(a) Rates for purchases.

(1) Rates for purchases shall:

(i) Be just and reasonable to the electric consumer of the electric utility and in the public interest; and

(ii) Not discriminate against qualifying cogeneration and small power production facilities.

(2) Nothing in this subpart requires any electric utility to pay more than the avoided costs for purchases.

(b) Relationship to avoided costs.

(1) For purposes of this paragraph, “new capacity” means any purchase from capacity of a qualifying facility, construction of which was commenced on or after November 9, 1978.

(2) Subject to paragraph (b)(3) of this section, a rate for purchases satisfies the requirements of paragraph (a) of this section if the rate equals the avoided costs determined after consideration of the factors set forth in paragraph (e) of this section

(3) A rate for purchases (other than from new capacity) may be less than the avoided cost if the State regulatory authority (with respect to any electric utility over which it has ratemaking authority) or the nonregulated electric utility determines that a lower rate is consistent with paragraph (a) of this section, and is sufficient to encourage cogeneration and small power production.

(4) Rates for purchases from new capacity shall be in accordance with paragraph (b)(2) of this section, regardless of whether the electric utility making such purchases is simultaneously making sales to the qualifying facility.

(5) In the case in which the rates for purchases are based upon estimates of avoided costs over the specific term of the contract or other legally enforceable obligation, the rates for such purchases do not violate this subpart if the rates for such purchases differ from avoided costs at the time of delivery.

(6) Locational Marginal Price. There is a rebuttable presumption that a state regulatory authority or nonregulated electric utility may use a Locational Marginal Price as a rate for as-available qualifying facility energy sales to electric utilities located in a market defined in §292.309(e), (f), or (g).

(7) Competitive Price. A state regulatory authority or nonregulated electric utility may use a Competitive Price as a rate for as-available qualifying facility energy sales to electric utilities located outside a market defined in §292.309(e), (f), or (g). A Competitive Price may be either a Market Hub Price or a Combined Cycle Price, determined as follows:

(i) A Market Hub Price is a price established at a liquid market hub which a state regulatory authority or nonregulated electric utility determines represents an appropriate measure of the electric utility's avoided cost for as-available energy, and is a hub to which the electric utility has reasonable access, based on an evaluation by the state regulatory authority or nonregulated electric utility of the relevant factors, including but not limited to the following:

(A) Whether the hub is sufficiently liquid that prices at the hub represent a competitive price;

(B) Whether prices developed at the hub are sufficiently transparent;

(C) Whether the electric utility has the ability to deliver power from such hub to its load, even if its load is not directly connected to the hub; and

(D) Whether the hub represents an appropriate market to derive an energy price for the electric utility's purchases from the relevant qualifying facility given the electric utility's physical proximity to the hub or other factors.

(ii) A Combined Cycle Price is a price determined pursuant to a formula established by a state regulatory authority or nonregulated electric utility using published natural gas price indices, a proxy heat rate, and variable operations and maintenance costs for an efficient natural gas combined-cycle generating facility. Before establishing such a formula rate, a state regulatory authority or nonregulated electric utility must determine that the resulting Combined Cycle Price represents an appropriate measure of the purchasing electric utility's avoided cost for energy, based on its evaluation of the relevant factors, including but not limited to the following:

(A) Whether the cost of energy from an efficient natural gas combined cycle generating facility represents a reasonable measure of a competitive price in the purchasing electric utility's region;

(B) Whether natural gas priced pursuant to particular proposed natural gas price indices would be available in the relevant market;

(C) Whether there should be an adjustment to the natural gas price to appropriately reflect the cost of transporting natural gas to the relevant market; and

(D) Whether the proxy heat rate used in the formula should be updated regularly to reflect improvements in generation technology.

(8) Competitive Solicitation Price.

(i) A state regulatory authority or nonregulated electric utility may use a price determined pursuant to a competitive solicitation process to establish qualifying facility energy and/or capacity rates for sales to electric utilities, provided that such competitive solicitation process is conducted pursuant to procedures ensuring the solicitation is conducted in a transparent and non-discriminatory manner including, but not limited to, the following:

(A) The solicitation process is an open and transparent process that includes, but is not limited to, providing equally to all potential bidders substantial and meaningful information regarding transmission constraints, levels of congestion, and interconnections, subject to appropriate confidentiality safeguards;

(B) Solicitations are open to all sources, to satisfy that electric utility's capacity needs, taking into account the required operating characteristics of the needed capacity;

(C) Solicitations are conducted at regular intervals;

(D) Solicitations are subject to oversight by an independent administrator; and

(E) Solicitations are certified as fulfilling the above criteria by the relevant state regulatory authority or nonregulated electric utility through a post-solicitation report.

(ii) To the extent that the electric utility procures all of its capacity, including capacity resources constructed or otherwise acquired by the electric utility, through a competitive solicitation process conducted pursuant to paragraph (b)(8)(i) of this section, the electric utility shall be presumed to have no avoided capacity costs unless and until it determines to acquire capacity outside of such competitive solicitation process. However, the electric utility shall nevertheless be required to purchase energy from qualifying small power producers and qualifying cogeneration facilities.

(iii) To the extent that the electric utility does not procure all of its capacity through a competitive solicitation process conducted pursuant to paragraph (b)(8)(i) of this section, then there shall be no presumption that the electric utility has no avoided capacity costs.

