By Michael J. Gergen and Tyler Brown

On September 8, 2014, the United States Court of Appeals for the Fifth Circuit (“Fifth Circuit”), in a 2-1 decision, reversed an opinion by the United States District Court for the Western District of Texas (“District Court”) and held that the Public Utility Commission of Texas (“PUCT”) acted within its discretion and properly implemented a federal regulation under the Public Utilities Regulatory Policies Act of 1978 (“PURPA”) in a manner that limits the ability of Qualifying Facilities (“QFs”) to enter into a long-term, fixed-price power purchase agreements, known as “PURPA Put Contracts,” with electric utility buyers to QFs that generate “firm power” as defined by the PUCT.  This decision calls into question the ability of intermittent generation resources, such as many wind generation resources, in Texas (and potentially in Louisiana and Mississippi, the two other states in the Fifth Circuit) to sell power under PURPA Put Contracts.   

Under a provision in the federal PURPA regulations issued by the Federal Energy Regulatory Commission (“FERC”) “each qualifying facility shall have the option…to provide energy or capacity [to an electric utility] pursuant to a legally enforceable obligation for the delivery of energy or capacity over a specified term…based on either…the [utility’s] avoided costs calculated at the time of delivery[,or]…calculated at the time the obligation is incurred.” 18 C.F.R. § 292.304(d).

PURPA requires states to implement FERC’s PURPA regulations, including the provision quoted above. The PUCT implemented FERC’s regulations by issuing its own regulations, which in part limit the class of QFs that can obtain a legally enforceable obligation to only those QFs that generate “firm power.” The PUCT regulations, in turn, define “firm power” as “power or power-producing capacity that is available pursuant to a legally enforceable obligation for scheduled availability over a specified term” and “non-firm power” as “power provided under an arrangement that does not guarantee scheduled availability, but instead provides for delivery as available.”

The controversy underlying the Fifth Circuit decision involves a group of wind-powered QFs currently owned by Exelon (“Exelon Wind”), which sought to enter into PURPA Put contracts with Southwestern Public Service Company (“SPS”), an electric utility. In May 2009 the PUCT issued an order finding that only when a wind farm can provide firm power as defined by the PUCT may it enter into a legally enforceable obligation (“PUCT Order”). Exelon Wind subsequently submitted a filing at FERC, requesting that FERC (i) declare that the PUCT’s actions were inconsistent with PURPA and FERC’s PURPA regulations and (ii) initiate an enforcement action in federal district court under section 210(h) of PURPA to compel the PUCT to act in a manner consistent with PURPA and FERC’s PURPA regulations.

FERC declined to initiate an enforcement action (thereby permitting Exelon Wind to bring its own action in federal district court), but did issue a declaratory order finding that “the requirement in Texas law that legally enforceable obligations are only available to seller of ‘firm power,’ as defined by Texas law, [is] inconsistent with PURPA and our regulations implementing PURPA, particularly section 292.304(d) of our regulations.” FERC interpreted Section 292.304(d) of its own PURPA regulations as providing every QF, without qualification, the ability to sell its output pursuant to a legally enforceable obligation. Exelon Wind brought its own enforcement action in District Court, which issued an order agreeing with FERC’s reasoning and conclusion in its declaratory order.

In a lengthy review of the District Court’s subject matter jurisdiction over the controversy, the Fifth Circuit vacated the District Court’s opinion with respect to Exelon Wind’s challenge of the PUCT Order itself for a lack of subject matter jurisdiction. The Fifth Circuit unanimously held the challenge of the PUCT Order to be an “as-applied” challenge, which, under PURPA and applicable judicial precedent, is within the exclusive jurisdiction of state courts.

The Fifth Circuit also unanimously held that Exelon Wind’s challenge of the PUCT regulations regarding which QFs are eligible to obtain a legally enforceable obligation under PURPA was properly before the District Court, as “implementation” challenges under PURPA are within the jurisdiction of federal courts. In considering Exelon Wind’s implementation challenge the Fifth Circuit panel, however, was divided on whether the PUCT regulations are contrary to PURPA and FERC’s PURPA regulations.

The majority, relying heavily on a 2005 decision by the Fifth Circuit (Power Res. Grp. v. Pub. Util. Comm’n, 422 F.3d 231 (5th Cir. 2005)), found that FERC’s regulations grant the states discretion in setting the specific parameters for eligibility to obtain a legally enforceable obligation and that the plain language of the relevant provision in FERC’s PURPA regulations (quoted above) does not require that all QFs be eligible to obtain a legally enforceable obligation. Consequently, the majority deferred to the PUCT’s regulations and the PUCT’s interpretation of FERC’s PURPA regulations and upheld the PUCT’s limitation on eligibility to enter into a legally enforceable obligation to “firm power” resources as a proper implementation of FERC’s PURPA regulations. In doing so, the majority decided to give no deference to FERC’s declaratory order interpreting Section 292.304(d) of its PURPA Regulations as not allowing for a distinction between firm and non-firm generation resources, but instead, found this order to have no more weight than an informal guidance letter (and repeatedly referred to it as “FERC’s Letter”).

The dissent strongly disagreed with the majority and found that the plain language in Section 292.304(d) of FERC’s PURPA regulations, especially the express reference to “each qualifying facility shall have,” requires that every QF be eligible to obtain a legally enforceable obligation. Finding the plain language clear and unambiguous the dissent found it unnecessary to consider whether the PUCT or FERC should be afforded interpretive deference. However, as it is a “hard issue of first impression” the dissent explained why it would find that FERC should be afforded deference in interpreting its own regulation, rather than the PUCT.

The Fifth Circuit’s decision upholding the PUCT regulations limiting those QFs eligible to obtain a legally enforceable obligation to those that can supply firm power, calls into question the ability of intermittent generation resources, including many wind resources, in Texas to enter into PURPA Put Contracts. This decision also calls into question whether the public utility commissions in Louisiana and Mississippi (which are also within the jurisdiction of the Fifth Circuit) can similarly restrict QFs’ ability to enter into PURPA Put Contracts.