IDEA member Cornell University recently rebuffed an attempt by its host utility to terminate the obligation to purchase excess energy from Cornell's cogeneration facility. In a March 2010 decision, the Federal Energy Regulatory Commission (FERC) ruled that New York State Electric and Gas Corporation (NYSEG) is still subject to the mandatory purchase obligation under the Public Utility Regulatory Policies Act of 1978 (PUPRA), at least with respect to Cornell. [1] This column will discuss recent changes to PURPA that spawned this FERC proceeding, analyze the FERC decision preserving the requirement that NYSEG purchase the output of Cornell's cogeneration facility, and provide guidance to IDEA members facing a possible elimination of the mandatory purchase requirement.

EPAct 2005 Modifies PURPA's Mandatory Purchase Requirement
PURPA was initially passed in 1978 to promote the growth of cogeneration and small power production. The Act established a class of qualifying facilities (QFs) that received exemptions from various federal and state laws and enjoyed other benefits related to power production. One of these benefits was a requirement that utilities purchase all the available output from QFs in their service territories.

Through the years, utilities have opposed the mandatory purchase requirements which, they claim, force them to buy energy that they do not need or cannot use. Further, they have argued that developments in the industry, such as standardized interconnection procedures, open access transmission tariffs and established energy markets, have removed the obstacles that PURPA was originally designed to eradicate.

Congress responded to these complaints in the Energy Policy Act of 2005 (EPAct 2005). While PURPA still remains in effect today, EPAct 2005 added a new PURPA Section 210(m), which allows utilities to terminate their obligation to purchase energy from any QF over 20 MW that has nondiscriminatory access to certain wholesale energy markets. Section 210(m) applies only to new contracts or obligations, leaving existing contracts intact.

In 2006, FERC issued a Final Rule (Order No. 688) establishing the process by which utilities could apply for termination approval. FERC found that the six existing Regional Transmission Organizations (RTOs) and the Electric Reliability Council of Texas provide the necessary access to wholesale energy markets described in Section 210(m). In their applications to FERC, utilities located in those designated regions can rely on a rebuttable presumption that QFs greater than 20 MW have nondiscriminatory access to wholesale markets.

FERC gave QFs the opportunity to rebut this presumption and illustrated the kind of evidence needed to make this showing. For example, a QF could present evidence that its highly variable thermal or electric demand prevents it from effectively participating in the market. Alternatively, the QF may lack access to the scheduling mechanisms necessary to make advanced energy sales on a consistent basis. Or, transmission constraints may prevent the QF from being able to deliver energy to market. FERC determines on a case-by-case basis whether the QF presented sufficient evidence to demonstrate a lack of market access.

Cornell Protests NYSEG's Termination Application
Cornell certified its 40 MW facility as a QF in late 2009. Shortly thereafter, NYSEG applied to FERC to terminate its purchase obligation under PURPA, relying on the rebuttable presumption that its membership in the New York ISO (NYISO) provides QFs with adequate access to a wholesale energy market. If NYSEG's application were granted, Cornell would need to make alternate, and possibly less beneficial, arrangements for the excess output from its QF. Cornell therefore protested the application [2] - it was the only QF to do so.

Cornell presented evidence that the operating characteristics of its facility prevent it from participating in NYISO's day-ahead and real-time energy markets. Because Cornell's facility serves steam load, which is highly sensitive to the variable weather conditions in central New York State, the amount of electricity available for sales to the market is both variable and unpredictable, leaving Cornell vulnerable to penalties imposed by NYISO for over- or under-generation. To demonstrate that it does not have nondiscriminatory access to NYISO markets, Cornell highlighted the fact that the NYISO penalties are waived for other intermittent resources.

NYSEG answered Cornell's protest. Although it recognized the variable nature of the QF's operations, NYSEG argued that Cornell failed to quantify that variability. NYSEG also refuted the unique operating conditions of Cornell's facility, arguing that Cornell's steam generation did not necessarily dictate its available electric output.

In the end, FERC sided with Cornell. FERC noted that a mere showing that electric output was dependent on variable weather conditions would not have sufficed. Rather, in upholding NYSEG's obligation to purchase from Cornell, FERC focused on the highly variable demands of Cornell's steam load and the resulting unpredictable electric output available for sale into NYISO markets. That fact, coupled with the discriminatory nature of the NYISO penalties for under-generation, satisfied FERC that Cornell lacked nondiscriminatory access to the NYISO markets.

What This Decision Means for IDEA Members
This case is significant because it shows FERC's willingness to consider the variable nature of steam load in the context of PURPA purchase obligations. The key in these cases is being able to show how a particular wholesale market operates in a manner that does not accommodate district energy systems.

Cornell's successful challenge provides a road map for other IDEA members that may be facing similar termination threats. That said, it is not always easy to predict how a regulatory agency like FERC is going to rule. Only two years ago, FERC denied a QF challenge that was similarly based on the variable nature of a QF's available output due to the needs of its thermal host. [3] In that case, FERC cited a lack of detail and actual data of past experiences - information that it did not seem to require from Cornell. This shows the fact-specific nature of these cases. FERC examines QF challenges on a case-by-case basis. Nevertheless, by examining both past victories and failures, IDEA members can increase their chance of success in challenging a utility's termination request.

Utilities are required to notify all QFs in their region when they file a termination application. If you receive such notification and believe the continuation of a mandatory purchase requirement is beneficial, the Cornell case offers the following lessons in preparing a challenge:

  • Show up. Cornell's efforts demonstrate that it is possible to ward off termination of PURPA's mandatory purchase obligation. But that can only happen if you participate in the process. Cornell was the only QF to file a protest against NYSEG's application, and it is the only QF from which NYSEG is still required to purchase energy. FERC granted NYSEG's termination request for all other QFs in the NYSEG service territory.
  • Know your market. These challenges turn on whether the QF has nondiscriminatory access to wholesale markets. Whether due to transmission constraints, scheduling issues or your own operational limitations, your challenge to a termination application must identify the specific obstacles that prevent you from reaching the market. This means explaining your own operations in the context of your particular RTO's market rules and identifying the impact of any market failures.
  • Give FERC all the details. These proceedings are highly fact specific. Merely stating you do not have access to energy markets is not enough. You must demonstrate with specificity the operating characteristics of your facility or other factors that prevent you from effectively participating in the wholesale market.  

1. New York State Electric & Gas Corporation and Rochester Gas and Electric Corporation, 130 FERC ¶ 61,216 (2010).

2. The protest was prepared by Leonard Singer from the law firm of Couch White.

3. Virginia Electric and Power Company, 124 FERC ¶ 61,045 (2008).