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PA Bulletin, Doc. No. 05-631


Petition for Declaratory Order

Petition for a Declaratory Order Regarding the Ownership of Alternative Energy Credits and any Environmental Attributes Associated with Non-Utility Generation Facilities under Contract to Pennsylvania Electric Company and Metropolitan Edison Company; Doc. No. P-00052149

[35 Pa.B. 2041]

Petition for Declaratory Order

   Pennsylvania Electric Company (''Penelec'') and Metropolitan Edison Company (collectively, the ''Companies'') request the entry of a declaratory order, pursuant to Section 331(f) of the Public Utility Code, 66 Pa.C.S. § 331(f), and 52 Pa. Code § 5.42 of the Pennsylvania Public Utility Commission's (''Commission'') regulations, and in support thereof represent as follows:

I.  Summary of Requested Relief

   1.  The Companies seek a declaratory order from this Commission confirming that they are entitled to the ownership of all ''alternative energy credits'' (''AECs''), as defined in the Alternative Energy Portfolio Standards Act, Act 213 of 2004 (''Portfolio Standards Act'') and any environmental attributes1 associated with the non-utility generation (''NUG'') facilities from which they are currently purchasing electric energy and/or capacity pursuant to executed and fully effective long-term power purchase agreements (''PPAs''). Such an order is necessary to protect the interests of the Companies' customers who pay through a competitive transition charge for the above market costs associated with the NUG PPAs.

   2.  The Companies recognize that the Commission has embarked on the implementation of the Portfolio Standards Act in a generic proceeding presently pending at Docket No. M-00051865. Indeed, the Companies participated in the technical conference and have submitted two rounds of comments in that proceeding. Although this generic proceeding has touched on the issue of the ownership of the AECs and any environmental attributes associated with existing NUG projects, it is not likely to be resolved timely in that proceeding. This Petition has been filed to allow the Commission to resolve expeditiously an actual controversy that has emerged regarding the ownership of AECs and any environmental attributes associated with the NUG facilities.

   3.  The entry of a Commission order in this proceeding is necessary to resolve an existing dispute with a NUG owner and operator regarding the ownership of these alternative energy credits and the environmental attributes of certain NUG facilities under contract to the Companies. The entry of such an order will also serve to protect customers and resolve any uncertainty regarding the ownership of AECs and environmental attributes associated with other NUG facilities having PPAs with Met Ed, Penelec and other Pennsylvania electric distribution utilities. To minimize contractual controversies that may arise from NUG agreements entered into prior to the time the Commission acts on this Petition, the Companies also request that the Commission publicly state--in the form of a notice in the Pennsylvania Bulletin and a Secretarial letter to all jurisdictional electric distribution companies and electric generation suppliers--that any transactions entered into during the pendency of this Petition are at the risk of the contracting parties.

II.  Introduction

   4.  Penelec is an electric public utility organized and existing under the laws of the Commonwealth of Pennsylvania that provides transmission, distribution and provider of last resort services to retail customers in the northwestern and north-central portions of Pennsylvania.

   5.  Met-Ed is an electric public utility organized and existing under the laws of the Commonwealth of Pennsylvania that provides transmission, distribution and provider of last resort services to retail customers in the southeastern and south central portions of Pennsylvania

   6.  The Companies are both subject to the jurisdiction of this Commission with respect to their rates, service and facilities.

   7.  The York County Solid Waste and Refuse Authority (''York County'') is the owner and operator of a 34.7 megawatt NUG facility (''Facility'') located in Manchester Township, York County, Pennsylvania. York County and Met-Ed entered into a thirty (30) year PPA2 on November 25, 1986 (''York County PPA'') pursuant to which Met-Ed is purchasing all of the electric energy and capacity from the Facility. The York County PPA does not directly address alternative energy credits or other environmental attributes of the Facility. The York County PPA is scheduled to terminate in 2016. The Facility is a ''qualifying facility'' (as described further below) under applicable regulations of the Federal Energy Regulatory Commission (''FERC'').3 The York County PPA, as amended.

