The U.S. Court of Appeals for the Fifth Circuit rejected a claim by Chicago-based Exelon that its Texas Panhandle wind farms are entitled to favorable pricing. The wind farms sell power to Southwestern Public Service Company, an Xcel Energy subsidiary.
The dispute stems from an interpretation of the Public Utility Regulatory Policies Act (PURPA) of 1978, designed to help alternative energy developers overcome market barriers created by utility monopolies.
Under PURPA, the wind farms can operate as ‘qualifying facilities,’ meaning they are eligible for special rate and regulatory terms.
But a decade ago Exelon and Southwestern began disputing exactly what those terms are. And the argument has been winding its way through regulatory and court venues, culminating in the September 8 circuit court decision.
Exelon maintained that Southwestern was obliged to enter into a long-term contract based on avoided costs, with payments pegged at $0.035/kWh to more than $0.090/kWh for the first nine years of a 20-year agreement.
Southwestern argued that the price was too high and refused to accept the terms. Because the wind farms could not supply firm power, they were eligible only for a current ‘time of delivery’ price for ‘as-available’ power, the utility said.
In a 2-1 decision, Judges Jennifer Walker Elrod and Jerry Edwin Smith sided with Southwestern and the Public Utility Commission of Texas on the issue.
Elrod and Smith said that while PURPA promotes alternative energy, it does not “do so at the expense of the American consumer” but “mandates that the rates that utilities pay for such power shall be just and reasonable.”
The majority went on to say that the more favorable pricing is meant only for those generators “able to forecast when they will deliver energy to the utility – and capable of delivering the specified amount of energy at the scheduled time.”
What does this mean for wind farms within the Fifth Circuit Court’s jurisdiction (Louisiana, Mississippi and Texas)?
“The issue is concerning,” said Scott DuBoff, an attorney who specializes in environment and energy with Garvey Schubert Barer. “It is advantageous for the wholesale purchaser, and it presents potentially serious disadvantages for the producer of the power.”
Good for Storage
Roy Palk, attorney and senior energy industry advisor at LeClairRyan, said the decision is likely to result in contract renegotiations and partnerships among wind farms that operate as QFs in the affected states.
“Wind producers that are selling into the marketplace in the Fifth Circuit either are going to have to accept the as-available tariff or increase their bundle of offerings when they sell wind to make it firm,” Palk said.
This may mean partnering with other wind farms that will act as back-up, he said. “Power producers do buy and sell from each other on a regular basis, so that model is not foreign to the marketplace.”
Or it could mean employing storage, especially as it comes down in price, to supply power when the wind isn’t blowing.
The court decision “is an incentive for further development of energy storage equipment, further technology developments, further refinements,” Palk said. “Storage is an option, and it’s going to become better and better,”
Of course, much depends on whether or not there is further court action or an appeal. Exelon has yet to show its hand. A company spokesman told Renewable Energy World only that “Exelon is still evaluating the issue.”
Legal experts say that Exelon has a few options. The company could forego legal action and concentrate on contract renegotiation. It could also petition the Supreme Court. It’s unclear whether the Supreme Court would take the case. But if it did, any decision could have implications for QFs nationally.
The Supreme Court receives 10,000 petitions each year and hears only about 80 cases. So even if Exelon did appeal, chances are slim the case would be heard. But there are some elements that could possibly draw the Supreme Court’s interest, say attorneys interviewed.
Of particular note is how the circuit court treated the Federal Energy Regulatory Commission in relationship to the Texas PUCT. The court upheld a state ruling on a federal policy and went against the federal agency’s stand on the policy. FERC had issued a declaratory ruling on the issue that said a QF may collect the more favorable rates, even if its power is not firm.
“It certainly has implications that transcend this case and transcend PURPA,” DuBoff said. “The additional wrinkle here is that you had deference given to a state agency with respect to federal PURPA regulations – and what they mean – as opposed to the federal agency that wrote those regulations and has to implement them at the federal level.”
An appeal to the Supreme Court is not the only legal alternative. Another possibility is a rehearing at the Fifth Circuit Court level. This option is boosted by a strong dissent that was written by Judge Edward Prado, say legal experts.
Prado wrote that the court should give “FERC deference because FERC is the author of the regulation at issue.”
Instead the majority “rejects the considered view of the federal agency that authored the regulation in question and that enforces the program, based on nothing more than the state regulatory authority’s say-so,” he said.
As a result, the decision could create “a far-reaching precedent, with the potential to impact how we review the numerous federal programs that seek to obtain the benefits of both state and federal participation,” he said, citing several examples, among them the Clean Air Act.
Prado also said that the court undermined “an important federal program that promotes renewable energy.” PURPA was meant to provide investment certainty; the decision does the opposite “and, inevitably, many developers will be unable to produce energy using the new technologies that PURPA sought to encourage,” Prado said.
The majority reached beyond the language in PURPA, according to Prado. The federal law says that each QF is eligible for the favorable rate structure and did not distinguish between those offering firm or non-form energy.
But for now – at least in the Fifth Circuit Court’s jurisdiction – wind farms need to figure out how to firm up their power or add storage to get the better QF pricing. One industry’s lament appears to be another’s celebration.
[See also: “The Catch-22 of Energy Storage”, John Morgan, Aug. 25, 2014, The Energy Collective, http://theenergycollective.com/barrybrook/471651/catch-22-energy-storage: “Several recent analyses of the inputs to our energy systems indicate that, against expectations, energy storage cannot solve the problem of intermittency of wind or solar power. Not for reasons of technical performance, cost, or storage capacity, but for something more intractable: there is not enough surplus energy left over after construction of the generators and the storage system to power our present civilization. …”]