Standard Offer Program Contract Financeability - Q&A

 

We have received many questions from banks and potential tax equity investors who are performing due diligence on the financeabilityof the Standard Offer Program Contract.  The following information, in question and answer format, is being provided in order to rapidly disseminate the answers to questions that seem to come up repeatedly.

 

One of our primary functions is to facilitate the deployment of Standard Offer Program projects. We recognize that bankers and investors are one of the keys to getting projects from concept to operation. We are here to assist with that process. If you need answers to additional questions please do not hesitate to contact our office.

 

Q.1  Who is VEPP Inc?

 

A.1  VEPP Inc. is a not-for-profit Vermont Corporation. VEPP Inc.’s Executive Director reports to a Board of Directors consisting of four executives from the Vermont Utilities, four independent power producers and 3 “public members” appointed by the Vermont Department of Public Service.  Our business is limited to managing two renewable energy programs for the Vermont Public Service Board; the Standard Offer Program and the Rule 4.100 Program.  Although we are contractors to the Vermont Public Service Board, we maintain functional independence from the Board. VEPP Inc. has been in this business since 1996.

 

Q.2  Where does the Public Service Board get its authority to create a Standard Offer Program?

 

A.2  The Board’s authority for the Standard Offer Program comes from complementary federal and state laws.  In 1978 Congress passed the Public Utility Policy Act (PURPA). One aspect of this law is that for the first time and under certain guidelines, states now have the authority to set rates for renewable energy generators less than 80 MW in size (“Qualifying Facilities”). As part of the state’s implementation of PURPA, Vermont passed a law giving the Public Service Board authority over Qualifying Facilities (30 V.S.A. §209(a)(8)).  Note that all Standard Offer Projects meet the definition of a Qualifying Facility (QF) under PURPA.  

 

In 2009, the State Legislature passed legislation creating the Standard Offer Program. This law has since been amended several times by the Legislature

(30 V.S.A. §8005 and §8005a). The Standard Offer Program is further defined by various Orders issued by the Vermont Public Service Board (http://www.vermontstandardoffer.com/psb-board-orders/).

 

Q.3  Has Vermont’s Standard Offer Program ever been challenged?

 

A.3  Yes, on May 1, 2013 Otter Creek Solar, LLC (Otter Creek) challenged 5 aspects of Vermont’s Standard Offer Program at the Federal Energy Regulatory Commission (FERC).  FERC declined to issue any enforcement action against the state, essentially affirming Vermont’s Standard Offer Program. 

 

Q.4  Why is VEPP Inc. the counterparty to the Standard Offer Program Contracts?

 

A.4  VEPP Inc. is the counterparty to the Standard Offer Program Contracts in its role as “Standard Offer Program Facilitator” under the Standard Offer Program.  This is similar to our duties as “Purchasing Agent” in the 4.100 Program where we are the counterparty to the 4.100 long-term purchase power contracts.

 

The Purchasing Agent, and now Standard Offer Program Facilitator role, arises from how Vermont has delivered power to its residents since rural electrification. Vermont has had as many as 24 utility companies providing electric service to the state’s electric customers.  Despite recent consolidation, there are still 17 electric distribution companies in the state. Many of these utilities are small municipal utilities with relatively small customer bases.  The “Purchasing Agent” role solved Vermont’s challenge in promoting renewable energy development in locations served by these small utilities. If a relatively large renewable energy project were to locate in the service territory of one of the small utilities, the output from the renewable energy project would comprise a large portion of that utility’s purchased power. The relatively large cost of the purchased power from the project would not only have a significant effect on ratepayer costs but would also impact the financability of the project. 

 

Under the Purchasing Agent/Standard Offer Program Facilitator arrangement, the small utilities receive only a small amount of power from Vermont’s renewable energy programs while the larger utilities receive a larger amount of the renewable energy. Vermont’s renewable energy programs ensure that all electric customers receive a share of the renewable energy produced by in-state generators on a pro-rata basis for the ratepayer’s electric use. The “Purchasing Agent” aggregates all the renewable power produced by these in-state generators and distributes the power, and the costs of that power, on a pro-rata basis to the utilities.  VEPP, Inc. performs the same role in the Standard Offer Program in its capacity as the Standard Offer Program Facilitator.

 

Q.5  Explain exactly how the developer gets paid under the Standard Offer Program Facilitator system.

 

A.5  Every day VEPP Inc. receives hourly output information from each renewable energy project in the Standard Offer Program. On the first business day of the month we use our billing system to apply the correct billing rate for each project to the output from each project.  We then produce a “Statement” of the amount owed to each project for the previous month’s output. 

