PURPA Reform

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We previously indicated that “[t]he March 8, 2022 SEIA v. FERC oral argument on FERC’s PURPA reform rule – Order No. 872 – resulted in a somewhat unexpected lesson on the National Environmental Policy Act (NEPA).” The same can be said of the Ninth Circuit’s opinion on Order No. 872. Although the Final Rule was upheld in its entirety, it also was remanded because FERC violated the NEPA by failing to prepare an environmental assessment (EA) before issuing the Final Rule. The Final Rule will remain in effect during the remand. The EA is rather unlikely to result in changes to the Final Rule, as the court opined the order does not suffer from “fundamental flaws” and it had “no reason to believe that the agency would be unable to cure those deficiencies on remand.”

Although the opinion’s substantive rulings are relatively unremarkable, the opinion’s and concurrences’ discussions of Chevron were perhaps more remarkable and may provide a glimpse of a post-Chevron future. Two judges embraced Chevron deference as the law of the land, with the opinion relying on the premise that the court should “review an agency’s interpretation of a statute under the framework of Chevron.” In concurring with most of the opinion, the third jurist indicated that Chevron deference was unnecessary to uphold the Final Rule.

Under the two-step process of Chevron, a reviewing court first decides if the intent of Congress is unambiguous, or clearly stated, if so, then the inquiry must end. If, the intent of Congress is unclear, or if the statute lacks direct language on a specific point, the court decides whether the agency interpretation is based on a permissible construction of the statute, one that is not arbitrary or capricious or obviously contrary to the statute. The majority relies on Chevron deference because it remains the law of the land. Indeed, two members of the panel chastise their colleague for ignoring Chevron,in premature anticipation of “the Case-That-Must-Not-Be-Named” being overturned by the Supreme Court. Judge Bumatay, a Federalist Society member, is concerned about the future of Chevron and sees no reason to apply the second step of Chevron, as the statute provides FERC ample discretion to adopt the PURPA changes proposed given the statutory text. In any case, Judges Miller and Nguyen also find, in their own concurrence, that “the court’s opinion examines the plain text of the statute and concludes that Congress did not directly address the questions but instead left their resolution to FERC’s discretion.” In sum, even if the Supreme Court were to overturn Chevron, there is every likelihood that the non-NEPA issues would survive further judicial review because Congress provided such broad discretion to FERC in enacting PURPA.

Generally, the opinion found that the Final Rule, as a whole, was not inconsistent with PURPA’s directive that FERC “encourage” the development of QFs. The non-NEPA specific issues that were upheld were: the “Site Rule”; the “Fixed-Rate Rule”; the use of locational marginal energy (LMP) prices as a proxy for avoided cost; and, the reduction to 5 MW in size of the must-purchase rule for utilities requesting relief in certain organized markets. These issues, and the NEPA-based remand, are discussed below.

Consistency with “Encouragement” Requirement. The opinion asserts that petitioners analyzed Order No. 872 incorrectly, by merely arguing that Order No. 872 provides “less support” to QFs than the status quo under the prior PURPA rules. The court pointed out that the appropriate statutory test is for FERC to prescribe “such rules as it determines necessary to encourage” QFs and the statute even directs FERC to “from time to time thereafter revise” those rules. The statute thus gives “FERC broad discretion to evaluate which rules are necessary to encourage QFs and which are not” and the “discretion to reevaluate its rules and alter them in light of experience.” The court found that “PURPA does not require FERC to encourage QFs to the maximum extent possible, regardless of any countervailing interests.” It also held that FERC’s various exercises of discretion were not unreasonable simply because FERC balanced the need to encourage QFs against other competing interests.

