Federalism in Microcosm, the Station Power Conundrum

By Jeffrey M. Gray, PhD

In electricity law, it is axiomatic that interstate transmission and wholesale sales are federal jurisdictional, and local distribution and retail sales are state jurisdictional. But, if a merchant power plant sells wholesale electricity into the interstate transmission grid, and also buys retail electricity from the local utility, how do federal and state jurisdiction interrelate for that generating station? Or do they interrelate at all? More importantly, who cares? These questions were answered in a recent D.C. Circuit Court of Appeals decision in Calpine Corp., et al. v. FERC, No. 11-1122 (D.C. Cir. Dec. 18, 2012) (“Calpine”), which affirmed two Federal Energy Regulatory Commission (“FERC”) Remand Orders that eviscerated FERC’s long-standing policies for the self-supply of station power.

Station power is the electricity used by a generating station to start its turbines, provide lighting, heating, and air conditioning, and operate various on-site machinery and equipment. Under FERC’s long-standing policies, as reflected in wholesale tariffs, a merchant power plant would be deemed to have self-supplied its station power if the generating station is net positive (i.e., gross output exceeds station power requirements) over a monthly netting period. Conversely, the merchant power plant would be deemed to have purchased station power at retail, subject to state jurisdiction and the local utility’s retail tariff, if the generating station is net negative over the monthly netting period.

FERC issued the Remand Orders in response to the Court’s remand in Southern California Edison Co. v. FERC, 603 F.3d 996 (D.C. Cir. 2010) (“Edison”). The Edison Court characterized the question before it as “stark:” whether “the netting period [FERC] approved to calculate energy delivered to and taken from the grid by generators [for determining] transmission charges must also govern [retail] charges the utilities seek to impose [on] the generator’s own use of power?” The Court concluded that the answer to the foregoing question is no, and vacated and remanded the case to FERC for further proceedings. The Remand Orders followed.

In the Remand Orders, FERC concluded “as explained by the [Edison] Decision, [FERC] and the states can use different methodologies when [FERC] determines the amount of station power that is transmitted on the [FERC]-jurisdictional transmission grid and the states determine the amount of station power that is sold in state-jurisdictional retail sales.” Further, FERC noted that “the [Edison] Decision stated that, in the context of approving the terms and conditions of the [California Independent System Operator Corp. (“CAISO”)] Tariff’s Station Power Protocol, [FERC] had effectively, and improperly, set the netting period for retail energy sales” and “[s]hould generators face increased costs due to the application of different federal and state netting periods, any increased charges due from generators are a result of that state’s approach to estimating station power and are, simply put, not within our jurisdictional purview….”

So, why all the fuss? If the local utility were to apply a shorter (e.g., hourly) netting period pursuant to a state-jurisdictional retail tariff, then a merchant power plant that runs only during peak hours would be unable to self-supply its station power during most hours. Instead, most of its station power usage would be subject to retail charges by the local utility under the retail tariff. Under such a scenario, merchant peaking plants in CAISO, for example, would face increased costs that would not apply to the local utility’s own power plants. Because of those discriminatory costs, utility-owned power plants would have a competitive advantage over merchant power plants, which runs contrary to FERC’s goal of promoting non-discriminatory wholesale markets.


Jeffrey M. Gray, PhD is an energy lawyer and economist, and is admitted to the Michigan, Wisconsin, New York, and District of Columbia Bars.  Jeff focuses his practice on energy markets, energy infrastructure, commercial transactions, public policy, and state and federal regulation.  He provides sophisticated legal services to clients including renewable energy developers, electric and natural gas utilities, commodities firms, and electric transmission companies.  Additional information about his practice is available at www.graypllc.net.

PACE has a Pulse in Connecticut

By Dana Hall, Esq.

