44 F.3d 1178, 1193 (3d Cir. 1995) (
Freehold Cogeneration
);
Smith Cogeneration Mgmt.
v.
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

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

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

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

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

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

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

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.
v.
State Farm

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2020-26106. Public record. Not legal advice.