Site Rule. In the Final Rule, FERC created a non-rebuttable presumption as to affiliated QFs within one mile of one another being located at the same site for determining size and allowed entities to seek to prove that affiliated QFs located within 1-10 miles of one another are at the same site. (It remains unclear whether the Site Rule impacts PURPA regulations beyond the 80 MW size cap on small power production QFs (Renewable QFs), such as the >1 MW rule for self-certification; the 5 MW and 20 MW purchase mandate limitations; and the FPA rate exemption for >20 MW QFs.) The court found that Congress gave FERC broad discretion to define the meaning of the phrase “located at the same site.” The court dismissed arguments that “site” had to reflect location and physical proximity, noting that the prior PURPA rule also took into account other factors such as fuel type and ownership. As to whether the choice of 10 miles was arbitrary, the court indicated that effectively any number selected would be arbitrary in some sense, but found that where an agency has to choose a number from a range, a court will uphold the number even if other reasonable figures exist. The court ruled that FERC had the authority to change its prior Site Rule policies and that it even mitigated the impacts on QFs relying on the old rules. Claims that the Final Rule was retroactive were readily dismissed on the grounds that a rule is not retroactive merely because it “upsets expectations based in prior law” or “is applied in a case arising from conduct antedating the statute’s enactment.”

Fixed Rate Rule (Energy Rate May Be Variable). In the Final Rule, FERC allowed the avoided energy cost portion of a QF’s contract to vary based on the as-available rate calculated at the time of delivery but continued to require that QFs be given the option to receive avoided capacity costs at fixed rates. Petitioners argued that this aspect of Order No. 872 was discriminatory and arbitrary and capricious. The court explained that the statute did not support this reading because it was so broad that FERC could have imposed a variable energy price for the very start of PURPA. As to the argument that QFs now must accept a variable, uncertain energy rate, whereas utilities are guaranteed the long-term recovery of their costs and a return on investment such that QFs now face financial risks that utilities do not, the court held that Congress never intended to impose traditional ratemaking concepts on QFs. “Order [No.] 872 requires that QFs receive a rate equal to full avoided costs, and that is sufficient to satisfy the nondiscrimination requirement.” The opinion holds that FERC explained its changed policy on energy rates by finding that its prior belief as to under- and over-recovery evening out over time was no longer supported by evidence and that “it is not necessarily the case that overestimations and underestimations of avoided energy costs will balance out.” This finding of regular, routine overestimations not balanced out by underestimations fully justified the change in policy. As to arguments that the change would make financing difficult, the court observed FERC’s finding that the variable energy rate/fixed capacity rate construct is the standard rate structure used throughout the electric industry for power sales agreements. The evidence of a 700 percent increase in independent renewable generation between 2005 and 2018, also supported FERC’s position that QFs would be financeable.

LMP for Energy in Organized Markets. In the Final Rule, FERC provided states the flexibility to use various market prices when calculating a utility’s avoided costs, allowing states to adopt a rebuttable presumption that, for utilities located within certain organized energy markets, the LMP reflects the purchasing utility’s avoided costs. Petitioners’ position, that some utilities procure energy outside auctions and may have avoided costs higher than the LMP, was rejected because a state’s use of LMP as a reasonable proxy for a utility’s avoided costs could be rebutted on a case-by-case basis, if and when a state adopted such approach.

Rebuttable Presumption of Market Access Set to 5 MW for Renewable QFs. In the Final Rule, FERC found that Renewable QFs with a net capacity above 5 MW will be presumed to have nondiscriminatory access to certain markets, such that utilities in those markets can submit filings to be relieved of buying from such Renewable QFs. The former size minimum for mandated purchases was 20 MW for both cogeneration and Renewable QFs. FERC cited changed circumstances since the issuance of Order No. 688 to justify its downward revision of the market-access presumption from 20 MW to 5 MW for Renewable QFs. The court reviewed FERC’s stated basis for that revision – more mature markets, an RTO requirement to allow100 kW resources to participate in markets, and evidence of under 20 MW QFs participating in markets – and found the explanation sufficient.

