case3:13-cv-04934-jd document66 filed07/23/14 page1 of 19€¦ · 1 2 3 4 5 6 7 8 9 10 11 12 13 14...

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JENNER &BLOCK LLPMATTHEW PRICE (pYo hac vice)1099 New York Avenue NW Suite 900Washington, DC 20001Telephone: (202) 639-6873Facsimile: (202) [email protected]

THOMAS MELONE (pro hac vice)MICHAEL MELONE (pro hac vice)ALLCO RENEWABLE ENERGY LIMITED14 Wall St., 20th FloorNew York, NY 10005Telephone: (212) 681-1120Facsimile: (801) [email protected]@Al1coUS.com

Attorneys for Plaintiff

FUTTERMAN DUPREE DODD CROLEY MAIER LLPJAMIE L. DUPREE (158105)JAIME G. TOUCHSTONE (233187)180 Sansome Street, 17th FloorSan Francisco, CA 94104Telephone: (415) 399-3906Facsimile: (415) [email protected] touchstone@fddcm. com

Local Attorneys.for Plaintiff ,

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

SAN FRANCISCO DIVISION

WINDING CREEK SOLAR LLC,

Plaintiff,

~ v.

MICHAEL PEEVEY, MICHAEL FLORIO,CATHERINE SANDOVAL, CARLAPETERMAN, and MICHAEL PICKER, intheir official capacity as Commissioners ofthe California Public Utilities Commission,

Defendants.

Case No. C 13-04934 JD

PLAINTIFF'S OPPOSITION TODEFENDANTS' MOTION TO DISMISSTHE SECOND AMENDEDCOMPLAINT

Honorable James Donato

Hearing Date: September 3, 2014Time: 9:30amLocation: Courtroom 11, 450 Golden GateAvenue, San Francisco, CA.

CasE No. C-13-04934 JDOPPOSITION TO MOTION TO DISMISS THE SECOND AMENDED COMPLAINT

Case3:13-cv-04934-JD Document66 Filed07/23/14 Page1 of 19

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TABLE OF CONTENTS

TABLE OF AUTHORITIES ...........................................................................................................ii

I. INTRODUCTION ............................................................................................................... 1

II. STANDARD OF REVIEW ................................................................................................. 2

III. STATUTORY FRAMEWORK AND FACTUAL BACKGROUND ................................ 2

IV. ARGUMENT ...................................................................................................................... 5

A. The Lodi Facility Meets The Criteria For A "Qualifying Small PowerProduction Facility" And Thus Winding Creek Has Exhausted ItsAdministrative Remedies And Has Statutory Standing .......................................... 5

1. PURPA's Plain Text Shows That aYet-to-be Constructed FacilityCan Bea "Small Power Production Facility" .............................................. 6

2. To the Extent the Statute Is Ambiguous, the Court Must Defer toFERC's Reasonable and Longstanding Interpretation ................................ 8

3. CPUC's May 2012 Order .......................................................................... 10

B. The Commissioners' Additional Grounds For Dismissing The SAC Fail............ 11

1. Winding Creek Has Stated a Claim ........................................................... 11

2. The Existence Of An SRAC Rate Has Nothing To Do With thePermissibility Of A Cap On The Mandatory Purchase Obligation........... 14

3. Winding Creek Has Article III Standing ................................................... 14

i-__ __

CASE No. C-13-04934 JDOPPOSITION TO MOTION TO DISMISS THE SECOND AMENDED COMPLAINT


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TABLE OF AUTHORITIES

CASES

American Paper Institute, Inc. v. American Electric Power Service Corp., 461 U.S. 402(1983) .................................................................................................................................. 3, 11

Ashcroft v. Iqbal, 556 U.S. 662 (2009) ........................................................................................... 2

BalistYeri v. Pacifica Police Department, 901 F.2d 696 (9th Cir. 1990) ........................................ 2

BedRoc Ltd., LLC v. United States, 541 U.S. 176 (2004) ...............................................................6

Brower° v. Evans, 257 F.3d 1058 (9th Cir. 2001) .......................................................................... 10

Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) ................ 8

FERC v. Mississippi, 456 U.S. 742 (1982) ..................................................................................... 9

Independent Energy Producers Ass 'n v. California Public Utilities Commission, 36 F.3d848 (9th Cir. 1994) ............................................................................................................ 12, 14

McCollum v. California Department of Corrections, 647 F:3d 870 (9th Cir. 2011) .................... 15

National Cable &Telecommunications Ass 'n v. Brand X Internet Services, 545 U.S. 967(2005) ....................................................................................................................................8, 9

Power Resource Group,, Inc. v. Public Utility Commission of Texas, 422 F.3d 231 (5thCir. 2005) ..............................................................................................................................3, 4

Sorenson v. Secretary of Ti^easury, 475 U.S. 851 (1986) ................................................................8

TwoRivers v. Lewis, 174 F.3d 987 (9th Cir. 1999) .......................................................................... 2

United States v. HaggarApparel Co., 526 U.S. 380 (1999) ........................................................... 9

STATUTES AND REGULATIONS

16 U.S.C. § 796(17)(A) ................................................................................................................... 7

16 U.S.C. § 796(17)(D) ...................................................................:........................................... 6, 7

16 U.S.C. § 796(17)(E) ................................................................................................................... 8

16 U.S.C. § 824a-3(a) .................................................................................................................. 2, 6

16 U.S.C. § 824a-3(b) ..................................................................................................................... 3

16 U.S.C. § 824a-3~~~1) ........................................................................................................... 3, 12

