By Robert Mullin

In a decision that could boost small solar development in California, a federal appeals court last week struck down a state program that sets the terms by which investor-owned utilities must contract with alternative energy suppliers.

The decision by the 9th U.S. Circuit Court of Appeals found California’s Renewable Market Adjusting Tariff (ReMAT) program violates the Public Utility Regulatory Policies Act by capping the volume of energy that utilities must purchase from qualifying facilities and setting contracts at a market-based rate rather than one based on a utility’s avoided cost. The ruling affirmed a district court opinion.

“The district court observed that ‘despite the complex regulatory and factual background’ in this case, ‘the key legal issues turned out to be straightforward.’ We agree,” Judge M. Margaret McKeown wrote in the appellate panel’s opinion.

The case arose when Winding Creek Solar, a QF seeking to develop a 1-MW solar facility in Lodi, Calif., contested the ReMAT program, which the California Public Utilities Commission implemented in 2013 to set a market-based rate for energy generated by QFs.

After Winding Creek unsuccessfully challenged ReMAT at FERC, it filed suit in the U.S District Court for the Northern District of California, which issued a summary judgment in favor of the company but declined to grant its preferred remedy of receiving the initial $89.23/MWh contract price offered under ReMAT at the program’s inception. The QF then appealed that decision to the 9th Circuit for further review.

‘Essentially an Auction’

The legal questions over ReMAT came down to its design, which was intended to bring an element of competition to QF contracting while providing suppliers with access to a market.

Under the program, QFs in a given utility service territory are placed into a queue on a first-come, first-served basis. Every two months, in what the court described as “essentially an auction,” the utility offers to contract with QFs at the front of the queue at a predefined price. QFs are free to accept or reject the contract, and those choosing the latter can hold their place in the queue until the next round of offerings two months later.

The CPUC caps the volume of energy the state’s three large investor-owned utilities must buy through the program at 750 MW, which is divided among the IOUs based on their share of peak load. Each utility is additionally allowed to subtract from its share any energy that it purchases under other CPUC programs.

The Winding Creek facility would be sited in the territory of Pacific Gas and Electric, which is obligated to purchase about 150 MW of energy under ReMAT, divided equally among “baseload,” “non-peaking as-available” and “peaking as-available” generation. Winding Creek falls under the last category.

The court pointed out that PG&E is obligated to purchase no more than 5 MW of energy from each category over a two-month period, allowing it to halt contract offers after reaching the caps.

The ReMAT program also functions as a kind of dynamic price-setter for QF contracts. While the CPUC initially set a QF contract price of $89.23/MWh for peaking as-available generation, ReMAT prices can adjust every two months based on the willingness of QFs to accept contracts at the price offered during the previous bidding interval. If QFs collectively offer less than 1 MW of energy during a two-month period (and there are at least five unaffiliated QFs in the queue), the price rises for the next interval; if QFs supply more than 5 MW, the price declines. In cases when QFs supply 1 to 5 MW, the price remains unchanged. Prices adjust based on a formula provided by the CPUC.

When Winding Creek was accepted into the ReMAT program in 2013, it was not placed near the top of the queue and did not receive the initial $89.23/MWh price. By the time it received an offer in March 2014, the contract price had fallen to $77.23/MWh, which the developer rejected because it could not operate the facility at that price.

Two Wrongs

The 9th Circuit first took issue with ReMAT’s cap on the amount of energy utilities must purchase from QFs, calling it impermissible because it violates PURPA’s “must-take” provision.

“As a result [of the cap], a utility could purchase less energy than a QF makes available, an outcome forbidden by PURPA,” the court found.

The court further determined that ReMAT’s pricing scheme “runs afoul” of PURPA’s requirement that utilities contract with QFs at their avoided cost rate (ACR). While acknowledging that state agencies have flexibility in calculating that rate, the court said “the ReMAT price, which is arbitrarily adjusted every two months according to the QFs’ willingness to supply energy at the predefined price, strays too far afield from a utility’s but-for costs to satisfy PURPA.”

The court went on to reject the CPUC’s argument that its other PURPA program, known as the “Standard Contract,” provides QFs a sufficient alternative to ReMAT. While that program offers an ACR based on a six-variable formula, the court found that three of the six “are impossible to determine at the time of contracting.”

“The Standard Contract violates PURPA because it fails to give QFs the option to calculate avoided cost at the time of contracting,” the court said.

The court pointed out that PURPA mandates that QFs be given a choice of calculating the avoided cost at either the time of contracting or time of delivery.

“The bottom line is that two wrongs don’t make a right. Because neither option offered by the CPUC is PURPA- compliant, California’s regulatory scheme is pre-empted by federal law.”

But the appellate court also did not provide full satisfaction to Winding Creek, agreeing with the lower court’s decision that it would not be offering “equitable relief” by granting the QF a contract at ReMAT’s initial $89.23/MWh price.

“Indeed, it would be inappropriate to order a non-party to contract with Winding Creek under a modified version of the very program the court had just determined to be pre-empted by federal regulation,” the court found. “It is not the court’s job to fashion a new contract to Winding Creek’s liking.”