The Green Controversy

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

Who should have "green tag" ownership under power purchase agreements, the buyers or the sellers?

A legal controversy is brewing in the electric industry over who should reap the financial benefits of the green characteristics of power plants, under existing power purchase agreements (PPA).

Many of those PPAs were entered into well before there was any intrinsic value to the renewable resources generating the power sold under those contracts, other than that created under the Public Utility Regulatory Policies Act of 1978 ("PURPA")1 and analogous state laws. In fact, the PPAs ignore any environmental commodity produced by these plants separate from energy and capacity.

The debate has continued to heat up as states adopt renewable portfolio standards2 and fuel disclosure laws,3 while the environmental attributes of green power-"green tags" as they are sometimes known-are becoming increasingly valuable in their own right as tradable commodities separate from their associated power.

Now, not surprisingly, the buyers and sellers of the power under those agreements are arguing that the financial benefits of the plants' environmentally friendly attributes belong to them.

Although there is no decisive answer on the ownership of these green tags, one thing is certain: With the upswing in state laws requiring renewable energy sources and the development of a retail green power market, this issue must be resolved.

The ability to meet attribute reporting requirements and to offer green power programs rests on the ability to claim possession of environmentally friendly attributes. As more reporting requirements and green power programs evolve, more entities will be faced with the need to know which attributes are truly theirs to claim and report. Ultimately, the decision may come down to competing policy considerations between increasing renewable energy resources and lowering consumers' electric bills.

PURPA Unwittingly Sets the Stage

PURPA requires electric utilities to purchase energy and capacity that is made available from a "qualifying facility"4 (QF) under the statute. Facilities can qualify as QFs in a number of ways, including one that requires 75 percent or more of the facility's total energy input from biomass, waste, renewable resources, geothermal resources, or a combination thereof.5 Many QFs have the desirable green characteristics that are at the center of the debate between purchasers and sellers. Indeed, many of the power purchase agreements giving rise to this debate were entered pursuant to PURPA.

Under PURPA contracts, utilities must pay a QF a purchase price for its energy and capacity that does not exceed the "incremental cost to the utility of alternative electric energy."6 As defined under PURPA, the incremental cost to the utility, or its "avoided cost," equals the cost to the electric utility of the energy that the utility would generate itself or buy elsewhere, had it not bought such energy from the cogenerator or small power producer as required under PURPA.7

Proponents of allocating environmentally beneficial attributes to the QF generators under PURPA contracts argue that the statute does not contain any language directing that such attributes-unbundled from energy and capacity-are to be included in, or priced into, a PURPA transaction. Congress was aware of the environmental benefits of certain methods of power production when it enacted PURPA in 1978. And Congress certainly knew of the emissions characteristics of electricity generation, as evidenced by the enactment of the Clean Air Act in 1970.8 Still, Congress was specific that energy and capacity, and not any environmental benefits produced by the QF, are the products to be sold under a PURPA contract. Moreover, the price paid for environmentally friendly power generated by a QF is based on the cost of producing power from any resource, not from an identical renewable resource-evidence that the environmental benefits of the power are not accounted for in the "avoided cost" paid under a PURPA contract. Accordingly, the environmental attributes should remain with the QF.

The alternative argument-that green attributes ought to transfer to utilities buying power under PURPA contracts-is that the sale of "energy" and "capacity" required under PURPA are not discrete components of electricity, but include all components of electricity. If energy and capacity were thought to encompass all such components in 1978, Congress would not have felt that it was also necessary to state explicitly that certain additional, environmentally beneficial components of electricity were intended in the transfer. The intent of PURPA, the argument goes, was for utilities to purchase all of the components of the power that was produced by the QF, including any environmentally beneficial attributes.

Those arguing that PURPA power purchasers also acquire title to the environmental attributes of the generation units, could also claim an economic justification for their position. Because utilities are statutorily required to buy power at avoided cost from QFs that obtain that status, partly as a result of their "green" characteristics, those utilities already are bearing a financial burden related to the QFs' environmentally beneficial generating technology. The QFs, on the other hand, already are receiving a financial benefit from their renewable generating technology, because it permitted them to qualify as QFs and required their power to be purchased at that avoided cost. Therefore, allocating the environmental attributes to the purchasers would simply follow the costs and benefits of the purchase and sale arrangements already required under PURPA. The Maine Public Utilities Commission has taken just this position, tentatively finding that the purchasers under existing PURPA contracts should receive the benefits of the environmental attributes of the plants generating under those contracts.9

State Laws-More of the Same Muddle

PURPA, enacted decades prior to the idea of state retail choice, renewable portfolio standards, and fuel source disclosure laws that have created additional value for environmental attributes, does not dictate how green tags should be allocated in today's market. Unfortunately, PURPA-like legislation enacted more recently on the state level also does not address the allocation of green tags.

