It is somewhat common for a utility to determine not to challenge a new rule on power purchases issued by its state commission that is clearly in violation of PURPA or the FPA. This reluctance is understandable and often rests on a political decision: fighting a state commission over an issue may have a greater downside than upside with regard to the continuing relationship between the utility and its regulators. Utilities also sometimes ignore the illegality of new state laws requiring them to purchase energy from certain sources or at certain rates. Developers are less inclined to defer to state legislatures or regulators and often will challenge laws or state commission orders that appear facially unlawful. But, as such challenges can be costly, some preemptable state laws and regulations in some cases go unchallenged. Allowing such laws and regulations to remain in place can lead to unforeseen impacts and expenses for purchasing utilities and developers alike.

A recent example is reflected in an order issued by a Montana state district court (Cause No. DDV-180640) involving the reversal of a Montana Public Service Commission (MPSC) decision to grant waivers and not impose penalties on NorthWestern’s failure to abide by a state-law requirements to purchase energy from Community Renewable Energy Projects (CREPs).

State law provided that MPSC-regulated utilities such as NorthWestern had to purchase both the renewable energy credits and a certain number of megawatts from CREPs. See Mont. Code Ann. § 69-2-2004(3)(b) and 4(b). A CREP is defined as: “an eligible renewable resource that: (a) is interconnected on the utility side of the meter in which local owners have a controlling interest and that is less than or equal to 25 megawatts in total calculated nameplate capacity; or (b) is owned by a public utility and has less than or equal to 25 megawatts in total nameplate capacity.” “Public utility” is defined under the same statute as being limited to MPSC-regulated utilities. The Montana CREP law also provided the MPSC to impose penalties and grant waivers.

NorthWestern sought and obtained MPSC waivers for CREP compliance for each year of the program from 2012-2016. After the MPSC granted the 2016 waiver, the Montana Environmental Information Center appealed both the 2015 and 2016 waivers to state court and won its appeal on the grounds that NorthWestern did not take all reasonable steps to procure CREP resources in 2015 and 2016. The MPSC or NorthWestern may appeal this decision. If they do not, the MPSC may impose penalties on NorthWestern.

Northwestern ended up expending resources seeking waivers, defending its non-compliance, and may pay penalties when it could have challenged the law as protectionist and facially unconstitutional on Commerce Clause grounds.

At the same time, at least one developer was expending resources trying to abide by the “local owners” requirements. Greycliff Wind Prime, LLC tried to meet the local owner requirement, but as interpreted by the MPSC, it could not do so. In a Declaratory Order, the MPSC explained that under Section 69-3-2003 of the Montana Code, “local owners have a controlling interest” in a project only if they own, directly or indirectly, more than half of the equity, income and voting interests in the project. Another developer, New Colony, also failed to meet the requirement. Although it is unclear how much these developers expended in trying to obtain contracts under the law, the developers may have well been better off merely threatening to challenge the local ownership requirement.

With open access, it may be possible for a state to craft a law that requires purchases from in-state generation resources that could survive a Commerce Clause challenge, but there must be a valid basis for the in-state restriction. For example, if energy was needed in a locality for reliability purposes and out-of-state resources could not meet the reliability need, an in-state location requirement could be justified, but probably not in-state ownership. The CREP law lacks any lawful basis for the in-state ownership requirement. The local ownership requirement in the law seems particularly vulnerable to challenge now that this Supreme Court has ruled in Tennessee Wine & Spirits Retailers Ass’n v. Thomas that under “our dormant Commerce Clause cases, if a state law discriminates against … nonresident economic actors, the law can be sustained only on a showing that it is narrowly tailored to ‘advanc[e] a legitimate local purpose.’ Department of Revenue of Ky. v. Davis, 553 U.S. 328…(2008).” In dicta some six years ago, Judge Posner noted that “Michigan cannot, without violating the commerce clause of Article I of the Constitution, discriminate against out-of-state renewable energy.”

Indeed, a TransCanada company filed a complaint against a Massachusetts renewable law with an in-state location requirement and the state settled without even filing a response. A Missouri law with in-state sourcing requirements did not survive a challenge at the state commission attempting to implement the law, as discussed in a related appeal. Arguably, had someone challenged the CREP law years ago, the legislation may have been changed quickly or eliminated. One MPSC Commissioner noted the law was “hastily conceived and poorly crafted.”

Declining to challenge legally questionable state laws and regulations can create unforeseen costs for both utilities and developers.