LEO Still Roars: FERC Declares Montana PURPA Rules Illegal

March 21, 2014

After the Federal Energy Regulatory Commission's ("FERC") recent lawsuit against the Idaho Public Utilities Commission ended in something of a whimper, many industry observers speculated that FERC would retreat from aggressively challenging states that attempt to unduly restrict the rights of power sellers on the Public Utility Regulatory Policies Act of 1978 ("PURPA"). A long-awaiting FERC decision, issued yesterday, suggests this speculation may have been premature. The decision declares that Montana's PURPA program, which requires many PURPA-eligible projects to win irregularly-scheduled competitive bidding processes and also imposes a 50-MW limit on wind generation acquired under PURPA, does not comply with FERC's "legally enforceable obligation" or "LEO" rules. Hydrodynamics, Inc., 146 FERC P 61,193 (issued March 20, 2104).

The controversy centers on how to interpret PURPA's basic mandate, which requires utilities to purchase power from PURPA-eligible generators, called "Qualifying Facilities" or "QFs", at avoided-cost rates. Generally, QFs are small, renewable generators owned by independent power producers. The law was designed to help non-utility developers overcome barriers to entry in the power generation market created by vertically-integrated utility monopolies. Hence, a basic requirement of FERC's PURPA rules is that, if an independent producer presents a utility with a PURPA-eligible contract, it creates a LEO, requiring the utility to honor the contract, even if the utility refuses to sign the contract. This prevents utilities from defeating PURPA's intent by dragging their feet on signing contracts that otherwise meet all PURPA requirements.

In Hydrodynamics, Inc., a group of small wind and hydroelectric generators challenged both the competitive solicitation system established by the Montana Public Service Commission ("MPSC") for PURPA-eligible projects meeting certain capacity thresholds and the MPSC's limit of 50 MW on interconnection of wind generation under PURPA. The Montana producers argued that these restrictions, along with the fact that competitive solicitations are rarely held, effectively destroyed the PURPA market in Montana. The producers' FERC complaint drew opposition not only from the MPSC and Northwestern Energy (Montana's largest utility), but also from two major national groups, the Edison Electric Institute and the National Association of Regulatory Utility Commissioners.

In yesterday's order, FERC declared that these restrictions are inconsistent with the LEO requirement because they prevent a PURPA-eligible generator who presents a valid LEO from obtaining a PURPA contract if it does not meet the additional requirements of the MPSC program. The solicitation rules also present a "practical disincentive" for PURPA developers if no competitive solicitations are held or they are infrequent. In addition, FERC rejected an argument posited by Northwestern Energy that PURPA does not require compensation to PURPA generators for generation capacity. FERC concluded that refusing to compensate a PURPA generator for the capacity value of its project is permissible only if the utility has no demand for capacity. This ruling could prove particularly important because the advent of wind generation and other forms of variable generation resources has created substantial demand for capacity in the West.

It should be noted that FERC, following its usual practice, declined to take direct enforcement action against the MPSC. Instead, it issued a declaratory order summarizing its views of the Montana PURPA program. The order therefore does not require any particular action by the MPSC, but is likely to be persuasive to the Montana courts that are currently reviewing the MPSC's PURPA program.

If you have any questions about FERC, PURPA, Western state utility commissions, or other matters discussed in this post, please contact a member of GTH's Energy, Telecommunications, and Utilities practice group or Environment & Natural Resources practice group. We're proud that our partner Jim Waldo was recently named 2013 Lawyer of the Year for Energy and Natural Resources Law, and practice group members Don Cohen, Bill Lynn, and Brad Jones were all named among Seattle's Best Lawyers.