16 U.S.C. § 824a-3~h)~2)~B) ........................................................................................................... 6

Public Utility Regulatory Policies Act of 1978, Pub. L. No. 95-617, 92 Stat.3117 ....................... 1

18 C.F.R. § 292.207(b)(1) ............................................................................................................. 10

iiCasE No. C-13-04934 JD

OPPOSITION TO MOTION TO DISMISS THE SECOND AMENDED COMPLAINT


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18 C.F.R. ~ 292.303(a)(1) .........................................................................................................3, 14

18 C.F.R. ~ 292.304(b)(2) ...............................................................................................................3

18 C.F.R. § 292.304(d)(2) ......................................................................................................... 3, 14

18 C.F.R. § 292.304~d)~2)~ii) .................................................................................................. 13, 15

18 C.F.R. § 292.304(e) .................................................................................................................... 3

LEGISLATIVE MATERIALS

H.R. Rep. No. 95-496(IV) (1978), reprinted in 1978 U.S.C.C.AN. 8485 ..................................... 2

S. Rep. No. 95-442 (1977), reprinted in 1978 U.S.C.C.A.N. 7903 ................................................ 9

ADMINISTRATIVE DECISIONS

D.12-OS-035 (Cal. Pub. Utils. Comm'n May 2012) ....................................................1, 4, 5, 10, 11

D.13-01-041 (Cal. Pub. Utils. Comm'n Jan. 2013) .................................................................... 1, 5

D.13-OS-034 (Cal. Pub. Utils. Comm'n May 2013) ................................................................ 1, 4, 5

JD Wind 1 LLC, 130 FERC ¶ 61,127 (2010) ...................................................................... 9, 12, 14

JD Wind 1 LLC, 129 FERC ¶ 61,148 (2009) .................................................................................. 9

North Little Rock Cogeneration, L.P. v. Entergy Services Inc., 72 FERC ¶ 61,263 (1995) ... 10, 13

Northern Laramie Range Alliance, 138 FERC ¶ 61,171 (2012) ................................................... 10

Revised Regulations Governing Small Power Production and Cogeneration Facilities,114 FERC ¶ 61,102 (2006) ..................................................................................................... 13

Southern California Edison Co., 70 FERC ¶ 61,215 (1995) ........................................................ 13

OTHER AUTHORITIES

Pacific Gas &Electric Re-MAT Feed-in Tariff Rates, http://pge.com/b2b/energysupply/wholesaleelectricsuppliersolicitation/ReMAT/index. shtml ................................................... 5-6

Small Power Production and Cogeneration Facilities; Regulations Implementing Section210 of the Public Utility Regulatory Policies Act of 1978, Order No. 69, 45 Fed. Reg.12,214 (1980) .................................:.......................................................................................... 9

iiiCASE NO. G13-04934 JD



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INTRODUCTION

In its Second Amended Complaint ("SAC"), Plaintiff Winding Creek Solar LLC

("Winding Creek") alleges that a series of California Public Utilities Commission ("CPUC")

Orders —specifically orders D.12-OS-035 ("May 2012 Order"), D.13-01-041 ("January 2013

Order"), D.13-OS-034 ("May 2013 Order") (collectively, the "Orders," attached to the SAC as

Exhibits A-C) —violate the Public Utility Regulatory Policies Act of 1978, Pub. L. No. 95-617,

92 Stat. 3117,("PURPA"), and Federal Energy Regulatory Commission ("FERC") regulations

implementing that statute. PURPA was intended to promote reliance on renewable fuels by

requiring that utilities purchase any electricity produced by a "qualifying facility," a term that

includes Winding Creek's 1.0 megawatt planned solar project located in Lodi, California ("the

Lodi facility"). Moreover, utilities must offer qualifying facilities the choice of two rates at

which the electricity is purchased: the utility's avoided costs calculated at the time the contract is

signed, or the utility's avoided costs at the time the electricity is delivered.

CPUC's orders are in direct conflict with this regulatory scheme. First, the Orders cap the

amount of electricity a California utility must purchase from renewable sources in violation of

the Federal scheme's mandatory purchase requirement. Second, the Orders set a purchase price

that is in no way tied to the utility's avoided cost. Instead, they are tied to the pYoduceY's cost of

production. Because CPUC's only authority to regulate wholesale electricity sales is derived

from PURPA, the SAC alleges that the Orders are preempted.

In their motion to dismiss, Defendants Commissioners of CPUC ("Commissioners")

primarily. contend the Lodi facility cannot be a "qualifying facility" because it is not currently

operational. Based on that premise, they ̀ assert that Winding Creek has failed to exhaust its

administrative remedies and lacks constitutional and statutory standing. However, the

Commissioners' premise is mistaken. The plain text of PURPA and FERC's regulations

implementing it, FERC's practice over the last 30 years, and the terms of CPUC's own May 2012

Order all make clear that a planned, not-yet-operational facility can be a "qualifying facility."

