On September 8, a divided panel of the Fifth Circuit (Smith, Prado (dissenting), Elrod) issued a decision in Exelon Wind 1, LLC v. Nelson, No. 12-51228. Before going any further with my summary, let me start with an exhortation to pay attention to this decision if you care about renewable energy or agency deference. FERC cases—this really is a FERC case, even though FERC was not a party—make a lot of people’s eyes glaze over, but this is a significant opinion. If you care about renewable energy, this is an important decision because it allows states to limit the ability of renewable energy facilities to sell power under the Public Utilities Regulatory Policies Act of 1978 (PURPA) through long-term contracts unless the facilities can provide “firm power.” This “firm power” requirement is a problem for renewable energy developers, because (a) renewable energy, in particular wind and solar, is by its nature often variable and therefore can be difficult to provide as “firm power”; and (b) long-term contracts, especially long-term contracts under PURPA’s favorable terms, are often the key to financing renewable energy facilities. As to administrative law, this case is chock full of discussions of important questions of agency deference, including applications of City of Arlington, Christensen, Auer, and Brand X. Both the majority and dissent engage in detail with these questions—and disagree strongly. So on to the actual decision, which takes a little more explaining than the typical case.
The plaintiffs, various Exelon Wind entities, own wind generation facilities in Texas that meet the definition of “qualifying facilities” under PURPA. PURPA requires utilities to purchase electric power from qualifying facilities at rates that can be quite favorable to the facilities. FERC regulations issued pursuant to PURPA allow qualifying facilities to sell power to utilities either on a flexible “as-available” basis or to a “legally enforceable obligation” at either a predetermined rate or flexible basis.
The Texas Public Utilities Commission’s (PUC’s) rules implementing PURPA—actually, the PUC’s rules implementing FERC’s regulations implementing PURPA—only allow qualifying facilities to sell “firm power” to a legally enforceable obligation. That is, if a qualifying facility is not selling firm power, it can only sell on an “as available” basis. Firm power, as its name suggests, must deliver a specified amount of electric power at a scheduled time. This is difficult for wind generation facilities such as those owned by Exelon.
When Exelon attempted to force Southwestern Public Service Company, a utility, to purchase power from Exelon through long-term legally enforceable obligations, Southwestern refused on the ground that Exelon’s power was not firm power. Exelon complained to the PUC, which sided with Southwestern. Exelon complained to FERC, and FERC opined, in an informal declaratory letter, that a qualifying facility may form a legally enforceable obligation even if its power is non-firm.
Exelon filed suit in federal district court against the PUC. The district court found for Exelon and enjoined the PUC Commissioners from requiring qualifying facilities to provide firm power as a condition of creating a legally enforceable obligation. The PUC and Southwestern, which had intervened, appealed. (According to Judge Prado’s dissent, on appeal the PUC abandoned all but its jurisdictional arguments, which if true makes Judge Smith and Elrod’s adoption of the PUC’s merits position interesting.)
The Fifth Circuit panel majority (Smith, Elrod) for the most part rejected the appellants' jurisdictional objections, holding that the federal courts had jurisdiction to adjudicate Exelon’s claims insofar as they raised a broad-based “implementation challenge” to the PUC, as opposed to an individualized “as-applied challenge” that can only be brought in state court. In the course of its analysis, however, the majority declined to defer to FERC’s interpretation of Exelon’s claims as raising an “implementation challenge”; the court’s analysis includes debatable applications of City of Arlington and Christensen.
As to the merits, the majority held that the PUC’s rule limiting legally enforceable obligations to firm power was within the PUC’s permissible discretion because neither PURPA itself nor FERC’s regulations implementing PURPA specifically address the question. Under the majority's reading, PURPA gives states discretion “to define the parameters of the circumstances in which Qualified Facilities could form Legally Enforceable Obligations” (p. 25). The court declined to defer to FERC’s advisory letter, which had interpreted FERC’s PURPA regulations to allow all qualifying facilities—even those that produce non-firm power—to form legally enforceable obligations.
Judge Prado dissented. He would have held, consistent with FERC’s advisory letter, that the PUC violated FERC’s PURPA regulations, which he read to “mandate that every qualifying facility shall have the option to form legally enforceable obligations” (p. 36).
There’s a lot more to say about this decision, but I’ll leave it at that for now.