FERC Sides with TX QFs on Utility Purchase Obligation

Responding to concerns voiced by several Texas qualifying facilities (QFs), FERC last week affirmed that any company that meets the definition of electric utility under the Public Utility Regulatory Policies Act of 1978 (PURPA) following restructuring in the Lone Star state will continue to have an obligation to purchase power from QFs.

FERC's decision comes in response to a petition for a declaratory order filed at the Commission by several Texas QFs. The QFs note that several Texas utilities, since the passage of legislation in the state in 1999, have either restructured or proposed to restructure. Under the legislation, Senate Bill 7, Texas electric utilities are required to restructure themselves into holding companies by Jan.1, 2002. Each holding company, in turn, will have three required subsidiary companies -- a generating company, a transmission and distribution company and a retail electric service company.

According to the Texas QFs, utilities in the state have informed them that after Dec.31, 2001, the Texas Independent System Operator will provide a sufficient market for QF output in the state and that they will not purchase QF power. The Texas QFs asked FERC to declare that under PURPA the restructured utility holding company systems in Texas continue to satisfy the definition of electric utility and continue to have an obligation to make purchases from the QFs.

In response, the Public Utility Commission of Texas filed a notice of intervention in the QF proceeding and requested that FERC waive the obligation of Texas electric utilities under PURPA to purchase from QFs. The Texas PUC argued that the PURPA purchase obligation is unnecessary following the state's restructuring and will impede the functioning of a competitive market.

FERC, however, wasn't convinced by the points made by the Texas PUC and agreed to grant the request for a declaratory order made by the Texas QFs. FERC pointed out that Texas electric utilities acknowledge that entities that meet the PURPA definition of "electric utilities" will continue to have an obligation to purchase from QFs under PURPA following implementation of the Texas restructuring legislation. According to FERC, the state's utilities also admit that of the three types of companies formed from the existing electric utilities in Texas under the restructuring plan, both the generating company and the retail electric service company will meet the PURPA definition of electric utility after restructuring. The Commission therefore said it would grant the request for a declaratory order made by the Texas QFs, to the extent that the QFs are requesting that FERC state that any company that meets the PURPA definition of electric utility following restructuring has a purchase obligation.

In contrast, FERC denied the Texas PUC's request for waiver. The Commission said that its review of the state PUC's petition does not convince it that a sufficient market for QF power will exist after restructuring such that there is no longer a need to implement PURPA in Texas. In addition, FERC noted that its review of the Texas PUC's petition indicates that the state commission's major concern is with an avoided cost rate in the face of retail competition. The Texas PUC suggests that its current, administratively determined avoided costs, will not be accurate and may inhibit the free market. FERC said that it shares the state commission's concern that the mandatory QF purchase obligation under PURPA, in conjunction with administratively avoided costs rates, may be inconsistent with the operation of an effective competitive market. However, the Commission said that under these circumstances, it believes that the Texas PUC has sufficient flexibility to adopt a more market-oriented method of determining avoided costs that would be both consistent with PURPA and its retail competition program.

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