Friday, November 4, 2016

PURPA Haze Begins to Clear

By Ed Jewell, Energy Fellow
A recent opinion from the District Court of Massachusetts may help clarify an important provision in the Public Utility Regulatory Policies Act of 1978 (PURPA), an important law for renewable energy development. The case is Allco Renewable Energy v. Massachusetts Electric Co., and the provision at issue establishes a “legally enforceable obligation” (LEO).

PURPA is the original instigator of renewable energy grid interconnection in the United States. It is long running, under-appreciated, and is still as important as ever. PURPA provides an energy generating facility that meets certain size and resource restrictions (a qualifying facility or “QF”) with a set of guarantees. PURPA requires the utility in whose service area the QF is constructed to 1) allow the QF to plug into the utility’s grid, 2) buy the electricity generated by the QF, and 3) pay avoided cost rates for the electricity purchased.

In order to realize these guarantees, the Federal Energy Regulatory Commission (FERC)—the expert federal agency responsible for the statute—recognized that a QF developer would need to obtain financing in order to construct the project. In order for a QF developer to obtain financing, FERC created the concept of a LEO, which allows the QF developer to lock in what are known as avoided cost rates at the time a LEO is created with the utility. Avoided cost rates represent an approximation of the price that the utility would pay for power if it were to solicit proposals for a least-cost facility or construct such a facility on its own. With the avoided cost rate locked in, the QF developer is able to show a steady and predictable source of income throughout the term of the LEO, which she can take to the bank in order to obtain construction capital.

Quick review: under PURPA, a QF gets a LEO (a concept created by FERC) to show the bank in order to obtain construction capital to build its renewable energy facility. 

PURPA is an example of cooperative federalism, a regulatory model in which the federal government sets a standard that states must implement. However, one person’s implementation is another person’s evisceration. State PUCs have taken a variety of stances on how to implement PURPA ranging from diligent implementation to thinly veiled hostility aimed at slowing the development of renewable energy.

The quintessential example of a state PUC undermining PURPA through crafty rulemaking occurred in Texas, a rule that the Fifth Circuit Court of Appeals deferred to in Exelon Wind v. Nelson. As explained in more detail in GEI Director Melissa Powers’ previous Charged Debate blog post, the Fifth Circuit’s decision eviscerated the PURPA requirement that utilities purchase electricity from “each” QF. The Fifth Circuit did so by upholding a Texas PUC rule that only allowed QFs producing “firm” (ie, guaranteed) power to enter into a LEO with the utility. Solar and wind technologies without on-site energy storage, which is not yet economically available in most markets, do not meet the definition of firm power.

The Fifth Circuit reached this conclusion despite regulations that state “each” QF “shall” be entitled to sell its “electricity or capacity” to the utility. And, as explained in Staff Attorney Amelia Schlusser’s follow-up blogpost on the subject, the Fifth Circuit also failed to apply bedrock administrative law principles such as deference to the expert federal agency that authored the regulations. Exelon Wind thus demonstrates the analytical gymnastics that some state PUCs and federal courts are willing to engage in to maintain a closely held yet unsupported notion of states’ rights at the expense of sensible jurisprudence. The Exelon Wind decision misinterpreted the structure of the LEO provision, gave an undue amount of deference to the state PUC interpretation, and set a dangerous precedent that threatened to undermine the effectiveness of PURPA implementation around the country. 

Given the troubling Exelon Wind decision, it is heartening that the Allco Renewable opinion refused to follow the Fifth Circuit’s flawed analyses on deference and regulatory interpretation and instead decided to hew to a line more faithful to the language and purpose of PURPA and its implementing regulations. In Allco Renewable, the District Court of Massachusetts rejected the main contention of the Texas PUC, accepted in Exelon Wind, that the structure of the regulation that establishes a LEO must be read creatively so as to avoid superfluity. By denying the contention that the plain language of the regulation could not govern, the District Court of Massachusetts freed itself to interpret the language of the regulation sensibly. In doing so, the District Court of Massachusetts recognized that although state PUCs are entitled to “some deference” in implementing PURPA, “whatever latitude the MDPU is given to implement FERC’s PURPA rules does not justify an implementation that plainly conflicts with those rules.”
In order to allow the plain language to control, the District Court of Massachusetts answered—with the help of a FERC amicus brief—the question that stumped the Fifth Circuit, ie why would a QF entitled to a LEO not enter into a LEO? The court sensibly reasoned, “a QF that values flexibility and is willing to keep both upside and downside risks may choose an as-available sale even if a [LEO] is an option.”

The question in Allco Renewable was whether the PUC could set an avoided cost rate set according to the prevailing price on the New England ISO spot market. The court decided that allowing the PUC to do so would hollow out the guarantee of PURPA that each QF shall have the option of entering into a LEO with a price set at the time the LEO is entered into. The court recognized the importance of the LEO provision and the fixed avoided cost rate to the bankability of the project, and refused to allow the state PUC rule to undermine the critical function played by a LEO in implementing the mandates of PURPA.
The Fifth Circuit did not have the benefit of hearing from FERC in Exelon Wind. Under PURPA, FERC has the option to bring an enforcement action, either of its own volition or in response to a petition from a QF, intervene as a matter of right if it refuses to bring an enforcement action, or file an amicus brief stating its interpretation of the law. FERC’s failure to engage in any of these options left counsel for Exelon Wind in the awkward position of arguing for deference to a federal agency that did not bother to present itself in any manner before the court. In contrast, the Allco Renewable court makes note of FERC’s presence at the beginning of its opinion, “This Court relies extensively on the Brief of Amicus Curiae Federal Energy Regulatory Commission (“FERC”), which explains the relevant statutory and regulatory background.”

Thus, the Allco Renewable opinion is notable because 1) it cast doubt upon the reasoning of the Exelon Wind majority by diverging analytically and 2) FERC seems to have learned from the Exelon Wind decision that its guidance is necessary. 

PURPA and the FERC regulations implementing it are full of undefined terms, and energy law is a swampy mix of arcane statutes and regulations, economic considerations, and blurry federal/state jurisdictional lines. If FERC wants to disallow states from undermining the purpose of PURPA, it must at least file an amicus brief to explain the regulations and the reasoning behind the language to the judges who are not as steeped in energy law minutiae as FERC. When FERC provides its interpretation of the statute, it makes it much easier for the court to arrive at a logical conclusion.

While it is still too early to tell from one District Court opinion, there is now hope that the PURPA haze created by the Fifth Circuit will be cleared up and the statute will continue to be an important foundation to the renewable energy revolution. With a little bit of help from FERC, that is. 
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