United States: Court Holds Federal Law Preempts California Regulations Promoting Renewable Energy Projects

Last Updated: December 19 2017
Article by Tara S. Kaushik

Tara Kaushik is a Parter in the San Francisco office

Highlights:

  • A solar developer claimed that California Public Utilities Commission (CPUC) orders promoting solar and wind generation under 3 megawatts (MW) prevented it from securing a contract from a utility under the Public Utility Regulatory Policies Act (PURPA).
  • U.S. District Court held that federal law preempts CPUC orders regulating such contracts.
  • The case leaves uncertain what will happen with the current contracts utilities have executed with developers under the CPUC program. As California pushes forward with aggressive renewable energy goals, it will need to structure programs carefully to supplement federal contracts and regulatory pricing for qualifying facilities.

Background

Winding Creek Solar LLC, a solar developer, filed this action in 2014 against the CPUC for a declaration that three CPUC orders conflict with federal law and consequently violate the Supremacy Clause of the United States Constitution.  Winding Creek proposed building a solar project in Lodi, California, and it sought a long-term contract to sell the energy from the project to PG&E. It claimed the CPUC orders prevented it from getting a contract.

California has aggressive goals to procure 50 percent of its electricity from renewable energy resources by 2030. To that end, the CPUC set up a feed-in tariff called the "Renewable Market-Adjusting Tariff" (Re-MAT) in 2013 requiring utilities to offer long-term contracts to renewable energy projects under 3 MW, with a statewide cap of up to 750 MW of generation that the utilities had to purchase. Each investor-owned utility was assigned a share of the generation it had to purchase. The price would vary depending on the category of power (baseload, peaking or non-peaking) and an auction that each regulated utility would hold every two months. 

The CPUC designed the price to respond to changes in generator interest and costs to construct and operate generation facilities, so that ratepayers could benefit from what appear to be increased supply and falling prices. 

Federal Preemption

Winding Creek claimed that the 750 MW cap and the prices set by the Re-MAT program conflicted with PURPA, which requires utilities to purchase renewable energy generation (with no cap) from projects less than 80 MW at the "avoided costs", or the costs the utility would have spent to procure electricity from another source. Both Winding Creek and the CPUC moved for summary judgment of the case.

The CPUC claimed its program pricing is properly based on utilities' avoided cost rates, and that its standard contract satisfies the pricing requirements under PURPA, so the CPUC was free to have alternative programs like Re-MAT even if those additional programs may not be PURPA-compliant.

The Court disagreed. As PURPA contains no cap on the generation a utility must purchase, the Court held that the 750 MW cap of the Re-MAT program conflicted with PURPA. The Court also held that although California's program set prices based on avoided costs, it did not offer the same pricing choices as PURPA did. 

Accordingly, the Court granted Winding Creek's motion for summary judgment.

What Happens Now?

This case leaves an uncertain path for renewable energy developers who have executed contracts with California utilities under the Re-MAT program. The contracts may be subject to renegotiation, as the CPUC will likely re-examine its Re-MAT tariff requirements in light of this case.  The State may also appeal this case, as its regulations likely never intended to prevent renewable energy developers from securing utility contracts. 

There's no doubt that federalism issues will continue to play a key role in such cases as California pushes forward with its efforts to combat climate change. In light of previous precedent such as Hughes v. Talen Energy Marketing, more of these challenges are likely to occur. The State will have to carefully structure its programs promoting renewable energy and distributed generation, as the Federal Energy Regulatory Commission seeks comments on ways to amend PURPA and to implement the U.S. Department of Energy's directive to reexamine the price that should be paid for coal and nuclear generation.

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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