June 01, 2013

FERC Sues State Commission for PURPA Failings

Scott Grover

On March 23, 2013, the Federal Energy Regulatory Commission (FERC) assumed a rare posture: federal district court plaintiff suing a state public utility commission. Calling it a “first of its kind” lawsuit, FERC initiated the enforcement action against the Idaho Public Utilities Commission (IPUC), alleging repeated failures by the IPUC to comply with the requirements of the Public Utility Regulatory Policies Act of 1978 (PURPA) relating to electricity sales to certain electric utilities by certain generating facilities. See FERC v. IPUC, No. 1:13-cv-141, Compl. (March 2, 2013, D. Idaho) (IPUC Complaint).

The fair reading of the history of the proceeding—outlined below—suggests that FERC exhibited patience and chose to bring suit only after it became evident that the IPUC was not going to apply the PURPA requirements consistent with FERC view. But the decision to act was not unanimous. Commissioner Tony Clark, the most recent appointee to the five-member executive branch agency, dissented. Calling the enforcement action “[c]ontrary to longstanding policy,” he recognized that the suit seemed “to be mostly an act of exasperation at a string of cases within a single state, exasperation alone is not a rationale for abandoning a sound Commission practice.” Murphy Flat Power, LLC, et al., 141 FERC 61,145, 1–2 (Nov. 12, 2012) (Clark, dissenting).

Beyond the IPUC complaint, public expressions by the agency that state authorities may be an impediment to the federal agency’s electricity policy goals seem to be increasing. FERC’s unprecedented enforcement action against the IPUC thus raises a question of whether the federal agency may be embracing more aggressive postures against its state counterparts, or if this is a situation of a state authority thumbing its nose at the federal government and inviting exactly what FERC has chosen to bring.

The primary source of FERC’s authority, particularly with regard to regulation of electricity and public utilities, is the Federal Power Act (FPA). In enacting the FPA, however, Congress recognized the historical role played by the states in these respects, declaring as a general policy that “such Federal regulation [shall] extend only to those matters which are not subject to regulation by the States.” 16 U.S.C. 824(a); see also Conn. Light & Power v. Fed. Power Comm’n, 324 U.S. 515, 529–30 (1945). (“Congress is acutely aware of the existence and vitality of these state governments. It sometimes is moved to respect state rights and local institutions even when some degree of efficiency of a federal plan is thereby sacrificed.”)

But when Congress so directs, FERC assumes a role. Such is the case with Section 210 of PURPA. Enacted as part of a package of legislation intended to fight the prevailing national energy crisis, Section 210 sought to encourage development of cogeneration and small power production facilities (SPPs), including through the establishment of rules requiring public electric utilities to purchase energy from these producers at prescribed rates. See 16 U.S.C. 824a-3; Small Power Production and Cogeneration Facilities; Regulations Implementing Section 210 of PURPA (Order No. 69), 45 FR 12214, 12214-15 (Feb. 25, 1980); see also FERC v. Miss., 456 U.S. 742, 745 (1982). Section 210 also attempted to reduce perceived burdens on SPPs. See FERC v. Miss. at 750–51; Order No. 69, 45 FR at 12215. By facilitating the contribution of SPPs (such as those using biomass and renewable resources) to the nation’s energy supply, Section 210 sought at once to promote conservation and a diversification of the generation mix. See Order No. 69, 45 FR at 12215.

State authorities were given an opportunity to implement FERC’s rules. See Order No. 69, 45 FR at 12215. FERC declined to issue rules for the states to adopt without modification, stating that it “believe[d] that providing an opportunity for experimentation by the States is more conducive to the development of these difficult rate principles.” Id. at 12231. FERC emphasized, however, that it possessed the authority to enforce implementation, using the court system or itself as the forum. Id. at 12231; see also 16 U.S.C. 824a-3(h). Moreover, FERC stated that its enforcement powers extended not only to implementation, but also “application by a State regulatory authority . . . on a case-by-case basis, of its regulations or of any provision it may have adopted to implement [its] rules under section 210.” Id. Compare Policy Statement Regarding the Commission’s Enforcement Role Under Section 210 of the Public Utility Regulatory Policies Act of 1978, 23 FERC 61,304, 61,645 & n.6 (May 31, 1983) (stating that once a state authority has implemented the Commission’s rules, “the Commission’s role is limited regarding questions of the proper application of these rules on a case-by-case basis.”) with FERC v. Miss., 456 U.S. at 760 (viewing FERC’s judicial duties under Section 210 as an unremarkable recognition by Congress that the contrary would “allow the States to disregard the preeminent position held by federal law throughout the Nation. . . .”).

To be sure though, an aggrieved SPP possesses comparable rights. It can petition FERC to bring an enforcement action, and then proceed with an action in federal district court if FERC does not act within sixty days. See 16 U.S.C. 824a-3(h)(2)(B). This is how the IPUC Complaint started. In August 2011, certain SPPs petitioned FERC to bring such an action against IPUC. The basis for the petition was a refusal by IPUC to approve several Section 210 energy sale contracts, primarily on the grounds that the contracts had not been signed by both parties prior to a December 2010 deadline. See Cedar Creek Wind, LLC, 137 FERC 61,006, 1, 8 (Oct. 4, 2011). FERC declined to initiate the enforcement action, although it did conclude that IPUC had acted contrary to the requirements of Section 210 when it held that a legally enforceable obligation, for purposes of Section 210, required contract execution by both parties. See id. at 29–30, 32, 38–39.

Then, a second scenario presented, with virtually identical facts. See Rainbow Ranch Wind, LLC, 139 FERC 61,077 (April 30, 2012). Again, FERC opted to stay its hand, although it did defend its ability to bring such an action. See id. at 22, 26–28.

