United States

United States

Ruling sets risky precedent -- Removal of PURPA backstop

A case recently decided by the Federal Energy Regulatory Commission (FERC) could have subtle but real consequences for wind power's expansion in America. Major utilities in the Southwest Power Pool -- one of North America's nine Regional Transmission Organisations and Independent System Operators (RTO/ISOs) -- asked recently to be exempted from a 30-year-old law that helps level the playing field for mid-scale generators looking to connect to the electric grid. They partially won the case, raising concerns in the wind industry that a precedent has been set that will disadvantage its members when negotiating power purchase contracts in all competitive markets.

Under the 1978 Public Utilities Reform Policy Act (PURPA), Congress directed that in situations where bilateral power contract negotiations break down between a generator under 80 MW and a utility, the utility must agree to pay the generator a payment equal to the "avoided cost" of buying the power from elsewhere. The level of the avoided cost is determined locally based on the cost of available energy sources and is approved by state energy regulators.

Use of the PURPA process used to be commonplace in wind power development, but the law's role as a regulatory backstop has faded. Other wind market drivers, in particular state green energy mandates and the federal government's Production Tax Credit (PTC), have taken its place. In competitive RTO/ISO markets, however, such as PJM Interconnection, Midwest Independent System Operator (ISO), New York ISO, New England ISO, the California ISO and the Southwest Power Pool, PURPA still has a role to play, say experts.

Nonetheless, in the 2005 Energy Policy Act, Congress decided to exempt utilities from the PURPA mechanism if they could prove they were operating within a sophisticated, open and competitive regional RTO/ISO market with effective transmission systems. Provided such markets are developed with an eye to the needs of wind as well as other generation, in theory PURPA has no role to play.

FERC's ruling

At issue now is whether FERC is right in exempting the subsidiaries of two major utilities in the Southwest Power Pool (SPP) from compliance with PURPA while not exempting a third in a different part of the SPP. The SPP area of jurisdiction stretches through the windiest parts of eastern New Mexico, Texas, Kansas and Oklahoma.

In making the ruling, FERC was responding to an application for exemption by the subsidiaries of Xcel Energy, American Electric Power (AEP), and Oklahoma Gas & Electric (OG&E). FERC's decision came down to a split, voting in favour of exempting AEP and OG&E's regional utility subsidiaries but not exempting Xcel's subsidiaries.

Wind industry sources say the utilities jumped the gun in believing the SPP was a fully competitive market in which PURPA had no role. FERC's decision, they add, unjustly validates parts of the Southwest Power Pool as a competitive market and does away with a functioning market mechanism that in some cases would have secured wind companies fair power purchase contracts. FERC, the wind industry fears, has lowered the bar for what is considered a fair competitive market, a decision that could send ripples throughout all the energy markets.

Floodgates

"It's a huge deal...it's going to open the floodgates and everybody is going to come in and say we have the same rudimentary structure that SPP does so get rid of the [PURPA] backstop for us as well," says Bill Holloway, an attorney with the law firm Pillsbury Winthrop Shaw Pittman LLP, who filed with FERC on behalf of the wind industry.

He argues that if the SPP decisions are replicated elsewhere, development of RTO/ISO markets could stop short of implementing the measures that are required for wind to compete with thermal generators. Without the threat of PURPA as an incentive for utilities to sign power purchase contracts for wind, he fears the worst.

Holloway's firm made its filing on behalf of the American Wind Energy Association (AWEA) and wind companies with a stake in the SPP region, including John Deere Renewables, Acciona Wind Energy, Eurus Energy America Corp and The Wind Coalition, a group that represents most major wind companies doing business in Texas.

Challenge FERC

"I'm just hearing people in the wind industry are very dissatisfied with the order," says Holloway. "You don't know what it means. Could this now be used as a way to roll out and adversely impact wind? You are not really sure."

A conservative estimate in the nearer term of what the companies are developing is somewhere in the range of 500 to 1000 MW of wind, says Holloway. That is now at risk. Beyond SPP, if other less developed markets also gain the exemption it could be mean a lot of stalled megawatt, he says.

"Everybody is waiting to see if this holds up or not or if people will challenge the order. I think everybody is waiting to see when the other shoe drops," says Holloway.

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