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Latest Round in PURPA Wars: Fifth Circuit Upholds Texas Rule Limiting PURPA Rights of Wind Generators

September 11, 2014 posted by Eric Christensen

Earlier this week, the United States Court of Appeals for the Fifth Circuit issued the latest salvo in the PURPA wind wars, this time handing wind producers a painful defeat. The Fifth Circuit's opinion upholds a rule issued by the Public Utility Commission of Texas ("PUCT") preventing non-firm resources from forming Legally Enforceable Obligations under PURPA. If the Fifth Circuit opinion stands, it could limit the ability of wind producers to obtain access to electricity markets under PURPA (the Public Utility Regulatory Policies Act), a 1978 law aimed at allowing small independent and renewable energy producers (referred to as "Qualifying Facilities" or "QFs") access to electricity markets controlled by regulated utility monopolies.

The Fifth Circuit opinion, however, may not be the final word. The Fifth Circuit's opinion is at odds with the Federal Energy Regulatory Commission's ("FERC") 2009 declaratory order in the same dispute, which found the PUCT rule to be contrary to FERC regulations requiring that "[e]ach qualifying facility shall have" the option to sell energy under a "legally enforceable obligation." In addition, a lengthy dissenting opinion issued by Judge Edward C. Prado suggests that the majority's reasoning may be vulnerable, both in its primary conclusion and in supporting conclusions related to the degree of deference owed to FERC's interpretation of PURPA and federal regulations.

The dispute, which dates back nearly a decade, involves a series of Exelon wind projects in the Texas Panhandle. Relying on FERC regulations requiring that QFs must have the option to sell power to the local utility under a "legally enforceable obligation" ("LEO"), Exelon demanded that Southwestern Public Service Company purchase output from the wind projects at PURPA-mandated avoided cost rates set as of the date of the LEO. Southwestern rejected these demands, relying on the PUCT rule, which requires QFs to offer firm power in order to qualify for a LEO. Because wind generators can provide power only when the wind blows (at least in the absence of energy storage devices or other measures to "firm" wind output), Southwestern argued that the projects did not qualify under the Texas rule. Instead, Southwestern offered to pay "as available" rates, which are the prevailing prices for energy at the time the energy is produced. The difference is significant because "as available" pricing is difficult to predict, which complicates the task of projecting the revenue a QF may produce and therefore makes financing the QF a significant challenge.

Southwestern's rejection set off a series of legal challenges at FERC, in the Texas courts, and in the federal courts. As noted above, FERC in 2009 issued a declaratory order finding that the Texas rule barring non-firm energy producers from LEOs is contrary to FERC's regulations. Following its usual course, however, FERC declined to take action directly against the PUCT but left the door open for Exelon to take action in federal court. Exelon took up the baton, challenging the PUCT rule, as well as several specific PUCT orders, in federal district court. The District Court largely sided with Exelon, but this week's Fifth Circuit opinion reached the opposite conclusion.

The Fifth Circuit opinion also addresses important procedural questions arising from PURPA's scheme of "cooperative federalism" (although in recent years, cooperation has often given way to conflict). The opinion concludes that PURPA's jurisdictional rules allow challenges to state PURPA implementation rules to be brought in federal court, but that "as applied" challenges, which the Court concludes means challenges to entity-specific orders issued by a state commission, must be brought in state court. In addition, the majority opinion concludes that FERC's declaratory order is nothing more than an "opinion letter," to which no deference is due, while the PUCT's interpretation of its rules is accorded significant deference. The majority's conclusions regarding these complex deference issues are challenged at length in Judge Prado's dissent.