Reed Smith Client Alerts

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On January 22, 2015, the Federal Energy Regulatory Commission (FERC) issued an order reaffirming a qualifying facility’s (QF) right to sell all of its net output to a utility under the Public Utility Regulatory Policies Act of 1978 (PURPA). In an order partially granting a complaint filed by PáTu Wind Farm, LLC (PáTu) against Portland General Electric Company (Portland General) regarding PáTu’s rights under Section 210 of PURPA, FERC determined that Portland General had an obligation to purchase and compensate PáTu – a QF with variable output – for its entire net output, and could not use transmission scheduling requirements as a basis to avoid this obligation.1 This order could prove significant for QFs and utilities alike as FERC decided the dispute largely based on the more generally applicable mandatory purchase requirements under PURPA, rather than the transmission scheduling dispute that was the primary focus of the parties’ briefs.

PáTu’s Focus on Dynamic Scheduling PáTu sells power to Portland General pursuant to a Public Utility Commission of Oregon (Oregon Commission) standard PURPA contract for off-system, intermittent-resource QFs of less than 10 MW. PáTu relies on Bonneville Power Administration’s (BPA) transmission system to deliver its power to Portland General’s system at its Troutdale substation. BPA offered PáTu dynamic scheduling service, which would allow for scheduling and delivery of PáTu’s precise, instantaneous output to Portland General, while avoiding paying for BPA’s Generator Imbalance Service, Wind Regulating Reserves, Wind Following Reserves, and Wind Imbalance Service. However, PáTu alleged that Portland General would not accept PáTu’s deliveries via dynamic scheduling. PáTu alleged that Portland General also refused to accept 15-minute scheduling as an alternative to dynamic scheduling. Instead, PáTu alleged that Portland General would only agree to accept delivery of power by PáTu in hourly, prescheduled MW-hour blocks. According to PáTu, Portland General decided that when PáTu’s delivered power varied from its hourly schedule, Portland General, in the case of over-generation, would not compensate PáTu for any excess power delivered, and in the case of under-generation, would pay market index rates (rather than PáTu’s contract rate) for electricity provided by BPA to fill in hourly blocks. PáTu alleged these decisions by Portland General were driven by commercial considerations of Portland General’s merchant function and not its transmission function.

The gist of PáTu’s legal arguments were that Portland General’s refusal to accept dynamic scheduling was unduly discriminatory in violation of FERC’s open access regulations and FERC’s PURPA regulations, which also prohibit discrimination. According to PáTu, Portland General provides dynamic scheduling for its own power purchases, including renewable resources, and for non-affiliated non-QF resources. PáTu also alleged Portland General’s policy on dynamic scheduling violated PURPA by preventing PáTu from being compensated for its full output at its avoided cost contract rate. Finally, PáTu argued that Portland General violated FERC’s Standards of Conduct, which require, among other things, that transmission customers be treated on a non-discriminatory basis and that transmission function employees generally operate independently from merchant function employees.

Portland General’s Response Portland General argued the thrust of PáTu’s allegations involve transmission service under Portland General’s tariff, and that such claims should be dismissed because Portland General’s merchant function – and not PáTu – is the transmission customer taking service under Portland General’s tariff. By distinguishing between its merchant and transmission functions, Portland General argued that its merchant function had the right to make an economic decision on behalf of its ratepayers to not allow dynamic scheduling of PáTu’s output, and that because PáTu was not a transmission customer, Portland General did not violate PáTu’s PURPA rights or discriminate against PáTu by declining to offer PáTu dynamic scheduling or other ancillary services that are only available to Portland General transmission customers.

Portland General also argued that dynamic scheduling was inconsistent with the terms of PáTu’s PURPA contract, which required that PáTu schedule deliveries on an hourly basis, and that by demanding dynamic scheduling, PáTu sought to transform a firm hourly product into a non-firm product without adjusting the contractual avoided cost rate. Portland General also claimed it did not violate FERC’s Standards of Conduct requirement that its merchant and transmission functions operate independently because, in this case, the merchant function was the transmission customer and therefore had the right to make decisions regarding dynamic scheduling.

