---------------------------------------------------------------------------

    \325\ APPA Comments at 12-13; Arizona Public Service Comments at
6; California Commission Comments at 23; Chamber of Commerce
Comments at 4; Duke Energy Comments at 9-10; EEI Comments at 27; El
Paso Electric Comments at 3; Idaho Commission Comments at 3;
Southern Comments at 9.
    \326\ California Commission Comments at 23; EEI Comments at 27-
28.
    \327\ APPA Comments at 13; Duke Energy Comments at 10; EEI
Comments at 27; Idaho Commission Comments at 3; Southern Comments at
9-11.
---------------------------------------------------------------------------

    210. El Paso Electric argues that: (1) The gas index price should
be adjusted to account for the basis differential between the price at
the natural gas hub and the price of natural gas in or near the
utility's service area; and (2) states should be allowed to update the
formula periodically to reflect improved

efficiencies in combined cycle generating facilities.\328\
---------------------------------------------------------------------------

    \328\ El Paso Electric Comments at 3-4.
---------------------------------------------------------------------------

c. Commission Determination
    211. We adopt the NOPR proposal to revise 18 CFR 292.304 to add a
subsection (b)(7) which, in combination with new subsection (e)(1),
would permit a state to set the as-available energy rate paid to a QF
by electric utilities located outside of RTO/ISO markets at Combined
Cycle Prices, defined as a formula rate established by the state using
published natural gas price indices and a proxy heat rate for an
efficient natural gas combined-cycle generating facility. We also
clarify that the formulas used to set as-available energy rates based
on natural gas prices should include recovery of variable O&M costs.
    212. While some commenters oppose allowing states to use Combined
Cycle Prices (or other competitive prices) to set avoided energy cost
rates, states already had the flexibility to determine avoided costs in
this manner under the current regulations, as the California Commission
and EEI observe.\329\ If Combined Cycle Prices accurately represent a
particular purchasing utility's avoided energy costs, their use would
be consistent with the Commission's existing definition of avoided
costs as ``the incremental costs to an electric utility of electric
energy or capacity or both which, but for the purchase from the
qualifying facility or qualifying facilities, such utility would
generate itself or purchase from another source.'' \330\ Furthermore,
as noted above in section IV.B.2, the use of competitive market prices,
including Combined Cycle Prices, to set QF rates is explicitly subject
to the requirement that such prices are equal to the purchasing
utility's avoided energy costs. Therefore, this proposal merely
codifies more explicitly an option for determining avoided cost rates
that already existed, i.e., where a state determines that a Combined
Cycle Price is a measure of the purchasing electric utility's avoided
cost for as-available energy.
---------------------------------------------------------------------------

    \329\ States could have used any of the competitive prices
adopted in this final rule to set avoided cost energy rates as long
as such prices met, to the extent practicable, the factors described
18 CFR 292.304(e).
    \330\ See 18 CFR 292.101(b)(6).
---------------------------------------------------------------------------

    213. The concerns of R Street, ELCON, and others that Combined
Cycle Prices may not reflect a particular purchasing electric utility's
avoided cost are addressed by the requirement that the state would need
to determine that the Combined Cycle Price indeed represents the
purchasing electric utility's avoided cost for as-available energy.
    214. While some commenters requested that we expand the proposed
regulation explicitly to include technologies other than combined cycle
natural gas generating facilities, we decline to do so for two reasons.
First, as already mentioned, the current regulations are already
flexible enough to accommodate states calculating avoided costs based
on the cost of the generating units or technology that accurately
reflects the relevant purchasing utility's avoided cost.\331\ Second,
this proposal focused specifically on combined cycle technology, as
opposed to other generating technologies, because combined cycle
generation makes up such a large portion of the nation's generation
fleet.\332\ This relative ubiquity, coupled with the fact that combined
cycle natural gas generation facilities are often the marginal units in
many regions, justifies an elevated profile in the PURPA Regulations
for combined cycle technology compared to other technologies. This
final rule does not foreclose other technologies from being used for
avoided cost determination, upon an appropriate finding by the state
that they accurately measure a purchasing electric utility's avoided
cost for as-available energy.
---------------------------------------------------------------------------

    \331\ See 18 CFR 292.101(b)(6).
    \332\ According to EIA data, the nameplate capacity of natural
gas-fired combined cycle generation technology, exceeds the
nameplate capacity of generation from any other fuel source. See
EIA, Electric Power Annual Table 4.7.A Net Summer Capacity of
Utility Scale Units by Technology and by State, 2018 and 2017
(Megawatts), https://www.eia.gov/electricity/annual/html/epa_04_07_a.html, and 4.7.C Net Summer Capacity of Utility Scale
Units Using Primarily Fossil Fuels and by State, 2018 and 2017
(Megawatts), https://www.eia.gov/electricity/annual/html/epa_04_07_c.html.
---------------------------------------------------------------------------

    215. Southeast Public Interest Organizations support their
opposition to Combined Cycle Prices in part by claiming that the
Commission did not specifically require states to include variable O&M
in the formula. We agree that variable O&M expenses are an appropriate
cost component of formula rates and should be included in any Combined
Cycle Price formulae in order to accurately reflect the relevant
purchasing electric utility's avoided costs.
    216. With respect to the arguments of Southeast Public Interest
Organizations regarding natural gas transportation costs, the
regulation we adopt in this final rule, 18 CFR 292.304(b)(7)(ii)(C),
specifically requires that states consider whether there should be an
adjustment to the natural gas price to appropriately reflect the cost
of transporting natural gas to the relevant market. As to El Paso
Electric's arguments regarding index price adjustments using basis
differentials, and periodic formula updates to reflect efficiency
improvements, we note that the revisions to the PURPA Regulations,
which we adopt in this final rule, provide that states which choose to
rely on Combined Cycle Prices must consider, when designing their
formulae, whether and to what extent to include these costs, based on
their assessment of how best to identify a relevant purchasing electric
utility's avoided cost for as-available energy.\333\
---------------------------------------------------------------------------

    \333\ See new 18 CFR 292.304(b)(7)(ii).
---------------------------------------------------------------------------

6. Permitting the Energy Rate Component of a Contract To Be Fixed at
the Time of the LEO Using Forecasted Values of the Estimated Stream of
Market Revenues
    217. The NOPR noted that, frequently, price forecasts are available
for LMPs in RTOs/ISOs, for liquid market hubs located outside of RTOs/
ISOs, and for natural gas pricing hubs. Accordingly, the NOPR suggested
that such forecasts could be used to allow QFs to request a fixed
energy rate component calculated at the time a LEO is incurred. The
Commission therefore proposed to add a new option in 18 CFR
292.304(d)(1)(iii) permitting fixed energy rates to be based on
forecasted estimates of the stream of revenue flows during the term of
the contract.\334\ In other words, states could rely on estimates of
forecasted energy prices at the time of delivery over the anticipated
life of the contract--such estimates are commonly referred to as
forward price curves--to develop a fixed energy rate component for that
contract when such estimates reflect the purchasing electric utility's
avoided costs.
---------------------------------------------------------------------------

    \334\ NOPR, 168 FERC ] 61,184 at P 61.
---------------------------------------------------------------------------

    218. The NOPR stated that the fixed energy rate component of the
contract could be a single energy rate, based on the amortized present
value of the forecast energy prices, or it could be a series of
specified energy rates that are different in future years (or other
periods).\335\ Under this proposal, the QF would be able to establish,
at the time the LEO is incurred, the applicable energy rate(s) for the
entire term of a contract; however, the energy rate in the contract
could be different from year-to-

year (or some other period) and nevertheless comply with the current
requirement in 18 CFR 292.304(d)(2)(ii) that the energy rate be fixed
for the term of the contract.\336\
---------------------------------------------------------------------------

    \335\ Id. P 62 (noting that the PURPA Regulations already
require that the fixed energy rate would need to account for the
operating characteristics of the QF, including the QF's ability to
deliver energy during peak periods and the utility's ability to
dispatch energy from the QF (citing 18 CFR 292.304(e)(2)).
    \336\ Id. (noting that this is permissible under the
Commission's existing PURPA Regulations (citing Windham Solar LLC,
157 FERC ] 61,134, at PP 5-6 (2016) (Windham Solar) (``[A]lthough
state regulatory authorities cannot preclude a QF . . . from
obtaining a legally enforceable obligation with a forecasted avoided
cost rate, we remind the parties that the Commission's regulations
allow state regulatory authorities to consider a number of factors
in establishing an avoided cost rate. These factors which include,
among others, the availability of capacity, the QF's
dispatchability, the QF's reliability, and the value of the QF's
energy and capacity, allow state regulatory authorities to establish
lower avoided cost rates for purchases from intermittent QFs than
for purchases from firm QFs.'' (citing 18 CFR 292.304(e)-(f))
(footnote omitted))).
---------------------------------------------------------------------------

a. Comments
    219. Two commenters oppose the NOPR proposal to add a new option in
18 CFR 292.304(d)(1)(iii) permitting fixed energy rates to be based on
forecasted estimates of the stream of revenue flows during the life of
the contract.\337\ Southeast Public Interest Organizations and Mr.
Mattson state that the NOPR proposal is a departure from past
precedent.\338\ Southeast Public Interest Organizations state that this
proposal suffers the same deficiencies as the LMP and liquid market hub
price proposals. Furthermore, according to Southeast Public Interest
Organizations, the NOPR provides no analysis as to how or whether the
forward price curves result in just and reasonable and non-
discriminatory rates as required by PURPA.\339\
---------------------------------------------------------------------------

    \337\ Southeast Public Interest Organizations Comments at 25;
Mr. Mattson Comments at 26.
    \338\ Southeast Public Interest Organizations Comments at 25;
Mr. Mattson Comments at 26.
    \339\ Southeast Public Interest Organizations Comments at 25.
---------------------------------------------------------------------------

    220. Other commenters support the NOPR proposal to add a new option
in 18 CFR 292.304(d)(1)(iii) permitting fixed energy rates to be based
on forecasted estimates of the stream of revenue flows during the term
of the contract.\340\ The South Dakota Commission and Pennsylvania
Commission state that they support the NOPR proposal on forecasted
values of the estimated stream of revenues because it forecasts a
steady stream of revenue and provides built-in flexibility.\341\
According to these commenters, the proposal also balances the QF's need
for a steady stream of revenue with the purchasing electric utility's
responsibility to have a prudent mix of supply contracts for its
provider of last resort obligations.\342\ The Chamber of Commerce
states that, while future rates are not guaranteed to materialize, the
projected rates will more accurately reflect those realized than a
single avoided cost rate set at the inception of a QF contract.\343\
---------------------------------------------------------------------------

    \340\ Allco Comments at 8; APPA Comments at 14; Arizona Public
Service Comments at 2-3; Chamber of Commerce Comments at 4-5;
Connecticut Authority at 13; Distributed Sun Comments at 2; EEI
Comments at 28-30; Idaho Commission Comments at 4; NorthWestern
Comments at 6; NRECA Comments at 8; Pennsylvania Commission Comments
at 8; Resources for the Future Comments at 8; South Dakota
Commission Comments at 3.
    \341\ Pennsylvania Commission Comments at 8-9; South Dakota
Commission Comments at 3.
    \342\ Pennsylvania Commission Comments at 8-9.
    \343\ Chamber of Commerce Comments at 4-5.
---------------------------------------------------------------------------

    221. Arizona Public Service states that it supports the proposal
because it grants states additional flexibility, which helps protect
utilities' customers from over-paying for generation due to QFs need
for sales guarantees and financing.\344\ NRECA agrees that states must
have flexibility in determining forecasted market prices including
appropriate discounting to ensure that utilities and consumers are not
locked into contracts with fixed prices that are higher than prevailing
market prices.\345\
---------------------------------------------------------------------------

    \344\ Arizona Public Service Comments at 2-3.
    \345\ NRECA Comments at 8.
---------------------------------------------------------------------------

    222. NRECA requests that the Commission clarify proposed revisions
to 18 CFR 292.304(d)(1)(i), (ii), and (iii) to state that an electric
utility is exempt from offering a stream of market revenue as payment,
even if there is a market hub price that could be relevant.\346\ The
Connecticut Authority also suggests that the Commission modify 18 CFR
292.304(d)(1)(ii) to specify that a state may set a series of energy
rates. For this option, Connecticut Authority argues, the regulatory
text should provide greater regulatory and commercial certainty to QF
developers, avoiding disputes with distribution utilities and
states.\347\
---------------------------------------------------------------------------

    \346\ Id. at 9.
    \347\ Connecticut Authority Comments at 14.
---------------------------------------------------------------------------

    223. Connecticut Authority supports revisions to 18 CFR
292.304(d)(2) because the rule would permit a state to limit a QF's
option to select a preferred energy rate methodology.\348\ Connecticut
Authority also supports the proposed 18 CFR 202.304(d)(iii) that
permits states to set a stated or fixed rate for energy that is
calculated using the present value of the expected stream of revenue
from as-available energy rates during the life of the contract or LEO.
---------------------------------------------------------------------------

    \348\ Id. at 13.
---------------------------------------------------------------------------