Commercial businesses in Connecticut have a new opportunity to finance energy improvements to the buildings they occupy with the new statewide Commercial Property Assessed Clean Energy (C-PACE) financing program. Carefully crafted to address the concerns of lenders, and to avoid a pending federal rule by the Federal Housing Finance Agency (FHFA) that will continue to plague the residential sector, C-PACE could break some of the barriers that prevent commercial property owners and their occupants from making the choice to invest in energy improvements.

First launched through residential pilot programs in California in 2007, Property Assessed Clean Energy (PACE) financing programs have spread across the nation and are now enabled in 28 states and the District of Columbia.[1] The contentious and some say revolutionary model uses tax lien financing to provide capital to property owners interested in financing energy improvements, and allows them to repay the loans through assessments on their property tax bills.[2]

In May, 2010, residential PACE hit a roadblock when the federal mortgage-finance agencies Fannie Mae and Freddie Mac, which together guarantee roughly half of U.S. residential mortgages, informed their sellers and servicers that their instruments prohibit loans that have senior lien status to a mortgage.[3] In June of that same year, the FHFA declared in a statement that PACE assessments are not valid and should be treated like “loans” that cannot be senior to mortgages.[4]

The State of California, several California counties and municipalities, and the Sierra Club in the Northern District of California brought suit in federal district court in California, and a formal rulemaking process was ordered.  In June, 2012, the FHFA announced their proposed rule which effectively maintains the current comatose state of residential PACE programs in the United States.  Thousands of public comments were received and the final rule is pending.

Despite these federal setbacks in the residential sector, PACE still has a pulse and may be showing real signs of life in the Connecticut commercial sector, with the nation’s first and only statewide commercial PACE program.[5] The enabling statute[6] designates the Clean Energy Finance and Investment Authority (CEFIA) as a statewide central agency for the program, charging them with the creation of standards and guidelines that all participating municipalities[7] must agree to.

C-PACE was carefully designed to address the concerns of lenders by requiring lender consent to participate, keeping the lien with the property regardless of ownership, and requiring the increase in property value resulting from the improvements to be counted as collateral. Approved projects must demonstrate a Savings to Investment Ratio (SIR) greater than one, so that the loan can be fully repaid from energy savings over the term. C-PACE also does not allow acceleration of the lien upon foreclosure, thus only the arrearage becomes due on a foreclosure sale.

Perhaps the most fascinating aspect of C-PACE is CEFIA’s assertions that the program is fully compatible with equity investment financing structures, such as power purchase agreements, and is encouraging developers who are bidding into the LREC and ZREC reverse auction program to also consider C-PACE as a financing tool. For more information on C-PACE, visit http://www.c-pace.com.



[1] To see all the jurisdictions that have enabled PACE programs, visit http://pacenow.org/pace-programs/.

[2] Tax lien financing has been used for decades to provide “low-cost long-term capital to finance improvements to private property that meet a public purpose.” See http://pacenow.org/about-pace/.

[3] See WSJ blog at http://blogs.wsj.com/developments/2010/05/17/fannie-freddie-freeze-out-energy-efficiency-loan-initiative/.

[4] An ongoing FHFA rulemaking process is addressing PACE issues, and PACE advocates are pursuing congressional action to restore residential PACE programs. See http://pacenow.org/about-pace/residential-pace-2/.

[5] See http://www.ctcleanenergy.com/YourBusinessorInstitution/CommercialPropertyAssessedCleanEnergyCPACE/tabid/642/Default.aspx.

[6] CT Public Act 12-2 passed on June 12, 2012. See http://www.cga.ct.gov/2012/TOB/s/pdf/2012SB-00501-R00-SB.pdf.

[7] As of this writing, the municipalities that have enacted Agreements to participate in C-PACE include Beacon Falls, Bridgeport, Durham, Hartford, Middletown, Norwalk, Simsbury, Stamford, West Hartford, Westport and Windham.





If you have any questions about the items discussed above, please contact Dana at dana@danahalllaw.com.


Dana Hall, Attorney at Law offers legal and regulatory support services for a range of clean energy clientele. Serving property owners and energy service companies, Ms. Hall uses her experience as an energy policy analyst and educator to add value to her clients' business operations. Additional information about Dana Hall, Attorney at Law can be found at danahalllaw.com.

