Exelon Wind v. Nelson: The Fifth Circuit’s Questionable Legal Analysis

By Amelia Schlusser, Staff Attorney

This post continues the discussion raised by GEI DirectorMelissa Powers’s post regarding the Fifth Circuit’s recent decision in Exelon Wind v. Nelson. In that decision, a majority of the court ruled that states have discretion to preclude some types of Qualifying Facilities (QFs) from entering into long-term contracts to sell the renewable energy they generate. This holding disregards the plain language of PURPA and the statute’s federal implementing regulations. Moreover, in reaching its decision, the court inappropriately deferred to the Texas Public Utilities Commission (PUC) rather than the Federal Energy Regulatory Commission (FERC).

As Melissa explained, PURPA requires utilities to purchase electricity generated by qualifying renewable energy facilities, and directs FERC to promulgate rules that facilitate this purchase mandate. FERC subsequently issued regulations that give “[e]ach qualifying facility” the option to either 1) sell power on an as-available basis, or 2) “provide energy or capacity pursuant to a legally enforceable obligation for the delivery of energy or capacity over a specified term.” While this provision clearly grants “each” QF the option to enter into a legally enforceable obligation, in 2002 the Texas PUC amended its rule implementing FERC’s regulation to allow QFs to only make sales of “firm power” through legally enforceable obligations. QFs generating “non-firm power”—which includes power produced through existing wind energy technologies—may only sell their generation on an as-available basis.

The court’s decision to uphold the Texas PUC rule was largely influenced by the 2005 Power Resources III decision in which the Fifth Circuit held that “a state has broad authority to implement PURPA with respect to the approval of purchase contracts between utilities and [QFs].” Using this quoted language as support, theExelon majority concluded that the PUC’s implementation of PURPA was entitled to deference. In doing so, the court disregarded both the plain language of the FERC regulation and longstanding Supreme Court precedent regarding the level of deference an agency is entitled to receive in interpreting ambiguous regulations.

For decades, courts have followed a two-step approach to statutory and regulatory interpretation established by the Supreme Court’s Chevron and Auer doctrines. The first step to interpreting the meaning of a statutory or regulatory provision is to determine whether the relevant provision is clear or if the text is ambiguous. If the court concludes the provision is unambiguous, it will state what the provision means. If the regulation is instead open to more than one reasonable interpretation, the court will defer to an agency’s interpretation as long as the agency is authorized to interpret the meaning of the provision and the agency’s interpretation is reasonable and consistent with the text. Under these doctrines, courts should thus defer to a federal agency’s interpretation of its own regulation unless the interpretation is clearly erroneous or inconsistent with the regulation at issue.

To understand the flaws in the majority’s reasoning, it helps to first review the Judge Prado’s well-reasoned dissenting opinion. Applying Step One of the Chevron and Auer doctrines, Judge Prado determined that the plain language of the regulation unambiguously enabled qualifying non-firm power generators to sell power pursuant to legally enforceable obligations. Under the dissent’s reading of the regulatory text, “[e]ach qualifying facility” meant every qualifying facility, and therefore every QF had the option to choose between the two payment structures. Because the plain meaning of the regulatory provision was clear, the Texas PUC’s rule was inconsistent with the federal regulation.

The Exelon majority, however, inexplicably chose to disregard the interpretive framework established by the Supreme Court, and its analysis regarding the meaning of the regulation was disjointed and conflicting. First, the majority concluded that the regulation did not require that all QFs be allowed to form legally enforceable obligations because the regulation did not specifically address whether non-firm energy providers could enter into these agreements. Thus, because the regulation did not explicitly state that “legally enforceable obligations” are available to both firm and non-firm generators, the majority determined that Congress must have intended for state PUCs to decide which QFs could enter into long-term contracts. The majority further decided that interpreting the regulations to allow any QF to choose to either sell power on an as-available basis or through a legally enforceable obligation would render the option to sell power on an as-available basis unnecessary or “superfluous.” Under the majority’s logic, the PUC’s rule was justifiable because FERC could not have intended to give non-firm QFs the freedom to choose between the two pricing structures because these generators would never conceivably select to sell power on an as-available basis.

