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UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
Tri-State Generation and Transmission
Association, Inc.

)
)

Docket No. EL16-39-001

REQUEST FOR REHEARING OF
TRI-STATE GENERATION AND TRANSMISSION ASSOCIATION, INC.

Clinton A. Vince
Stuart A. Caplan
James M. Costan
Jessica M. Lynch
Dentons US LLP
1900 K Street, NW
Washington, DC 20006
Tel.: (202) 408-6460
clinton.vince@dentons.com
stuart.caplan@dentons.com
james.costan@dentons.com
jessica.lynch@dentons.com
Counsel for Tri-State Generation
and Transmission Association, Inc.

July 18, 2016

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TABLE OF CONTENTS
I.

STATEMENT OF THE CASE............................................................................................ 2

II.

STATEMENT OF ISSUES ................................................................................................. 6

III.

SPECIFICATIONS OF ERROR ......................................................................................... 7

IV.

ARGUMENT ON REHEARING ........................................................................................ 8
A.

B.

V.

The Commission’s Ruling that Order No. 69 Fixed Cost Equalization Applies
Only to Pre-PURPA Contracts Is Arbitrary, Capricious, and Not In Accordance
With Law, Rendering an Interpretation of Order No. 69 that is At Odds with
Congress’s Intent in Enacting Section 210 of PURPA and With Order No. 69 and
the Commission’s Subsequent PURPA Orders. ..................................................... 8
1.

The June 16 Ruling is at Odds with PURPA and Congress’s Intent in
PURPA to Avoid Subsidies Associated with QF Sales. ............................. 9

2.

Order No. 69 Does Not Limit Cost Equalization to Pre-PURPA FullRequirements Contracts. ........................................................................... 10

3.

No Commission Order Has Limited Order No. 69 Fixed Cost Equalization
Solely to QF Sales Affecting Pre-PURPA Full-Requirements Contracts. 12

4.

The Commission’s Pre-PURPA/Post-PURPA Distinction Does Not
Reflect Reasoned Decision-Making and is Arbitrary and Capricious. ..... 14

The Other Grounds Cited in the June 16 Order For Denying Tri-State Fixed Cost
Equalization Are Erroneous, Running Counter to Prior Commission Orders and
Principles Under PURPA...................................................................................... 20

CONCLUSION.................................................................................................................. 23

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UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
Tri-State Generation and Transmission
Association, Inc.

)
)

Docket No. EL16-39-000

REQUEST FOR REHEARING OF
TRI-STATE GENERATION AND TRANSMISSION ASSOCIATION, INC.
Pursuant to section 313 of the Federal Power Act (“FPA”)1 and rules 212 and 713 of the
Rules of Practice and Procedure of the Federal Energy Regulatory Commission (“Commission”
or “FERC”),2 Tri-State Generation and Transmission Association, Inc. (“Tri-State”) respectfully
submits this request for rehearing of the Commission’s June 16, 2016 order in this docket.3
In its February 17, 2016 Petition for Declaratory Order, 4 Tri-State requested that the
Commission issue an order confirming that Tri-State’s fixed cost recovery proposal contained in
its revised Board Policy 101 5 is consistent with section 210 of the Public Utility Regulatory
Policies Act of 1978 (“PURPA”)6 and the Commission’s implementing regulations. In its June
16 Order, the Commission denied such relief and, in so doing, erred in several critical respects,
including: (i) failing to honor Congress’s intent in enacting PURPA to avoid subsidies in
connection with sales of power by qualifying facilities (“QF”), (ii) failing to follow Order No.

1

16 U.S.C. § 825l.

2

18 C.F.R. §§ 385.212 and 385.713 (2016).

3

Tri-State Generation and Transmission Ass’n, Inc., 155 FERC ¶ 61,269 (2016) (“June 16 Order”).

4

Petition for Declaratory Order of Tri-State Generation and Transmission Association, Inc., Docket No. EL16-39000 (Feb. 17, 2016, amended Mar. 10, 2016) (“Petition”).
5

Tri-State’s revised Board Policy 101 was included as Exhibit C to the Petition.

6

16 U.S.C. § 824a-3.

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697 and the Commission’s subsequent PURPA orders, and (iii) failing to articulate a reasoned
basis for its decision and for its departure from its PURPA precedent.
If allowed to stand on rehearing, the June 16 Order could have a disruptive effect on the
entire United States rural electric cooperative program, creating uncertainty regarding the
enforceability of contracts with member electric cooperatives, threatening the financing and
creditworthiness of wholesale electric cooperatives like Tri-State, and promoting disputes with
and among wholesale electric cooperatives, their member distribution electric cooperatives and
QFs.
I.

STATEMENT OF THE CASE
Background
Tri-State is a member-owned generation and transmission cooperative (“G&T”) that

operates in four states in the Great Plains and Rocky Mountain region. Its members serve retail
customers in some of the most economically challenged areas in the region that it serves.
Through its power supply agreements8 with each of its 43 members (39 distribution cooperatives
and four public power districts), Tri-State is obligated to meet all of the member’s electric power
requirements except for up to 5% of such requirements from generation that the member may
elect to own or control. Tri-State recovers costs from its members through rates adopted by its
Board as Board Policies that are intended to share costs on an equal basis across its membership.
7

Final Rule Regarding the Implementation of Section 210 of the Public Utility Regulatory Policies Act of 1978,
Order No. 69, FERC Stats. & Regs. ¶ 30,128, at 30,871, order on reh’g, Order No. 69-A, FERC Stats. & Regs.
¶ 30,160 (1980), aff’d in part & vacated in part on other grounds sub nom. Am. Elec. Power Serv. Corp. v. FERC,
675 F.2d 1226 (D.C. Cir. 1982), rev’d in part on other grounds sub nom. Am. Paper Inst., Inc. v. Am. Elec. Power
Serv. Corp., 461 U.S. 402 (1983) (“Order No. 69”) (recognizing fixed cost equalization for full requirements
suppliers to take account of QF purchases by full requirements customers where QF chooses to sell directly to
customer rather than to upstream supplier under transmission option in 18 C.F.R. section 292.303(d)).
8

Tri-State is a party to a Wholesale Electric Service Contract (“Power Supply Agreement”) with each of its
members. Tri-State provided a copy of its Power Supply Agreement with Delta-Montrose Electric Association
(“Delta-Montrose”) as Exhibit B to the Petition.
2

