On September 8, 2014, the U.S. Court of Appeals for the Fifth Circuit dealt a blow to Exelon Corp. (“Exelon”), rejecting challenges by various Exelon wind-generating entities to a Texas Public Utility Commission (PUCT) regulation and a 2009 PUCT order involving the sale of power from Qualifying Facilities (QFs)1 to a public utility under the Public Utilities Regulatory Policies Act (PURPA). The Fifth Circuit’s opinion raises important questions about the roles Congress gave to state and federal regulatory authorities to implement portions of PURPA.

The Federal Energy Regulatory Commission (FERC) has created two pricing structures for QFs to sell power to utilities under PURPA: (1) on an “as-available” basis, where price is determined at the time of delivery; or (2) pursuant to a “Legally Enforceable Obligation,” where price can be determined either at the time of delivery or at the time the obligation is incurred. In a somewhat unusual statutory scheme, PURPA orders states to implement the federal law.  The federal law therefore requires state public utility commissions, such as the PUCT, to adopt rules that comply with FERC’s regulations implementing PURPA.2

Under a PUCT rule implementing FERC’s PURPA regulations, the Legally Enforceable Obligation pricing option is available only to QFs that can provide “firm power.”  The PUCT rule defines “firm power” as “power or power-producing capacity . . . that is available pursuant to a legally enforceable obligation for scheduled availability over a specified term.”  QFs unable to meet this requirement can charge the utility only the current or “as-available” price.

In a 2007 complaint filed with the PUCT, Exelon argued that it had formed a Legally Enforceable Obligation with Southwestern Public Service Company (“Southwestern”), and that Southwestern therefore owed Exelon payment under rates that ranged from $0.035/kWh to $0.090/kWh—rates that significantly exceeded the applicable as-available rates. Southwestern argued that no Legally Enforceable Obligation was formed because Exelon’s wind generation could not provide “firm power.” Exelon alleged that its power was in fact firm.  In its 2009 order, the PUCT ultimately sided with Southwestern, finding that the Exelon wind entities did not comply with the conditions for creating a Legally Enforceable Obligation and, therefore, that the appropriate rate was the as-available rate.

Subsequently, Exelon filed a Petition for Declaratory Order with FERC, asking FERC to determine whether all QFs are entitled to the Legally Enforceable Obligation pricing option under FERC’s regulations. In November 2009, FERC issued an order finding that the PUCT decision was inconsistent with FERC’s regulations implementing PURPA and that QFs may form Legally Enforceable Obligations even with non-firm power. FERC noted that its regulations make no distinction between firm and non-firm power in the QF context. Upon receiving this favorable order from FERC, Exelon filed suit in federal district court seeking declaratory and injunctive relief against the PUCT. The district court granted Exelon’s motion for summary judgment, finding that the PUCT could not impose the firm power condition on the creation of a Legally Enforceable Obligation.

The Fifth Circuit reversed.  First, the Fifth Circuit vacated the portions of the district court judgment regarding the PUCT’s 2009 order and directed the district court to dismiss those claims for lack of subject matter jurisdiction. The court reasoned that, under PURPA, state courts have exclusive jurisdiction over “as-applied” challenges, which are claims asserting that a state agency’s implementation of PURPA is unlawful as it applies to an individual petitioner. The Fifth Circuit held that Exelon’s claims regarding the PUCT’s 2009 order fell within this category and thus determined that the federal district court lacked jurisdiction.

Exelon had also challenged the underlying PUCT regulation itself, arguing that the regulation failed to implement FERC’s regulation, as determined by FERC in its November 2009 Declaratory Order. In a divided opinion, the majority held that Exelon failed to show that the PUCT was implementing FERC’s PURPA regulations improperly. Because FERC’s regulation did not explicitly mandate that all QFs must be able to form Legally Enforceable Obligations, the Fifth Circuit held that Texas was within its discretion to set reasonable parameters on its implementation of FERC’s regulations, such as limiting Legally Enforceable Obligations to firm power QFs.  The court held that FERC’s Declaratory Order advising that all QFs should be able to form Legally Enforceable Obligations was merely an “informal guidance letter,” which only had persuasive value at best. The majority also relied on canons of statutory construction, reasoning that Exelon’s reading of FERC’s regulations would render certain sections superfluous.  Specifically, the court concluded that if all QFs, regardless of whether they provided firm or non-firm power, were eligible to form Legally Enforceable Obligations, the as-available pricing mechanisms in FERC’s regulations would be duplicative.

In a partial dissent, Judge Edward Prado argued that the plain language of the PUC rule conflicts with the FERC regulations implementing PURPA and, even if the language were not in conflict, the court should defer to FERC’s interpretation of its own regulation.