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

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1 Case:-cv-0-JD Document Filed0// Page of 0 ' ' JENNER &BLOCK MATTHEW PRICE (pyo hac vice) 0 New York Avenue NW Suite 00 Washington, DC 00 Telephone: () - Facsimile: () -0 mprice@jenner.com THOMAS MELONE (pro hac vice) MICHAEL MELONE (pro hac vice) ALLCO RENEWABLE ENERGY LIMITED Wall St., th Floor New York, NY 000 Telephone: () -0 Facsimile: (0) - Thomas.Melone@AlcoUS.com MJMelone@AlcoUS.com Attorneys for Plaintiff FUTTERMAN DUPREE DODD CROLEY MAIER JAMIE L. DUPREE (0) JAIME G. TOUCHSTONE () 0 Sansome Street, th Floor San Francisco, CA 0 Telephone: () -0 Facsimile: () - jdupree@fddcm.com j touchstone@fddcm. com Local Attorneys.for Plaintiff, UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN FRANCISCO DIVISION WINDING CREEK SOLAR LLC, ~ v. Plaintiff, MICHAEL PEEVEY, MICHAEL FLORIO, CATHERINE SANDOVAL, CARLA PETERMAN, and MICHAEL PICKER, in their official capacity as Commissioners of the California Public Utilities Commission, Defendants. Case No. C -0 JD PLAINTIFF'S OPPOSITION TO DEFENDANTS' MOTION TO DISMISS THE SECOND AMENDED COMPLAINT Honorable James Donato Hearing Date: September, Time: :0am Location: Courtroom, 0 Golden Gate Avenue, San Francisco, CA. JENNER.AND BLOCK CasE No. C--0 JD

2 Case:-cv-0-JD Document Filed0// Page of 0 TABLE OF CONTENTS TABLE OF AUTHORITIES...ii I. INTRODUCTION... II. STANDARD OF REVIEW... III. STATUTORY FRAMEWORK AND FACTUAL BACKGROUND... IV. ARGUMENT... A. The Lodi Facility Meets The Criteria For A "Qualifying Small Power Production Facility" And Thus Winding Creek Has Exhausted Its Administrative Remedies And Has Statutory Standing.... PURPA's Plain Text Shows That ayet-to-be Constructed Facility Can Bea "Small Power Production Facility".... To the Extent the Statute Is Ambiguous, the Court Must Defer to FERC's Reasonable and Longstanding Interpretation.... CPUC's May Order... 0 B. The Commissioners' Additional Grounds For Dismissing The SAC Fail.... Winding Creek Has Stated a Claim.... The Existence Of An SRAC Rate Has Nothing To Do With the Permissibility Of A Cap On The Mandatory Purchase Obligation.... Winding Creek Has Article III Standing... JENN~R AND BLOCK ~cp i - CASE No. C--0 JD

3 Case:-cv-0-JD Document Filed0// Page of TABLE OF AUTHORITIES JENNGR AND BLOCK 0 ' i CASES American Paper Institute, Inc. v. American Electric Power Service Corp., U.S. 0 ()..., Ashcroft v. Iqbal, U.S. (0)... BalistYeri v. Pacifica Police Department, 0 F.d (th Cir. 0)... BedRoc Ltd., LLC v. United States, U.S. (0)... Brower v. Evans, F.d 0 (th Cir. 0)... 0 Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., U.S. ()... FERC v. Mississippi, U.S. ()... Independent Energy Producers Ass 'n v. California Public Utilities Commission, F.d (th Cir. )..., McCollum v. California Department of Corrections, F:d 0 (th Cir. )... National Cable &Telecommunications Ass 'n v. Brand X Internet Services, U.S. (0)..., Power Resource Group,, Inc. v. Public Utility Commission of Texas, F.d (th Cir. 0)..., Sorenson v. Secretary of Ti^easury, U.S. ()... TwoRivers v. Lewis, F.d (th Cir. )... United States v. HaggarApparel Co., U.S. 0 ()... STATUTES AND REGULATIONS U.S.C. ()(A)... U.S.C. ()(D)...:..., U.S.C. ()(E)... U.S.C. a-(a)..., U.S.C. a-(b)... U.S.C. a-~~~)..., U.S.C. a-~h)~)~b)... Public Utility Regulatory Policies Act of, Pub. L. No. -, Stat.... C.F.R..(b)()... 0 ii CasE No. C--0 JD

4 Case:-cv-0-JD Document Filed0// Page of 0 C.F.R. ~.0(a)()..., C.F.R. ~.0(b)()... C.F.R..0(d)()..., C.F.R..0~d)~)~ii)..., C.F.R..0(e)... LEGISLATIVE MATERIALS H.R. Rep. No. -(IV) (), reprinted in U.S.C.C.AN.... S. Rep. No. - (), reprinted in U.S.C.C.A.N ADMINISTRATIVE DECISIONS D.-OS-0 (Cal. Pub. Utils. Comm'n May )...,,, 0, D.-0-0 (Cal. Pub. Utils. Comm'n Jan. )..., D.-OS-0 (Cal. Pub. Utils. Comm'n May )...,, JD Wind LLC, 0 FERC, (0)...,, JD Wind LLC, FERC, (0)... North Little Rock Cogeneration, L.P. v. Entergy Services Inc., FERC, ()... 0, Northern Laramie Range Alliance, FERC, ()... 0 Revised Regulations Governing Small Power Production and Cogeneration Facilities, FERC,0 (0)... Southern California Edison Co., 0 FERC, ()... OTHER AUTHORITIES Pacific Gas &Electric Re-MAT Feed-in Tariff Rates, wholesaleelectricsuppliersolicitation/remat/index. shtml... - Small Power Production and Cogeneration Facilities; Regulations Implementing Section 0 of the Public Utility Regulatory Policies Act of, Order No., Fed. Reg., (0)...:.... iii CASE NO. G-0 JD

