Perhaps the easiest means for a state to provide a subsidy to a preferred generation/resource type or class is to mandate purchases from that class at state-mandated rates. The typical reaction of a FERC attorney to such a claim should be, well that approach is simply illegal; states cannot compel utility purchases outside the bounds of PURPA. Indeed, in the last fifteen years, FERC has said so at least twice – when state -mandated purchase programs were challenged by California's investor owned utilities and the New England Ratepayers Association. FERC resolutely held that mandated purchases were limited to purchases from QFs under PURPA at avoided cost rates. The Supreme Court rejected a (somewhat) less obvious means for states to mandate subsidized wholesale purchases in Hughes v. Talen. But, these cases do not mean that state programs that mandate purchases outside of the PURPA avoided cost construct have been eliminated, even where organized wholesale markets exist. Many such programs still exist, in any number of forms, including net metering programs that pay cash at the end of a time period at above an avoided cost rate and virtually all community solar programs. Most such programs are never challenged, but there is one entity willing to take on some state-mandated purchase programs that fall outside of PURPA, as evidenced by the latest challenge by Allco Finance Limited (Allco), this time to a Massachusetts program.
The Allco petition should be no surprise, as Allco has for over a decade led both the fight against state commissions compelling utilities to pay QF resources above PURPA avoided cost rates and compelling utilities to pay non-QF resources state-mandated rates. Although Allco's success has been somewhat limited as discussed below, the outsized role Allco has played is not surprising. There are very few utilities willing to challenge a state regulator or legislature that requires the utility to buy from either a QF at above an avoided cost rate or from a non-QF, pursuant to a state-mandated price or process. As a result, some state-mandated programs can morph into a voluntary purchase programs, that are nearly impossible to challenge on legal grounds. One might expect that if a state program were too generous and caused ratepayers to pay unmerited subsidies, that consumer advocates would challenge such programs. However, traditional consumer advocates are often state actors themselves (i.e., independent offices of the state commission, state Attorneys General, etc.), also hesitant to challenge to state action. The result is that Allco has been the primary thorn in the side of state legislatures and commissions, representing neither consumer or utility interests, but the interests of QFs that are ineligible for the programs or are failed bidders in programs.
The most prominent Allco case to date, Allco v. Klee, involved a Connecticut law that appeared to mandate that Connecticut utilities sign contracts with winning (non-QF) renewable generators under a state-run wholesale power purchase program. The Second Circuit ruled that "the fact that the statutes authorize the [] Commissioner to 'direct' utilities to 'enter into' contracts with specific bidders is not sufficient to render plausible Allco's claim that utilities will be 'compelled' ... to accept specific bids." The court relied on various request for proposal documents and the possibility that a winning bidder could fail to reach an agreement with the purchasing utility, rather than the statute itself, to reach the conclusion that any resulting contracts were voluntary. In the case, there was no testimony from the impacted utilities as to whether they believed that they were compelled to enter wholesale contracts. Although Allco lost this case, it arguably does provide impacted utilities the ability to reject winning bidders under similar state programs and provides direction that an absolute state mandate to purchase will not be tolerated by the courts.
In a series of cases, Allco has long challenged Vermont's two separate programs for paying small renewable generators – the Rule 4.100 program and the standard offer contract program (formerly known as SPEED). Ironically, at one time, the standard offer contract program, which pays resources more than Rule 4.100's traditional PURPA avoided cost program, likely would have been found unlawful if challenged by a purchasing utility, but FERC and court precedent on tiered avoided costs may ultimately mean that the standard offer contract program is lawful. (Tiered avoided costs allow states to set various avoided cost rates based on resource characteristics, if there is an unfilled state mandate to buy from resources with certain characteristics.) For more than a decade, FERC has permitted states to have multiple PURPA programs, as long as one such program paid an avoided cost rate and was open to all QFs. Additional PURPA programs, which typically pay more, but were often capped, led to challenges by Allco, on the caps. Indeed, Allco was successful, in Winding Creek Solar, in challenging the California PUC's multiple PURPA programs on the grounds that the California PUC PURPA program that was uncapped did not offer an avoided cost rate. As a result, California had to change the pricing in its "open to all" PURPA program. In the Vermont state commission proceedings, Allco challenged Vermont's standard offer program's market-based pricing mechanism as violating PURPA, but the Vermont commission defended the program on the existence of a PURPA compliant program under Rule 4.100. The case was appealed to the Vermont Supreme Court.
