Can Oregon use the 3 percent ratepayer surcharge on electric bills to subsidize small renewable energy projects, even when those same projects sell power to utilities at federally regulated 'avoided cost' rates under PURPA?

Subject

Public Utility Commission of Oregon

Plain-English summary

Oregon has a 3 percent surcharge on retail electric bills called the public purpose charge (ORS 757.612). About 19 percent of that revenue goes to subsidize "above-market costs" of new renewable energy projects of 20 megawatts or smaller. The Energy Trust of Oregon distributes the funds. Many of those projects also qualify as "qualifying facilities" (QFs) under the federal Public Utility Regulatory Policies Act of 1978 (PURPA), which means utilities have to buy their power at federally regulated "avoided cost" rates.

That created a question. PURPA caps how much utilities can be required to pay for QF power: the avoided-cost rate, no more, because Congress did not want to burden ratepayers with hidden federal-mandated subsidies. So a small renewable producer could get the avoided-cost rate plus an Oregon ratepayer-funded subsidy, meaning the same ratepayers who pay for the avoided-cost-rate purchase also pay the surcharge that funds the subsidy. Was Oregon doing what Congress refused to do?

The AG concluded no, on four grounds.

First, there is a presumption against preemption. Reading PURPA broadly enough to bar state retail subsidies would extend federal law on the basis of "mere ambiguity," which the U.S. Supreme Court has discouraged.

Second, the language of PURPA limits its rate cap to "rules requiring any electric utility to offer to purchase electric energy from any [QF]." The Oregon subsidy is not a wholesale purchase from a utility; it is a separate ratepayer-funded payment routed through Energy Trust of Oregon, which is not a utility and does not buy QF power.

Third, federal law expressly preserves state authority over retail rates (16 USC § 2627). The U.S. Supreme Court in FERC v. Mississippi described the federal retail-rate provisions as merely "establish[ing] requirements for continued state activity in an otherwise preemptible field." States can set retail surcharges that fund renewable energy without bumping into the wholesale rate cap.

Fourth, the FERC regulations implementing PURPA (18 CFR § 292.301) apply only to "sales and purchases between qualifying facilities and electric utilities." They do not regulate retail prices or non-utility transactions.

The AG also ruled out express preemption, field preemption, and physical impossibility, leaving obstacle preemption as the only theory in play, and rejecting that one too.

Currency note

This opinion was issued in 2012. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

What is "avoided cost" and why does PURPA care about it?

Avoided cost is what the utility would have spent generating the power itself or buying it elsewhere if it had not bought from the qualifying facility. PURPA sets that as the ceiling for federally mandated QF purchase rates. The point was to encourage cogeneration and renewables without making ratepayers pay above-market prices through federally compelled subsidies. FERC has acknowledged the avoided-cost rule does not save ratepayers money, but argued it does not cost them more either, while supporting non-fossil generation.

Why does Oregon route the subsidy through Energy Trust of Oregon instead of directly through utilities?

That structural choice mattered to the AG's analysis. ETO is a nonprofit, not a utility. Oregon utilities collect the surcharge from ratepayers and forward it to ETO. ETO then distributes the funds to qualifying renewable projects. The AG emphasized that "ETO is not a utility. The ETO is not purchasing the output of the QF. And the subsidies are not tied to power purchase contracts between a utility and QF." That separation is what kept the program on the state retail side of the federal-state line.

What about the "trapping costs" concern from earlier preemption cases?

In Nantahala and Mississippi Power & Light, the U.S. Supreme Court held that states cannot use retail-rate authority to trap the costs of FERC-approved wholesale transactions inside utilities. Oregon's surcharge does not do that. It does not modify any avoided-cost rate, and it does not affect a FERC-approved wholesale transaction. It is a separate ratepayer-funded program for renewables.

Is there any federal-state preemption rule the AG worried might still apply?

Express preemption was out (PURPA does not include language preempting state law on this point). Field preemption was out (Congress left state retail rate authority intact). Physical impossibility preemption was out (utilities could comply with PURPA while the state distributed subsidies). That left obstacle preemption, which the AG found inapplicable for the four reasons above.

Could a state action requiring above-avoided-cost rates pass through to ratepayers raise a different issue?

Yes. The AG flagged that "any state action that would require a utility to purchase power at a price in excess of the 'avoided cost' rate, and then pass that cost through to ratepayers, would raise preemption issues under PURPA." But Oregon's program did not do that.