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The Power Supply Agreements with members and related revenues are the backbone of TriState’s ability to finance its operations and manage resources in a manner that is cost effective
for all of its distribution member cooperatives.
Tri-State’s Board Policy 101, which is the subject of this proceeding, establishes the
procedures under which Tri-State and its members will implement their purchases of power from
QFs. Contrary to the Commission’s findings in the June 16 Order that Tri-State is seeking to
“undermine” QF purchases,9 Tri-State has adopted policies over the years designed to permit and
encourage local generation by QFs and renewable energy projects.10 For instance, Tri-State’s
Board Policy 118 is designed to allow members to support renewable or distributed generation in
their respective service territories that may exceed the 5% self-supply limitation provided for in
the Power Supply Agreement.11 Tri-State’s policy allows individual members to support local
renewable or distributed generation projects that may provide environmental or other economic
development benefits to the local community, yet insulates the remaining Tri-State members
from negative financial impacts of un-economic generation.
Tri-State’s Board Policy 101 is intended to address the situation where a member elects
to self-generate or purchase more than 5% of its power needs from a QF or other generation

9

See June 16 Order at P 17.

10

Tri-State has been encouraging and has experienced over the last several years a dramatic increase in the
development of renewable resources on its system. Tri-State currently complies with the renewable portfolio
standards (“RPS”) of the States of Colorado and New Mexico. In addition to its 2,841 MW of generating capacity,
Tri-State has a 583 MW allocation of federal hydropower and 348 MW of capacity from other renewable energy
resources, including wind, solar, and small hydro. In 2015, Tri-State contracted for an additional 76 MW of wind
capacity and 55 MW of solar capacity, which are expected to achieve commercial operation in 2016 and 2017.
Further, Tri-State’s members may elect to provide up to 5% of their requirements from distributed or renewable
generation owned or controlled by them, which has enabled many members to invest in small, renewable generation
projects. As of this filing, 16 of Tri-State’s members have chosen this election and have developed or plan to
develop 97 MW of distributed generation through 55 separate projects. In 2016, approximately 25% of the energy
Tri-State and its member systems will deliver to cooperative members will be generated from renewable resources.
11

Board Policy 118 provides that Tri-State will agree to purchase the output of a generation project at a price at least
equal to Tri-State’s avoided cost. If the project is not economically viable based on Tri-State’s avoided cost, the
member may provide additional financial support so that the project becomes economic.
3

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source. It provides that, in such circumstances, where the member purchases less than 95% of its
requirements from Tri-State, “then Tri-State will bill that Member System an amount equal to
Tri-State’s lost revenue minus Tri-State’s avoided costs.”12 This is intended to place the member
purchasing QF power and Tri-State’s other requirements customers in the identical position visà-vis responsibility for fixed costs that they would occupy had Tri-State purchased the QF energy
directly under the transmission option and allocated the costs to its members. In the absence of
such a policy, a loophole would be created, affording members the opportunity to make
relatively uneconomic and inefficient purchases of QF energy for more than 5% of their
requirements with the expectation that Tri-State’s other members would bear the costs of such
purchases above Tri-State’s avoided costs. 13 Individual members would also have fewer
incentives to abide by their Power Supply Agreements.
In the Petition, Tri-State sought a ruling that its fixed cost equalization mechanism in
revised Board Policy 101, based on Order No. 69 and the Commission’s order in Carolina
Power & Light Co.,14 is consistent with PURPA.
The June 16 Order
The Commission denied Tri-State’s Petition, concluding that the fixed-cost equalization
sought by Tri-State: (i) “seeks to undermine the Commission’s prior order in Delta-Montrose, by
imposing financial burdens on Delta-Montrose that could affect its purchasing from QFs above
the contract’s 5 percent limitation,”15 and (ii) “would also limit a QF’s ability to sell its output at

12

Petition, Exhibit C, Revised Board Policy 101 at 2.

13

The need for revised Board Policy 101 has been made more urgent by the plans of one of Tri-State’s full
requirements members, Delta-Montrose, to move forward with arrangements to purchase power from a QF, where
the QF seller has chosen not to sell its power to Tri-State under the transmission option but rather to Delta-Montrose.
14

Carolina Power & Light Co., 48 FERC ¶ 61,101, at 61,390 (1989) (“CP&L”).

15

June 16 Order at P 17 (internal citations omitted).
4

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negotiated rates.”16 Relying on its earlier decision in Public Service Company of New Hampshire
v. New Hampshire Electric Cooperative,17 the Commission rejected Tri-State’s cost recovery in
order to “vindicate” its determination that Delta-Montrose must purchase QF power offered to it
in excess of the 5% allowance.18
The Commission also found that Tri-State could not rely on Order No. 69, because the
fixed cost equalization discussed there was in the context of pre-PURPA full requirements
contracts, whereas the power supply contract between Tri-State and Delta-Montrose was postPURPA and expressly provided for QF purchases by Delta Montrose.19 Finally, the Commission
found that “Tri-State has not demonstrated that, in fact, it will not recover its fixed costs if Delta
Montrose exceeds the contract’s 5 percent limitation on QF purchases,”20 pointing out that TriState can make off-system sales of excess power and in its Annual Report had noted that the QF
purchases by Delta-Montrose would not have a material adverse effect on Tri-State’s finances.21
Impact of the June 16 Order
The impact of the June 16 Order goes far beyond Tri-State and its need for fixed cost
equalization, potentially marginalizing the enforceability of G&Ts’ all-requirements contracts,
thereby jeopardizing the financial stability of the rural electrification sector. The Power Supply
Agreements between Tri-State and its members and those between other G&Ts and their
members are the foundation for Tri-State’s and other cooperatives’ financial commitments,
allowing Tri-State and other G&Ts to borrow money at or below market rates. These Power

16

Id.

17

Pub. Serv. Co. of New Hampshire v. New Hampshire Elec. Coop., 85 FERC ¶ 61,044 (1998) (“PSNH”).

18

June 16 Order at P 19.

19

Id. at P 20.

20

Id. at P 21.