 

The amounts owed to each project are totaled to obtain the total monthly program billing amount for the previous month. This amount is then split amongst 16 Vermont utilities on a pro-rata basis determined by each utility’s total retail sales from the previous year. Bills and supporting information are sent electronically to each of the 16 utilities.

 

Payment is due from the utilities on or about the 15th of the month. VEPP Inc. uses the payments received from each of the utilities to pay the statement amounts owed to the various Standard Offer Projects. The projects receive payment electronically on or about the 18th of the month.

 

Q.6  If VEPP Inc. is a contractor to the Vermont Public Service Board, are the Standard Offer Contracts backed by the credit of the State of Vermont?

 

A.6  No. The Standard Offer Contracts are promulgated by the State of Vermont.

 

Q.7  How can the credit risk of VEPP Inc. as the Standard Offer Contract off-taker be determined?

 

A.7  VEPP Inc. is an “Instrumentality of the State” and as such does not provide credit for the Standard Offer Contracts. (30 V.S.A. §8005a(a))

 

Q.8  The Contracts need to be backed by a credit and we need to assess the credit risk.  Where is the credit?

 

A.8. The credit for the contracts is provided by the Vermont Utilities which have a specific statutory mandate to pay for power distributed to them by the Standard Offer Program Facilitator. (30 V.S.A. §8005a(k)(2)) The utilities are entitled by statute to recover the cost of the standard offer contracts in their rates. (30 V.S.A. § 8005a(k)(5)).

 

Under state law, the requirement to pay for power from the Standard Offer Program applies to multiple electric retail utilities each of which has its own credit profile.

 

Q.9  Is there information on the Vermont Utilities available?

 

A.9 Annual reports for all the Vermont Utilities are on file with the Vermont Department of Public Service and are available to the public.

 

Q.10 Under this unique system what happens if a Utility doesn’t pay the Standard Offer Program Facilitator?

 

A.10 This system of billing and payment is not unique!  It is essentially the same system that the State has used for the Rule 4.100 Program that VEPP Inc. also administers.  The Rule 4.100 Program has been active since 1985.  Since 1985 there have been thousands of bills issued to the Vermont Utilities by the Purchasing Agent for monthly purchased power from renewable energy projects.  Without exception, the Developers in the Rule 4.100 Program have been paid for all power produced.

 

Q.11 Vermont has a very good track record in getting its renewable energy developers paid.  However, what is our recourse if a utility doesn’t pay its bill?

 

A.12 If a utility does not pay its pro-rata share, we would still pay the developer for his output, less the amount we did not received from the delinquent utility. 

 

Because the statutory mandate for the utility to pay accrues to the Standard Offer Program Facilitator, upon non-payment by a utility, VEPP Inc. would immediately petition the Public Service Board for enforcement of the law.  The Public Service Board has the authority to “restrain any company subject to supervision [all Vermont Utilities]... from violations of law. ” (30 V.S.A. § 209(a)(6)).  The Developer may also petition the Public Service Board for enforcement of the law as a third party beneficiary of the statutory mandate.

 

Q.13 What would happen if a Vermont Utility went bankrupt and was prohibited from paying its bills, including its bill from the Standard Offer Program Facilitator?

 

A.13 This actually happened in 1996 under the Rule 4.100 program when Vermont Electric Cooperative (VEC) filed for bankruptcy. The payment due for the initial month of bankruptcy was not made by VEC to the Purchasing Agent.  Operation of the utility was taken over by a Federal Bankruptcy Trustee and all subsequent payments were made on time. In this case the Developers filed claims with the Federal Bankruptcy Trustee for the one month’s revenue that the Purchasing Agent did not collect.  The claims were approved by the Trustee and the Developers collected 100% of the money owed to them about 3 months later.

 

Q.14 Is there “market risk” under the Standard Offer Program Contract?  In other words, if prices in the regional market for energy drop is there risk that the Standard Offer Developers will be paid less?

 

A.14 The rates are not in any way indexed to market prices.  The Standard Offer Program Contracts are for a specific term (i.e. 25 years for solar projects), and the rates for each year are specified in the Standard Offer Program Contracts. FERC has consistently affirmed that QFs have the right to a long-term avoided cost contracts with rates determined at the time the obligation is incurred “....even if the avoided costs at the time of delivery ultimately differ from those calculated at the time the obligation is originally incurred”.    

 

 Updated: February 27, 2017

 

 

 

 

Legal Disclaimer: The preceding Q&A provides generalized information regarding the Standard Offer Program and is not offered nor intended to act as legal advice, legal opinion, or to replace project specific advice of legal counsel and should not be treated as such. The reader must not rely on the information on this website as an alternative to legal advice from an attorney and should consult with an attorney or other professional legal services provider, if they are concerned about a specific legal issue.