The Federal Energy Regulatory Commission ("FERC") recently issued an order claiming jurisdiction over certain transactions involving Renewable Energy Credits ("RECs"). FERC reasoned that its jurisdiction extends to the terms and conditions of wholesale energy sales moving in interstate commerce and that REC sales, if "bundled" with a sale of electric power, are jurisdictional because the REC price materially affects the jurisdictional sale. On the other hand, FERC concluded, unbundled REC sales, which are not coupled with a sale of power, are not subject to FERC jurisdiction.
RECs are the product of state Renewable Portfolio Standard ("RPS") laws requiring that electric utilities produce a certain percentage of the power they sell from renewable resources. Most RPS laws allow utilities to purchase RECs as a means of complying with RPS requirements. Thus, a utility that does not need physical power may purchase a REC, which documents that it has acquired the environmental attributes of a renewable generation project, while allowing the unneeded power to be sold separately to other buyers. For example, the Washington RPS statute, Initiative 937, allows utilities to meet their RPS targets entirely through the purchase of RECs. On the other hand, California's recently-passed RPS legislation, SBX2, places stringent limits on the use of REC-only transactions for RPS compliance. RPS laws are now in place in 29 states, plus the District of Columbia and Puerto Rico. In addition, eight more states have RPS goals. Hence, REC sales, both bundled and unbundled, have become increasingly common.
The FERC order has important implications. Bundled REC sales contracts must now recognize that such contracts are subject to FERC jurisdiction, which may give rise to a host of legal consequences. For example, the sale may be subject to price caps if one or both parties to the transaction have not been granted authority by FERC to charge market-based rates. Similarly, a bundled REC contract should also include a "Mobile-Sierra" or "Memphis" clause to govern the standard for review should be transaction be challenged at FERC.
FERC's expansion of jurisdiction also carries with it an implied roll-back of state powers because the Federal Power Act gives FERC exclusive jurisdiction over matters within its domain. In other words, because the order establishes bundled REC transactions as an area of exclusive FERC jurisdiction, it necessarily implies that state laws extending into this area of exclusive jurisdiction are preempted. Hence, the order raises the question whether state-level rules governing the interstate movement of renewable energy contracts, such as the rules recently enacted by California governing importation of renewable energy into the state, are preempted by FERC's action.