A Skeptical Assessment of Federal Preemption of State Feed-in Tariffs

Energy Conference

A Skeptical Assessment of Federal Preemption of State Feed-in Tariffs Jim Rossi Florida State University College of Law Feed-in Tariffs (FiT) • Provides a secure contract for renewable power at a set price that provides a rate of return to investors and developers. • Widely deployed in Europe, in the form of a mandate to purchase renewable power at a set rate. • Used by some municipal utilities (e.g., City of Gainesville, Florida). • Adopted in several states (e.g., California, Vermont). Ferrey, et al. "Grafting onto American constitutional law a mandatory FIT for renewable power, at above the typical wholesale market cost of all power or above a purchasing utility's avoided cost of alternative equivalent power resources, confronts existing legal precedent and provisions of the FPA. The renders the European option of wholesale FIT legally barred from state mandate under American's legal system." Steven Ferrey, Chad Laurent & Cameron Ferrey, FIT in the USA: Constitutional Questions About State-Mandated Renewable Tariffs, Public Utilities Fortnightly, June 2010, at 60, 66. National Renewable Energy Laboratory Some paths for FiTs are available, but "[d]etailed discussions involving FERC, renewable producers, utility buyers, and possibly Congress will be necessary to create a legal context in which states can enact or promulgate feed-in tariffs …" NREL, Renewable Energy Prices in State-Level Feed-in Tariffs: Federal Law Constraints and Possible Solutions (January 2010) FERC's Summer 2010 Order Came out strong in suggestion that California's FiT cannot exceed avoided costs - adopts a PURPA preemption argument. Potential Preemption Problems • PURPA - does avoided cost mandate preempt FiTs? (< 20 MW) • FPA - does "just and reasonable" mandate preempt FiTs? (> 20 MW) PURPA • Under PURPA no rule requiring a utility to purchase energy from a QF "shall provide for a rate which exceeds the incremental cost to the electric utility of alternative electric energy." • "Avoided cost" methodologies determine what costs are appropriate under PURPA. • So for PURPA-mandated benefits, the claim is that avoided costs impose a preemption ceiling on FiT buyback rates. FERC's FiT Orders • Summer 2010 order found preemption under PURPA, requiring state FiT to comply with avoided cost mandate. • Fall 2010 order on rehearing clarified preemption, and rejected California's arguments that there was no mandate requiring FERC jurisdiction/approval of FiT buyback rates. Are concerns about PURPA preemption overstated? • To the extent there is any preemption, PURPA only extends to wholesale buybacks. • States have flexibility with avoided cost calculations. • But, in my view, FERC has still gone too far - - PURPA is best interpreted as a preemption floor, not a ceiling. - Even if it is interpreted as a ceiling, PURPA is an opt-in scheme for project developers - one way but not the only way. Some Micro-Generation FiTS not preempted • Many FiT programs are aimed at micro-scale generation which a retail customer uses interconnection to off-set its rates. • If there is no sale but only retail rate discounts for power, there is nothing subject to PURPA or the FPA. State flexibility in setting avoided costs • States have a lot of flexibility with the methodology for calculating full avoided costs under PURPA Section 210. • Apart from how avoided costs are calculated, FERC precedents have allowed states to exceed avoided cost by a) assigning RECs, b) giving subsidies/incentives, or c) providing a utility a tax credit equal to the excess above avoided cost. • To FERC's credit, its fall 2010 FiT clarification order invites states to calculate avoided costs for classes of generators and to also take into account differences in transmission costs for renewable sources. PURPA as a floor, not a ceiling To the extent PURPA is designed to promote conservation and efficient deployment of new technologies, its purposes are consonant with other environmental statutes like the CAA, which courts have interpreted as a floor. What about consumer protection concerns? • Dictum from the 9th Circuit quotes FERC for the claim PURPA's avoided cost rates are the "statutory ceiling" a utility can be forced to pay in buying back QF power. Independent Energy Producer Ass'n v. Cal., PUC, 36 F.3d 848, 853 (9th Cir. 1994). • However, the court concluded that the CPUC avoided cost program "is preempted by PURPA insofar as it authorized the determine that a QF is not in compliance with the Commission [FERC's] operating and efficiency standards and to impose a reduced avoided cost rate on that QF." Id. at 858. • The case simply has no bearing on a state FiT that operates independent of a project's QF status. Reading PURPA as a ceiling on all non-renewable subsidies would allow a state's utilities to provide subsidies for their own projects that do not extend to non-utility renewable projects - violating the basic avoided cost principle of making the utility indifferent to non-utility projects. Opt-In • QF status is something a developer opts into for purposes of receiving benefits under federal law. • Qualification for a FiT and its benefits flow under state law, and simply do not change or modify any of the benefits specified under federal law. • At a minimum, if a developer opts not to take QF status, there is no reason a state could not set FiT rates and its own interconnection requirements, etc. FERC's mistep • 2005 amendments to the FPA authorizes FERC to exempt utilities from PURPA purchase obligations where QFs have access to wholesale markets - FERC's regs indicate that even where an exemption is granted, utilities still are obligated to purchase from a QF that is 20 MW or less. • But for facilities < 20 MW FERC has rejected both observations - that PURPA is a floor and an opt in program. • In doing so, it also rejected California PUC's argument that the FiT was not a buyback mandate but a requirement for a utility to offer to purchase power from renewable sources, which would still be subject to FERC approval. This decision sidesteps an obstacle for > 20 MW projects: The FPA • Under 2005 amendments to PURPA, FERC has allowed utilities to seek exemption from PURPA buyback obligations from QFs with capacity > 20 MW. • These wholesale transactions must comply with sections 205 and 206 of the FPA, which require rates be "just and reasonable" and not "unduly discriminatory." - Cost-based rates - Market-based rates • FPA does not apply to munis - but PURPA does. But states arguable have some options with FiTs…. State cannot require the utility to purchase at a price set by the state under preemption orders. However a state can require utility to offer to purchase power at a state-set price, but delay execution of the purchase until the contract is approved by FERC. FiT within the FPA's rate mandate? FPA requires some FERC approval of the transaction. a) The utility and seller have to enter into a contract, and b) FERC must approved the contract. FERC could facilitate this process through a set of guidelines, rebuttable presumptions to help determine which FiTs are appropriate. Otherwise, a case by case approval of state FiT contracts would be necessary. But FERC's PURPA preemption FiT order rejected this interpretation suggesting - for now - all FiTs above 20 MW are subject to just & reasonable/market based rate standards and can potentially be challenged under federal law. Conclusion • Contrary to what FERC claims, PURPA is not a barrier per se; the issue will be litigated and in the meantime states have leeway in setting avoided costs for FiTs. • The FPA can be a barrier, if states frame FiTs as mandates. But as I've argued states can formulate FiTs by reframing the nature of the requirement as a requirement that utilities offer to purchase and FERC has discretion to establish criteria to help improve the predictability of FiT transactions. • States do have a lot of flexibility even without congressional action. • Given the risk of near-term federal preemption, states might bolster legality of FiTs by mandating the outcome (e.g., RPS) and letting the market set the price.