FERC Orders Interconnections for Third-Party QF Sales

Looking to ensure that the maximum amount of qualifying facility (QF) power is available to the California energy market this summer, FERC last week ruled that when QFs in the state sell excess power or make sales to third parties under court authorization, they should be allowed to request interconnection and transmission service from utilities in California. The Commission proposed ordering California utilities to provide interconnections to state QFs under a key section of the Federal Power Act.

The Commission's action last Wednesday comes in response to motions for emergency relief filed by Ridgewood Power LLC and the California Cogeneration Council, both of which represent the interests of QFs in California. In their motions for emergency relief, Ridgewood and California Cogeneration assert that previous QF-related waivers granted by FERC have not increased supply in California by a single megawatt and allege that this is largely due to the actions of California's utilities.

FERC has previously granted temporary waiver of the technical regulations relating to QF status so as to increase generation supply for the California markets by allowing California QFs to enter into bilateral contracts for the sale of excess power. The Commission, in a December order, noted that an additional 1,000 MW could be made available by this action. In March, FERC extended the QF-related waiver through Dec. 31, 2001 and, last week in a concurrent order, extended the waivers to April 30, 2002.

In their motions for emergency relief, Ridgewood and California Cogeneration propose remedies that they say will allow QF capacity that has historically been sold to California's utilities to continue being sold, while also increasing the generation supply for the California markets by enabling sales of excess QF power. Ridgewood, for example, proposes that FERC issue a declaration stating that to the extent that any utility has failed to pay for power production, the QF is free to sell 100% of its output to a third party at negotiated rates. Among California Cogeneration's many proposals, it floats the idea of FERC issuing an order granting relief under Section 210 of the Federal Power Act by requiring interconnections and by requiring California utilities to cease their denial of interconnection, transmission and related services to California QFs under existing agreements.

In its order, FERC granted in part and denied in part the relief requested by Ridgewood and California Cogeneration. The Commission said that it would defer action on the issue of whether, for any QF that has not been fully paid by a California utility for past deliveries of power, FERC should allow that QF to sell 100% of its power to third parties at negotiated rates under bilateral agreements. The Commission said it would address this issue in a future order to the extent that these matters are not otherwise resolved.

FERC noted in the order that sales of excess QF power have not materialized as expected. As a result, the Commission believes that it must take action to enable QFs in California to make third party sales of excess power at negotiated rates. In this regard, FERC noted that pursuant to waiver orders, sales of excess QF power may take place outside the context of pricing provisions of existing QF contracts and may be at negotiated rates, as long as that power is sold in California. Moreover, if a QF enters into a third party contract to make sales of excess power, California utilities must provide interconnection service under their existing interconnection agreements, FERC ruled. Also, the Commission emphasized that a QF that sells excess power to third party purchasers has the right to request transmission service and the appropriate public utilities have the obligation to provide it under FERC's Order 888. FERC also said that any QF in the Western Systems Coordinating Council (WSCC) may sell excess power to third party purchasers within the WSCC.

The Commission emphasized that the action it is taking does not modify or abrogate existing contracts. Whether or not the contract between a QF and its utility-purchaser has been breached by either the QF or the purchasing utility, as well as what the appropriate remedies may be and whether any sales to third party purchasers serve to mitigate damages, are all issues for a state court to resolve, the Commission said. FERC also emphasized that its actions do not affect the QF status of any facility that makes third party sales in any way.

So as to avoid any uncertainty and to assure that interconnection services are provided, FERC also proposed to order under section 210(d) of the Federal Power Act that electric utilities in California immediately provide interconnection service to allow for sales of excess QF power to third party purchasers or sales of QF power that are authorized by a court of competent jurisdiction. FERC gave the California utilities and QFs five days from the date of the issuance of its proposed order to negotiate the rates, terms and conditions of the interconnections ordered by the Commission. FERC also required that on the fifth day after the order's issuance, the California QFs are to make a final offer as to the proposed interconnection agreement reflecting all issues upon which the parties have agreed and detailing the rationale for any final positions on issues that the parties have not agreed upon.

In taking action related to California QFs, FERC appears to have discounted the pleadings of California Gov. Gray Davis. Davis, in a letter sent to FERC Chairman Curt Hebert May 15, asked that the Commission hold off on any QF-related rulings as the state continues to grapple with its ongoing energy woes. "I would ask that the Commission stay its hand on any QF-related matter while the State of California addresses these important issues," Davis wrote. "We are doing everything within our power in the State of California to increase our energy supply, even in the face of a dysfunctional wholesale electricity market. It would be extremely unfortunate if actions by federal regulators were to thwart our progress."

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