Connecticut’s LREC/ZREC Program, a Competitive Reverse Auction Model for 15-year REC Contracts

By Dana Hall, Esq.

In April of 2012, the State of Connecticut Public Utilities Regulatory Authority ("PURA") announced a new procurement program for renewable technologies using a competitive reverse auction model. Connecticut’s ZREC (zero-emissions) and LREC (low-emissions) program is a six-year solicitation for 15-year REC contracts, with over one billion dollars of funding to be administered by the state’s two largest electric utilities – Connecticut Light & Power ("CL&P") and United Illuminating ("UI").

While the budget for the program is statutorily established, a competitive market drives the REC price through a reverse auction that awards the bidding developers who require the least amount of subsidy with 15-year REC contracts. The result has been REC prices that are substantially lower than neighboring statutory alternative compliance payments or REC prices, but exactly the price each individual project needs to be economically viable. The initial procurement has resulted in ninety-seven executed contracts for over 31 MW of new low and zero emission capacity and over $7.5 million of REC value. [1]

LREC eligible technologies (including fuel cells and biomass) are those that have emissions below established criteria, [2] and ZREC eligible technologies (solar, wind, small hydro) are those that emit no pollutants. To be eligible for the program, LREC projects may not be larger than 2,000 kW, and ZREC projects are broken into three tiers:

• Small tier ZREC projects are those up to 100 kW
• Medium tier ZREC projects are over 100 kW, but under than 250 kW
• Large tier ZREC projects are those between 250 kW – 1,000 kW

The Energy Act imposes price caps of $350 per ZREC and $200 per LREC, and both LRECs and ZRECs must come from Connecticut generation projects located behind customer meters, in operation on or after July 1, 2011.

The program budget exceeding $1 billion is allocated with $300 million to be spent on LRECs over five years, and $720 million to be spent on ZRECs over six years. Each year, UI and CL&P will solicit up to $120 million worth of ZREC contracts ($8 million per year for 15 years) and up to $60 million of LREC contracts ($4 million per year for 15 years). Because CL&P serves approximately four times the distribution load that UI serves, PURA allocated the REC procurement obligation roughly 80% to CL&P and 20% to UI. The annual LREC target is roughly $3.2 million for CL&P and $0.8 million for UI, and the annual ZREC target is roughly $6.4 million for CL&P and $1.6 million for UI. The ZREC program has three tiers, allocating the $8 million per year in equal thirds among the three size classes.

The first solicitation of June 2012 sought proposals for LREC projects, and for the Medium and Large ZREC tiers, and was competitively bid with executed contracts filed for PURA approval in October 2012. The Small ZREC tier was reserved for a later RFP and will not be competitively bid, as per program parameters. Instead, each year the Small ZREC tier will receive a PURA decreed REC offer price equivalent to the weighted average accepted bid price in the most recent solicitation for the Medium ZREC tier.

According to UI Company Interrogatories filed in October, 2012, of the over 400 bids received, a few were disqualified because they had either material errors or omissions in the bidder response form, failed to include a bid price, or failed to submit the form as a working excel file. Once accepted, a small number of bids were withdrawn. Offered explanations for withdrawals of accepted bids included reasons such as the customer of record couldn’t commit to remain at the location for 15 years, the customer of record was not prepared to execute a PPA with the bidder, a bidder discovered that its proposed project could not be built as proposed, and a bidder determining that its project would not meet statutory emission requirements.

Interestingly, despite reports about bumps in the road for the ZREC program which claim that winning bids were withdrawn prior to contract execution because they were speculative in nature and failed to secure financing, a failure to secure financing was not amongst the explanations offered in the interrogatories. Even if it were true that many developers could not secure financing to meet contractual obligations, the fact that the program uses a 90-day standby period allowing the next most competitive bids to make performance assurance and execute contracts, demonstrates the success of the program. Moreover, the entire structure of the program is based on the use of 15-year fixed REC contracts, offering a secure revenue stream designed to attract financiers.

