In 2017, a California federal district held in Winding Creek v. CPUC that the California Public Utilities Commission (CPUC) had two PURPA problems: 1) its capped PURPA program entitled “Re-MAT” did not adopt an avoided-cost price because of its adjustment mechanism scheme; and 2) the CPUC’s standard PURPA contract (Standard Contract) failed to properly implement PURPA because the contract had only one, not two, pricing options. As a result, the court found that the cap on the Re-MAT program was improper. The district court found that the Standard Contract would need to provide a fixed price at the time of contracting and at delivery to satisfy FERC’s PURPA regulations. The district court also held that it was not its job to fix the Re-MAT pricing problem by setting an avoided cost price or requiring the purchasing utility to provide a contract at the “unadjusted” price demanded by the QF. Both sides appealed.

Yesterday, the Ninth Circuit ruled that the district court was correct as to all its findings. Perhaps of most importance, the Ninth Circuit concluded that a formula rate could not satisfy the requirement of 18 C.F.R. § 292.304(d)(2)(ii) of a price set at the time of contracting (i.e., when a legally enforceable obligation (LEO) is formed). It stated, that the “Standard Contract provides only one formula for calculating avoided cost, and that formula relies on variables that are unknown at the time of contracting.” Indeed, it found this “infirmity is plain from the face of the regulations, so we do not defer to FERC’s unreasoned conclusion to the contrary.”

As to the Re-MAT price, the court agreed that its price “which is arbitrarily adjusted every two months according to the QFs’ willingness to supply energy at the pre-defined price, strays too far afield from a utility’s but-for costs to satisfy PURPA.” Finally, the Ninth Circuit agreed with the lower court’s denial of any relief. It affirmed that “it would be inappropriate to order a non-party to contract with Winding Creek under a modified version of the very [Re-MAT] program the court had just determined to be preempted by federal regulation.”

In the meantime, the CPUC opened a proceeding in 2018 with the intent of amending the Standard Contract such that it includes two pricing options. That docket remains pending at the CPUC. As to the Re-MAT program, the CPUC stopped the program altogether.

Now that a second appellate court has weighed in on the 18 C.F.R. § 292.304(d)(2)(ii) pricing issue, FERC must decide whether it is time to reform its regulation that requires a QF be offered a price that is set at time of LEO formation. FERC could: 1) eliminate such regulation; or 2) reform the regulation to specifically permit a formula rate (including a market-based rate), whereby the formula is set at the time of the LEO. This reform has been sought by the utility purchasing side of the industry for several years, but no action has yet been taken by FERC.