Then a third arrived. Its primary difference from the first two was that IPUC had been asked to modify an earlier order based on FERC’s decisions in Cedar Creek and Ranch Wind. IPUC refused, concluding that the petitioners’ request was barred by their failure to pursue reconsideration or appeal, “in addition to the Idaho Commission’s jurisdiction exclusive to the Commission over as-applied PURPA claims.”). Murphy Flat Power, LLC, 141 FERC 61,145, PP 6, 9 & n.16, 11 & n.18 (Nov. 20, 2012). Ostensibly at the proverbial third time’s a charm, FERC deferred no longer: “[W]e intend to go to court to enforce PURPA.” Id. at p 23.

Between Murphy Flat and the IPUC Complaint, FERC issued a fourth order. The facts there paralleled the other cases, and particularly Murphy Flat, in that SPPs were given an opportunity to revisit an earlier IPUC order (albeit to no avail). See Grouse Creek Wind Park, LLC, 142 FERC 61,187, pp 6, 11, 35 (March 15, 2013). As with Murphy Flat, FERC gave notice that it intended to pursue enforcement. And as with Murphy Flat, Commissioner Clark dissented. But Grouse Creek differed in one notable respect: The petitioners are pursuing relief from the Idaho Supreme Court—an (ultimately) unpersuasive fact acknowledged by FERC. Id. at 12, 20, 42.

As Commissioner Clark noted in Murphy Flat, FERC’s decision to pursue enforcement may reflect the Commission’s exasperation with IPUC. But a fact underlying all of the IPUC decisions warrants emphasis that none of the FERC decisions squarely confront. A viable contract (i.e., entered into prior to the deadline) would have obligated the utility to purchase energy from the SPPs at avoided cost rates. In the case of Murphy Flat, those rates equate to nearly $300 million over twenty years—an amount for which Idaho ratepayers ultimately bear responsibility. A contract entered after the deadline, however, would not have entitled the SPP to secure those same rates by long-term contract. Rather, the SPP would be required to price the sale using a different and presumably less valuable methodology. See IPUC Compl., Exhibit A.

The notion that FERC might be grappling with a recalcitrant state authority thus weakens, when a retail consumer-based motivation for IPUC is revealed. (And that is saying nothing of Idaho’s desire to protect its own process.) Which then prompts the question of whether FERC is in fact—as its newest Commissioner sensed—taking an overly aggressive approach to the advancement of federal policy at the expense of state authority.

Recent history suggests such it may be. Take, for example, FERC’s implementation of FPA Section 216, enacted by Congress as part of the Energy Policy Act of 2005. Known in the industry as the provision authorizing FERC power over “backstop siting,” FPA 216 allows FERC in very limited circumstances to issue a permit for the construction of electric transmission facilities in a state (and carrying with it the power of federal eminent domain). See 16 U.S.C. 824p(b). The limits in large degree reflect the fact the states historically have regulated the siting and construction of electric transmission facilities. See Piedmont Envt’l Council v. FERC, 558 F.3d 304, 310 (4th Cir. 2009), cert. denied sub nom. Edison Elec. Inst. v. Piedmont Envt’l Council, 558 U.S. 1147 (2010). One precondition to such an award is that the state authority withholds approval for a permit request. See 16 U.S.C. 824p(b)(1)(C)(i). In its implementing regulations, however, FERC construed this language to include situations where the state affirmatively denied a permit. The Fourth Circuit disagreed and rejected that interpretation. See Piedmont, 558 F.3d at 313–15. Despite this conclusion, FERC staff expressed the view that Piedmont may only limit the agency in states situated within the Fourth Circuit, and that it’s original view of the statute stands elsewhere. See FERC Staff Preliminary and Conceptual Transmission Siting Proposal.

A more recent example surfaced in connection with FERC’s recent rulemaking, Order No. 1000. Although that rule, which established new regional and interregional transmission planning requirements on transmission-owning public electric utilities, is being challenged on appeal, the compliance plan deadline was not suspended and FERC is now reviewing the submissions. In connection with one such review, Commissioner John Norris issued a press release that seemed to be laying the groundwork for a future argument that certain state laws might somehow be preempted—presumably on a conflict basis—by Order No. 1000 and its requirements:

Order No. 1000 appropriately gave deference to state laws and regulations impacting the siting and construction of transmission within their borders, and it made clear that the Commission was not seeking to preempt or otherwise intrude on those measures. However, I am concerned by efforts to extend state laws and regulations into the federal planning process itself in a manner that limits the projects that may be considered for inclusion in the regional plan.

Statement of John Norris on Order No. 1000 Compliance Filings, FERC Accession No. 20130321-4009 (March 21, 2013).

Contemporaneously with this statement, FERC issued its annual strategic plan. In the plan, FERC included a separate appendix outlining “factors that may affect goal achievement.” Notable among the “external and internal challenges in its efforts to meet its strategic goals” was the section “Government Actions: Congress or state legislatures could enact legislation that prevents, inhibits or accelerates the effectiveness of reforms pursued by the Commission . . . . State commissions could take actions that affect the desire of companies to invest in new technologies and other resources or that otherwise affect reforms pursued by the Commission.” The Strategic Plan, Appx. A, p. 35 (March 2013).

Ultimately, the IPUC Complaint may prove to be just another fruitful dustup in the nation’s storied history of federal/state relations. A fair view of the context—including that giving rise to FERC’s enforcement action as well as the background generally—suggests that more may be at play. The Article III courts of the United States now have an opportunity to see if that is so.

Scott Grover

Mr. Grover is an energy law partner in the Birmingham, Alabama, office of Balch & Bingham LLP, and a member of the editorial board of Natural Resources & Environment.