New Entrants in Electric Generation in the Tennessee Valley

43rd Annual Environmental Show of the South

Gatlinburg, Tennessee

April 30, 2014

PURPA Background

Jim Rossi Vanderbilt University Law School

Public Utility Regulatory Policies Act of 1978 (“PURPA”)

• Adopted in the wake of 1970’s world oil crisis. • General purposes of promoting conservation

and efficiency in electric power. • Spawned introduction of competition into

interstate electric power markets. • Introduced significant incentives for

development of power projects by non-utility generators.

Qualifying Facilities (“QF”)

Section 210 of PURPA requires electric utilities to interconnect with and purchase power from two basic forms of QFs:

Small Power Production Facilities • use biomass, waste or renewable resources - including

solar, wind and water - to produce electric energy • up to 80 MW in size

Cogenerators • produce electric energy and steam or other forms of

useful energy (like heat) for industrial, commercial or cooling purposes

Primary Benefits for QFs

• Right to be served by incumbent utility – Interconnection, backup power, etc.

• Right to sell back power to incumbent utility at “avoided cost rates” – “Must purchase” obligation applies to all electric utilities,

including IOUs, municipals, rural cooperatives, PUDs, water districts, the TVA, and each federal power marketing authority, unless FERC grants a waiver.

– Exempts facility from other federal and state regulation of rates.

– Significance is that this can lead to a power purchase agreement.

Avoided Cost Rates

• FERC requires that host utilities must purchase at rates equal to the host utility’s full avoided cost: “the incremental cost to the electric utility of electric energy or capacity or both which, BUT FOR the purchase from the QF or QFs, such utility would generate itself or purchase from another source” (CFR § 292.101(b)(6)).

• Basic idea is to make utility indifferent between purchasing QF power or producing energy itself.

• Common avoided cost approaches adopted by states: – cost of host utility’s next planned unit – cost of natural gas peaker providing next unit of energy

Effects on Power Generation (2011 data)

PURPA’s Future

• 2005 Amendments

• PURPA Preemption of Feed-In Tariffs

• Avoided Costs for Renewables

2005 Amendments

• EPAct 2005 provided a new section (210(m)) that requires FERC to excuse host utilities from entering into new purchase or contract obligations if there is access to a sufficiently competitive market for a QF to sell its power.

• FERC Order 688 created a rebuttable presumption that QFs of more than 20 MW have non-discriminatory access to at least one of these competitive markets, but so far this presumption is limited to areas with multi-utility Regional Transmission Organizations that provide for open access.

Feed-In Tariffs

• In 2010 FERC ruled that Feed-In Tariff programs – guaranteed purchase prices for electric power from renewable sources – must comply with PURPA’s avoided cost criteria.

• State or local Feed-In Tariff rates may not exceed avoided costs.

• Problem: Until this ruling, most avoided cost rates were not high enough to encourage renewable power purchase agreements.

Avoided Costs: The New Era

• Where a state requires a utility to procure a certain percentage of energy from generators with certain characteristics, FERC has stated that those types of generators “constitute the sources that are relevant to the determination of the utility’s avoided cost for that procurement requirement.”

• A multi-tiered resource approach for determining avoided costs – setting different levels of avoided costs and thus different avoided cost rate caps for different types of resources, competitive bidding for different types of resources, or environmental adders – complies with PURPA.

• Voluntary utility programs are not subject to PURPA’s avoided cost mandate.

TVA and PURPA

• TVA is clearly subject to PURPA’s requirements. • Unlike most IOUs (which are subject to state avoided

cost policies) TVA sets avoided costs itself (subject to PURPA).

• Given its market power in the state of TN and lack of competition, TVA is unlikely to be declared exempt from PURPA “must purchase” obligations under 210(m).

• Despite these strong federal incentives, non-utility power projects in TN appear weak in comparison to other states.

Overview of Power Generation, Transmission & Distribution in Tennessee

Greg Young

Overview of Power Generation, Transmission & Distribution in Tennessee • Tennessee is not like other states with privately

held public utilities. • TVA

– 16 U.S.C. 831 et. seq. • Fence

– 16 U.S.C. 831n-4(a) • Anti-cherry picking

– 16 U.S.C. 824k(j)

Overview of Power Generation, Transmission & Distribution in Tennessee • TVA sells most power at wholesale rates to

municipalities or electric membership cooperatives.

Overview of Power Generation, Transmission & Distribution in Tennessee • TVA also sells some power directly to large federal facilities and

large industrial customers at retail rates. – 51 customers – producers of primary metals, chemicals, industrial gases,

forest products and nuclear fuel for power plants.