III.  Background of Dispute

   8.  From the early 1980's through the early to mid 1990's the Companies actively acquired energy and capacity from NUG sources exclusively through long-term PPAs. Most of the Companies' current NUG PPAs have contract terms of ten (10) to thirty (30) years.

   9.  In 1978 Congress passed the Public Utility Regulatory Policies Act of 1978, 16 U.S.C. § 824a-3(a)--(j) (''PURPA''), as part of a series of legislative enactments intended to address the oil embargo and related high oil prices the United States experienced in the early 1970's. PURPA, among other things, required electric utilities like the Companies to purchase electric energy and capacity from those NUG facilities that were certified by the Federal Energy Regulatory Commission (''FERC'') as ''qualifying facilities'' (''QFs'') under FERC regulations. Under PUPRA, QFs are entitled to special pricing for the electric energy and capacity required to be purchased by electric utilities, often referred to as ''avoided cost.''4

   10.  As a result of the Companies' energy and capacity program of the early 1980's, they currently have 13 active NUG/QF projects in Pennsylvania totaling about 717 MW that may qualify as alternative energy facilities under the Portfolio Standards Act. A list of those current projects is Appendix B.

   11.  While the actual prices and terms of the Companies' various NUG contracts vary, all of them are based on a substantially similar model. In general, the NUG PPAs are full requirements contracts in which the Companies are required to purchase and the NUG operators are required to sell all of the electric output (i.e., energy and capacity) from their respective generating facilities. In some PPAs, like the York County PPA, the NUG operator is required to actually deliver a specified minimum amount of energy annually to a designated metering point in order to avoid being assessed liquidated damages. (York County PPA, Section D. 3(a)).

   12.  Pennsylvania Governor Edward Rendell signed the Portfolio Standards Act into law on November 30, 2004 as Act 213. The Act takes effect on February 28, 2005.

   13.  The Portfolio Standards Act requires, among other things, that a certain percentage of electric energy sold to retail customers in Pennsylvania by electric distribution companies and electric generation suppliers be derived from alternative energy sources. This includes, but is not limited to, solar, wind, hydropower, geothermal, biomass, and demand side management resources. (Portfolio Standards Act, Section 2). The Act further requires that 18% of the electricity sold in Pennsylvania to retail customers be from renewable energy sources within 15 years. The Commission has the primary responsibility for implementing and enforcing the Portfolio Standards Act through, among other things, its establishment of (i) an alternative energy credits program, (ii) a registry of information regarding all available alternative energy credits, (iii) regulations governing the verification and tracking of energy efficiency and demand-side management measures, and (iv) a depreciation schedule for alternative energy credits created through demand-side management, energy efficiency and load management technologies.

   14.  After the enactment of the Portfolio Standards Act (but prior to its effective date), York County advised Met-Ed in a letter dated January 20, 2005 that it intended to sell the ''renewable energy credits'' created by the electric generation at its Facility during calendar year 2004. A copy of the January 20, 2005 York County letter is Appendix C.

   15.  Met-Ed responded to York County in a letter dated January 28, 2005 (a copy of which is attached hereto as Appendix D) and stated that, as the purchaser of the power under the York County PPA, Met-Ed ''is the rightful owner of the renewable energy credits5 associated with the power.''

   16.  In a letter dated February 4, 2005, York County advised that, notwithstanding Met-Ed's claim to any renewable energy credits or other environmental attributes associated with the Facility, York County ''will proceed to arrange for a sale of those assets to another buyer.'' A copy of the February 4, 2005 York County letter is Appendix E.

   17.  On February 10, 2005, Met-Ed responded to York County's February 4 letter, a copy of which is Appendix F. In that letter Met-Ed advised that any sale by York County of the renewable energy credits associated with the Facility will be invalid and/or voidable. Met-Ed further advised that the rights to renewable energy credits from existing NUGs with whom Met Ed has a PPA belong to Met-Ed and that the credits may not be legally transferred to a third party without Met-Ed's consent.