21

Id.
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Supply Agreements, including the one with Delta-Montrose, are not simple requirements
contracts but, pursuant to Tri-State’s First Mortgage Indenture, are pledged as security and are
essential collateral to secure the repayment of Tri-State’s and other G&Ts’ indebtedness, thereby
effectuating an important federal policy of supplying electricity to rural areas at reasonable cost.
When Tri-State’s members signed the Power Supply Agreements, they were well aware that TriState and its lenders were relying upon the enforceability of such contracts and the revenues TriState would receive under them, as expressly reflected in the recitals contained in the Power
Supply Agreements. 22 Erosion of the obligations under these all-requirements contracts
compromises the collateral security for repayment of G&T loans, potentially threatening the
financial health of the rural cooperative sector.
II.

STATEMENT OF ISSUES
In accordance with 18 C.F.R. section 385.713(c)(2), Tri-State specifies the following

issues with respect to which it seeks rehearing:
1.

Whether the Commission’s June 16 ruling that Order No. 69 fixed cost
equalization is limited solely to QF sales that displace sales under pre-PURPA
full-requirements power supply contracts is consistent with Congress’s intent in
PURPA to avoid subsidies in connection with all QF sales -- not just sales
affecting pre-PURPA supply agreements -- and to “provid[e] for increased
conservation of electric energy, increased efficiency in the use of facilities and
resources by electric utilities, and equitable retail rates for electric consumers.”
Authorities relied upon: H.R. Conf. Rep. No. 95-1750, at 98 (1978), reprinted in
1978 U.S.C.C.A.N. 7797,7832; Swecker v. Midland Power Coop., 807 F.3d 883,
884 (8th Cir. 2015) (“Swecker”); 16 U.S.C. § 2601(1).

22

For example, the Fifth Recital states:
[Delta Montrose] acknowledges that [Tri-State] and the Government and other lenders are relying on this
[all requirements] commitment from [Delta Montrose], and similar commitments from all other [Tri-State]
Members having similar contracts to purchase electric service for its present and future load requirements
hereunder and provide for (a) the financing of [Tri-State’s] facilities, (b) the development of an
organization to serve [Delta Montrose], and (c) for a long-term planning and power supply acquisition
program.
6

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2.

Whether the Commission’s ruling that Order No. 69 fixed cost equalization is
limited solely to QF sales that displace sales under pre-PURPA full-requirements
contracts is consistent with Order No. 69.
Authorities relied upon: Order No. 69 at 30,871; CP&L, 48 FERC at 31,389-90;
City of Longmont, 39 FERC ¶ 61,301, at 61,974 (1987); Wahl v. AllamakeeClayton Elec. Coop., 115 FERC ¶ 61,318, at P 10 (2006); Swecker, 807 F.3d at
884-85.

3.

Whether the Commission’s ruling that Order No. 69 fixed cost equalization is
limited solely to QF sales that displace sales under pre-PURPA full-requirements
contracts is consistent with the Commission’s subsequent PURPA orders
interpreting Order No. 69.
Authorities relied upon: PSNH, 85 FERC at 61,135-36; CP&L, 48 FERC at
61,389-90.

4.

Whether the Commission has offered a reasoned basis for (i) its ruling that Order
No. 69 fixed cost equalization is limited solely to QF sales that displace sales
under pre-PURPA full-requirements contracts and (ii) its departure from past
Commission orders that do not limit the availability of fixed cost equalization by
contract vintage.
Authorities relied upon: Order No. 69 at 30,871; CP&L, 48 FERC at 31,389-90;
Encino Motorcars, LLC v. Navarro, 579 U. S. __ , slip op. at 9 (June 20, 2016);
Motor Vehicles Mfrs. Assoc. v. State Farm Mutual Auto. Ins. Co., 463 U.S. 29,4243 (1983); PG&E Gas Transmission, NW Corp. v. FERC, 315 F.3d 383, 390 (D.C.
Cir. 2003).

5.

Whether the other grounds cited in support of the June 16 Order -- (i) the
possibility that Tri-State’s revised Board Policy 101 could “undermine” QF
purchases by Delta-Montrose or limit the QF seller’s ability to sell its power at a
negotiated rates in excess of Delta-Montrose’s avoided cost, (ii) the need for TriState to demonstrate harm or inability to recover displaced fixed costs by other
means, and (iii) the possible prohibition of QF sales by Board Policy 101-- are
supported by the Commission’s prior PURPA orders and principles under PURPA.
Authorities relied upon: Order No. 69 at 30,871; CP&L, 48 FERC at 31,387, 8990; 16 U.S.C. § 2601(1); 18 C.F.R. §§ 292.303(b)(1), 292.304(a)(2).

III.

SPECIFICATIONS OF ERROR
In accordance with 18 C.F.R. section 385.713(c)(1), Tri-State submits that the

Commission erred in the June 16 Order as follows:

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IV.

1.

In ruling that Order No. 69 fixed cost equalization is limited solely to QF sales
that displace sales under pre-PURPA full-requirements power supply contracts,
the Commission defied Congress’s intent in PURPA to avoid subsidies in
connection with all QF sales -- not just sales affecting pre-PURPA supply
agreements -- and to “provid[e] for increased conservation of electric energy,
increased efficiency in the use of facilities and resources by electric utilities, and
equitable retail rates for electric consumers.”23

2.

In ruling that Order No. 69 fixed cost equalization is limited solely to QF sales
that displace sales under pre-PURPA full-requirements contracts, the Commission
failed to follow Order No. 69 and its subsequent PURPA orders (i.e., CP&L and
PSNH) dealing with fixed cost equalization.

3.

The June 16 Order is arbitrary and capricious because the Commission failed to (i)
offer a reasoned basis for its ruling that Order No. 69 fixed cost equalization is
limited solely to QF sales that displace sales under pre-PURPA full-requirements
contracts; (ii) consider the broader implications of its decision on the overall G&T
sector, especially in light of Congress’s intent to avoid subsidies associated with
QF sales; (iii) follow its own PURPA precedent; and (iv) offer a reasoned basis
for departing from such precedent.

4.

The other grounds cited in support of the June 16 Order -- i.e., (i) the possibility
that Tri-State’s revised Board Policy 101 could “undermine” QF purchases by
Delta-Montrose or limit the QF seller’s ability to sell its power at a negotiated
rates in excess of Delta-Montrose’s avoided cost, (ii) the need for Tri-State to
demonstrate harm or inability to recover displaced fixed costs by other means,
and (iii) the possible prohibition of QF sales by Board Policy 101-- are erroneous
and not supported by the Commission’s prior PURPA orders and principles under
PURPA.