To the extent that the Commissioners engage the merits of Winding Creek's allegations, their

argument fails to come to grips with the two requirements of federal law outlined above: first, a

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mandatory purchase requirement that cannot be squared with CPUC's 5-megawatt per month

program cap, and second, a requirement that qualifying facilities be able to choose a rate based

on the utility's avoided costs, calculated at the time a contract is signed,. Because Winding Creek

has standing to bring this action, and because the Commissioners cannot explain how Winding

Creek's allegations fail as a matter of law, the motion to dismiss should be denied. ~

~ II. STANDARD OF REVIEW

In assessing a motion to dismiss under Fed. R. Civ. P. 12(b)(6), this Court "must accept all

factual allegations of the complaint as true and draw all reasonable inferences in favor of the

nomnoving party." TwoRivers v. Lewis, 174 F.3d 987, 991 (9th Cir. 1999). A motion to dismiss

should be denied unless the plaintiff has failed to plead "sufficient factual matter, accepted as

true, to state a claim to relief that is plausible on its face," Ashcroft v. Igbal, 556 U.S. 662, 678

(2009) (internal quotation marks omitted), or the complaint "lacks a cognizable legal theory,"

Balistreri v. Pacifica Police Department, 901 F.2d 696, 699 (9th Cir. 1990).

III. STATUTORY FRAMEWORK AND FACTUAL BACKGROUND

In enacting PURPA, Congress sought to "accelerate the development of renewable and

~ inexhaustible energy sources and convert the national economy to alternative fuel resources in

order to protect this country from the problems that would otherwise occur." H. R. Rep. No. 95-

496(IV), at 14 (1978). In order to achieve this goal, § 210 of PURPA provides that "[FERC]

shall prescribe ... such rules as it determines necessary to encourage cogeneration and small

power production ...which rules require electric utilities, to offer to — (1) sell electric energy to

qualifying cogeneration facilities and qualifying small power production facilities and (2)

purchase electric energy from such facilities." 16 U.S.C. § 824a-3(a) (emphasis added).

PURPA also specified that the rate utilities were required to offer to purchase electricity from

qualifying facilities as part of that mandatory purchase obligation2 shall not "exceed[] the

~ The SAC does not abandon Winding Creek's claim for statutory enforcement. See MTD 1.Indeed, the SAC pleaded jurisdiction over this case pursuant to 16 U.S.C. § 824a-3(h)(2)(B), theprovision authorizing qualifying facilities to bring suit to enforce PURPA. SAC ¶ 17. Moreover,the Commissioners do not dispute that a cause of action exists under PURPA and the SupremacyClause, and thus Winding Creek's claim is not dependent on 42 U.S.C. § 1983. See MTD 15.'` The mandatory purchase obligation creates a "legally enforceable obligation" on the utility. See

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incremental cost to the electric utility of alternative electric energy." Id. § 824a-3(b).

Pursuant to PURPA, FERC promulgated regulations laying out the specifics of the statute's

mandatory purchase obligation. First, FERC provided that "[e]ach electric utility shall purchase

...any energy and capacity which is made available from a qualifying facility ... [d]irectly to

the electric utility." 18 C.F.R. § 292.303(a)(1) (emphasis added). Second, FERC determined

that, for facilities constructed after PURPA's passage, the required rate for purchases must

~ "equal[] the avoided costs" of the utility. Id. § 292.304(b)(2); see also American Paper Inst., Inc.

v. Am. Elec. Power Serv. Corp., 461 U.S. 402, 417 (1983) (upholding FERC's decision to require

utilities to purchase electricity from qualifying facilities at the "maximum rate authorized by

PURPA," namely a utility's full avoided cost). In 18 C.F.R. § 292.304(e), FERC listed various

factors that "to the extent practicable" should be taken into consideration when determining a

utility's "avoided cost," including specific data concerning the utility's operational and cost

characteristics. Id. § 292.304(e). Third, and crucial for this case, in 18 C.F.R. § 292.304(d),

FERC specified that, when a qualifying facility is providing energy or capacity to a utility over a

specified term, the qualifying facility can elect one of two methods for calculating a utility's

avoided costs, which can_ vary over time due to fluctuating prices of natural gas and coal, or for

other reasons. FERC provided that "the rates for such purchases shall, at the option of the

qualifying,facility exercised prior to the beginning of the specified term, be based on either: (i)

The avoided costs calculated at the time of delivery; or (ii) The avoided costs calculated at the

time the obligation is incurred." Id. § 292.304(d)(2) (emphasis added). In other words, a

qualifying facility can elect to have its rate —the utility's avoided costs —calculated on month-to-

month basis when the electricity is delivered, or fixed at the outset for the entirety of the contract.

The former rate is known colloquially as a "short run avoided cost rate ("SRAC"), while the

latter is known as the "long run avoided cost" rate ("CRAG")

PURPA also directed state regulatory agencies, such as CPUC, to adopt rules that complied

with and implemented FERC's regulations. See 16 U.S.C. § 824a-3(fl(1). Thus, while PURPA

____18 C.F.R. § 292.304(d)(2); Power Res. Grp., Inc. v. Pub. Util. Comrn'n of Tex., 422 F.3d 231,233 (5th Cir. 2005).

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thereby gives state regulatory agencies some discretion in implementing FERC's rules, they

cannot violate those rules And, because states' only authority to regulate wholesale electricity

sales is derived from PURPA, any state rule that conflicts with PURPA is necessarily preempted,

as this Court previously recognized. See ECF No. 39 at 2.

Acting pursuant to this limited grant of authority, CPUC determined that a utility incurs a

mandatory purchase obligation under PURPA so long as a qualifying facility can satisfy six

"project viability criteria," including a contractual commitment to be online and delivering

electricity within 24 months of the contract date (with one 6 month extension for regulatory

delays). May 2012 Order at 69-70; SAC ¶ 47. Because this determination does not conflict with

PURPA or FERC's regulations, it is not preempted and Winding Creek does not challenge it.

See Power Res. Grp., Inc. v. Pub. Util. Comm'n of Tex., 422 F.3d 231, 240 (5th Cir. 2005)

(upholding a Texas law limiting a utility's mandatory purchase obligation to qualifying facilities

able to deliver electricity within 90 days).

