Energy Law Alert: Washington Voters Choose to Enhance State's Renewable Energy Legacy
11/9/2006

Voters in Washington appear to have approved Initiative Measure No. 937 (I-937), commonly referred to as the renewable portfolio standard (RPS). As of publication, 51.9% of voters favor its adoption with a 61,078 vote spread. 343,396 ballots remain uncounted according to the Secretary of State's office.

Providing the spread holds, Washington will join 21 other states and the District of Columbia in requiring certain electric utilities to generate a portion of their electricity from renewable sources. Arizona is one of these states.

Generally, I-937 establishes renewable energy and conservation targets, imposes a penalty for failing to reach these targets, allows for recovery from customers of costs that were prudently incurred in complying with the measure, and requires certain progress reports. I-937 also grants authority to the Utilities and Transportation Commission (UTC) and the state Department of Community, Trade and Economic Development (CTED) to adopt rules implementing the measure for investor-owned electric utilities and publicly owned electric utilities, respectively.

I-937 applies only to public and private utilities serving more than 25,000 customers located in the State of Washington ("qualifying utilities"). There are currently 17 such entities. Utilities that become qualifying utilities after December 31, 2006, must meet the renewable energy and conservation targets in timeframes comparable to those applicable to these 17 utilities.

Following is a detailed summary of I-937's primary provisions:

Targets for Energy Produced from Renewable Resources.

I-937 requires qualifying utilities to use eligible renewable resources or acquire equivalent renewable energy credits (RECs) (or a combination of both),¹ to meet certain targets expressed as a percentage of the utility's annual load.

Target	Deadline
3% of Load	January 1, 2012
9% of Load	January 1, 2016
15% of Load	January 1, 2020

In meeting these targets, the qualifying utility may not count eligible renewable resources or distributed generation where the associated RECs are owned by a separate entity or if such resources or credits were obtained for and used in an optional pricing program.

Two other ways exist to achieve compliance. First, a qualifying utility can achieve compliance if it invests at least 4% of its total annual retail revenue requirement in renewable resources. Qualifying utilities are also deemed in compliance if their loads for the previous three years, on average, did not increase, the utility did not commence or renew ownership or incremental purchases of electricity from resources other than renewable resources during that time, and the utility invested at least 1% of its total annual retail revenue requirement that year on eligible renewable resources, associated RECs, or a combination of both.

Renewable resources include energy from a generation facility powered by water, wind, solar energy, geothermal energy, landfill gas, wave or tidal power, gas from sewage treatment facilities, biodiesel or biomass energy derived from animal waste or solid organic fuels from wood, forest, field residues, or dedicated energy crops. Biomass does not include certain treated wood, black liquor byproduct from paper production, wood from old growth forests, or municipal solid waste.

Not all renewable resources above are considered eligible renewable resources. To be eligible, the generation facility powered by the renewable resource must have commenced operation after March 31, 1999. The facility must also either be located in the Pacific Northwest² or its electricity must be delivered into Washington on a real-time basis without shaping, storage or integration services.

Furthermore, electricity produced from hydroelectric facilities is generally not eligible. It is only eligible if it is incremental electricity (1) resulting from efficiency improvements to such facilities completed after March 31, 1999, (2) the facility is owned by the qualifying utility, (3) the facility is located in the Pacific Northwest, and (4) the additional generation does not result in new water diversions or impoundments.

Cofiring fossil fuels and combustible renewable resources in one generating unit also counts toward a qualifying utility's renewable energy target under two conditions: (1) the generating unit must be located in the Pacific Northwest; and (2) "cofiring commenced" after March 31, 1999. The qualifying utility may only count the portion that represents the heat value of the combustible renewable resources. Renewable resources that are combustible include landfill gas, gas from sewage treatment facilities, and biodiesel and biomass with the restrictions mentioned above.

I-937 also provides several incentives, which enable qualifying utilities to receive additional credits. First, a utility may count distributed generation (renewable resource facilities with generating capacity of 5 megawatts or less), at double the facility's electrical output for purposes of compliance if the utility owns or contracted for the distributed generation and associated RECs, or purchased the associated RECs. This provision will primarily benefit solar and small wind facilities. Second, if the eligible renewable resource or associated RECs are obtained from a facility that commenced operation after December 31, 2005, and the developer used certain apprenticeship programs during the construction of that facility, the qualifying utility can count this acquisition at 1.2x the base value of the resource or credit. Finally, the UTC is authorized to consider providing additional incentives to investor-owned utilities to exceed renewable energy targets.

