The Montana Supreme Court Rules Against the Montana Commission’s Approval of Shorter Contract Terms and Lower Avoided Cost Prices

On August 24, 2020, the Montana Supreme Court ruled against the Montana Public Service Commission’s (Montana Commission) actions to reduce avoided cost rates and shorten contract terms for power purchase agreements between the utilities and solar Qualifying Facilities (QFs). The ruling is a victory for renewable energy developers and advocates, as it upheld an integral piece of the Public Utility Regulatory Policy Act of 1978’s (PURPA) that encourages QF development. Since Congress passed PURPA, the states and federal government have worked through a cooperative federalism model to encourage the development of QFs, which include small renewable energy facilities. PURPA requires utilities to purchase energy and capacity from QFs at “avoided cost” rates, which are essentially the prices the utility would have paid had it obtained the energy and capacity elsewhere.

Part of the states’ role in implementing PURPA is approving the methodology for calculating each regulated utility’s avoided costs. At issue in this case, was the Montana Commission’s attempt to lower avoided costs by 1) by removing a “cost of carbon adder”, 2) by reducing the capacity contribution to QFs, and 3) shortening the contract term.

Montana’s avoided cost methodology has historically factored in any carbon tax or cost the utility would have incurred purchasing power from a fossil fuel source. In 2017, the Montana Commission proposed eliminating the cost of carbon from the state’s avoided cost rate methodology. The Montana Commission had also approved using the projected cost of electricity from a combined cycle combustion turbine (CCCT) to determine avoided capacity costs. Combined cycle power plants use both gas and steam turbines together to produce more energy, more efficiently using the same amount of fuel, making generation less expensive. However, the utility had not planned to bring that CCCT capacity on until 2025. Additionally, the Montana Commission’s avoided cost methodology had also undervalued QF capacity value and effectively reduced the capacity contributions QFs would receive.

In addition to the avoided cost methodology changes, the Montana Commission proposed shortening the length of QF contract terms. Vote Solar, the Montana Environmental Information Center, and Cypress Creek Renewables challenged the Montana Commission, and the challenge ultimately reached the Montana Supreme Court.

On the cost of carbon issue, the Montana Commission argued that the current federal administration’s opposition to regulating carbon made any costs related to regulating carbon reduction unlikely. Nevertheless, the Montana Supreme Court determined that PURPA required the Montana Commission to encourage QF development, even during times of market uncertainty. And in any event, market uncertainty did not justify setting the cost of carbon total to zero. The Court also pointed out that the Montana Commission had previously called the cost of carbon factor a “key” ingredient to the calculation. Ultimately, the Court found that the Montana Commission did not sufficiently justify its sharp deviation from its previous stance on including the cost of carbon. Therefore, the Montana Commission’s decision had violated PURPA.

The Court also took issue with the Montana Commission’s decision to use projected CCCT resource costs before they were online. Ultimately, it held that this decision violated PURPA because the price the utility would have paid for energy and capacity elsewhere would not have matched the discounted payments the QFs were going to receive. Regarding the estimated capacity value, the Court determined that the Montana Commission had also not adequately factored in the value that solar resources provide to summer and peak capacity needs.

The Montana Supreme Court similarly reviewed and rejected the decision to shorten the maximum QF contract term from 25 to 15 years. QF contract terms must be long enough to attract adequate project financing. In this case, the Court explained that 15-year contracts were not always unreasonable, but the Montana Commission had not considered what lowering the contract term and lowering avoided cost rates would do to QF financing options. Therefore, the Montana Commission’s decision, as a whole, did not encourage QF development as required by both the federal and state PURPA laws.

Sanger Law represented Cypress Creek Renewables in this proceeding, which is a renewable energy developer that is committed to creating and operating solar and solar plus storage projects that benefit communities.

These materials are intended to as informational and are not to be considered legal advice or legal opinion, nor do they create a lawyer-client relationship. Information included about previous case results does not assure a similar future result.