On September 5, 2023, the U.S. Court of Appeals for the Ninth Circuit (“Ninth Circuit”), in Solar Energy Industries Association v. FERC, held that the Public Utility Regulatory Policy Act (“PURPA”) gives FERC broad discretion to evaluate which implementation rules are needed to encourage the development of qualifying small-scale renewable generating facilities. While the Ninth Circuit did not vacate FERC’s decision, it remanded the decision back to FERC for failing to conduct the proper National Environmental Policy Act (“NEPA”) review. The decision stems from the Solar Energy Industries Association and several environmental organizations’ (collectively, “Petitioners”) challenge to Order Nos. 872 and 872‑A (collectively, “Order 872”), which were rules adopted by FERC that altered which small-scale renewable facilities qualify for benefits under PURPA and how those facilities are compensated (see July 20, 2020 edition of the WER).

Petitioners first argued that Order 872 was inconsistent with PURPA’s directive that FERC “encourage” the development of independent, non-utility-owned energy producers known as “qualifying facilities” or “QFs.” Second, the Petitioners challenged specific provisions of Order 872 as being inconsistent with PURPA and arbitrary or capricious under the Administrative Procedure Act (“APA”). These specific provisions include (1) the modified Site Rule, (2) the modified Fixed-Rate Rule, (3) the creation of the locational marginal pricing rebuttable presumption, and (4) the revised market-access presumption. Lastly, environmental petitioners argued that FERC violated NEPA by failing to conduct an Environmental Assessment (“EA”) prior to issuing Order 872, and that it was reasonably foreseeable that the order would negatively impact the environment by reducing the incentive for small-scale renewable energy facilities.

The Ninth Circuit rejected Petitioners’ argument that Order 872 is inconsistent with PURPA’s directive that FERC “encourage” the development of QFs. Utilizing the two-step analysis set forth in Chevron v. NRDC (1984), the Ninth Circuit held that, (1) PURPA on its face gives FERC broad discretion to evaluate which rules are necessary to encourage the development of QFs, and (2) FERC’s determination that the encouragement provision of PURPA is satisfied so long as its regulations as a whole continue to encourage QFs was not unreasonable. The Ninth Circuit also rejected Petitioners’ specific challenges to Order 872, finding that the rules satisfy the Administrative Procedure Act and were not arbitrary or capricious. First, the Ninth Circuit upheld FERC’s revisions to (1) the Modified Site Rule, which modified the rules for determining when facilities are deemed to be located at the same or separate sites: increasing the distance at which the irrebuttable presumption that facilities are located at a separate site applies,  from one mile to 10 miles, and creating a rebuttable presumption that facilities located more than 1 mile but less than 10 miles apart are located at a separate site; and (2) the Fixed-Rate Rule, which modified the rates paid to QFs by allowing (but not requiring) states to eliminate fixed-contract energy rates, while requiring states to maintain the right of QFs to elect fixed-contract capacity rates. Second, the Ninth Circuit upheld FERC’s rule allowing states to adopt a rebuttable presumption that locational market prices represent the purchasing utility’s avoided cost. Specifically, the rule states that for utilities located within certain organized energy markets, the locational market price represents the purchasing utility’s avoided costs. Lastly, the Ninth Circuit upheld FERC’s provision reducing the threshold (from 20 megawatts (“MW”) to 5 MW) that terminates an electric utility’s obligation to purchase from a QF if the QF has nondiscriminatory access to certain organized markets. The Ninth Circuit emphasized that FERC had discretion under PURPA and the APA to make changes to its rules.

While the Ninth Circuit found in favor of FERC’s interpretation of PURPA, it sided with environmental petitioners in finding that FERC violated NEPA by failing to prepare an EA prior to issuing Order 872. FERC argued that Order 872 was categorically excluded from NEPA review because the rule did not substantially change the effect of the rules being amended. The Ninth Circuit disagreed, stating that when an agency adopts “broad, transformative, and substantive changes to its regulations, it cannot sidestep NEPA’s requirements.” The Ninth Circuit also rejected FERC’s argument that environmental impacts from the final rule were not reasonably foreseeable. The Ninth Circuit explained that the most significant environmental impact of Order 872 is the possible effect on greenhouse-gas emissions, because the “sweeping overhaul of its PURPA rules would reduce the incentives provided to QFs” and “because many QFs rely on renewable power sources, it takes little imagination to see that a reduction in the incentives provided to QFs could, in turn, alter the mix of energy production, shifting production away from renewable production and toward fossil-fuel production.”

The Ninth Circuit remanded back to FERC without vacatur, finding that while FERC’s environmental analysis was deficient, it had no reason to believe that the agency would be unable to cure those deficiencies on remand.

A copy of the opinion can be found here.