A federal court in New York is scheduled to hold a hearing Friday on a case that could have implications for the legal boundaries between federal and state authority regarding energy policy.
Among the possible repercussions would be a change in how states structure mechanisms for meeting renewable energy targets.
The case is being watched by renewable energy stakeholders for its implications, but it is possible the plaintiff may not get past the first hurdle, which means the court might not rule on the merits of the case. Even if that does happen, the court’s action could be consequential for 460 MW of renewable energy projects sitting in limbo.
The plaintiff, Allco Financial, an affiliate of developer Allco Renewable Energy, was rebuffed twice by a federal court that ruled the company did not have the legal standing to bring the case. The case is now before the U.S. Court of Appeals for the Second District where a hearing is scheduled for Dec. 9.
Allco’s complaint concerns wholesale power purchase contracts awarded in a request for proposals (RFP) jointly issued by Connecticut, Massachusetts and Rhode Island for renewable energy capacity. Early last month the appeals court issued an injunction that prohibited the Connecticut Department of Energy and Environmental Protection (DEEP) and the Connecticut Public Utilities Regulatory Authority from approving the contracts awarded in the RFP. Allco bid in the first of two rounds of RFPs, one in 2013 and one in 2015.
After the first solicitation, Allco filed a complaint in federal district court against the Connecticut Department of Energy and Environmental Protection, arguing that the state violated the Federal Power Act by setting wholesale power rates, which are the sole jurisdiction of the federal government, and compelling Connecticut utilities to enter into wholesale power contracts. Allco argued Connecticut’s actions are a violation of the Federal Power Act (FPA) and the supremacy clause of the U.S. Constitution, which holds that federal law preempts state law.
The district court dismissed the complaint, saying Allco lacked standing to bring the case because it suffered no injury and “it is speculative at best whether Allco’s claimed injury would be redressed by a favorable decision.”
The Second Circuit Court of Appeals upheld the district court’s finding, but on an alternative basis. Allco lacks standing, the court found, because the company had not exhausted administrative remedies under law by first seeking satisfaction from the Federal Energy Regulatory Commission.
Allco had meanwhile filed a second complaint in district court. The new claim repeated the claim under the supremacy clause and added a new argument: The RFP violated the rights of qualifying facilities (QFs) under the Public Utility Regulatory Policies Act of 1978 (PURPA). In that claim, Allco argues that states have no legal right to compel action in the wholesale power market except under and in compliance with PURPA.
Ultimately Allco would like to see the 2015 RFP voided and issued again under PURPA. One of Allco’s arguments is that Connecticut violated PURPA by not allowing bids for projects under 20 MW, for which PURPA makes accommodations. The state argues that not only is it following precedent and settled law in issuing an RFP for its needs, but that it also conducts a separate process that is available for smaller renewable energy projects.
Allco also added a new claim in its second complaint, arguing that the deliverability of the renewable energy credits (RECs) in the RFP is a form of “regional protectionism” and, thus, in violation of the dormant commerce clause of the Constitution under which states are barred from obstructing interstate commerce.
Allco acknowledges that a state can solicit in-state RECs, but by accepting RECs from the ISO New England region it is showing favoritism among states. Allco argues it should be able to bid RECs from its Georgia solar farm into the 2013 RFP.
The district court dismissed Allco’s second complaint in March 2016. Allco brought the case to the Second Circuit Court of Appeals where it now awaits a hearing. In its appeal, Allco also sought an injunction to halt the award of contracts under the RFP, which the court granted.
In its filing, Allco argued to the appeals court that it had cured the administrative defect by petitioning FERC and, thus, had standing before the court.
The FERC cure
In September 2016, Allco and Windham Solar LLC filed a petition for enforcement at FERC against the Connecticut Public Utilities Regulatory Authority (PURA). The plaintiffs argue that PURA violated FERC’s regulations regarding the right of a qualifying facility (QF) as designated under PURPA to sell power under a legally-enforceable obligation at a forecasted avoided cost rate.
FERC on Nov. 22 declined to take action, which the commission said “means that Petitioners may themselves bring an enforcement action against the Connecticut Authority in the appropriate court.”
FERC did, however, weigh in on the issue with a declaratory ruling upholding the rights of QFs to receive both energy and capacity payments for under long-term avoided cost rates as provided for by its regulations.