The measure excuses qualifying utilities from compliance if a failure to comply was the result of certain force majeure events.

Energy Conservation.

Aside from the renewable energy targets, I-937 requires qualifying utilities to plan for and engage in energy conservation. Conservation is defined by the measure to mean "any reduction in electric power consumption resulting from increases in the efficiency of energy use, production, or distribution."

A utility's first long-term conservation assessment is due by January 1, 2010. The assessment must identify the utility's "achievable cost-effective conservation potential" through 2019. Cost-effective means that the project or resource is forecast to be "reliable and available within the time needed" and that it will "meet or reduce the electric power demand of the intended consumers at an estimated incremental system cost no greater than that of the least-cost similarly reliable and available alternative project or resource, or any combination thereof." This long-term assessment must be updated every two years thereafter to reflect the conservation potential achievable in the subsequent ten-year period.

I-937 then imposes biennial acquisition targets to achieve the utility's "cost-effective conservation potential." These targets must be at least the pro rata share of the utility's conservation potential for that biennial period as compared with the subsequent 10-year period.

If a retail customer of the qualifying utility owns "high-efficiency cogeneration" that is used to meet its own power needs, the utility may count the reduction in the utility's load due to this cogeneration towards meeting its biennial conservation target. However, the reduction will seldom be one-for-one. The allowable reduction is calculated using the ratio of the fuel chargeable to the power heat rate of the cogeneration facility as compared to the heat rate of a best-commercially available technology combined-cycle natural gas-fired combustion turbine.

Reporting and Enforcement.

No later than June 1, 2012, all qualifying utilities must report their progress toward achieving the renewable energy and conservation targets for the preceding year to the appropriate governmental entity. The UTC is responsible for determining whether qualifying investor-owned electric utilities have achieved compliance and for enforcement. For all other qualifying utilities, the state auditor is responsible for determining compliance and the state attorney general is charged with enforcing compliance. These reports must include certain information necessary for determining compliance. Such information may vary depending on which method the utility selected for achieving compliance with its target for energy produced from renewable resources.

A qualifying utility that fails to meet its targets for energy produced from renewable resources or for conservation is assessed an administrative penalty of $50 per megawatt-hour. This penalty is adjusted for inflation beginning in 2007. Any penalties assessed are deposited in an account used only for the purchase of RECs or for energy conservation projects at state or local government facilities or public educational institutions. Utilities must notify their retail customers of the penalty. The UTC must determine whether investor-owned utilities can pass this penalty on to its customers in its electric rates.

If you have any questions about this update or if you would like our assistance in connection with this matter, please contact your Stoel Rives lawyer or one of the following energy attorneys:

William H. Holmes at whholmes@stoel.com or (503) 294-9207
Pamela L. Jacklin at pljacklin@stoel.com or (503) 294-9406
Tim L. McMahan at tlmcmahan@stoel.com or (503) 294-9517
Alan R. Merkle at armerkle@stoel.com or (206) 386-7636

This is a publication of Stoel Rives Energy Group for the benefit and information of clients and friends. This bulletin is not legal advice or a legal opinion on specific facts or circumstances. The contents are intended for information purposes only. Copyright 2006, Stoel Rives LLP.

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¹ A renewable energy credit represents 1 megawatt-hour of an eligible renewable resource. It must be produced during that year or the immediately prior or subsequent year and include all nonpower attributes. Nonpower attributes are all environmentally related characteristics associated with the generation of electricity from renewable resources, such as avoided emissions of pollutants, carbon dioxide and other greenhouse gases.

² "Pacific Northwest" is defined as "(A) the area consisting of the States of Oregon, Washington, and Idaho, the portion of the State of Montana west of the Continental Divide, and such portions of the States of Nevada, Utah, and Wyoming as are within the Columbia River drainage basin; and (B) any contiguous areas, not in excess of seventy-five air miles from the area referred to in subparagraph (A), which are a part of the service area of a rural electric cooperative customer served by the Administrator [of the Bonneville Power Administration] on December 5, 1980, which has a distribution system from which it serves both within and without such region." 16 U.S.C. § 839a(14).