However, as alleged in the SAC, the CPUC Orders directly conflict with PURPA and the

FERC regulations in two other ways. First, the CPUC Orders cap the utilities' mandatory

purchase obligations. In its May 2012 Order, CPUC apportioned a total obligation of 750

megawatts among each of three investor-owned utilities, including Pacific Gas and Electric

("PG&E"), and then further divided each utility's total obligation among three different types of

renewable generation technology.3 May 2012 Order at 42-44, 49, 78; SAC ¶¶ 50-51. As a result,

PG&E's remaining mandatory purchase obligation under CPUC's orders for "peaking, as

available" facilities (including solar generators like the Lodi facility) is approximately 31.1

megawatts, even though "peaking, as available" facilities currently wish to enter into contracts to

provide PG&E with 54.1 megawatts. SAC ¶¶ 52-53. Moreover, the May 2013 Order further

limited PG&E's mandatory purchase obligation by determining that, in any two-month period, a

utility could only enter into contracts for 5 megawatts from generators of each of the three types

of renewable generation technology. May 2013 Order at 10-15, 20-21; SAC ¶ 54. However,

3 As noted in the SAC, there are three types of renewable energy generators that sell electricity toutilities under the Re-MAT scheme: "baseload" (for example, geothermal); "non-peaking, as

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nothing in PURPA permits a state to cap a utility's mandatory purchase obligation. Indeed,

FERC made clear in 18 C.F.R. § 292.303(a)(1) that utilities are required to purchase "any energy

and capacity which is made available from a qualifying facility" (emphasis added). CPUC's cap

on utilities' mandatory purchase obligation cannot be squared with that requirement.

Second, CPUC's May 2012 Order established the "Renewable Market-Adjusting Tariff'

("Re-MAT"), which, according to CPUC, satisfied its obligation under 18 C.F.R.

292.304(d)(2)(ii) to set an avoided-cost rate that was fixed at the outset of a multi-year contract

term. See May 2012 Order at 17-29; see also January 2013 Order at 19 (reaffirming Re-MAT);

May 2013 Order at 4-6 (same). However, the Re-MAT pricing methodology has nothing at all to

do with a utility's avoided costs, and therefore conflicts with FERC's regulations. See SAC

¶¶ 55-65. Re-MAT functions as a "reverse-auction" whereby the utility offers generators a 10-,

15-, or 20-year contract to provide electricity at a particular rate. See id. ¶ 56. As relevant here,

if sufficient projects in the queue accept the price so as to fulfill the utility's 5-megawatt capped

obligation, then the next price (offered two months hence) will be reduced pursuant to a CPUC-

determined formula. See id. ¶ 57. This is precisely what has happened: PG&E's initial offer to

"peaking, as available" .facilities in November 2013 was $.89.23/megawatt-hour. That price fell

each subsequent two-month period, and for the current two-month period, it is $53.23/megawatt-

hour. SAC ¶¶ 58-61.4 In promulgating the Re-MAT scheme, CPUC did not explain how this

adjustable price mechanism —which is itself dependent on a cap on the mandatory purchase

obligation in conflict with PURPA —has anything to do with a utility's avoided costs as

described in 18 C.F.R. § 292.304(d)(2).

IV. ARGUMENT

A. The Lodi Facility Meets The Criteria For A "Qualifying Small PowerProduction Facility" And Thus Winding Creek Has Exhausted ItsAdministrative Remedies And Has Statutory Standing.

The Commissioners and Winding Creek agree that, as relevant here, PURPA's mandatory

purchase obligation and the various rates that must be offered pursuant to that obligation are only

available" (generally wind), and "peaking, as available" (generally solar). SAC ¶ 49.4 These rates are available at http://pge.com/li2b/energysupply/wholesaleelectricsupplier

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available to a "qualifying small power production facility." 16 U.S.C. § 824a-3(a) The

Commissioners contend, however, that the Lodi facility cannot be a "qualifying small power

production facility" because it does not currently produce energy. See MTD 10. Based on that

premise, the Commissioners claim Winding Creek has failed to exhaust its administrative

remedies,s MTD 8-10, and has failed to allege statutory standing, id. at 13.

However, PURPA and FERC's implementing regulations make clear that a proposed small

power production facility can be a "qualifying small power production facility," even if it is not

yet operational, and even if construction has not yet begun. Moreover, CPUC itself recognized

that truth in promulgating the May 2012 Order. CPUC provided that, so long as an unbuilt

facility can contractually commit to being online within 24 months, it is entitled to participate in

the Re-MAT program — a program that, under the May 2012 Order, is expressly limited to

"qualifying facilities" under PURPA. SAC ¶ 47.

1. PURPA's Plain Text Shows That a Yet-to-be ConstructedFacility Can Bea "Small Power Production Facility"

When a court addresses a question of statutory interpretation, the "inquiry begins with the

statutory text, and ends there as well if the text is unambiguous." BedRoc Ltd., LLC v. United

States, 541 U.S. 176, 183 (2004). Under 16 U.S.C. § 824a-3(h)(2)(B), "[a]ny ... qualifying

small power producer may petition [FERC] to enforce the. requirements of [§ 824a-3(h)(2)(B)],"

which is the subsection of PURPA requiring state regulatory commissions to implement rules

effectuating PURPA and FERC's regulations. If FERC does not initiate an enforcement action

within 60 days against a state regulatory agency, "the petitioner may bring an action in the

appropriate United States district court to require such State regulatory authority ... to comply

with such requirements, and such court may issue such injunctive or other relief as may be

appropriate." Id. § 824a-3(h)(2)(B). Winding Creek has done so here. See SAC ¶ 24.

soli citati on/ReMAT/index. shtml.5 The Commissioners' argument that Winding Creek failed to exhaust administrative remedies isbased on their assertion that Winding Creek is not a "qualifying small power producer." MTD 8.However, because a "qualifying small power producer" is the owner and operator of a"qualifying small power production facility," 16 U.S.C. § 796(17)(D), and because the Lodifacility is the only small power production facility identified in the SAC, the Commissioners'argument turns on whether the Lodi facility is a "qualifying small power production facility."