NEPA. In the Final Rule, FERC determined that Order No. 872 fell within a “categorical exclusion” to NEPA for rules that are “clarifying, corrective, or procedural” in nature and held that any downstream environmental effects were too uncertain and speculative to trigger NEPA review. The court disagreed with FERC that several of its policy changes were corrective, holding: “when an agency adopts broad, transformative, and substantive changes to its regulations, it cannot sidestep NEPA’s requirements by claiming that it was motivated by its desire to better conform to the statute and then applying a ‘corrective’ label. A regulatory change as significant as Order [No.] 872 is not corrective merely because the agency expresses some interest in better statutory compliance.” As to the foreseeability argument, FERC claimed both that its rule did not involve a particular project and that it was impossible to know what the states may choose to do and what impacts the changes would have. The court found that FERC misinterpreted the case law and ruled that an EA is required for a major agency action unless it normally does not have a significant effect on the human environment. The court found that it was “eminently foreseeable that a regulatory change of this magnitude could produce significant environmental effects” because it was a near-certainty that at least some QFs could lose their status under the Site Rule, or that at least some states would eliminate the fixed-rate option for the calculation of energy avoided costs. The court elaborated that “because many QFs rely on renewable power sources, it takes little imagination to see that a reduction in the incentives provided to QFs could, in turn, alter the mix of energy production, shifting production away from renewable production and toward fossil-fuel production.” Thus, the court remanded the Final Rule, requiring FERC to perform an EA.

Importantly, the court did not vacate the Final Rule due to the failure to prepare an EA. The Ninth Circuit test for vacatur weighs the seriousness of the agency’s errors against the disruptive consequences of an interim change that may itself be changed. Although the court found the EA omission serious, courts in the Ninth Circuit ask whether the agency would likely be able to adopt the same rule on remand and the court had no reason to believe that the agency would be unable to cure the deficiencies on remand. As to the disruption that a vacatur would cause, the court ruled it was significant. The court noted that FERC, various states, and regulated parties have all begun to implement the rule in various ways. The court, in an understatement, noted that “several” utilities have already applied for – and received – relief from their mandatory-purchase obligations when dealing with facilities between 5 and 20 MW in size. The “QM” PURPA relief dockets number is already about 50, with most filings by larger, investor-owned utilities.

Judge Bumatay, dissenting on the NEPA issue, found that the petitioners lacked standing to raise the NEPA issue because, despite their claims, the petitioners interests are not distinct from the interest held by the public at large and rest on speculation, or as more colorfully described: “To traverse the gap between FERC’s rule changes and their asserted injury, Petitioners layer conjecture on top of speculation on top of guesswork about how State governments, individual Qualifying Facilities, the broader energy market, and emissions will react to the rule changes. To credit their claim, we must accept that FERC’s new rules will lead to greater fossil-fuel consumption in some unspecified manner, in some unspecified location, to some unspecified degree, by the independent actions of third parties—all leading to an unspecified harm to Petitioners’ members.” As noted above, given many other factors (particularly including state clean energy policies), the tweaks to PURPA made by Order No. 872, likely have had minimal impacts on the country’s fuel mix since they were adopted.

Once the mandate is issued and the case remanded, the court’s prediction that FERC can cure any deficiencies is prescient. Indeed, given the amount of renewable resources in interconnection queues as opposed to fossil resources, the notion that a somewhat “stricter” PURPA would have environmental impacts that merit any further review is highly questionable. Voluntary and state-mandated renewable portfolio standards undermine the notion that the PURPA changes at issue here have, or would play, a meaningful role in the country’s resource mix. Perhaps the strongest argument that FERC’s PURPA rule changes are insignificant in terms of the overall resource mix is the fact that numerous states offer compensation through community solar, net metering, and other programs that allow Renewable QFs to flourish outside of the traditional constraints of PURPA. Actually, the Final Rule’s formal adoption of tiered avoided costs allows states to lawfully impose much higher avoided cost rates than they have historically. In the years since Order No. 872 became effective, the petitioners would be hard pressed to prove that the Final Rule hampered renewable development generally, even as such development likely was slowed to some degree by interconnection queue issues, COVID-19, tariffs, and supply chain issues. With the named Petitioner recently issuing a press release stating “due in part to the strong first quarter numbers and a surge in demand from the Inflation Reduction Act (IRA),” its consulting partner “expects the solar market to triple in size over the next five years, bringing total installed solar capacity to 378 GW by 2028,” proving that the Final Rule is having environmental impacts becomes all the more challenging. The dissent supports this view, relying on record evidence from Montana’s thriving renewables industry, which includes many projects too large for QF status.Continue Reading FERC’s PURPA Reform Rule Survives Judicial Review Intact, Subject to an Environmental Assessment, as the Majority of the Ninth Circuit Panel Continues to Embrace Chevron Deference

