107 FERC ¶ 61,016

UNITED STATES OF AMERICA

FEDERAL ENERGY REGU LATORY COMMISSION

Before Commissioners: Pat Wood, III, Chairman; Nora Mead Brownell, Joseph T. Kelliher, and Suedeen G. Kelly.

American Ref-Fuel Company, Docket No. EL03-133-001 Covanta Energy Group, Montenay Power Corporation, and Wheelabrator Technologies, Inc.

ORDER DENYING REHEARING

(Issued April 15, 2004)

1. In this order, we deny rehearing of th e Commission’s October 1, 2003 Order in this proceeding, American Ref-Fuel Company, et al. , 105 FERC ¶ 61,004 (2003) (October 1 Order). In the October 1 Order, the Commission interpreted the Commission’s regulations implementing secti on 210 of the Public Utility Regulatory Policies Act of 1978 (PURPA), 16 U.S.C. § 824a-3 (2000), see 18 C.F.R. Part 292 (2003), by declaring that contracts for the sa le of qualifying facility (QF) capacity and energy entered into pursuant to PURPA do not convey renewable energy credits or similar tradeable certificates (R ECs) to the purchasing utility (absent express provision in a contract to the contrary). The Commission further declared that while a State may decide that a sale of power at wholesale au tomatically transfers ow nership of the Statecreated RECs, that requirement must find its authority in State law, not PURPA.

Background

2. RECs were created in recent years by State programs typically designed to promote increased reliance on renewable en ergy resources. These State programs typically are premised on prom oting policy goals such as improved air and water quality, reduction of greenhouse gas emissions, broader fuel diversity, enhanc ed energy security, and hedging against the pri ce volatility of fossil fuels.

3. According to the petition, such programs had been adopted in 13 states as of the date of the petition. The programs require reta il sellers of electricit y to include in their resource portfolios a certain amount of electricity from renewable energy resources. ThisDoc k et No. EL03- 133- 001 - 2 -

obligation can be satisfied by owning renewable energy facilities, by purchasing power from such facilities, or by pu rchasing tradeable certificates, such as RECs, that correspond to a certain amount of renewable energy genera ted by a third party. Two States have implemented REC trading progra ms. Some Independent System Operators and Regional Transmission Organizations are also developing markets for REC trading.

4. The development of these programs and tr ading markets for RECs has given rise to disputes between QFs and their purchasing utilities. Thes e disputes have focused on the underlying PURPA purchase obligation; that is, whether the existence of a long-term contract entered into pursuant to a PURPA purchase obligation determines ownership of the RECs, though the long-term contract may be silent.

October 1 Order

5. On June 13, 2003, American Ref-Fue l Company, Covanta Energy Group, Montenay Power Corporation, and Wheelabrator Te chnologies Inc. (Petitioners) filed a petition for declaratory order seeking an inte rpretation of the Commission’s avoided costs rules under PURPA. Specifically, Petitioners so ught an order declaring that avoided cost contracts entered into pursuant to PURPA, ab sent express provisions to the contrary, do not inherently convey to th e purchasing utility any RECs. They argued that the power purchase price that the utility pa ys under such a contract co mpensates a QF only for the energy and capacity produced by that facility and not for any environmental attributes associated with the facility.

6. In the October 1 Order the Commission gran ted the petition for declaratory order:

to the extent that the petition asks that the Commission declare that the Commission’s avoided cost regulations did not contemplate the existence

of RECs and that the avoided cost rate s for capacity and energy sold under contracts entered into pursuant to PU RPA do not convey the RECs, in the absence of an express contractual provision.[ 1 ]

1 October 1 Order at P 18, 24; accord id . at P 3. Our reference to an “express contractual provision” here and elsewhere in the October 1 Order seems to have been misunderstood. We did not mean to sugges t that the parties to a PURPA contract, by contract, could undo the requirements of State la w in this regard. All we intended by this language was to indicate that a PURPA contr act did not inherently convey any RECs, and correspondingly that, assuming State law did not provide to the contrary, the QF by contract could separately convey the RECs.Doc k et No. EL03- 133- 001 - 3 -

The Commission continued that, while a State may decide that a sale of power at wholesale automatically transf ers ownership of the State-cr eated RECs, that requirement must find its authority in State law. 2