ARGUMENT ON REHEARING
A.

The Commission’s Ruling that Order No. 69 Fixed Cost Equalization Applies
Only to Pre-PURPA Contracts Is Arbitrary, Capricious, and Not In
Accordance With Law, Rendering an Interpretation of Order No. 69 that is
At Odds with Congress’s Intent in Enacting Section 210 of PURPA and With
Order No. 69 and the Commission’s Subsequent PURPA Orders.

The June 16 ruling that Order No. 69 cost equalization applies solely to pre-PURPA fullrequirements power supply agreements interprets Order No. 69 in a way that is at odds with
Congress’s intent in enacting section 210 of PURPA, and with Order No. 69 and the
Commission’s subsequent PURPA orders. As Tri-State demonstrates below, the Commission’s
23

16 U.S.C. § 2601(1).
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order in PSNH, on which the June 16 Order was based, does not stand for the proposition that
Order No. 69 cost equalization is available for only post-PURPA requirements contracts. In fact,
the availability of Order No. 69 cost equalization has nothing to do with contract vintage. It
simply assures that the upstream supplying utility will be in the same position with its
downstream full requirements customer vis-à-vis fixed cost recovery regardless of whether the
QF seller chooses to sell its power to (i) the upstream supplier under the transmission option in
18 C.F.R. section 292.303(d) or (ii) the downstream full requirements customer to which the QF
is connected. Because the QF seller here has chosen to sell to Delta-Montrose rather than
transmit its power to Tri-State, Tri-State is entitled to recovery of the fixed costs displaced by
Delta-Montrose’s QF purchases. A failure to allow such recovery would create a windfall in
favor of the individual member cooperative and the QF at the expense of Tri-State’s 42 other
members.
1.

The June 16 Ruling is at Odds with PURPA and Congress’s Intent in
PURPA to Avoid Subsidies Associated with QF Sales.

In denying Tri-State the ability to remedy cross-subsidization of Delta-Montrose’s QF
purchases by Tri-State’s other full requirements customers, the June 16 Order runs afoul of
Congress’s express intent in enacting PURPA to avoid all subsidies in connection with QF sales
-- not just subsidies associated with QF sales that displace sales under pre-PURPA fullrequirements supply contracts. In the Conference Report accompanying PURPA, the HouseSenate conferees explained that “[t]he provisions of [§ 210] are not intended to require the rate
payers of a utility to subsidize cogenerators or small power producers.”24 Congress’s concern
with avoiding subsidies reflects its stated purpose in PURPA to provide for “increased
24

June 16 Order at P 21. H.R. Conf. Rep. No. 95-1750, at 98 (1978), reprinted in 1978 U.S.C.C.A.N. 7797,7832.
See also Swecker, 807 F.3d at 884.
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conservation of electric energy, increased efficiency in the use of facilities and resources by
electric utilities, and equitable retail rates for electric consumers.”25 Yet if the June 16 Order is
allowed to stand on rehearing, it will require Tri-State’s other full requirements members to
subsidize Delta-Montrose’s QF purchases, fostering the inefficient use of generation resources
by incentivizing surplus capacity, directly contrary to Congress’s intent.
2.

Order No. 69 Does Not Limit Cost Equalization to Pre-PURPA FullRequirements Contracts.

Contrary to the June 16 Order,26 nowhere does Order No. 69 state that the fixed cost
equalization associated with a full requirements customer’s purchases of QF power is limited
solely to pre-PURPA requirements contracts, or suggest there are policy reasons to support such
a limitation.27 Yet if such a distinction were intended in Order No. 69, it would be of a material
nature and important to the administration of PURPA, supporting the expectation of at least
mention if not some explanation in the text of the Commission’s principal PURPA rulemaking
order. The pre-PURPA/post-PURPA distinction in the June 16 Order is not supported by Order
No. 69.
In fact, as Order No. 69 and CP&L make clear, fixed cost equalization has nothing to do
with whether the QF sales involve a pre-PURPA or post-PURPA power supply agreement, but
only with whether the QF seller chooses to sell its power to the downstream full requirements
customer to which it is connected rather than to the upstream full requirements supplier28 under

25

16 U.S.C. § 2601(1).

26

June 16 Order at P 20.

27

See Order No. 69 at 30,871-72.

28

The Commission’s orders make clear that utilities like Tri-State that supply virtually all of the requirements of
their customers, carving out a small percentage for self- or local generation by the customer, are considered “full
requirements suppliers” for purposes of Order No. 69. CP&L, 48 FERC at 61,389; City of Longmont, 39 FERC
¶ 61,301, at 61,974 (1987). Because of the must-take obligation under PURPA, Tri-State cannot limit DeltaMontrose’s QF purchases, even if they exceed the 5% allowance for self- and local generation under the parties’
10

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the transmission option. As described below, cost equalization is an integral part of the avoided
cost rule for full-requirements customers of supplying utilities and the transmission option set
forth in 18 C.F.R. section 292.303(d), all of which have universal application, regardless of the
vintage of any affected full requirements contract.
Order No. 69, CP&L and other orders recognize that the avoided cost of a full
requirements purchaser like Delta-Montrose is the avoided cost of its supplier (i.e., Tri-State),
“because it is the supplier that avoids generation when the full requirements customer purchases
from a QF.”29 In Order No. 69, the Commission adopted 18 C.F.R. section 292.303(d), allowing
a full requirements customer, instead of purchasing QF power itself, to transmit the QF power to
its upstream full-requirements supplier for purchase so long as the QF seller agrees. For such QF
sales, there is no need for fixed cost equalization, because the upstream full-requirements
supplier makes the QF purchase at its avoided cost, as contemplated by the Commission’s
avoided cost rule, and suffers no loss of revenue from displacement by QF sales. But in the case
where the QF seller does not consent to transmit the power to the upstream supplier, choosing
instead to sell to the full requirements customer, there will be loss of revenue, or stranded fixed
costs, from the QF sales that will need to be recovered through the fixed cost equalization
described in Order No. 69. Such fixed cost equalization simply assures that the upstream utility
supplier will be treated the same financially regardless of whether the QF seller chooses to sell to

