FERC rules NH biomass energy law preempted

U.S. energy regulators have granted a petition for a declaratory order, ruling that a recently enacted New Hampshire statute mandating a purchase price for wholesale sales by certain biomass generators in the state is preempted by federal law. The ruling casts doubt on state programs that seek to support renewable or other resources by specifying the price for wholesale sales of electric energy in interstate commerce.

At issue is the 2018 enactment of New Hampshire Senate Bill 365, which added a new Chapter 362-H to New Hampshire law. The bill expresses a legislative finding that "the continued operation of the state’s 6 independent biomass-fired electric generating plants and the state’s single renewable waste-to-energy generating plant are at-risk due to energy pricing volatility," and requires New Hampshire's major regulated electric distribution company to offer to purchase the net energy output of eligible biomass and waste-to-energy facilities located in its service territory, at a rate based on 80 percent of the retail rate for default energy service.

The bill was controversial before the Legislature for issues including whether or how these resources should be subsidized; it was ultimately enacted over the veto of Governor Sununu. In November 2018, an activist group called the New England Ratepayers Association (NERA) filed a petition to the Federal Energy Regulatory Commission seeking a declaratory judgment that the New Hampshire law is preempted by the Federal Power Act (FPA) and section 210 of the Public Utility Regulatory Policies Act of 1978 (PURPA).

Citing a 2016 Supreme Court case invalidating a Maryland state energy contracting program, NERA argued SB 365 violated the FPA by setting wholesale energy rates, which are within the Commission’s exclusive jurisdiction. Specifically, NERA claimed that New Hampshire  impermissibly established a wholesale rate in violation of the FPA by (1) requiring utilities to purchase the net output of the eligible facilities at a rate based on 80 percent of the retail rate for default energy service; and (2) after selling into the ISO New England, Inc. (ISO-NE) market at the ISO-NE market clearing price, allowing utilities to recover from ratepayers the difference between the state-established rate for the purchase and the ISO-NE real-time market clearing price. NERA also noted that New Hampshire had not invoked PURPA as a basis for setting the rates for these facilities, but that even if the legislature had invoked PURPA, SB 365 does not conform to PURPA because it does not establish an eligible facility’s rate based on the utility’s avoided costs.

In a September 19, 2019 order, the Commission granted NERA's petition. The Commission concluded that SB 365 is preempted by federal law:

SB 365 requires utilities to offer to purchase the net output of eligible biomass and waste facilities at a state-established rate. As explained below, this requirement establishes a rate for wholesale sales of electric energy in interstate commerce, which intrudes on the Commission’s exclusive jurisdiction over wholesale sales of electric energy in interstate commerce. We therefore conclude that the rate established by SB 365 is preempted by the FPA... SB 365 establishes a wholesale rate by requiring purchasing utilities to offer to purchase electricity from eligible facilities at a specific state-established rate (i.e., 80 percent of the retail default energy rate). In so doing, SB 365 “sets an interstate wholesale rate, contravening the [FPA’s] division of authority between state and federal regulators.

On PURPA matters, the Commission found that the seven generators in question are Qualifying Facilities under PURPA, and therefore focused on the issue of "whether the state-established rate in SB 365 (i.e., 80-percent-of-the-default-energy-rate) exceeds the purchasing utilities’ avoided cost." The Commission noted that the SB 365 rate is not based on the purchasing utilities’ avoided cost,
but rather is based on the state’s retail default energy rate, and that the New Hampshire Commission had found that the SB 365 rate will likely exceed the current avoided cost rate based on ISO-NE wholesale market prices. Finally, the Commission noted that nothing in SB 365 limits the rate to a rate equal to or less than the avoided cost rate, or otherwise allows the New Hampshire Commission to limit the eligible facilities’ rate so that it would not exceed the avoided cost rate. For these reasons, the Commission found that SB 365 is also inconsistent with PURPA.

The Commission's ruling on NERA's petition for a declaratory order highlights a key tension between state policymakers seeking to pursue state goals (such as supporting renewable generators or other kinds of resources) and federal law which generally reserves to Congress and to the Commission the right to regulate the price of electric energy sold at wholesale in interstate commerce. While the Commission is considering reforms to how it implements PURPA that could give states more leeway or control over the pricing of sales by QFs, the bottom line is that despite the best intentions of state policymakers, the basic issue of federal preemption will remain a barrier to some programs.