Requests for Rehearing

7. Timely requests for rehearing were filed by the Maine Public Utilities Commission (Maine Commission); the Edison El ectric Institute; Southern California Edison Company and Pacific Ga s and Electric Company, join tly; Jersey Central Power & Light Company, Metropolitan Edison Comp any and Pennsylvania Electric Company (collectively, the FirstEnergy Companies); Public Service Electric and Gas Company (PSE&G); Northeast Utilities Service Company on behalf of Connecticut Light and Power Company, Western Ma ssachusetts Electric Company, and Public Service Company of New Hampshire (collectively the NU Operating Companies) and United Illuminating Company; and Xcel Energy Servi ces, Inc. All urge that the Commission

should have either dismissed the petition for declaratory order, or, if it did not dismiss the petition, the Commission should have ruled that PURPA contracts are bundled total output contracts that include the renewable at tributes and thus RE Cs convey with the electricity sold under the contracts.

8. Petitioners filed an answer to the requests for rehearing.

Discussion

9. Rule 713(d) of the Commission’s Rules of Practice and Procedure provides that the Commission will not permit answer to request s for rehearing. 18 C.F.R. § 385.713 (d) (2003). We will accordingl y reject Petitioners’ answer to the requests for rehearing.

10. Nothing raised on rehearing warrants changing our decision in the October 1 Order and, accordingly, we will deny rehearing.

11. The entities seeking rehearing, other than the Maine Commission, are (or represent) utilities that purchase electric ity from QFs. They argue the Commission should have dismissed the petition and left th e issue of whether a contract conveys RECs to the appropriate State court. 3 Alternatively, just as th ey argued in response to the

2 Id . at P 24.

3 While those seeking rehearing argue that, once the Commi ssion acknowledged

that RECs are creatures of the States a nd exist outside the confines of PURPA, see id . at P 23-24, dismissal of the pe tition was the only action the Co mmission could take in this case, we do not agree. In this regard we no te that those seeking rehearing also argue on (continued...)Doc k et No. EL03- 133- 001 - 4 -

original petition, all seek a ru ling that avoided cost rates paid under PURPA pay not just for capacity and energy from a QF , but also any associated RECs. All oppose having this

Commission rule that contracts for the sale of QF capacity and energy entered into pursuant to PURPA convey only the capacity and energy, and do not convey RECs, to the purchasing utility (absent express provisi on in the contracts to the contrary).

12. We disagree. As we stated in the Octobe r 1 Order, “States, in creating RECs, have the power to determine who owns the REC in the initial instance, and how they may be sold or traded; it is not an issue controlled by PURPA.” 4 However, PURPA does

determine the rate which electric utilities mu st offer to purchase electric energy from QFs.

13. As we explained in the October 1 Order, 5 section 210(a) of PURPA requires the Commission to prescribe rules imposing on electr ic utilities the obligation to offer to purchase electric energy from QFs. 6 The Commission implemented the purchase obligation in PURPA in secti on 292.303 of its regulations, 18 C.F.R. § 292.303 (2003), which provides:

Each electric utility shall pur chase, in accordance with § 292.304, any energy and capacity which is made available from a qualifying facility . . . .

Section 292.304, in turn, requires that rate s for purchases shall: (1) be just and

reasonable to the electric customer of the elect ric utility and in the public interest; and (2) not discriminate against qualifying cogeneration and smal l power production

facilities. 18 C.F.R. § 292.304(a)(1) (2003). The regulation further provides that nothing

rehearing, as they did in re sponse to the petition, that RE Cs automatically convey under

PURPA avoided cost contract s to the power-purchasing u tilities. They ask that the Commission affirmatively rule that, under PURPA, RECs are conveyed to the purchasing utilities. They, in essence, argue that the Commission may properly address the substance of the petition, as long as the Commi ssion rules in their fa vor. They implicitly acknowledge that the Commission can properly rule on the substance of the petition,

rather than dismiss it. Th eir quarrel is thus with ho w the Commission ruled on the substance of the petition.

4 Id . at P 23. Indeed, insofar as RECs are State-created, different States can treat RECs differently.

5 Id . at P 19-21.

6 In PURPA the QFs are referred to as qualifying small power production facilities and as qualifying c ogeneration facilities.Doc k et No. EL03- 133- 001 - 5 -

in the regulation requires any electric utility to pay more than the avoided costs for purchases. 18 C.F.R. § 292. 304(a)(2) (2003). “Avo ided costs” is defined as “the

incremental costs to an electric utility of electric energy or ca pacity or both which, but for the purchase from the qualifying facility or qualifying facilities, such utility would generate itself or purchase from another sour ce.” 18 C.F.R. § 292.101(b)(6) (2003).

