United States: Massachusetts Federal Court Ruling Helps Clarify QFs' Rights To Avoided Cost Rates

Meredith L. Hiller is an associate in Holland & Knight's Boston office

HIGHLIGHTS:

  • A federal court in Massachusetts recently issued an important ruling that helps explain the rights PURPA qualifying renewable energy facilities enjoy in deregulated states when asserting the mandatory purchase obligation against the local electric utility.
  • This important decision could also help renewable energy project developers in other deregulated states, as it relied on the plain meaning of the PURPA statute and FERC's regulations in considering whether a state regulatory authority's regulations were consistent with federal requirements.

In Allco Renewable Energy Ltd. v. Massachusetts Electric Company d/b/a National Grid (2016 WL 5346937), Allco Renewable Energy Limited (Allco) filed a lawsuit in federal court in Massachusetts against National Grid and the Commissioners of the Massachusetts Department of Public Utilities (MPDU) and the Massachusetts Department of Energy Resources (MDOER) claiming:

  • National Grid violated the Public Utility Regulatory Policies Act (PURPA) by refusing to enter into a long-term contract to purchase electric energy from Allco's solar energy projects at a specified rate
  • the MDPU regulations National Grid cited to refuse to enter into the long-term agreement were inconsistent with PURPA and therefore invalid.

Congress enacted PURPA in 1978 to reduce dependence on traditional fossil fuels by encouraging development of nontraditional electricity generating resources, such as renewable generation. One problem for renewable project developers was the traditional utilities' reluctance to do business with such non-utility generating projects, so PURPA included a directive that the Federal Energy Regulatory Commission (FERC) promulgate rules requiring utilities to purchase electric energy from such qualifying facilities (QFs). 

PURPA requires that those electric energy purchases be at rates not above the avoided cost, which is the cost to the utility of the electric energy it would have otherwise generated or purchased from a source other than the QF. The related FERC rules provide two options for how QFs can provide energy to utilities:

  • at rates based on the purchasing utility's avoided costs calculated at the time of delivery
  • under a legally enforceable obligation for the delivery of energy or capacity over a specified term in which case the rates shall be, at the QF's option, based on either the avoided costs calculated at the time of delivery or the avoid costs calculated at the time the obligation is incurred.

State public utility commissions must implement the FERC rules, which the MDPU did under its regulations at 220 C.M.R. § 8.00. In Massachusetts, a QF may sell to a utility under either a standard contract for all QF sales at the short-run rate or under a negotiated contract between a QF and a utility. The short-run rate is the hourly market clearing price for energy and the monthly market clearing price for capacity as determined by ISO New England, Inc. (ISO-NE), the regional transmission operator for New England. For QFs one megawatt or greater, the output must be metered and purchased at rates equal to what the utility received from ISO-NE for the output for the hours in which the QF generated electricity above its requirements, making the avoided cost rate for those facilities the same as the ISO-NE spot market rate.

Allco offered to sell all of the generation output from several solar QFs in Massachusetts to National Grid under 25-year contracts with two pricing options, both of which National Grid rejected, instead proposing that it would purchase that energy at the rate from its P Tariff, which was the same as the ISO-NE spot market rate. After Allco requested that the MDPU investigate the reasonableness of this response and the MDPU declined, Allco asked FERC to initiate an enforcement action against the MDPU, which the FERC declined to do, leading Allco to file suit against the MDPU and National Grid in the U.S. District Court. Allco sought a declaration that the MDPU regulations were invalid and that National Grid had a legally enforceable obligation to purchase energy and capacity from Allco's QFs at a forecasted avoided cost rate for 25 years, as well as relevant damages from National Grid. 

The U.S. District Court found that under PURPA, while a private party can challenge the validity of a state implementation by bringing a claim against the applicable state regulatory authority, it cannot bring such a claim against an electric utility directly, and dismissed Allco's complaint against National Grid. The court agreed with Allco that the MDPU rule was invalid, however, finding that the MDPU rules prevented QFs from being able to receive the avoided cost rate calculated at the time the obligation is incurred, since it only allowed the spot market rate to be used. The court found this was not proper implementation of the FERC regulations as PURPA mandated, since the plain language of the FERC regulations provided for a different rate. The court also cited FERC's consistent affirmations of QFs' rights to long-term avoided cost contracts or other legally enforceable obligations with rates determined at the time the obligation is incurred, even if different than the avoided cost at the time of delivery. Further, the court noted that a utility making a purchase under a long-term forecasted rate bears the risk that prices will drop in the future while the QF faces the corresponding risk that prices will rise. 

Practically speaking, QF developers can take comfort knowing that even in competitive markets in which the traditional utility no longer owns generating facilities, a federal court has held that the clear language of the FERC regulations under PURPA give them options. Such QFs can choose either the avoided cost rate calculated at the time the obligation is incurred or at the time of delivery, and a state regulatory authority's elimination of one of those two options would be an invalid interpretation of the FERC regulations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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