Michigan PSC to form task force to look at PURPA avoided cost issues

The Michigan Public Service Commission on Oct. 27 ordered the creation of a special task force to report back to it next April on how the commission might change its somewhat outdated policies related to qualifying facilities (QFs) under the federal Public Utility Regulatory Policies Act of 1978.

The task force will look at issues like the avoided cost payments that a public utility may be obligated to pay to a QF. Recently, the commission staff briefed the commission on PURPA issues. In preparation for the briefing, the staff drafted a status report, an updated version of which is appended to the Oct. 27 order. The PURPA report draws information from a lengthy March 2014 report titled “PURPA Title II Compliance Manual” (PURPA Manual), which was issued jointly by the American Public Power Association, Edison Electric Institute, the National Association of Regulatory Utility Commissioners, and the National Rural Electric Cooperative Association. It also relied on a variety of other resources.

“The Staff’s briefing and report have persuaded the Commission that it should revisit its current regulatory response to the matters of PURPA and avoided cost,” said the Oct. 27 order. “It is quite clear that conditions extant nearing the end of 2015 are significantly different than those faced in 1978 when PURPA became the law of the land. In 1978, the nation was exiting from a period of economic chaos and energy shortages attributable in large measure to the 1973-1974 oil embargo by the Organization of Petroleum Exporting Countries (OPEC). Coal was then the preferred fuel source for new electric energy generation in the country. A significant number of nuclear plants were under construction. Electric utilities remained vertically-integrated monopolies that were providing their captive customer bases with generation, distribution, and transmission services on a fully-regulated basis. There were no energy markets, alternative energy suppliers, or regional transmission organizations.

“Times have changed. Natural gas, not coal or nuclear, is viewed generally as the fuel preference for new generation plants. Nine coal-fired units in Michigan will be shuttered during the first half of 2016. Utility customers are allowed to shop for retail generation service. Alternative electric suppliers (AESs) are allowed to become state licensed suppliers, and may compete against the traditional utilities in the retail market. Transmission services are provided by independent transmission suppliers. The Midcontinent Independent System Operator, Inc. (MISO), and PJM Interconnection, LLC (PJM), operate competitive wholesale energy markets.

“Moreover, some of the initial PURPA power arrangements between QFs and Michigan utilities are about to expire, and there is significant uncertainty over the future of these arrangements. Significant amounts of renewable energy have been added to the state’s generating portfolio. Additionally, as observed in the Staff’s report ‘[t]here is increasing interest in distributed generation in Michigan, primarily combined heat and power and solar. As a result of Michigan meeting the 10% renewable energy standard, utilities are no longer seeking contracts with third party generators. These generators are now turning to the PURPA avoided cost rate as an option for sales.’

“PURPA remains the law of the land. Although PURPA has been revised on several occasions, one unique aspect of PURPA remains essentially unchanged. Ordinarily, wholesale power rates are within the sole jurisdiction of the Federal Energy Regulatory Commission (FERC). However, the task of determining the wholesale rates paid by utilities to QFs has been assigned to the states. Under Section 210(b) of PURPA the rate to be paid by a utility to a QF must be ‘just and reasonable’ to the electric consumers of the utility and in the public interest. Also, the rate shall not discriminate against cogenerators or small power producers. PURPA also provides that rates must not exceed the incremental cost to the electric utility of alternative electric energy. In the administrative rules promulgated by the FERC to implement PURPA, the Code of Federal Regulations (CFR) provides that PURPA rates must equal the utility’s full avoided cost.

“The Commission is aware that PURPA and the FERC’s regulations do not proscribe a single methodology for a state to determine the avoided cost to be paid by the public utilities under its jurisdiction. In fact, the approaches followed by the states are many and varied. Some of these approaches include the use of a hypothetical proxy generating facility; the peaker method; the partial displacement method; the fueled rates method; the request for proposals/auction method; and the standard avoided cost rate method.

“As indicated earlier in this order, the Commission is persuaded that it is time for another comprehensive examination of PURPA and avoided cost issues. Toward that end, the Commission directs Paul Proudfoot, Director of its Electric Reliability Division, to begin the process of forming a Technical Advisory Committee (TAC) to be composed of the Staff and representatives of electric utilities and electric cooperatives, QFs, small power producers, and distributed generation advocates. Mr. Proudfoot shall use the resources of his division to assemble the names of interested persons willing to voluntarily serve in this capacity. Volunteers shall contact Mr. Proudfoot at their earliest convenience to express their interest in participation in the TAC’s activities.

“The objective of the TAC will be to assess the continuing appropriateness of the Commission’s current regulatory implementation regarding the Public Utility Regulatory Policies Act of 1978, and to report its findings and recommendations to the Commission by filing a report in this docket no later than April 8, 2016.”

Noted the staff report: “There is increasing interest in distributed generation development. The Commission May 14, 2015 Order in Case No. U-17752 approving Consumers Energy’s community solar program, describes a scenario for third party community solar based on the project developer obtaining a PURPA contract with the utility. Additionally, the Commission tasked Staff with reinstating the Solar Working Group to investigate capacity pricing for solar. Staff foresees this task to have an impact on the capacity component for purposes of developing Companies’ avoided cost.”

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.