On July 29, 2019, the U.S. Court of Appeals for the Ninth Circuit (“Ninth Circuit”) issued a decision in Winding Creek Solar LLC v. Peterman affirming a district court’s finding that the California Public Utilities Commission’s (CPUC) implementation of the Public Utility Regulatory Policies Act of 1978 (PURPA) did not meet the statutory requirements with respect to renewable generation developers’ contracting opportunities with electric utilities. While the decision is a victory for renewable generation developers in California and, potentially, elsewhere, it also highlights the limits of states’ flexibility with respect to PURPA implementation absent statutory and regulatory changes.
Brief Background on PURPA
Congress enacted PURPA in 1978 to, among other things, promote the use of non-utility owned domestic renewable energy resources. A key element of PURPA is the “must take” requirement, which requires electric utilities to purchase the power produced by small generating facilities called “Qualifying Facilities” (QFs) at the utility’s “avoided cost” (i.e., the cost the utility would have incurred to produce the power itself or contract from another source). Pursuant to the Federal Energy Regulatory Commission’s (FERC) implementing regulations, QFs have the option of having the “avoided cost” rate determined at the time the QF delivers electricity to the utility or, alternatively, at the time the QF enters into a power purchase agreement with the utility (which is often before the generation facility is developed). The Energy Policy Act of 2005 amended PURPA to remove utilities’ “must take” obligation for most QFs greater than 20 MW if they have access to competitive wholesale markets. However, the “must take” obligation remains with respect to QFs less than 20 MW.
California’s PURPA Programs
The CPUC implements PURPA through several programs. Winding Creek Solar LLC (“Winding Creek”), the developer of a one MW solar QF in Lodi, California, was eligible to participate in two of these programs: the Renewable Market Adjusting Tariff (Re-MAT) program and the “Standard Contract” program. Re-MAT, which took effect in 2013, is a feed-in tariff program for QFs that are three MW or less. QFs accepted to Re-MAT are assigned to a queue on a first come, first served basis. Every two months, the local utility offers the QFs at the head of the queue contracts at the predefined Re-MAT price, which QFs can accept or reject. QFs that reject the contracts maintain their queue position for future offerings. The total volume of energy utilities are required to purchase through Re-MAT is administratively capped such that not all eligible QFs can receive Re-MAT contracts. The Re-MAT price offered to QFs adjusts based in part on market forces. The Standard Contract program is an alternative to Re-MAT and does not cap the amount of energy a utility is required to purchase. The Standard Contract offers QFs an avoided cost rate using a formula based on a number of variables, some of which cannot be determined at the time of contracting (i.e., burner tip gas price, market heat rate and a location adjustment factor).
Winding Creek’s Challenge to Re-MAT and California’s PURPA Implementation
Winding Creek was accepted into the Re-MAT program but, because it was not placed near the top of the queue, did not receive a Re-MAT contract offer from its local utility at the initial price of $89.23/MWh. Winding Creek subsequently received a contract offer in March 2014, but rejected the offer since the applicable Re-MAT price had dropped to $77.23/MWh and Winding Creek could not develop its facility at that price.
Winding Creek initially challenged the Re-MAT program at FERC, arguing that Re-MAT and, in particular, its cap on the amount of electricity utilities were obligated to purchase from eligible QFs, violated PURPA. FERC found that Re-MAT, even if itself not compliant with PURPA, did not render California in violation of PURPA since Re-MAT was merely an alternative to the Standard Contract option, which allows eligible QFs to enter avoided cost contracts with utilities without any cap on utilities’ purchase obligations.
Winding Creek subsequently filed a lawsuit in the U.S. District Court for the Northern District of California against the CPUC, arguing that Re-MAT violated PURPA by capping utilities’ purchase obligations and setting a market based rate (albeit administratively determined) rather than one based on the utilities’ avoided cost. The district court granted summary judgment in favor of Winding Creek. The court agreed with Winding Creek that Re-MAT’s volume cap and pricing mechanism did not comply with PURPA. The court rejected the CPUC’s primary defense that the Standard Contract program did offer a PURPA-compliant contracting option. The court agreed with Winding Creek that while the Standard Contract option did not improperly cap the volume of utilities’ purchase obligations, its single pricing mechanism—which considers variables not known at the time of contracting—was insufficient since QFs must be afforded the choice of an avoided cost rate determined at the time of contracting or, alternatively, at the time of delivery of energy.
The Ninth Circuit’s Decision in Favor of Winding Creek
In its July 29 decision, the Ninth Circuit affirmed the district court’s determination that Re-MAT violated PURPA. The court agreed that Re-MAT’s volume limitation and pricing mechanism ran afoul of PURPA. Like the district court, the Ninth Circuit agreed that if the Standard Contract program was PURPA-compliant, the parameters of the Re-MAT program would not render California out of compliance with PURPA. However, the Ninth Circuit agreed with the district court that the Standard Contract program itself was not PURPA-compliant due to its singular pricing mechanism.
The Ninth Circuit’s decision is a win for renewable generation developers in California and, potentially, elsewhere (including other western states governed by Ninth Circuit law). Although states have some flexibility in implementing PURPA, the decision highlights the limits states face (even states, like California, that are supportive of renewable generation) given the statutory and regulatory requirements of PURPA.
The decision also comes at a time when PURPA is subject to increasing debate. While supporters argue PURPA continues to play an important role in promoting the development and use of renewable energy, others argue the statute—in particular, the “must take” requirement—is dated given the energy market and policy developments that have occurred since 1978, and no longer in the best interests of energy consumers. FERC is in the process of reviewing its rules for implementing PURPA, and there have also been efforts in Congress to make changes to PURPA. Such changes could potentially give state regulators like the CPUC greater flexibility in implementing PURPA than they are currently afforded under the statute and FERC’s implementing rules.