Various states, including Michigan, Oregon, Minnesota, Florida, and Illinois have enacted laws that, like PURPA, compel power purchase agreements that encourage greater use of renewable resources and the reduction of harmful emissions. For example, Michigan Public Act 2 of 1989 requires certain utilities to enter into power purchase agreements for energy and capacity10 with "resource recovery facilities" that utilize environmentally beneficial generating technologies.11 In Oregon, electric utilities must offer to purchase energy and/or capacity from qualifying facilities,12 at a price not less than the utility's avoided costs.13 Under Minnesota law, a utility must purchase all energy and capacity from an interconnected qualifying facility at a rate equal to the utility's "full avoided capacity and energy costs as negotiated by the parties, as set by the commission, or as determined through competitive bidding approved by the commission."14 In Florida, an electric utility must purchase all electricity offered for sale by cogenerators or small power producers in its service area at a rate set by the commission equal to the purchasing utility's full avoided costs.15 And in Illinois, electric utilities must enter into long-term contracts to purchase electricity from qualified solid waste energy facilities16 within the utility's service area17 at a price equal to the average amount/kWh paid by local government entities, minus amounts paid for street lighting and pumping service.18

Like PURPA, these state laws compelling power purchase agreements fail to state explicitly whether the seller/generator or the purchaser/utility is entitled to the environmentally beneficial attributes of the purchased electricity. And so, the same arguments for allocating green tags to the generating facilities under PURPA contracts also apply to these state-required power contracts. For example, in states like Oregon and Minnesota that require purchase of capacity and energy, one might argue that green tags associated with the energy sold should stay with the generating facility, because the state statute specifically limits the purchase to capacity and energy. Green attributes, unmentioned in these statutes, are simply not part of the sale. Moreover, many of these state laws were enacted during a time of heightened national environmental awareness; had state legislatures intended the transfer of green attributes, the statute would have said so in a straightforward manner. Finally, because these state laws do not account for environmental benefits in the calculation of "avoided cost," those environmental benefits are not included in the products purchased pursuant to those laws.

Yet just as the converse argument-all of the components of "electricity" produced by the generators, including the environmental attributes, are required to be sold to the utility-can be made under PURPA, so too can it be made under these state statutes. This argument is stronger in states that require utilities to purchase electricity, as opposed to the component parts. Utilities can further bolster the argument by pointing to the fact that they were statutorily required to enter into purchase contracts for their power, and thus had to bear the cost of environmentally beneficial generating technology-and so should be compensated with the receipt of green characteristics related to that technology.

Calculations of "stranded costs"19 in state public utility commission proceedings related to electric restructuring statutes could provide some further insight into the allocation of green environmental attributes by the energy industry. In states that are moving to a competitive power environment, these costs can include the price 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 may be commonly understood to include green tags, green tags should be understood in today's energy market to be covered by the purchase price.

Certificate Programs

The recent enactment of fuel source disclosure and renewable portfolio standard laws, and the availability of green electricity at retail, have given rise to a number of green tag programs. Under those programs, the environmentally beneficial characteristics of certain generating units is captured in tradable certificate-tags. Those tags are used by retail suppliers to demonstrate the environmental attributes of the power they sell. The rules adopted for those programs do not, however, provide much additional clarity as to who owns the certificates.

One such green tag program is administered by the Center for Resource Solutions ("Green-e"). Green-e allows suppliers of electricity to certify green products based on existing power purchase arrangements. Based on applications by retail power providers, Green-e certifies renewable energy products that meet its environmental and consumer protection standards.26 In order for a utility to have its energy certified, Green-e presupposes that the retail providers possess the green attributes; thus entities selling power to utilities cannot also possess these green benefits. Conversely, the Center for Resource Solutions also has begun a Tradable Renewable Certificate (TRC) program. Each TRC represents the bundle of attributes separated from the electrical energy, and Green-e recommends that, in the absence of specific legislation or of contract terms, ownership and the right to transfer TRCs should be deemed to belong to the renewable energy generator that generated the energy.27 Thus, the owner of Green-e certified attributes can be largely dependent upon which program the attributes were certified under.

