On Wednesday, December 6, 2017, the United States District Court for the Northern District of California (“the Court”) issued a decision in Winding Creek Solar LLC v. Peevey (“Winding Creek decision”),[1] finding that the California Public Utilities Commission’s (“CPUC”) Renewable Market-Adjusting Tariff (“Re-MAT”) program violated the federal Public Utility Regulatory Policies Act (“PURPA”). The Court also found that the CPUC’s “Standard Contract” for generators less than 20 MW failed to comply with PURPA, throwing into question the effectiveness and pricing associated with a significant amount of renewable energy generation currently under contract.

I. Background: Where PURPA and Re-MAT Collide

In 1978, Congress enacted PURPA in reaction to a perceived national dependence on fossil fuels. One of PURPA’s goals was to encourage the development of smaller-scale renewable energy and cogeneration resources. PURPA’s regulations, as implemented by the Federal Energy Regulatory Commission (“FERC”), require utilities to purchase electricity from Qualifying Facilities (“QFs”) (which include renewable resources under 80 MW) at the utility’s “avoided costs,” an obligation that has come to be known as a utility’s “must-take obligation.” A utility’s avoided cost is the cost that the utility would have paid to generate the energy itself or from another source. The avoided costs can be calculated based on the cost of energy “at the time of delivery” or “at the time the obligation is incurred.” Because PURPA contains no cap on how much electricity a utility must buy, in recent years, many commentators have called for a regulatory overhaul to bring PURPA current with contemporary energy generation and consumption trends.

The CPUC’s Re-MAT program is a much more recent procurement tool, having been established in 2013 to encourage renewable energy investment and to meet California’s ambitious Renewables Portfolio Standard (“RPS”) goals. Re-MAT requires utilities to offer long-term power contracts to small (under 3 MW) renewable energy producers. But unlike PURPA, Re-MAT’s contract price and time of delivery factors are determined by an auction held every two months, called “program periods.” After each auction, every renewable energy developer in the program period receives the same final price for the entire length of the contract. The Re-MAT program has a statewide cap of 750 MW on the amount of electricity that utilities can purchase from the renewable energy developers. The Pacific Gas & Electric Company (“PG&E”), one of California’s three investor-owned utilities, is limited to 218.8 MW under this cap.

II. Winding Creek’s Re-MAT Efforts with PG&E

Winding Creek Solar LLC (“Winding Creek”) was developing a 1 MW solar project in Lodi, California and intended to sell its power to PG&E under the CPUC’s Re-MAT program. Although Winding Creek participated in several Re-MAT auctions, none of the power prices offered by PG&E were satisfactory. Thus, Winding Creek never entered into a power purchase agreement with the utility. In 2014, Winding Creek sued the CPUC, arguing that its Re-MAT program violated PURPA by preventing Winding Creek from entering into a long-term contract to sell power to PG&E at PG&E’s avoided costs, which it argued should be higher than the Re-MAT auction prices being offered.

Winding Creek argued that two aspects of the Re-MAT program violated PURPA. First, Winding Creek challenged the Re-MAT program’s 750 MW cap on the amount of electricity that utilities had to purchase from renewable energy developers as inconsistent with the utilities’ must-take obligations. Second, Winding Creek argued that Re-MAT’s “market adjusting tariff,” allowing the prices to rise or fall depending on the outcome of the auctions and price adjustments of the previous program period, was not based on a utility’s avoided costs.

In response, the CPUC argued that the utilities’ “Standard Contract” complied with PURPA and provided a viable alternative to complying with PURPA, regardless of any requirements of the Re-MAT program. The CPUC’s Standard Contract was established in 2010 and resolved years of litigation over the terms of PURPA contracts between QFs, utilities, and the CPUC. For QFs that are 20 MW or less, the Standard Contract provides an average term of 10 years, calculates its costs using an avoided cost framework, and does not include a cap on the amount of energy that utilities can purchase from QFs. According to the CPUC, PG&E and other California utilities were free to implement additional programs like Re-MAT because, at a minimum, the Standard Contract provided a backstop solution that complied with PURPA.

III. The Court Invalidates Re-MAT and CPUC’s “Standard Contract”

The Court largely agreed with Winding Creek when it held that the Re-MAT program violated PURPA on two grounds. PURPA’s must take obligation required PG&E to buy all of the energy and capacity produced by QFs like Winding Creek’s proposed solar facility, not just the first 750 MW that met Re-MAT requirements. The Court also found that Re-MAT’s auction failed to comply with PURPA’s definition of avoided costs. While a utility’s avoided costs could be determined by the “spot market price” of electricity, the Court held that Re-MAT’s complex administrative auction procedure “strayed too far” from PURPA’s requirements and was “burdened with arbitrary rules” such as its two month program period and the $4/MWh increments in which the price could rise or fall. Despite Re-MAT’s complexities, the Court viewed both of these legal infirmities as “straightforward” violations of PURPA.

Nor could Re-MAT be salvaged by the Standard Contract because the Court found that it also did not comply with PURPA. Under FERC’s PURPA regulations, a QF must have the option to receive the avoided costs “calculated at the time of delivery” or “calculated at the time the obligation is incurred.” Even though the Standard Contract calculated its rates based on the utility’s avoided costs, it only offered the avoided cost calculation at the time the obligation was incurred, and not at the time of delivery.

Therefore, like Allco Renewable Energy Ltd v. Massachusetts Electric Company (“Allco Renewable Energy”), [2] where the court found that that Massachusetts Department of Public Utilities offered QFs the spot market rate only, and not a pricing option at the time the obligation was incurred, California’s Standard Contract did not offer both pricing options as required by PURPA. Being noncompliant with federal law itself, the Standard Contract could not salvage Re-MAT’s failures under PURPA. While the Court granted declaratory and injunctive relief, it declined to order PG&E to contract with Winding Creek at a particular price.

IV. Industry Impact

The Court’s Winding Creek decision shows that while state agencies retain some discretion to implement PURPA, they cannot create programs to incentivize renewable resources that directly conflict with the plain language of FERC’s implementing regulations. The Winding Creek decision not only throws some uncertainty to the existing power purchase agreements executed under Re-MAT and the Standard Contract, but also contracts under similar programs like the CPUC’s Bio-MAT, which also relies on an auction mechanism to price power from small biomass facilities that can in some circumstances be considered QFs.

Continuing the trend from Allco Renewable Energy, under Winding Creek, courts will likely find that a state program violates PURPA if the program caps the amount of energy a utility can purchase from a QF, or restricts a QF from choosing between a price based on the time of delivery or a price based on the time of contract. The CPUC will likely have to revisit its implementation of FERC’s regulations through Re-MAT and the Standard Contract. As courts interpret PURPA and FERC’s implementing regulations in ways that limit state agencies discretion to fashion renewable energy procurement programs, states may increase pressure to reform PURPA and the associated regulations. Just this past week, the National Association of Regulatory Utility Commissioners called on FERC to reform PURPA, including adopting regulations to permit more competitive solicitations and reduce the burden and transaction costs to state commissions.

While states may push for reforms, QFs may also feel emboldened to explore whether their existing contracts are non-PURPA compliant. K&L Gates’ energy lawyers will continue to monitor the shake-out from this consequential ruling.