“We hold only that where a utility uses energy from a QF to meet a state RPS, the avoided cost must be based on the sources that the utility could rely upon to meet the RPS.” Californians for Renewable Energy v. CPUC (CARE)

Wow! This ruling is now binding within the Ninth Circuit and could have ripple effects throughout the country.

In 2010, in CPUC v. SCE, FERC reversed several decades of PURPA policy and precedent on avoided costs, permitting States with Renewable Portfolio Standards (RPS) to base avoided cost rate calculations on the costs of other renewable resources regardless of whether alternative non-renewable sources were available at lower cost. This is referred to as “multi-tiered” avoided cost rates. The Ninth Circuit has now taken FERC’s re-interpretation of the rules for determining avoided cost rates a giant step further. Where FERC held that States have discretion to adopt multi-tiered avoided cost rates, the court in CARE turned it into a mandate.

The concept of multi-tiered avoided cost rates has always been legally questionable (and, indeed, has never been subjected to challenge before a court). It is legally suspect because it permits the States to set avoided costs that could impose higher costs on customers than they would have incurred absent the PURPA mandate. This runs contrary to the central principle behind avoided cost pricing according to FERC, which is to prevent the PURPA mandate from increasing a utility’s costs to serve its customers – that “utilities (and their ratepayers) be in the same financial position as if they had not purchased QF power.” As the Supreme Court explained, FERC’s adoption of full avoided cost requires utilities to pay “the same costs had they generated the energy themselves or purchased it from other sources” and, therefore, holds the utility and its customers harmless. PURPA, thus, compels utilities to buy from certain renewable generators, but caps the price based on the alternatives the utility would have built or bought absent the purchase mandate. In CARE, however, the Ninth Circuit arguably turned this principle on its head – with regard to any QF purchase made to meet an RPS. The decision forbids States from considering the costs of the generation resources the utility would have built or bought in the absence of PURPA. 

Here is some background on the FERC decisions upon which the court relied. In SoCalEdison, FERC held the California PURPA program violated PURPA and its implementing regulations because the CPUC did not consider all sources in reaching its avoided cost determinations. It stated: “that regardless of whether the State regulatory authority determines avoided cost administratively, through competitive solicitation (bidding), or some combination thereof, it must in its process reflect prices available from all sources able to sell to the utility whose avoided cost is being determined.” In other words, in calculating a utility’s avoided cost rate, all types of resources were to be considered. This interpretation seemingly reflects Congress’ intent in adopting PURPA, that QFs were to compete with other resources on equal footing.

In CPUC v. SCE, FERC, however decided that any time the SoCalEdison decision spoke of “all sources,” it really meant “all sources able to sell to the utility.” FERC explained that the fact it did not expressly include that phrase in every instance in SoCal Edison was “of no moment” as “it was there implicitly.” In sum, FERC found that it “would be illogical to read SoCal Edison as authorizing consideration for purposes of setting a utility’s avoided costs of sources that are, in fact, not able to sell to that utility.” That said, FERC did not mandate that all states adopt multi-tiered avoided cost rates. For example, the FERC stated “the concept of a multi-tiered avoided cost rate structure can be consistent with the avoided cost rate requirements.” On rehearing, FERC made the voluntary nature of this new idea even more clear, stating “because a state may determine what particular capacity is being avoided, the state may rely on the cost of such avoided capacity to determine the avoided cost rate. Thus, the avoided cost rate may take into account the cost of electric energy from the generators being avoided, e.g., generators with certain characteristics.” (Emphasis added, internal citations deleted.) To top it off, FERC emphasized that, “while the Commission provided guidance on the concept presented by the CPUC, states may have other ways of establishing avoided cost rates that may be consistent with the Commission’s PURPA regulations.”

The Ninth Circuit CARE case garnered little notice as it proceeded thought the court, perhaps due to the fact that the lead plaintiff (CARE) had failed to successfully prosecute claims in myriad FERC and court proceedings. The complete dismissal of CARE’s claims by the district court, presumably lulled any observers into a lack of concern. But, with the Ninth Circuit, the plaintiffs finally had some success. The plaintiffs alleged that the CPUC-set avoided cost rates under certain PURPA programs could not be set using a natural gas plant and cost benchmark. The CPUC had a standard avoided cost rate for all under 20 MW QFs (renewable or cogeneration) that used such a benchmark. The plaintiffs argued that if a QF’s power was used to meet an RPS standard the avoided cost had to based on energy sources that would meet the RPS. The Ninth Circuit agreed. It found “[w]here a utility uses energy from a QF to meet the utility’s RPS obligations, the relevant comparable energy sources are other renewable energy providers, not all energy sources that the utility might technically be capable of buying energy from.” It remanded the issue of whether the CPUC’s various PURPA programs met this standard back to the district court.

The potential impacts of this decision are significant and of course apply to a huge region of the country; all Ninth Circuit utilities outside of California are still required to buy from renewable resources up to 80 MW in size, with California utilities required to purchase from QFs up to 20 MW. RPS programs are pervasive throughout this region. This means that, in accordance with CARE, each of these States with an RPS mandate will be required to set one or more tiers of avoided cost rates to apply to the utilities’ purchases from QFs made to meet RPS. These tiered avoided costs will be required to exclude consideration of the prices of any resources that would not have been eligible to meet the applicable RPS. This has the potential to harm customers by increasing power prices for PURPA-compelled purchases, unless the appropriate avoided cost rate for a utility would otherwise be based on purchasing from or building a facility that qualified for the RPS.

Notably, in other respects, the Ninth Circuit did affirm the district court on issues such as whether net metering customers who are paid in cash for excess energy were required to be paid a capacity component under PURPA (No!). It also decided that QFs could be compelled to transfer their Renewable Energy Credits to their purchasing utilities, if the state had such a policy, a conclusion that had already been reached by other federal courts.

CARE was decided by a vote of 2-1, with a powerful dissent from Judge Nguyen. It may be challenged en banc or on Petition for Certiorari. FERC may also be asked to weigh in on the court’s interpretation of its avoided cost rules and regulations.