    224. EEI states that this proposal is not novel, and as an example
notes that the Commission and a federal district court have already
found that the Connecticut Authority could set avoided cost rates based
on a forecast of future avoided costs.\349\ According to EEI, the
Commission has not ruled either that any form of forecasting is
mandated or that any is unacceptable.\350\
---------------------------------------------------------------------------

    \349\ EEI Comments at 28 (citing Allco Renewable Energy Ltd. v.
Mass. Elec. Co., 208 F. Supp. 3d. 390, 395 (D. Mass. 2016); Windham
Solar, 157 FERC ] 61,134 at P 5.
    \350\ EEI Comments at 28-30.
---------------------------------------------------------------------------

    225. Allco states that the proposed new option in 18 CFR
292.304(d)(1)(iii) permitting fixed energy rates to be based on
forecasted estimates of the stream of revenue flows during the life of
the contract is consistent with PURPA section 210 and is already
permitted. Allco also states that forecasts need to be non-
discriminatory. According to Allco, utilities and states frequently use
one forecast when dealing with QFs and another when obtaining approval
for their favored projects; Allco asserts that this practice is
discriminatory.\351\
---------------------------------------------------------------------------

    \351\ Allco Comments at 8.
---------------------------------------------------------------------------

    226. APPA states that the proposed change is a logical extension of
the conclusion that market options are a legitimate alternative means
of specifying avoided costs.\352\ Distributed Sun states that it
supports permitting states to set fixed energy rates with forward
curves or through competitive solicitations.\353\ NorthWestern supports
the proposal to permit fixed energy rates to be on a forward price
curve developed from prices in either the organized markets or liquid
market hubs.\354\
---------------------------------------------------------------------------

    \352\ APPA Comments at 14.
    \353\ Distributed Sun Comments at 2.
    \354\ NorthWestern Comments at 6.
---------------------------------------------------------------------------

b. Commission Determination
    227. We adopt the proposal to add a new option in 18 CFR
292.304(d)(1)(iii) permitting fixed energy rates to be based on
forecasted estimates of the stream of revenue flows during the term of
the contract. The Commission has previously permitted the use of this
method to establish energy and capacity rates over the term of a
contract or LEO.\355\ Nevertheless, given the flexibilities we adopt in
this final rule with respect to competitive market prices and variable
energy rates, we clarify here that a state may use competitive market
prices and/or variable energy rates in the context of a more fixed
estimated avoided cost energy rate (together with a fixed avoided
capacity rate) that is determined at the time an LEO or contract is
incurred. The fixed energy rate component of the contract could be

a single rate, based on the amortized present value of forecast energy
prices, or it could be a series of specified rates that change from
year-to-year (or other periods) in future years. We also will allow the
state to establish the applicable energy rate(s) for the QF for the
entire term or the rate may change from year-to-year (or some other
period) of the contract at the time the LEO is incurred.
---------------------------------------------------------------------------

    \355\ Windham Solar, 157 FERC ] 61,134 at P 4 (citing 18 CFR
292.304(d)(2)).
---------------------------------------------------------------------------

    228. Southeast Public Interest Organizations and Mr. Mattson state
that the NOPR proposal is a departure from past precedent. The very
purpose of a proceeding like this is to consider changes to our
regulations and our doing so is not impermissible.
    229. Southeast Public Interest Organizations also state that the
proposal suffers the same deficiencies as the LMP and liquid market hub
pricing proposals and that the NOPR provides no evidence as to how or
if the forward price curves present just and reasonable and non-
discriminatory rates as required by PURPA. Given that we find above
that LMPs and liquid market hub prices may reflect avoided as-available
energy costs and that estimates of such prices over the term of a
contract can therefore reflect a purchasing electric utility's avoided
as-available costs over time, we do not believe Southeast Public
Interest Organizations and Mr. Mattson's concerns are justified.
    230. Although, as described below, we allow states to require
variable avoided cost energy rates, allowing forward price curves
determined at the time an LEO is incurred provides an additional option
for states to calculate avoided energy costs in advance while also
using transparent metrics for those calculations. Use of the forward
price curve does not deter the adoption of just and reasonable and non-
discriminatory rates required by PURPA, moreover, and insofar as we
require that states determine that the estimated stream of revenues
reflects the purchasing electric utility's avoided energy, such pricing
is fully consistent with the statute's requirements. With regard to
forecasts, we acknowledge that the forecast used to set the avoided
cost rate must meaningfully and reasonably reflect the utility's
avoided costs over time.\356\
---------------------------------------------------------------------------

    \356\ See 18 CFR 292.304(b)(5). Rates calculated at the time of
a LEO (for example, a contract) do not violate the requirement that
the rates not exceed avoided costs if they differ from avoided costs
at the time of delivery.
---------------------------------------------------------------------------

    231. We decline to modify this proposal expressly either to permit
or prohibit a state from setting a series of estimated avoided energy
costs over time. Each state will be required to determine whether a
particular estimated stream of revenues represents a purchasing
electric utility's avoided costs over a specified term. Similarly, in
order to provide states flexibility to use LMPs and other competitive
market prices to establish as-available avoided energy costs, we will
not require a state to use this option to guarantee a stream of
revenues.
7. Providing for Variable Energy Rates in QF Contracts
a. Background
    232. As explained above, if a QF chooses to sell energy and/or
capacity pursuant to a contract, the PURPA Regulations currently
provide the QF the option of receiving the purchasing electric
utility's avoided cost calculated and fixed at the time the LEO is
incurred.\357\ The Commission's justification in Order No. 69 for
allowing QFs to fix their rate at the time of the LEO for the entire
term of a contract was that fixing the rate provides certainty
necessary for the QF to obtain financing.\358\ The Commission stated
that its regulations pertaining to LEOs ``are intended to reconcile the
requirement that the rates for purchases equal the utilities' avoided
costs with the need for qualifying facilities to be able to enter
contractual commitments based, by necessity, on estimates of future
avoided costs.'' \359\ Further, the Commission agreed with the ``need
for certainty with regard to return on investment in new
technologies.'' \360\ The Commission stated its belief that any
overestimations or underestimations ``will balance out.'' \361\
---------------------------------------------------------------------------

    \357\ 18 CFR 292.304(d)(2)(ii).
    \358\ Order No. 69, FERC Stats. & Regs. ] 30,128 at 30,880
(justifying the rule on the basis of ``the need for certainty with
regard to return on investment in new technologies'').
    \359\ Id.
    \360\ Id.
    \361\ Id.
---------------------------------------------------------------------------

    233. The provision that QFs be permitted to fix their rates for the
entire term of a contract or other LEO has proved to be one of the most
controversial aspects of the Commission's PURPA Regulations. Some
commenters at the Technical Conference submitted data indicating that
energy prices have declined in recent years, leaving the fixed energy
portion of the QF rate, even when levelized, well above market prices
that likely would represent the purchasing electric utility's actual
avoided energy costs at the time of delivery.\362\ Based on this
concern, some commenters recommended that the Commission allow states
to ``price generation [energy] from QFs at market prices, and to update
those prices regularly so that the prices for [QFs] are not burdensome
on customer rates'' and that the Commission should limit avoided cost
energy rates in a LEO to no higher than avoided cost rates at the time
of delivery.\363\ QFs, in turn, argued that elimination of the option
to fix QF rates for the term of a contract would threaten a QF's
ability to obtain financing.\364\
---------------------------------------------------------------------------

    \362\ See Alliant Energy Comments, Docket No. AD16-16-000, at 5
(Nov. 7, 2016) (``Current market-based wind prices in the Iowa
region of MISO are approximately 25 [percent] lower than the PURPA
contract obligation prices [Interstate Power and Light Company] is
forced to pay for the same wind power for long-term contracts
entered into as of June 2016. As a result, PURPA-mandated wind power
purchases associated with just one project could cost Alliant
Energy's Iowa customers an incremental $17.54 million above market
wind prices over the next 10 years.'') (emphasis in original); EEI
Supplemental Comments, Docket No. AD16-16-000, attach. A at 3-4
(June 25, 2018) (EEI Supplemental Comments) (``On August 1, 2014, a
10-year fixed price contract at the Mid-Columbia wholesale power
market trading hub was priced at $45.87/MWh. On June 30, 2016, the
same contract was priced as $30.22/MWh, a decline of 34 [percent] in
less than two years. However, over the next 10 years, PacifiCorp has
a legal obligation to purchase 51.9 million MWhs under its PURPA
contract obligations at an average price of $59.87/MWh. The average
forward price curve for the Mid-Columbia trading hub during the same
period is $30.22/MWh, or 50 [percent] below the average PURPA
contract price that PacifiCorp will pay. The additional price
required under long-term fixed contracts will cost PacifiCorp's
customers $1.5 billion above current forward market prices over the
next 10 years.''); Comm'r Kristine Raper, Idaho Commission Comments,
Docket No. AD16-16-000, at 3-4 (filed June 30, 2016) (``Idaho Power
demonstrated that the average cost for PURPA power since 2001 has
exceed the Mid-Columbia (Mid-C) Index Price and is projected to
continue to exceed the Mid-C price through 2032. Likewise,
PacifiCorp's levelized avoided cost rates for 15-year contract terms
in Wyoming shows a decrease of approximately 50 [percent] from 2011
through 2015 (from approximately $60 per megawatt-hour to less than
$30 per megawatt-hour).'').
    \363\ EEI Supplemental Comments, attach. A at 4; see also
Southern Company Comments, Docket No. AD16-16-000, at 7 (filed June
30, 2016) (``[T]he avoided energy cost payment to the QF should be
based on actual avoided energy cost at the time the QF delivers
energy.'').
    \364\ See Technical Conference, Docket No. AD16-16-000, Tr.
26:22-25, 27:1-3 (June 29, 2016) (filed July 8, 2016) (Technical
Conference Tr.) (Solar Energy Industries) (``The Power Purchase
Agreement is the single most important contract of the development
and financing of an energy project that's not owned by a utility.
Without the long-term commitment to buy the output of that agreement
at a fixed price, there is no predictable stream of revenue. Without
a predictable stream of revenues, there is no financing. Without any
financing, there is no project.'').
---------------------------------------------------------------------------

b. NOPR Proposal
    234. In the NOPR, the Commission proposed to revise 18 CFR
292.304(d) to permit a state to limit a QF's option to elect to fix at
the outset of a LEO the energy rate for the entire length of its
contract or LEO, and instead allow the state the flexibility to require
QF energy

rates to vary during the term of the contract. However, under the
proposed revisions to 18 CFR 292.304(d), a QF would continue to be
entitled to a contract with avoided capacity costs calculated and fixed
at the time the contract or LEO is incurred. Only the energy rate in
the contract or LEO could be required by a state to vary. Further, the
NOPR did not propose to obligate states to require variable avoided
cost energy rates--they would retain the ability to allow the QF's
energy rate be fixed at the time the LEO is incurred.\365\
---------------------------------------------------------------------------

    \365\ NOPR, 168 FERC ] 61,184 at P 67.
---------------------------------------------------------------------------

    235. The Commission preliminarily found compelling the record
evidence that overestimations have not been adequately balanced by
underestimations in past years. Further, it appeared to the Commission
that this trend may persist into the future with the continuing general
decline in the cost of both wind and solar generation.\366\
Consequently, the Commission found that it may be necessary to allow
states to provide for a variable energy rate in order to reflect more
accurately the purchasing electric utility's avoided costs and
therefore to satisfy the statutory requirement that QF rates not exceed
the utility's avoided cost and ``be just and reasonable to the electric
consumers of the electric utility and in the public interest.'' \367\
---------------------------------------------------------------------------

    \366\ Id. P 68 (citing EIA, Today in Energy, Average U.S.
construction costs for solar and wind continued to fall in 2016
(Aug. 8, 2018), https://www.eia.gov/todayinenergy/detail.php?id=36813 (``Based on 2016 EIA data for newly constructed
utility-scale electric generators (those with a capacity greater
than one megawatt) in the United States, annual capacity-weighted
average construction costs for solar photovoltaic systems and
onshore wind turbines declined . . . .'')).
    \367\ Id. P 68 (internal quotations omitted) (citing 16 U.S.C.
824a-3(b)(1)).
---------------------------------------------------------------------------

    236. The Commission acknowledged that the current PURPA Regulations
allowing a QF to fix its rates for the life of a contract or LEO were
based on the recognition that fixed rates are beneficial for obtaining
financing for QF projects. The Commission also recognized that QF
developers have continued to assert that they require fixed rates to
finance new projects. However, the Commission stated that it did not
view the proposed modification to the PURPA Regulations as materially
affecting the ability of QFs to obtain financing for several
reasons.\368\
---------------------------------------------------------------------------

    \368\ Id. P 69.
---------------------------------------------------------------------------

    237. First, the Commission expressed its understanding that fixed
energy rates are not generally required in the electric industry in
order for electric generation facilities to be financed. For example,
RTO/ISO capacity markets provide only for fixed capacity payments,
leaving capacity owners to sell their energy into the organized
electric markets at LMPs that vary based on market conditions at the
time the energy is delivered. The Commission stated that these fixed
capacity and variable energy payments have been sufficient to permit
the financing of significant amounts of new capacity in the RTOs and
ISOs.\369\ Testimony presented at the Technical Conference similarly
showed that non-QF independent power projects located outside of RTOs
enter into contracts with fixed capacity and variable energy
prices.\370\ Other comments at the Technical Conference suggested that
a fixed capacity charge likewise would be adequate for financing a QF
project.\371\
---------------------------------------------------------------------------

