By David E. Pettit

Since its decision in American Ref-Fuel Company in 2003, the Federal Energy Regulatory Commission (“FERC”) has taken the view that avoided cost power purchase agreements between a qualifying facility (“QF”) and a utility buyer under the Public Utility Regulatory Policies Act of 1978 (“PURPA”), often referred to as a “PURPA Put Contract,” do not also convey renewable energy certificates (“RECs”) to the utility buyer unless the contract expressly states otherwise.  RECs are state-created and state-issued instruments certifying that electric energy was generated pursuant to certain requirements, such as a renewable portfolio standard, which generally requires that a certain percentage of a load-serving utility’s energy mix comes from renewable energy resources.  RECs can either be bundled with the underlying renewable energy or unbundled and sold independently of the underlying renewable energy, and in two recent orders, FERC has provided further clarification and guidance regarding the ownership of RECs associated with PURPA Put Contracts and its ratemaking authority over REC sales unbundled from the sale of associated renewable energy and capacity under the Federal Power Act (“FPA”). 

In Morgantown Energy Associates, two owners of QFs petitioned FERC to enforce PURPA in response to an order issued by the Public Service Commission of West Virginia (“WV PSC”), which found that under West Virginia law a utility buyer owns the RECs associated with purchases of electric energy and capacity from a QF pursuant to a PURPA Put Contract  even if the contract  is silent as to REC ownership.  The WV PSC offered a number of reasons for its finding, including the justification that the avoided cost rate paid by a utility buyer under a PURPA Put Contract is sufficient compensation such that “no additional consideration is needed for the generation of RECs.”  The owners of the QFs then filed a petition with FERC alleging that the WV PSC order violated PURPA by incorrectly holding that the avoided cost rate is sufficient to transfer RECs to the utility buyer even when their PURPA Put Contracts were silent on the issue. 

While FERC declined to initiate an enforcement action under PURPA in Morgantown Energy Associates, it nonetheless found that the WV PSC’s reasoning regarding avoided cost rates under PURPA was “inconsistent with the requirements of PURPA.”  Referencing its 2003 order in American Ref-Fuel, FERC stated that a utility buyer under a PURPA Put Contract is not required to pay more than the avoided cost of generating the power itself or of purchasing the power from another source and that avoided cost rates are not intended to compensate a QF for more than capacity and energy.  In other words, a PURPA Put Contract that is silent as to REC ownership does automatically transfer RECs to the utility buyer as in a bundled sale of renewable energy and capacity and associated RECs—the QF may sell the RECs separately to the utility buyer or some other buyer on an unbundled basis.     

In another recent order regarding pro forma bilateral transactional agreements used to buy and sell bulk power in the western U.S., FERC also addressed the question of whether it has ratemaking jurisdiction under sections 201, 205 and 206 of the FPA.  With its submission of a new service schedule allowing for RECs to be sold on a bundled or unbundled basis, WSPP Inc., relying in part on American Ref-Fuel Company, also requested that FERC confirm that unbundled REC transactions are not subject to FERC’s ratemaking jurisdiction because such transactions do not include the wholesale sale or purchase of bulk power.”  FERC agreed, holding that unbundled REC transactions fall outside its ratemaking jurisdiction because they do not “affect wholesale electricity rates and the charge for the unbundled REC is not a charge in connection with a wholesale of electricity.”  At the same time, FERC stated that bundled REC transactions are jurisdictional because the sale of RECs are part of a jurisdictional sale of wholesale energy.  Moreover,  FERC made clear that parties cannot simply separate a bundled REC transaction into separate contracts for the sale of energy and the sale of RECs to avoid FERC’s jurisdiction, stating that “where multiple instruments, executed contemporaneously or at different times, pertain to the same transaction, they will be read together, even if they do not expressly refer to each other.”