The New England Power Pool generation information system, which creates tradable certificates for the attributes of power to facilitate compliance with state emissions and renewable energy laws,28 is no clearer about who owns the green attributes under power purchase agreements. Under the operating rules for this system, certificates initially are assigned to generators. Those rules, though, expressly state that that assignment is "without prejudice to which person or entity is the owner of such [c]ertificate for other purposes."29 Thus, as with the Green-e program, the New England generation information system does not provide significant guidance on who owns the environmental characteristics of power sold under an existing power purchase agreement.

Comparison to Federal Tax Credits and Emissions Credits

Federal tax credit legislation supports the conclusion that green tags logically could be allocated to either the generator or the purchasing utility. The Internal Revenue Code (IRC) provides a renewable electricity production credit to generators that use wind, closed-loop biomass, or poultry waste.30 The IRC also provides generators with a business investment credit for solar and geothermal equipment.31 Proponents of keeping the environmental attributes with the generators would argue that both of these provisions reflect the understanding that the financial benefits resulting from environmentally beneficial generating technologies should be allocated to the entities that are actually using that technology, i.e., the generators. Those who support allocation to power purchasers would argue, however, that the IRC specifically provides that certain environmental benefits belong to the generator because without these tax statutes, green attributes flow with the energy and the capacity to the purchasing entity.

Similar arguments could be made with respect to emission credits produced by renewable generating resources. The 1990 Amendments to the Clean Air Act,32 which created the allowance and trading program for sulfur dioxide, allocate allowance credits to the unit that generated the emissions. One side would argue that this allocation reflects the notion that the generators, being the entities that produce the emissions, are the entities whose behavior is to be affected by awarding the credits to them. Allocating green attributes to purchasing utilities under pre-existing power purchase agreements would not impact the behavior of the generators, eviscerating the purpose and goals of the program. The proponents of transferring the green attributes to the purchasers of power would again argue that because the generators are permitted to retain the emission credits, fairness dictates that the remaining environmental characteristics should be assigned to them.

A Question of Balance

As the courts and legislatures attempt to sort out this issue, the resolution likely will become a matter of public policy. Permitting the owners of renewable generating units to retain the environmental attributes of their power and the associated financial benefits will provide them with another source of revenue that will permit some otherwise uneconomic units to continue to operate, perhaps displacing some existing or to-be-built fossil fuel units. In addition, if the sellers under existing power purchase contracts are deemed to own the green characteristics of their power, that could become the default for new power contracts, making the development of new renewable resources more economic and therefore more probable.

Conversely, if the purchasers of green power under existing agreements are found to own the environmental characteristics of that power, they are relieved of the burden of having to purchase those characteristics to comply with state renewable portfolio standards, or to offer them in retail green power programs. And, they have a product they can sell for a profit. This reduced expense and added revenue source could help to subsidize their operations, thereby permitting them to charge less to their retail customers. Therefore, as courts and legislatures consider this issue, they are faced with balancing the societal interest in promoting cleaner power sources against the political interest of lowering electric rates.

