An appeal to the ninth circuit federal court asks it to consider what PURPA really means.
In the years since its passage, Section 210 of the Public Utility Regulatory Policies Act (PURPA) has provided one of the few options for small producers of renewable energy to access electric generation markets controlled by monopoly utilities. The law requires a monopoly utility to purchase the output of certain small power producers known as “qualifying facilities” (QFs) at the utility’s “avoided cost”—that is, the cost the utility would incur to generate or purchase power in the absence of the purchase from the QF.
This “must purchase” obligation places otherwise absent pressure on monopoly utilities to continually reduce their costs to preserve market share. Ratepayers further benefit because QFs bear the risk of construction cost overruns and operational problems—costs which monopoly utilities typically pass on to ratepayers.
Monopoly utilities, however, are not only attempting to persuade congress and the Federal Energy Regulatory Commission (FERC) to weaken PURPA but they are also working to undermine PURPA’s implementation at the state level. Certain state regulatory commissions have supported the utilities’ efforts to prevent PURPA from working as it should, creating obstacles to QF power sales and subverting PURPA’s goals. These actions have resulted in extensive litigation before FERC and in the state and federal courts.
The “Legally Enforceable Obligation”
In enacting Section 210 of PURPA, Congress sought to address a regrettable reality—true at the time of the law’s passage in 1978 as well as now: monopoly utilities are reluctant to purchase power from independent third parties, including QFs, because the utilities earn a guaranteed rate of return when they build generation resources themselves. In implementing PURPA, FERC recognized that the “must purchase” obligation by itself was not sufficient to overcome this reluctance.
FERC thus gave QFs the unilateral right to create a “legally enforceable obligation” (LEO) on the part of the utility to purchase the QF’s output by unequivocally committing to sell that output to the utility. Moreover, FERC gave QFs the right to fix the price at which to sell that output at the utility’s avoided cost as of the time of LEO formation. This right is especially important because utilities may try to avoid contracting with QFs when they plan to seek a reduction in their avoided cost rates from the state regulatory commission.
The role of state commissions
A crucial part of PURPA’s framework — determining when a QF has created a LEO — has been entrusted to state regulatory commissions. Some commissions have adopted generally applicable “bright line” tests for LEO formation, while others have made LEO determinations on a case-by-case basis. In either case, the state commission’s discretion is not unfettered and must be exercised in a manner consistent with FERC’s guidance and policy concerning LEO formation.
When a state commission adopts a generally applicable rule concerning LEO formation inconsistent with PURPA or FERC policy, a QF may challenge that action in federal court after petitioning FERC to take action against the commission to enforce PURPA requirements (a rare occurrence, as discussed below). On the other hand, when a state commission makes a fact-specific determination that a particular QF has not established a LEO, PURPA gives the QF the right to challenge that determination in state court.
There are numerous examples of state regulatory commissions improperly limiting the ability of QFs to form LEOs, thereby impeding QF development. For example, the Idaho Public Utilities Commission adopted a rule requiring a QF to obtain a power purchase agreement (PPA) signed by the utility before it could create a LEO—effectively leaving the formation of the LEO up to the utility instead of the QF.
The Montana Public Service Commission took a similar approach in recognizing the existence of a LEO only when a QF has obtained an executed interconnection agreement from the utility. This scheme, too, allows a utility to impede the creation of a LEO by delaying the interconnection study process. If utilities are allowed to delay LEO formation, they can avoid contracting with the QF or otherwise becoming legally obligated to purchase its output until the utility’s avoided cost rate has been reduced and it becomes economically unfeasible for the QF to proceed with development.
These actions run counter to the core aims of Section 210. Congress intended to combat the reluctance of utilities to contract with small power producers, but these state commissions have opened a backdoor allowing utilities to do exactly that. Such limitations ignore the governing regulation: “[E]ach qualifying facility shall have the option” to provide power by forming a LEO.
FERC’s involvement
When state commissions subvert federal aims by unlawfully implementing FERC’s regulations, FERC is the first line of defense. Practically, though FERC has frequently and repeatedly stated that such restrictive implementations of its regulations are unlawful — with language strongly disapproving of state commission efforts to prevent LEO formation — it has rarely taken direct enforcement action to correct them.
For example, in response to Montana’s implementation, FERC stated that “requiring a QF to tender an executed interconnection agreement is … inconsistent with PURPA and our regulations” because it “allows the utility to control whether and when a legally enforceable obligation exists.” FERC’s decision not to initiate its own enforcement action, however, leaves enforcement to QFs who are free to challenge the state commission’s unlawful action in federal court.
The power of federal courts
Given FERC’s reluctance to intervene when state commissions unlawfully implement its regulations, the task of ensuring that PURPA’s goals are not subverted falls largely to federal courts, which have exclusive jurisdiction “to require [a] State regulatory authority … to comply with” PURPA and FERC’s regulations.
Not all courts are willing to take up the task. Faced with the Texas Public Utilities Commission’s regulation prohibiting QFs from forming LEOs unless they could provide “firm power,” the Fifth Circuit declined in the Exelon Wind decision to defer to FERC’s interpretation of PURPA and instead deferred to the state commission, finding that states, rather than FERC, should make policy decisions about LEO formation.
Exelon Wind inverts the appropriate federal-state balance, failing to recognize that PURPA represents a federal intervention in the operation of state utilities specifically to address the utilities’ hostility towards small and alternative power producers. While states play an important role in implementing PURPA, they do not get to choose whether LEOs, or even the “must purchase” obligation, are desirable. States must instead faithfully implement PURPA as specified by FERC, which indisputably allows every QF to create a LEO unilaterally.
When state commissions deviate from that goal, federal courts should correct — rather than defer to — those deviations.
The Ninth Circuit will soon have such an opportunity. In Bear Gulch Solar, LLC v. Montana Public Service Commission, a federal district court concluded that Montana’s implementation of FERC was unlawful but that it lacked the power to grant appropriate relief. More recently, a Montana state court detailed the Montana state commission’s unlawful conduct aimed at killing off QF development.
On appeal at the Ninth Circuit, QFs wrongfully deprived of their statutory right to unilaterally create a LEO seek to uphold PURPA’s statutory scheme through meaningful and appropriate declaratory and injunctive relief.
Editor’s note: The Ninth Circuit will hear arguments for the appeal and a cross-appeal from the district court’s summary judgment in this matter on May 17th, 2019.