    \369\ Id. P 70 (citing Monitoring Analytics, LLC., Third
Quarter, 2018 State of the Market Report for PJM, January through
September, at 249, Table 5-6 (Nov. 8, 2018), http://www.monitoringanalytics.com/reports/PJM_State_of_the_Market/2018/2018q3-som-pjm.pdf (over 23,000 MW of new capacity constructed in
PJM Interconnection, L.L.C. since 2007-2008; including over 16,000
MW of new capacity added in the last four years)).
    \370\ Id. (citing Technical Conference Tr. at 167-69 (Southern
Company) (``So if we enter into a bilateral contract with an
independent power producer for combustion turbine or combined cycle
capacity, we don't fix the energy price. The capacity payment is a
fixed payment. That's their fixed [stream]. The energy price is
typically indexed to the price of natural gas.''); id. at 178
(American Forest & Paper Association) (``Now, you sign a long-term
IPP contract. That contract [has] got a variable energy cost in
it.'')).
    \371\ Id. P 70 (citing Solar Energy Industries Comments, Docket
No. AD16-16-000, at 3 (filed June 30, 2016) (``Developers need rates
for such sales of energy and/or capacity to be fixed.'') (emphasis
added)).
---------------------------------------------------------------------------

    238. The Commission further noted that there are financial products
available, such as contracts for differences, which allow generation
owners to hedge their exposure to fluctuating energy prices.\372\ The
Commission stated that financial products can provide additional
comfort to lenders regarding the level of energy rate revenues that a
QF can expect from the energy it delivers, in addition to the fixed
capacity payments the QF is entitled to receive under its
contract.\373\
---------------------------------------------------------------------------

    \372\ Id. P 72 (citing Elec. Storage Participation in Mrkts.
Operated by Reg'l Transmission Org. and Independent Sys. Operators,
Order No. 841, 162 FERC ] 61,127, at P 299 (2018) (noting that
``market participants that purchase energy from the RTO/ISO markets
. . . may enter into bilateral financial transactions to hedge the
purchase of that energy'')).
    \373\ Id. P 72.
---------------------------------------------------------------------------

    239. The Commission also explained that, although it may have been
true at the time the Commission promulgated its PURPA Regulations in
1980 that QFs needed to fix their energy rate for the term of their
contract in order to obtain financing of their facilities, there is
evidence that this no longer is true. This evidence comes in the form
of data, described below, showing that independent generators that have
not qualified as QFs under PURPA (including renewable resources that
could qualify as QFs but have not sought QF status) have been able to
obtain financing for new facilities. The Commission stated that the
fact that owners of such facilities, which do not have recourse to the
avoided cost rate provisions of PURPA, have been able to obtain
financing for new projects is relevant to the question of whether the
existing PURPA avoided cost provisions--including the requirement to
enter into contracts with fixed energy rates--are necessary for QFs to
obtain financing.\374\
---------------------------------------------------------------------------

    \374\ Id. P 73.
---------------------------------------------------------------------------

    240. For example, EIA data showed that, since 2005, QFs have made
up only 10% to 20% of all renewable resource capacity in service in the
United States, demonstrating that most renewable resources no longer
need to rely on PURPA avoided cost rates to sell their output
economically.\375\ EIA data also showed that net generation of energy
by non-utility owned renewable resources in the United States escalated
from 51.7 terawatt hours (TWh) in 2005 when EPAct 2005 was passed, to
340 TWh in 2018. The Commission further observed that, while much of
this growth was in states located in RTOs/ISOs, there also was
significant growth of non-utility renewable generation in other states.
For example, net generation by non-utility renewable resources in the
region defined by EIA as the Mountain State region \376\ increased from
3.6 TWh in 2005 to 19.5 TWh in 2012, and to 42.5 TWh in 2018. Pacific
Northwest (Oregon and Washington) net non-utility generation from
renewable resources increased from 1.5 TWh in 2005, to 8.7 TWh in 2012,
and to 10.6 TWh in 2018.\377\
---------------------------------------------------------------------------

    \375\ Id. P 74 (citing EIA, Today in Energy, North Carolina has
More PURPA-Qualifying Solar Facilities than any other State, figure
titled PURPA qualifying facilities (1980-2015) percent of total
renewable capacity (Aug. 23, 2016), https://eia.gov/todayinenergy/detail.php?id=27632).
    \376\ Arizona, Colorado, Idaho, Montana, Nevada, New Mexico,
Utah, and Wyoming.
    \377\ NOPR, 168 FERC ] 61,184 at P 74.
---------------------------------------------------------------------------

    241. The Commission found that EIA data on independently-owned
natural gas-fired generation capacity told a similar story. Natural
gas-fired capacity without the requisite cogeneration technology cannot
qualify as qualifying small power production or cogeneration, and thus
most of this capacity would not be within the scope of the PURPA
avoided cost rate provisions. The Commission cited to EIA data showing
that, in 2018,

approximately 44% of all energy produced by natural gas-fired
generation in the United States was generated by independently-owned
capacity.\378\ The total amount of energy produced in 2018 by
independently-owned natural gas-fired generation was 651 TWh, an
increase of 13.7% from 2017.\379\ Again, the percentage of
independently-owned natural gas generation outside of RTOs/ISOs was
lower than in RTOs/ISOs, but still was significant. In the Mountain
State region, 21.4% of the energy produced by natural gas-fired
generation in 2018 was produced by independently-owned capacity, and in
Oregon and Washington 45.4% of natural gas-fired energy was produced by
independently-owned capacity.\380\ From this, the Commission concluded
that independent owners of non-QF generation have been, and continue to
be, able to obtain financing for their facilities.\381\
---------------------------------------------------------------------------

    \378\ NOPR, 168 FERC ] 61,184 at P 75 (citing EIA, Electric
Power Monthly with Data for December 2018, at tbl. 1.7.B, https://www.eia.gov/electricity/monthly/current_month/epm.pdf.).
    \379\ Id.
    \380\ Id.
    \381\ Id.
---------------------------------------------------------------------------

    242. The Commission did not suggest that this evidence supports the
conclusion that substantial non-QF capacity is being financed and
constructed without any form of fixed revenue to support financing.
Rather, the Commission concluded that the evidence demonstrated that
the existing PURPA avoided cost rate provisions are not necessary for
some independent power generators to put in place contractual
arrangements, including fixed revenue streams, that are sufficient to
obtain financing. The Commission reasoned that QFs, which have the
ability to take advantage of PURPA's mandatory purchase requirements,
should be better positioned than non-QFs to negotiate the necessary
contractual arrangements for financing. Moreover, the Commission noted
that QFs are equally as well positioned as non-QF independent
generators to take advantage of federal and state incentives designed
to encourage the construction of renewable resources. \382\
---------------------------------------------------------------------------

    \382\ Id. P 76.
---------------------------------------------------------------------------

    243. Further, the Commission pointed to evidence that the desire to
limit the effect of fixed QF contract rates had directly led to PURPA
implementation issues that affected QF financing in other respects,
particularly with respect to the length of QF contracts.\383\ For
example, a commissioner of the Idaho Commission testified at the
Technical Conference that the Idaho Commission's decision to limit QF
contracts to a two-year term was based on the Idaho Commission's
concern that longer contract terms at fixed rates would lead to
payments above avoided costs.\384\ Similarly, Southern Company
testified that the fixed rate requirement is ``resulting in . . .
typically shorter contract term lengths.'' \385\ Golden Spread Electric
Cooperative recommended that, if the fixed rate requirement is not
eliminated, the Commission permit shorter contract terms, ``as short as
one-year or three years at most.'' \386\
---------------------------------------------------------------------------

    \383\ Id. P 65 (citing Natural Resources Defense Council
Comments, Docket No. AD16-16-000, at 4 (filed June 30, 2016)).
    \384\ Id. P 65 (citing Technical Conference Tr. at 142-43 (Idaho
Commission) (``No matter the starting point, allowing QFs to fix
their avoided cost rates for long terms results in rates which will
eventually exceed and overestimate avoided cost rates into the
future. The longer the term, the greater the disparity. . . . [The
Idaho Commission] recently reduced PURPA contract lengths to two
years in order to correct the disparity. We didn't reduce contract
lengths to kill PURPA. We did it to allow periodic adjustment of
avoided cost rates.'')).
    \385\ Id. P 65 (citing Technical Conference Tr. at 202 (Southern
Company)).
    \386\ Id. P 65 (citing Golden Spread Electric Cooperative
Comments, Docket No. AD16-16-000, at 10 (filed June 30, 2016)).
---------------------------------------------------------------------------

    244. Finally, the Commission addressed one particular standard form
of QF contract rate currently employed by a number of utilities, which
is a one-part rate, applicable to each MWh of energy delivered by the
QF. This one-part rate is calculated to reflect both avoided capacity
costs and avoided energy costs. Contracts employing such rates also
typically impose a must purchase obligation on the purchasing utility.
The Commission stated that its proposed rule was not intended to
prevent states from implementing such an approach to setting QF
contract rates in the future. The Commission proposed that, to the
extent a state determines to establish a one-part QF contract rate that
recovers both avoided capacity and avoided energy costs, the rate must
continue to be subject to the QF's option to select a fixed rate for
the term of the contract, as provided in 18 CFR 304(d)(2)(ii). Any
requirement to impose a variable energy QF contract rate would need to
be accomplished through a multi-part rate that includes separate
avoided capacity cost rates and avoided energy cost rates.\387\
---------------------------------------------------------------------------

    \387\ Id. P 81.
---------------------------------------------------------------------------

c. General Comments on the NOPR Proposal
i. Comments in Support of NOPR Proposal
    245. Several commenters support the NOPR proposal to allow energy
rates to vary in QF contracts and other LEOs, arguing it will reduce
overpayments and protect customers.\388\ In that regard, Duke Energy
asserts that the primary factor behind overpayment has been the
requirement to offer fixed avoided cost energy rates during a period of
rapidly declining energy prices.\389\ Several other commenters
similarly cite to the general decline of energy prices coupled with the
fact that QFs have been able to lock in rates over the life of a
contract or other LEO as reasons for their support of the NOPR
proposal.\390\
---------------------------------------------------------------------------

    \388\ Conservative Action Comments at 1; Consumer Energy
Alliance Comments at 2; EEI Comments at 30-31; Idaho Power Comments
at 7-8; Idaho Commission Comments at 4; LG&E/KU Comments at 3;
NextEra Comments at 5; see also Alaska Power Comments at 1; Arizona
Public Service Comments at 3-4; Basin Comments at 6-8; Chamber of
Commerce Comments at 4; Freedom Center Comments at 1-2; R Street
Comments at 5; Tax Reform Comments at 1-2.
    \389\ Duke Energy Comments at 5-7.
    \390\ Consumer Energy Alliance Comments at 2; Idaho Power
Comments at 7-8; Idaho Commission Comments at 4; LG&E/KU Comments at
3; Ohio Commission Energy Advocate Comments at 4.
---------------------------------------------------------------------------

    246. Several commenters also support the NOPR's variable rate
proposal because it will allow states greater flexibility to determine
avoided cost rates accurately and to meet PURPA's consumer protection
goals.\391\ LG&E/KU states that such flexibility is appropriate and
necessary to meet the statutory requirement that ratepayers not pay a
rate that exceeds the electric utility's incremental cost of
alternative energy.\392\ NorthWestern argues that providing such
flexibility will assist in guaranteeing that customers are held
harmless by purchases of QF power.\393\
---------------------------------------------------------------------------

    \391\ Alliant Energy Comments at 9; Duke Energy Comments at 8-9;
LG&E/KU Comments at 4; MA DPU Comments at 1, 7; NorthWestern
Comments at 6-7.
    \392\ LG&E/KU Comments at 4.
    \393\ NorthWestern Comments at 6-7.
---------------------------------------------------------------------------

    247. Supporters of the NOPR variable rate proposal also commented
on specific aspects of the proposal. These comments are discussed in
more detail in the following sections.
ii. Comments in Opposition to NOPR Proposal
    248. Several commenters oppose the NOPR variable energy rate
proposal.\394\

In addition to objections as to specific aspects of that proposal,
which are discussed in the following sections, some commenters raise
threshold issues regarding this proposal.
---------------------------------------------------------------------------

    \394\ Allco Comments at 9-11; AllEarth Comments at 2; Biogas
Comments at 2; BluEarth Comments at 2; CARE Comments at 3-5;
Biological Diversity Comments at 8; ELCON Comments at 18, 21-23;
EPSA Comments at 6-13; Massachusetts AG Comments at 8-9; North
Carolina DOJ Comments at 2-6; North Carolina Commission Staff
Comments at 2-4; New England Hydro Comments at 8; NIPPC, CREA, REC,
and OSEIA Comments at 29-48; North American-Central Comments at 4-6;
Public Interest Organizations Comments at 6-7, 27-51; Resources for
the Future Comments at 4-7; Solar Energy Industries Comments at 28-
38; SC Solar Alliance Comments at 4-10; Southeast Public Interest
Organizations Comments at 9-18; sPower Comments at 10-13; State
Entities Comments at 2-3; Mr. Mattson Comments at 26-27; Two Dot
Wind Comments at 11-13; Western Resource Councils Comments at 2.
---------------------------------------------------------------------------