Background and statutory framework

PURPA was enacted in 1978 to reduce U.S. reliance on oil and gas and encourage alternative energy. The relevant provision (16 USC § 824a-3) requires utilities to buy QF power at FERC-set rates that cannot exceed the utility's "incremental cost" of alternative electric energy, which is commonly called "avoided cost." 18 CFR § 292.304 implements that.

Federal law's retail-side carve-out is at 16 USC § 2627: "Nothing in this chapter prohibits any State regulatory authority or nonregulated electric utility from adopting, pursuant to State law, any standard or rule affecting electric utilities which is different from any standard established by this subchapter." The U.S. Supreme Court in FERC v. Mississippi confirmed that this leaves states free to regulate retail rates.

Oregon Law 1999 created the public purpose charge in ORS 757.612, requiring electric companies to collect 3 percent from retail customers. ORS 757.612(3)(b)(B) directs 19 percent of those revenues to subsidies for "above-market costs of constructing and operating new renewable energy resources with a nominal electric generating capacity * * * of 20 megawatts or less." OPUC distributes the funds through Energy Trust of Oregon, which then makes the actual subsidy distributions.

The federal preemption framework applied here came from Hines v. Davidowitz (obstacle preemption test), Maryland v. Louisiana (presumption against preemption), and Gregory v. Ashcroft (limits on giving "state-displacing weight of federal law to mere congressional ambiguity"). The state-retail-authority cases were Nantahala Power & Light v. Thornburg and Mississippi Power & Light v. Mississippi.

Citations

• 16 USC § 824(a); 824(d); 824a-3; 2601-2645; 2627
• 18 CFR §§ 292.101, 292.301, 292.304
• ORS 757.612; 757.612(3)(b)(B)
• FERC v. Mississippi, 456 US 742 (1982)
• Nantahala Power & Light Co. v. Thornburg, 476 US 953 (1986)
• Mississippi Power & Light Co. v. Mississippi, 487 US 354 (1988)
• Hines v. Davidowitz, 312 US 52 (1941)
• Maryland v. Louisiana, 451 US 725 (1981)
• Gregory v. Ashcroft, 501 US 452 (1991)
• American Paper Institute v. American Electric Power Service Corp., 461 US 402 (1983)
• Independent Energy Producers Ass'n v. California Pub. Util. Comm'n, 36 F3d 848 (9th Cir 1994)

Source

• Landing page: https://www.doj.state.or.us/oregon-department-of-justice/office-of-the-attorney-general/attorney-general-opinions/
• Original PDF: https://www.doj.state.or.us/wp-content/uploads/2012/08/op2012-2.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain — the linked PDF is authoritative.

ELLEN F. ROSENBLUM
Attorney General

MARY H. WILLIAMS
Deputy Attorney General

DEPARTMENT OF JUSTICE
GENERAL COUNSEL DIVISION

August 2, 2012

Susan Ackerman, Commission Chair
Stephen Bloom, Commissioner
John Savage, Commissioner
Public Utility Commission of Oregon
550 Capitol St NE #215
PO Box 2148
Salem OR 97308-2148

Re: Opinion Request OP-2012-2

Dear Ms. Ackerman & Messrs. Bloom and Savage:

Oregon's Legislative Assembly has delegated certain administrative responsibilities pertaining to alternative energy production to the Public Utility Commission of Oregon (OPUC). The responsibilities delegated to OPUC include the exercise of authority arising under both state and federal law. Both state and federal statutes encourage the production of energy from alternative sources. The means employed by the relevant state and federal laws differ. Those differences have prompted OPUC to pose the following question.

QUESTION PRESENTED

Does the Public Utility Regulatory Policies Act of 1978 (PURPA) preempt the provision of alternative energy subsidies to a "qualifying facility" that sells electric energy to a utility under PURPA's mandatory purchase provisions if those subsidies are funded by the three percent public purpose charge imposed on ratepayers by ORS 757.612?

SHORT ANSWER

No.

DISCUSSION

I. Background

A. PURPA

The sale of electricity is regulated by both federal and state governments. The Federal Power Act (FPA) grants the federal government jurisdiction to regulate the "transmission of electric energy in interstate commerce and the sale of such energy at wholesale in interstate commerce." 16 USC § 824(a). The wholesale sale of electric energy is defined as the sale of electric energy for resale. 16 USC § 824(d). The FPA expressly limits federal regulation of the energy industry to only "those matters which are not subject to regulation by the states." 16 USC § 824(a). States generally retain regulatory authority over sales of energy to ultimate consumers.

