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FIT in the USA

Constitutional questions about state-mandated renewable tariffs.

Fortnightly Magazine - June 2010

utility. Some states require an in-state transmission interconnection to count an out-of-state REC. Several states require that a REC actually be associated with energy that is, or could be, by virtue of contracted transmission capability, delivered in-state. Some states allow a wider trading area within an independent system operator (ISO) or similar electric transmission system region. Some states encourage, but don’t require, RECs to be traded in-state by attaching a multiplier value to in-state RECs. Distributed generation typically is required to be located in-state to qualify to create RECs. However, requirements to create RECs in a state raise dormant Commerce Clause issues, and multipliers can raise similar concerns.

Several states give preferences to in-state projects. California’s amendments to its RPS law in 2006 for the first time in a decade allowed new out-of-state generation to be counted toward RPS requirements of load-serving entities in the state. 30 Eight states require that the power eligible for RPS RECs must be delivered to in-state load-serving entities. Such geographic program restrictions raise Commerce Clause concerns under the U.S. Constitution. 31

FIT Endgame

Federal case law and FERC precedent indicate that PURPA and the FPA prevent utilities from being mandated or required to purchase renewable energy above their avoided cost for wholesale purchases. Even state FIT legislation can’t mandate a wholesale electric purchase at a price above the avoided cost under principles of federal preemption. Any theoretical FIT proposal, in order to be effective, would have to require prices well above purchasing utilities’ avoided costs, and therefore would be subject to a Federal Power Act challenge by ratepayers or utilities. These challenges began in May 2010.

PURPA regulations and FERC provide that they don’t limit the ability of parties to negotiate agreements for rates and terms different from those called for in regulation. 32 However, a situation where regulated utilities voluntarily agree to purchase power at a rate clearly exceeding their wholesale avoided cost also could be open to legal challenge as imprudent under the FPA or its PURPA amendments, or state ratemaking law, by other parties, such as industry or consumer groups, if the latter are consequently compelled to bear the cost of a higher retail electric rate. It’s unclear that voluntary utility participation, at the utility’s own cost and risk, would provide the long-term investment certainty desired from a FIT incentive program.

Grafting onto American constitutional law a mandatory FIT for renewable power, at above the typical wholesale market cost of all power or above a purchasing utility’s avoided cost of alternative equivalent power resources, confronts existing legal precedent and provisions of the FPA. This renders the European option of wholesale FIT legally barred from state mandate under America’s legal system. Despite this, some states are ignoring these issues and moving toward mandating above-wholesale-cost FITs for state-regulated investor-owned utilities by their state regulatory authorities. Great legal care is necessary in this regard. This leaves the RPS with tradeable RECs as the legally viable alternative to monetarily incentivize the adoption of renewable power technologies for power generation by independent power producers in the United States.