    249. NIPPC, CREA, REC, and OSEIA cite to the PURPA Conference
Report as expressing Congress's intent that QFs be entitled to long-
term fixed energy rates. Specifically, they cite to the statement in
the Conference Report that ``the Commission and States should look to
the reliability of that power to the utility and the cost savings to
the utility which may result at some later date by reason of supply to
the utility at that time of power from the cogenerator or small power
producer.'' \395\ According to NIPPC, CREA, REC, and OSEIA, this
statement shows that ``Congress also recognized that attempts to set
the rates based on the avoided costs at the time of delivery would
likely be insufficient to encourage such facilities.'' \396\
---------------------------------------------------------------------------

    \395\ NIPPC, CREA, REC, and OSEIA Comments at 27 (quoting Conf.
Rep. at 98-99).
    \396\ Id.
---------------------------------------------------------------------------

    250. Harvard Electricity Law asserts that the Commission may not
authorize state regulators to change rates in existing contracts.\397\
Harvard Electricity Law then asserts that the Commission: (1) Attempts
to portray its agenda as consistent with Congressional intent by
providing a skewed summary of the legislative history; (2) presents an
unsupported statement that its rules will ``continue to encourage'' QF
development, which ignores the administrative record and fails to
account for regulatory changes since PURPA's enactment; (3) misreads
its own rules in claiming that repeal is necessary to protect
consumers; and (4) relies on a finding that fixed price energy
contracts are not necessary to encourage QFs that is based on
irrelevant data and questionable assumptions that are not grounded in
reasoned decision making.
---------------------------------------------------------------------------

    \397\ Harvard Electricity Law Comments at 23 (citing API, 461
U.S. at 414).
---------------------------------------------------------------------------

    251. Harvard Electricity Law also asserts that allowing long-term
contracts to include variable rates is contrary to PURPA.\398\ In
support of this assertion, Harvard Electricity Law cites to two
decisions which it claims stand for the proposition that the
Commission's proposed rule would impose forbidden utility-type
regulation on QFs.\399\
---------------------------------------------------------------------------

    \398\ Id. at 28.
    \399\ Id. at 29 (citing Freehold Cogeneration Assoc. v. Bd. of
Regulatory Comm'rs. of N.J., 44 F.3d 1178, 1193 (3d Cir. 1995)
(Freehold Cogeneration); Smith Cogeneration Mgt. v. Corp. Comm'n.,
863 P.2d 1227 (Okla. 1993) (Smith Cogeneration)).
---------------------------------------------------------------------------

    252. NIPPC, CREA, REC, and OSEIA and Public Interest Organizations
assert that it is unclear whether independent power producers that have
obtained financing did so with short-term variable rate
conditions.\400\ North American-Central argues that, if a variable rate
will preclude a QF from receiving financing in the first place, it is
irrelevant that a state might be more willing to offer a longer-term
contract.\401\
---------------------------------------------------------------------------

    \400\ NIPPC, CREA, REC, and OSEIA Comments at 46.
    \401\ North American-Central Comments at 5-6.
---------------------------------------------------------------------------

iii. Commission Determination
    253. In this final rule, we adopt without modification the NOPR
variable rate proposal. We find that setting QF energy avoided cost
contract and other LEO rates at the level of the purchasing utility's
avoided energy costs at the time the energy is delivered is consistent
with PURPA, which limits QF rates to the purchasing utility's avoided
costs. Indeed, a variable energy avoided cost approach is a more
accurate way to ensure that payments to QFs equal, but do not exceed,
avoided costs.\402\ It is inevitable that, in contrast, over the life
of a QF contract or other LEO a fixed energy avoided cost rate, such as
that used in past years, will deviate from actual avoided costs.
---------------------------------------------------------------------------

    \402\ 16 U.S.C. 824a-3(b)(1).
---------------------------------------------------------------------------

    254. As described in more detail in the following sections, the
record overwhelmingly supports our conclusions that long-term forecasts
of avoided energy costs are inherently less accurate, and that states
should be given the flexibility to rely on a more accurate variable
avoided cost energy rate approach. Further, there are numerous
instances where overestimates and underestimates have not balanced
out.\403\ When that has occurred, consumers have borne the brunt of the
overpayments, which subsidized QFs, in contravention of Congressional
intent and the Commission's expectations.
---------------------------------------------------------------------------

    \403\ See Duke Comments at 6 (Duke's QF contracts cost $4.66
billion but its ``actual current avoided costs'' are $2.4 billion);
Idaho Power Comments at 10-11 (``The cost of PURPA generation
contained in Idaho Power's base rates, on a dollars per MWh basis,
is not just greater than Mid-C market prices, it is greater than all
the net power supply cost components currently recovered in base
rates. Idaho Power's average cost of PURPA generation included in
base rates is $62.49/MWh. At $62.49/MWh, the average cost of PURPA
purchases is greater than the average cost of FERC Account 501, Coal
at $22.79/MWh; greater than FERC Account 547, Natural Gas at $33.57/
MWh; greater than FERC Account 555, Non-PURPA Purchases at $50.64/
MWh; and significantly greater than what is being sold back to the
market as FERC Account 447, Surplus Sales at $22.41/MWh.'');
Portland General Comments at 5 (``for a typical 3 MW Solar QF
project that incurred a LEO in 2016 and reaches commercial
operations three years later, [Portland General's] customers would
pay 67% more for the project's energy than if the 2019 avoided cost
rate had been used. As a result of this lag, [Portland General's]
customers would pay an additional $1.6 million more for the energy
from the QF facility over the 15-year contract term.''); see also
NOPR, 168 FERC 61,184 at P 64 n.101 (citing Alliant Energy,
Comments, Docket No. AD16-16-000, at 5 (filed Nov. 7, 2016)
(``Current market-based wind prices in the Iowa region of MISO are
approximately 25% lower than the PURPA contract obligation prices
[Interstate Power and Light Company] is forced to pay for the same
wind power for long-term contracts entered into as of June 2016. As
a result, PURPA-mandated wind power purchases associated with just
one project could cost Alliant Energy's Iowa customers an
incremental $17.54 million above market wind prices over the next 10
years.'') (emphasis in original); EEI Supplemental, Comments,
attach. A at 3-4 (``On August 1, 2014, a 10-year fixed price
contract at the Mid-Columbia wholesale power market trading hub was
priced at $45.87/MWh. On June 30, 2016, the same contract was priced
as $30.22/MWh, a decline of 34% in less than two years. However,
over the next 10 years, PacifiCorp has a legal obligation to
purchase 51.9 million MWhs under its PURPA contract obligations at
an average price of $59.87/MWh. The average forward price curve for
the Mid-Columbia trading hub during the same period is $30.22/MWh,
or 50% below the average PURPA contract price that PacifiCorp will
pay. The additional price required under long-term fixed contracts
will cost PacifiCorp's customers $1.5 billion above current forward
market prices over the next 10 years.''); Comm'r Kristine Raper,
Idaho Commission Comments, Docket No. AD16-16-000, at 3-4 (filed
June 30, 2016) (``Idaho Power demonstrated that the average cost for
PURPA power since 2001 has exceed the Mid-Columbia (Mid-C) Index
Price and is projected to continue to exceed the Mid-C price through
2032. Likewise, PacifiCorp's levelized avoided cost rates for 15-
year contract terms in Wyoming shows a decrease of approximately 50%
from 2011 through 2015 (from approximately $60 per megawatt-hour to
less than $30 per megawatt-hour).'').
---------------------------------------------------------------------------

    255. Given that PURPA section 210(b) prohibits the Commission from
requiring QF rates in excess of avoided costs,\404\ this record
evidence supports our decision to give the states the flexibility to
require variable avoided cost energy rates in QF contracts and other
LEOs to prevent QF rates from exceeding avoided costs. We discuss
specific aspects of the variable energy rate provisions below, but at
the outset address certain threshold issues raised in the comments.
---------------------------------------------------------------------------

    \404\ This prohibition is described in Section IV.A.
---------------------------------------------------------------------------

    256. We reiterate the points made in detail above in Section II.
The variable energy avoided cost rate provision is not based on any
determination that the Commission's rules no longer should encourage QF
development. The question of whether QFs should continue to be
encouraged is a question for Congress. Rather, we are revising the
PURPA Regulations by giving states the flexibility to require variable
avoided cost energy rates in QF contracts and other LEOs in order to
better comply

with Congress's clear instruction in PURPA that the Commission may not
require QF rates in excess of a purchasing utility's avoided costs.
    257. By its very nature, the question of fixed versus variable
energy rates is a question of how risk from increases in avoided energy
costs over the life of a QF contract or other LEO should be allocated.
Answering this question requires the Commission to allocate this risk
either to (i) customers of electric utilities, or (ii) QFs and their
investors and lenders. But the Commission does not have unlimited
discretion in how it resolves the question. Congress in PURPA section
210(b) provided guidance to the Commission in how it should perform
that allocation--by mandating that the Commission cannot adopt a rule
that provides for a rate that exceeds the incremental cost of
alternative electric energy.\405\
---------------------------------------------------------------------------

    \405\ 16 U.S.C. 824a-3(b); see also 16 U.S.C. 824a-3(d); 18 CFR
292.101(b)(6), 292.304(b)(2).
---------------------------------------------------------------------------

    258. Opponents of variable avoided cost energy rates urge the
Commission to continue placing this risk on the customers of electric
utilities, as it did in the past, by retaining the option for QFs to
fix their avoided cost energy rates in their contracts or LEOs
notwithstanding record evidence, discussed elsewhere in this final
rule, that fixed energy rates compared to actual avoided costs have not
balanced out over time. But, after consideration of the record, the
Commission has decided instead to allow states to reduce the risk to
customers by giving states the flexibility to require variable avoided
cost energy rates in QF contracts and LEOs. The Commission's
determination ensures that the PURPA Regulations continue to be
consistent with the statutory avoided cost rate cap in PURPA section
210(b), coupled with the directive in the Conference Report that
customers of utilities not be required to subsidize QFs.\406\
---------------------------------------------------------------------------

    \406\ Conf. Rep. at 98 (``The provisions of this section are not
intended to require the rate payers of a utility to subsidize
cogenerators or small power produc[er]s.'') (emphasis added).
---------------------------------------------------------------------------

    259. Third, there is no merit to the contention that the PURPA
Conference Report expresses Congressional intent that QFs are entitled
to long-term fixed energy rates. The statement in the Conference Report
cited by NIPPC, CREA, REC, and OSEIA does not support this
contention.\407\ The example provided in the PURPA Conference Report
was of a utility owning a hydroelectric generating facility. Congress
hypothesized that this utility might be able to avoid drawing down its
reservoir as a result of a purchase from a QF, and thereby be able to
generate electricity from the hydroelectric facility at a later date
rather than running a more expensive fossil fuel unit at that later
date. Congress stated that the avoided cost in its example should be
based on the cost of the more expensive fossil unit whose operation was
avoided at a later date rather than the avoided cost at the time the QF
delivered its energy.\408\
---------------------------------------------------------------------------

    \407\ See NIPPC, CREA, REC, and OSEIA Comments at 27 (quoting
Conf. Rep. at 98-99).
    \408\ Id. at 98-99 (``In interpreting the term `incremental cost
of alternative energy,' the conferees expect that the Commission and
the states may look beyond the cost of alternative sources which are
instantaneously available to the utility. Rather, the Commission and
states should look to the reliability of that power to the utility
and the cost savings to the utility which may result at some later
date by reason of supply to the utility at that time of power from
the cogenerator or small power producer; for example an electric
utility which owns a source of hydroelectric power and which is
offered the sale of electric energy from a cogenerator or small
power producer might, if measured over the short term, have a low
incremental cost of alternative power because of its access to
hydropower; however, it may be the case that by purchasing from the
cogenerator or small power producer and saving hydropower for later
use, the utility can avoided the use of expensive electric energy
generated by fossil fired units during later months of its seasonal
generation cycle. Thus, viewed over the longer period of time, the
incremental cost of alternative electric energy might be
substantially higher than that measured by the instantaneously
available hydropower.'').
---------------------------------------------------------------------------

    260. While Congress recognized that the better measure of avoided
cost in that scenario might be the cost of the alternative fossil fuel
unit that would not be run at that later date,\409\ nothing in the
quoted section of the PURPA Conference Report suggests that Congress
intended the Commission to require that all avoided cost energy rates
be fixed at the outset for the life of a QF contract or other LEO. And
nothing in the revision being implemented in this final rule would
prohibit a state from calculating a QF's avoided cost energy rate for a
QF contract or LEO in the manner suggested in the PURPA Conference
Report or, indeed, in the manner the Commission has long allowed, if a
state determined that such an approach best reflects the purchasing
electric utility's avoided costs.
---------------------------------------------------------------------------

