March 2005
Debate Rages in the Court Over Ownership of RECs
by Robert Olson  --   Brown, Olson and Wilson, P.C.
(originally published by PMA OnLine Magazine: 2005/05/06)

Whether qualifying facilities (“QFs”) or purchasing utilities own the renewable energy certificates (“RECs”) associated with renewable QF generation is the subject of a number of cases currently winding their way through the court system. One such case is Xcel Energy Services Inc. v. Federal Energy Regulatory Commission, which is filed in the United States Court of Appeals for the District of Columbia Circuit. Briefing is complete, but the appeals court has not yet issued an opinion.

This case is an appeal of FERC’s decision in American Ref-Fuel Co., 105 FERC ¶61,004 (Oct. 1, 2003), reh’g denied, 107 FERC ¶ 61,016 (Apr. 15. 2004). In American Ref-Fuel Co., a number of QFs petitioned FERC for a declaration that contracts entered into under the Public Utility Regulatory Policies Act of 1978 (“PURPA”) do not inherently transfer RECs to utilities that purchase QF electricity and capacity. FERC explained that PURPA is silent with regard to RECs and that RECs are creations of state law. FERC ruled that RECs are not transferred from QFs to purchasing utilities under PURPA contracts absent a contract provision to the contrary or some independent basis under state law.

Xcel Energy appealed FERC’s ruling on the basis that FERC violated its own rule that the price a utility must pay for QF energy may not exceed the purchasing utility’s avoided costs. According to Xcel Energy, FERC did so by recognizing that energy and the renewable attributes of generation are separate products and by requiring utilities to purchase both. In summary form, Xcel Energy argued that FERC was mistaken in determining that RECs and electricity are separate products because a utility’s obligation to purchase QF power arises from the renewable and environmental attributes of QF generation; avoided cost rates, therefore, compensate QFs for a QF’s renewable attributes, and FERC precedent prohibits states from requiring utilities to pay an avoided cost rate plus an environmental adder.

FERC argued that the appeals court has no jurisdiction to review its order and that, assuming the court has jurisdiction, its order was reasonable. According to FERC, its order was reasonable because PURPA only requires a utility to purchase a QF’s energy and capacity at the utility’s avoided cost. Although PURPA regulations specify the factors that states must consider in setting a utility’s avoided costs, the environmental attributes of QFs are not among those specified factors. According to FERC, the environmental attributes of a QF are relevant only to a QF’s initial qualification as a QF but have nothing to do with a utility’s avoided costs. According to FERC, neither PURPA nor FERC’s interpretation of PURPA requires utilities to make payments in excess of avoided costs by requiring utilities to purchase and pay separately for RECs. On the contrary, state law controls the creation and transference of RECs. Consequently, state law, not PURPA, determines whether RECs and electricity are separate commodities and whether the purchase of both would result in an aggregate payment that exceeds a utility’s avoided costs.

The California Public Utilities Commission filed a brief in which it agreed that the court of appeals lacked jurisdiction to review FERC’s order. The California commission also agreed with FERC that state law controls whether RECs are conveyed to the purchasing utility under a PURPA contract. American Ref-Fuel Company and a number of other interveners filed a joint brief generally supporting FERC’s order. However, American Ref-Fuels argued that FERC’s appeal argument that REC ownership must be decided under state law went too far because FERC’s order explicitly decided that PURPA contracts do not convey RECs to purchasing utilities, and FERC’s order did not leave that issue open for further determination under state law. According to American Ref-Fuels, avoided cost rates are squarely controlled by PURPA and FERC’s rules, and FERC decided that PURPA contracts and the avoided cost rates paid there under are insufficient to convey RECs to a purchasing utility.

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

rolson@bowlaw.com | (603) 225-9716