In a recent opinion, the Ninth Circuit held that the California Public Utilities Commission’s (CPUC) Renewable Market Adjusting Tariff (Re-MAT) program and alternative Qualifying Facility (QF) standard offer contract (Standard Contract) were preempted by federal law. The Re-MAT program and Standard Contract required California utilities to purchase energy from certain QFs with capacities up to three and twenty megawatts (MWs), respectively. The court found that the program and the contract violated the Public Utility Regulatory Policies Act of 1978’s (PURPA) pricing requirements. The decision, Winding Creek Solar LLC v. Peterman, USCA Case Nos. 17-17531 and 17-17532 (9^thCir. 2019) demonstrates that PURPA continues to maintain a floor from which state regulatory programs must encourage the development of renewable energy from small producers. In 2018 and prior to Winding Creek, the CPUC instituted a rulemaking to consider adoption of a new Standard Contract but has not yet taken action. Winding Creek reemphasizes the importance of that proceeding for ensuring that California has a PURPA-compliant program in place for utilities to purchase QF-produced energy.

PURPA and Related Federal Energy Regulatory Commission (FERC) Regulations

PURPA was enacted to encourage the development of alternative energy resources, including small renewable power producers like wind and solar generators. Pursuant to PURPA’s “must take” provision, all of the energy produced by QFs must be purchased by the electric utility at its “avoided cost.” QFs are provided with the option of selecting a rate based on the utility’s “avoided costs” at either the time the QF enters the contract with, or delivers its energy to, the utility. “Avoided costs” equal the costs a utility would have incurred but for the purchase from a QF, either by purchasing the energy from some other source or by generating the energy itself.

The CPUC Programs and Winding Creek Solar LLC (Winding Creek)

The CPUC established several programs implementing PURPA and regulating the terms of utility contracts with QFs. For small (less than 3 MWs) renewable QFs, such as Winding Creek, the CPUC created the Re-MAT program and also permitted such generators to enter into a Standard Contract (available to QFs 20 MWs and less). In the Re-MAT program, the CPUC capped the obligations of California’s three investor‑owned utilities to purchase energy from participating QFs on an aggregate level and during each bimonthly offer period. Due to the cap, the utilities were not required to purchase all of the energy offered by participants in the Re-MAT program, and depending upon a QF’s position in the queue, a participating QF may not have received an offer from a utility. Further, the CPUC initially set the offered contract rate at $89.23/MWh and then, in subsequent periods, adjusted the rate based on the QFs’ prior willingness to accept the price offered.

If a QF’s energy was not purchased by a utility in the Re-MAT program, the CPUC permitted such QFs to enter into a Standard Contract with a utility. Utilities’ purchases that utilized the Standard Contract were not capped, but the Standard Contract only offered an “avoided cost” rate that could not be calculated at the time the QF entered into the contract. Thus, Standard Contract rates could only be based upon the utility’s avoided costs at the time the QF delivered energy.

The Ninth Circuit held that neither the Re-MAT program nor the Standard Contract were PURPA‑compliant, and California’s regulatory program was preempted by federal law. According to the court, the Re-MAT program’s cap on utility purchases violated PURPA’s “must take” provision, and the Re-MAT rate strayed too far from the “avoided costs” standard set by PURPA. While the Standard Contract may have saved the Re-MAT program if it had provided a PURPA-compliant alternative, the court concluded that the Standard Contract also violated PURPA because it failed to give QFs the option to calculate their rate based on the utility’s avoided cost at the time of contracting. Because neither program was PURPA‑compliant, the court held that the regulatory scheme was preempted by federal law.

In 2018 and prior to Winding Creek, the CPUC instituted a rulemaking to consider adoption of a new Standard Contract but has not yet taken action. Winding Creek reemphasizes that the outcome of that proceeding must be a PURPA-compliant program.

This post was written with contributions from Paul Kaufmann.