Stampedes are dangerous. QF stampedes toward stale above-market standard avoided costs rates are dangerous to ratepayers. The first stampede occurred in the 1980s in California. California’s utilities were compelled to offer standard rates to QFs based on gas and oil prices at the time and then very shortly thereafter the bottom fell out of the oil and gas markets. California ratepayers paid for that stampede for decades. Stampedes toward stale avoided cost rates are continuing in various states today, particularly as solar generation prices have fallen rapidly. For example, Portland General reported that in Oregon, where standard rates are available for up to under 10 MW QFs, it has received 173 contract requests from sub-10 MW QFs. How state commissions, FERC, state courts, and federal courts all react to such stampedes will be discussed in future posts, as events unfold in various states. The experience of the Montana PSC in trying to stop a stampede illustrates the differences between the state and federal courts as relates to their authority to specifically set rates, terms, and conditions of PURPA contracts. In the case of the Montana PSC, a state court’s broad authority to set rates may exacerbate the impacts an existing QF stampede.
Both Northwestern Energy and the Montana PSC have been trying to fend off a stampede from 3 MW and smaller (mainly solar) QFs on numerous fronts, but were dealt a blow by a April 2, 2019 state district court order in Vote Solar v. Montana PSC that vacated certain Montana PSC orders. The most interesting aspect of the Cascade County District Court opinion was the fact that the court actually ordered the PSC to set rates, terms, and conditions of standard PURPA contracts in a particular manner.
By 2016, Northwestern recognized that a stampede was heading its way due to stale avoided cost rates for QFs of 3 MW or less. It took several proactive steps to have the Montana PSC protect its ratepayers. The Montana PSC lowered the standard avoided cost rate, limited what size QFs were permitted to request the standard avoided cost rate, reduced the length of the term of standard contracts, and affirmed its legally enforceable obligation (LEO) standard.
As discussed in an earlier post, further litigation ensued at FERC and then in federal court, as QFs sought to establish that the Montana LEO standard was unlawful. In the federal court litigation over the LEO, the LEO standard was found unlawful, but when the QFs tried to convince the federal district court that it could order the Montana PSC to turn back the clock and re-write its order in such a way that each QF plaintiff could be found to have a LEO and benefit from the stale standard rate, the court found the relief sought did not fall within the Ex Parte Young exception to the Eleventh Amendment. (The Eleventh Amendment provides states sovereign immunity, but not from implementation claims under PURPA’s judicial regime.) Bear Gulch Solar, LLC v. Montana Pub. Serv. Comm’n, 356 F. Supp. 3d 1041, 1053 (D. Mont. 2018). Indeed, a federal court will not turn an implementation claim into an as-applied claim and provide specific contractual relief, as also evidenced by the Winding Creek case. There, the federal district court refused to award a QF contract at a specific price to the plaintiff. Both these decisions have been appealed, but it is unlikely a federal appeals court will order a PSC to determine either that a particular QF had a LEO or would set an avoided cost rate. These are matters left to the PSC to decide in the first instance.
In the meantime, in state court, QFs challenged several of other changes that the Montana PSC had adopted that were intended to protect ratepayers from overpaying for QF power. The QFs had some success. The Cascade County District Court found that the Montana PSC should have adopted a staff proposal that a standard contract have a 25-year term and it ordered the PSC to adopt a contract of such length. It also ruled that such contracts’ rates had to include a specific carbon adder identified in a Montana PSC staff memo. Other findings were more general, but it is these specific rulings that are significant from a legal perspective.
Although state courts are not bound by the Eleventh Amendment, the filed rate doctrine is recognized in many states. In states that follow the doctrine, a court that found that a PSC did not set rates in accordance with PURPA likely would remand the case to the PSC to correct its errors. The Supreme Court of Minnesota, in adopting the filed rate doctrine, found that: “Courts apply the filed rate doctrine for three primary reasons. First, ratemaking is a legislative function delegated to government agencies; under separation-of-powers principles, courts should not second-guess the reasonableness or lawfulness of agency-approved rates. Schermer v. State Farm Fire & Cas. Co., 721 N.W.2d 307, 314 (Minn.2006) (adopting the filed rate doctrine in Minnesota). Second, the regulation of rates is a comprehensive system and courts “ha[ve] neither the expertise nor the mechanisms to deal with the entire rate structure or the adequacy of the return to the regulated entity.” Id. at 315. Third, courts hesitate to create discriminatory rate schedules by “retroactively reallocat[ing] rates among ratepayers, [which modifies] the rates for some ratepayers but not for others.” Id.” In contest, the filed rate doctrine has not been adopted by Montana’s Supreme Court, which views the doctrine as one grounded in federal, not state, law.
As a result, Montana finds itself in a situation of great uncertainty. Litigation over which QFs had a LEO in time to take advantage of the standard rate presumably will continue at the PSC and beyond after the appeal over the LEO standard is heard next month. Such litigation will determine how many QFs are eligible for what will be a standard rate that could be well above market (pending possible further appeals). Before the Montana PSC, several years ago, Northwestern estimated the overpayments by ratepayers could total $60 million. With the 25-year contract term and the time passed the number could be larger. It may take several more years before all such litigation is complete.