    \409\ Under the approach adopted in this final rule, with the
flexibility granted to states to adopt--but not a mandate directing
states to adopt--variable avoided cost energy rates for QF contracts
and other LEOs, states can adopt a pricing approach that best fits
their circumstances, including adopting the pricing approach
described by the Conference Report to address the circumstances
described by the Conference Report.
---------------------------------------------------------------------------

    261. Fourth, the variable avoided cost energy rate provision
adopted herein does not run afoul of the Freehold Cogeneration and
Smith Cogeneration cases cited by Harvard Electricity Law.\410\ Those
decisions, which overturned state avoided cost determinations allowing
for changes in QF rates, were based on the provision in the original
PURPA Regulations giving QFs the option to select contracts with long-
term fixed avoided cost rates.\411\ Indeed, the Smith Cogeneration
decision quotes at length from the explanation in Order No. 69 of the
Commission's justification for its requiring in its regulations fixed
avoided cost rates in QF contracts and LEOs.\412\ Neither decision
suggests that PURPA would prevent the Commission from revising its
regulations to allow states the flexibility to require variable avoided
cost energy rates, as the Commission is doing here.
---------------------------------------------------------------------------

    \410\ Harvard Electricity Law Comments at 29 (citing Freehold
Cogeneration, 44 F.3d at 1193; Smith Cogeneration, 863 P.2d at
1227).
    \411\ See Smith Cogeneration, 863 P.2d at 1241 (holding that
allowing reconsideration of established avoided costs ``makes it
impossible to comply with PURPA and FERC regulations requiring
established rate certainty for the duration of long term contracts
for qualifying facilities that have incurred an obligation to
deliver power'') (emphasis added); Freehold Cogeneration, 44 F.3d at
1193 (relying on Smith Cogeneration analysis that ``that PURPA and
FERC regulations preempted the State Commission rule'') (emphasis
added).
    \412\ Smith Cogeneration, 863 P.2d at 1240.
---------------------------------------------------------------------------

    262. Harvard Electricity Law also relies on Freehold Cogeneration
and Smith Cogeneration to assert that the Commission is imposing
``utility-type'' regulation in violation of Congressional intent as
expressed in the PURPA Conference Report.\413\ However, those holdings
do not address the changes the Commission is implementing here. By
adopting a provision that allows states the option to require variable
avoided cost energy rates, we are not mandating ``utility-type''
regulation. The PURPA Conference Report states that: ``It is not the
intention of the conferees that [QFs] become subject . . . to the type
of examination that is traditionally given to electric utility rate
applications to determine what is the just and reasonable rate that
they should receive for their electric power.'' \414\ Our action today
is consistent with that statement; we are not subjecting QFs to the
same type of examination that is traditionally given to electric
utility rate applications (e.g., cost-of-service rate regulation).
---------------------------------------------------------------------------

    \413\ Harvard Electricity Law Comments at 30.
    \414\ Conf. Rep. at 97.
---------------------------------------------------------------------------

    263. Indeed, the regulation adopted today does not subject QF rates
to any examination whatsoever of the costs incurred by QFs in producing
and selling power. Rather, the variable avoided cost energy rate
provision applicable to QF contracts and other LEOs that is adopted in
this final rule sets QF rates based on the avoided costs

of the purchasing utility. In no sense can this variable avoided cost
energy rate provision be characterized as imposing utility-style
regulation on the QFs themselves.
    264. Finally, we agree with Harvard Electricity Law that state
regulators may not change rates in existing QF contracts or other
existing LEOs.\415\ By its terms, the variable energy avoided cost
provision adopted in this final rule applies only prospectively to new
contracts and new LEOs entered into after the effective date of this
final rule. Nothing in the final rule, including in this preamble,
should be read as sanctioning the modification of existing fixed-rate
QF contracts and LEOs.
---------------------------------------------------------------------------

    \415\ Harvard Electricity Law Comments at 23 (citing API, 461
U.S. at 414).
---------------------------------------------------------------------------

d. Whether the Current Approach Has Resulted in Payments to QFs in
Excess of Avoided Costs
i. Comments in Support of NOPR Proposal
    265. Duke Energy states that its experience shows the Commission's
original assumption that overestimations and underestimations will
balance out over time was incorrect. From 2012 to 2017, Duke Energy
states that it experienced explosive growth in solar QF contracts, and
entered into at a time of rapidly declining natural gas prices--which
drove down Duke Energy's avoided costs. Duke Energy states that, as of
July 1, 2019, it has almost 4,000 MW of QF power under contract and in
commercial operation. Duke Energy claims the total estimated financial
obligation on Duke Energy's retail and wholesale customers to pay for
this QF power is approximately $4.66 billion over the next
approximately 15 years. If the contracts had been permitted to contain
rates that mirrored the utilities' declining incremental costs either
to generate that electric energy itself or to purchase alternative
electric energy, i.e., Duke Energy's ``actual current avoided costs,''
Duke Energy asserts that the contracts would be valued at $2.4 billion.
Duke Energy claims that, among the factors contributing to this
overpayment of $2.26 billion for the remainder of these QF contracts,
the primary factor has been the requirement to offer fixed avoided cost
energy rates during a period of rapidly declining energy prices.\416\
---------------------------------------------------------------------------

    \416\ Duke Energy Comments at 6.
---------------------------------------------------------------------------

    266. EEI argues that relying on certain avoided cost methods, such
as the costs of a proxy unit at a fixed point in time, may result, and
has resulted, in the over estimation of future energy prices, leaving
customers saddled with uneconomic PURPA contracts. According to EEI,
the Commission's variable rate proposal will help ensure that the
variable energy rate more accurately reflects the electric utility's
actual avoided cost of energy so that rates for customers are just and
reasonable. EEI describes this change as important for states,
especially those in RTO/ISO markets, that elect to have the avoided
cost rate set at LMP.
    267. EEI also submitted with its comments a study performed by
Concentric Energy Advisors showing that the avoided cost rates in the
sample of solar and wind QF contracts they reviewed generally exceeded
rates that are realized in competitive markets for solar and wind
energy. According to that report, the total overpayment ranged between
$2.7 billion and $3.9 billion. Several other commenters also cited the
Concentric Energy Advisors report for the proposition that consumers
nationwide have overpaid for QF contracts between 2009-2018.\417\
Berkshire Hathaway represents that PURPA contracts held by PacifiCorp
will cost customers more than $1.2 billion above projected market costs
over the next 10 years.\418\
---------------------------------------------------------------------------

    \417\ Alliant Energy Comments at 7-8; Conservative Action
Comments at 1; Duke Energy Comments at 5-7; Mr. Moore Comments at 2;
Mr. Transeth Comments at 2.
    \418\ Berkshire Hathaway Comments at 5.
---------------------------------------------------------------------------

    268. Massachusetts DPU argues that a 10-year, fixed energy rate
based on current New England wholesale energy market prices is highly
likely to diverge from actual energy market prices over the ten-year
contract term and could significantly harm ratepayers.\419\ Mr.
Transeth represents that Consumers Energy's QF contracts are priced
between 30 to 50% higher than their current market value.\420\
---------------------------------------------------------------------------

    \419\ Massachusetts DPU Comments at 7 (citing NOPR, 168 FERC ]
61,184 at 40).
    \420\ Mr. Transeth Comments at 2.
---------------------------------------------------------------------------

    269. APPA supports the variable energy rate proposal because the
discrepancy between administratively set, locked-in, long-run avoided
costs and actual market prices for the purchase of equivalent energy
can be enormous, as demonstrated by the evidence submitted in the
Technical Conference. According to APPA, were continued development of
the IPP and renewable industries in jeopardy, the Commission might have
grounds to conclude that enabling QFs to lock in energy payments over
the course of their agreement is needed in order to bolster these
resources, but the growth in the IPP and renewables industries in RTOs/
ISOs indicate otherwise.\421\
---------------------------------------------------------------------------

    \421\ APPA Comments at 16.
---------------------------------------------------------------------------

    270. Commissioner O'Donnell asserts that the Montana Public Service
Commission has addressed concerns about overpayments by shortening QF
contract length from 25 years to 15, which has resulted in litigation
currently pending before the Montana Supreme Court. Commissioner
O'Donnell asserts that, because the energy component of an avoided cost
rate reflects the price at which the purchasing electric utility could
purchase power on the open market, there is no need to fix that fluid
energy component for as long as 25 years.\422\
---------------------------------------------------------------------------

    \422\ Commissioner O'Donnell Comments at 2.
---------------------------------------------------------------------------

    271. Competitive Enterprise asserts that long-term fixed price
rates ``serve only to reward certain financial investors at the expense
of consumers, who are forced to pay inflated rates for electricity''
and insists that utilities should only be required to purchase from
resources that are needed and competitively priced.\423\
---------------------------------------------------------------------------

    \423\ Competitive Enterprise Comments at 2.
---------------------------------------------------------------------------

ii. Comments in Opposition to NOPR Proposal
    272. Harvard Electricity Law observes that the Commission's
examples of contract rates that exceed avoided costs calculated years
prior illustrate the general proposition that ``energy forecasts have a
manifest record of failure.'' \424\ Harvard Electricity Law notes,
however, that in issuing Order No. 69, the Commission recognized that
industry changes are difficult to forecast, but the Commission
nonetheless concluded in Order No. 69 that the possibility that
consumers would be harmed by high rates was outweighed by the
Commission's duty to encourage QFs.\425\ Harvard Electricity Law
further claims that the repeal of the fixed-price rule is not necessary
to protect consumers from rates in future contracts.\426\ Harvard
Electricity Law argues that the Commission's rules do not require an
annual matching between avoided costs and rates, nor prevent states
from setting declining avoided costs (which Order No. 69 explicitly
condones).\427\
---------------------------------------------------------------------------

    \424\ Harvard Electricity Law Comments at 24 (citing Vaclav
Smil, Energy at the Crossroads: Global Perspectives and
Uncertainties, Mass. Inst. Tech., 2003, at 121, 145-149).
    \425\ Harvard Electricity Law Comments at 24.
    \426\ Id. at 23.
    \427\ Id. at 23-24 (citing Order No. 69, FERC Stats. & Regs. ]
30,128 at 30,881).
---------------------------------------------------------------------------

    273. Several commenters argue that the NOPR's assertion of
artificially high avoided cost rates is unsupported or

relies on flawed data and analysis.\428\ For example, NIPPC, CREA, REC,
and OSEIA argue that the Commission relied on flawed data and analysis
by using actual market prices that resulted after substantial QF
penetration (which they assert has reduced power prices).\429\
---------------------------------------------------------------------------

    \428\ NIPPC, CREA, REC, and OSEIA Comments at 30; Public
Interest Organizations Comments at 39-40; Public Interest
Organizations Comments at 43; Solar Energy Industries Comments at
34-36.
    \429\ NIPPC, CREA, REC, and OSEIA Comments at 30-31.
---------------------------------------------------------------------------

    274. Public Interest Organizations claim that the NOPR's evidence
of overestimations is based on a selective choice of years reflecting
general wholesale price declines, in which QF contracts were executed
just before unforeseen natural gas price declines.\430\ Public Interest
Organizations argue that these recent electricity price overestimations
are not unique to QFs and can be explained by general declines in
natural gas prices since the adoption of hydraulic fracturing and the
2007-2009 recession.\431\
---------------------------------------------------------------------------

    \430\ Public Interest Organizations Comments at 39-40.
    \431\ Id. at 47-50.
---------------------------------------------------------------------------

    275. Public Interest Organizations dispute Alliant's asserted
overestimation by claiming that Alliant likely would have procured non-
QF energy at the same price and further point out that Alliant does not
disclose the data upon which it relies.\432\ Public Interest
Organizations assert that the Commission similarly erred in relying on
EEI's description of overestimations of avoided costs in PacifiCorp's
QF contracts because PacifiCorp only compares those prices to the Mid-C
hub and does ``not contain an analysis of the long-term balancing of
its forecasted avoided energy rates with actual avoided energy costs.''
\433\ Public Interest Organizations contend that this comparison
implies that PacifiCorp would have relied entirely on the Mid-C hub for
all of its needs but for the QF contracts.\434\
---------------------------------------------------------------------------

    \432\ Id. at 40-41.
    \433\ Id. at 41 (citing NOPR, 168 FERC ] 61,184 at P 64 n.101
(citing EEI Supplemental Comments, Docket No. AD16-16-000, attach. A
at 3-4 (June 25, 2018))).
    \434\ Id.
---------------------------------------------------------------------------

    276. SC Solar Alliance contests Duke Energy's estimate of $2.26
billion in overpayments for QF power. According to SC Solar Alliance,
``an expert witness for South Carolina's Office of Regulatory Staff,
which represents the interests of the using and consuming public in
proceedings before the South Carolina Commission, recently testified
that Duke's estimation of `overpayments' to QFs was not reliable and
that he `wouldn't put a whole lot of weight in [Duke's estimate].' ''
\435\
---------------------------------------------------------------------------

    \435\ SC Solar Alliance Comments at 7 (quoting Public Service
Commission of South Carolina, Docket No. 2019-185 & 186-E, Hearing
Transcript Vol. 2 at 596, lines 6-21 (Horii Test.)) (attached as
Appendix 1 to SC Solar Alliance Comments).
---------------------------------------------------------------------------