  1. 16 U.S.C.S. § 824a-3.
  2. See, e.g., Mass. Ann. Laws ch. 25A, § 11F (2002) (defining "renewable energy generating source" as including generators which use, among other fuels, solar energy, wind energy, tidal energy, fuel cells utilizing renewable fuels, landfill gas, waste-to-energy, hydroelectric and certain types of biomass conversion technologies); Conn. Agencies Regs. § 16-245-5 (2002) (requiring demonstration of percentage of total electricity output from Class I and Class II renewable energy sources). Conn. Gen. Stat. § 16-1 (26) and (27) (2001) define Class I renewable energy source as energy derived from solar power, wind power, a fuel cell, methane gas from landfills or from certain types of biomass facilities and Class II renewable energy source as including energy derived from trash-to-energy facilities and non-Class I biomass facilities meeting certain requirements.
  3. See, e.g., Mass. Regs. Code tit. 220, § 11.06 (2) (d) (2002) (requiring customer disclosure labels with information on fuel, emissions and labor characteristics); Code Me. R § 65-407-306 (2)(E)(2) (2002) (requiring competitive electric suppliers to disclose fuel mix and emissions characteristics); R.I. Code R. 90 000 016 (2002) (requiring non-regulated power producers to provide information to customers about fuel and environmental aspects); cf. Conn. Gen. Stat. § 16-245p (2001) (electric suppliers must submit quarterly reports to the Department of Public Utility Control with information on energy sources and emissions data that the Department will make available to customers).
  4. 18 C.F.R. § 292.303(a).
  5. 18 C.F.R. § 292.204(b)(1)(i).
  6. 16 U.S.C.S. § 824a-3(b) (2001). PURPA requires the Commission to ensure that rates for sales under PURPA that do not exceed the "incremental cost to the utility of alternative electric energy."
  7. 16 U.S.C.S. § 824a-3(d) (2001). "[T]he term incremental cost of alternative electric energy means, with respect to electric energy purchased from a qualifying cogenerator or qualifying small power producer, the cost to the electric utility of the electric energy which, but for the purchase from such cogenerator or small power producer, such utility would generate or purchase from another source."
  8. Jeanne M. Dennis, Comment, Smoke for Sale: Paradoxes and Problems of the Emissions Trading Program of the Clean Air Act Amendments of 1990, 40 UCLA L. Rev. 1101, 1106-1107 (1993).
  9. Investigation of GIS Certificates Associated with Qualifying Facility Agreements, Maine PUC Docket No. 2002-506 (Sept. 6, 2002).
  10. Mich. Comp. Laws Ann. § 460.6o(2)(2002).
  11. "Resource recovery facility" is defined as "a facility that meets all of the following requirements: (i) Has machinery, equipment, and structures installed for the primary purpose of recovering energy through the incineration of qualified solid waste, qualified landfill gas, or scrap tires. (ii) Utilizes at least 80% of its total annual fuel input in the form of qualified solid waste, at least 90% of its total annual fuel input in the form of qualified landfill gas, or 90% of its total annual fuel input in the form of scrap tires, exclusive of fuel used for normal start-up and shutdown. (iii) Is a qualifying facility as defined by the federal energy regulatory commission pursuant to the public utility regulatory policies act of 1978, Public Law 95-617, 92 Stat. 3117. " Mich. Comp. Laws. Ann. § 460.6o(1)(a).
  12. Or. Rev. Stat. § 758.525 (2) (2001).
  13. Or. Rev. Stat. § 758.505(1) (2001). The price for this purchase shall not be less than "the incremental cost to an electric utility of electric energy or energy and capacity that the utility would generate itself or purchase from another source but for the purchase from a qualifying facility."
  14. Minn. Stat. Ann. § 216B.164 Subd. 4(b) (2001).
  15. Fla. Stat. Ann. § 366.051 (West 2001). "A utility's full avoided costs are the incremental costs to the utility of the electric energy or capacity, or both, which, but for the purchase from cogenerators or small power producers, such utility would generate itself or purchase from another source."
  16. 220 Ill. Comp. Stat. Ann. 5/8-403.1(b) (West 2001). A "qualified solid waste energy facility" is one which qualifies under the Illinois Local Solid Waste Disposal Act that uses methane gas generated from landfills as its primary fuel and which qualifies as a cogeneration or small power production facility under federal law.
  17. 220 Ill. Comp. Stat. Ann. 5/8-403.1(c) (West 2001).
  18. 220 Ill. Comp. Stat. Ann. 5/8-403.1(c).
  19. Stranded costs are those costs incurred by utilities, recovery of which might be obstructed by the introduction of a competitive industry under state restructuring statutes, which must be built into the retail rates of the utilities to compensate them for prudent actions previously taken before the advent of competition. Mass. Inst. of Tech. v. Dep't of Pub. Utils., 425 Mass. 856, 858 n.4, 684 N.E. 2d 585 (1997).
  20. Gregory N. Basheda et al., "The FERC, Stranded Cost Recovery, and Municipalization," 19 Energy Law Journal, 351, note 26 (1998). "The main categories of individual stranded cost components include: generating units, fuel purchase contracts, purchased power agreements, non-utility generation and PURPA contracts, regulatory assets, decommissioning costs for nuclear and non-nuclear power plants, and labor retraining and transition costs."
  21. Conn. Gen. Stat. § 16-245e(g) (2001)
  22. Code Me. R. § 65-407-307(J)(2002)
  23. 16 Tex. Admin. Code § 25.227 (c)(6) (2002).
  24. Michigan Public Utilities Reports, Fourth Series, Slip Opinion, Michigan Public Service Commission (Feb. 11, 1998) (stating the Commission calculated costs for Detroit Edison in five categories: (1) nuclear capital costs, (2) capacity costs in power purchase agreements, (3) regulatory assets, (4) implementation costs, and (5) retraining costs).
  25. Investigation of GIS Certificates Associated with Qualifying Facility Agreements, Maine PUC Docket No. 2002-506 (Sept. 6, 2002) at 4.
  26. See (last visited July 12, 2002).
  27. , at 3, 10 (March 5, 2001 draft).
  28. ISO New England website (last visited July 15, 2002).
  29. New England Power Pool Generation Information System Operating Rule 2.6 (2002).
  30. 26 U.S.C. § 45.
  31. 26 U.S.C. § 48.
  32. 42 U.S.C. § 7651, et seq.

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