The Energy Policy Act of 2005: Purpa Reform, the Amendments and Their Implications

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I. INTRODUCTION

The Energy Policy Act of 2005 (EPAct 2005)1 introduced sweeping changes to nearly every sector of the energy industry, including the electricity sector. One of the more significant provisions of EPAct 2005 is the amendment of the Public Utility Regulatory Policies Act of 1978 (PURPA or the Act).2 Enacted during the Carter administration as one of five major energy bills consolidated into "the National Energy Act," PURPA sought to promote energy efficiency and encourage the use of alternative fuels to lessen the nation's dependence on foreign oil.3

This article addresses one of the main aspects of PURPA, codified at section 210 of the Act, which, together with the implementing regulations promulgated by the Federal Energy Regulatory Commission (the FERC or the Commission), established a class of generators known as "qualifying facilities" (QFs) and provided them certain benefits and exemptions in order to encourage their development. Although each of the other components of the National Energy Act has been repealed, and PURPA section 210 has been the subject of repeal efforts,4 PURPA continues in effect as amended by EPAct 2005. This article describes the statutory and regulatory framework established under section 210 of PURPA and the FERC's implementing regulations, as well as the changes to that framework effected by the provisions of EPAct 2005 and regulations recently issued by the Commission implementing some of those provisions. This article also examines potential implications of PURPA reforms initiated by EPAct 2005.

II. BACKGROUND AND HISTORY

A. The Public Utility Regulatory Policies Act of 1978

The National Energy Act, including PURPA, embodied the Carter administration's response to the energy crises of the 1970s, most notably the Middle East oil embargo of 1973-74 and a second oil "shock" in 1977.5 Following those events, the administration and Congress sought to create a statutory framework to facilitate the diversification of America's energy supplies and to reduce the nation's dependence on imported oil, among other objectives. Congress intended PURPA to foster energy efficiency in an environmentally friendly manner by establishing incentives for the development of cogeneration facilities and small-scale renewable power projects.6 PURPA's incentives included the creation of markets for the power produced by these facilities and the exemption of the facilities from most state and federal utility regulation.

1. Qualifying Facilities

PURPA and the Commission's implementing regulations established the standards for the certification of a cogeneration facility or small power production facility as a "qualifying facility" entitled to the incentives and exemptions under the Act. The standards for QF certification cover the types and performance of facilities eligible for certification, as well as limitations on their ownership by electric utilities and electric utility holding companies. Although EPAct 2005 substantially modifies or eliminates the original standards developed by the FERC for QF status, many of the original standards will continue to apply to existing QFs, and are therefore described in this section and in the following section.7

Facility-Related Conditions. PURPA delegated to the FERC responsibility to develop rules for the eligibility for QF status of small power production facilities and cogeneration facilities.8 Under the FERC's regulations in effect on August 8, 2005, when EPAct 2005 became law (the FERC's original QF regulations), a small power production facility was "qualifying" if it satisfied the QF ownership requirements, described in the next section, and if (1) its primary energy source (i.e., at least 75% of its energy input) was from biomass, waste, renewable resources, geothermal resources, or any combination of the foregoing;9 and (2) its total net power production capacity, together with any other facilities at the same site, was not greater than 80 megawatts10 or it was an "eligible solar, wind, waste or geothermal facility" of any size. …