    277. GridLab attacks the conclusions of the Concentric Report,
raising two principal arguments. First, according to GridLab, QF
contracts are executed in non-competitive markets where utilities do
not perform competitive solicitations. If QF avoided cost pricing is
higher than prices set through competitive bidding, GridLab asserts
that is because the utility's production costs are higher than
competitive prices.\436\ Second, GridLab asserts that Concentric has
compared two datasets that are different in several ways, most notably
project size--with larger projects enjoying economies of scale that
result in lower costs. According to GridLab, the difference in project
size and its impact on cost is a significant factor that could account
for the whole of the reported increase on price.\437\
---------------------------------------------------------------------------

    \436\ GridLab Comments at 1-2.
    \437\ Id. at 4.
---------------------------------------------------------------------------

    278. NIPPC, CREA, REC, and OSEIA argue that it was unreasonable for
the Commission in the NOPR to assume that electricity price declines
are permanent, given recent integrated resource plans (IRP) in the
Northwest predicting significantly increased electricity demand and
market prices at the Mid-C and Palo Verde hubs.\438\ NIPPC, CREA, REC,
and OSEIA represent that electricity prices will climb significantly in
the Northwest. NIPPC, CREA, REC, and OSEIA also assert that 100%
renewable or non-emitting generation mandates and increased
electrification of transportation could substantially increase
electricity demand. NIPPC, CREA, REC, and OSEIA contend that fixed-
price QF contracts protect consumers from the potential for future
rising prices, market volatility, market risk, and project risk.\439\
---------------------------------------------------------------------------

    \438\ NIPPC, CREA, REC, and OSEIA Comments at 33-34.
    \439\ Id. at 34-36.
---------------------------------------------------------------------------

    279. Resources for the Future reasons that ``while fixed prices
determined [five to ten] years ago would likely exceed current average
market prices, that may not be true for fixed prices determined either
more recently or in the future.'' \440\ Resources for the Future states
that, contrary to the NOPR, there is no consensus that wind and solar
generation costs will continue to decline because any capital cost
declines will be relatively modest and will be offset by declining
federal tax credits.\441\ Furthermore, Resources for the Future
attributes these cost declines to the recent U.S. natural gas boom and
points out that this decline is therefore not likely to continue.\442\
sPower similarly argues that recent energy price declines will not
necessarily continue, especially given expiring tax credits and
additional tariffs.\443\
---------------------------------------------------------------------------

    \440\ Resources for the Future Comments at 4.
    \441\ Id. at 5.
    \442\ Id. at 4.
    \443\ sPower Comments at 10-11.
---------------------------------------------------------------------------

    280. Several commenters assert that the risk of overpayments to QFs
should be compared to the alternative generation sources used by the
utility.\444\ For example, ELCON claims that critics who assert that
QFs are ``locking-in'' consumers to artificially high rates must
acknowledge that utility procurement does exactly the same via the pre-
approval process, sometimes for even longer durations. ELCON argues
that QFs can only benefit consumers by competing on a level playing
field with comparable terms and conditions.\445\ North Carolina
Commission Staff similarly asserts that the risk of overpayment to QFs
should be considered in the context of a utility's long-term commitment
to build plants where ``generation decisions are based upon uncertain
forecasts that could result in ratepayers bearing the same type of
forecast risk from utility plants as they do from QFs.'' \446\
---------------------------------------------------------------------------

    \444\ ELCON Comments at 22; North Carolina Commission Staff
Comments at 2-3; NIPPC, CREA, REC, and OSEIA Comments at 31; Public
Interest Organizations Comments at 40, 43; Solar Energy Industries
Comments at 36-38.
    \445\ ELCON Comments at 22.
    \446\ North Carolina Commission Staff Comments at 2-3.
---------------------------------------------------------------------------

    281. According to Solar Energy Industries, the risk from utility
generation construction is allocated to ratepayers for the life of
these assets regardless of ongoing changes in energy prices, while
PURPA was designed to shift this risk away from ratepayers. Solar
Energy Industries state that there is no evidence that ratepayers are
harmed by long-term QF contracts any more than other long-term
contracts or utility recovery of generation assets in their rate base.
Solar Energy Industries state that, even though solar prices have
declined over time, solar QFs should not be penalized for utility
failures to update their avoided cost calculations to keep pace with
such declines.\447\
---------------------------------------------------------------------------

    \447\ Solar Energy Industries Comments at 36-38.
---------------------------------------------------------------------------

    282. The DC Commission states that, with respect to the fact that
long-term contracts (e.g., 20 years) using fixed avoided energy costs
could create stranded costs potentially due to

inaccurate projections, the chance of creating stranded costs is
substantially reduced when the most up-to-date data regarding avoided
energy costs is used. The DC Commission states that, if the contract
length is permitted to be flexible, the possibility of stranded costs
would be significantly reduced for shorter term contracts.\448\ The DC
Commission states that, without the worry of stranded costs, there is
no need to eliminate the fixed price contract option for QFs.\449\
---------------------------------------------------------------------------

    \448\ DC Commission Comments at 8.
    \449\ Id.
---------------------------------------------------------------------------

iii. Commission Determination
    283. As explained above, the NOPR proposal to give states the
flexibility to require variable energy pricing in QF contracts and
other LEOs, instead of providing QFs the right to elect fixed energy
prices, was based on the Commission's concern that, at least in some
circumstances, long-term fixed avoided cost energy rates have been well
above the purchasing utility's avoided costs for energy--a result
prohibited by PURPA section 210(b). And the record evidence
demonstrates just that, i.e., that QF contract and LEO prices for
energy can exceed and have exceeded avoided costs for energy without
any subsequent balancing out. In addition to the examples presented in
the record of the Technical Conference that were cited in the NOPR,
commenters have provided additional examples of such overpayments, as
described above.\450\ Such evidence has persuaded us that it is
necessary to give states the flexibility to address QF contract and LEO
rates for energy that exceed avoided costs for energy, while at the
same time still allowing states the flexibility to continue requiring
long-term fixed avoided cost energy rates in QF contracts and other
LEOs when such treatment is appropriate.
---------------------------------------------------------------------------

    \450\ See Duke Comments at 6; Idaho Power Comments at 10-11;
Portland General Comments at 5; NOPR, 168 FERC ] 61,184 at P 64
n.101.
---------------------------------------------------------------------------

    284. As Harvard Electricity Law concedes, the examples of QF
contract rates that exceed avoided costs that are in the record
illustrate the general proposition that ``energy forecasts have a
manifest record of failure.'' \451\ It is this ``manifest record of
failure'' including evidence in the record that the failure has been at
the expense of consumers, that drives us to make the change adopted in
the final rule.\452\
---------------------------------------------------------------------------

    \451\ Harvard Electricity Law Comments at 24 (citing Vaclav
Smil, Energy at the Crossroads: Global Perspectives and
Uncertainties, Mass. Inst. Tech., 2003, at 121, 145-149).
    \452\ See, e.g., supra P 254 & note 403.
---------------------------------------------------------------------------

    285. While some commenters challenge the idea that avoided cost
energy rates in QF contracts and other LEOs have exceeded actual
avoided costs, their arguments largely either concede that
overestimations have occurred while arguing that such overestimations
impacted purchasing electric utilities just as much as QFs, or attempt
to argue that such overestimations were temporary or unusual. For these
reasons, they assert that the Commission should not conclude that
historical overestimations of avoided cost require a change to the
current PURPA Regulations requiring states to allow QFs to fix their
avoided costs energy rates for the term of their contracts. These
arguments do not cause us to reconsider our determination, for the
reasons explained below.
    286. First, Harvard Electricity Law's citation to the Commission's
original determination in Order No. 69 that it was not necessary to
provide for variable avoided cost energy rates carries little
weight.\453\ The purpose of the NOPR was to reconsider the Commission's
determinations made in Order No. 69 in light of changes in
circumstances and additional evidence that was not available to the
Commission when it issued Order No. 69 in 1980. The record evidence
cited above demonstrates that, contrary to the Commission's finding in
1980, overestimations and underestimations of future avoided costs may
not even out.\454\ Consequently, the Commission's determination in 1980
does not preclude the Commission from changing the rule adopted at that
time.
---------------------------------------------------------------------------

    \453\ Id. at 23-24 (citing Order No. 69, FERC Stats. & Regs. ]
30,128, at 30,881).
    \454\ See Duke Comments at 6; Idaho Power Comments at 10-11;
Portland General Comments at 5; NOPR, 168 FERC ] 61,184 at 64 n.101.
---------------------------------------------------------------------------

    287. We agree with Public Interest Organizations that the recent
electricity price overestimations were not unique to QFs and can be
explained by general declines in natural gas prices since the adoption
of hydraulic fracturing and the 2007-2009 recession.\455\ But that is
precisely why the estimates of avoided costs reflected in the QF
contracts and LEOs were incorrect and why the resulting fixed avoided
cost energy rates reflected in such QF contracts and other LEOs
resulted in QF rates well above utility avoided costs in violation of
PURPA section 210(b); the precipitous decline in natural gas prices
caused a corresponding reduction in utilities' energy costs, and thus
in their energy avoided costs but this decline was not reflected in the
QFs' fixed contract rates that remained at their previous levels.
---------------------------------------------------------------------------

    \455\ Public Interest Organizations Comments at 47-50.
---------------------------------------------------------------------------

    288. Similarly, arguments from commenters that electric utilities
also based resource acquisitions on incorrect forecasts of natural gas
prices \456\ ignore a key distinction between utility rates and fixed
QF rates. Electric utilities may have relied on incorrect natural gas
price forecasts to justify the timing and type of their resource
acquisitions, as commenters assert. But once an electric utility
resource decision was made, their cost-based rate regimes typically
obligated the electric utility eventually to pass through to customers
any energy cost savings realized as a result of declining natural gas
and other fuel prices, as well as any energy cost savings due to lower
purchased power rates resulting from the decline in natural gas prices.
By contrast, once QF avoided cost energy rates were fixed based on now-
incorrect (and now-high) natural gas price forecasts, those energy
rates remained fixed for the term of the QFs' contracts and LEOs.
Therefore, unlike fixed avoided cost energy rates in QF contracts and
LEOs, cost-based electric utility energy rates declined as the cost of
natural gas and other fuels and purchased power declined.
---------------------------------------------------------------------------

    \456\ ELCON Comments at 22; North Carolina Commission Staff
Comments at 2-3; NIPPC, CREA, REC, and OSEIA Comments at 31; Public
Interest Organizations Comments at 40, 43; Solar Energy Industries
Comments at 36-38.
---------------------------------------------------------------------------

    289. We also disagree with Public Interest Organizations'
assertions that it was improper to have used competitive market hub
prices to determine whether fixed QF contract and LEO prices resulted
in overpayments as compared to electric utilities' actual avoided
costs.\457\ We recognize that the competitive market hub prices used in
the comparisons may not have precisely reflected the avoided energy
costs of all electric utilities located in the same region as the
competitive market hub. However, as explained above in the discussion
of the use of Market Hub Prices to determine avoided energy costs,
competitive market prices in general should reflect the marginal
avoided energy costs of utilities with access to such markets.
Certainly, those markets generally reflect the marginal cost of energy
in the region.\458\ The

magnitude of the differences between the market hub prices and the QF
contract and LEO prices provides solid evidence that the QF contract
and LEO prices used in the comparison were well above actual avoided
energy costs at the time the energy was delivered by the QFs, even if
the exact magnitude is unclear.
---------------------------------------------------------------------------

    \457\ Public Interest Organizations Comments at 40-41.
    \458\ A review of recent Mid-C Hub daily spot prices (from
Intercontinental Exchange (ICE) https://www.eia.gov/electricity/wholesale/, indicates that they reflect the marginal cost of energy
in that area since they are usually the result of a significant
number of trades (averaging 54 per day), counterparties (averaging
16 per day), and trading volume (averaging 26,714 MWh/day), which
usually exceed those of the NP-15 trading hub, an active Western
trading hub in Northern California in the CAISO footprint (averaging
6 trades per day, 4 counterparties per day, and 2,756/MWh per day).
The prices for Mid-C ranged between an average of approximately $16/
MWh high price and $13/MWh low price during the recent spring (Mar
19-Jun 20, 2020). During this period the index was reported for 65
trading days for Mid-C and 9 trading days for NP-15.
---------------------------------------------------------------------------

    290. We acknowledge that energy prices may increase in the future,
as several commenters point out.\459\ However, as noted by Harvard
Electricity Law, ``energy forecasts have a manifest record of
failure.'' \460\ Moreover, the fact that energy prices may increase in
the future does not eliminate the risk that fixed avoided cost energy
rates could still be above actual avoided costs. That is, if the actual
increase in energy prices is still lower than the forecasted increase
that would form the basis of the fixed avoided cost energy rate, then
the fixed avoided cost energy rate will be above actual avoided energy
costs. Giving states the flexibility to require variable avoided cost
energy rates in QF contracts and in other LEOs will allow states to
better ensure that avoided cost energy payments made to QFs will more
accurately reflect the purchasing utility's avoided costs regardless of
whether energy prices are increasing or declining. We also note that,
if energy prices do in fact increase, variable avoided cost energy
pricing would protect and even benefit the QF itself, as it would not
be locked into a fixed energy rate contract or LEO that would be below
the purchasing electric utility's avoided energy cost.
---------------------------------------------------------------------------

