United States: In Blow To Renewables, Ninth Circuit Mostly Upholds FERC's PURPA Reforms

The U.S. Court of Appeals for the Ninth Circuit on Sept. 5, 2023, issued a critical ruling upholding certain reforms the Federal Energy Regulatory Commission (FERC) issued in 2020 to its regulations implementing the federal Public Utility Regulatory Policies Act (PURPA), 16 U.S.C. § 2601 et seq. These reforms will make it more difficult for entities, especially renewable generators, to be eligible as "Qualifying Facilities" (QFs) under PURPA and will make it less financially advantageous to be a QF overall.

Background

Congress passed PURPA in 1978 to encourage the development of QFs, a new class of independent, non-utility-owned energy producers. QFs can either be "small power production" facilities, usually renewably powered electric generation plants under 80 megawatts (MW), or "cogeneration" units, which sequentially generate both electricity and thermal energy (e.g., heat or steam) to be used for certain commercial or industrial purposes. As relevant here, PURPA also codified a legal obligation for traditional electric utilities to purchase power from QFs (known as the "mandatory purchase obligation") at the utility's "avoided cost," a rate roughly equivalent to what cost the utilities would incur to generate such power themselves or to buy it from a non-QF.

Though PURPA tasks FERC with developing national rules and standards, the statute delegates to state regulatory authorities primary responsibility for implementing FERC's rules. For instance, whereas FERC broadly defines how the avoided cost rate is to be calculated, states are responsible for actually calculating and applying the rate to individual QFs and utilities.

In Order No. 872, finalized in November 2020, FERC changed the QF eligibility criteria and mandatory purchase obligation and avoided cost methodology under PURPA in certain material ways. Specifically, FERC modified the following aspects of the PURPA regulatory regime:

• Modified Site Rule. FERC modified its "one-mile rule" for determining whether generation facilities are considered to be at the same site for purposes of determining small power production QF eligibility. Specifically, FERC allowed utilities, state regulatory authorities and other interested parties to show that affiliated small power production QFs that use the same energy resource and are more than one mile apart and less than 10 miles apart actually are at the same site. Facilities one mile or less apart would irrefutably be at the same site, and those 10 miles or more apart would irrefutably be at separate sites.
• Fixed Rate Rule. FERC granted states the flexibility to require that energy rates in QF power sales contracts with utilities vary with changes in the purchasing utility's "as-available" avoided costs at the time the energy is delivered. If a state exercises this flexibility, a QF no longer would have the ability to elect to have its energy rate be fixed but would continue to be entitled to a fixed capacity rate for the term of the contract.
• Locational Marginal Pricing. FERC allowed states to adopt a rebuttable presumption that, for utilities located within certain organized wholesale energy markets run by regional transmission organizations (RTOs) or independent system operators (ISOs), the locational marginal price within those markets accurately represent the "as-available" purchasing utility's avoided costs. For QFs and utilities outside RTOs/ISOs, FERC permitted states to set as-available energy avoided cost rates at competitive prices from liquid market hubs or calculated from a formula based on natural gas price indices and specified heat rates, provided that the states first determine that such prices represent the purchasing utilities' energy avoided costs.
• Mandatory Purchase Obligation Termination. FERC reduced the threshold that allows a utility to terminate its mandatory purchase obligation for QFs that have "nondiscriminatory" access to organized wholesale markets, whether in an RTO/ISO or otherwise. Whereas utilities could formerly terminate their obligation to buy power from such QFs where the latter had a capacity above 20 MW, now the threshold would be 5 MW.

Challenging Reforms

Several stakeholders, including renewable energy industry groups and environmental organizations, objected to these reforms, arguing that they discouraged small-scale renewable development, gave states far too much discretion to administer PURPA and otherwise violated the spirit and the letter of the statute.

In the case at hand, the Solar Energy Industries Association (SEIA) and several other related entities filed a lawsuit challenging Order No. 872 under PURPA and the Administrative Procedures Act (APA). SEIA argued that FERC's reforms violated PURPA's broad directive to FERC to "encourage" the development of QFs. SEIA also maintained that FERC's reforms were arbitrary and capricious under the APA. Several parties intervened in support of SEIA's challenge, including various renewable groups and environmental organizations, whereas other parties intervened on behalf of FERC, including groups representing large investor-owned utilities and public power utilities.

In its opinion, the Ninth Circuit rejected the petitioners' objections to FERC's reforms. Citing the U.S. Supreme Court's decision in Chevron U.S.A. Inc. v NRDC, Inc., which generally mandates judicial deference to reasonable agency interpretations of ambiguous statutory provisions, the Ninth Circuit found that PURPA provided FERC discretion to construe PURPA and that FERC's interpretation of the statute in Order No. 872 was reasonable and neither arbitrary nor capricious.

But, the court did agree with the environmental organizations who joined the lawsuit that FERC violated the National Environmental Policy Act (NEPA) by failing to prepare an environmental assessment before issuing Order No. 872. So, the court remanded the order without vacating it, directing FERC to conduct such an assessment. Order No. 872 will thus remain in force while FERC conducts the required environmental assessment, though the court's decision may still of course be appealed to the Supreme Court.

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