The original plan for this issue's Legal Brief was to consider the impact of anticipated federal energy legislation on distributed generation. Congress, however, failed to vote the proposed bill into law in 2003. In mid-January 2004, there was another call for federal legislation as the northeastern states faced a period of bitter cold that stressed supplies of electricity and heating fuel. The New England Independent System Operator announced the possibility of rolling blackouts during the cold spell, and proponents of the stalled energy bill seemed poised to push the bill to a vote. In his State of the Union address, President Bush devoted only a single sentence to energy, urging Congress to pass legislation to Òmodernize our electricity system, promote conservation, and make America less dependent on foreign sources of energy.Ó At present it appears that the fate of the proposed legislation won't be decided until the spring of 2004.

So far in 2004, reliability concerns remain a major focus of state and federal agencies that regulate the electric industry. To date, reliability standards for the electric grid have been set by the North American Electric Reliability Council (NERC), with voluntary compliance by the owners of electric transmission and distribution systems. Absent federal legislation that would impose mandatory reliability standards, FERC possibly will mandate them. The move toward regional control of the transmission system continues in 2004, with a strong focus on the midwestern states where utilities are split between the PJM Independent System Operator and the Midwest Independent System Operator.

FERC has not yet acted in response to the tens of comments filed in reaction to the agency's small-generator interconnection rulemaking discussed in the initial Legal Brief. Commenters include the National Association of Regulatory Utility Commissioners, the Combined Heat and Power Association (CHPA), the Small Generator Coalition (SGC), state and federal regulatory agencies, electric utilities, RTOs, and manufacturers of generating equipment. Neither time nor space will allow a review of all the comments, but there clearly is no consensus on issues relating to the interconnection of small generators.

Both SGC and CHPA strongly criticize the rule proposed by FERC. The two organizations suggest that the rule will inhibit rather than encourage the development of distributed generation and that it does not recognize that the impact of small generators on the grid is minimal but instead gives utilities the ability to arbitrarily impede the interconnection of distributed generation. In contrast, utility and ISO commenters suggest that concepts in the rule protect the small generator but fail to address the impact of interconnection on the grid.

Commenters note that FERC's jurisdiction does not extend to facilities connected to the grid below the transmission voltage level and that as many as 99% of small generators would not be subject to FERC rules. Instead, interconnection of these small generators would be within the jurisdiction of state public utility commissions. More technical commenters encourage FERC to apply existing industry standards, such as IEEE 1547, rather than seek to reinvent the wheel. State regulators propose that any rule adopted by FERC be superseded by rules adopted by the individual states. The comments filed with FERC suggest that rules proposed by the states will result in an equally lively debate.

An important subcategory of distributed generation is renewable generation. A growing number of states have adopted programs to encourage or require utilities and other retail-electricity suppliers to include renewable resources in their supply portfolios. This renewable supply obligation, or renewable portfolio standard, can be satisfied by owning or buying renewable generation. The renewable attribute of the generation is evidenced by Renewable Energy Credits (REC), which are bought and sold in a manner comparable to the sale of electric energy and capacity. RECs are creatures of state law and, depending on applicable state law or the rules of the regional energy market, are sold with electric energy and capacity or, in some cases, on an unbundled basis.

Many renewable generators are Qualifying Facilities under the Public Utility Regulatory Policy Act (PURPA) that sell generation to electric utilities under avoided cost contracts that reflect the cost to the purchasing utility of generating a like increment of electric energy. PURPA, which requires utilities to buy electricity from Qualifying Facilities at avoided cost, became law in 1978, well before the creation of RECs. As it became clear that RECs increased the value of renewable generation, disputes arose between utilities and qualifying facilities as to whether an avoided cost purchase of electric energy and capacity also includes the associated RECs where the power purchase agreement is silent as to the RECs.

In 2003, four owners of Qualifying Facilities filed a petition asking FERC to rule that an avoided cost purchase of electric energy does not in and of itself include the sale of associated RECs. A number of utilities argued that, to the contrary, the bundled purchase of electricity included the RECs. FERC issued the requested order, finding that, without specific language addressing the transfer of RECs, an avoided-cost contract does not transfer RECs to the purchasing utility. FERC ruled that avoided cost includes compensation only for capacity and energy and that the calculation of avoided cost does not reflect the use of renewable technology. FERC noted, however, that RECs are a creation of state law and the states are free to specify who owns them.

FERC's decision about REC ownership is just one of the many issues that will arise as the markets for renewable energy continue to develop. In addition to initiatives at the state level, the federal energy bill includes incentives for renewables, including the production tax credit the windpower industry deems critical to its survival.

FREDDI L. GREENBERG is principal at Freddi L. Greenberg Attorney at Law in Chicago, IL.

DE - May/June 2004