About a decade ago, FERC opened the door to state commissions setting different avoided cost rates and adopting different standard contracts for different types of QFs. Although the ultimate legality of so-called “tiered avoided cost pricing” remains to be tested in court, a decision from the United States Court for the District of Idaho teaches an important lesson in how state commissions should and should not issue rulings categorizing QFs as fitting within a particular tier, if such tiers exist. In Franklin Energy Storage, the court decided that a state commission order finding that a particular type of QF was only eligible for the avoided cost rate and contract for solar and wind facilities was in error because the state commission actually was ruling on whether the facilities were or were not QFs. Despite the fact that all the parties to the case agreed that QF status was a matter exclusively within FERC’s jurisdiction, as supported by the IEP v. CPUC precedent, the court still read the Idaho commission’s action as a ruling on the merits of QF status.

The QFs at issue consisted of battery storage devices that would receive 100% of their energy input from a combination of renewable energy sources such as wind, solar, biogas, biomass. The purchasing utility obtained an order from the Idaho commission that that storage facility QFs such as the plaintiffs’ were subject to the same treatment and rates as wind and solar QFs rather than the treatment of “other QFs.” The plaintiffs challenged this order, which would have resulted in less favorable contracts. The court found that the Idaho Commissioners made their own determination of QF status, despite their concession that only FERC could make such determination. It appears that it was the specific wording of the Idaho commission’s order that caused this result.
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In the last year, two decisions from judges sitting on the bench of the United States Court for the District of New Mexico have opined that PURPA claims made by plaintiffs were “as applied” rather than “implementation” claims and thus could not be heard in federal court. The first decision, in Great Divide I, was a close call and provided an in-depth discussion of the “as applied” versus “implementation” precedent. There, had the case been pled more broadly, as an attack on the legally enforceable obligation (“LEO”) standard established by the New Mexico commission, the court said it would have heard the case on its merits. Indeed, the issue of whether a LEO standard meets PURPA’s requirements had been heard recently by the Montana federal court system. The Great Divide I court invited a better-styled complaint, indicating the complaint could be transformed into an implementation claim.

The plaintiffs filed such an amended complaint, and the court did review the merits of the case, issuing an order on the merits in Great Divide II (2019 WL 5847060) last November. The court found that the New Mexico LEO standard did not violate PURPA, especially given FERC’s silence on appropriate prerequisites which gave the New Mexico Commissioners “the wiggle room” to implement a prerequisite. This decision has been appealed and may be mooted by FERC’s PURPA Final Rule. Now, the newest decision from New Mexico District Court – Vote Solar, – indicates that at least one judge in New Mexico would not have entertained any attempt by the Great Divide I plaintiffs to replead their case.
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Admittedly, it is odd for a PURPA blog to take a month to publish on the PURPA NOPR. But, it took some thought to determine what the NOPR really means to the industry. (The author’s 10-day October vacation had nothing to do with the delay.) In any case, this blog is not for the purpose of summarizing the NOPR; plenty of summaries abound across the internet. The purpose of this posting is to consider what will be the impact of the Final Rule, assuming that it changes very little from the NOPR. Despite the two primary reactions – extensive hand-wringing and substantial glee – the impacts likely will not be very profound, nor does the NOPR diverge from any Congressional mandate reflected in PURPA.

Prior to discussing the potential impacts of PURPA reform, we briefly examine the legality of FERC’s actions. We must start with the premise that Congress did not enact PURPA to encourage QFs. That oft-repeated mantra is false. Congress enacted PURPA to encourage those QFs that could sell power while being paid an avoided cost rate. And, we also must remember that in 2005, Congress indicated QFs with access to certain markets no longer needed to be supported by the PURPA purchase mandate. Congress did not say anything about 20 MW QFs, 1 MW QFs, or any other size QFs. Congress never said a thing in PURPA about avoided cost rates being fixed, formulaic, market-based, or taking any other particular form. Finally, PURPA is silent on legally enforceable obligations (LEOs) establishing a date for fixing the avoided costs rate, for the simple reason PURPA never required a fixed rate to begin with. In short, the NOPR does not appear to violate Congress’ intent; rather, it changes FERC’s implementation of PURPA, which of course could be changed back by a future Commission.