6CASE No. C-13-04934 JD

OPPOSI'T'ION TO MOTION TO DISMISS THE SECOND AMENDED COMPLAINT


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A "qualifying small power producer" is defined in PURPA as "the owner or operator of a

~ ~ qualifying small power production facility," 16 U.S.C. § 796(17)(D), and a "qualifying small

power production facility" is defined in § 796(17)(C) as "a small power production facility that

[FERC] determines, by rule, meets such requirements (including requirements respecting fuel

(~ use, fuel efficiency, and reliability) as [FERC] may, by rule, prescribe." Thus, an entity may

petition a district court for. an enforcement action against a state regulatory agency. only if, first, it

owns a facility that is a "small power production facility" under PURPA, and second, that facility

qualifies under FERC's definition, contained in 18 C.F.R. § 292.203.

The Commissioners argue that because the Lodi facility is 'not yet constructed, it cannot

constitute a "small power production facility" under PURPA and therefore, a fortiori cannot

constitute a "qualifying small power production facility." The Commissioners are incorrect,

however. The text of PURPA unambiguously provides that ayet-to-be constructed facility, such

', ~ as the Lodi facility, can be a "small power production facility" within the meaning of 16 U.S.C.

§ 796(17)(A). PURPA provides:

(A) "small power production facility" means a facility which is an eligible solar, wind,waste, or geothermal facility, or a facility which

(i) produces electric energy solely by the use, as a primary energy source, of biomass,waste, renewable resources, geothermal resources, or any combination thereof; and

(ii) has a power production capacity which, together with any other facilities locatedat the same site (as determined by the Commission), is not greater than 80 megawatts.

16 U.S.C. § 796(17)(A).

The Commissioners' argument is focused on the word "produces" in subparagraph (i); they

contend that, unless a facility is actually producing electric energy, it cannot qualify as a small

power production facility. However, Congress made crystal clear that, by using the word

"produces," it did not intend to exclude yet-to-be-constructed facilities. Subsection 796(17)(A)

defines a "small power production facility"' to include "an eligible solar, wind, waste, or

geothermal facility," which itself is defined in Subsection 796(17)(E) to be "a facility which

produces electric energy solely by the use, as a primary energy source, of solar energy, wind

energy, waste resources or geothermal resources; but only if — ... (ii) construction of such

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.facility commences not later than December 31, 1999, or, if not, reasonable diligence is exercised

toward the completion of such facility taking into account all factors relevant to construction of

~ the facility." Id. § 796(17)(E) (emphasis added)

In other words, Congress defined an "eligible solar, wind, waste, or geothermal facility" as

(one that "produces" electric energy, yet it included within that definition facilities on which

construction had not yet commenced. This shows that Congress did not intend, by using the

word "produces," to exclude yet-to-be constructed facilities from the definition of "small power

production facilities." To the contrary, Congress expressly considered the question and

concluded ayet-to-be-constructed facility could be a "small power production facility,"

notwithstanding that it did not already "produce[] electric energy." Id. § 796(17)(E).6

The best reading of Section 796(17), contrary to the Commissioners', is that Congress was

attempting to distinguish between different types of generation facilities —those of an appropriate

size that produce electricity through the use of renewable fuels, which can benefit from the

statute; and those that are larger or that produce electricity through fossil fuels, which cannot

benefit from the statute. Congress included within the former category facilities that were

already operational as well as planned facilities that had yet to be constructed.

2. To the Extent the Statute Is Ambiguous, the Court Must Defer toFERC's Reasonable and Longstanding Interpretation.

While PURPA makes clear that ayet-to-be-constructed facility can be a "small power

production facility," to the extent that this Court finds the statute ambiguous, it must defer to

FERC's carefully reasoned and longstanding interpretation. See Chevron U.S.A. Inc. v. NRDC,

Inc., 467 U.S. 837, 843-44 (1984). A court is required to accept a reasonable agency

construction of a statute under Chevron, "even if the agency's reading differs from what the court

believes in the best statutory interpretation." Nat'l Cable & Telecomms.. Assn v. Brand X

6 The Lodi facility claims to be a "small power ~ production facility" under Subsection796(17)(A)(i) & (ii), rather than under'Subsection 796(17)(A) & (E). But there is no reason whythe word "produce" should be read any differently in Section 796(A)(i) than in Section796(17)(E), when in both cases Congress is defining a "small power production facility." The"normal rule of statutory construction assumes that identical words used in different parts of thesame act are intended to have the same meaning," Sorenson v. Sec'y of Treasury, 475 U.S. 851,860 (1986) (internal quotation marks omitted), and that rule has all the more force when theg



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Internet Servs., 545 U.S. 967, 980 (2005). Determining whether an agency's interpretation is

reasonable requires a court to assess the "legislature's revealed design," United States v. Haggar

Apparel Co., 526 U.S. 380, 392 (1999) (internal quotation marks omitted), and deference is

especially fitting when the question involves "difficult policy choices that agencies are better

~ equipped to make than courts," Brand X, 545 U.S. at 980.

