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Energy Law Exchange

August 8, 2019

The Ninth Circuit Affirms that California QF Contracts Do Not Comply with PURPA


On July 29, 2019, the United States Court of Appeals for the Ninth Circuit issued its decision in Winding Creek Solar LLC v. Peterman et al, Case Nos. 17-17531, 17-17532 (9th Cir. July 29, 2019), which affirmed the judgment of the federal district court that a Renewable Market Adjusting Tariff (“Re-MAT”) established by the California Public Utilities Commission (“CPUC”) violates, and is therefore preempted by, the requirements under the Public Utility Regulatory Policies Act of 1978 (“PURPA”) (slip op. at 9).  Further, the court affirmed the district court’s finding that the CPUC’s Standard Contract offering for qualifying facilities (QF) 20 Megawatts (MW) or less also violates PURPA, notwithstanding a contrary interpretation by the Federal Energy Regulatory Commission (“FERC”) (slip op. at 10–11). 

PURPA requires that an electric utility purchase all the energy that a qualifying facility (QF) makes available at a rate derived from the electric utility’s “avoided costs.”   FERC’s regulations implementing PURPA allow QFs to choose an avoided cost rate calculated at the time the obligation is incurred or at the time of delivery.  18 C.F.R. § 292.304(d)(2).  The Ninth Circuit affirmed that Re-MAT violates PURPA because it caps the amount of energy electric utilities must purchase from QFs and arbitrarily adjusts the contract price every two months according to the willingness of QFs in the queue to sell energy to the utilities at the pre-defined contract price.  The CPUC argued that even if the Re-MAT program failed to comply with PURPA, the Standard Contract complied with PURPA and was available to all QFs 20 MW or less.  The court rejected the CPUC’s argument and affirmed the district court’s determination that the Standard Contract also violates PURPA.  Although the Standard Contract does not cap the amount of energy utilities must buy and offers an avoided-cost rate, the Ninth Circuit observed that three of the six variables used to set the avoided cost rate under a Standard Contract (burner tip gas price, market heat rate and a location adjustment factor) “are impossible to determine at the time of contracting,”  (slip op. at 7-8).   The court affirmed that the Standard Contract violates PURPA, as it “relies on variables that are unknown at the time of contracting” (slip op. at 10). 

The Ninth Circuit further noted that FERC made a contrary finding with respect to the Standard Contract’s compliance with PURPA and FERC’s own regulations implementing PURPA.  FERC’s view was that the Standard Contract “….provides QFs the opportunity to enter into long-term legally enforceable obligations at avoided-cost rates….” (slip op. at 10), citing Winding Creek Solar LLC, 153 FERC ¶ 61,027, 2015 WL 6083932 (2015), denying reconsideration of Winding Creek Solar LLC, 151 FERC  ¶ 61,103 (2015).  The court disagreed.  The court found it “plain from the face of the [FERC ] regulations” that the Standard Contract fails to offer QFs the rate options the regulations require.  Thus, the court stated that it would not “defer to FERC’s unreasoned conclusion to the contrary…” under Auer v. Robbins, 519 U.S. 452 (1997) (slip op. at 10).  Citing the Supreme Court’s decision in Kisor v. Wilkie ____ U.S.  ____, No. 18-15, slip op. at 11-19 (June 26, 2019), the court stated that Auer deference is only appropriate if the regulation being interpreted is “genuinely ambiguous” and the agency’s interpretation “reflect[s] fair and considered judgment.” (slip op. at 10).   

In August 2018, the CPUC initiated proceedings to revisit and revise its existing Standard Contract offering to QFs 20 MW or less.  (The Standard Contract is the only offering available to QFs in California.  The CPUC suspended the Re-MAT tariff in 2017).  With the Ninth Circuit having affirmed that the Standard Contract is preempted by federal law, it is reasonable to expect that, before long, the CPUC will conclude these proceedings and issue a new Standard Contract that offers QFs avoided cost that comply with PURPA and FERC’s regulations.