PURPA Rates Set at Time of Obligation and the Need for Reform Part I: The Allco Decision on Formula Rates

FERC’s PURPA regulations contain a rather serious anachronism. In this three-part series, we identify the problem, as reflected in a federal district court decision (Part I); discuss its impacts to date, which have remained relatively minimal (Part II); and explore whether FERC-led PURPA reform is coming and/or what states can do without federal help (Part III). FERC’s PURPA regulations state that a qualifying facility (QF) is entitled to a contract (i.e., a legally enforceable obligation) that provides it the option of selling energy or capacity at a rate based on a purchasing utility’s avoided cost calculated at the time of delivery, or the avoided cost calculated at the time the obligation is incurred. The meaning of the latter subsection – “avoided costs calculated at the time the obligation is incurred” – was addressed by a Massachusetts federal district court in 2016 (affirmed by the First Circuit in 2017). The court indicated that a formula rate did not constitute an avoided cost calculated at the time the obligation is incurred as required by the regulation. Such ruling means that QFs (at least in the First Circuit) are entitled to an absolutely fixed price per MWh for their energy. In an era of markets, competition, FERC’s own preference for formula rates, and reduced fuel price fluctuation risk, this view is anachronistic. In Allco, the district court found that a state commission rule providing that the only contract price rate for QFs larger than 1 MW was the ISO-New England spot market price ran afoul of 18 C.F.R. Section 292.304(d)(2)(ii). The court largely relied on prior FERC pronouncements regarding fixed contract prices, which FERC has claimed provide a potential investor in a QF reasonable certainty about the expected return on a potential investment and resulted in an equitable sharing of the price risk. In sum, to the extent state commissions have permitted utilities to refuse to offer fixed price contracts that do not include formula rates to QFs, the first court to rule on the issue has not viewed such approach favorably.