FERC's Feed-in Tariff Order Addresses State/Federal Conflict in Renewables Area

The Federal Energy Regulatory Commission ("FERC") recently determined in a case of first impression that states have limited authority to implement feed-in tariff programs, which generally seek to encourage "green" energy. For energy service companies and energy sellers seeking to take advantage of these programs, the order potentially dampens the prospects for feed-in tariffs to take off in the US, and, at a minimum presents additional FERC compliance considerations, discussed below.

Feed-in tariffs generally consist of three elements: (1) a state-fixed incentive rate designed to attract new sources; (2) a mandated offer to purchase power for a prescribed duration through long-term contract; and (3) a guaranteed access to the grid.

At issue was California's Waste Heat and Carbon Emissions Reduction Act ("Act"), which requires California IOUs to file 10-year power purchase contracts ("feed-in tariffs") with the CPUC that offer to purchase energy from cogenerators at predetermined rates. As FERC has jurisdiction over wholesale sales of electricity, the California IOUs sought a declaratory order from FERC on the legality of the program.

FERC's order holds that the CPUC's feed-in tariff program constitutes "impermissible wholesale rate-setting" that is preempted by the FPA because the CPUC was establishing "rates for wholesale sales in interstate commerce by public utilities," which are the exclusive prerogative of FERC.

FERC found there was room for states to implement feed-in tariff programs, however, to the extent such programs comply with PURPA, namely: (1) eligible cogenerators must obtain qualifying facility("QF") status from FERC; and (2) the state prices must comply with PURPA's "avoided cost" price ceiling. FERC expressly rejected arguments from the CPUC and other intervenors that feed-in tariffs are permissible because they have their genesis in environmental considerations, which are arguably more in the province of state jurisdiction.

FERC's order has caused controversy among renewables advocates around the country, and according to some reports, may require a legislative fix in order to keep existing programs intact. In all events, the order raises questions about the continued lawfulness of certain existing programs, and raises several other interesting compliance aspects for entities seeking to take advantage of incentive rates under feed-in tariff structures.