United States: The Light Shines For CA QFs: The Ninth Circuit Finds PURPA Preempts CA Renewable Energy Program

Tara S. Kaushik is a Partner and Kevin John Ashe is an Associate in our San Francisco office.

On July 30, 2019, a Ninth Circuit Court of Appeal panel unanimously held that the federal Public Utility Regulatory Policy Act (PURPA) preempts two components of California's Renewable Market Adjusting Tariff (Re-MAT) program. Specifically, the court in Winding Creek Solar, LLC v. Peterman et al.1  found that the California program violated PURPA because it (i) placed a cap on the amount of energy electric utilities must purchase from alternative energy facilities, and (ii) used a predetermined, market-based contracting price rather than the "avoided cost" price. The decision not only represents a victory for small renewable power producers, but reaffirms PURPA's primacy in states with existing renewable energy procurement and contracting regimes. It will likely change the procurement contracts for distributed generation with California utilities.

Background

In 2012, the California Public Utilities Commission (the Commission) established Re-MAT, a feed-in tariff program for small renewable producers less than 3 MW. Under Re-MAT, energy purchased by California's three investor-owned utilities (IOU) are counted towards their renewable procurement targets, but the Commission placed a 750 MW statewide cap on participation in the IOUs Re-MAT programs. Additionally, the Commission established a market-based pricing formula under Re-MAT that diverged from the "avoided cost" standard. Specifically, Re-MAT offers three different prices for various service types: (1) baseload, (2) peaking as-available, and (3) non-peaking as-available. The prices for each product type may vary and are subject to upwards or downward adjustments every two-month contract cycle.

Enacted in 1978, PURPA sought to diversify the electric power industry and reduce dependence on fossil fuels through promoting alternative energy sources. Subject to a few exceptions, PURPA requires electric utilities to buy all the power produced by Qualifying Facilities ("QFs"), known as the "must-take" requirement. More so, a utility must purchase the energy at the price the utility would have paid to generate the energy itself or obtain the energy from non-QF sources (known as the "avoided cost.") QFs are guaranteed a choice: they can calculate the avoided cost at the time contract or the time of delivery.

Winding Creek's Challenge and the Ninth Circuit's Decision

Winding Creek Solar, LLC ("Winding Creek") sought to develop a 1 MW solar facility in Lodi, California and sell the project's energy to Pacific Gas & Electric Company ("PG&E"). Under the Re-MAT program, PG&E was obligated to purchase no more than 5 MW of "baseload," "non-peaking, as-available," and "peaking, as-available" generation on a bi-monthly basis. During PG&E's first Re-MAT offering, the price for peaking as-available was $89.23 per megawatt hour. After its acceptance into the Re-MAT program, Winding Creek received an offer in March 2014 to provide the same solar service at $77.23 per megawatt hour. Winding Creek rejected this and subsequent lower offers, claiming it could not develop the project at such costs.

In December 2017, the U.S. District Court for the Northern District of California granted summary judgment in favor of Winding Creek,2 finding that the Re-MAT's cap violated the "must-take" obligation under PURPA, and the pricing scheme ran afoul of PURPA's "avoided cost" mandate.

The Ninth Circuit noted that under Re-MAT, PG&E was only allowed to purchase up to 5 MW of energy from each of the three categories in a two-month period. "As a result, a utility could purchase less energy than a QF makes available, an outcome forbidden by PURPA."3 Second, the Court found that Re-MAT's pricing violated PURPA. Although states may take a variety of factors into account when calculating avoided costs, the Court found that the Re-MAT prices were "arbitrarily adjusted every two months" and thus stray too far from a utility's avoided cost.4

The Commission argued that the Re-MAT program ensures a balance, where utility ratepayers are not paying for contracts that are higher than the market price, or paying a price that is lower than what the market will bear. The Commission also pointed out that it complied with PURPA because an alternative California contracting mechanism — the "Standard Contract" for QFs — satisfied PURPA. Unlike Re-MAT, the Standard Contract does not cap the amount of energy a utility can purchase from QFs and does allow avoided cost pricing. The Court was unpersuaded. It noted that the Standard Contract's formula for calculating avoided cost relies on variables unknown at the time of contracting, and thus deprives QFs the option to calculate avoided cost at the time of contracting.

Implications

The Winding Creek decision affirms PURPA's primacy, especially in Western states with lofty renewable energy procurement targets and existing implementing programs. However, it also means state commissions will continue to grapple with balancing the protection of ratepayers from higher than market prices, and promotion of renewable energy markets. Should the Commission decide not to seek review before the Supreme Court of the United States, it will need to revise the Re-MAT program (and Standard Contract) in a new rulemaking proceeding. The Commission has already put a "freeze" on Re-MAT program applications and contracts since December 15, 2017, in response to the District Court's decision. Current contracts are still enforceable.

This would not be the first time a state public utility commission revised a program based on PURPA considerations. For example, on June 12, 2019, the Washington Utilities and Transportation Commission adopted General Order R-597 to better align the state's renewable procurement program with PURPA. The Commission, as well as other state regulatory agencies, will need to review their existing regulatory regimes in light of this recent precedent. In a market where contract prices fluctuate quickly for solar and other renewable energy resources, we can expect other QF developers to challenge similar state programs as inconsistent with PURPA, to benefit their projects.


Notes

1No. 17-17531 (9th Cir. 2019)

2Winding Creek Solar LLC v. Michael Peevey, et al., Case 3:13-cv-04934-JD (N.D. Cal).

3No. 17-17531 (9th Cir. 2019) at 9.

4Id.

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