A recent order issued by the Arizona Corporation Commission (ACC), the state’s public utilities commission, is expected to increase stability for renewable energy companies wanting to invest in Arizona. The December 2019 order from the ACC requires a minimum of 18-year terms for contracts between Arizona’s regulated utilities and qualifying facilities (QFs) over 100 kilowatts under the Public Utility Regulatory Policies Act of 1978 (PURPA).
QFs are those small, power-production facilities or cogeneration facilities (generating 80 megawatts or less), the primary energy source of which is renewable (solar, wind or hydro) biomass, waste or geothermal. Under PURPA, QFs have a right to be served by, and sell to, a host electric utility at the utility’s “avoided cost rate.” “[A]voided cost” is the “incremental cost to an electric utility of electric energy or capacity or both which, but for the purchase from the [QF], such utility would generate itself or purchase from another source.”
Prior to this ruling, there was not a mandated standard contract term for fixed-price contracts between regulated utilities and QFs. However, the Federal Energy Regulatory Commission (FERC), which promulgates the rules to implement PURPA, recently clarified that such contracts must be long enough to “allow QFs reasonable opportunities to attract capital from potential investors.”
The primary purpose of the enactment of PURPA was to reduce “the country’s dependence on foreign oil and to encourage the development of renewable energy technologies as alternatives to fossil fuel.” In October 2019, FERC issued a Notice of Proposed Rulemaking (NOPR) to modify and update existing PURPA rules so that they would be more in line with today’s energy industry. Some parties in the ACC PURPA proceeding argued that the ACC should delay issuing their order until the NOPR was finalized. However, the ACC decided to proceed based on the concerns that QF developers would not be able to take advantage of certain federal tax credits if the decision were not issued by the end of 2019, and there was too much uncertainty around when and if the NOPR would be finalized.
After hearing arguments from the various parties, the ACC ruled that an 18-year minimum contract term between regulated utilities and QFs in Arizona would comply with the PURPA requirement that such contracts be long enough to “allow QFs reasonable opportunities to attract capital from potential investors,” while at the same time align with the utilities’ Integrated Resource Planning Process. Under the ACC order, the three primary, investor-owned electric utilities in Arizona (Arizona Public Service Company, Tucson Electric Power Company, and UNS Electric, Inc.) are required to revise their QF tariffs to effect the following:
- Provide QFs with a contract term of no less than 18 years for QFs with a nameplate capacity over 100 kilowatts;
- Offer QFs contracts “that have business terms that are reasonably similar to other [power purchase agreements] that the utility has entered into previously”;
- Pay the QF the utility’s long-term avoided cost as established by the ACC’s methodology;
- Make their application and contracting procedures readily available to QFs; and
- Make all necessary interconnections with the QF to accomplish purchases or sales of energy and capacity.
In addition, these utilities must report all of the following relevant QF data every three years with, or as part of, the Integrated Resource Plan: (1) number of QF contracts entered into to date; (2) nameplate capacity for each interconnected QF to date, and (3) the avoided cost rate for each QF interconnected to date. The ACC made clear that its ruling does not apply to the electric cooperatives due to their unique status under Arizona law.
By mandating longer minimum PURPA contract terms that are more in line with the expected useful lifetimes of renewable projects, it is expected that this ruling will encourage renewable energy development in Arizona. The December ACC order is also consistent with policies adopted in other states, including Wyoming with contract terms set at 20 years, and Utah and Oregon with contract terms of 15 years. The dockets for each of the ACC rulings pertaining to Arizona’s regulated investor-owned electric utilities can be found in the Corporation Commission’s online docket at https://edocket.azcc.gov under docket numbers E-01345A-16-0272 (Arizona Public Service Company), E-01933A-17-0360 (Tucson Electric Power Company), and E-04204A-18-0087 (UNS Electric, Inc.).
Michelle De Blasi is a director at Fennemore Craig in Phoenix, Arizona.
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