14. Section 292.304 sets forth what factors are to be considered in determining

avoided costs. See 18 C.F.R. § 292.304(e) (2003). The factors to be considered include:

(1) the utility’s system cost data;

(2) the availability of capacity or energy from a QF during the system daily and season peak periods;

(3) the relationship of the availability of energy or capacity from the QF to the ability of the electric u tility to avoid costs; and

(4) the costs or saving resulting from va riations in line losses from those

that would have existed in the absence of purchases from the QF.

15. As the Commission stated in its October 1 Order, 7 the factor that is not mentioned in the Commission’s regulations is the enviro nmental attributes of the QF selling to the utility. This is because, under PURPA and our implementing regulations, avoided costs were intended to put the utility in the same position when purchasing QF capacity and energy as if the utility either had generated the energy itself or purchased the energy from another source. In this regard, the avoided co st that a utility pays a QF does not depend on the type of QF, i.e. , whether it is a fossil-fuel-fi red cogeneration facility or a renewable-energy-fired small power producti on facility. As those seeking rehearing recognize, only renewable energy small pow er production facilitie s have renewable attributes, yet the energy from a cogeneration f acility is priced the same as the energy from a small power production f acility. Both are priced ba sed on a purchasing utility’s

avoided costs. The Commission thus reasonab ly concluded that avoided cost rates are not intended to compensate the QF for more than capacity and energy. 8

7 Id . at P 22.

8 Id

.Doc k et No. EL03- 133- 001 - 6 -

16. If avoided cost rates are not intended to compensate a QF for more than capacity and energy, it follows that other attributes asso ciated with the facilit ies are separate from, and may be sold separately from, the capacity and energy. 9 Indeed, states in creating

RECs that are unbundled and tradeable have re cognized this. The ve ry fact that RECs may be unbundled and may be traded under State law indicates that the environmental attributes do not inherently convey pursuant to an avoided cost contract to the purchasing utility.

17. In sum, therefore, we will deny rehearing of our October 1 Order.

The Commission orders:

The requests for rehearing are hereby denied.

By the Commission.

( S E A L )

Magalie R. Salas, Secretary.

9 In this regard, we note that cogenera tion facilities, to receive QF status, are required to produce both electricity and useful thermal output. See 16 U.S.C. §§ 796 (18)(A)(i)-(ii), (B) (2000); 18 C. F.R. §§ 292.202(c), 292.205 (2003). The thermal output that is a pre-requisite to a cogeneration fa cility’s achieving QF status is saleable separately from the capacity and ener gy of the cogeneration facility. See

, e.g. , Liquid Carbonics Industries Corp. v. FERC, 29 F. 3d 697, 700 (D.C. Cir. 1994) (purchase of thermal output by unaffiliated thermal host es tablishes arm’s-length market for thermal output); see also Brazos Electric Power Cooperative, In c. v. FERC, 205 F.3d 235, 237-38 (5 th Cir. 2000); Kamine/Besicorp Allegany L.P ., 63 FERC ¶ 61,320 at 63,157-59 (1993); Arroyo Energy Limited Partnership, 62 FERC ¶ 61,257 at 62,722-23, reh’g denied

, 63 FERC ¶ 61,198 at 62,545-46 (1993); Electrodyne Corp., 32 FERC ¶ 61,102 at 61,277- 79 (1985).

If the thermal output of a cogeneration QF is separately saleable, the renewable attributes of a small power production QF are similarly separate.UNITED STATES OF AMERICA

FEDERAL ENERGY REGU LATORY COMMISSION

American Ref-Fuel Company, Docket No. EL03-133-001 Covanta Energy Group, Montenay Power Corporation, and Wheelabrator Technologies Inc.

(Issued April 15, 2004)

Nora Mead BROWNELL, Commissioner dissenting :

1. As I stated in my prior dissent, I belie ve that once the Commission acknowledged that RECs are creations of the States, the only logical course was to dismiss the petition and leave the issue of ownership of RECs to be resolved in the appropriate state fora. Therefore, I would have granted rehearing.

____________________ Nora Mead Brownell