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 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.
Continue Reading A New Mexico Federal District Court Tries to Slam Shut the PURPA “Implementation” Claims Window

The Legally Enforceable Obligation (LEO) concept is a construct of FERC that is used in one of FERC’s avoided cost pricing regulations, i.e., 18 CFR § 292.304(d)(2)(ii).  The date a LEO is formed is the date a QF is entitled to have its avoided cost rate determined, if it so elects.  Through the decades, state utility commissions have adopted a quite broad array of standards for when a QF has established a LEO with a purchasing electric utility.  In providing non-binding guidance on the topic, FERC has had relatively little to say about the LEO standard other than that the purchasing utility cannot control LEO formation by its own action or inaction, such as a refusal to sign a contract.  For example, FERC has opined that the LEO standard cannot depend on the willingness of the purchasing utility executing a contract with the QF, whether it be a power purchase agreement.  In 2016, FERC expanded on that view, opining that a state may not require that a purchasing utility sign an interconnection agreement before a LEO is formed.  In 2018, several states examined their LEO standards.

Early in the year, the Vermont Public Utility Commission upheld its rule that a LEO cannot be formed until regulatory approval of a proposed power purchase agreement by the Vermont PUC.

As a result of various legal actions, the Colorado Public Service Commission eventually changed its regulations to ensure that a QF could obtain a LEO without winning a competitive solicitation.

In a case before the Minnesota Public Utilities Commission, the state commission looked for a QF to have made a “substantial commitment” and found that one had been made (and a LEO formed) when a QF:  (1) had paid for the Facility Study, which established how interconnection could be achieved, (2) had executed a Land Lease and Wind Easement, (3) had obtained necessary approvals from government entities, (4) had wind study results, (5) had reserved equipment, and (6) had filed the Complaint with the Commission.
Continue Reading The Formation of Legally Enforceable Obligations: The Year in Review (2018)

As the industry continues to await action from FERC on PURPA in Docket AD16-16 or through a new rulemaking, various parties have submitted comments or pleadings in that docket and in other cases, that effectively take the position that QFs should not be accountable for knowing the laws and regulations to which they are subject. This same mindset may repeat itself when FERC adopts a Final Rule DER aggregation

As to PURPA, in August 2018 comments submitted by North American BioFuels (BioFuels), the company proposed making it a requirement that the purchasing utility to have received a copy of the Form 556 (or the equivalent) before the utility starts purchasing power from a QF.  That is, BioFuels proposes to shift the burden to the utility to ensure that a QF is in compliance with the law before buying power.  And, BioFuels seeks an amnesty period for QFs currently not in compliance with FERC’s requirements.  In October 2018, BioFuels enhanced its proposal with a legal paper suggesting that FERC has acted unlawfully in applying its standard time-value refund penalty for late-filed tariffs and agreements to QF-eligible entities who fail to timely file their self-certification form.  In a similar vein, QFs continue to argue to FERC in individual cases that the time-value refund penalty should not be imposed on them.  FERC generally has held steady in rejecting such pleas for relief in cases such as IGS ORIX Solar I.  Some QFs, such as York Haven, are taking these arguments further, arguing that QFs should be able to recover all of their fixed costs, thus effectively eliminating the time-value refund penalty.

Given that FERC provided notice to the QF community by issuing a rulemaking in 2005, these “remedies” are hardly necessary.  FERC has no broader way to communicate to the public than a rulemaking.  The time between the rulemaking being issued and the Final Rule (Order No. 671) being made effective that adopted the QF self-certification approach was about six months, plenty of time for a compliance process that BioFuels admits for renewable QFs is as “easy as pie” and takes only about 30 minutes.  Moreover, in the cases imposing the time-value refund penalties, FERC otherwise has excused late-filing QFs from the myriad other burdens of acting as public utilities for what has in some cases been years (i.e., MBR Tariff filing, EQR, etc.).  The “It should not be a QF’s responsibility to read FERC rulemakings” attitude reflects is troubling.  “Ignorance of the law IS an excuse!” is a very poor policy when it comes to electricity, which, although a product that provides light, is a product that cannot be taken lightly.  When laws and regulations concerning electricity are not followed, the results can be lethal.
Continue Reading QF & DERs: Ignorance of the Law Is No Excuse

With comments having been filed in response to two dockets focused on DERs, this blog will examine comments filed in the rulemaking docket (Participation of Distributed Energy Resource Aggregation in Markets Operated by Regional Transmission Organizations and Independent System Operators), Dkt. No. RM18-9 and (1) identify the key takeaways from differing sets of stakeholders (including