As discussed above, one of the primary purposes of PURPA was to promote the development

of small power production facilities, see supra p. 2-3, and indeed the Senate Report explicitly

noted that,, "in recognition of the potential contribution of ...small power production facilities to

the achievement of the purposes of this act, the committee adopted language to encourage the

development and use of these power sources." S. Rep. No. 95-442, at 10 (1977). In 1978, when

PURPA was enacted, "there was very little non-utility generation; virtually all new generating

capacity was provided by traditional electric utilities." JD Wind 1, 129 FERC ¶ 61,148, 61,633

(2009); see also FERC v. Mississippi, 456 U.S. 742, 750-51 (1982) (noting that in passing

PURPA, Congress sought to address "problems impeding] the development of nontraditional

generating facilities"). Thus, as FERC acknowledged in Small Power Production and

Cogeneration Facilities; Regulations Implementing Section 210 of the Public Utility Regulatory

Policies Act of 1978, Order No. 69, 45 Fed. Reg. 12,214, 12,219 (1980), "[t]he mandate of

PURPA [is] to encourage cogeneration and small power production." See also id. at 12,220.

One of the key ways to promote small power production, as FERC understood, was to require

utilities to offer a fixed contract price for the duration of a contract term before a facility's

construction had begun, so that an investor could determine whether to begin the project: "[I]n

order to be able to evaluate the financial feasibility of a cogeneration or small power production

facility, an investor needs to be able to estimate, with reasonable certainty, the expected return on

a potential investment before construction of a,facility." Id. at 12,218 (emphasis added); see also

JD Wind 1, 130 FERC ¶ 61,127, 61,631 (2010). Limiting the definition of "small power

production facilities" to those already constructed and in operation would therefore frustrate one

of Congress's key objectives in enacting the statute. This Court should not accept such an

identical word is used in different parts of the sag e definition.

CASE No. C-13-04934 JDOPPOSITION TO MOTION TO DISMISS THE SECOND AMENDED COMPLAINT


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interpretation. See Brower v. Evans, 257 F.3d 1058, 1065 (9th Cir. 2001) ("In determining a

statutory provision's meaning, we may consider ... whether the proposed interpretation would

frustrate or advance that purpose." (internal quotation marks omitted)).

In order to effectuate the statute's purpose, FERC's regulations explicitly recognize that a

yet-to-be constructed facility can be a "small power production facility," and therefore also a

"qualifying small power production facility." In 18 C.F.R. § 292.207(b)(1), FERC lays out the

"[p]rocedures for obtaining qualifying status" and provides "[i]n lieu of the self-certification

procedures ... an owner or operator of an existing or a proposed.facility ...may file with the

Commission an application for Commission certification that the facility is a qualifying facility."

And FERC's longstanding and well-established practice is to grant oz uphold a small power

production facility's project certification as a "qualifying facility" even though the project is still

under development and thus not actually producing electricity at the moment the certification is

granted. See, e.g., Northern Laramie Range Alliance Pioneer Wind Park 1, 138 FERC ¶ 61,171,

61,731, 61,734 (2012). (upholding a wind generator's self-certification as a qualifying small

power production facility even though the wind parks had not yet been installed); ECF No. 56 at

4-5 (collecting numerous FERC decisions). Indeed, ironically, one of the cases cited by the

Commissioners, North Little Rock Cogeneration, L.P. v. Entergy Services Inc., 72 FERC

¶ 61,263, 62,170 (1995), involves a claim under PURPA concerning a qualifying facility "to be

built and operated by Petitioners." (emphasis added). FERC did not deny petitioners' claim

because they had not yet built their facility, but rather addressed the merits of their challenge.

3. CPUC's May 2012 Order

The Commissioners' position before this Court is particularly perplexing, because it is

impossible to square with CPUC's own May 2012 Order that established the Re-MAT program.

That Order asserts that the Re-MAT program "compl[ies] with federal law by requiring, among

other things, that all FERC jurisdictional generators participating in the progam register with the

FERC as QFs." May 2012 Order at 11. Thus, the Order requires that any generator such as the

Lodi facility that wishes to participate in the Re-MAT program first be registered as a "qualifying

facility" with FERC. Yet the Order then goes on to set forth various "project viability criteria,"

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which CPUC determined were necessary to "ensure that only viable projects participate in the

~ program." Id. at 69-70. Number five among the six "project viability criteria" is "Online Date:

~ 24 months with one 6-month extension for regulatory delays." Id. at 70. Thus, CPUC's own

May 2012 Order recognizes the truth of Winding Creek's position: an entity can be a small

power production facility certified as a qualifying facility with FERC (as all participants in the

Re-MAT program must be), even though it has not yet been constructed. Indeed, the Lodi

facility meets CPUC's viability criteria and has been accepted in the Re-MAT program. It

currently sits first in Pacific Gas &Electric's queue for "peaking, as-available" facilities, and has

been offered a contract pursuant to the Re-MAT program. SAC ¶¶ 66-68. The Commissioners'

litigation position is not credible in light of CPUC's own prior practice and understanding.

