United States: FERC's New PURPA Rules Upheld, NEPA Issue Remanded

On September 5, 2023, the Ninth Circuit issued an order in SEIA v. FERC, remanding, without vacatur, the Federal Energy Regulatory Commission's (FERC) revised PURPA regulations implemented through Order No. 872.¹ The court upheld the order on the basis that FERC's challenged modifications were not "arbitrary and capricious." The court, however, found FERC non-compliant with the National Environmental Policy Act's (NEPA) requirement that, at the least, an Environmental Assessment (EA) be performed. Although finding a "serious omission" in failing to conduct a NEPA review, the court also determined that there would be significant disruptive consequences if the order were vacated. The court indicated that it was not unlikely that FERC would adopt the same rule on remand.

As a result, FERC will have the opportunity to comply with NEPA requirements on remand and, should they choose, affirm the regulation which remains unchanged and in effect following the recent Ninth Circuit decision. Should FERC choose to do so, it is unclear whether comments are required to be permitted,² but FERC may offer the opportunity for comment.

I. All Components of FERC's Order No. 872 Were Upheld

The court, addressing each substantive issue brought by petitioners, applied Chevron deference. Specifically, the court analyzed whether FERC's new rule was "contrary to the unambiguous terms" of the Public Utility Regulatory Policy Act (PURPA) or "reflected an unreasonable interpretation of the statute," as required by Chevron. Judge Bumatay, concurring in part and dissenting in part, found that Chevron was not necessary to resolve the matter, which he criticized as inapplicable to this case because the statute was clear. Under his alternative concurring analysis, he reached the same result. The other judges found his reasoning as anticipatory of the potential overturning of Chevron by the Supreme Court.

A. Consistency with "Encouragement" Requirement

Addressing the petitioner's first substantive concern under step one of Chevron, the court found that PURPA statute "require[d] FERC to prescribe 'such rules as it determines necessary to encourage' [Qualifying Facilities (QF)], and it directs FERC to 'from time to time thereafter revise' those rules." The court noted that FERC need only encourage, in its discretion, the development of QFs and that the statute did not require FERC "ratchet" up the level of encouragement with each new regulation. The court then turned to the second step of Chevron, finding that FERC's conclusion that the new regulations "may end up encouraging QF development differently from current PURPA Regulations, but the Commission's regulations continue to encourage QF development." The court thereafter concluded that the Commission had properly balanced the need to encourage QFs "in new ways" against other competing interests.

B. Site Rule

In Order No. 872, FERC created a non-rebuttable presumption as to affiliated QFs within 1 mile of one another being located at the same site for determining size and allowed entities to seek to prove that affiliated QFs located within 1-10 miles of one another are at the same site. QFs over 10 miles apart are considered separate sites. The court noted that step one of Chevron is satisfied because Congress explicitly delegated the task of determining what constituted a single site. The court then moved to step two, determining that "site" is more than simply location and proximity, and thus FERCs more expansive definition was appropriate. As to whether the choice of 10 miles was arbitrary, the court indicated that effectively any number selected would be arbitrary in some sense, but found that where an agency has to choose a number from a range, a court will uphold the number even if other reasonable figures exist. The court also noted that this greater proximity requirement was reasonable because the one mile requirement was, in some cases, strategically abused to gain the benefits of PURPA. Furthermore, the court ruled that the change of rules was not retroactive merely because it "upsets expectations based in prior law" or "is applied in a case arising from conduct antedating the statutes enactment." Rather, the court looked favorably upon FERC's "substantive changes" exception to the new rules, whereby existing expectations were largely unchanged under the new rule.

C. Fixed Rate Rule

In Order No. 872, FERC allowed the avoided energy cost portion of a QF's contract to vary based on the as-available rate calculated at the time of delivery but continued to require that QFs be given the option to receive avoided capacity costs at fixed rates. The court explained under Chevron step one that the statute was so broad that FERC could have imposed a variable energy price since the inception of PURPA. As to the argument that QFs now must accept a variable, uncertain energy rate, whereas utilities are guaranteed the long-term recovery of their costs and a return on investment such that QFs now face financial risks that utilities do not, the court held that Congress never intended to impose traditional ratemaking concepts on QFs. "Order [No.] 872 requires that QFs receive a rate equal to full avoided costs, and that is sufficient to satisfy the nondiscrimination requirement." The opinion held that FERC explained its changed policy on energy rates by finding that its prior belief as to under- and over-recovery evening out over time was no longer supported by evidence and that "it is not necessarily the case that overestimations and underestimations of avoided energy costs will balance out." This finding of routine overestimations not balanced out by underestimations fully justified the change in policy. As to arguments that the change would make financing difficult, the court observed FERC's finding that the variable energy rate/fixed capacity rate construct is the standard rate structure used throughout the electric industry for power sales agreements. The evidence of a 700 percent increase in independent renewable generation between 2005 and 2018, also supported FERC's position that QFs would be financeable. Furthermore, the court looked favorably on FERC's finding that the new interpretation "better compli[es] with the statutory requirement that rates not exceed avoided costs."

