The Fifth Circuit Eviscerated PURPA in Texas
September 23, 2014
The Fifth Circuit Eviscerated PURPA in Texas
by Melissa Powers
On September 8, the Fifth Circuit released Exelon Wind v. Nelson, a decision that eviscerates the Public Utilities Regulatory Policies Act (PURPA) in Texas and could have much broader impacts—on both renewable energy development and administrative law—well outside of Texas’s borders. Since 1978, PURPA has served as a critical tool to compel electric utilities to buy power from renewable facilities. PURPA spurred the first wave of investment in renewable energy in the 1970s, and it demonstrated that electricity generation could become a competitive, non-monopolistic enterprise. PURPA also provided the template for other countries to develop feed-in tariffs, which have spurred broad investment in renewables in Germany, Spain, and other countries. Despite its importance, however, utilities have long hated PURPA because it requires them to buy other entities’ power at competitive prices. If the Fifth Circuit decision remains on the books (but I hope Exelon will seek rehearing), it could provide a roadmap for other utilities and states hostile to PURPA to follow. This, in turn, would make independent renewable energy development even harder than it already is.
On its face, PURPA is a relatively simple law designed to promote development of “qualifying facilities,” which include renewable energy facilities with capacities of 80 megawatts (MW) or smaller. Once a qualifying facility is certified, it may compel a utility to 1) connect the qualifying facility’s power to the transmission system, 2) purchase the qualifying facility’s power, and 3) pay “avoided cost rates”—the rates the utility would otherwise pay to produce or purchase power from other sources—for the renewable power. In other words, PURPA created a mandatory market for small renewable energy facilities and guaranteed those facilities competitive rates for their power (at least in markets where wholesale power is relatively expensive).
In practice, PURPA has become more complicated and contentious as renewable energy producers, utilities, states, and the Federal Energy Regulatory Commission (FERC) seek to either implement or undermine PURPA’s mandate. Since PURPA’s inception, utilities and some states have sought to limit the power of PURPA by challenging the status of energy producers as qualifying facilities, by requiring qualifying facilities to pay high costs for transmission access, by keeping avoided cost rates low, and by seeking PURPA’s repeal. On the other side, qualifying facilities, other states, and FERC have sought to protect PURPA’s core requirements. The Exelon decision makes utilities and Texas clear victors in a key battle of the long-running and increasingly heated “PURPA Wars.”
The Legal Decision
In Exelon, wind power qualifying facilities owned by Exelon sought to compel the Texas utility, Southwestern Public Service Company, to buy their power pursuant to a long-term contract (or “legally enforceable obligation” in PURPA-speak). Southwestern refused to buy the power, relying on a Texas rule that allows only qualifying facilities that generate “firm power” to enter into legally enforceable obligations. Exelon challenged this refusal, arguing that federal—not state—regulations controlled the issue, and that federal regulations plainly required the utility to buy the wind power.
To support its argument, Exelon pointed to FERC’s regulations implementing PURPA, which state:
Each qualifying facility shall have the option either:
(1) To provide energy as the qualifying facility determines such energy to be available for such purposes, in which case the rates for such purposes shall be based on the purchasing utility’s avoided costs calculated at the time of delivery; or
(2) To provide energy or capacity pursuant to a legally enforceable obligation for the delivery of energy or capacity over a specified term, in which case the rates for such purchases shall, at the option of the qualifying facility exercised prior to the beginning of the specified term, be based on either:
(i) The avoided costs calculated at the time of delivery; or
(ii) The avoided costs calculated at the time the obligation is incurred.
Exelon argued (and the dissent agreed) that the regulation plainly gives “each” qualifying facility the option to either sell electricity (1) as available or (2) pursuant to a legally enforceable obligation. The choice, moreover, belongs to the qualifying facility and not the utility. The Texas rule, in contrast, only allows “some” qualifying facilities—those that produce firm power—to enter into legally enforceable obligations. It therefore conflicts with the requirement that each (and thus every) qualifying facility have the option of using legally enforceable obligations.
The majority, however, upheld the Texas rule based on a previous Fifth Circuit decision that gave the Texas PUC the authority to interpret “legally enforceable obligation,” a term not defined under FERC Rules. Thus, although the regulation requires “each qualifying producer” to have an option to sell renewable power through a legally enforceable obligation, the court decided the Texas PUC could eviscerate that requirement by defining “legally enforceable obligation” to exclude any qualifying facilities that produce non-firm power. As my colleague, Amelia Schlusser, argues, the Fifth Circuit’s ruling is full of legal flaws. And if it stands, it could seriously hurt renewable energy development.
The Implications for Renewables
The Exelon decision could have significant and harmful effects on renewable energy development in Texas and, perhaps, beyond. Within Texas, new wind and solar power developers could lose their access to capital if they cannot demonstrate they will be able to negotiate long-term contracts with utilities. Facilities that are operational in Texas but that lack an existing PURPA contract (like the wind farms at issue in Exelon) will have to sell their power on an as-available basis and likely have to accept low spot-market prices for their electricity. Perhaps worse, the decision could signal to other states how they can design their own PURPA-evading rules and may lead to other appellate courts following the Fifth Circuit’s questionable reasoning. Thus, not only will the Exelon ruling affect wind farms in Texas, it could affect the renewables industry across the country.
For new wind and solar developers, the Exelon decision has made Texas a very risky environment for investment. Renewable facilities already face the risk of intermittency and difficulty getting access to capital, but PURPA tried to mitigate those risks by guaranteeing access to the market and stable prices through long-term contracts. Without these long-term contracts, new developers will have a hard time convincing their investors that they can recover their sunk costs and become profitable. Other policies that could potentially mitigate the impacts of this decision, moreover, are not reliable replacements for the stability of PURPA long-term contracts. Past wind development in Texas has outpaced the state’s Renewable Portfolio Standard, driving down demand, and Congress’s failure to enact a stable long-term Production Tax Credit has dried up tax equity investment. While solar power development in the state has expanded in recent years, it seems likely that the PURPA limitation will hurt the solar market, as Texas has no net metering laws or RPS carve-outs specifically designed to support solar development. The future for new renewables seems bleak indeed.
For existing facilities that had capital to build but could not get long-term contracts with utilities, the future is less bleak, but far from rosy. These facilities will have to sell their power on an as-available basis, and thus will find themselves competing with other producers on the spot market. While PURPA’s purchase mandate should put them at the front of the line, lower bids by fossil fuel producers will certainly drive the avoided cost prices down. While it is possible that some of the existing sources will be able to sell their power during peak times, and thus receive premium prices, transmission congestion could limit grid access. It may be that the state’s efforts to support renewable energy transmission will enable reliable access to the power market. However, even with Texas’s impressive Competitive Renewable Energy Zones, congestion could remain an issue for renewables during peak periods. Without adequate and reliable access to the grid, of course, the as-available power purchases will not occur.
The broader implications of Exelon are what really trouble me, though. Unlike many other states, Texas has actually done a great deal to build up its renewable energy infrastructure, and it has more than 12,000 MW of wind power capacity as it stands. Yet, even in Texas, resistance to PURPA has led to an evisceration of its key requirements. What will happen outside of Texas, when other utilities and states decide to follow the Texas PUC’s lead and “interpret” legally enforceable obligations so as to prevent long-term contracts for renewables? That prospect, perhaps more than anything else, makes me hope that Exelon will seek rehearing of the court’s poorly decided opinion.