   18.  Although York County has provided no specific timetable for when it proposes to sell any renewable energy credits or other environmental attributes associated with the Facility over Met-Ed's objection, such sale could be imminent. In order to prevent an unlawful transfer or other disposition of the AECs or other environmental attributes associated with this Facility or other similar facilities, the Companies believe that immediate action from this Commission is necessary. The Companies believe that such transfers are adverse to the interests of their customers.

   19.  Pennsylvania is not the first state to see the environmental and societal benefits of renewable resources for the production of electricity. Indeed, several states have enacted legislation establishing some form of system for developing, tracking and monitoring the environmental or ''green'' attributes of generating facilities fueled by renewable resources.6 Several regional or national organizations now issue what are known in the industry as tradable ''green tags.'' Green tags are also known as green certificates, renewable energy credits and tradable renewable certificates. In theory, these green tags represent the environmental and other non-power attributes associated with one megawatt hour (''MWH'') of electricity generated from a renewable resource.

   20.  Depending how a state actually addresses renewable energy and related environmental benefits, there could be real and significant value in any tradable instrument evidencing a green attribute. Hence, as Pennsylvania embarks on the implementation of the Portfolio Standards Act, there is likely to be uncertainty and controversy over who is entitled to own and trade these attributes.

   21.  Indeed, York County's present claim to the AECs and/or environmental attributes of the Facility over Met-Ed's objection squarely places this issue before the Commission.

IV.  Legal Basis and Need for Issuing a Declaratory Order

   22.  Section 5.42 of this Commission's regulations, 52 Pa. Code § 5.42, permits this Commission to issue a declaratory order ruling to ''terminate a controversy or remove uncertainty.''

   23.  A declaratory order from this Commission is necessary to, among other things, resolve the immediate controversy between York County and Met-Ed and, on broader level, to address for all electric distribution companies and NUG owners the question of who is entitled to the ownership of the AECs under the Portfolio Standards Act and any related environmental attributes under existing long-term NUG PPAs. The Commission's action to resolve this issue will ensure that the interests of customers are considered prior to the occurrence of transactions potentially detrimental to the Companies and their customers.

   24.  There is no question that this Commission has the authority to address the issues raised by this Petition. In American Ref-Fuel Company et al., FERC Docket No. EL03-133-000, 105 FERC ¶ 61,004 (October 1, 2003) (''American Ref-Fuel''), the FERC conclusively determined that renewable energy certificates (''RECs'') ''are created by the States'' and, therefore, ''exist outside the confines of PURPA'' (American Ref-Fuel, at ¶ 23). Thus, the states like Pennsylvania ''have the power to determine who owns the REC in the initial instance and how they may be sold or traded'' because ''it is not an issued controlled by PURPA'' (ibid.). FERC went on in American Ref-Fuel to acknowledge that the states could treat RECs differently; clearly suggesting that uniformity across the states is not required.

   25.  The Portfolio Standards Act confirms the Commission's authority--indeed responsibility--to decide the merits of this Petition. Section 3(e) of the Act requires the Commission, among other things, to establish an alternative energy credits program. This duty includes the power to create and administer an alternative energy credits certification, tracking and reporting program which should include, at a minimum. a process for qualifying alternative energy systems and determining the manner such credits can be created, accounted for, transferred and retired. (Section 3(e)(2)(i)). Clearly, determining the ownership of AECs and related environmental attributes associated with purchases under long term NUG PPAs clearly is within the Commission's broad statutory responsibilities under the Portfolio Standards Act.

V.  Met-Ed is the Rightful Owner of the Alternative Energy Credits and related Environmental Attributes of the York County Facility.

