Montana Administrative Register Notice 38-5-218 No. 21   11/14/2013    
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In the matter of the amendment of ARM 38.5.1902 pertaining to qualifying facilities






TO: All Concerned Persons


1. On May 23, 2013, the Department of Public Service Regulation published MAR Notice No. 38-5-218 pertaining to the public hearing on the proposed amendment of the above-stated rule at page 827 of the 2013 Montana Administrative Register, Issue Number 10.


2. The department has amended the following rule as proposed, but with the following changes from the original proposal, new matter underlined, deleted matter interlined:


            38.5.1902 GENERAL PROVISIONS (1) through (4) remain as proposed.

            (5) All purchases and sales of electric power between a utility and a qualifying facility shall be accomplished according to the terms of a written contract between the parties or in accordance with the standard tariff provisions as approved by the commission. A long-term contract for purchases and sales of energy and capacity between a utility and a qualifying facility greater than 100KW 3 MW in size shall be contingent upon selection of the qualifying facility by a utility through an all-source competitive solicitation conducted in accordance with the provisions of ARM 38.5.2001 through 38.5.2012. Between competitive solicitations, purchases, and sales of energy and capacity between a utility and a qualifying facility greater than 100KW 3 MW in size shall be accomplished in accordance with negotiation of a short-term written contract. The utility shall recompute the short-term and long-term standard tariffed avoided cost rates following submission of its least cost plan filing, ARM 38.5.2001 through 38.5.2012, or procurement plan filing, ARM 38.5.8201 through 38.5.8229. If the qualifying facility is not selected, or does not participate, in the first available competitive solicitation, purchases and sales of energy and capacity shall continue only according to the terms of a newly negotiated short-term written contract. Long-term contracts for purchases and sales of energy and capacity between a utility and a qualifying facility 100KW 3 MW or less may be accomplished according to standard tariffed rates as approved by the commission. The contract shall specify:

            (a) through (j) remain as proposed.

            (6) All purchases and sales of electric power between a utility and a qualifying facility shall be compatible with the goal of the commission's integrated least cost resource planning and acquisition guidelines, ARM 38.5.2001 through 38.5.2012, and the commission's procurement plan guidelines, ARM 38.5.8201 through 38.5.8229.

            (7) An existing qualifying facility that entered into a smaller than 10 MW whose contract with a utility expires prior to July 1, 20135 will not be subject to the 100 KW 3 MW size limitation for the purpose of obtaining a new or extended contract under an existing standard rate option.


AUTH: 69-3-103, 69-3-604, MCA

IMP: 69-3-102, 69-3-602, 69-3-603, MCA


3. The department has thoroughly considered the comments and testimony received. A summary of the comments received and the department's responses are as follows:


COMMENT 1: Many commenters expressed concerns about the potential impact of the proposed rule on rural economic development. Commenters generally supported the development of small-scale renewable energy projects in rural communities as a way of generating additional revenue from taxes and impact fees, which would help fund needed services and infrastructure. Some commenters highlighted economic benefits of landowner lease payments. Others pointed to additional good-paying jobs associated with QF development in rural communities. 


RESPONSE 1: The commission appreciates the potential for economic benefits in rural Montana communities from renewable energy resource development generally and QF projects specifically. PURPA requires that QF contract rates must not exceed the utility's cost of alternative resources and must be just and reasonable to consumers. The commission's decisions in this proceeding are designed to improve compliance with these requirements. The rule adopted in this notice does not prevent rural economic development that is compatible with the requirements of PURPA.


COMMENT 2: Several commenters indicated that although expanding the use of competitive bidding to acquire QF projects might have conceptual merits, in practice utility competitive solicitations do not treat QF projects fairly. Commenters observed that resource solicitations are not held at regular intervals, are not monitored by an independent entity to ensure fairness, and QF bidders never win. Commenters questioned whether current solicitation practices adequately check a utility's incentive to choose resources it will own and profit from over QF resources. These commenters expressed concern over the utility's monopoly power and suggested that administratively determined rates provide QFs a way to compete. Other commenters stated that competitive solicitations are a useful and necessary check on administratively determined avoided costs and contend that QF-type resources have been successfully developed through competitive procurements. 


