FERC Rules State Mandated Power Purchase Program Is Preempted by Federal Power Act

In 2018, the New Hampshire legislature enacted a law requiring electric distribution companies in the state to offer to purchase the net output of eligible biomass and waste facilities within their service territories at a rate based on the retail rate for default energy service. In turn, the rate for default energy service is determined through a competitive solicitation process.

Under that law, utilities can recover the difference between what they pay for electricity and the market clearing price of electricity in New England via a service charge applicable to all retail electric service customers. Although the goal of this legislation was to encourage development of eligible biomass and waste generating facilities in New Hampshire, the Federal Energy Regulatory Commission (FERC) recently ruled that the law is preempted by the Federal Power Act.

New England Ratepayers Association, 168 FERC ¶ 61,169 (2019).

FERC Applies Hughes

Citing Hughes v. Talen Energy Mktg., 136 S. Ct. 1288 (2016), FERC noted that a state-mandated program under which a generator was guaranteed a predetermined rate for any energy or capacity it sold into a regional power supply market through a “contract for differences” was preempted because it impermissibly set an interstate wholesale electricity rate. According to FERC, the New Hampshire law similarly “establishes a wholesale rate by requiring purchasing utilities to offer to purchase electricity from eligible facilities at a specific state-established rate.”

Because FERC believes the New Hampshire law “intrudes on the Commission’s exclusive jurisdiction over wholesale sales of electric energy in interstate commerce,” FERC concluded that the logic of the Hughes decision applied with equal force to the New Hampshire law.

The eligible biomass and waste facilities in New Hampshire were certified as Qualifying Facilities (QF) under the Public Utility Regulatory Policies Act of 1978 (PURPA).  FERC also concluded that the rate at which utilities in New Hampshire were required to offer to purchase electricity from such facilities was not permissible under PURPA.

FERC made this determination because the rate could, and in all likelihood would, exceed the maximum rate at which utilities could be required to purchase electricity from QFs under PURPA; i.e., the avoided cost rate of the purchasing utility.

Challenges for State Energy Programs

In recent years, various states have sought ways to reward generators that provide desirable benefits such as fuel diversity, electricity from low carbon-emission sources, and employment for state residents. However, as recognized in New England Ratepayers Association, such state efforts that affect the price of electricity may be directly preempted by the Federal Power Act.

The challenge to states and the preferred generators is to develop a mechanism to provide additional compensation to such generators that is politically acceptable but not perceived as establishing a rate for sale of energy and capacity for resale.

FERC Distinguishes Between State Energy Programs

In its order, FERC distinguished between the New Hampshire program and state programs to encourage development of specific types of generation facilities found to be permissible under the Federal Power Act. Among these programs are:

• A Connecticut program that required a state agency to solicit proposals for the supply of electricity from renewable energy resources. The Connecticut program was distinguished from the New Hampshire program because it did not establish a specific rate for any resulting electricity purchases.

• Various state programs to compensate operators of nuclear power plants for supplying electricity with zero carbon emissions. These programs were distinguished from the New Hampshire program because the payments to generators were for something other than energy and capacity sold in wholesale electricity markets.

Supporters Argue New Hampshire Law Does Not Affect Wholesale Rates; FERC Disagrees

It is generally recognized that FERC has authority to regulate sales of electricity for resale, but that it lacks jurisdiction over electricity purchases. Supporters of the New Hampshire law argued that it does not affect FERC’s authority over wholesale sales of electricity because eligible generators were not required to sell electricity to utilities at the specified rate, and the law does not compel the purchasing utilities to sell electricity into the ISO-New England market.

Proponents also argued that the law was an appropriate exercise of the state’s authority to regulate health and safety matters because of the fuel diversity and environmental benefits expected to be derived under the law. However, FERC ignored these arguments and did not otherwise offer suggestions of how New Hampshire might achieve its objectives.