On July 29, 2019, the U.S. Court of Appeals for the Ninth Circuit issued an opinion in Winding Creek Solar LLC v. Peterman et al. (Nos. 17-17531 & 32) strongly upholding core principles of the Public Utility Regulatory Policies Act of 1978 (PURPA), and concluding that California’s renewable energy programs fail to meet PURPA requirements. The opinion makes clear that PURPA will continue to play a major role in the expansion of renewable energy, especially for smaller projects that depend on PURPA to obtain access to electric power markets.

Background

Enacted in 1978 in response to the recurring energy crises of that decade, PURPA aimed to increase the production of power by small renewable generation and co-generation projects (termed “Qualifying Facilities” or “QFs”). To overcome the reluctance of traditional utility monopolies to permit their competitors to access electricity markets, Section 210 of PURPA imposes a mandatory purchase obligation on regulated utilities, requiring them to purchase power from QFs at “avoided cost” rates, referred to as PURPA’s “must-take” provision. The Federal Energy Regulatory Commission’s (FERC) regulations implementing PURPA give QFs the option of selling power at an avoided cost rate fixed at the time the QF contracts with the purchasing utility or else to sell power at prevailing market rates as it is produced by the QF. Responsibility for implementing these regulations falls primarily on state utility regulators.

Winding Creek Litigation

Winding Creek Solar, the plaintiff in the case, seeks to build a small solar generation facility near Lodi, California. Winding Creek attempted to take advantage of the California Public Utilities Commission’s (CPUC) Renewable Market Access Tariff (ReMAT), which set an initial price for renewable power produced by independent producers like Winding Creek, then adjusted that price upward or downward in increments of $4 per megawatt-hour (MWh), depending on the results of periodic auctions. But ReMAT, which is currently suspended as a result of this litigation, limits the amount purchased in each period to 5 megawatts (MW) and imposes an overall limit of 750 MW on acquisitions by California’s Investor-Owned Utilities (IOUs), with that limit further subdivided among the three IOUs and among different types of generation.

Winding Creek submitted an application to participate in the first ReMAT auction, where prices were set at $89.23 per MWh. Unfortunately, Winding Creek was placed at the end of the queue for the initial period. Because the 5 MW cap for that period was exhausted, Winding Creek’s contract was not accepted and the ReMAT price was adjusted downward by $4 per MWh in each subsequent auction period, rendering the project uneconomic.

After unsuccessfully seeking relief at FERC, Winding Creek sued the CPUC in the U.S. District Court for the Northern District of California. The District Court concluded that ReMAT does not comply with PURPA’s must-offer requirement because it imposes limits on the amount of power California’s IOUs must purchase. Arguing that it could offer an alternative path to compliance with PURPA, the CPUC argued that its “Standard Offer Contract,” which allows QFs with 20 MW or less of capacity to enter into standard, CPUC-approved contracts with the California IOUs, is sufficient to satisfy PURPA. But the prices for Standard Offer Contracts are set based on a Short-Run Avoided Cost (SRAC) formula including several factors that vary from day to day based on short-run market conditions, including spot natural gas prices and locational marginal prices. The District Court concluded that SRAC pricing does not satisfy PURPA because these variable prices mean there is no long-term fixed price option available to QFs.

The Ninth Circuit's Decision

The CPUC appealed the District Court’s decision to the Ninth Circuit. The Ninth Circuit rejected the appeal with language that emphasizes the continuing vitality of PURPA despite tectonic changes in the electric utility industry since PURPA was enacted four decades ago. PURPA’s must-take obligation, the Court emphasized, “requires utilities to purchase all of the energy a QF provides.” Hence, the Court found, “the conclusion to be drawn from this web of regulations is not complicated.” The quantitative caps on ReMAT clearly violate PURPA’s must-offer requirement. Further, because the ReMAT price is “arbitrarily adjusted every two months,” it fails to satisfy PURPA’s requirement that QFs be paid avoided cost rates – that is, the rates that the utility would pay but for the purchase from the QF.

The Ninth Circuit likewise easily concluded that the Standard Offer Contract violates PURPA. Because “PURPA mandates that QFs be given a choice between calculating the avoided cost rate at the time of contracting or at the time of delivery” and, because SRAC pricing “relies on variables that are unknown at the time of contracting,” there is no fixed-price option available to QFs. Because neither ReMAT nor the Standard Offer Contract satisfies PURPA, the Court concluded, “California’s regulatory scheme is preempted by federal law.”

The Continued Importance of PURPA

Although state law in this area is rapidly evolving, PURPA remains the primary mechanism to encourage the development of renewable energy, especially small renewable generators, in many states. The Ninth Circuit’s strong reaffirmation of PURPA’s continuing vitality therefore matters not just to California, which has a wealth of programs to encourage the transition to renewable energy in its electric sector, but in the many states that lack such strong incentives for renewables development.

Of Counsel Eric Christensen (Seattle) successfully argued the case in the Ninth Circuit on behalf of Winding Creek Solar LLC