FERC Requires Utilities to Pay QFs for Capacity

On March 20, 2014, the Federal Energy Regulatory Commission (FERC) issued a declaratory order concluding that utilities must pay qualifying facilities (QF) for capacity as well as energy in sales pursuant to a legally enforceable obligation.  A legally enforceable obligation is when a QF has the right to sell power to a utility at specific prices.  FERC found that the Montana Public Service Commission’s (Montana Commission) rule requiring QFs to participate in a competitive bidding process to be paid for capacity failed to adequately compensate QFs.  As it typically does, FERC declined to initiate an enforcement action against the Montana Commission, but the declaratory order allows a number of QFs to sue the commission in court. 

The decision is another in a recent string of cases in which FERC has defended and promoted the interests of QFs that sell power to electric utilities under the Public Utility Regulatory Policies Act (PURPA).  PURPA is intended to reduce America’s reliance upon fossil fuels and require electric utilities to purchase power from cogenerators and small power production facilities, including renewable energy generators.  PURPA achieves this purpose by requiring electric utilities to purchase energy and capacity from QFs at the utilities’ avoided costs.  Capacity is the physical amount of electric generation that is available to meet load and represents the potential energy that can be produced.  In contrast, energy is the actual amount of energy produced, and generators typically produce less energy than their maximum potential capacity.  Extra capacity is a necessary part of any electric system because it can be used to meet consumers’ peak load during hot summer or cold winter periods.

The Montana Commission had a long-standing rule that included a 50 megawatt (MW) installed capacity limit for wind QFs, and required QFs with a size greater than 10 MW to win a competitive solicitation.  The QF petitioners argued that these limits harmed all QFs, and effectively prevented them from being compensated for capacity or entering into a legally enforceable obligation. 

FERC’s order makes it clear that QFs must be compensated for both the energy and capacity that they provide to electric utilities.  QFs can sell power on an as available basis, with prices based on energy but not capacity, or pursuant to a legally enforceable obligation that includes compensation for both energy and capacity.  FERC rejected the requirement that QFs 10 MWs and larger need to participate in a competitive solicitation because it prevented these QFs from being compensated for capacity.   FERC also found that the 50 MW limit on the total amount of QF generation was inconsistent with PURPA because it had the practical effect of requiring wind QFs greater than 100 kW but equal to or below 10 MW to only be paid market rates that did not include capacity payments.



These materials are intended to as informational and are not to be considered legal advice or legal opinion, nor do they create a lawyer-client relationship. Information included about previous case results does not assure a similar future result.