The Vermont Supreme Court issued an opinion in 2021 that cogently explained that the Rule 4.100 program met PURPA's requirements such that the Vermont commission could supplement its implementation of the basic requirements of PURPA with programs like the standard offer program. The court found that "states may offer QFs voluntary opportunities to secure contracts for limited increments of generating capacity when those programs offer QFs more favorable terms than the generic avoided-cost pricing required by PURPA and are otherwise 'just and reasonable to the electric consumers of the electric utility and in the public interest' and do not 'discriminate against qualifying cogenerators or qualifying small power producers.'" The Vermont court did not rule directly on the issue of whether the standard offer program was: 1) purely voluntary as to the purchasers; or 2) mandatory, but justified by rulings on tiered avoided costs. Given that no Vermont utility had challenged the standard offer program it remains lawful, as any purchases can be considered voluntary. Only if consumer advocates challenged utilities' prudence, i.e., arguing the standard offer program pays an unjustified subsidy, would the situation become more interesting.
The Vermont Supreme Court case opinion does not mean that Allco has given up in Vermont. Allco also has sought relief from a federal district court regarding the cap on the standard offer program, under which no Allco affiliate had managed to obtain a contract. Years before, in 2016-2017, Allco petitioned FERC and FERC issued an intent not to act, opening the door to federal litigation, which Allco eventually filed. In a somewhat odd turn in light of PURPA's review scheme, a federal district court, in 2021, dismissed Allco's challenge on sovereign immunity grounds under the Eleventh Amendment. Although Eleventh Amendment challenges are common as defenses to PURPA challenges against state commissioners, they generally never succeed. Indeed, Allco appealed this decision successfully in Allco v. Rosiman. The Second Circuit did not even have to address the jurisdiction provided by PURPA itself, but instead ruled that a plaintiff may avoid the Eleventh Amendment bar and proceed against individual state officers, provided that the complaint alleges an ongoing violation of federal law and seeks relief properly characterized as prospective. The court also found the issue was not moot and the 2016 FERC petition was sufficient to exhaust administrative remedies. Finally, the court found that the Vermont standard offer program remains codified in state law and is likely to resume in some form in the future.
On remand, it will be interesting to see how the Vermont commission defends its standard offer program. The Vermont Supreme Court indicated that the higher-paying standard offer program might well be a lawful compelled PURPA program under the concept of tiered avoided costs or could be found lawful as a voluntary program that was not compelled. If the Vermont commission takes the first approach, arguing that the standard offer program is mandatory, it would still need to demonstrate that the market-based pricing approach results in a true avoided cost rate. If the Vermont commission relies on the standard offer program as consisting of voluntary purchases by utilities, the program likely would be lawful, but it could open the door to prudence challenges by ratepayer interests that disagree with the philosophy that Vermont utilities should voluntarily purchase power at above avoided cost rates.
Massachusetts is now the latest target of Allco. The Massachusetts Legislature enacted an act authorizing the Massachusetts Department of Public Utilities and the Massachusetts Department of Energy Resources to solicit proposals for renewable energy, to select winners of the solicitation, and to compel Massachusetts' investor owned electric utilities to enter into wholesale electricity contracts with the winners. State regulations also provide for compelling the Massachusetts utilities to enter into wholesale sales with solicitation winners and to have the price set at the bid price. Allco has challenged these actions on the grounds that it results in compelled wholesale transactions with non-QFs. A follow-up article will address the imminent answers, but much like Allco v. Klee, the existence of actual compulsion which may depend on the statute, regulations, and implementing documents. Whether there is a mandate likely will be dictated by a court, not FERC. That said, if no utility will support a claim that it was actually compelled to contract or even participate in litigation, the legality of the law and implementing regulations may be irrelevant as any relevant contracts can be considered voluntary.
In short, the notion that states cannot compel wholesale sales at state-set prices outside of the PURPA avoided cost scheme may be true only in the abstract. Unless the purchasers complain of, or admit to, compulsion, the states may have far more power than the FPA intended to set wholesale prices, particularly from small resources that qualify as QFs. Of course, FERC itself could take action against state programs, but there is no evidence that this FERC intends to stand in the way of the states, and Allco may have to battle on alone.
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