In Order No. 872, FERC provided PURPA purchasers and other interested parties the opportunity to protest QF re-certifications if a “substantive change” was being made, although the Final Rule was less than perfectly clear as to what constituted a substantive change. FERC stated in Order No. 872-A that substantive changes that may be subject to a protest could include “a change in electrical generating equipment that increases power production capacity by the greater of 1 MW or five percent of the previously certified capacity of the QF or a change in ownership in which an owner increases its equity interest by at least 10% from the equity interest previously reported.” In response to a concern that the “substantive change” standard was vague, FERC responded that it intended to make a case-by-case determinations on what changes are substantive.

In Dalreed Solar, FERC declined an opportunity to expand its identification of examples of substantive changes. In the re-certification at issue, Dalreed Solar changed its net power production capacity from 20 MW to 40 MW, an obvious slam dunk of “substance,” although due to an earlier re-certification of its original proposed project from 40 MW to 20 MW, Dalreed Solar had a non-frivolous claim that the change was not substantive. FERC readily dismissed this argument and indicated that the proper comparison was between the last re-certification and the current one. Given that it ruled on this MW change as sufficient, FERC then declined to rule on whether other changes were substantive.
Continue Reading Dalreed Solar – FERC Declines to Provide Additional Clarity as to QF Re-Certification “Substantive Changes” that Trigger Protest Rights, But Engages in a Same-Site Analysis

Tuning into a replay of the March 8, 2022 SEIA v. FERC oral argument on FERC’s PURPA reform rule – Order No. 872 – resulted in a somewhat unexpected lesson on the National Environmental Policy Act (NEPA), including NEPA standing, and remedies. About two-thirds of the argument focused on whether an Environmental Assessment (EA) was necessary or too speculative, whether the Public Interest Organizations (PIOs) had standing to raise NEPA issues, and whether the most appropriate remedy for a NEPA violation was vacatur of the Final Rule or remand (leaving the Final Rule in place).

Before delving into the NEPA issues, much of the other one-third of the oral argument was spent discussing the issue of the right of a state commission to eliminate a QF’s option of selecting a fixed energy rate with the rate set at time of the legally enforceable obligation. SEIA’s primary contention was that FERC reversed a long-standing policy by finding in Order No. 872 that a single PURPA contract that over its life exceeded actual avoided cost, rather than balancing out over time, was a violation of PURPA itself. SEIA may have scored a point in arguing that given such a policy was adopted, the Final Rule could not have left it to the states to determine whether or not energy costs could be fixed or variable, as that act in itself would have itself been arbitrary. That said, it is quite difficult to find in Order No. 872 any definitive holding or finding that an individual contract violates PURPA if it over-estimates avoided cost over its lifetime, let alone, that FERC adopted a remedy to address this possible result.
Continue Reading The Future of PURPA Reform Under Order No. 872: Did the Oral Argument Provide Any Clues?

This post updates the most recent post regarding initial state and federal proceedings that were initiated in light of Order No. 872.

Post-Order No. 872 Requests for Relief from the PURPA Purchase Mandate

Given the paucity of actual or potential QFs in the relevant service areas of ETEC and NTEC, and thus an absence of protests, these entities, who led the pack in submitting the first QM filing under Order No. 872, rather quickly obtained the requested relief. Since their filing, a few more applications have been submitted and certainly more are expected soon. Not surprisingly, many of the earliest filers had relatively few existing or queued potential QFs. No protest has been filed in any QM docket to date.
Continue Reading Order No. 872-Related FERC and State Proceedings Initiated in Its Initial Months of Effectiveness

