The Montana Public Service Commission “arbitrarily and unlawfully” reduced solar generators’ payments and contract lengths under the Public Utility Regulatory Policies Act, the state Supreme Court ruled this week.
Upholding a 2019 lower court order, the high court said the PSC improperly reduced solar qualifying facility standard-offer rates by excluding carbon dioxide emissions costs and other costs from NorthWestern Energy’s avoided-cost rate. It also said the regulators acted improperly in calculating solar QFs’ capacity contributions and reducing contracts to a maximum of 15 years.
The ruling Monday remanded the case back to the PSC for reconsideration of Orders 7500c and 7500d, which reduced standard-offer contract rates and maximum contract lengths for solar QFs of 3 MW or less under NorthWestern’s QF-1 tariff rate. The court acted on a challenge by Vote Solar, the Montana Environmental Information Center and Cypress Creek Renewables.
In 2017, citing remarks by Commissioner Bob Lake caught on a hot mic, the Billings Gazette reported that the rules rejected by the court this week “might have been knowingly set to discourage development.”
The ruling came days after the Solar Energy Industries Association and other intervenors asked FERC to rehear its July rulemaking giving state regulators more flexibility in how they establish avoided-cost rates and the ability to require those rates to vary over the span of a QF’s contract.
‘Gold Rush’ Feared
PURPA and the Montana PSC’s regulations require that avoided-cost rates and contract lengths be sufficient to “enhance the economic feasibility of” QFs. NorthWestern historically signed QF contracts for at least 25-year terms.
The dispute began in May 2016, when NorthWestern asked the PSC to reduce standard-offer rates for small solar and wind QFs from $66/MWh to between $34 and $44/MWh. (See Montana PSC Racks up 2nd Lawsuit over PURPA Rates.)
The utility said the reduction was needed for solar QFs because the $66 rate exceeded its avoided costs and threatened to cause a “gold rush” of developers seeking new QF-1 projects. At the time, NorthWestern had executed five power purchase agreements with small solar QFs, and had 43 active interconnection requests for 3-MW facilities under study and another 75 requests in preapplication phases.
NorthWestern also sought to abandon use of the “proxy” method of calculating avoided-cost rates, which is based on the projected capacity and energy costs of the utility’s next planned resource additions.
The utility asked regulators to adopt the “peaker” method, separating its avoided-cost rate into separate energy and capacity elements. It also proposed that avoided-capacity costs be based on the levelized cost of internal combustion engines it planned to bring online in 2019.
In October 2016, the commission asked for comment on whether 25-year maximum-length contracts were unduly risky for ratepayers and whether a shorter length would be reasonable — issues not raised by Northwestern or any of the intervenors in the case.
In July 2017, the PSC issued Order 7500c, reducing the maximum contract length to 10 years and cutting standard-offer rates for QFs by more than half — lower even than proposed by NorthWestern.
The PSC continued to use the proxy methodology, but it declined to use as its proxy resource the internal combustion engine identified as the next resource to be added under NorthWestern’s 2015 resource procurement plan. Instead, regulators chose to use a combined cycle combustion turbine as its proxy unit.
It adopted what the court called SPP’s “novel” method for calculating QFs’ capacity contributions. Under the new methodology, NorthWestern and the PSC concluded that solar QFs contributed only 6.1% of nameplate capacity, well below the 38% capacity contribution value then used in QF-1 rates.
The PSC also declined to use a carbon emission adjustment in its avoided-cost calculations, saying “the political forces that once indicated environmental regulatory action at the federal level was likely in the reasonably foreseeable future has diminished and, accordingly, the likelihood of carbon emissions regulation has decreased” — a reference to the election of President Trump.
The commission said a 10-year contract would provide sufficient encouragement for QF development while mitigating forecast risk for customers, citing decisions by Idaho and North Carolina regulators, which reduced QF contracts to between two and 15 years.
In November 2017, however, the commission revised the contract length to 15 years in response to requests for reconsideration (Order 7500d).
Reversal
In April 2019, Montana’s 8th Judicial District Court vacated and modified Orders 7500c and 7500d. The state Supreme Court stayed the district court’s ruling pending the appeal.
In its Monday ruling, the Supreme Court concluded it was discriminatory to exclude carbon costs from solar QFs while permitting them for hydro and wind QFs, saying “mere speculation based on political forecasting hardly constitutes technical or scientific knowledge worthy of deference.”
The court also slammed the PSC’s reduced contract length, saying it “was based almost entirely on a 2014 North Carolina Utilities Commission decision. However, the PSC lacks any intimate knowledge regarding QF development policies in North Carolina or other states. Indeed, we find the PSC’s justification especially dubious given its wholesale rejection of out-of-state decisions as a consideration when setting the avoided-cost rate.”
“To be sure, 15-year contracts, standing alone, are not per se unreasonable,” the court added. “But because the PSC failed to consider shortened contract lengths in conjunction with greatly reduced standard-offer QF-1 rates, 15-year contracts cannot be considered sufficient to encourage and enhance QF development.”
The court said the PSC also acted arbitrarily in its distinction between avoided capacity and energy costs. It agreed with the district court’s rejection of the 6.1% capacity factor, which concluded the commission had discounted NorthWestern’s summertime capacity needs and disregarded regional peak demand data. The court said the PSC “focused only on a handful of peak demand hours — 220 hours over a 10-year period — that reflect primarily infrequent wintertime spikes while overlooking evidence that NorthWestern lacks sufficient capacity to meet peak customer demand in both summer and winter.”
The court said the PSC also “misapplied” SPP’s methodology “by acting contrary to the plain language of the SPP criteria and did not articulate a satisfactory explanation for its actions.”
It rejected the argument of the Montana Consumer Counsel that the most critical factor of avoided-cost analysis is protecting the ratepayer.
“Were that the case, there would be no purpose to PURPA, which is to preclude discrimination in the marketplace for sources of energy that provide an alternative to fossil fuel development,” the court said.
It added that NorthWestern’s “frequently uttered trope that the requirements of PURPA and thus approval of solar sources of energy will wildly increase the rates charged to consumers finds little basis of support in this record.”
Rehearing Sought on FERC Rule
The Montana ruling came a week after several groups, including SEIA and the Electric Power Supply Association, asked for rehearing of FERC’s July 16 final rule revising its PURPA regulations (AD16-16, RM19-15). (See FERC Issues Final Rule to ‘Modernize’ PURPA.)
SEIA said FERC’s rulemaking violates PURPA and discourages the development of QFs by terminating their ability to select a long-term energy rate under long-term supply contracts. It also challenged the commission’s revision of the “1-mile” rule for preventing gaming.
“The commission erred in revoking a qualifying facility’s longstanding right to elect to be paid a long-term energy rate in contract for long-term energy delivery without citing to any evidence in the record that financing is generally available for projects using as available energy rates and fixed capacity rates,” SEIA said.
