New Entrants in Electric Generation in Tennessee Valley" at the 43rd Annual Environmental Show of the South on April 30, 2014 in Gatlinburg, TN. The panel was comprised of experts in energy law and federal regulations, including Jim Rossi of Vanderbilt University and Gregory Young and Kenneth Gish of Stites and Harbison, PLLC. The session was approved for continuing legal education credits.

1. New Entrants in Electric Generation
in the Tennessee Valley
43rd Annual Environmental Show of the
South
Gatlinburg, Tennessee
April 30, 2014

2. PURPA Background
Jim Rossi
Vanderbilt University Law School

3. Public Utility Regulatory Policies Act
of 1978 (“PURPA”)
• Adopted in the wake of 1970’s world oil crisis.
• General purposes of promoting conservation
and efficiency in electric power.
• Spawned introduction of competition into
interstate electric power markets.
• Introduced significant incentives for
development of power projects by non-utility
generators.

4. Qualifying Facilities (“QF”)
Section 210 of PURPA requires electric utilities to
interconnect with and purchase power from two basic
forms of QFs:
Small Power Production Facilities
• use biomass, waste or renewable resources - including
solar, wind and water - to produce electric energy
• up to 80 MW in size
Cogenerators
• produce electric energy and steam or other forms of
useful energy (like heat) for industrial, commercial or
cooling purposes

5. Primary Benefits for QFs
• Right to be served by incumbent utility
– Interconnection, backup power, etc.
• Right to sell back power to incumbent utility at
“avoided cost rates”
– “Must purchase” obligation applies to all electric utilities,
including IOUs, municipals, rural cooperatives, PUDs, water
districts, the TVA, and each federal power marketing
authority, unless FERC grants a waiver.
– Exempts facility from other federal and state regulation of
rates.
– Significance is that this can lead to a power purchase
agreement.

6. Avoided Cost Rates
• FERC requires that host utilities must purchase at
rates equal to the host utility’s full avoided cost:
“the incremental cost to the electric utility of electric
energy or capacity or both which, BUT FOR the
purchase from the QF or QFs, such utility would
generate itself or purchase from another source”
(CFR § 292.101(b)(6)).
• Basic idea is to make utility indifferent between
purchasing QF power or producing energy itself.
• Common avoided cost approaches adopted by
states:
– cost of host utility’s next planned unit
– cost of natural gas peaker providing next unit of energy

7. Effects on Power Generation
(2011 data)

8. PURPA’s Future
• 2005 Amendments
• PURPA Preemption of Feed-In Tariffs
• Avoided Costs for Renewables

9. 2005 Amendments
• EPAct 2005 provided a new section (210(m)) that
requires FERC to excuse host utilities from entering
into new purchase or contract obligations if there is
access to a sufficiently competitive market for a QF
to sell its power.
• FERC Order 688 created a rebuttable presumption
that QFs of more than 20 MW have non-
discriminatory access to at least one of these
competitive markets, but so far this presumption is
limited to areas with multi-utility Regional
Transmission Organizations that provide for open
access.

10. Feed-In Tariffs
• In 2010 FERC ruled that Feed-In Tariff programs
– guaranteed purchase prices for electric power
from renewable sources – must comply with
PURPA’s avoided cost criteria.
• State or local Feed-In Tariff rates may not exceed
avoided costs.
• Problem: Until this ruling, most avoided cost
rates were not high enough to encourage
renewable power purchase agreements.

11. Avoided Costs: The New Era
• Where a state requires a utility to procure a certain
percentage of energy from generators with certain
characteristics, FERC has stated that those types of
generators “constitute the sources that are relevant to
the determination of the utility’s avoided cost for that
procurement requirement.”
• A multi-tiered resource approach for determining
avoided costs – setting different levels of avoided costs
and thus different avoided cost rate caps for different
types of resources, competitive bidding for different
types of resources, or environmental adders – complies
with PURPA.
• Voluntary utility programs are not subject to PURPA’s
avoided cost mandate.

12. TVA and PURPA
• TVA is clearly subject to PURPA’s requirements.
• Unlike most IOUs (which are subject to state avoided
cost policies) TVA sets avoided costs itself (subject to
PURPA).
• Given its market power in the state of TN and lack of
competition, TVA is unlikely to be declared exempt
from PURPA “must purchase” obligations under
210(m).
• Despite these strong federal incentives, non-utility
power projects in TN appear weak in comparison to
other states.

13. Overview of Power Generation,
Transmission & Distribution in Tennessee
Greg Young

14. Overview of Power Generation,
Transmission & Distribution in Tennessee
• Tennessee is not like other states with privately
held public utilities.
• TVA
– 16 U.S.C. 831 et. seq.
• Fence
– 16 U.S.C. 831n-4(a)
• Anti-cherry picking
– 16 U.S.C. 824k(j)

15. Overview of Power Generation,
Transmission & Distribution in Tennessee
• TVA sells most power at wholesale rates to
municipalities or electric membership cooperatives.