RESPONSE 2: The commission agrees that competitive solicitations must treat all bidders, including QFs, fairly and must foster genuine competition between bidders to properly implement PURPA and provide economic benefits for consumers. Montana law requires NorthWestern to use open, fair, and competitive resource procurement processes whenever possible, and the commission has defined standards for open, fair, and competitive resource procurement processes. The commission is not persuaded that utility resource solicitations treat bidders unfairly or are insufficiently monitored. The commission evaluates whether utility solicitation processes conform to Montana law and commission rules when a utility requests approval to procure a resource or when it presents a procured resource for cost recovery. These evaluations occur in contested cases which provide QFs and other affected parties an opportunity to challenge the openness, fairness, and competitiveness of the utility's resource solicitation. In addition to these safeguards, a QF may challenge the reasonableness of the standard rate schedule approved by the commission at any time, or petition the commission to set contract rates and conditions under certain circumstances. In recent cases, the commission has determined that utility solicitation processes complied with applicable laws and rules. The commission believes that, taken together, the contested case processes that enable QFs to challenge competitive solicitations and standard rate schedules adequately prevent utility resource bias, safeguard the fairness of solicitations, and adequately check a utility's monopoly power. Requiring regular competitive solicitations would increase the risk of bid rigging and collusion among bidders and result in unjust and unreasonable rates when a utility does not need additional resources.


COMMENT 3: Several commenters questioned the reasonableness of a 100 kilowatt (kW) standard rate eligibility threshold. Some commenters asserted that 100 kW QF projects are not economically feasible because, at that size, they are unable to exploit economies of scale and, therefore, cannot compete with utility-scale generation alternatives. According to these commenters, a 100 kW threshold will effectively eliminate QF projects in Montana. One commenter stated that a threshold of 3-6 MW would accommodate economically feasible small hydro projects. Another commented that standard rates should be available to smaller, unsophisticated QFs and recommended a 3 MW threshold. Yet another recommended a threshold of 500 kW, which would allow larger solar projects to obtain standard rates but require utility-scale wind projects to compete. Others recommended leaving the threshold at 10 MW or increasing it to 20 MW.


RESPONSE 3: The commission is not persuaded that reducing the standard rate eligibility threshold below 10 MW precludes QF project developers from exploiting available economies of scale. By requiring more QF projects to compete, the rule encourages project developers to economically size their projects based on a utility's resource solicitation. The commission agrees with comments that associate the appropriate standard rate eligibility threshold with the transactions costs of bidding and other burdens placed on smaller QFs. The commission adopts a 3 MW threshold rather than a 100 kW threshold because QFs 3 MW and smaller may be discouraged from participating in competitive solicitations or challenging unfair bidding practices due to high transactions costs relative to total revenue potential. However, bid preparation costs and potential costs to litigate a complaint against a utility for unfair treatment in a bidding process should be small relative to total revenue potential for QFs larger than 3 MW. 


COMMENT 4: Some commenters recommended creating separate standard rate thresholds for wind and hydro QFs to encourage small hydro projects and recognize the distinct attributes of these resources.


RESPONSE 4: As discussed in the response to Comment 3, the commission is persuaded that an appropriate standard rate threshold prevents transactions costs (e.g., bidding and litigation costs) from discouraging small QFs from participating in a solicitation or challenging the fairness of a solicitation. Such transactions costs should be similar for small wind and hydro projects. Therefore, the commission is not persuaded that a separate standard rate threshold for hydro QFs is reasonable.


COMMENT 5: Several commenters stated that a 100 kW threshold would be inconsistent with the intent of the 2013 Montana Legislature, which considered reducing the standard rate eligibility threshold to 3 MW in House Bill 188.


RESPONSE 5: Although House Bill 188 was vetoed by the Governor, the commission adopts a 3 MW threshold for the reasons stated in the response to Comment 3.