In sum, the Lodi facility is a small power production facility that has been recognized as a

qualifying small power production facility by FERC —and by CPUC itself. SAC ¶ 23. Under

Section 796(17)(D), its owner, Winding Creek, is therefore a qualifying small power producer

and has statutory standing to bring its claim for preemption. On June 13, 2013, Winding Creek

petitioned FERC to bring an enforcement action against CPUC pursuant to § 824a-3(h)(2)(A),

which FERC declined to do, SAC ¶ 24. Thus, Winding Creek has exhausted its administrative

remedies, and the Commissioners' claims to the contrary should be rejected.

B. The Commissioners' Additional Grounds For Dismissing The SAC Fail.

1. Winding Creek Has Stated a Claim.

The Commissioners contend that Winding Creek has failed to state a claim because the Re-

MAT price is permissible. That is incorrect. In American Paper Institute, the Supreme Court

upheld FERC's decision. to make the rate at which a utility must purchase electricity from

qualifying facilities equal to the utility's full avoided cost. 461 U.S. at 423. In setting the

methodology through which that rate is calculated, FERC provided that qualifying facilities

could elect to have the utility's avoided costs calculated either (1) at the time the electricity was

delivered, or (2) at the time the initial term contract was entered. See 18 C.F.R. § 292.304(d)(2).

As Winding Creek noted in the SAC, the first of these methodologies is known in the industry as

an "SRAC" rate, while the second is known as an "CRAG" rate. SAC ¶ 37. But there is no

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magic to this industry shorthand. The point of FERC's regulations is that autility —and thus a

state regulatory agency setting rules for the utility, see 16 U.S.C. § 824a-3(x(1) —must offer a

qualifying facility. the choice among these two types of rates, both of which are based on a

utility's avoided costs, but which are calculated at different times.

As the Commissioners note, under a different program, CPUC provides fox an "SRAC" rate =

an avoided-cost rate that is determined at the time the electricity is delivered. See MTD at 5, 12-

13. Winding Creek does not dispute. that CPUC has. satisfied its obligations under 18 C.F.R.

'i § 292.304(d)(2)(i). But that does not end the story, because CPUC is required to offer qualifying

facilities the choice of the avoided-cost rate described in Subsection 292.304(d)(2)(i) or the

avoided-cost rate described in Subsection 292.304(d)(2)(ii), see, e.g., JD Wind 1, 130 FERC

61,127 at 61,631, and Winding Creek alleges that CPUC has failed to make the latter rate

available. Although the Re-MAT program sets a price that is fixed for the entirety of the ten to

twenty-year contract term at the outset of the contract, it does not comply with Section

292.304(d)(2)(ii) because, as Winding Creek has alleged, the Re-MAT rate is not based on the

utility's avoided costs. Instead, it is based on the qualifying facility's production costs. SAC ¶¶

55-65, 87-95. Yet, under 18 C.F.R. § 292.304(d)(2)(ii), autility must offer a rate that is both

long-term and based on a utility's avoided costs.

Thus, the Commissioners are simply wrong as a matter of law when they state

"§ 292.304(d)(2) simply allows a QF to establish a fixed price at the outset of its obligation, or to

receive the avoided cost at the time of delivery." MTD 11 (emphasis added). A fixed, long-run

rate based on something other than a utility's avoided costs does not satisfy PURPA's, or

FERC's, requirements, as the plain language of § 292.304(d)(2) makes clear. See Indep. Energy

Producers Ass 'n v. CPUC, 36 F.3d 848, 857 (9th Cir. 1994) ("[T]he Commission's regulations

are clear that the rate to be paid by utilities for electric energy be determined according to the

avoided cost to the utilities] of generating that energy or purchasing it elsewhere ... ").

The Commissioners' response is to attack a strawman. The Commissioners claim that "the

term ̀ long-run-rate' or words to that effect are not used in 18 C.F.R. § 292.304(d) or anywhere in

PURPA or FERC's regulations." MTD 11. But by fixating on the industry's shorthand term, the

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~ ~ Commissioners ignore the words that are in the regulation, namely those requiring a rate that

reflects the utility's "avoided costs calculated at the time the obligation is incurred" for the

(duration of the specified contract term. 18 C.F.R. § 292.304(d)(2)(ii) (emphasis added).

The Commissioners also argue that amarket-based rate can be permissible. See MTD at 14.E

To be sure, some market-based rates can indeed reflect a utility's avoided cost. For example, if a

utility would otherwise buy electricity from the real-time energy market, the rate in that market

reflects the utility's avoided costs. Here, however, CPUC has set up a market in which

~ qualifying facilities are forced to compete with one another for a limited number of PURPA

contracts, with the purpose of driving the rate down to the lowest possible rate at which a

~ qualifying facility is willing to sell electricity. That "market-based rate" does not reflect the

utility's avoided costs — it does not reflect the costs the utility would otherwise incur but for its

requirement to buy from a qualifying facility. See S. Cal. Edison Co., 70 FERC ¶ 61,215, 61,677

(1995) (striking down a previous California program designed —like the Re-MAT — to force

qualifying facilities to bid against a benchmark, and holding that "[i]f the state is determining

avoided cost by relying on a combination of benchmark and bidding procedures, as here, this

means that the bidding cannot be limited to certain sellers (QFs)").

Indeed, by forcing qualifying facilities to compete with one another over price, CPUC's

scheme frustrates the basic policy of PURPA, which is to allow qualifying facilities a premium if

doing so leaves ratepayers no worse off than they would be if the utility had no obligation to

purchase from qualifying facilities. Congress and FERC adopted that policy to further renewable

generation, by providing economic incentives for qualifying facilities to enter the market. See

SAC ¶¶ 90-95; Indep. Energy ProduceYs, 36 F.3d at 858.