In enacting PURPA, Congress amended the FPA with the goal of reducing the nation's reliance on oil and gas and encouraging the development of alternative energy sources. The relevant portion of PURPA requires electric utilities to offer to purchase electric energy from energy producers that satisfy specified criteria. 16 USC § 824a-3(a)(2). An energy producer that meets those criteria is commonly described as a "qualifying facility" (QF).

PURPA requires utilities to make these purchases at rates established through the application of rules adopted by the Federal Energy Regulatory Commission (FERC). 16 USC § 824a-3(b). PURPA mandates that FERC's rules must ensure that the rates are "just and reasonable to the electric consumers of the electric utility and in the public interest," and provides that the rates "shall not discriminate against [QFs]."

PURPA also prohibits rules that would "provide for a rate which exceeds the incremental cost to the electric utility of alternative electric energy." PURPA defines "incremental cost of electric energy" to mean "the cost to the electric utility of the electric energy which, but for the purchase from [a QF], such utility would generate or purchase from another source." 16 USC § 824a-3(d). The phrase "avoided cost" is commonly employed to describe this congressional limitation.

FERC's rules that implement PURPA generally require utilities to purchase power from QFs at rates that reflect the utility's "full" avoided cost, which must be determined in a manner specified by rule. 18 CFR 292.304.

B. Oregon public purpose charge subsidies

The State of Oregon has also enacted laws to promote the development of alternative energy sources. Under ORS 757.612, electric companies must collect a three percent surcharge from their retail customers to fund the "public purpose expenditure standard." Nineteen percent of these ratepayer-funded revenues must be distributed by OPUC as subsidies for "the above-market costs of constructing and operating new renewable energy resources with a nominal electric generating capacity * * * of 20 megawatts or less." ORS 757.612(3)(b)(B). We understand that OPUC distributes the funds raised under ORS 757.612 through Energy Trust of Oregon, Inc. (ETO), a nonprofit corporation. We are informed that many recipients of these subsidies are QFs that may also sell energy to utilities under PURPA's mandatory purchase provisions.

We note that the subsidies established by ORS 757.612(3)(b)(B) are not paid by electric companies to QFs as part of an energy purchase arrangement. Instead they are collected by electric companies from ratepayers and forwarded to ETO at the direction of OPUC. ETO then distributes the funds as required by ORS 757.612, including distribution of the alternative energy subsidies.

C. Interplay of PURPA rates and public purpose charge subsidies

As a result of the state and federal laws just discussed, a QF may simultaneously receive (1) a sales contract at a rate equivalent to the purchasing utility's full avoided costs, as determined under FERC's regulations implementing PURPA, and (2) a ratepayer-funded subsidy to defray the "above-market costs" of their "new renewable energy resources." Both of these incentives encourage alternatives to energy generated using fossil fuels, and both are ultimately funded by ratepayers.

II. Analysis

A. Preemption generally

Article VI, clause 2, of the United States Constitution, commonly referred to as the Supremacy Clause, establishes the primacy of federal law. As a result of the Supremacy Clause, federal law can preempt state law. The circumstance that is most relevant to the question presented is when a state law "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." Hines v. Davidowitz, 312 US 52, 67 (1941). This is commonly referred to as "obstacle preemption."

B. The public purpose charge subsidies and obstacle preemption

In order for PURPA to preempt the subsidies established by ORS 757.612(3)(b)(B), the fact that retail electricity consumers fund those subsidies would have to "stand[] as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress" in enacting PURPA. PURPA's provisions indicate that Congress wanted to promote alternative energy and cogeneration. In doing that, Congress wanted to avoid "burdening ratepayers" with costly subsidies.

Whether consumer-funded state subsidies impede Congress's purpose depends in turn on whether Congress (a) wanted to ensure that consumers would never subsidize alternative energy except as might incidentally occur through PURPA's "avoided cost" rates, or (b) merely wanted to avoid creating a broader subsidy on a nationwide basis through its own enactment of PURPA. On balance, we believe that the latter interpretation of Congressional intent is the better one. We reach that conclusion for four reasons.