FERC Found Both Parties Missed the Real Point In the order, FERC noted that the parties’ various pleadings did not focus on the most important issue – whether Portland General was fulfilling its obligations under PURPA. While the parties intensely briefed the dynamic scheduling issue, FERC found that the most critical issue was a utility’s obligation under the PURPA regulations to purchase a QF’s entire output. FERC held that Portland General, “and more specifically in the context of a functionally unbundled utility, Portland General’s merchant function, has an obligation to purchase PáTu’s entire net output delivered to Portland General’s Troutdale substation, as required by PURPA and [FERC’s] regulations.” 2

As part of this analysis, FERC reviewed the terms of PáTu’s PURPA contract and found that they (i) were not inconsistent with a requirement that Portland General purchase PáTu’s full net output and (ii) did not preclude delivery to Portland General via dynamic scheduling. Although the PURPA contract did refer to hourly scheduling, FERC noted that it nonetheless required Portland General to purchase PáTu’s “Net Output,” which the contract defined as “all energy . . . produced by [PáTu]” less onsite uses and losses.3 FERC expressed concern that an alternative interpretation could allow utilities to:

routinely escape their PURPA mandatory purchase obligation . . . by imposing overly restrictive or un-meetable scheduling requirements, or by the purchasing electric utility’s failing to arrange the necessary transmission service to dispose of its purchase of the QF’s entire net output once it has been delivered to the utility.4

FERC essentially agreed with Portland General that, in the case of a functionally unbundled utility, it is the merchant function’s decision to choose how best to schedule and deliver the QF’s power to load once it reaches the utility’s system. However, regardless of the type of transmission service the merchant function decides to use, it must purchase the QF’s entire delivered net output and do so at avoided cost rates (unless the utility has been relieved of its PURPA purchase obligation by FERC5, or unless the PURPA contract specifies otherwise, of course).

Because of Portland General’s obligation to purchase PáTu’s entire net output, FERC dismissed the remainder of PáTu’s claims, including its claim for “monetary reparations.” FERC determined that in seeking reparations, PáTu was “essentially asking for damages resulting from a Portland General breach of contract,” and that such a matter is “best left to the Oregon Commission or an appropriate court.” 6

What the Order Means Assuming the order is not modified by FERC on rehearing or during judicial review, it contains three noteworthy implications for QFs and utilities:

First, despite the parties’ focus on dynamic scheduling, FERC essentially flipped the inquiry and held Portland General had a primary obligation to pay PáTu for the energy delivered to Portland General’s system without regard to how Portland General scheduled and integrated the delivered energy. This finding makes it much more difficult for utilities to claim that internal scheduling or transmission integration issues could limit their PURPA mandatory purchase obligations.

Second, although the order could be read as reflecting a bright-line view of utilities’ purchase obligations under PURPA, it is worth noting that FERC also decided this case in the context of the terms of PáTu’s PURPA contract, which FERC concluded required compensation for all delivered energy, and did not preclude delivery via dynamic scheduling. Contract terms will continue to drive resolution of these types of PURPA disputes.

Finally, the order appears to reflect a continuing willingness by FERC to address PURPA disputes that involve novel issues. PURPA disputes often implicate state regulatory and contractual matters (such as avoided cost determinations and contract terms), and, in response to QF petitions for enforcement against state commissions and nonregulated entities, FERC generally exercises its discretion to not initiate enforcement actions in federal court (allowing QFs to litigate their disputes on their own in federal court).7 However, as shown by the PáTu order, FERC will enforce its PURPA regulations (such as the mandatory purchase requirement) against jurisdictional utilities directly through its proceedings. In the PáTu order, FERC decided the threshold question regarding the utility’s compliance with the mandatory purchase obligation, but punted the question of damages (i.e., “monetary reparations”) to the relevant state commission or an appropriate court.8


  1. PáTu Wind Farm, LLC v. Portland General Electric Company, 150 FERC ¶ 61,032 (January 22, 2015).
  2. Order at P 50.
  3. Id. at P 51.
  4. Id. at P 53.
  5. Under certain circumstances, utilities petition FERC to be relieved of their mandatory purchase obligation with respect to QFs with net capacities of more than 20 MWs. See generally 18 C.F.R. § 292.309 and .310.
  6. Order at P 57.
  7. 16 U.S.C. § 824a-3(h).
  8. Another notable QF case involving a utility’s obligation to purchase a QF’s entire net output remains pending at FERC in Exelon Corp. v. Xcel Energy Services, Inc., Docket. No. EL13-61-000 (filed May 9, 2013), where Exelon has argued, among other things, that Southwestern Public Service Co., an Xcel subsidiary, violated FERC’s PURPA regulations by refusing to purchase the full output of certain Exelon wind facilities. In its answer, Xcel has taken the position that FERC does not have jurisdiction to enforce PURPA through proceedings at FERC, and that all PURPA actions must take place in federal court pursuant to Section 210(h) of PURPA. Although FERC has not issued an order in the Exelon case, the PáTu case at the very least suggests FERC does not believe it lacks authority to enforce its PURPA regulations against jurisdictional utilities.

 

Client Alert 2015-016