D. LMP for Energy in Organized Markets

In Order No. 872, FERC provided states the flexibility to use various market prices when calculating a utility's avoided costs, allowing states to adopt a rebuttable presumption that, for utilities located within certain organized energy markets, the Locational Marginal Price (LMP) reflects the purchasing utility's avoided costs. Petitioners' position, that some utilities procure energy outside auctions and may have avoided costs higher than the LMP, was rejected because a state's use of LMP as a rational proxy for a utility's avoided costs could be rebutted on a case-by-case basis, if and when a state adopted such approach.

E. Rebuttable Presumption of Market Access Set to 5 MW for Renewable QFs in Organized Markets

In Order No. 872, FERC found that "Renewable QFs", i.e., small power production facilities, with a net capacity above 5 MW, will be presumed to have nondiscriminatory access to certain markets such that utilities in those markets can submit filings to be relieved of buying from such Renewable QFs. The former size minimum for mandated purchases was 20 MW for both cogeneration and Renewable QFs. FERC cited changed circumstances since the issuance of Order No. 688 to justify its downward revision of the market-access presumption from 20 MW to 5 MW for Renewable QFs. The court reviewed FERC's stated basis for that revision – more mature markets, RTO requirements to allow 100 kW resources to participate in markets, and evidence of under 20 MW QFs participating in markets – and thus found FERC's explanation sufficient.

II. The Court Ordered FERC to Conduct NEPA Review, Rejecting Arguments that the Rulemaking Was Entirely "Clarifying, Corrective, or Procedural"

In Order No. 872, FERC determined that its order fell within a "categorical exclusion" to NEPA for rules that are "clarifying, corrective, or procedural" in nature and held that any downstream environmental effects were too uncertain and speculative to trigger NEPA review. The court disagreed with FERC that several of its policy changes were corrective, holding:

As to the foreseeability issue, FERC claimed both that its rule did not involve a particular project and that it was impossible to know what the states may choose to do and what impacts the changes would have. FERC also noted that it had no way to model or predict the effects of a rule of this nature. The court found that FERC misinterpreted the case law and ruled that an EA is required for a major agency action unless it normally does not have a significant effect on the human environment. The court found that it was "eminently foreseeable that a regulatory change of this magnitude could produce significant environmental effects" because it was a near-certainty that at least some QFs could lose their status under the Site Rule, or that at least some states would eliminate the fixed-rate option for the calculation of energy avoided costs. The court elaborated that "because many QFs rely on renewable power sources, it takes little imagination to see that a reduction in the incentives provided to QFs could, in turn, alter the mix of energy production, shifting production away from renewable production and toward fossil-fuel production." Thus, the court remanded Order No. 872, requiring FERC to perform an EA. The court noted that if FERC is unable to model or predict the impacts, it should explain that in the EA.

Importantly, the court did not vacate the Final Rule due to the failure to prepare an EA. The Ninth Circuit test for vacatur weighs the seriousness of the agency's error against the disruptive consequences of an interim change that may itself be changed. Although the court found the EA omission serious, the Ninth Circuit asks whether the agency would likely be able to adopt the same rule on remand and the court had no reason to believe that the agency would be unable to cure the deficiencies on remand. As to the disruption that a vacatur would cause, the court ruled it would be significant. The court noted that FERC, various states, and regulated parties have all begun to implement the rule in various ways. The court noted that "several" utilities have already applied for – and received – relief from their mandatory-purchase obligations when dealing with facilities between 5 and 20 MW in size. Actually, PURPA relief dockets already number approximately 50, with most filings by larger, investor-owned utilities.

Judge Bumatay, concurring in part and dissenting in part, found that no petitioners had standing to bring the NEPA claims, and thus, he would not have remanded the matter to FERC.

III. Further Proceedings

A request for rehearing en banc, let alone a petition to the Supreme Court by the Petitioners, is somewhat unlikely, given the strength and tone of the opinion. Similarly, FERC likely will not appeal further and instead, will await the court mandate and proceed to the required NEPA process. The fact that FERC issued an EA with its initial PURPA regulations decades ago (an Environmental Impact Statement (EIS) also was prepared, but only as to diesel generators) supports the argument that judicial relief is unlikely. NEPA regulations require that FERC shall involve the public, State, Tribal, and local governments, relevant agencies, and any applicants (to the extent practicable) in preparing the EA. Several environmental organizations submitted NOPR comments arguing that an EA and EIS were both necessary. FERC thus may seek input on the required EA as part of an effort to bolster its position that the PURPA rule changes are not likely to have significant effects on the environment and to counter the likely further efforts by environmental organizations and the QF industry to push for an EIS.

Footnotes

1. Solar Energy Indus. Ass'n v. FERC, No. 20-72788, 2023 WL 5691711 (9th Cir. Sept. 5, 2023).

2. 18 CFR § 380.10(b). Though FERC has already had a comment period where parties were permitted to – and did – submit comments on "environmental issues" in the proceeding, FERC may provide additional opportunity to comment to have a more complete record in issuing a final EA.

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