The 9th Circuit Court of Appeals in San Francisco has largely upheld the Federal Energy Regulatory Commission’s 2020 policy changes, known as Order 872, to the commission’s original implementation 1978 Public Utility Regulatory Policies Act (PURPA), which FERC adopted in 1980.
The three-judge panel in SEIA v. FERC rejected claims by the Solar Energy Industries Association and several environmental groups including the Sierra Club that FERC’s revisions of its original rules undercut the intent of the law – which is to encourage new electric generating technologies – and also was not “just and reasonable” under the terms of the Administrative Procedures Act. They also argued that FERC failed to conduct a necessary environmental analysis of the new rules under the National Environmental Policy Act.
The nation’s three major utility trade associations – the Edison Electric Institute, the National Rural Electric Cooperative Association, and the American Public Power Association – supported FERC’s policy revisions.
FERC’s initial implementation of the law – setting up rules for how small and innovative generators could become “qualified facilities” or “QFs” under PURPA – spurred a wave of innovation in the electric industry. It gave QFs guaranteed markets for their power. PURPA spurred the rise of non-utility independent power producers.
But FERC’s rules also included unintended mechanisms for gaming the system, creating facilities that came to be known as “PURPA machines.” Under FERC’s rules to encourage cogeneration, a merchant gas-fired generator could become a QF by selling 5% of its steam output to a non-utility user, getting access to a mandated favorable price for the electricity it sold to the grid. The concept was that the steam sales would go to industrial users such as an oil refinery. But clever entrepreneurs made deals to sell steam to greenhouses and fish farms, gaining QF status.
FERC’s regs also gave preference to “small,” meaning under 80-MW of capacity, generators. The non-utility generators responded by building multiple 80-MW combustion turbines in close proximity to each other, claiming QF status for each unit.
The conventional utilities objected strenuously to what they saw as untoward manipulation of the intent of PURPA. Congress paid attention to these complaints and in 2005 passed the Energy Policy Act, which limited the mandatory purchase requirements of PURPA. FERC took up the issues raised by the utilities and the new law and in 2016 began serious consideration of changes to its implantation rules. The commission held a technical conference in 2019 and adopted the new rules the next year by a 3-1 vote.
In adopting the new rules, the commission decided that it did not need to conduct a new environmental analysis under NEPA because its new rules were “clarifying, corrective, or procedural” rather than substantive and that any environmental effects would be uncertain and speculative.
The opponents of the FERC rules argued that they were “inconsistent” with PURPA’s mandate to encourage the development of small and innovative QFs, as defined by the 1984 Supreme Court decision in Chevron U.S.A. Inc. v. NRDC, Inc.
Writing for the three-judge panel, Judge Eric Miller wrote, “The principal flaw in petitioners’ argument is that PURPA does not simply task FERC with prescribing rules ‘to encourage’ QFs. Rather, it requires FERC to prescribe ‘such rules as it determines necessary to encourage’ QFs, and it directs FERC to ‘from time to time thereafter revise’ those rules.” Miller added, “Of course, it is easy to imagine ways in which FERC could have provided even more encouragement to QFs. But PURPA does not require FERC to encourage QFs to the maximum extent possible, regardless of any countervailing interests. To the contrary, the statute makes clear that FERC must take into account at least some other considerations.”
The court then took up the NEPA contention, which was raised only by the environmental groups, not to solar industry. After granting that the environmental groups had standing, which the utility lobbies had raised, the court concluded that FERC dropped the ball in directly refusing to conduct a new environmental analysis.
Miller wrote, “The environmental harms that they fear— namely, an increase in pollution and greenhouse-gas emissions resulting from reduced incentives provided to renewable sources—undoubtedly fall within NEPA’s zone of interests.” He said, “Indeed, we are aware of no case approving an agency’s decision not to engage in any environmental analysis for a rulemaking of this magnitude. And while the lack of reasonably foreseeable environmental impacts may justify an agency’s decision not to complete an EIS [environmental impact statement], it cannot relieve an agency of its obligation to produce an EA.”
The court declined to vacate the FERC rule as a consequence of its failure. Miller wrote, “We do not believe that Order 872 suffers from ‘fundamental flaws’ making it unlikely that FERC could adopt the same rule on remand. While FERC’s environmental analysis was deficient, we have been given no reason to believe that the agency would be unable to cure those deficiencies on remand.” He remanded the issue to FERC to conduct an environmental analysis.
Judge Patrick Bumatay agreed with the panel’s decision, while dissenting on its reasoning in rejecting the solar lobby’s argument. A member of the conservative Federalist Society, which is a hotbed of skepticism about the Chevron doctrine, he wrote that “given PURPA’s clear text, I would not rely on Chevron deference to reach this conclusion. I write separately to show why we should have applied the traditional tools of statutory interpretation to resolve the challenges to FERC’s rules. As for the claim that FERC violated the National Environmental Policy Act of 1969 (“NEPA”) in enacting these rules without an environmental assessment, I would hold that no petitioner has standing to bring a NEPA claim. I thus would deny the petition on NEPA grounds as well.”
Miller rebutted Bumatay’s reasoning on Chevron: “The only difference in approach is that he would do so without admitting that he is following Chevron, instead treating that decision—which, it bears repeating, remains binding Supreme Court precedent—as the Case-That-Must-Not-Be-Named. The Supreme Court has ‘the prerogative of overruling its own decisions,’ whether expressly or sub silentio. Rodriguez de Quijas, 490 U.S. at 484. We do not.”
Miller and Bumatay were Trump appointees, although Bumatay’s nomination was controversial, requiring repeated Trump nominations, opposition from California’s two senators, and a cloture vote to shut off debate on the nomination. Judge Jacqueline Nguyen, who concurred with the decision, was an Obama appointee.
–Kennedy Maize
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