In the ruling, FERC reiterated that it has “long held” that QFs need to be able to enter into legally enforceable contracts on estimates of “future avoided costs” that are long enough “to allow QFs reasonable opportunities to attract capital from potential investors.”
That is the “heart of the matter,” according to Jerry Bloom, a partner at Winston & Strawn. In an historical context, the Energy Policy Act of 2005 amended PURPA, allowing utilities to opt out of PURPA’s mandatory purchase obligation in regions where there are competitive markets.
That forces QFs into the spot market, and it can be difficult to finance a project solely on the basis of short-term prices. Those concerns were obviated as states began offering long-term contracts under their renewable portfolio standards.
But more recently the flow of long-term power purchase agreements has begun to slow as states near their RPS targets and as PPA prices have declined with falling renewable energy costs. Those factors are prompting developers to look once again at PURPA as a source of financeable contracts for their projects.
“The issue is becoming bigger and bigger,” Bloom said.
The PURPA wedge
In that context, Allco is reinserting PURPA as a wedge in the competitive wholesale market where it operates. FERC itself has upheld states’ rights to set their own energy policy, a fact noted in the Allco case filings.
If the appeals court grants that Allco has standing and takes up the case on its merits, the ruling could be significant on several fronts.
If Allco is successful to the full extent of its argument regarding the supremacy clause, it could mean that state power solicitations would have to be conducted in accordance with PURPA and that those projects would be paid long-term avoided cost rates.
But even if the court does not directly address the supremacy clause issues, it could set a precedent for other pending energy cases.
In several instances in the Allco cases, plaintiff and defendants both invoke Hughes v. Talen Energy Marketing, the Supreme Court case that ruled against Maryland’s plan to provide incentives to in-state generation. That case is seen as a victory for FERC and wholesale markets, but was a mixed result for independent generators, and it imposed limits on the mechanisms states’ have at their disposal for setting their energy policies.
Hughes has been invoked several times recently in cases against so-called out-of-market arrangements, such as Maryland was attempting. That is also an issue in New York where there is an ongoing case being litigated over the zero emission credit (ZEC) the state has put in place for nuclear power plants.
“If the court reaches the merits, it will likely be the first to opine on the meaning of Hughes,” said Ari Peskoe, senior fellow in electricity law at the Environmental Policy Initiative at Harvard Law School and the manager of the Initiative’s State Power Project website.
The Allco case also has the potential to set precedent on another issue that has been at the heart of many energy cases: court challenges under the dormant commerce clause. Allco is using the commerce clause issue to challenge Connecticut’s use of RECs in its RFPs.
The issue hangs on the deliverability of the RECs. With in-state REC programs or RFPs that is not usually a problem, but in this case Connecticut is part of the ISO New England, and Allco has raised the deliverability issue because the RECs can be delivered from anywhere in the six state region. Allco argues that interferes with interstate commerce by favoring New England states.
The Allco case has “the potential to bring the issue to a head,” says Carolyn Elefant, an energy attorney with her own firm in Washington.
There are unique circumstances in the Allco case because Connecticut is a member of ISO New England, but roughly half the states in the union participate in some form of competitive market and California and some western states are looking at forming a multi-state market.
“If the court agrees with Allco's theory about RECs, it could inspire a wave of litigation about state RPS laws,” said Peskoe.
Even if it does not draw a bright line on the supremacy clause and commerce clause issues, “the court's ruling may directly affect the case about New York's Zero-Emission Credits,” he added.
Connecticut has invoked another recent Supreme Court decision, Armstrong v. Exceptional Child Center, as a means of having the court dismiss the Allco case. It is a threshold issue over whether the Federal Power Act permits courts to exercise jurisdiction over suits seeking to enforce the supremacy clause.
Armstrong was also invoked by the New York Public Service Commission in a case in which it was defending payments to NRG Energy’s Dunkirk repowering project in New York. The case is moot because Entergy has withdrawn its complaint, but it could become an issue in another pending case in which some generators are challenging the PSC over New York’s ZEC.
If the appeals court sides with Connecticut on Armstrong, the ZEC plaintiffs would have to figure out how to distinguish their case and argue why the Second Circuit’s reading of Armstrong should not apply to its case, which is being heard within the Second Circuit’s jurisdiction. It could also mean that the Allco case would not be over, and Allco would have to go back to FERC.