Challenges and Opportunities for QFs, Part II of III
by Laurel W. Glassman
While it’s true that the the Energy Policy Act of 2005 created a number a challenges for qualifying facilities, there remain significant-and unique-benefits and opportunities for QFs. In fact, contrary to rumors of the demise of the qualifying facility industry, it’s likely to grow.
A QF may still reap significant rate advantages while avoiding most of the regulatory requirements of the Federal Power Act, the Public Utility Holding Company Act of 2005 and state utility laws. In the January/February issue, we began to explore the regulatory changes that are impacting the qualifying facility industry. In this second of a three-part series, we expand our discussion to include the technical operating requirements on new cogeneration QFs.
Elimination of the Mandatory Sales Obligation
A critical but less familiar provision of the Energy Policy Act of 2005 eliminates the obligation of electric utilities to sell electric energy to QFs, in certain circumstances. Specifically, the “Mandatory Sales Obligation” provision will be eliminated if FERC makes a finding that “competing retail electric suppliers are willing and able to sell and deliver electric energy” to QFs and “the electric utility is not required by state law to sell electric energy in its service territory.”
A qualifying small power production facility located in upstate New York, owned by FortisUS. Click here to enlarge image
Unlike its proposal to make generic findings with respect to elimination of the “PURPA Put” in the MISO, PJM, ISO-NE and NYISO markets (with the “PURPA Put,” QFs could require the electric utility with which they were directly interconnected to purchase their power), FERC has not proposed to make any generic findings with respect to elimination of the Mandatory Sales Obligation.
Moreover, although not required to do so under EPAct 2005, FERC has proposed to include in the regulations a mechanism for QFs to apply for reinstatement of the Mandatory Sales Obligation, similar to that by which QFs apply for reinstatement of the “PURPA Put.”
Significant economic harm to QF developers could result from elimination of the Mandatory Sales Obligation. Under current FERC regulations, QFs are entitled to receive backup, maintenance, and supplementary power from the utility to which they are directly interconnected. (Backup power is defined as electric energy or capacity supplied by an electric utility to replace energy ordinarily generated by a facility’s own generation equipment during an unscheduled outage of the facility; maintenance power is defined as electric energy or capacity supplied by an electric utility during scheduled outages of a QF; and supplementary power is defined as electric energy or capacity regularly used by a QF in addition to that which the QF generates itself.)
QFs receive no beneficial rate treatment with respect to their purchases of supplementary power because, in taking such power, they are no differently situated than other industrial retail customers. However, QFs do receive beneficial rate treatment with respect to their purchases of backup and maintenance power. Specifically, rates for sales of backup power cannot be based on an assumption that forced outages or other reductions in electric output by all QFs on an electric utility’s system will occur simultaneously, or during system peak, or both, and rates for sales of maintenance power must take into account the extent to which scheduled outages of the QF can be usefully coordinated with scheduled outages of the utility’s facilities. These regulatory requirements mean that QFs typically pay less for backup and maintenance power than they otherwise would if, for example, they were simply industrial customers purchasing firm power on an occasional basis.
The rate benefits attendant to backup and maintenance power may well disappear for QFs if FERC makes the required findings to eliminate the Mandatory Sale Obligation. This is because FERC need only find that competing retail electric suppliers exist that are willing and able to sell and deliver “electric energy.” However, “electric energy” is a generic term, and it is not the same thing as backup or maintenance power. While QFs would be able to purchase electric energy during periods when they are out of service in whole or in part due to scheduled or unscheduled outages, there are no guarantees that the rate for such electric energy would be comparable to the lower rates they now enjoy for backup and maintenance power.
More stringent requirements
As part of the imposition of more stringent technical operating requirements on new cogeneration QFs, all new cogenerators seeking QF status for a facility must now file with FERC either a notice of self-certification or an application for certification.
This is accomplished in either case by filing a completed FERC Form No. 556. Currently, the filing fee applicable to an application for certification is $19,360 for a cogeneration facility, and $17,110 for a small power production facility. There is no filing fee applicable to a notice of self-certification. When an application is filed, FERC will review the application and, typically within 90 days, issue an order either granting or denying the application. If the application is granted, the facility will be considered to be a QF so long as it conforms to the facts forming the basis on which the application was granted. A notice of self-certification does not represent a determination by FERC that a facility meets the requirements to be a QF.
In the past, QF status was not contingent upon whether a cogenerator or small power producer had made such a filing. To be sure, there was a filing requirement, but a facility that met the standards to be a QF was deemed to be a QF, whether a notice of self-certification or an application for certification had been filed (unless FERC denied an application for certification).
In addition, although the old operating and efficiency standards for existing cogeneration QFs remain unchanged, all new cogeneration facilities must now meet several new technical operating standards in order to achieve QF status if they wish to exercise the “PURPA Put” outside of the MISO, PJM, ISO-NE and NYISO markets. New cogeneration QFs not wishing to exercise the “PURPA Put” are required to meet only the “old” technical operating and efficiency standards.
The new technical operating standards for cogeneration QFs are referred to, respectively, as the “Productive and Beneficial Standard” and the “Fundamental Use Standard.” EPAct added these requirements, now embodied in FERC’s regulations, 18 C.F.R. §292.205(d), in response to complaints from utilities that some thermal applications in the past were a sham.
[Editor’s note: The third part of this article will be published in the May/June issue.]
Laurel Glassman practices in the energy, infrastructure and project finance group at White & Case, LLP, resident in the firm’s Washington, D.C., office. She has more than 30 years of experience representing clients before the Federal Energy Regulatory Commission, and has also represented clients before state public utility commissions and in federal courts. She routinely provides advice on complex qualifying facility issues, and has published extensively on developments in the qualifying facilities sector.