   26.  On the merits of this Petition, the Companies believe they are the rightful owners of the AECs and any related environmental attributes associated with the York County Facility and all NUG facilities under contract to them. This conclusion is based upon an analysis of the recently enacted Portfolio Standards Act as well as broad policy considerations underlying the NUG PPAs themselves. Under the Portfolio Standards Act, an ''alternative energy credit'' is ''a tradable instrument that is used to establish, verify and monitor compliance with this act. A unit of credit shall equal one megawatt hour of electricity from an alternative energy source.'' (Section 2).

   27.  It is clear that under the Portfolio Standards Act the Pennsylvania General Assembly intended to create specific renewable portfolio standards for electric distribution companies and electric generation suppliers over the next fifteen (15) years. However, it is not clear whether that law expressly creates a green or environmental attributes program in the classic sense described above--one in which the environmental or green attributes of a generating resource are expressly separated from the physical electric energy itself. Indeed, by linking the AEC to actual electric energy produced by the renewable energy resource, the definition of ''alternative energy credit'' in Section 2 of the Portfolio Standards Act suggests that no actual separation between environmental attributes and physical energy was intended. Thus, the purchaser of the energy from a renewable source would also own the environmental attribute associated with that energy.

   28.  If no separation of the environmental attributes from the physical energy was actually intended in the Portfolio Standards Act, the Companies are entitled to the AECs, which include both the electric energy and any environmental attributes. For the NUG PPAs described in Appendix B, the Companies are purchasing on a full requirements basis all of the electric energy and capacity associated with these plants. Based upon the clear statutory definition, the AEC for each megawatt hour of electricity purchased from these NUG plants under existing long-term PPA's must belong to the Companies. Essentially, with no separation of the attributes from the physical energy, the General Assembly intended that the Companies, as the purchasers of the energy, also own any environmental attributes.

   29.  On the other hand, if the Commission believes that Section 3(e) of the Portfolio Standards Act, expressly or impliedly, establishes an environmental or green attribute separate from the physical energy, the Companies request that the Commission confirm in this proceeding that they are the owners of all right, title and interest in and to said attributes associated with existing NUG PPAs.

   30.  The Companies believe that fairness and equity dictate that their customers, who are paying the full cost of the power purchases under the NUG PPAs, receive the benefit of any environmental or green attributes associated with the subject facilities. Indeed, Met-Ed and Penelec were required to enter into these PPAs primarily because the environmental characteristics of these facilities enabled them to qualify as QFs under PURPA and empowered the NUGs to invoke the mandatory purchase obligations of PURPA.

   31.  For each of the NUG contracts listed in Appendix B of this Petition, Met-Ed and Penelec sought and obtained specific approval from this Commission to recover from customers all of the costs they are paying under these agreements. The right to collect all stranded costs associated with these NUG projects was reaffirmed and preserved in the settlement of the Companies' restructuring proceedings.

   32.  Moreover, the pricing provisions of these NUG PPAs provided the owners and developers sufficient revenue to finance the construction and operation of these facilities and to earn a return on their investment. In fact, the pricing of these NUG PPAs has been and continues to be generally in excess of comparable market pricing. These NUG projects resulted in $516.7 million (net present value) of stranded costs to Met-Ed and $918.4 (net present value) million of stranded costs to Penelec during the Companies' restructuring proceedings.

   33.  To the extent the Commission believes that the Portfolio Standards Act was intended to create new value in environmental attributes separate from the physical energy, it would be unfair to deprive the Companies' customers the ability to receive the benefits of these attributes, particularly since customers are ultimately the ones paying the above-market costs of these various NUG projects.

   34.  While there is no specific reference to environmental attributes in any of the Companies' NUG PPAs, which is understandable given that such term was not part of industry parlance at the time that these contracts were entered into, the Companies nevertheless believe that the structure of the purchase and sale obligations under these agreements necessarily includes the disposition of all the attributes attendant to that electrical energy or output, including the environmental benefits. In essence, these NUG PPAs represent bundled transactions for the electrical output of the NUGs, including all environmental benefits.

