On March 20, 2014, FERC issued a declaratory order holding that the Montana Public Service Commission’s (“Montana PSC”) implementation of the Public Utility Regulatory Policies Act of 1978 (“PURPA”) was inconsistent with PURPA and FERC’s regulations.  However, FERC declined to exercise its enforcement authority under PURPA and initiate an enforcement action against the Montana PSC.

The Montana PSC case arose after several companies that own qualifying facilities (“QFs”) in Montana (“Petitioners”) filed a petition for enforcement and declaratory order (“Petition”) against the Montana PSC for its alleged inconsistent implementation of PURPA.  Specifically, the Petitioners claimed that the Montana PSC’s “Montana Rule” – where QFs larger than 10 MW could only receive a long-term contract through competitive solicitation, while QFs smaller than 10 MW can sell power at avoided cost rates through short-term agreements – is an unreasonable barrier to forming a legal obligation.  The Petitioners also argued that the Montana PSC’s 50 MW installed capacity limit, which applies to the cumulative purchases of all wind QFs greater than 100 kW but less than or equal to 10 MW, was a barrier to entry in the Montana wind QF market.

The Montana PSC responded by stating that requiring competitive solicitations for QFs over 10 MW does not violate PURPA because FERC has previously supported competitive solicitations.  Furthermore, the Montana PSC argued that the 50 MW installed capacity limit is lawful because the Montana PSC has the right to eliminate standard rates for purchases from QFs over 100kW.

In its order, FERC held that the Montana Rule and installed capacity limits were both inconsistent with PURPA and FERC regulations.  FERC explained that requiring a QF to win a competitive solicitation creates “a practical disincentive to amicable contract formation because a utility may refuse to negotiate with a QF at all,” and therefore is an unreasonable obstacle under PURPA.  Similarly, FERC held that the installed capacity limits do not support PURPA’s goal of promoting QF development, nor do they adhere to FERC’s regulations requiring a utility to purchase energy from a QF at a forecasted avoided cost rate.

While FERC noted that it had the authority to initiate an enforcement action to uphold PURPA regulations (see January 6, 2014 edition of the WER), it declined to do so.  As such, FERC stated that the Petitioners could initiate their own action in a U.S. district court, and that the district court could use FERC’s order to assist it with FERC’s conclusions and reasoning on the matter.

A copy of the order is available here.