Rule Narrows Universe of Qualifying Facilities, Widens Ownership

In a final rule issued February 2, FERC largely adopted its earlier proposed rulemaking implementing the Energy Policy Act of 2005's (EPAct 2005) significant scaling back of the 1978 qualifying facility (QF) program of the Public Utility Regulatory Policy Act (PURPA).  As reported in an earlier entry, [Long-Term Transmission Rights Proposed for Organized Markets] FERC already has adopted a rule implementing EPAct 2005's biggest change to the nearly 30-year-old QF program "” prospectively terminating in organized electricity markets the mandatory purchase or "PURPA Put," which empowered qualifying cogenerators and small power producers to force traditional electric utilities to buy their electrical output at attractive, avoided-cost prices.  The February 2 rule further tightens the eligibility requirements for future cogenerator QFs, reduces the benefits accessible to QFs, and eliminates the prohibition against an electric utility owning more than 50 percent of existing and future QFs.

In addition to the now largely defunct PURPA Put, an important benefit of being a QF has been exemption from various state and federal regulatory laws.  For new (but not existing) QF contracts, the new rule eliminates one of the most valuable exemptions that removed QFs from price regulation under the statutory just and reasonable requirement of the Federal Power Act.  Going forward, QF contracts for cogeneration and small power production facilities of greater than 20 megawatts will be subject to price regulation, albeit probably pursuant to market-based rate schedules.   QFs retain their exemption of regulation as electric utilities under the new Public Utility Holding Company Act of 2005, but will be subject to the new market transparency and anti-fraud provisions that EPAct 2005 added to the Federal Power Act.

In order to qualify as a QF, PURPA required that the thermal energy that a cogenerator produces in tandem with electricity be "useful."  FERC implemented that requirement by simply presuming that the thermal output of a cogenerator was useful and making that presumption irrebuttable.  Much  to the consternation of utilities forced to by cogenerated electricity, this irrebuttable presumption, on occasion, countenanced thermal applications that were plainly not useful, such as distilling water only to dispose of the distilled water.  Responding to complaints that these thermal applications were a "sham," Congress directed in EPAct 2005 that FERC change its QF eligibility rules to require that a cogenerator's thermal energy output be "productive and beneficial" and that its electrical, chemical and thermal output be used "fundamentally" for "industrial, commercial or institutional purposes" and not "fundamentally" to make electricity sales to an electric utility.   The February 2 rule adopts this language verbatim and requires and will require that an applicant for status as a cogenerator QF prove both that its thermal energy is productive and beneficial and that all of its ouput is fundamentally for purposes other than making electricity sales to an electric utility.  

Importantly, FERC clarified that residential uses are subsumed within permissible "institutional" purposes, and rejected the demand of the Edison Electric Institute that formal economic and financial reports support any finding that thermal energy is productive and beneficial.   Also importantly, FERC instructed that thermal uses that were irrebuttably presumed useful under the old rule will be presumed rebuttably to be productive and beneficial under the new rule.  And once certified as a QF cogenerator, the owner will not lose that status even if the economics of its thermal energy output later reverse.  Cogenerators with 5 megawatts or less are also rebuttably presumed productive and beneficial.

 With regard to the new fundamental-use requirement, the February 2 rule adopts a straightforward safe harbor:  If 50 percent of the aggregated annual energy output of a facility is used industrially, commercially or institutionally and not sold to an electric utility, then the fundamental-use requirement will be presumed irrebuttably to be satisfied.   And again, cogenerators with less than 5megawatts or less are rebuttably presumed to satisfy this new requirement.

Pre-existing efficiency standards for oil- and gas-fired cogenerators are unchanged in the new rule, and FERC rejected demands that it establish efficiency standards for coal-fired cogenerators.  Also retained is the existing practice by which both cogenerator and small power QFs can self-certify and self-recertify.  The only difference is that such self-certifications will be publicly noticed in the federal register and can be challenged by the public or by FERC on it own initiative.