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benefit of counsel PURPA lives

Issue 2 and Volume 84.

How the mandatory purchase obligation of PURPA survived and was reincarnated as an enforcement tool for competition

Remember Section 210 of the Public Utility Regulatory Policies Act of 1978 (PURPA)? Most developers and utilities in the electricity business certainly do, but with dramatically varying perspectives. To developers, Section 210 of PURPA and the resultant FERC regulations launched the competitive power industry after close to a century of “natural” monopoly by franchised utilities. Not surprisingly, from the utilities’ vantage point, Section 210 of PURPA imposed an unfair mandate that they purchase power from developers, thus saddling the utilities with unneeded power and exorbitant costs.

When Congress enacted Section 210 in 1978, it did so with full appreciation of the fact that it was injecting a competitive experiment into a long-standing legal and regulatory framework, knowing that for many parties there was little incentive to, or likelihood that they would, embrace either the Act or the nascent industry Congress intended to promote. To counteract that hostility, Congress served up a hefty dose of statutory incentives: It exempted qualifying projects from the Public Utility Holding Company Act (PUHCA) and from federal and state rate regulation; it offered generous tax credit incentives; and, most importantly, it gave FERC authority to require utilities to provide backup power to and to purchase power from such facilities. FERC’s watershed rulemaking under the new statute evinced an effort to do virtually everything permitted under the statute to launch this new industry.

For much of the last decade, as Congress labored in vain to produce an energy bill, PURPA’s so-called “mandatory purchase” requirement suffered a thousand deaths in committee but managed to survive while the larger energy bill died year after year. In the legislation’s final version, however, Congress stopped short of repealing outright Section 210 of PURPA, despite an initiative of more than a decade to do so. Rather, after 10 years of impasse, Congress’ Solomonic solution essentially was to open the door to a waiver of the mandatory purchase requirements should FERC determine that a sufficiently competitive market exists for the Qualifying Facility (QF) to sell its power. This compromise was an express look back to the days of 1978 when no workably competitive markets existed, and tacit acknowledgement of the present, where such markets are evolving in some areas but not in all parts of the country. And it was also an implicit nod to FERC’s conditioning authority, where it has traditionally worked at its best, rather than its mandating authority, which has encountered substantial resistance in recent years.

Specifically, FERC’s proposed rule in connection with Section 210(m) (18 CFR Part 292, 71 Fed. Reg. 4532, issued Jan. 19, 2006) would grant blanket waivers to at least the “Big Four” FERC-certified RTOs-PJM, ISO-New England, MISO and NYISO. And it would establish a rebuttable presumption of eligibility for such a waiver if a utility has filed an open access transmission tariff (OATT) that complies with FERC’s pro forma OATT. All other requests for waiver would require an affirmative showing by the requesting utility that a viable wholesale competitive market exists within its service territory. Lastly, and importantly, in accord with Congress’ stated intent, the mandatory purchase requirement could be reinstated prospectively upon a showing of changed circumstances, i.e., that the elements of workable competition had eroded to such an extent that the waiver should be stripped and the mandatory purchase reinstated.

Section 210(m) is a watershed certificate of matriculation for an industry that did not exist 25 years ago. With the struggles the industry has undergone the past few years, however, it remains to be seen whether this fledgling industry will in fact be able to hold onto that certificate in the years ahead. In the Background section of the proposed regulation, FERC staff, as if harkening back to prehistoric times, describe the pre-PURPA world in this way: “[U]tilities were not generally willing to purchase [non-utility] output or were not willing to pay an appropriate rate for that output.” (71 Fed. Reg. 4533.) For many competitive power companies and in many jurisdictions, that description of the past sounds very much like the present. It is to be hoped that PURPA’s rebirth as a new tool in FERC’s arsenal to foster workably competitive markets will ultimately render the conditions that required a mandatory purchase obligation moot.

Larry Eisenstat is head of the electric power practice and Richard Lehfeldt is an energy partner with Dickstein Shapiro Morin & Oshinsky LLP. They can be reached at [email protected] and [email protected], respectively.