    \459\ NIPPC, CREA, REC, and OSEIA Comments at 33-36; Resources
for the Future Comments at 4; sPower comments at 10-11.
    \460\ Harvard Electricity Law Comments at 24 (citing Vaclav
Smil, Energy at the Crossroads: Global Perspectives and
Uncertainties, Mass. Inst. Tech., 2003, at 121, 145-149).
---------------------------------------------------------------------------

    291. Although many commenters agreed that fixed QF energy rates
were higher than actual avoided energy costs in at least some
instances, challenges were raised against both Duke Energy's estimate
that its fixed QF contract rates were $2.6 billion above market costs,
and the Concentric Report's comparison of QF fixed rates for wind and
solar facilities with the cost of wind and solar projects with
competitive, non-PURPA contracts.
    292. However, the expert testimony cited by the SC Solar Alliance,
that the witness ``wouldn't put a whole lot of weight in [Duke's
estimate],'' \461\ does not address Duke's calculation of past
overpayments. Rather, the witness was answering a question regarding
the potential for overpayments ``[f]or going forward solar,'' i.e.,
future overpayments as a result of the new fixed avoided cost rates
being considered by the South Carolina Commission that were the subject
of the expert witness' testimony.\462\ The same witness acknowledged
the past overpayments made by Duke Energy, which he attributed to
``drops in natural gas prices that no one could've foreseen.'' \463\ It
is these overpayments due to unforeseen declines in natural gas prices
that form an important basis for the Commission's determination in this
final rule to now give states the flexibility to require variable
avoided cost energy rates in QF contracts and LEOs.
---------------------------------------------------------------------------

    \461\ SC Solar Alliance Comments at 7 (quoting, Public Service
Commission of South Carolina, Docket No. 2019-185 & 186-E, Hearing
Transcript Vol. 2, Tr. at 596: 6-21 (Horii Test)) (attached as
Appendix 1 to SC Solar Alliance Comments).
    \462\ Public Service Commission of South Carolina, Docket No.
2019-185 & 186-E, Hearing Transcript Vol. 2, Tr. 596: 3-4 (Horii
Test)) (attached as Appendix 1 to SC Solar Alliance Comments).
    \463\ Id. at 593:21-22.
---------------------------------------------------------------------------

    293. With respect to the criticisms of the Concentric Report, we
emphasize that we have not relied on that report to support the
variable energy avoided cost provision adopted in the final rule. It is
not clear that the lower cost of the competitively priced renewable
resources identified in the report represents the avoided costs of the
purchasing utilities that entered into the QF contracts at fixed rates
for renewable resources under PURPA. Therefore, it is not clear that
the difference in costs identified by Concentric can be ascribed to the
fixed rates in the QF contracts or rather to the fact that the avoided
cost rates in the QF contracts were based on more expensive non-
renewable capacity that was avoided by the purchasing utilities.
e. Whether the Proposed Change Would Violate the Statutory Requirement
that the PURPA Regulations Encourage QFs
i. Comments
    294. Several commenters argue that the NOPR's variable rate
proposal is inconsistent with PURPA's mandate that the PURPA
Regulations ``encourage'' the development of QFs.\464\ Southeast Public
Interest Organizations state that removing QFs' right to a fixed energy
rate would flout Congressional intent that PURPA encourage QF
development because fixed rates are necessary to attract QF
financing.\465\ Harvard Electricity Law states that Congress's mandate
to encourage QFs is not contingent on industry conditions and does not
expire.\466\
---------------------------------------------------------------------------

    \464\ Allco Comments at 9; Con Edison at 3, 4; Harvard
Electricity Law Comments at 1; North American-Central Comments at 4-
6; Southeast Public Interest Organizations at 9-11.
    \465\ Southeast Public Interest Organizations Comments at 9-10.
    \466\ Harvard Electricity Law Comments at 1.
---------------------------------------------------------------------------

ii. Commission Determination
    295. As explained above in Section IV.A.1, the statutory
requirement that the Commission's PURPA Regulations encourage QFs
remains, but it is bounded by the statutory provision in PURPA section
210(b) that QF rates may not exceed a purchasing utility's avoided
costs. Further, as explained above, we have determined, based on the
record evidence, that it is not necessarily the case that
overestimations and underestimations of avoided energy costs will
balance out. Consequently, a fixed energy rate in a QF contract or LEO
potentially could violate the statutory avoided cost cap on QF rates.
    296. The Commission's PURPA Regulations continue to encourage the
development of QFs by, among other things, allowing a state to vary the
rate paid to the QF over time but in a way that satisfies the rate cap
established in PURPA section 210(b). In this way, the QF can obtain a
higher rate when the utility's avoided costs increase, and ratepayers
are not paying more than the utility's avoided costs when prices
decrease. Furthermore, as discussed above, allowing the use of variable
energy rates may promote longer contract terms, which would help
encourage and support QFs.\467\ It therefore is consistent with PURPA
section 210(b), as well as the obligation imposed by PURPA section
210(a) to revise the Commission's PURPA Regulations ``from time to
time,'' to provide the states the flexibility to require that QF
contracts and other LEOs implement variable avoided cost energy rates
in order to prevent payments to QFs in excess of the purchasing
electric utility's avoided energy costs. PURPA section 210(b) prohibits
the Commission from requiring QF rates above avoided costs even if,
according to some commenters, a fixed avoided cost energy rate would
provide greater encouragement to QFs than a variable avoided cost
energy rate.
---------------------------------------------------------------------------

    \467\ See infra P 349.

---------------------------------------------------------------------------

f. Discrimination
i. Comments in Support of NOPR Proposal
    297. Alliant Energy observes that utility-owned generation and
traditional power purchase agreements (PPAs) are subject to a
demonstration of need and that traditional PPAs are subject to re-
evaluation during their term to determine whether they continue to be
cost-competitive and in the best interests of customers. Alliant Energy
asserts that, by contrast, QFs are not required to demonstrate that
their projects are needed and that, once a contract is executed, it is
not subject to re-evaluation.\468\
---------------------------------------------------------------------------

    \468\ Alliant Energy Comments at 6-7.
---------------------------------------------------------------------------

ii. Comments in Opposition to NOPR Proposal
    298. Several commenters assert that the NOPR's variable avoided
cost energy rate proposal is discriminatory.\469\ For example, EPSA
argues that PURPA requires the Commission to implement regulations
that, for rates for electric utility purchases from QFs, ``shall not
discriminate against qualifying cogenerators or qualifying small power
producers.'' EPSA describes this standard as more restrictive than the
FPA's prohibition against ``unduly discriminatory'' rates. According to
EPSA, the fact that long-term QF contracts are substantially above
prevailing market prices due to declining wholesale prices over the
long-term does not justify the variable rate proposal because electric
utility-owned generation is similarly based on imperfect long-term
forecasts of energy prices that oftentimes prove to be too high. EPSA
therefore argues that the NOPR variable rate proposal should not be
adopted unless utility-owned assets are also subject to a similar cost
recovery regime.\470\
---------------------------------------------------------------------------

    \469\ ELCON Comments at 21-22; SC Solar Alliance Comments at 5-
10; sPower Comments at 13; see also ELCON Comments at 22; North
Carolina Commission Staff Comments at 2-3; NIPPC, CREA, REC, and
OSEIA Comments at 31; Public Interest Organizations Comments at 40,
43; Solar Energy Industries Comments at 36-38.
    \470\ EPSA Comments at 8-9.
---------------------------------------------------------------------------

    299. sPower describes the NOPR proposal to allow variable rates as
providing a significant advantage to electric utilities over QFs, given
that electric utilities themselves, according to sPower, have not had
to lower rates to consumers as energy prices have declined.\471\ ELCON
asserts that pushing more market risk to QFs while utility assets
remain insulated from markets creates an investment risk asymmetry.
ELCON claims this puts QFs at a competitive disadvantage and shifts the
consumer burden to more utility builds, which have generally been
higher cost than merchant builds.\472\
---------------------------------------------------------------------------

    \471\ sPower Comments at 13.
    \472\ ELCON Comments at 21-22.
---------------------------------------------------------------------------

    300. SC Solar Alliance states that utilities often rely on fuel
price forecasts over time to justify rate base approval for generation
assets that might run beyond price forecasts. SC Solar Alliance argues
that allowing utilities this right, but not QFs, holds QFs to a much
higher standard than utilities and therefore is discriminatory.\473\
---------------------------------------------------------------------------

    \473\ SC Solar Alliance Comments at 5-10.
---------------------------------------------------------------------------

    301. Commissioner Slaughter argues that, by removing the fixed,
long-term contract option for independent power producers, the NOPR
threatens to hamper the competitiveness of renewable-based energy firms
challenging vertically integrated utilities in many localities across
the country.\474\
---------------------------------------------------------------------------

    \474\ Commissioner Slaughter Comments at 4.
---------------------------------------------------------------------------

iii. Commission Determination
    302. The discrimination claims are based on the incorrect
assumption that electric utilities have not been required to lower
their energy rates as prices have declined. To the contrary, as
explained above, utilities typically charge their customers cost-based
rates, and as their fuel and purchased power costs have declined, they
typically have been required to provide corresponding reductions in the
energy portion of their rates to their customers.\475\ Requiring QF
avoided cost energy rates to likewise change as purchasing electric
utilities' avoided energy costs change does not create a discriminatory
difference, but rather puts QF rates on par with utility rates.
---------------------------------------------------------------------------

    \475\ See supra PP 40, 122, 288.
---------------------------------------------------------------------------

    303. Further, we are not changing the requirement that QF avoided
cost energy rates be set at the purchasing utility's full avoided
energy costs. As the Supreme Court held in API, ``the full-avoided-cost
rule plainly satisfies the nondiscrimination requirement.'' \476\
Rather, we are allowing the states the option to now choose to require
QF avoided cost energy rates that vary with the purchasing utility's
avoided costs of energy, rather than QF avoided cost rates that are
fixed for the life of the QF's contract or LEO, to ensure the rates
comply with PURPA.
---------------------------------------------------------------------------

    \476\ API, 461 U.S. at 413.
---------------------------------------------------------------------------

g. Effect of Variable Energy Rates on Financing
i. Comments in Support of the NOPR Proposal
    304. Several commenters state that fixed energy payments are not
necessary for QFs to obtain financing.\477\ Alliant states that it is
on track to be the third largest utility owner-operator of wind
facilities in the United States, with 1.9 GW on its system and in
addition is increasing the pace of solar resource development in its
Wisconsin territory. Alliant states it therefore does not believe that
the proposed change will slow renewable deployment and adoption.\478\
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    \477\ APPA Comments at 16-17; Indiana Commission Comments at 6.
    \478\ Alliant Energy Comments at 6.
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    305. Several commenters assert that PURPA's must-purchase
requirement itself should necessarily afford QF developers a degree of
certainty and enables developers to attract capital at advantageous
terms.\479\ The Idaho Commission states that, even if modified as
proposed, QF contract terms would remain superior to competitively bid
renewable projects where the energy is not ``must take'' and
curtailment and other reliability parameters are imposed.\480\
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    \479\ APPA Comments at 16-17; Finadvice Comments at 2; Idaho
Commission Comments at 4; Commissioner O'Donnell Comments at 3.
    \480\ Idaho Commission Comments at 4.
---------------------------------------------------------------------------

    306. Finadvice and APPA argue that maintaining a fixed capacity
rate, as proposed by the Commission, will help attract capital and
ameliorate any negative effect that the variable energy rate proposal
may impose.\481\ Ohio Commission Energy Advocate argues, as evidence
that QFs can still flourish under a variable energy rate, that the PJM
market has successfully attracted new supplies and ensured resource
adequacy through fixed capacity and variable energy rates.\482\
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    \481\ APPA Comments at 16-17; Finadvice Comments at 2.
    \482\ Ohio Commission Energy Advocate Comments at 3-4.
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    307. The Idaho Commission states that variable energy prices
protect the ratepayer while allowing the QF to ensure a stream of
revenue through a longer-term contract. The Idaho Commission affirms
that the rapid growth of non-QF renewable projects and their ability to
obtain financing should quell any concerns about a QF's ability to
obtain financing as long as PURPA's ``must take'' provision
remains.\483\ Commissioner O'Donnell asserts that QFs should bear some
market risk as energy prices rise and fall in a way that balances risks
to all parties.\484\
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    \483\ Idaho Commission Comments at 4.
    \484\ Commissioner O'Donnell Comments at 3.
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    308. EEI argues that PURPA does not require the Commission or the
states to implement regulations that guarantee a

QF's financeability. EEI represents that Congress intended QFs to be
treated similarly to merchant generation and simply required QFs to
have non-discriminatory access. According to EEI, because QFs are not
subjected to the oversight or regulatory responsibilities applicable to
electric utilities, it was not expected or intended that QFs be treated
the same as electric utilities.\485\ Similarly, Duke argues that the
central design criteria for PURPA rates and terms should be customer
indifference, just and reasonableness, and non-discrimination. Duke
Energy states that a design that requires QF financeability as a
criterion will inevitably lead to a QF boom and customer harm.\486\
Duke Energy further asserts that several factors affect financeability
and that, therefore, claims by QFs that they require fixed energy
payments for financing purposes should be rejected.\487\
---------------------------------------------------------------------------