Power Supply Agreement. However, as it seeks to affirm in this Request for Rehearing, Tri-State claims a valid right
under Order No. 69 to implement fixed cost equalization associated with such purchases if the QF seller chooses to
sell to Delta-Montrose rather than to Tri-State under the transmission option in 18 C.F.R. section 292.303(d).
29

Wahl v. Allamakee-Clayton Elec. Coop., 115 FERC ¶ 61,318 at P 10 (“In Order No. 69, the Commission
determined that the avoided cost of a full requirements customer is the avoided cost of the full requirements supplier
because it is the supplier that avoids generation when the full requirements customer purchases from a QF. The
Commission has consistently followed this rule.”) (emphasis added); Accord. Order No. 69 at 30,871; CP&L, 48
FERC at 61,389-90; City of Longmont, 39 FERC ¶ 61,301, at 61,974; Tennessee Power Co., 76 FERC ¶ 61,125, at
61,485 (1996); Cuero Hydroelectric, Inc. v. City of Cuero, 77 FERC ¶ 61,114 (1996); Swecker v. Midland Power
Coop., 142 FERC ¶ 61,207, at P 36 (2013); Swecker, 807 F.3d at 884-85.
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the upstream supplier under the transmission option in 18 C.F.R. section 292.303(d) or to the
downstream customer utility to which it is connected.30 As explained in CP&L, cost equalization
assures that “the full requirements supplier will be in the same position as if it had purchased the
power directly from the QF.”31 That Order No. 69 does not limit cost equalization solely to QF
sales that displace sales under pre-PURPA requirements contracts is not surprising, because the
potential for cost shifts and subsidization of one requirements customer by other requirements
customers exists with equal force in pre-PURPA and post-PURPA agreements.
Like the avoided cost rule for full-requirements customers and the transmission option,
Order No. 69 gives fixed cost equalization universal application. The June 16 Order’s limitation
of cost equalization based on contract vintage was in error and should be corrected on rehearing.
3.

No Commission Order Has Limited Order No. 69 Fixed Cost
Equalization Solely to QF Sales Affecting Pre-PURPA FullRequirements Contracts.

Contrary to the June 16 Order,32 no prior Commission order has construed Order No. 69
fixed cost equalization as being limited solely to QF sales affecting pre-PURPA power supply
agreements. Indeed, were that the case, the Commission would have denied fixed cost
equalization in PSNH precisely for that reason. Yet it did not.
Acknowledging that the power supply agreement before it in PSNH was a post-PURPA
agreement, the Commission explained that, with such an agreement, it is possible for the seller to
waive its rights to Order No. 69 fixed cost equalization or for the parties to contractually provide

30

In Order No. 69, the Commission described the mechanics of fixed cost equalization as follows: “rather than
allocating its loss in revenue among all of its customers, in this situation the supplying utility should assign all of
these losses to the all-requirements utility. That utility should, in turn, deduct these losses from its previously
calculated avoided costs, and pay the qualifying facility accordingly.” Order No. 69 at 30,871.
31

CP&L, 48 FERC at 61,389.

32

June 16 Order at PP 19-20.
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for their own rate adjustments in the event of future QF purchases by the customer utility.33 The
Commission then considered the claim of Public Service Company of New Hampshire (“Public
Service Company”) that it should be allowed to effect an Order No. 69 adjustment through a
filing under FPA section 205, as allowed in CP&L. The Commission concluded that such a filing,
if allowed by contract, could be used to achieve the fixed cost equalization sought by Public
Service Company, but that no such filing had been made or could be made by Public Service
Company, because it had contractually waived its right to seek rate relief under FPA section 205
or 206.34 Thus, PSNH stands for the proposition that, so long as there is contractual authority to
seek rate relief and no waiver, fixed cost equalization is allowed in connection with costs
displaced under post-PURPA requirements contracts.
But unlike PSNH, there is no issue of waiver here. The Tri-State/Delta-Montrose Power
Supply Agreement expressly reserves to the Tri-State Board of Directors the prerogative to
adjust the rates as deemed necessary no less frequently than once a year. 35 Further, Tri-State’s
Bylaws provide that the Tri-State Board may adopt Rules and Regulations to address the
governance, oversight and management of Tri-State and that the members expressly agree to
comply with such Rules and Regulations.36
In contrast to PSNH, in CP&L, there was no issue of contractual waiver of section 205
rights, and the Commission expressly allowed a fixed cost equalization filing under section 205
by the supplying utility almost 10 years after enactment of PURPA without ever stating whether
the power supply agreement at issue was a pre-PURPA or post-PURPA agreement. But if the
vintage of the supply contract were determinative, as suggested by the June 16 Order, it would
33

PSNH, 85 FERC at 61,135.

34

Id. at 61,135-36.

35

E.g., Power Supply Agreement, section 3(b).

36

Tri-State Bylaws attached to Petition, Article I, section 1(c).
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have been reasonable to expect mention of such a material fact in the Commission’s order. As
with the section 205 filing allowed in CP&L, Tri-State has the clear contractual authority under
its member agreements to adopt and implement its Revised Board Policy 101 effecting fixed cost
equalization for the fixed costs displaced by the QF purchases of its full requirements members.
As demonstrated above, because the QF seller here chose not to sell its power to Tri-State
under the transmission option in 18 C.F.R. section 292.303(d) but rather to Tri-State’s full
requirements customer, Delta-Montrose, Tri-State is entitled to avail itself of the fixed cost
equalization allowed under Order No. 69 and subsequent orders, and the Commission should so
hold on rehearing.
4.

The Commission’s Pre-PURPA/Post-PURPA Distinction Does Not
Reflect Reasoned Decision-Making and is Arbitrary and Capricious.

