MPSC approves final inputs, avoided costs for Consumers Energy PURPA contracts

November 21, 2017

LANSING, Mich. – The Michigan Public Service Commission (MPSC) today finalized a new avoided cost formula Consumers Energy Co. must use to buy power from independent, qualified facilities under the federal Public Utilities Regulatory Policies Act (PURPA).

PURPA requires the Commission to establish how much a utility is obligated to pay the owner of a small electric production or cogeneration facility – such as landfill gas, hydroelectric, solar, biomass or wind -- for the power it produces. The law says the Commission must set avoided cost rates that are “just and reasonable to the electric consumer of the electric utility and in the public interest;” and that do not “discriminate against qualifying cogeneration and small power production facilities.”

The avoided cost is how much a utility would have to pay to produce the energy itself, and is the sum of capacity and energy costs. Avoided costs have not been recalculated in almost 30 years and many contracts are coming due. In today’s order (Case No. U-18090), the Commission set the rates for the next two years, when they will be reviewed again.

“With the development of regional electricity markets and the advancement of renewable energy and other fuels used to generate electricity, the electric industry has undergone significant change since the Commission last updated the payments Consumers Energy must make to small, independent power producers under PURPA,” said Sally Talberg, chairman of the MPSC. “The Commission has approved a payment structure based on the utility’s updated avoided cost that reflects these changing market conditions and gives small power producers an opportunity to compete on a level playing field as required by the federal law.”

Talberg also acknowledged the extensive input provided by stakeholders throughout this process.

In its ruling today, the Commission approved the avoided capacity cost of $117,203 per megawatt year or $140,505 per zonal resource credit (ZRC) year. It also approved use of regional U.S. Energy Information Administration forecasted natural gas delivered price, and a 2.37 percent line loss factor should be added to the sum of energy avoided cost and investment cost attributable to energy and line losses.

Previous MPSC rulings determined the standard offer tariff is available for qualified facilities (QF) with a design capacity of up to two megawatts, and QFs can select contract lengths of five, 10, 15, or 20 years.

The ruling marks a change in the way avoided cost payments are structured. Current contracts are based on the costs of running a coal plant. New contracts will be based on the energy costs associated with running a natural gas combined cycle plant, and capacity costs based on a natural gas combustion turbine power plant, both of which better reflect the trend in producing power today.

Another change is that current PURPA contracts pay a qualified facility for capacity at a contracted rate per kilowatt hour. Based on the way capacity is measured and bought in today’s electricity markets, the new PURPA contracts will pay a fixed monthly capacity payment based on the ZRCs the qualifying facility can provide, and a per kilowatt hour price for the energy the utility purchases.

In the several PURPA proceedings that were initiated in 2016, the Commission was required to establish accurate and up-to-date avoided capacity and energy costs for each rate-regulated utility that it oversees. It ruled in September (Case No. U-18094) that UPPCO’s current contract prices for capacity are a reasonable proxy for avoided capacity cost until May 31, 2020, and directed UPPCO to file its next PURPA review application by Feb. 1, 2019.

PURPA cases for DTE Electric Co., Alpena Power Co., Indiana Michigan Power Co., Northern States Power Co., and Upper Michigan Energy Resources Co. are pending before the Commission.

For an Issue Brief about PURPA and the Commission’s action, click here.

For more information about the MPSC, please visit www.michigan.gov/mpsc or sign up for one of its listservs to keep up to date on MPSC matters.

DISCLAIMER: This document was prepared to aid the public’s understanding of certain matters before the Commission and is not intended to modify, supplement, or be a substitute for the Commission’s orders. The Commission’s orders are the official action of the Commission.

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