   35.  In fact, PURPA, among other things, encouraged the development of small power production as a means of energy conservation and efficiency by requiring electric utilities to purchase from such facilities at their avoided costs, and accorded preferred status to these facilities precisely because of their environmental attributes.

   36.  There is no public policy reason why a NUG should receive compensation for the environmental attribute of a QF in addition to the full avoided cost rates already being paid by the Companies and ultimately recovered from customers, especially when those rates are substantially above market prices. Indeed, FERC precedent holds that QFs should not be compensated for their ''social value.'' Prop-Reg-Preamble, FERC SR 1988-1998 ¶ 32,457 at 32,163, Administrative Determination of Full Avoided Costs, Sales of Power to Qualifying Facilities, and Inter-connection Facilities, March 16, 1988, 53 FR 31822 (''it should be emphasized that the avoided costs standard dictates that QFs be paid consistent with, not their social value, but cost of displaced sources of power to utilities'').

   37.  Thus, a NUG should not be eligible for any additional payments in the form of value for environmental attributes since the public has already paid for this ''social'' benefit by financing the development and operation of this NUG through the avoided cost payments. Such additional payments would constitute an unjust windfall for these facilities to the detriment of customers. The entitlement to a long term contract, the entitlement to full avoided cost pricing, and the exemption from certain regulatory controls that exist under PURPA were and still are substantial benefits that Congress has conferred upon QFs such as York County. Through PURPA, customers have paid for the environmental attributes that qualified these projects for special benefits, in addition to paying for the energy and capacity from those projects at above market rates. QFs such as York County should not be permitted to seek further preferential treatment and what would amount to an additional financial windfall by asserting ownership of the AECs or any other environmental attributes.

   38.  The Companies are not requesting that the Commission determine the rights to AECs and environmental attributes for future NUG contracts or alternative energy facilities that may built as a result of the Portfolio Standards Act. Presumably the parties negotiating those contracts will determine their respective rights as part of their negotiations.

   39.  Nevertheless, three jurisdictions that have already considered the question of the ownership of environmental attributes from NUG's have found that the purchasing electric utility is entitled to those environmental benefits. To the Companies' knowledge, no jurisdiction has found otherwise.

   40.  In Investigation of GIS Certificates Associated with Qualification Facility Agreements, Docket No. 2002-506 (September 6, 2002), the Maine Public Utility Commission held that renewable certificates and environmental benefits associated with QF facilities in that state inured to the benefit of the purchasing utilities. That commission was also concerned about unfairly enriching QF owners at the expense of ratepayers and frustrating the expectations of the Maine Legislature in enacting the portfolio standards in that state:

''The failure to transfer the certificates to utilities could also, in our current view, unfairly enrich the QFs at the expense of ratepayers and frustrate the reasonable expectations of Legislature in enacting the portfolio requirement. The QFs have received what turned out to be above-market prices by virtue of their status as either a renewable or cogeneration resource. Any attempt by a QF to sell certificates to entities other than the utility with which it has a PPA would provide extra benefit to the QF by lowering value of the utilities' entitlements. Because the proceeds from the entitlement sales are used to offset stranded cost, a lower value for the entitlements translates into higher stranded costs for rate payers. It is reasonable to expect that the Legislature, by including QF power eligible to satisfy the portfolio requirement, intended that any resulting increase in value would benefit rate payers through greater offset to stranded costs.''

Maine Order 4-5.

   41.  Similarly, the Department of Public Utility Control in Connecticut has held that environmental attributes (in the form of Generation Information System Certificates) belong to the purchaser of output from a co-generation facility. Application of Minnesota Methane, LLC Regarding the Sale of Electricity Generated at the Hartford Landfill to the Connecticut Light and Power Company, Docket No. 96-07-21RE01 (March 19, 2004).