The “arbitrary and capricious” standard of review in section 5 of the Administrative
Procedure Act37 requires that the June 16 Order must reflect reasoned decision-making.38 Among
other things, it must produce a result consistent with Congressional intent, taking into account
factors that Congress viewed as important.39 It must also be consistent with the Commission’s
own precedent under PURPA or, if it departs from such precedent, it must offer a reasoned basis
for doing so, taking into account important aspects of the problem before it and honoring
Congressional intent.40

37

5 U.S.C. § 551, et seq.

38

5 U.S.C. § 706(2). See Encino Motorcars, LLC v. Navarro, 579 U. S. __ , slip op. at 9 (June 20, 2016) (“Encino
Motocar”) (an agency must give adequate reasons for its decision); Motor Vehicles Mfrs. Assoc. v. State Farm Ins.,
463 U.S. 29, 43 (1983) (“Motor Vehicles”) (agency must offer reasoned basis for its decision); Missouri PSC v.
FERC, 234 F.3d 36, 41 (D.C. Cir. 2000) (the Commission must fully articulate the basis for its decision).
39

Motor Vehicles, 463 U.S. at 42-43, 59.

40

Encino Motorcars, 579 U.S. __ , slip op. at 9 (“When an agency changes its existing position … a reasoned
explanation is needed for disregarding facts and circumstances that underlay or were engendered by the prior
policy.”); see also FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009) (agency must “display awareness
that it is changing position” and “show that there are good reasons for the new policy”); National Cable &
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The June 16 Order falls far short of being a reasoned decision. In it, the Commission has
embraced a principle ‒ its pre-PURPA/post-PURPA distinction ‒ that is not supported by reason
or Congressional intent and that upsets the intricate set of rules fashioned in Order No. 69 to
serve equity and Congress’s purpose to avoid subsidies in connection with QF sales. Without any
explanation of why it is necessary to do so, the June 16 Order nullifies the equal treatment of
upstream full-requirements suppliers envisioned by Order No. 69 and encourages QF sellers
never to utilize the transmission option but instead always to sell to the full-requirements
customer of a supplying utility at a rate in excess of the supplying utility’s avoided cost. This, in
turn, undermines the Commission’s avoided cost rule for downstream full-requirements
purchasers and contravenes the Commission’s express intent in Order No. 69 and CP&L to
ensure equal treatment of the upstream full-requirements supplier whenever a QF seller chooses
to sells its power to the downstream full-requirements customer rather than to the upstream
supplier under the transmission option.
Keenly aware of the subsidy issue in Order No. 69 and especially of the economic
inefficiencies that could result if a QF sells its power to a full-requirements customer at the
customer’s “avoided price” rather than at such customer’s “avoided cost,” the Commission
rightly determined that the avoided cost of a full-requirements customer is the avoided cost of its
full-requirements supplier, “because it is the supplier that avoids generation when the fullTelecommunications Assn. v. Brand X Internet Servs., 545 U.S. 967, 981–982 (2005) (“[u]nexplained inconsistency”
in agency policy is “a reason for holding an interpretation to be an arbitrary and capricious change from agency
practice”); Motor Vehicles, 463 U.S. at 42-43 (agency must offer a reasoned basis for its decision, including
effecting a departure from its own prior orders); Williams Gas Processing - Gulf Coast Company, L.P. v. FERC, 475
F.3d 319, 329 (D.C. Cir. 2006) (the Commission may not simply “gloss over” its prior position); PG&E Gas
Transmission, Nw. Corp. v. FERC, 315 F.3d 383, 390 (D.C. Cir. 2003) (“FERC’s failure to come to terms with its
own precedent reflects the absence of a reasoned decision-making process”); North Carolina Utils. Comm’n v.
FERC, 42 F.3d 659, 666 (D.C. Cir. 1994) (rejecting a FERC order because the Commission did not “sufficiently
explain[] its departure from its prior cases”); Hatch v. FERC, 654 F.2d 825, 834 (D.C. Cir. 1981) (“An agency must
provide a reasoned explanation for any failure to adhere to its own precedents.”). Cf. Louisiana Pub. Serv. Comm’n
v. FERC, 772 F.3d 1297, 1303 (D.C. Cir. 2014) (“The Commission can depart from a prior policy or line of
precedent, but it must acknowledge that it is doing so and provide a reasoned explanation.”).
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requirements customer purchases from a QF.”41 Also, knowing that QF sellers would seek to
exploit the arbitrage difference between the downstream full-requirements utility’s “avoided
price” and the upstream supplier’s avoided cost, the Commission adopted fixed cost equalization
to close the loophole, to assure that (i) the fixed cost recovery of the full-requirements supplier
will be the same as if it had purchased the QF power itself under the transmission option,42 and
(ii) the fixed cost responsibility of the downstream customer will be the same as if it had not
made any QF purchases.43
Use of the unadjusted wholesale rate [i.e., using the “avoided price” as the
avoided cost of the downstream purchasing utility] fails to take into account the
effect of reduced revenue to the supplying utility, as a result of the substitute of
the qualifying facility’s output for energy previously supplied by the supplying
utility. As the level of purchase by the all-requirements utility decreases, the
supplying utility’s fixed costs will have to be allocated over a smaller number of
units of output. In effect, the loss in revenue to the supplying utility will cause the
demand charges to the supplying utility’s customers (including the allrequirements customers interconnected with the qualifying facility) to increase.
Under the definition of “avoided costs” in this section, the purchasing utility must
be in the same position it would have been had it not purchased the qualifying
facility’s output. As a result, rather than allocating its loss in revenue among all of
its customers, in this situation the supplying utility should assign all of these
losses to the all-requirement utility. That utility should, in turn, deduct these
losses from its previously calculated avoided costs, and pay the qualifying facility
accordingly.44
In violation of Congress’s intent to avoid subsidies with QF sales, the June 16 Order reopens the loophole closed by Order No. 69’s fixed cost equalization, inviting QF sellers to
exploit the arbitrage difference between a full-requirements customer’s “avoided price” and such

41

Wahl v. Allamakee-Clayton Elec. Coop., 115 FERC ¶ 61,318 at P 10.

