California Feed-in-Tariff Program that Promotes Renewable Energy Procurement (Re-MAT) Found To Be Unconstitutional

As California marches forward with its aggressive renewable energy targets, expecting to procure half of its electricity from renewables by 2030, a recent federal district court decision calls into question the constitutionality of one of the major regulatory programs that the California Public Utilities Commission ("CPUC") implemented to foster further renewable development.

On December 6, 2017, the U.S. District Court for the Northern District of California issued an order granting summary judgment in favor of a solar developer, Winding Creek Solar LLC ("Winding Creek"), which is attempting to build a solar facility in Lodi, California and seeking a contract to sell energy from the project to Pacific Gas and Electric Company ("PG&E"). The decision involves the Renewable Market-Adjusting Tariff ("Re-MAT") that the CPUC created in 2013 and which is implemented by the state's investor-owned utilities ("IOUs"), including PG&E, Southern California Edison Company, and San Diego Gas and Electric Company.

Re-MAT is what is commonly referred to as a "feed-in tariff," which is a regulatory policy mechanism designed to accelerate the development of renewable energy projects such as wind and solar. The CPUC's Re-MAT program guarantees certain renewable energy generators, known as "Qualifying Facilities" or "QFs," the right to enter into a standard contract to export electricity to California's IOUs. In essence, if a developer can build a working renewable project in California under 3 megawatts in size, it is guaranteed a contract to sell the project's energy to one of the state's IOUs.

Each IOU offers standard $/MWh pricing for Re-MAT contracts, but the price fluctuates over time based on principles of supply and demand (i.e. when many developers are seeking to enter Re-MAT contracts, the price falls; when fewer developers are seeking re-MAT contracts, the price increases). At the start of the Re-MAT program, the offer price for peaking as-available facilities like Winding Creek was $89.23/MWh, but the price has consistently fallen over time. In addition, due to concerns that too many projects would take advantage of the Re-MAT program, California placed a 750 megawatt statewide cap on the quantity of Qualifying Facility generation that the IOUs are required to purchase under the Re-MAT program.

After failing to secure a Re-MAT contract at a price that it deemed acceptable, Winding Creek challenged the constitutionality of the Re-MAT program in federal court. Winding Creek argued that Re-MAT was in conflict with the federal Public Utility Regulatory Policies Act ("PURPA") and it's implementing regulations for two reasons. First, Winding Creek argued that the statewide cap of 750 megawatts conflicts with the federal mandate under PURPA that utilities must buy all of the energy and capacity offered by QFs (this federal mandate is known as a "must-take" obligation). Second, Winding Creek argued that the method for setting Re-MAT contract pricing does not satisfy the definition of "avoided cost" in PURPA's implementing regulations, which generally requires that QFs be compensated at a price equal to what the utility would otherwise have paid for alternative energy (i.e. the utilities "but-for" cost).

In a surprising decision issued on December 6, the Northern District of California agreed with Winding Creek's two arguments, finding that the Re-MAT program conflicts with PURPA and its implementing regulations and thereby violates the Supremacy Clause of the U.S. Constitution. The court determined that: (1) the CPUC's imposition of caps in the Re-MAT program violates PURPA's must-take obligation for QFs; and (2) the procedure for setting Re-MAT pricing strays too far from the PURPA requirement that QF contract pricing be set on a utility's but-for cost. The case is Winding Creek Solar LLC v. Michael Peevey, et al., Case 3:13-cv-04934-JD (N.D. Cal).

On December 15, 2017, in response to the court's decision, the CPUC's Executive Director issued a letter to the state's IOUs directing them to refrain from executing any new Re-MAT contracts, holding any new Re-MAT program periods, or accepting any new Re-MAT applications, effective immediately and pending next steps by the CPUC. It is not yet clear whether the CPUC intends to appeal the district court's decision to the 9th Circuit Court of Appeals. The CPUC will have 30 days from the district court's December 6 decision to file its notice of appeal.

The Road Ahead

The Winding Creek decision does not impact the validity of the contracts previously-executed under the Re-MAT program. However, it is unclear whether the decision could have ramifications for other feed-in-tariff programs instituted by the CPUC, particularly the Bioenergy Market Adjusting Tariff (BioMAT) program through which the IOUs are obligated to purchase power from qualifying biomass projects that produce energy from fallen trees and other forest material. The BioMAT program was launched in 2015 in part to help address California's ever-growing risk of forest fires by providing developers with an incentive to use forest material and debris as the fuel for producing renewable energy.