• Finally, TVA sells a very small amount of power to 12 surrounding utilities on interchange market.

Overview of Power Generation, Transmission & Distribution in Tennessee

• What about the TRA? TRA regulates “public utilities.” – T.C.A. 65-4-101 (6)(a) – broad definition

• 11 categories of exempt operations and activities. • Specifically excludes TVA, municipalities and coops.

• Only 4 electric public utilities serving approximately 47,000 customers. All but a handful of these customers are in the Kingsport area.

• Lack of highly developed electric utility regulatory framework and case law.

Overview of Power Generation, Transmission & Distribution in Tennessee • TVA is authorized to regulate municipal and

electric cooperatives. (16 U.S.C. 831i) • Regulation primarily via wholesale power

contracts. • Direct sales also conducted pursuant to

contracts. • Provisions in contracts protect TVA’s generation

and transmission interests. • TVA also has published guidelines re:

interconnection and dispersed power production.

Overview of Power Generation, Transmission & Distribution in Tennessee • Summary – TVA domination of the electric power market in

Tennessee makes independent power production rare, but it can happen via “qualified facility” cogeneration projects.

• There are currently 4 QF cogeneration projects in the TVA Region. These are located in Alabama, Kentucky, Mississippi, and Tennessee.

Qualified Facilities (“QF”) in the Tennessee Valley

Ken Gish

QFs in the Tennessee Valley

• QFs in the Tennessee Valley governed by TVA’s “Dispersed Power Production Guidelines.”

• Guidelines establish the prices TVA will pay QFs for power. – Prices vary from 2.914 ¢/kWh (small providers/super

peak) to 2.192 ¢/kWh (large provider/super off-peak). • QF must enter into contract with TVA.

– If via a “Connecting Electric System,” must make arrangements with it to get power to TVA.

• Security provisions for failure to deliver.

QFs in the Tennessee Valley

• Availability of Power FROM TVA – TVA will (is required to) provide standby power to QFs

connected to its system – Must be via contract – At Standby Power Rate

• Includes both demand and energy (hour ahead RTP) charges

– Must contract for maximum expected amount • No obligation to supply power in excess of

contract amount

QFs in the Tennessee Valley

• QFs right to sell may be subject to temporary curtailment.

• QF responsible for: – Interconnection arrangements – System impact mitigation – Costs of interconnection – Costs of metering – Compliance with all safety, system protection, and

system operating guidelines

Can You Sell the Power???

• Regulation of sales from QFs to direct customers primarily a matter of state law.

• Divergent ownership of power generation and steam host does not preclude being a QF.

• “Integrated Facility” – Common ownership of generation facility – “Close proximity” of two entities – Use of private transmission lines – Long-standing supplier-customer relationship

• Not an unrelated industrial park.

TRA Analysis

• TRA jurisdiction – whether a qualified facility could be regulated as a public utility?

• Not much legal guidance in Tennessee; other states vary across the spectrum.

• Would power be held out to the general public? • TRA is focused on consumer protection. • Some debate regarding a solar farm that is

trying to connect to a nearby industrial plant. • No formal opinion requests from TRA so far.

2013 Tennessee Legislation

• Tenn. Code Ann. § 65-5-103(d)(3)(A) allows a public utility to request and the TRA to authorize the recovery of “operational expenses, capital costs or both related to the expansion of infrastructure for the purposes of economic development . . . .”

• Such may include the infrastructure and equipment for “combined heat and power installations in industrial and commercial sites.”

2013 Tennessee Legislation

• Tenn. Code Ann. § 67-4-2004(9) was amended to expand the definition of a “certified green energy production facility.” It includes facilities that utilize natural gas in a “combined heat and power configuration . . . for production of heat and electricity for consumption onsite.”

• Such facilities are eligible to apply for a credit of 100% of the sales and use taxes paid for the machinery and equipment used to produce electricity. (Tenn. Code Ann. § 67-6-346.)

• Instead of taking the credit, taxpayers may apply for a refund of taxes paid or apply for authority to make tax-exempt purchases of machinery and equipment.

Contact Information • Jim Rossi – Vanderbilt University

(615) 343-6620 j.rossi@vanderbilt.edu

• Greg Young – Stites & Harbison, PLLC (615) 782-2264 greg.young@stites.com

• Ken Gish – Stites & Harbison, PLLC

(859) 226-2293 kgish@stites.com

• Molly Cripps – TDEC Office of Energy Programs (615) 741-2994 molly.cripps@tn.gov