Court ruling may unplug small power plants

The plans of many energy entrepreneurs, who were counting on federal regulations to allow them to sell as well as buy power from the nation's utilities, have been thrown into limbo.

Operators and promoters of wind farms, small-scale hydroelectric plants, cogeneration facilities (which produce both heat and electricity), and a number of other ''alternative technologies'' that produce electricity were handed a major setback when the Washington, D.C., Court of Appeals ordered the Federal Energy Regulatory Commission (FERC) to rewrite two key regulations drafted for the controversial Public Utility Regulatory Policies Act of 1978 (PURPA).

''Small power producers--wind, hydro, (solar cells)--will take it in the teeth once again,'' says Steven J. Strong, president of Solar Design Associates in Lincoln, Mass. Ironically, a house powered by electricity from a bank of solar cells Mr. Strong designed was connected into Boston Edison's power grid with considerable fanfare on Jan. 22, the day the three federal judges handed down their decision.

The plaintiffs in the case were New York's troubled utility, Consolidated Edison,and American Electric Power, a Midwest utility holding company. They complained that the FERC, in writing the public utility act regulations, overstepped its legislative authority on several key points.

The Appeals Court ruled in favor of the utilities on two major points:

* The judges found that the FERC had not demonstrated satisfactorily that its ''avoided cost'' approach to pricing power from small producers and cogenerators was in the economic best interest of utility customers.

In essence, the avoided-cost provision ordered utilities to pay the independent producer/consumer at a rate equal to the amount the utility saved in fuel costs by buying electricity from the independent. And the utility had to pay independents at a rate equal to the amount the utility saved by not building , if a new generating facility would have been needed to supply the power the independent produced.

Consolidated Edison's lawyers argued that in many cases this avoided cost was higher than the wholesale price for electricity. Thus, they argued, ConEd's customers were being forced to subsidize the independent electricity producers.

FERC lawyers said that this provision was in the long-term best interest of the consumer because it opened new sources of electricity and that avoided cost, by definition, would not cost consumers extra.

* A second provision of the public utilities act to which the judges took exception dealt with interconnections. Under the act, if John Doe's windmill is in utility A's service area, but he can get a higher price from utility B, then utility A is required to allow him to hook his wind machine into A's system. Utility A then transmits an equivalent amount of current to utility B. Utility B pays the independent, who without A's powerline would have no way to take advantage of B's higher price. The government argued this was necessary because the utility was a ''monopsonist buyer'': That is, the independent producer practically speaking can only link into the grid belonging to the utility in whose service area he is located.

But the Appeals Court felt the government had failed to prove this point.

The sweeping nature of the decision took FERC officials working on the act by surprise.

''I'm shell-shocked. I don't know what to make of it. What really bothers me is the way the decision was written. It's as if the judge knew where he wanted to come out, so he backed into it. I really hate to see a nice program like this set back,'' says one FERC official.

''It was simply a bad decision,'' declares Adam Wenner, who helped draft the regulations in the Carter administration and now is in the private law practice. ''The judges didn't even come close to understanding the issues involved. What's so frustrating is that this is the one energy program of the Carter administration that has been working. Almost 3,000 megawatts -- the equivalent of three nuclear power plants--has come into being . . . for free.''

Even Edison Electric Institute (EEI) lawyers say they believe that this decision will not stand. For it to be overturned, however, the government will have to appeal the case to the Supreme Court. FERC commissioners met in closed session last week and considered the situation, but did not decide on a course of action.

Despite Mr. Wenner's partisan enthusiasm, an assessment of the success of the public utility act program is difficult to make. According to FERC records, Wenner's 3,000 megawatts is a paper figure: the sum of the rated capacity of all the cogeneration and small power production plans presented to the government.

''We have no way of telling how many of these projects are actually operating or under construction,'' explains Peggy Force of FERC. On the other hand, there are a number of operating facilities that have not filed with the commission, she reports.

However, the number of notices to participate in power production under provisions of PURPA has been growing rapidly. In 1980, the FERC received only 32 . For the next year, the number almost doubled. And since October, the beginning of this fiscal year, 70 notices have been received - a dozen since the Appeals Court decision.

The part of the act that gives states the authority to draft their own regulations was not affected by the ruling. So it will have little effect on states like California - one of the hotbeds of activity in the alternative energy field. The state recently released its PURPA regulations. The situation is similar in states like New Mexico, Vermont, and possibly Massachussetts, where there is strong public support and small producers and cogenerators will continue to find conditions favorable, Mr. Strong says.