On October 21, 2010, the Federal Energy Regulatory Commission (“FERC” or the “Commission”) clarified how California may promote new generation resources in a way that does not contradict federal laws (the “October 21 Clarification”).  The Commission also denied the California Public Utilities Commission’s (“CPUC”) request for rehearing.

On July 15, 2010, the Commission issued an order stating the Federal Power Act (“FPA”) and the Public Utility Regulatory Policies Act of 1978 (“PURPA”) did not preempt the CPUC’s decision to require utilities to offer a minimum price for power from certain small combined heat and power (“CHP”) generators if they are Qualifying Facilities (“QF”) under PURPA (see July 23, 2010 edition of the WER) (the “July 15 Order”).  The July 15 Order described how the state could implement its feed-in tariff which encourages types of generation resources by providing assurance through a fixed price for the electricity produced under a long-term contract.

The state of California adopted feed-in tariffs by passing the California Waste Heat and Carbon Reduction Act (“AB 1613”).  AB 1613 amended CPUC code to require investor-owned utilities to buy power at a set CPUC price if it is generated by particular CHP generators and sent to the grid.  On August 16, 2010, the CPUC filed a request for clarification, or in the alternative, a request for rehearing of the July 15 Order. The CPUC asked FERC to clarify that California can require utilities to consider different factors in the avoided cost calculation in order to promote AB 1613 and “full avoided cost” does not have to be the cheapest avoided cost and may take into account limitations on alternate energy sources.  On September 14, 2010, the Commission issued an order granting rehearing for further consideration of the July 15 Order.

In its October 21 Clarification, the Commission found that a proposal that utilized a “multi-tiered resource approach” in order to come up with avoided costs, which would then set different levels of avoided costs and different avoided cost rate caps depending on the type of resource could be in compliance with Section 210 PURPA and FERC regulations.  The Commission recognized that a state may take into account obligations imposed on utilities to purchase energy from particular sources, or for a particular duration when determining the avoided cost rate.  This may include procurement requirements and the resulting costs imposed on utilities in California. 

The October 21 Clarification did not address whether CPUC’s offer price under its AB 1613 program is consistent with the avoided cost rate treatment of PURPA, and noted that a state may not include a bonus or an adder in the avoided cost rate unless it reflects “actual costs avoided.”  However, the state may provide additional compensation for environmental externalities, outside of the PURPA cost rate through Renewable Energy Credits.

A copy of the Commission’s order is available here.