Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

The Green Controversy

Who should have "green tag" ownership under power purchase agreements, the buyers or the sellers?
Fortnightly Magazine - November 1 2002

paid for power under purchase agreements that the utility was required to enter, to the extent that that price exceeds the fair market value of the power purchased under the agreement. 20 In states such as Connecticut, 21 Maine, 22 Texas, 23 and Michigan, 24 the calculation of stranded costs associated with PURPA or similar state schemes has not included a deduction from the overall stranded costs for green attribute benefits realized under those agreements. This could show that neither the utilities nor the state commissions, both involved in setting stranded costs, consider that the utilities received the financial benefits of the green attributes associated with the power sold under those contracts. Conversely, if the utilities or commissions deduct the environmental benefits of that power from the stranded costs that the utilities will recover, this would support a finding that those benefits have in fact passed to those utilities.

Some Creative Contractual Arguments

General principles of contract law could help allocate green attributes. One key argument centers around the silence of the purchase contracts on the issue of allocating the environmental attributes of power. Generators could claim that since many power purchase agreements are specific about the sale and pricing for energy and capacity, but silent as to the green attributes, those attributes simply are not included in the products, and therefore must remain with the selling generator. In addition, if those agreements calculate avoided cost based on a coal, natural gas, or other non-green fuel sources, and do not provide any price adjustment for the use of an environmentally beneficial fuel source, they could be interpreted as being priced for non-green power only. In other words, the agreements do not include the benefit of a green fuel source.

Intent of the parties, a fundamental concept of contract law, may offer further support for the suggestion that green tags should remain with the generating facilities. If at the time the agreements were signed, it was neither conceived nor intended by the parties that environmentally favorable features of the generating units would be included in the purchase, those features should not be deemed to be part of the purchase. Moreover, it can be argued that utilities that contract under PURPA or a comparable state law, do not intend to purchase more than is required under that law, namely, energy and capacity.

Those who assumed purchase obligations under PURPA contracts when they purchased divested utility assets may have reasonably expected that they were also receiving the environmental characteristics associated with those contracts. Permitting the generators to retain those characteristics could result in an "inequitable frustration of legitimate expectations" by those entities. 25

The intent of the parties doctrine can also provide a basis for arguing that green tags should transfer to power purchasers. For example, one might say that the intent of the parties at the time most PURPA contracts were entered into was for the QF to sell to the utility all of the output of the plant. In the past, that was thought to be only energy and capacity. Now, since output