With that background, the discussion below explains why some of the key NOPR proposals are not all that impactful. Some proposals simply address court precedent with which FERC disagrees. Other changes, if adopted, may have little impact, as states adopt programs that effectively undo the changes proposed.
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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.”
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Several moths ago FERC issued an Intent Not to Act on New Mexico Public Regulation Commission’s (NMPRC) LEO standard, which (seemingly) was challenged by a QF’s (Great Divide) Petition for Enforcement under PURPA. The NMPRC had adopted a very strict LEO standard, that required that QFs must be ready to interconnect and deliver energy before any legally enforceable obligation may be created to purchase the power at avoided cost rates. Great Divide turned to federal district court for relief, as one might expect. There was an expectation that this case could provide some important guidance as to the current chasm between many purchasing utilities and the QF industry as to at what point of time a LEO should be found to have been established.

Instead, what the industry received was a lengthy order dissecting whether Great Divide had truly brought an implementation claim as opposed to an “as applied” claim. The court (2019 WL 2144829) found that Great Divide brought an “as applied” claim largely because Great Divide was challenging an NMPRC order finding it had no LEO rather than the rule (Rule 570) on which such order was based and/or the NMPRC’s interpretation of that rule.
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On June 3, 2019, the US. Court of Appeals for the Ninth Circuit issued a Memorandum Opinion (i.e., not for publication), that reinforced the scope of the role of the district and appellate courts in cases brought under the juridical review scheme of PURPA. In the case below, the plaintiff QFs (Plaintiffs) had succeeded in convincing FERC (in a declaratory order ruling) that the Montana Public Service Commission’s (MPSC) legally enforceable obligation (LEO) standard violated PURPA and that the QFs were entitled to declaratory relief. The QF plaintiffs went to district court to obtain confirmation and an order that the LEO standard that the MPSC had applied was illegal. Before the district court could rule, however, the MPSC set a new LEO standard that it placed into effect prospectively. Nonetheless, the district court provided declaratory relief that the prior LEO standard was unlawful. Both the Plaintiffs and MPSC appealed.

The district court had left all interested parties (including with purchasing utility, Northwestern Energy) with no guidance as to what LEO standard should apply to the Plaintiffs and other QFs that were denied contracts under the illegal LEO standard. The QFs wanted guidance, the MPSC wanted the entire matter found moot. The Ninth Circuit agreed with the MPSC, holding that the district court erred in concluding it could reach the merits of Plaintiffs’ request for declaratory relief. The court found that the request for declaratory relief was moot, given that the MPSC regulation under challenge had been changed before the district court issued its ruling.
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“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. 
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Yesterday, FERC issued an order on a Petition for Declaratory order from Sunrun, asking that FERC waive the QF certification filing requirements for separately-interconnected, individual residential rooftop solar PV systems and related equipment with maximum net power production of 20 kW or less that Sunrun provides financing for but which the homeowner has an option to purchase, where such 20 kW or less systems may aggregate to over 1 MW within a one-mile radius; and that in a Form No. 556 submitted for a cluster of rooftop PV systems that exceeds 20 kW, the Commission waive the requirement in Item 8a of Form No. 556 to include information regarding the facilities covered by the first requested waiver (i.e., 20 kW or less facilities), even if they are within one mile of the cluster that exceeds 20 kW that is being certified).

Although the Petition garnered minimal opposition, largely in the form of requests to delay action until (anticipated) PURPA reform occurred, FERC chose to act. FERC granted both waivers, agreeing with prior statements that solar generation facilities installed at residences or other relatively small electric consumers such as retail stores, hospitals, or schools do not present a compelling need for QF registration. The burden of such filings was considered to be too great in light of the lack of benefits. The second waiver was granted for similar reasons, as the fact that new client homeowners are added frequently and existing client homeowners may at any time exercise their option to purchase their 20-or-less kW PV systems would create a major burden on entities with business models such as Sunrun.
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