1. Presumption against preemption

First, we are mindful that any "[c]onsideration under the Supremacy Clause starts with the basic assumption that Congress did not intend to displace state law." Maryland v. Louisiana, 451 US 725, 746 (1981). The presumption against preemption strongly favors the interpretation that congressional intent was limited to ensuring that its own enactment created only a limited subsidy for QFs.

2. Language of PURPA

The second of our reasons makes the presumption against preemption particularly appropriate in this context. We perceive nothing in the language of PURPA suggesting that the Congressional intent to protect ratepayers went beyond assuring that the federal scheme created by PURPA would not cost ratepayers any more than it would cost if a utility obtained the energy from another source. The statutory language expressly states that the limitation is applicable to "rules requiring any electric utility to offer to purchase electric energy from any [QF.]" By its terms, this limitation deals only with wholesale power transactions between a utility and a QF.

The ETO's distribution of ratepayer funded subsidies to help QFs defray above-market costs for the development of renewable energy resources does not relate, directly or indirectly, to a wholesale electricity transaction between a utility and a QF. The ETO is not a utility. The ETO is not purchasing the output of the QF. And the subsidies are not tied to power purchase contracts between a utility and QF.

3. No preemption of state retail rate authority

The fact that Congress has expressly declined to directly preempt state authority over retail rates is the third of our reasons for concluding that the subsidies created by ORS 757.612(3)(b)(B) are not preempted.

The FPA expressly limits federal regulation of the energy industry to "those matters which are not subject to regulation by the states." 16 USC § 824(a). Congress has enacted laws outside of PURPA pertaining directly to retail electricity rates. By their express terms, those laws do not preempt state laws with regard to retail rates: "Nothing in this chapter prohibits any State regulatory authority or nonregulated electric utility from adopting, pursuant to State law, any standard or rule affecting electric utilities which is different from any standard established by this subchapter." 16 USC § 2627.

The United States Supreme Court has noted that these provisions "require only consideration of federal standards" and "allowed the States to continue regulating in the area" after giving the federal standards the required consideration. FERC v. Mississippi, 456 US 742, 764-765 (1982).

We acknowledge that FERC's authority over wholesale power rates places some limits on states' general authority over retail rates. For example, in two cases considering the preemptive effect of FERC's approval of wholesale transactions under the FPA, the United States Supreme Court held that states could not "trap" the cost of FERC-approved wholesale energy transactions by establishing retail rates based on assumptions that the FERC-approved sales were more favorable to the affected utility than was actually the case.

We further recognize that Congress's intent to limit the impact of PURPA on ratepayers may constrain a state's retail authority in some circumstances. For example, any state action that would require a utility to purchase power at a price in excess of the "avoided cost" rate, and then pass that cost through to ratepayers, would raise preemption issues under PURPA. The reason is simple: Oregon's public purpose charge does not affect any transaction governed by PURPA. The subsidies created by ORS 757.612(3)(b)(B) do not implicitly or explicitly conflict with FERC's approval of any wholesale transaction. Nor do they have the effect of trapping the costs of a FERC-approved transaction within any utility.

4. Consistency with FERC rules

Although federal agency action can also preempt state laws, the pertinent FERC regulations are consistent with our understanding of PURPA's scope. Specifically, 18 CFR § 292.301 provides that the regulations implementing the avoided cost rate authorized by PURPA "appl[y] to the regulation of sales and purchases between qualifying facilities and electric utilities." Moreover, for purposes of those regulations, both "purchase" and "sale" are defined in a way that limits those terms to transactions between utilities and QFs. 18 CFR § 292.101(b)(2); 18 CFR § 292.101(b)(3). Thus, FERC's regulations do not purport to govern rates for the retail sale of energy.

III. Conclusion

In sum, we accept that Congress did not want PURPA to create a consumer-funded federal subsidy for QFs in excess of a purchasing utility's avoided costs. The subsidies created by ORS 757.612(3)(b)(B) do not conflict with that congressional intent, because the Oregon Legislative Assembly — not Congress — imposes that burden on consumers. Moreover, that imposition does not interfere with the wholesale relationships governed by PURPA. And it is consistent with the congressional determination that control over retail rates for energy should generally rest with the states. Accordingly, we conclude that the subsidies created by ORS 757.612(3)(b)(B) are not preempted by PURPA.

General Counsel Division
SAW:nog/Justice #3470679-v2.doc