16. Overview of Power Generation,
Transmission & Distribution in Tennessee
• TVA also sells some power directly to large federal facilities and
large industrial customers at retail rates.
– 51 customers – producers of primary metals, chemicals, industrial gases,
forest products and nuclear fuel for power plants.
• Finally, TVA sells a very small amount of power to 12 surrounding
utilities on interchange market.

17. Overview of Power Generation,
Transmission & Distribution in Tennessee
• What about the TRA? TRA regulates “public utilities.”
– T.C.A. 65-4-101 (6)(a) – broad definition
• 11 categories of exempt operations and activities.
• Specifically excludes TVA, municipalities and coops.
• Only 4 electric public utilities serving approximately
47,000 customers. All but a handful of these
customers are in the Kingsport area.
• Lack of highly developed electric utility regulatory
framework and case law.

18. Overview of Power Generation,
Transmission & Distribution in Tennessee
• TVA is authorized to regulate municipal and
electric cooperatives. (16 U.S.C. 831i)
• Regulation primarily via wholesale power
contracts.
• Direct sales also conducted pursuant to
contracts.
• Provisions in contracts protect TVA’s generation
and transmission interests.
• TVA also has published guidelines re:
interconnection and dispersed power production.

19. Overview of Power Generation,
Transmission & Distribution in Tennessee
• Summary – TVA domination of the electric power market in
Tennessee makes independent power production rare, but it can
happen via “qualified facility” cogeneration projects.
• There are currently 4 QF cogeneration projects in the TVA Region.
These are located in Alabama, Kentucky, Mississippi, and Tennessee.

20. Qualified Facilities (“QF”)
in the Tennessee Valley
Ken Gish

21. QFs in the Tennessee Valley
• QFs in the Tennessee Valley governed by TVA’s
“Dispersed Power Production Guidelines.”
• Guidelines establish the prices TVA will pay QFs
for power.
– Prices vary from 2.914 ¢/kWh (small providers/super
peak) to 2.192 ¢/kWh (large provider/super off-peak).
• QF must enter into contract with TVA.
– If via a “Connecting Electric System,” must make
arrangements with it to get power to TVA.
• Security provisions for failure to deliver.

22. QFs in the Tennessee Valley
• Availability of Power FROM TVA
– TVA will (is required to) provide standby power to QFs
connected to its system
– Must be via contract
– At Standby Power Rate
• Includes both demand and energy (hour ahead
RTP) charges
– Must contract for maximum expected amount
• No obligation to supply power in excess of
contract amount

23. QFs in the Tennessee Valley
• QFs right to sell may be subject to temporary
curtailment.
• QF responsible for:
– Interconnection arrangements
– System impact mitigation
– Costs of interconnection
– Costs of metering
– Compliance with all safety, system protection, and
system operating guidelines

24. Can You Sell the Power???
• Regulation of sales from QFs to direct customers
primarily a matter of state law.
• Divergent ownership of power generation and
steam host does not preclude being a QF.
• “Integrated Facility”
– Common ownership of generation facility
– “Close proximity” of two entities
– Use of private transmission lines
– Long-standing supplier-customer relationship
• Not an unrelated industrial park.

25. TRA Analysis
• TRA jurisdiction – whether a qualified facility
could be regulated as a public utility?
• Not much legal guidance in Tennessee; other
states vary across the spectrum.
• Would power be held out to the general public?
• TRA is focused on consumer protection.
• Some debate regarding a solar farm that is
trying to connect to a nearby industrial plant.
• No formal opinion requests from TRA so far.

26. 2013 Tennessee Legislation
• Tenn. Code Ann. § 65-5-103(d)(3)(A) allows a
public utility to request and the TRA to authorize
the recovery of “operational expenses, capital
costs or both related to the expansion of
infrastructure for the purposes of economic
development . . . .”
• Such may include the infrastructure and
equipment for “combined heat and power
installations in industrial and commercial sites.”

27. 2013 Tennessee Legislation
• Tenn. Code Ann. § 67-4-2004(9) was amended to expand
the definition of a “certified green energy production
facility.” It includes facilities that utilize natural gas in a
“combined heat and power configuration . . . for
production of heat and electricity for consumption
onsite.”
• Such facilities are eligible to apply for a credit of 100% of
the sales and use taxes paid for the machinery and
equipment used to produce electricity. (Tenn. Code Ann.
§ 67-6-346.)
• Instead of taking the credit, taxpayers may apply for a
refund of taxes paid or apply for authority to make tax-
exempt purchases of machinery and equipment.

28. Contact Information
• Jim Rossi – Vanderbilt University
(615) 343-6620
j.rossi@vanderbilt.edu
• Greg Young – Stites & Harbison, PLLC
(615) 782-2264
greg.young@stites.com
• Ken Gish – Stites & Harbison, PLLC
(859) 226-2293
kgish@stites.com
• Molly Cripps – TDEC Office of Energy Programs
(615) 741-2994
molly.cripps@tn.gov