Judge Prado’s dissent challenged the validity of the majority’s conclusions regarding the meaning of the regulatory text. The dissent argued that the majority’s focus on the term “legally enforceable obligation” was misguided. According to Judge Prado, the relevant provision was the language granting “[e]ach qualifying facility” the option to choose to enter into a legally enforceable obligation. In other words, the meaning of “legally enforceable obligation” was irrelevant; all that mattered was that every QF “shall have the option” to form one. 

Under Judge Prado’s reading of the regulation, the plain meaning of the text was clear: every QF must have the opportunity to choose between the two payment options. Because the text was unambiguous, the court was required to give effect to that meaning, and had no reason to continue on to Step Two of the Auerdoctrine, which considers whether an agency interpretation of an ambiguous provision is entitled to deference. The majority, however, conducted a deference analysis, though its reason for doing so and the approach it chose to follow were not in accordance with the Supreme Court’s interpretive doctrines. In doing so, the majority irrationally concluded that it was required to defer to the Texas PUC’s interpretation of the federal regulatory text, and determined that FERC’s interpretation of its own regulation was not entitled to deference because this interpretation was “unambiguously foreclosed by the regulatory text.”

To fully appreciate the shortcomings of the majority’s analysis, it is useful to understand the background surrounding FERC’s interpretation of the regulation at issue. In June 2007, Exelon had filed a complaint with the Texas PUC after the utility, Southwestern Public Service Company, had refused to buy Exelon’s power pursuant to a legally enforceable obligation (as required under FERC’s regulation). In response, the Texas PUC issued an Order declaring that Exelon’s power was not “firm,” and thus Exelon could not create a legally enforceable obligation with the utility. Exelon then filed a request for enforcement with FERC. FERC declined to commence an enforcement action against the Texas PUC, but it did issue a Declaratory Order letter stating that the Texas PUC’s Order was inconsistent with federal regulations. FERC also clarified that under its regulations, a QF is entitled to form a legally enforceable obligation for sales of non-firm power.

Under the Auer doctrine, FERC’s interpretation of its regulation in its Declaratory Order should be entitled to deference. The Fifth Circuit majority, however, determined that FERC’s interpretation was not entitled to deference, because the Power Resource III court had previously held that FERC’s regulation “unambiguously” gave the state authority to establish the requirements for forming a legally enforceable obligation. Under the majority’s rationale, the court was required to defer to the Texas PUC’s assertion that the state agency had properly implemented the federal regulation, even though the federal agency responsible for promulgating and implementing the regulation argued that the PUC’s actions were inconsistent with the regulations.

According to Judge Prado’s dissent, after departing from the plain meaning of the statute, the majority was wrong to refuse to defer to FERC. In other words, had the regulation actually been ambiguous (which, according to the dissent, it was not), the court was obligated to defer to FERC’s reasonable interpretation of its regulation. The majority therefore erred when it rejected FERC’s interpretation, “based on nothing more than the state regulatory authority’s say-so.” “In doing so,” Judge Prado opined, “the majority contravene[d] established principles of interpretation and administrative law and disrupts the scheme that Congress intended,” and improperly upheld a Texas PUC rule that facially conflicts with the federal regulatory requirements.

In conclusion, Judge Prado’s dissent cautioned that the majority’s approach has potentially far-reaching consequences, and will prevent PURPA from achieving its statutory purpose to advance the market for renewable and alternative energy. As Melissa Powers notes, this decision could significantly and negatively impact renewable energy development throughout the country for years to come. The implications and potential ramifications of the majority’s decision are enormous, yet the opinion was the product of flawed legal analyses and questionable logic. The Exelon decision appears more grounded in political ideology than impartial analysis of federal law, and it reflects poorly on the state of our judicial system as a whole. I share Professor Power’s concerns on the far-reaching implications of this decision, and hope the majority’s ruling is overturned through rehearing.