~ None of the FERC decisions. cited by Commissioners stands for the proposition that market-based rates are necessarily avoided cost rates. In Revised Regulations Governing Small PowerProduction and Cogeneration Facilities, 114 FERC ¶ 61,102, 61,340 (2406), FERC merelynoted in passing "many sales made pursuant to bilateral contracts between QFs and electricutilities (including contracts at market-based rates) are made pursuant to a state regulatoryauthority's implementation of PURPA." Id. This quote says nothing about the circumstancesunder which amarket-based rate can be an avoided-cost rate, or whether the Re-MAT schemerepresents PG&E's avoided costs. The .Commissioners' citation to Noah Little RockCogeneration, 72 FERC ¶ 61,263, is even further afield. There, the owners of a proposedqualifying facility complained that a rate given to anon-qualifying facility was discriminatory.

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Ultimately, the question of whether the Re-MAT price is an avoided-cost rate is one of fact.

The SAC alleges that "the Re-MAT pricing mechanism adopted by CPUC is not based on

~ [PG&E's] avoided costs, and, on information and belief, has resulted in an offer price that is

I, ~ lower than [PG&E's] long-run avoided costs." SAC ¶ 73; see also id. ¶ 63 (alleging the prices

PG&E hare. offered pursuant to the Re-MAT program "have no relationship whatsoever to the

costs that [PG&E] would otherwise incur if, instead of contracting with the qualifying facility, it

had generated that electricity itself or procured it from another source"). The Court must assume

these allegations to be true for purposes of deciding the motion to dismiss, and allow Winding

Creek the opportunity to prove these allegations. to be true through fact and expert discovery.

2. The Existence of an SRAC Rate Is Irrelevant.

As noted above, the SAC alleges that the Order also violates PURPA because it imposes a

cap on the utilities' mandatory purchase requirement. SAC ¶¶ 7, 85. FERC's regulations

implementing PURPA provide that "[e]ach electric utility shall purchase ... any energy and

capacity which is made available from a qualifying facility ... [d]irectly to the electric utility."

18 C.F.R. § 292.303(a)(1) (emphasis added); see Indep. Energy Producers, 36 F.3d at 855 ("The

regulations contain no provision that would permit a utility to decline to purchase energy from a

QF that has been certified under the optional procedure."). Yet, as a result of CPUC's illegal

cap, PG&E's queue contains a larger number of megawatts offered by qualifying facilities than

CPUC will require PG&E to purchase. SAC ¶¶ 53-54.

The Commissioners' note the existence of an "`all-source' standard offer contract with a rate

based on short-run avoided cost or SRAC." MTD 14. That is not responsive to Winding Creek's

claim. FERC's regulations provide that the qualifying facility shall have the option to choose an

avoided cost rate "calculated at the time of delivery" —that is, an SRAC rate — or instead choose

an avoided cost rate "calculated at the time the obligation is .incurred." Id. § 292.304(d)(2)

(emphasis added); JD Wind 1,130 FERC 61,127, 61,631..Those regulations do not allow CPUC

to make only one of those two avoided cost rates available on an unlimited basis.

3. Winding Creek Has Article III Standing.

Finally, combining their various arguments, the. Commissioners ,wrongly assert that

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Winding Creek lacks Article III standing. First, the Commissioners contend that Winding Creek

has no legally protectable interest because it is not a "qualifying small power production facility,"

~ MTD 11, but that argument is parasitic on their statutory standing claim, which is answered

~ above. See supra at 5-11. Second, the Commissioners argue that Winding Creek lacks standing

~ because "federal law does not ̀ guarantee' a contract based on LRAC." MTD 11. That is in fact

~ an argument on the merits, but regardless, federal law does guarantee a qualifying facility the

~ opportunity to enter into a contract based on the avoided cost pricing methodology laid out in 18

C.F.R. § 292.304(d)(2)(ii). Plaintiff has alleged that the Re-MAT program is inconsistent with

that requirement, for the reasons given above. See supra at 11-14. Third, the Commissioners

focus on the status of Winding Creek's financing. MTD 11-12. However, Winding Creek's

standing does not in any way depend upon the status of its financing. Winding Creek alleges that

CPUC's Orders deny it the "opportunity to enter into a contract with [PG&E] on terms required

by federal law." SAC ¶ 73. That lost opportunity —which federal law protects — is its injury-in-

fact. Cf. McCollum v. Cal. Dept of Corrections, 647 F.3d 870, 878 (9th Cir. 2011)

("McCollum's injury in fact is clear: he was denied the opportunity to apply fora paid-

chaplaincy position."). Moreover, Winding Creek's injury is not at all speculative. The Lodi

facility is currently first in PG&E's queue for "peaking, as-available" resources, and therefore

would be in a position to accept such a contract if CPUC made it available. SAC ¶¶ 67-71.

To the extent this Court does find Winding Creek's financing status relevant, the SAC alleges

~ that the current impermissible price offered under the Re-MAT program "is the only remaining

barrier to Plaintiff's ability to obtain the financing needed to construct the Lodi facility." SAC

¶ 76. Although not necessary to demonstrate standing, that allegation is more than a sufficient

basis upon which to deny the Commissioners' claim that Winding Creek's inability to obtain

financing "is pure speculation." MTD 12.

Dated: July 23, 2014 Respectfully submitted,

JENNER &BLOCK LLP

By: /s/ Matthew E. PriceMatthew E. Price (admitted pro hac vice)Attorneys for Plaintiff

15CasE No. C-13-04934 JD



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