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About The Author:

Robert A. Olson is a partner in the law firm of Brown, Olson & Gould, P.C. which maintains a nationwide practice in energy law, public utility law and related commercial transactions.

He can be reached at:

Brown, Olson & Gould, PC
2 Delta Drive
Suite 301
Concord, NH 03301
(603) 225-9716









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STATELINE by Robert Olson

May 2001

Texas Public Utilities Commission Petitions FERC For Waiver Of PURPA Qualifying Facilities Rules
by Robert Olson  --   Brown, Olson and Wilson, P.C.
(originally published by PMA OnLine Magazine: 2001/10/06)

On March 23, 2001, the Public Utilities Commission of Texas (PUCT) filed a petition with the Federal Energy Regulatory Commission (FERC) seeking a waiver of the FERC rules promulgated under section 210 of the Public Utility Regulatory Policies Act of 1978 (PURPA). These FERC rules require "electric utilities" to purchase power from qualifying cogeneration and qualifying small power production facilities (QFs) at an avoided cost rate and require electric utilities to sell power to QFs. The PUCT alleges in its petition that the rules are unnecessary and are impediments to competition in light of Texas legislation (SB 7), under which electric retail competition will begin in January, 2002. Numerous entities have moved to intervene in the docket, most of whom have also filed answers in support or opposition. A number of potential intervenors have also sought to consolidate the docket opened for the PUCT petition (Docket EL01-60) with a docket opened for a petition filed by Texas QFs seeking a declaration from FERC that the Texas electric utilities retain their PURPA purchase obligations after they restructure themselves under SB 7 (Docket EL01-49).

Under SB 7, Texas electric utilities are not required to divest their generation assets; however, they are required to unbundle into three entities, which may be affiliated: a transmission and distribution company (T&D), a power generation company (PGC), and a retail electric provider (REP). Under SB 7, the REP sells energy services to retail customers, but is prohibited from owning or operating generation facilities. The Texas law requires the affiliated REP to provide its residential and small commercial customers with price protections. The PGC is prohibited from selling energy to customers. The T&D company remains an "electric utility" under Texas law, but is not an "electric utility" under PURPA. The PGC and REP are "electric utilities" under PURPA. Under Texas law, the T&D company is prohibited from selling power and may only purchase power for its own consumption.

In its petition, the PUCT argues the imposition of the PURPA requirements on any of these entities would be unworkable, given the limited tasks of each entity and that they need to function in a competitive market. The PUCT also argues that the goal of PURPA – to stimulate the development of QFs – would be met once competition starts. Finally, the PUCT argues that the PURPA requirements would place PGCs at a competitive disadvantage to QFs because the QFs would have the benefit of a regulatory-imposed obligation to purchase, which would place affiliated REPs at a competitive disadvantage to non-affiliated REPs, who are free from offering price protections to their customers. The PUCT petition alleges that existing contracts for QF purchases will be honored.

Motions to intervene and oppositions to the PUCT’s petition have been filed by several Texas QFs and trade associations. A number of arguments have been advanced by the opponents. First, opponents argue granting the PUCT’s petition would amount to an administrative repeal of a federal statute, PURPA, in Texas and that such a wholesale waiver of the PURPA QF requirements is unprecedented. The opponents contend FERC should defer to Congress when addressing any fundamental changes in PURPA. They also contend that PURPA preempts Texas legislation which may arguably be interpreted as preventing PURPA’s implementation in Texas. They also contend that waivers of FERC rules may only be sought on a single utility basis, and cannot be sought en masse.

Second, opponents assert that the QF development will not, at least in the near term, be stimulated when retail competition is slated to begin in 2002, but will be impaired, and that the PUCT bears the burden of proving whether retail competition actually has stimulated QF development before it could seek a waiver of the PURPA requirements, thus making the request premature. Opponents cite a PUCT report concluding that the wholesale market in one of Texas’ regional districts is illiquid as a result of short-term trading accounting for 5.7% of total energy consumption.

The opponents also state market price will not be the same as the avoided cost rate the QFs are entitled to under PURPA. Opponents also surmise the QFs’ market for power will be limited given the bilateral contract nature of the market and the corporate relationship between affiliated PGCs and REPs. Opponents further stress that the alleged opportunity to sell energy with the advent of competition is not the same as the PURPA requirement that electric utilities are obligated to buy QF power. The opponents point out that QFs need the PURPA requirements in order to foster a market for their power because QF power generating schedules are often dependent on their steam host.

Third, with regard to the protection of existing contracts, opponents claim electric utilities have taken steps to abrogate QF contracts in light of SB 7, and further note that most of the existing contracts contain "regulatory out" clauses, which arguably could jeopardize the contracts upon a change in the law. As an alternative, the opponents seek a grandfathering for existing QFs for any waiver. Finally, the QFs argue that PURPA can be harmonized with SB 7 by requiring affiliated REPs and/or affiliated PGCs to maintain the PURPA obligations, on the basis that these entities have inherited the obligation from their previous corporate identity and on the basis that they remain "electric utilities" under the terms of PURPA. The opponents further claim that a waiver of the PURPA requirements would undermine the settled expectations of QF investors.

Three electric utilities, Entergy Gulf States, Inc., TXU Electric Company, and Reliant Energy, Incorporated, and a trade association of investor-owned utilities, the PURPA Reform Group, have moved to intervene and submitted comments in support of the PUCT’s petition. The supporters of the petition argue the continuation of the PURPA requirements will provide QFs with a competitive advantage, in that QFs will be able to choose from the higher of two prices: the market price or the avoided cost set by tariff. They also argue that the market price by definition is the "avoided cost." The supporters further contend that the only "electric utility" subject to the PURPA requirements is the T&D company, as only the T&D company is an "electric utility" under Texas law. Because the T&D companies are prohibited by state law from selling power, and may only buy power from a REP, the supporters argue, it would be inefficient to require the T&D company to buy QF power.

The supporters add that the T&D company is not an "electric utility" under PURPA, and therefore not obligated under PURPA to meet the QF purchasing requirements. Additionally, the supporters argue that requiring REPs or PGCs to buy unspecified amounts of QF power would create significant complications for them in arranging their power supply and generation needs.

The supporters argue that certain REPs may be more likely targets of QF power sales than other REPs, placing these REPs at a competitive disadvantage. With respect to the issue of existing contracts, TXU Electric stated that Texas law provides that SB 7 not interfere with existing contracts. In the event FERC refuses the waiver, the supporters ask that FERC alternatively grant the PUCT latitude in implementing PURPA’s rules to harmonize SB 7 with PURPA’s requirements. They also argue that the QF industry is now a developed industry, no longer needing the protections of PURPA.

Robert A. Olson is a partner in the law firm of Brown, Olson & Gould P.C. which maintains a nationwide practice in energy law, public utility law and related commercial transactions. He can be reached at:

Brown, Olson & Gould, PC
2 Delta Drive, Suite 301
Concord, NH 03301 | (603) 225-9716

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