42

See Swecker, 807 F. 3d 883, 885-886 (noting that the Commission adopted the avoided cost rule for full
requirements purchasers to encourage QF sellers to choose the transmission option and sell directly to the upstream
supplier).
43

In Order No. 69, the Commission explained that the avoided cost rule for full-requirements purchasers is intended
to assure that “the purchasing utility must be in the same financial position it would have been had it not purchased
the qualifying facility’s output.” Order No. 69 at 30,871.
44

Order No. 69 at 30,871.
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customer’s rightful avoided cost. Yet nowhere does the Commission explain the policy
supporting such action or why contract vintage should make a difference. Fixed cost equalization
is just as necessary to avoid subsidies associated with post-PURPA supply agreements as it is
with pre-PURPA agreements. Further, if the parties to a post-PURPA full-requirements contract
agree to terms allowing fixed cost equalization, as they have here, 45 their agreement should
rightly be given effect. Nullifying the parties’ intent based on whether a supply agreement is prePURPA or post-PURPA vintage makes no sense, and, as noted in section A. 3. above, finds no
support in the Commission’s prior PURPA orders.
Nor has the Commission considered the broader implications of its pre-PURPA/postPURPA distinction on the G&T sector. In fact, denying fixed cost equalization in connection
with all post-PURPA full requirements agreements could imperil the financial health of the G&T
sector by casting doubt on fixed cost recovery under G&Ts’ Power Supply Agreements in the
face of increased QF activity. The certainty of fixed cost recovery assured by Tri-State’s and
other cooperatives’ Power Supply Agreements underpins borrowing by cooperatives at or below
market rates and, overall, has been key to G&Ts’ ability to provide power at low-cost to the rural
communities they are charged to serve. Indeed, the importance of such agreements to G&Ts has
been validated by the United States Court of Appeals for the Tenth Circuit in Tri-State
Generation and Transmission Ass’n, Inc. v. Shoshone River Power, Inc., 46 where, as here, a
member cooperative sought to shirk its obligations under its Power Supply Agreement, not
through purchases of QF power like Delta-Montrose, but through a sale of its assets to a third

45

Power Supply Agreement, section 3(b); Tri-State Bylaws, Article I, section 1(c).

46

Tri-State Generation and Transmission Ass’n, Inc. v. Shoshone River Power, Inc., 874 F.2d 1346 (10th Cir. 1989),
(“Tri-State v. Shoshone”).
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party. Rebuffing such efforts, 47 the Tenth Circuit stressed the vital role Tri-State’s full
requirements contracts play in “connecting” the members’ power purchases to Tri-State’s
indebtedness, enabling Tri-State’s borrowings.48 According to the Court, these contracts are not
“routine arm’s-length requirements contract[s] between unrelated, private for-profit parties,”49
but rather an intricately fashioned set of commitments to support Tri-State’s indebtedness,
“thereby effectuating the REA policy to provide the economic means for supplying electricity to
rural areas.”50 As such, the Court concluded that Tri-State’s full requirements contracts must be
viewed in conjunction with the entire cooperative system and REA program,
including Shoshone’s participation in and relationship to Tri-State, the
interdependency of the members in the Tri-State system, the purpose behind the
REA program and its connection to the all-requirements contract, Shoshone’s
realization of benefits at the Tri-State level as a member of an REA-financed
cooperative system, the purpose for which Tri-State obtained [its] loans, the
reasons for entering into the all-requirements contract, the connection between the
contract and Tri-State’s indebtedness, the role the all-requirements contract plays
in the cooperative system, and the obvious need for an intact system and a
continued revenue stream.51
Yet if downstream cooperative members like Delta-Montrose can purchase QF power
with impunity under the PURPA must-take obligation, leaving upstream suppliers like Tri-State

47

The Court held that “Shoshone cannot escape its contractual obligations by simply taking it members’
requirements out of the Tri-State system and transferring them to [the Buyer],” Tri-State v. Shoshone, 874 F. 2d at
1360-61, because
“Tri-State and the federal government, through the REA program have made it possible for Shoshone to
provide electric power to its members. Selling out prior to the end of the contract would constitute an
abuse of the federal program. If [the Buyer] is allowed to purchase Shoshone’s member subscriptions,
Shoshone is not sharing the burden that has come with the benefits it has received under the REA program;
and [the Buyer] would be purchasing assets supported by federal dollars and a ready-made market created
by a federal program, without having to assume corresponding obligations.” Id. at 1360.
The same rationale applies here with regard to Delta-Montrose: it cannot escape its obligation under its
Power Supply Agreement and Tri-State Board Policies to cover the fixed costs displaced by its purchases of QF
power at a price in excess of the avoided cost prescribed under the Commission’s PURPA orders.
48

Tri-State v. Shoshone, 874 F. 2d at 1355.

49

Id. at 1359.

50

Id.

51

Id.
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no recourse to fixed cost equalization, despite the provisions of their Power Supply Agreements
to the contrary, overall revenues and fixed cost recovery for G&Ts, as well as easy access to
capital markets, could be jeopardized. Carried to its logical extreme, the June 16 Order would
permit QF sales to displace all of Tri-State’s sales without any recourse on Tri-State’s part for
fixed cost equalization from members that buy the QF power or for the fixed cost recovery
essential to Tri-State’s financial well being and existence.
Where previously G&T cooperatives and their lenders have been accustomed to relying
on the cooperatives’ Power Supply Agreements to ensure financial stability, certainty of
obligations and a steady, predictable stream of revenue to meet debt service and other obligations,
as was noted by the Tenth Circuit Tri-State v. Shoshone, the June 16 Order has now created
uncertainty as to enforceability of obligations. It has cast doubt whether a Power Supply
Agreement assures fixed cost recovery on any QF purchases by the customer that displace
portions of the requirements that Tri-State or any other cooperative is obligated to supply. If
allowed to stand, the June 16 Order could lead to lowered credit ratings and reduced access to
capital markets for G&Ts, hampering their capacity to continue to offer low cost power to the
rural communities they serve.
Despite the need to address such broader implications to render a reasoned decision, the
June 16 Order is silent. It offers no explanation why, in light of the potential consequences, the
pre-PURPA/post-PURPA distinction is nonetheless desirable and consistent with Congressional
intent.
Nor does the June 16 Order articulate a reasoned basis for the Commission’s departure
from its PURPA precedent. The Commission apparently misread PSNH as holding that fixed
cost equalization does not apply to post-PURPA supply agreements, when in fact all that PSNH

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can be read to stand for regarding post-PURPA contracts is that the Commission will give effect
to any waivers of cost equalization rights included in such contracts.52
In (i) failing to offer a reasoned basis for its pre-PURPA/post-PURPA distinction, (ii)
failing to consider the broader implications of its decision, especially in light of Congress’s
intent to avoid subsidies associated with QF sales, (iii) failing to follow its own PURPA
precedent, and (iv) failing to offer a reasoned basis for its decision when departing from such
precedent, the June 16 Order is unreasoned, arbitrary and capricious. The Commission should
remedy such errors on rehearing, determining Tri-State’s revised Board Policy 101 is consistent
with section 210 of PURPA.
B.

