Montana Supreme Court Again Rejects Public Service Commission's Modifications to PURPA Contracts
Following on the heels of its recent rejection of the Montana Public Service Commission’s (PSC) new standard contracts for small “Qualifying Facilities” (QFs) under the Public Utility Regulatory Policies Act of 1978 (PURPA), the Montana Supreme Court on September 22, 2020, again strongly rejected the PSC’s approach to PURPA contracts, this time for a large solar project. The Court’s new decision, MTSUN, LLC v. Montana PSC, concludes that the PSC exceeded its authority in attempting to modify several key contract terms for MTSUN’s 80-MW solar project, located near Billings, Montana. The decision also lays out standards for determining when a “Legally Enforceable Obligation” or “LEO” is formed, triggering PURPA’s much-purchase obligation. The decision may prove to be a particularly important precedent on this contentious and confusing aspect of PURPA law.
As we have previously discussed in greater detail, PURPA was enacted in 1978 in response to the recurring energy crises of that decade. Section 210 of PURPA requires regulated utilities to purchase power produced by “Qualifying Facilities” or “QFs,” small, independent renewable power producers and cogenerators, at “avoided cost” rates. This “must-purchase” obligation was intended to overcome the reluctance of vertically-integrated utility monopolies to permit their competitors access to retail electricity markets. While PURPA requires the Federal Energy Regulatory Commission (FERC) to promulgate rules guiding the implementation of PURPA by state utility commissions and the governing boards of publicly-owned utilities, the day-to-day implementation of PURPA is largely left to the states. Hence, the Montana Supreme Court’s decision and state decisions like it are quite important to the continuing vitality of PURPA.
The Montana court’s decision resolves a long dispute between MTSUN and Northwestern Energy, the investor-owned utility that serves a large part of Montana, over the terms of its QF contract with Northwestern. Because it exceeds the 3-MW limit for standard contracts offered under Montana’s “Mini-PURPA” statute, MCA 69-3-601 to 604, MTSUN was required to negotiate the terms of its PURPA contract with Northwestern. The negotiations began in 2015, but dragged out for over a year. The parties ultimately agreed on most terms of the contract but failed to agree on the capacity contribution percentage of MTSUN’s project, that is, the percentage of the project’s total capacity that supports Northwestern’s need for electric generating capacity rather than energy. On December 21, 2016, MTSUN petitioned the Montana PSC, asserting that it had formed a LEO by agreeing to all major terms of the contract proffered by Northwestern, and asking the PSC to resolve the methodological dispute that prevented the parties from agreeing on MTSUN’s capacity contribution percentage.
Rather than simply resolving the dispute concerning MTSUN’s capacity contribution, the PSC essentially rewrote the contract. The PSC concluded that no LEO had been formed because MTSUN had not agreed on the avoided cost rate proposed by Northwestern. The PSC also reduced the avoided cost rate for energy, eliminated a cost-of-carbon adder, and reduced the contract term from 25 to 10 years, even though the parties had agreed on those aspects of the contract. The end result was to reduce the avoided cost rate requested by MTSUN from $63.70 per MWh to $37.55 per MWh. MTSUN successfully appealed the PSC’s decision to the Montana District Court, which overturned the PSC’s decision. The PSC and Northwestern appealed the District Court’s decision to the Montana Supreme Court, which affirmed the District Court in all respects.
The Court's Decision
The Montana Supreme Court rejected the PSC’s conclusions across the board. On the question of LEO formation, the Court concluded that the PSC erred in requiring a complete agreement on all portions of the avoided cost rate because the PSC’s decision is inconsistent with FERC precedent making clear that a contract with the utility agreeing on all terms cannot be a prerequisite to a LEO. Requiring fully-formed contracts is inconsistent with the LEO concept, which is intended to prevent utilities from delaying contract negotiations in the hopes of obtaining more favorable avoided cost rates. Rather, the Court concluded, MTSUN had formed a LEO because it had submitted a binding offer to sell its output, and the difference in price between MTSUN and the utility was less than $1.00 per MWh. Further, MTSUN had undertaken significant work in developing its project, including obtaining control of its site and obtaining necessary permits. In addition, MTSUN had filed two petitions with the PSC seeking to resolve specific disputes with the utility. In the Court’s view, these factors made it clear that MTSUN had made a binding commitment to sell its output to Northwestern, and the PSC’s decision that no LEO had been formed was therefore unsupportable. Thus, the Court concluded, MTSUN formed a LEO when it submitted its petition to the PSC seeking to resolve the issue on capacity value, and it is entitled to avoided cost prices that were in effect at that time rather than the later, and lower, prices relied on by the PSC.
The Court also concluded that the PSC exceeded its authority in rejecting the parties’ agreed-upon avoided cost rates for energy, avoidance of carbon emissions, and the 25-year contract term. The Court reasoned that the PSC’s conclusions are inconsistent with both PURPA and state contract law. In addition, because it was acting in a quasi-adjudicatory capacity, the PSC was only authorized to resolve the disputed capacity cost issue, and not to rule on issues the parties did not dispute.
The Court also resolved the dispute regarding MTSUN’s capacity value in MTSUN’s favor. The Court reasoned that PURPA requires utilities to pay QFs the full avoided cost of the energy they provide. Thus, the PSC was required to look to Northwestern’s Integrated Resource Plan, which projected a capacity deficit by 2019 which Northwestern planned to fill with natural gas-fired combustion turbines. The utility’s avoided cost of capacity should therefore be measured by the costs of these gas turbines, and the extent to which the purchase from MTSUN allowed the utility to avoid these costs, rather than the PSC’s assumption that new capacity would not be needed until 2025.
Finally, one other aspect of the Court’s decision is worthy of note. The Court concluded that the dispute between the PSC and MTSUN is an “as-applied” dispute, and therefore the Montana courts had jurisdiction to hear the dispute under PURPA Section 210(g). The dispute is not an “implementation” dispute, which would require it to be resolved by federal courts under PURPA Section 201(h). This jurisdictional distinction has been another vexatious issue under PURPA, and the decision therefore could prove to be an important precedent on this issue, as well. While the Court was unanimous on the other issues addressed in the opinion, two judges signed a concurring opinion finding that, if it had been a matter of first impression, they would have rejected jurisdiction on the grounds that this was an “implementation” dispute. However, believing they were bound by earlier Montana precedent, they concurred with the Court’s assertion of jurisdiction, as well as its substantive conclusions.
Importance of the Decision
Because Montana has plentiful renewable resources, the Court’s decision is important because it clarifies that PURPA remains a viable pathway for independent power producers to develop and market these resources. The decision also adds significant clarity to the LEO concept, and to the appropriate role of state commissions in resolving disputes related to LEOs. Finally, the issues resolved by the Court were all major points of contention leading up to FERC’s recent overhaul of PURPA implementation rules. The decision again underscores the importance of state implementation actions in carrying out the new PURPA implementation rules assuming they survive an impending legal challenge.