On October 5 and 10, 2012, UI and CL&P respectively filed 97 executed LREC and ZREC contracts for PURA’s review and approval (19 solar and 2 fuel cell from UI and 68 solar and 8 fuel cell from CL&P). The winning bids offered REC prices well below the statutorily imposed caps of $350 per ZREC and $200 per LREC. CL&P's weighted average bid prices were $138 for Large ZRECs, $149 for Medium ZRECs and $59 for LRECs. UI's weighted average bid prices were $117 for Large ZRECs, $135 for Medium ZRECs and $51 for LRECs.

The table below details the bids submitted to PURA by UI. In all, 72 projects with 25.4 MW of total capacity were submitted to UI, and 21 bids with 6.2 MW of total capacity were accepted by UI.

In their interrogatory filings, UI reported that their solicitation for LRECs resulted in $311,640/yr of its $800,000/yr budget being unspent due to the large size of the next bid in the bid stack. [3] In other words, the bids were ordered by ascending REC price, and the capacity of the next project in the bid stack would have exceeded the remaining funds.

Under the Solicitation Plan, PURA and the companies will to revisit the program after the first year to evaluate the market response to solicitations for each size class, and determine whether it is appropriate to change the funding allocations, particularly amongst the ZREC tiers. This process is ongoing in the PURA docket 11-12-06, and is likely to address the bid stack issue in the LREC procurement.

Based on the current group of contracts Medium tier projects filed with PURA, UI projects a Small ZREC tariff rate of $148.89 per REC. As of this posting, PURA has not released the Small ZREC tariff rate per REC. UI and CL&P will be holding a Small ZREC Tariff Informational Meeting, focused on the “nuts and bolts” of submitting applications and interconnecting small zero-emission renewable energy systems, to be held at the Northeast Utilities offices at 107 Selden Street in Berlin, CT on November 27, 2012.  The companies also plan to post a Small ZREC Tariff Question and Answer document on their respective websites prior to the Informational Meeting.  Please visit CL&P (click on "Going Green" and then click on "Renewable Energy Credits")  or UI for more information on the Small ZREC Tariff.



1. CL&P Procurement Plan for the Purchase of LRECs and ZRECs (Exhibit A) Compliance Filing 10/10/2012, Docket No. 11-12-06, Order No. 5.; UI’s LREC/ZREC RFP Results, 9/27/2012; and UI's Compliance Filing 10/5/2012, Docket No. 11-12-06, Order No. 5. 

2. Emissions of no more than 0.07 pounds per MWh of nitrogen oxides, 0.10 pounds per MWh of carbon monoxide, 0.02 pounds per MWh of volatile organic compounds, and one grain per 100 standard cubic feet. (Solicitation Plan, April 4, 2012, p. 4).

3. UI raised this concern in its response to Interrogatory No. RA-4 in Docket No. 11-12-06.



 
Dana Hall, Attorney at Law offers legal and regulatory support services for a range of clean energy clientele. Serving property owners and energy service companies, Ms. Hall uses her experience as an energy policy analyst and educator to add value to her clients' business operations.  Additional information about Dana Hall, Attorney at Law can be found at danahalllaw.com.

FERC Issues Orders That Will Benefit the Renewable Sector

By Natara G. Feller, Esq.

Recently, the Federal Energy Regulatory Commission (“FERC”) issued several orders that will likely make it easier for renewable energy producers to compete in the U.S. energy marketplace. Specifically, FERC recently issued orders that: (i) confirm FERC does not have jurisdiction over unbundled Renewable Energy Credits; (ii) will facilitate integration of renewable generation into the Nation’s bulk power grid; (iii) issues its first off-shore wave power license; (iv) authorizes construction of 3500 MW that will bring generation from wind resources to Memphis, Tennessee; and (v) upholds Qualifying Facility Power Purchase Agreements in Idaho.