The Other Grounds Cited in the June 16 Order For Denying Tri-State Fixed
Cost Equalization Are Erroneous, Running Counter to Prior Commission
Orders and Principles Under PURPA.

The Commission’s other grounds for rejecting Tri-State’s proposed fixed cost
equalization are arbitrary, capricious and not in accordance with law, running counter to prior
Commission orders and well-established principles under PURPA.
First, the June 16 Order’s conclusion that Tri-State’s proposed cost recovery mechanism
would “undermine” Delta-Montrose’s purchases of QF power53 is based on a misinterpretation of
applicable law and rules. In administering the must-purchase obligation under PURPA section
210, the Commission has made clear in Order No. 69 and subsequent orders that it gives
precedence to avoiding stranded fixed costs by the full requirements supplier, even if doing so
might jeopardize the economics of some QF sales, because of the importance that “the

52

PSNH, 85 FERC at ¶ 61,135-36.

53

See June 16 Order at P 17.
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[supplying] utility and its captive customers not be worse off with the QF than without it.” 54 The
Commission’s vague finding that the rational, fair, and long-established practice of fixed cost
equalization would “undermine” Delta-Montrose’s PURPA purchase obligation overlooks the
essential purpose of fixed cost equalization, which is to put the upstream supplier in the same
position financially as if it had purchased the QF power itself under the transmission option.
Fixed cost equalization prevents the QF seller from undermining the avoided cost rule for the full
requirements customer by cutting a deal with such customer at a higher price to the detriment of
the upstream supplier whose generation is actually “avoided” by any such QF sales/purchases.
Second, the Commission’s concern that Tri-State’s cost recovery would “limit a QF’s
ability to sell its output at negotiated rates”55 is also misplaced. All that a QF seller can rightfully
expect to be paid for its power under PURPA is the purchasing utility’s avoided cost. 56 While
PURPA permits QF sales at negotiated rates in excess of the purchasing utility’s avoided costs,57
it only guarantees sales of QF power at the purchasing utility’s avoided costs.58
Third, contrary to the June 16 Order, 59 the Commission has never required that a
supplying utility seeking fixed cost equalization as a result of QF purchases by its full
requirements customer demonstrate its inability to recover lost revenues by other means, such as
off-system sales. The trigger for fixed cost equalization is not a showing of harm or inability to
54

CP&L, 48 FERC at 61,389; Order No. 69 at 61,389. This holding in CP&L is also consistent with the statutory
purpose of PURPA: “to provide for increased conservation of electric energy, increased efficiency in the use of
facilities and resources by electric utilities, and equitable retail rates for electric consumers.” (Swecker, 807 F.3d 805,
citing 16 U.S.C. § 2601(1)). Increased efficiency in facilities is not served by surplus capacity, and equitable retail
rates are not served by shifting costs away from cooperatives that purchase QF energy from and on cooperatives
that do not.
55

June 16 Order at P 17.

56

As noted, in the case of QF sales to a full requirements customer of a supplying utility like Tri-State, the proper
avoided cost for the purchasing utility is the avoided cost of its supplier. See, e.g., CP&L, 48 FERC at 61,189.
57

See 18 C.F.R. § 292.301(b)(1).

58

See 18 C.F.R. § 292.304(a)(2).

59

June 16 Order at P 21.
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recoup losses but that the QF seller has chosen to sell its power to the downstream full
requirements customer rather than to the upstream supplier under the transmission option in 18
C.F.R. section 292.303(d). In CP&L, the Commission expressly rejected the argument that fixed
cost equalization requires the upstream supplier to demonstrate harm or inability otherwise to
recover the fixed costs displaced by QF sales to its full requirements customer.60
Lastly, contrary to the June 16 Order,61 this case does not involve the issue of prohibiting
QF sales but only the cost equalization consequences that follow from the choice made by the
QF seller to sell its power directly to Tri-State’s full requirements customer Delta-Montrose
rather than to Tri-State under the transmission option. As described above, the consequences of
that choice are well-settled under Order No. 69, CP&L and the Commission’s subsequent
PURPA orders. The Commission should not reward attempts by QFs and member cooperatives
to circumvent these principles and freely exploit differences between the avoided costs of the
upstream supplier and the prices the member cooperatives have agreed to pay under their Power
Supply Agreements. The Commission should hold to its PURPA precedent on rehearing, finding
that Tri-State’s fixed cost equalization mechanism is consistent with section 210 of PURPA.

60

CP&L, 48 FERC at 61,387, 61,390 (holding that Order No. 69 does not require the supplying utility to show
measurable impact to effect fixed cost equalization).
61

June 16 Order at PP 17, 19.
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V.

CONCLUSION
In conclusion, the failure of the June 16 Order to honor the Commission’s PURPA

precedent, as well as Congress’s intent to avoid subsidies in the administration of section 210 of
PURPA, is reversible error. The Commission should correct such error on rehearing, recognizing
that Tri-State’s proposed fixed cost equalization mechanism is consistent with section 210 of
PURPA.
Respectfully submitted,
/s/ Clinton A. Vince
Clinton A. Vince
Stuart A. Caplan
James M. Costan
Jessica M. Lynch
Dentons US LLP
1900 K Street, NW
Washington, DC 20006
Tel: (202) 408-6460
clinton.vince@dentons.com
stuart.caplan@dentons.com
james.costan@dentons.com
jessica.lynch@dentons.com
Dated: July 18, 2016

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CERTIFICATE OF SERVICE
I hereby certify that I have this day served the foregoing document upon each person
designated on the official service list compiled by the Secretary in this proceeding in accordance
with the requirements of Rule 2010 of the Commission’s Rules of Practice and Procedure.
Dated at Washington, D.C., this 18th day of July, 2016.

/s/ Herminia M. Gomez
Herminia M. Gomez
Paralegal
Dentons US LLP
1900 K Street, NW
Washington, DC 20006
herminia.gomez@dentons.com

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Document Content(s)
Tri-State Request for Rehearing (EL16-39).PDF.........................1-26