    \485\ EEI Comments at 35.
    \486\ Duke Energy Comments at 17-18.
    \487\ Id. at 13.
---------------------------------------------------------------------------

    309. EEI claims QFs that require third-party financing will still
be able to obtain financing if the Commission adopts the proposals in
the NOPR, because they are additional options, in addition to those
currently being used by states, that will be available to determine
avoided costs. EEI maintains that a QF developer will be able to obtain
financing under any of the options, provided it can build a cost-
efficient plant that can profit at an avoided cost rate.\488\ EEI
claims that independent power producers lacking the certainty of the
mandatory purchase obligation are building most renewable generation
today because merchant power plants may be developed and financed using
a variety of hedging and risk management tools, such as commodity
hedges, that lock in cash flows and facilitate construction at the
outset.\489\
---------------------------------------------------------------------------

    \488\ EEI Comments at 35-36.
    \489\ Id. at 36.
---------------------------------------------------------------------------

    310. APPA states that much of the renewable development that has
occurred over the past 20 years has taken place within RTO/ISO
footprints and therefore is largely unaided by PURPA obligations.\490\
---------------------------------------------------------------------------

    \490\ APPA Comments at 16-17.
---------------------------------------------------------------------------

    311. Duke Energy states that concern about the potential for fixed
avoided cost contract rates exceeding actual avoided costs at the time
of delivery have led both North Carolina and South Carolina to enact
laws placing limits on the length of QF contracts.\491\ The Idaho
Commission states that there is no evidence that variable energy prices
would be fatal to QF development.\492\ The Idaho Commission states that
it reduced contract length on large projects to two years because it
did not interpret the Commission's current rules to allow for a
variable energy rate inside a long-term contract. The Idaho Commission
states that, because its experience dictated that the longer the
contract term, the more inflated the avoided cost rate, the Idaho
Commission set parameters to balance QF interests against utility
ratepayer interests. The Idaho Commission states that an energy rate
established at the time of contract formation that provides for
``revisions to the energy rate at regular intervals, consistent with,
for example, a purchasing electric utility's [integrated resource
planning (IRP)] to reflect updated avoided cost calculations'' would
allow states to consider longer term contracts without putting
ratepayers at risk.\493\ NorthWestern represents that the Montana
Commission has lowered the length of QF contracts from 25 to 15 years
in response to the current requirement that QFs are entitled to fixed
avoided cost rates for energy in their contracts and a concern that
rates calculated at the time a contract is signed are likely to change
over the life of that contract.\494\
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    \491\ Duke Energy Comments at 9; LG&E/KU Comments at 4.
    \492\ Idaho Commission Comments at 4.
    \493\ Id. (citing NOPR, 168 FERC ] 61,184 at P 5 n.5).
    \494\ NorthWestern Comments at 6-7.
---------------------------------------------------------------------------

ii. Comments in Opposition to the NOPR Proposal
    312. Many commenters assert that the NOPR's variable energy rate
proposal will result in QFs being unable to obtain financing.\495\
Several commenters also assert that it is discriminatory that utilities
and non-QF generators can rate-base long-term investments and recover
actual operating costs, while the NOPR's proposed rules would deprive
QFs of a reasonable ability to forecast their cost recovery with no
guarantees.\496\
---------------------------------------------------------------------------

    \495\ Allco Comments at 9; AllEarth Comments at 2; Biogas
Comments at 2; BluEarth Comments at 2; Biological Diversity Comments
at 8; Commissioner Slaughter Comments at 4; Con Edison Comments at
3, 4; Covanta Comments at 7-8; DC Commission Comments at 6-8;
Distributed Sun Comments at 1; EPSA Comments at 2; Energy Recovery
at 4; Harvard Electricity Law Comments at 5; Massachusetts AG
Comments at 8-9; New England Hydro Comments at 8; NIPPC, CREA, REC,
and OSEIA Comments at 37-38; North Carolina DOJ Comments at 3, 6;
North American-Central Comments at 4-6; Public Interest
Organizations Comments at 6-7; Resources for the Future Comments at
6-7. SC Solar Alliance Comments at 5-7; Southeast Public Interest
Organizations Comments at 9-11; State Entities Comments at 2-3; Two
Dot Wind Comments at 11-13.
    \496\ Allco Comments at 9; Commissioner Slaughter at 4; Harvard
Electricity Law Comments at 5; NIPPC, CREA, REC, and OSEIA Comments
at 36-37; Public Interest Organizations Comments at 6-7; Solar
Energy Industries at 29-30.
---------------------------------------------------------------------------

    313. Several commenters assert that the NOPR lacks evidence on the
record to conclude that the variable rate proposal would not affect the
ability of QFs to obtain financing.\497\ NIPPC, CREA, REC, and OSEIA
argue that the NOPR contained no record evidence demonstrating how this
proposal would continue to encourage QFs in a non-discriminatory
manner,\498\ and lacks evidence on how QF generation can be financed
without a fixed energy rate.\499\ Similarly, Harvard Electricity Law
asserts that repealing the fixed-price PPA requirement is premised on
irrelevant data and ignores the record, and disagrees with the
Commission's demonstration of information on non-QF capacity to show
that QF development no longer relies on contracts with fixed energy
rates.\500\
---------------------------------------------------------------------------

    \497\ NIPPC, CREA, REC, and OSEIA Comments at 29, 46; Harvard
Electricity Law Comments at 22, 25-27; Public Interest Organizations
Comments at 6-7, 33-35.
    \498\ NIPPC, CREA, REC, and OSEIA Comments at 29.
    \499\ Id. at 46-48.
    \500\ Harvard Electricity Law Comments at 22, 25 (citing NOPR,
168 FERC ] 61,184 at PP 69-70, 76).
---------------------------------------------------------------------------

    314. Public Interest Organizations assert that testimony from
Southern Company, American Forest and Paper Association, and Solar
Energy Industries, upon which the NOPR relies, states that non-QF
renewable PPAs generally entail fixed energy rates rather than variable
energy rates.\501\ In particular, Public Interest Organizations state
that testimony from Solar Energy Industries, refers to reliance on
fixed rates for energy and/or capacity without describing them as
alternatives but rather ``an acknowledgement that a [power purchase
agreement] may provide fixed capacity in addition to fixed energy
revenue, not a suggestion that a QF can be developed without a
predictable energy revenue stream.'' \502\
---------------------------------------------------------------------------

    \501\ Public Interest Organizations Comments at 33-35 (citing
NOPR, 168 FERC ] 61,184, at P 70 n.114 (citing Tech. Conference,
Docket No. AD16-16-000, Tr. at 153, 200 (filed June 30, 2016))).
    \502\ Id. at 35 (citing NOPR, 168 FERC ] 61,184, at P 70 n.115
(citing Solar Energy Industries Comments, Docket No. AD16-16-000, at
3 (filed June 30, 2016))).
---------------------------------------------------------------------------

    315. Allco describes programs in California, Massachusetts,
Connecticut, and Vermont that offer standard QF contract programs with
variable energy rates, none of which, according to Allco, have led to
the construction of solar projects.\503\ Allco claims that these
programs prove that, without the ability to obtain a fixed long-term
forecasted rate, QF solar energy development will

not exist.\504\ Southeast Public Interest Organizations assert that
Southeastern states with fixed QF energy rates have seen vigorous QF
development, while Southeastern states with variable energy rates have
seen virtually no QF development, undermining the Commission's
assertion that QFs can be financed without fixed energy rates.\505\
---------------------------------------------------------------------------

    \503\ Allco Comments at 10.
    \504\ Id. at 9-11.
    \505\ Southeast Public Interest Organizations Comments at 9-11,
15-16.
---------------------------------------------------------------------------

    316. Covanta and Energy Recovery state that the NOPR's variable
rate proposal would have an especially negative effect on Waste to
Energy facilities.\506\ Covanta states that, because Waste to Energy
depends on finite local tax resources, a loss in energy revenue due to
price variability cannot be easily replaced.\507\ Covanta states that,
without adequate QF pricing and multi-year contracts (and consistent,
predictable pricing throughout the life of the contract), local
governments may be forced to close their Waste to Energy facilities
prematurely, to minimize loss and stranding that investment.\508\
Energy Recovery states that the inability to secure suitable rates
through a long-term contract has closed seventeen Waste to Energy
facilities in the last fifteen years.\509\
---------------------------------------------------------------------------

    \506\ Covanta Comments at 7-8; Energy Recovery Comments at 1, 4.
    \507\ Covanta Comments at 7-8.
    \508\ Id. at 8.
    \509\ Energy Recovery Comments at 3.
---------------------------------------------------------------------------

    317. NIPPC, CREA, REC, and OSEIA state that the NOPR's anecdotal
reliance on tax incentives to encourage QF development is irrelevant
because these incentives are declining or disappearing, thereby
requiring QFs to rely even more on energy rates.\510\ NIPPC, CREA, REC,
and OSEIA predict that the NOPR's proposed rules would make QF
development riskier and would thereby slow the development of new
technologies such as energy storage, hydrogen fuels, and other advanced
renewable energy technologies.\511\
---------------------------------------------------------------------------

    \510\ NIPPC, CREA, REC, and OSEIA Comments at 40-41.
    \511\ Id. at 41-42.
---------------------------------------------------------------------------

    318. Solar Energy Industries states that financing for QFs differs
from financing for fossil fuel generators because ``much of the cost of
installation is incurred up-front, but once installed, the generation
has little, if any, variable cost.'' \512\ Likewise, Harvard
Electricity Law observes that wind and solar QFs, for example, have
higher capital costs, lower operating costs, and provide energy
intermittently, and therefore have characteristics that may present
different financing challenges as compared to non-QF natural gas fired
capacity.\513\ Similarly, Public Interest Organizations argue that,
unlike independent power producer natural gas generators with fixed
capacity payments and variable energy costs, renewable QFs rely on
fixed energy payments to cover their capital costs given their own
nominal variable energy costs.\514\
---------------------------------------------------------------------------

    \512\ Solar Energy Industries Comments at 30.
    \513\ Harvard Electricity Law Comments at 26.
    \514\ Public Interest Organizations Comments at 33-34.
---------------------------------------------------------------------------

    319. NIPPC, CREA, REC, and OSEIA state that the financeability of
generation with fixed capacity prices and variable energy prices inside
RTOs/ISOs is irrelevant to regions that lie outside of RTOs/ISOs.\515\
NIPPC, CREA, REC, and OSEIA criticize the NOPR's reliance on an
independent power producer natural gas turbine's financeability outside
the RTO/ISO context as irrelevant to QFs because these natural gas
turbines receive fixed capacity payments and variable energy payments
to account for the fluctuating price of fuel; whereas a QF would need a
sufficient fixed capacity payment to support financing and an energy
rate that removes market risk.\516\
---------------------------------------------------------------------------

    \515\ NIPPC, CREA, REC, and OSEIA Comments at 42-43.
    \516\ Id.
---------------------------------------------------------------------------

    320. NIPPC, CREA, REC, and OSEIA state that the NOPR's reference to
hedging instruments to reduce risks from fluctuating prices is
irrelevant.\517\ NIPPC, CREA, REC, and OSEIA state that hedging makes
projects less financeable because it increases transaction and
compliance costs for small power producer QFs that cannot afford large
legal divisions and trading floors to employ such hedges.\518\
---------------------------------------------------------------------------

    \517\ Id. at 44-45 (citing NOPR, 168 FERC ] 61,184 at P 72 &
n.117).
    \518\ Id. at 45-46.
---------------------------------------------------------------------------

    321. Resources for the Future states that wind projects have used
bank hedges, synthetic PPAs, and proxy revenue swaps.\519\ Resources
for the Future claims, however, that these products would be
inaccessible to most wind QFs if fixed energy payments are eliminated.
Resources for the Future argues that solar QFs would have even less
access to such hedging given their smaller size and high transaction
costs. Resources for the Future states that QFs under 5 MW in RTO/ISOs
and QFs outside of RTO/ISOs thus would be unable to obtain
financing.\520\
---------------------------------------------------------------------------

    \519\ Resources for the Future Comments at 6.
    \520\ Id. at 6-7.
---------------------------------------------------------------------------

    322. Solar Energy Industries states that QFs in RTO/ISO markets
without a fixed energy rate would require a hedging instrument to
finance their projects. Solar Energy Industries further states that QFs
outside RTO/ISO markets without a fixed energy rate would be unable to
finance their projects because they would have no access to such
hedging mechanisms.\521\ Solar Energy Industries states that the NOPR
failed to consider which markets offer financial products, whether
these financial products are available to QFs outside RTOs/ISOs, and
whether these products will be sufficient to provide financing to
QFs.\522\
---------------------------------------------------------------------------

    \521\ Solar Energy Industries Comments at 30.
    \522\ Id. at 31.
---------------------------------------------------------------------------

    323. Solar Energy Industries states that financing for QFs differs