(c) Standard rates for purchases.

(1) There shall be put into effect (with respect to each electric utility) standard rates for purchases from qualifying facilities with a design capacity of 100 kilowatts or less.

(2) There may be put into effect standard rates for purchases from qualifying facilities with a design capacity of more than 100 kilowatts.

(3) The standard rates for purchases under this paragraph:

(i) Shall be consistent with paragraphs (a) and (e) of this section; and

(ii) May differentiate among qualifying facilities using various technologies on the basis of the supply characteristics of the different technologies.

(d) Purchases “as available” or pursuant to a legally enforceable obligation.

(1) Each qualifying facility shall have the option either:

(i) To provide energy as the qualifying facility determines such energy to be available for such purchases, in which case the rates for such purchases shall be based on the electric utility's avoided cost for energy calculated at the time of delivery; or

(ii) To provide energy or capacity pursuant to a legally enforceable obligation for the delivery of energy or capacity over a specified term, in which case the rates for such purchases shall, except as provided in paragraph (d)(2) of this section, be based on either:

(A) The avoided costs calculated at the time of delivery; or

(B) The avoided costs calculated at the time the obligation is incurred.

(iii) The rate for delivery of energy calculated at the time the obligation is incurred may be based on estimates of the present value of the stream of revenue flows of future locational marginal prices, or Competitive Prices during the anticipated period of delivery.

(2) Notwithstanding paragraph (d)(1)(ii)(B) of this section, a state regulatory authority or nonregulated electric utility may require that rates for purchases of energy from a qualifying facility pursuant to a legally enforceable obligation vary through the life of the obligation, and be set at the electric utility's avoided cost for energy calculated at the time of delivery.

(3) Obtaining a legally enforceable obligation. A qualifying facility must demonstrate commercial viability and financial commitment to construct its facility pursuant to criteria determined by the state regulatory authority or nonregulated electric utility as a prerequisite to a qualifying facility obtaining a legally enforceable obligation. Such criteria must be objective and reasonable.

(e) Factors affecting rates for purchases.

(1) A state regulatory authority or nonregulated electric utility may establish rates for purchases of energy from a qualifying facility based on a purchasing electric utility's locational marginal price calculated by the applicable market defined in §292.309(e), (f), or (g), or the purchasing electric utility's applicable Competitive Price. Alternatively, a state regulatory authority or nonregulated electric utility may establish rates for purchases of energy and/or capacity from a qualifying facility based on a Competitive Solicitation Price. To the extent that capacity rates are not set pursuant to this section, capacity rates shall be set pursuant to subsection (2).

(2) To the extent that a state regulatory authority or nonregulated electric utility does not set energy and/or capacity rates pursuant to paragraph (e)(1) of this section, the following factors shall, to the extent practicable, be taken into account in determining rates for purchases from a qualifying facility:

(i) The data provided pursuant to §292.302(b), (c), or (d), including State review of any such data;

(ii) The availability of capacity or energy from a qualifying facility during the system daily and seasonal peak periods, including:

(A) The ability of the electric utility to dispatch the qualifying facility;

(B) The expected or demonstrated reliability of the qualifying facility;

(C) The terms of any contract or other legally enforceable obligation, including the duration of the obligation, termination notice requirement and sanctions for non-compliance;

(D) The extent to which scheduled outages of the qualifying facility can be usefully coordinated with scheduled outages of the electric utility's facilities;

(E) The usefulness of energy and capacity supplied from a qualifying facility during system emergencies, including its ability to separate its load from its generation;

(F) The individual and aggregate value of energy and capacity from qualifying facilities on the electric utility's system; and

(G) The smaller capacity increments and the shorter lead times available with additions of capacity from qualifying facilities; and

(iii) The relationship of the availability of energy or capacity from the qualifying facility as derived in paragraph (e)(2)(ii) of this section, to the ability of the electric utility to avoid costs, including the deferral of capacity additions and the reduction of fossil fuel use; and

(iv) The costs or savings resulting from variations in line losses from those that would have existed in the absence of purchases from a qualifying facility, if the purchasing electric utility generated an equivalent amount of energy itself or purchased an equivalent amount of electric energy or capacity.

(f) Periods during which purchases not required.

(1) Any electric utility which gives notice pursuant to paragraph (f)(2) of this section will not be required to purchase electric energy or capacity during any period during which, due to operational circumstances, purchases from qualifying facilities will result in costs greater than those which the utility would incur if it did not make such purchases, but instead generated an equivalent amount of energy itself.

(2) Any electric utility seeking to invoke paragraph (f)(1) of this section must notify, in accordance with applicable State law or regulation, each affected qualifying facility in time for the qualifying facility to cease the delivery of energy or capacity to the electric utility.

(3) Any electric utility which fails to comply with the provisions of paragraph (f)(2) of this section will be required to pay the same rate for such purchase of energy or capacity as would be required had the period described in paragraph (f)(1) of this section not occurred.

(4) A claim by an electric utility that such a period has occurred or will occur is subject to such verification by its State regulatory authority as the State regulatory authority determines necessary or appropriate, either before or after the occurrence.

[Order 69, 45 FR 12234, Feb. 25, 1980, as amended by Order 872, 85 FR 54733, Sept. 2, 2020]