Ballard Spahr LLP: Today's Legal Regime for Biomass 'Qualifying Facilities' Under PURPA

By Daniel R. Simon

Today's regulatory regime for a biomass qualifying facility (QF) is challenging. Long gone are the days when the Federal Energy Regulatory Commission required a host utility to purchase a biomass QF's energy output and exempted the facility from most regulatory requirements under the Federal Power Act. Meanwhile, even a utility's mandatory purchase requirement may not provide a rate high enough to ensure profitability.

Awareness of the current regulatory regime is critical to ensuring a biomass QF's success.

The Public Utility Regulatory Policies Act of 1978, enacted to combat the 1970s energy crisis, created the concept of QFs as a new class of generating facilities, receiving special rate and regulatory treatment. Most biomass plants typically satisfy the size and fuel requirements for QF status.

The Energy Policy Act of 2005 initiated a trimming of QF rate and regulatory benefits. PURPA originally required a host utility to buy capacity and energy generated by the QF at the utility's avoided cost. However, EPAct 2005 granted FERC the authority to terminate the mandatory purchase requirement if it determined that a QF had nondiscriminatory access to Independent System Operators/Regional Transmission Organizations-administered energy and capacity markets, or access to competitive wholesale markets that provided the opportunity to sell energy and capacity to buyers other than the host utility.

When FERC first wielded this authority in 2006, it made such a determination for the ISO-New England, New York ISO, PJM Interconnection and Midwest ISO balancing areas. Consequently, FERC typically waives the mandatory purchase requirement for host utilities in those regions for QFs larger than 20 megawatts (MW), while providing individual QFs the opportunity to demonstrate that they have operational characteristics that prevent them from participating in a market or that their facilities lack access to markets because of transmission constraints.

In June, FERC expanded its waiver of the purchase requirement to California's big three utilities for QFs with a net capacity in excess of 20 MW. FERC granted the request based on a combination of factors, the most prominent being a settlement of an agreement (awaiting final regulatory approval at press time) that establishes a new QF program for California.

EPAct 2005 also resulted in FERC expanding the regulatory requirements QFs must now satisfy-requirements FERC previously waived for QFs. For example, although traditional PURPA contracts remain exempt from FERC regulation, as well as sales from power production facilities (including biomass) that are smaller than 20 MW, FERC now requires QFs to obtain "market-based rate authority" to sell energy outside these scenarios.

Mandatory certification also was part of the 2006 changes. Previously, a generator merely needed to meet the QF criteria in FERC regulations to sell power to the host utility. Today, FERC can order a QF to make certain refunds if it fails first to certify its QF status with FERC. That's exactly what happened in May to several geothermal QFs.

On top of this and other, similar legal challenges, many states set avoided cost rates too low for biomass facilities to succeed, often because such rates are based on the typically lower, estimated cost of constructing a new natural gas generator.

One bright spot in recent FERC precedent for biomass QFs was the agency's explanation last October that a state may take into account its own procurement obligations-particularly any requirements to utilize renewable power in general or biomass specifically-when determining the avoided cost. This could open the door for states to develop "feed-in tariff" rates that set higher avoided cost rates for biomass (or other renewable resources) to recognize the true cost of placing such facilities into service.

In conclusion, FERC has signaled that tougher enforcement and a lower tolerance for noncompliance are the way of the future. However, QFs have the opportunity to encourage their state legislatures or utility commissions to adopt tiered avoided cost rate structures that reflect the financial realities and environmental benefits of biomass power.

Author: Daniel R. Simon
Partner, Energy and Project Finance Group,
 Ballard Spahr LLP

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