COMMENT 6: Several commenters stated that there are better alternatives to reducing the standard rate eligibility threshold. These better alternatives included imposing capacity limits in a utility's tariff schedule, adjusting standard rates more frequently, further refining standard rate options, setting QF project-specific rates, and supporting regional, independently administered, auction-based day-ahead and real-time wholesale markets.


RESPONSE 6: The commission believes that the suggested alternatives are inferior to the rule adopted in this notice. To the extent resource solicitations are fair and competitive (see Response 2), the rule adopted in this notice is more likely to ensure that QF contracts correspond to utility needs and do not exceed the cost of alternatives. Administratively determined rates are prone to deviate from the cost of alternatives because market conditions and public policies often change abruptly, and adjusting rates requires lengthy administrative proceedings. Procedural requirements and practical considerations limit how frequently contested cases may be used to adjust standard rates. While an organized wholesale market may be beneficial, neither the commission nor any one utility can create such a market. 


COMMENT 7: Some commenters asserted that the proposed rule would violate Montana's energy policy, specifically the goal to "develop contracts between qualifying small power production facilities, as defined in 69-3-601, MCA, and utilities, which facilitate development of small power production facilities by identifying fair and reasonable costs for integration of their power." The commenters asserted that a 100 kW threshold would not facilitate development of small power production facilities.


RESPONSE 7: The commission does not agree that the rule adopted in this notice violates Montana's energy policy; rather, it facilitates small power production facilities that meet the avoided cost standard, which for larger QFs is determined by competitive bidding. Montana's energy policy also promotes energy sources that represent the lowest economic cost, and the goal referenced by commenters appears to focus on the cost of integration service. A competitive bidding process can fairly identify integration costs, facilitate development of small power production facilities, and promote energy sources that represent the lowest long-term cost.


COMMENT 8: Some commenters addressed the proposal to eliminate the phrase "all-source" from the existing rule. One commenter stated that all-source solicitations are important to ensure a utility considers all available alternatives and to impose discipline on the procurement process. Another commenter supported eliminating the phrase to allow a utility to tailor solicitations to specific products and resources.


RESPONSE 8: As adopted, the rule retains the phrase "all-source." The meaning of the phrase has been misinterpreted by commenters and in recent QF proceedings. As defined in commission rules, "all-source solicitation" means all potential providers able to offer a specific resource or product requested in a utility solicitation, including QFs, other non-utility providers, and other utilities. An all-source solicitation may request only the specific types of resources or products needed by a utility. If a competitive bidding program is used to implement PURPA, bidding must be open to all providers.


COMMENT 9: Some commenters expressed concerns that reducing the standard rate eligibility threshold would reduce resource diversity and increase rates due to a diminished regulatory focus on a utility's long-run marginal cost. These commenters contend that contested avoided cost proceedings provide the best evidence of the marginal cost of new generation capacity, and that administratively determined avoided costs impose competitive pressure on a utility seeking to develop its own resources.


RESPONSE 9: Reducing standard rate eligibility to 3 MW will not diminish regulatory focus on a utility's long-run marginal or avoided costs. Estimates of such costs are critical to utility resource planning and retail rate design in addition to standard QF rate design. The commission believes competitive bidding, which involves an actual market for purchasing incremental generating capacity, provides better evidence of current long run marginal costs than administrative proceedings, which often rely on generic and quickly outdated resource costs. Because a utility examines its entire portfolio through least-cost resource planning, and competitive solicitations are an economically efficient method of acquiring new resources, the rule adopted in this notice will not reduce resource diversity or increase rates.


COMMENT 10: Several commenters noted that QF contracts provide customers with a long-term, fixed-price energy supply, which contributes stability to the utility's supply portfolio and provides a hedge against volatile wholesale market prices. These commenters also stated that QFs diversify resource ownership within the utility's supply portfolio and diversify risks to consumers since QFs are only paid for energy actually delivered. The commenters contend the proposed rule would eliminate such resource attributes.