   42.  On January 12, 2005, the State of New Jersey Board of Public Utilities (''BPU'') concluded that, for existing NUG contracts, the renewable energy credits in that state belong to the purchaser of the energy. The oral motion approved by the New Jersey BPU stated:

And so the motion for your consideration would be for us to draft an order indicating that the Board made a determination that for these existing NUG contracts, it's not for new contracts and it's only for these finite number of contracts that were entered into ten or fifteen years ago, that the ownership of the RECs [renewable energy certificates] would belong to the purchaser.

Transcript of January 12, 2005 Meeting, page 4 (Docket No. E)-04080879).

   The Companies urge the Commission to resolve the merits of this Petition consistent with the orders adopted in Connecticut, Maine and New Jersey.

VI.  Conclusion

   43.  The Companies request that this Commission review and approve this Petition expeditiously. Doing so will resolve the pending dispute between Met-Ed and York County, but also the broader issues impacting all NUGs under contract with the Companies. Granting this Petition is necessary to protect customers from bearing the burden of paying for AECs from such NUGs, while still being required to compensate NUGs at above market prices. It is essential that this Commission review and grant this Petition as soon as possible since it is unclear when York County or any other NUG owner under contract with the Companies will attempt to sell the AECs and/or alleged environmental attributes of their NUG facilities in violation of Pennsylvania law and in derogation of the Companies' ownership rights.

   44.  In order to facilitate the most expeditious review and approval possible, and consistent with 52 Pa. Code § 5.42, the Companies are serving this petition upon the Office of Consumer Advocate, Office of Trial Staff, Office of Small Business Advocate and all other parties that are or may be impacted by this Petition, including all of the NUG owners/operators currently under contract with the Companies and the major electric distribution companies in Pennsylvania.

   45.  The Companies also request that the Commission immediately enter an order (i) authorizing notice of the pendency of this proceeding in the Pennsylvania Bulletin and via a Secretarial Letter to all jurisdictional electric generation suppliers and electric distribution companies and (ii) directing all electric distribution companies to advise all NUG owners/operators with whom they have NUG contracts that any transactions involving the AECs and/or the environmental attributes of NUG facilities presently under contract are at the parties' risk and may be void or voidable depending upon the outcome of this proceeding.

   46.  In order to relieve all uncertainty about the Companies' rights, they specifically request that this Commission enter a declaratory order:

   *  approving this Petition in its entirety; and

   *  declaring that the Companies own the alternative energy credits (as defined in the Portfolio Standards Act) and any other environmental attributes associated with any and all NUG facilities listed on Appendix B of this Petition.

   Wherefore, Metropolitan Edison Company and Pennsylvania Electric Company request that this Commission issue a declaratory order as specified in this Petition and grant such other relief as is just and reasonable under the circumstances.

Respectfully submitted,

Alan Michael Seltzer
Matthew A. Totino
Ryan, Russell, Ogden & Seltzer LLP
1105 Berkshire Boulevard
Suite 330
Wyomissing, Pennsylvania 19610-1222
(610) 372-4761
Counsel for Metropolitan Edison Company and Pennsylvania Electric Company

Dated:  February 22, 2005


[Pa.B. Doc. No. 05-631. Filed for public inspection April 1, 2005, 9:00 a.m.]


1  Environmental attributes are the environmental and social benefits associated with electricity that is generated from renewable energy sources. In other states, these attributes are represented by ''green tags'' or ''renewable energy certificates'' (''RECs'').

2  The original 1986 Met-Ed-York County PPA was amended on November 25, 1986 and again on May 18, 1992.

3  The FERC granted York County's application to be certified as a qualifying facility at Docket No. QF 86-920-002 in an order dated November 3, 1986.

4  The Commission's regulations implementing PURPA are in 52 Pa. Code § 57.32 et seq.

5  The term ''renewable energy credits'' is not used in the Portfolio Standards Act. The term ''alternative energy credits'' is used instead. The Companies believe that in the context of their dispute with York County, it intends to sell the alternative energy credits as defined in the Portfolio Standards Act or any related environmental benefits.

6  Nineteen states have enacted renewable portfolio standards. Public Utilities Fortnightly, page 10 (February 2005).

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