Doug Kincaid, MJLST Staff Member
Recently, in Exelon Wind L.L.C. v. Nelson, 766 F.3d 380 (5th Cir. 2014), the Fifth Circuit Court of Appeals (Fifth Circuit) held that state agencies are entitled to deference under the Public Utilities Regulatory Policies Act of 1978 (PURPA) – a cooperative federalism regulatory scheme. The case revolved concerned the Texas Public Utilities Commission (PUC), which claimed that under state law a wind farm generating intermittent power (“non-firm”) power could not enter into a legally enforceable obligation (LEO) under Texas law, and that such an obligation was not required under PURPA. Unable to enter into a fixed price agreement, the generator was subject to highly variable market prices, increasing the financial risk of the project dramatically.
The Federal Energy Regulatory Committee (FERC) responded by declaring that federal law required all qualifying facilities under PURPA have the option to enter into a LEO. The Fifth Circuit, faced with competing state and federal interpretations, upheld the state interpretation despite the fact that FERC authored the relevant statutes. Because wind and solar energy, by nature, cause scheduling difficulties and extra costs to state agencies overseeing regional energy grids, an incentive may exist for other state agencies to follow the PUC’s lead. The Fifth Circuit’s holding in Exelon frustrates renewable energy development by refusing renewable generators the option to enter into LEOs and expands the deference state agencies are entitled to in a cooperative federalism regulatory scheme.
To the extent federal and state agencies disagree on the interpretation of a cooperative federalism statute, district courts are fragmented and little scholarship exists regarding how to resolve these conflicts. In determining whether to defer to a state agency’s interpretation of federal law, five out of six federal circuits which have considered the issue elected to give state agencies no deference. The underlying basis for federal deference in these cases was a sentiment favoring federal supremacy. The Fourth Circuit, an outlier, granted deference to state agencies citing state agency expertise in tailoring federal regulations to local conditions. Here, the Fifth Circuit in Exelon v. Nelson created a novel line of reasoning on this issue.
In relevant part, PURPA states that “Each qualifying facility shall have the option either: (1) To provide energy. . . based on the purchasing utility’s avoided costs calculated at the time of delivery; or (2) To provide energy or capacity pursuant to a legally enforceable obligation.” The plain meaning of this language, under traditional principles of statutory interpretation, creates a mandatory choice vested in the qualifying facility. The Fifth Circuit, however, read the statute as a bare-bones framework on which state agencies can project any regulation not expressly denied by the statutory language. Because PURPA contains no specific language addressing the obligation of firm or non-firm generators to form LEOs, the PUC regulation presents no facial conflict with PURPA.
The creative judicial interpretation employed to circumvent the mandatory choice interpretation reveals that the Fifth Circuit treated state sovereignty as a controlling concern in the examination of conflicting state and federal agency interpretations. A previous holding in F.E.R.C. v. Mississippi, 456 U.S. 742 (1982), held that PURPA subtly circumvents the anti-commandeering doctrine by allowing states to “comply with the statutory requirements by issuing regulations, by resolving disputes on a case-by-case basis, or by taking any other action reasonably designed to give effect to FERC’s rules.” Perceiving a potential Tenth Amendment conflict caused by forcing state governments to implement FERC’s PURPA regulations, the court hesitated to “wade unnecessarily into such murky waters” and instead elected to defer to the PUC. Exelon v. Nelson may remain an outlier, but considering the importance of state and federal agency cooperation in the energy sector, granting deference to state agency interpretations on constitutional grounds could have a significant effect on energy law. Nonetheless, in terms of implementation of PURPA, the court’s ruling is a setback for renewable energy and may require legislative action to clarify the intent of the law.
PURPA serves to promote renewable generation by creating a mandatory purchase provision for small generation facilities, an increasingly important function considering the massive carbon footprint of the power sector. The holding in Exelon v. Nelson reduces FERC’s power to promote renewable power. A simple legislative fix would preserve state implementation authority under PURPA while eliminating the state’s ability to frustrate renewable energy development through state regulations dictated by purchasing utilities.
Congress sets forth in PURPA’s text three express purposes: “to encourage (1) conservation of energy supplied by electric utilities; (2) the optimization of the efficiency of use of facilities and resources by electric utilities; and (3) equitable rates to electric consumers.” Congress should enact a fourth purpose for PURPA: “to encourage” renewable resources and long-term reduction of carbon emissions. Pursuant to this change, the purpose of PURPA would in fact change very little as renewable energy is already a key component of the statute. State regulations singling out renewable generators would be necessarily rejected in federal or state court pursuant to the express will of Congress. The amendment would honor the structure of cooperative federalism inherent to PURPA by balancing the state role of implementation with the federal role of enforcement, while strengthening the benefits derived by renewable generators from the mandatory purchase requirement.
In sum, Exelon v. Nelson presents a new and potentially significant holding on cooperative federalism – a staple legislative tool in today’s agency intensive power sector. It remains to be seen whether this case will bear significantly on future agency deference or remain an outlier, but the holding certainly calls into question the ability of renewable energy generators to enter into LEOs under PURPA. To counteract this negative effect, Congress should make “encouraging renewable resources and long-term reduction of carbon emissions” an express goal of PURPA, cementing the purpose that the statute already serves.