Last week, FERC issued Order No. 872-A, its “further guidance order” on the PURPA Reform Final Rule. Appeals of Order No. 872 are pending at the Ninth Circuit, with the first appeal being held in abeyance until no later than early January 2021. Given the relatively few changes to the Final Rule, this order may close the relevant docket at FERC, for now. Whether some portions of the Final Rule will be remanded or even vacated is difficult to predict at this early stage, and may well depend on the judicial panel. Of the clarifications issued, only one was particularly significant – the affirmation of CARE v. CPUC on tiered avoided cost rates. Both that clarification and the few other changes and clarifications indicate that the degree to which the Final Rule will alter the PURPA landscape is largely dependent on state and FERC implementation of the new policies and regulations adopted. The clarifications/modifications adopted by FERC are discussed below.
Continue Reading FERC’s PURPA Reform Rule: Order No. 872-A’s Few Clarifications and Modifications Continue to Indicate that FERC and the States Will Have Significant Discretion in Implementing PURPA

Order No. 872 spends an inordinate number of pages discussing the wholly optional use by a state of Locational Marginal Prices (LMPs) for those QFs selling only as available energy in an RTO market. 18 C.F.R. § 292.304(b)(6). The reason this fuss is somewhat surprising is that most QFs (excluding net metered QFs) enter into…

One very significant set of cases seems to have been overturned in Order No. 872, although more clarity could have been provided and a regulation is needed to make any reversal binding on the courts.

In 2010, in CPUC, FERC reversed 15 years of precedent and found that an avoided cost rate could be based on a subset of resources, as opposed to all resources. FERC, speaking permissively, said that a state with a renewable portfolio standard (RPS) may set an avoided cost rate foe renewables if the utility had not yet met the mandate. In short, the concept the tiered avoided costs was born. Several years later, the Ninth Circuit interpreted this permissive wording as mandatory, holding that if an RPS existed and a QF could meet that need, the avoided cost rate has to be based on only renewables.
Continue Reading PURPA Final Rule Post III – Were the Ninth Circuit’s CARE v. CPUC and FERC’s CPUC Decisions Overturned?

Because LSEs must still offer fixed capacity prices under Order No. 872, and given the trend in decreasing prices for renewables, the Final Rule’s impacts on LEO formation may actual be fairly significant, particularly in states viewed as hostile to QFs. In the Final Rule, FERC adopted a “minimum standard” for LEOs, amending its regulations to provide that: “A qualifying facility must demonstrate commercial viability and financial commitment to construct its facility pursuant to criteria determined by the state regulatory authority or nonregulated electric utility as a prerequisite to a qualifying facility obtaining a legally enforceable obligation. Such criteria must be objective and reasonable.” 18 C.F.R. § 292.304(d)(3).

FERC provided examples of factors a state could reasonably require a QF to demonstrate: (1) taking meaningful steps to obtain site control adequate to commence construction of the project at the proposed location and (2) filing an interconnection application with the appropriate entity. A state could also require that the QF show that it has submitted all applications, including filing fees, to obtain all necessary local permitting and zoning approvals. FERC also ruled that obtaining a PPA or financing cannot be required. Also not permitted are requirements that: a utility execute an interconnection agreement (or likely any agreement at all); a QF file a formal complaint with the state commission; the QF being capable of supplying firm power; and, the QF being able to deliver power in 90 days.
Continue Reading PURPA Final Rule Post II – LEOs, the Texas Lion Has Been Tamed and Other Impacts

In Post I, we explore the three “big” issues that the Final Rule highlights at Paragraphs 13-20 – the (potential) reduction of the 20 MW cap to a 5 MW cap for renewables as to the must-purchase obligation on utilities in organized markets; changes to the one-mile rule; and, the holding that for QFs selecting that a price be fixed at the time of its legally enforceable obligation (LEO), the energy price need no longer be fixed over the contract term. As discussed below, the impact of cap reduction to 5 MW may turn heavily on future case law, and may not prove highly significant if FERC finds specific barriers to participation. LSEs are going to need to carefully make their cases for a cap reduction in responding to protests, particularly if a change in Administration occurs before their new petitions are filed. As to the one-mile rule, this change may prove more significant due to the frequency with which the same FERC test is used for other purposes. Finally, the “new” rule on states being permitted to adopt non-fixed energy prices in otherwise fixed-rate contracts is not particularly new at all.
Continue Reading PURPA Final Rule Post I – Which of FERC’s Resolutions of the “Big Three Issues” Is Most Significant?