FERC Affirms it Lacks Jurisdiction Over Unbundled RECs, but Retains Jurisdiction Over Bundled REC Transaction: On September 20, 2012, FERC issued an order declaring that the ownership of renewable energy credits (“RECs”) are governed by state law, not Public Utilities Regulatory Policies Act (“PURPA”).[1] Therefore, FERC found that the Public Service Commission of West Virginia could not use PURPA as a legal basis to find that RECs are owned by the utilities that buy the renewable power from Qualifying Facility (“QF”) generators. Further, FERC determined that it lacks jurisdiction over RECs, when RECs are not bundled with renewable energy. However, FERC determined that a bundled transaction is within FERC’s jurisdiction, regardless of whether the contract separates the REC component from the energy component of the transaction. A “bundled” transaction includes the REC and renewable power, whereas an unbundled transaction involves the REC only.

FERC Variable Energy Resource Order Takes Effect: On September 11, 2012, FERC’s recently issued Variable Energy Resource Order (“VER Order”) became effective.[2] The VER Order was designed, in part, to facilitate delivery of power to the Nation’s bulk power grid from intermittent renewable resources, such as solar and wind generators (“Renewable Generators”) whose energy output may be vulnerable to changes in weather conditions and other variables. The VER Order includes key reforms. First, the VER Order will require Transmission Providers (i.e., grid operators, RTOs/ISOs, etc.) to offer all parties scheduling generation the option of scheduling transmissions on 15-minute intervals, rather than hourly intervals. This change is anticipated to be especially helpful to Renewable Generators as it should lower generator imbalance charges that Renewable Generators must pay when energy output varies within the scheduling time period. Second, Renewable Generators who buy and sell electricity back to the grid, will be required to provide Transmission Providers with meteorological and forced outage data. Transmission Providers will have until September 11, 2013 to submit new Open Access Transmission Tariff provisions that will comply with the VER Order.

FERC Issues First Wave Power License: On August 13th, FERC issued Ocean Power Technologies a 35 year license to construct and operate a 1.5 MW wave power station off the coast of Reedsport, Oregon.[3] This is the first FERC issued wave power license in the U.S., and is projected to provide power for approximately 1,000 homes.

3500 MW Transmission Line Receives FERC Authorization: On September 7, a project proposing to build a 3500 MW high voltage direct current transmission line designed to transmit electricity produced by wind turbines from Oklahoma, Texas, and Kansas to Memphis Tennessee, received conditional authorization, from FERC, to charge negotiated rates.[4] FERC also granted the project several waivers from Commission reporting regulations.

FERC Upholds QF Power Purchase Agreement: On September 20, FERC confirmed that the PURPA does not allow a public utility to buy less power than it is required to purchase under existing power purchase agreements with wind energy generators, during non-peak times. Specifically, in Idaho Wind Partners I,[5] FERC found that Qualified Facility (“QF”) power purchase agreements, between wind energy generators QFs and Idaho Power (a public utility) were binding contractual obligations, and that Idaho Power could not unilaterally reduce its QF purchases during low demand periods under the agreement. QF purchases may only be curtailed in a system emergency.


If you have any questions about the items discussed above, please contact Natara at natarafeller@fellerenergylaw.com.

The Law Office of Natara G. Feller is a boutique law firm offering clients an attractive, cost-effective alternative to large law firms on issues related to: Federal and State Energy Matters, Administrative Litigation, Regulatory Compliance and Transactional Matters. For more information on Natara's practice, please visit her firm website at www.fellerenergylaw.com



[1] Idaho Wind Partners 1, LLC, 140 FERC ¶ 61,219 (2012).

[2] Integration of Variable Energy Resources, Order No. 764, 139 FERC ¶ 61,246 (2012).

[3] Reedsport OPT Wave Park, LLC, 140 FERC ¶ 62,120 (2012).

[4] Plains and Eastern Clean Line LLC, et at., 140 FERC ¶ 61,187 (2012).

[5] 140 FERC ¶ 61,219 (2012).