RESPONSE 10: The commission agrees that diversity with respect to resource ownership and duration is desirable. Existing commission rules pertaining to resource planning and procurement require utilities to assess portfolio diversity and rank resources to achieve optimal resource diversity. A number of QFs have chosen a variable standard rate, which is directly tied to volatile wholesale prices, and the practice of using solicitations to hedge against such volatility and diversify ownership is preferable. Setting a 3 MW standard rate eligibility threshold for QFs does not undermine established standards for achieving diversity and mitigating risk in electric supply portfolios. 


COMMENT 11: A commenter stated that the proposed amendment will exclude public comment and review from the process of setting standard rates, foreclosing opportunities for input from interested parties in determining avoided costs.


RESPONSE 11: The proposed rule will not exclude public comment and review from utility planning dockets or standard rate proceedings. The commission determines a utility's avoided costs using information contained in the utility's resource plan. The process of reviewing and commenting on a utility's resource plan is very time-consuming. Because market conditions change rapidly, waiting until the entire planning process is complete to even propose updated standard rates ensures that they will be stale and not reflective of the utility's current avoided cost. The proposed rule reduces that delay by requiring utilities to propose updated QF rates following submission of its resource plan, rather than waiting until the review of the plan is complete. The proposed rule in no way prevents interested parties from participating in QF rate proceedings or commenting on a utility's resource plans.


COMMENT 12: A commenter questioned the fairness of exempting existing QF contracts that are extended or renewed from the new standard rate threshold. The commenter stated that the exemption would primarily benefit fossil fueled projects that are larger than the previous threshold and impose regulatory risks on utilities.


RESPONSE 12: The limited exemption in the proposed rule was intended to preserve the status quo for a small subset of QFs that were in contract negotiations with a utility during the rulemaking proceeding. The rule adopted in this notice narrows the scope of the exemption so that it only applies to QFs smaller than 10 MW.


COMMENT 13: A commenter stated that the rulemaking process was deficient and opaque because the commission did not provide adequate reasons for the proposed amendments.


RESPONSE 13: The commission believes it provided an adequate explanation for its proposal to amend the rule. The commission indicated that there are economic and public policy considerations associated with determining an appropriate size threshold that exceeds the federal minimum. Those economic and public policy considerations are addressed in the comments and responses above, and include the rigidity of administratively determined rates and the potential economic efficiency gains and associated consumer benefits from competitive bidding.  The commission invited interested persons to submit their views and arguments as to the appropriate size threshold. As expected, interested persons proposed a range of size thresholds based on various economic and public policy justifications. Based on its consideration of all of the comments it received (see Comments 1 through 12 and Responses), the commission adopts a 3 MW size threshold.


            4. Pursuant to 2-4-405, MCA, fifteen members of the Montana Legislature requested that the commission prepare a statement of the economic impacts of the proposed amendment. In response, the commission prepared an economic impact statement (EIS), which it submitted to the Energy and Telecommunications Interim Committee (ETIC) on August 22, 2013. On October 21, 2013 the ETIC determined that the EIS was sufficient.

The EIS discussed the potential economic impacts of the amendment on two primary affected classes of persons: QFs between 100 kW and 10 MW, and utility consumers. It attempted to quantify economic impacts where practicable. Based on an assumption that the regulatory framework in Montana is capable of promoting fair and effectively competitive bidding processes, the EIS found that the amendment would increase the use of competitive bidding to acquire QFs, which would benefit consumers and impose negligible incremental costs on QFs. It found that transactions cost could be burdensome for smaller QFs. It found the amendment superior to alternatives, including inaction. It found that the commission and other agencies would not incur material costs to implement the amendment and that the amendment represents an efficient allocation of public and private resources. A copy of the economic impact statement can be obtained from the Department of Public Service Regulation, 1701 Prospect Avenue, Helena, MT, 59620-2601, (406) 444-6199, and online at http://psc.mt.gov/.


/s/ JUSTIN KRASKE                                  /s/ W.A. (BILL) GALLAGHER       

Justin Kraske                                            W.A. (Bill) Gallagher

Rule Reviewer                                           Chairman

                                                                Public Service Commission



            Certified to the Secretary of State November 4, 2013


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