5 Case:-cv-0-JD Document Filed0// Page of JENNF.R AND BLOCK 0 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.-OS-0 ("May Order"), D.-0-0 ("January Order"), D.-OS-0 ("May Order") (collectively, the "Orders," attached to the SAC as Exhibits A-C) violate the Public Utility Regulatory Policies Act of, Pub. L. No. -, Stat.,("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.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 0 years, and the terms of CPUC's own May 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 CasE No. C--0 JD F

6 Case:-cv-0-JD Document Filed0// Page of 0'' mandatory purchase requirement that cannot be squared with CPUC's -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. (b)(), 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, F.d, (th Cir. ). 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, U.S., (0) (internal quotation marks omitted), or the complaint "lacks a cognizable legal theory," Balistreri v. Pacifica Police Department, 0 F.d, (th Cir. 0). 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. - (IV), at (). In order to achieve this goal, 0 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 () sell electric energy to qualifying cogeneration facilities and qualifying small power production facilities and () purchase electric energy from such facilities." U.S.C. a-(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 obligation shall not "exceed[] the ~ The SAC does not abandon Winding Creek's claim for statutory enforcement. See MTD. Indeed, the SAC pleaded jurisdiction over this case pursuant to U.S.C. a-(h)()(b), the provision authorizing qualifying facilities to bring suit to enforce PURPA. SAC. Moreover, the Commissioners do not dispute that a cause of action exists under PURPA and the Supremacy Clause, and thus Winding Creek's claim is not dependent on U.S.C.. See MTD. '` The mandatory purchase obligation creates a "legally enforceable obligation" on the utility. See CasE No. C--0 JD

7 Case:-cv-0-JD Document Filed0// Page of 0 incremental cost to the electric utility of alternative electric energy." Id. a-(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." C.F.R..0(a)() (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..0(b)(); see also American Paper Inst., Inc. v. Am. Elec. Power Serv. Corp., U.S. 0, () (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 C.F.R..0(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..0(e). Third, and crucial for this case, in C.F.R..0(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..0(d)() (emphasis added). In other words, a qualifying facility can elect to have its rate the utility's avoided costs calculated on month-tomonth 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 U.S.C. a-(fl(). Thus, while PURPA C.F.R..0(d)(); Power Res. Grp., Inc. v. Pub. Util. Comrn'n of Tex., F.d, (th Cir. 0). CasE No. C--0 JD

8 Case:-cv-0-JD Document Filed0// Page of 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 i 0' JENNEIZ AND BLOCK sales is derived from PURPA, any state rule that conflicts with PURPA is necessarily preempted, as this Court previously recognized. See ECF No. at. 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 months of the contract date (with one month extension for regulatory delays). May Order at -0; SAC. 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., F.d, 0 (th Cir. 0) (upholding a Texas law limiting a utility's mandatory purchase obligation to qualifying facilities able to deliver electricity within 0 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 Order, CPUC apportioned a total obligation of 0 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. May Order at -,, ; SAC 0-. 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. megawatts, even though "peaking, as available" facilities currently wish to enter into contracts to provide PG&E with. megawatts. SAC -. Moreover, the May 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 megawatts from generators of each of the three types of renewable generation technology. May Order at 0-, -; SAC. However, As noted in the SAC, there are three types of renewable energy generators that sell electricity to utilities under the Re-MAT scheme: "baseload" (for example, geothermal); "non-peaking, as - CasE No. C--0 JD

9 Case:-cv-0-JD Document Filed0// Page of 0 nothing in PURPA permits a state to cap a utility's mandatory purchase obligation. Indeed, FERC made clear in C.F.R..0(a)() 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 Order established the "Renewable Market-Adjusting Tariff' ("Re-MAT"), which, according to CPUC, satisfied its obligation under C.F.R..0(d)()(ii) to set an avoided-cost rate that was fixed at the outset of a multi-year contract term. See May Order at -; see also January Order at (reaffirming Re-MAT); May Order at - (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 -. Re-MAT functions as a "reverse-auction" whereby the utility offers generators a 0-, -, or -year contract to provide electricity at a particular rate. See id.. As relevant here, if sufficient projects in the queue accept the price so as to fulfill the utility's -megawatt capped obligation, then the next price (offered two months hence) will be reduced pursuant to a CPUCdetermined formula. See id.. This is precisely what has happened: PG&E's initial offer to "peaking, as available".facilities in November was $../megawatt-hour. That price fell each subsequent two-month period, and for the current two-month period, it is $./megawatthour. SAC -. 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 C.F.R..0(d)(). IV. ARGUMENT IENNER AND BLOCK A. The Lodi Facility Meets The Criteria For A "Qualifying Small Power Production Facility" And Thus Winding Creek Has Exhausted Its Administrative 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. These rates are available at CasE No. C--0 JD

10 Case:-cv-0-JD Document Filed0// Page0 of ' 0 available to a "qualifying small power production facility." U.S.C. a-(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 0. Based on that premise, the Commissioners claim Winding Creek has failed to exhaust its administrative remedies,s MTD -0, and has failed to allege statutory standing, id. at. 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 Order. CPUC provided that, so long as an unbuilt facility can contractually commit to being online within months, it is entitled to participate in the Re-MAT program a program that, under the May Order, is expressly limited to "qualifying facilities" under PURPA. SAC.. PURPA's Plain Text Shows That a Yet-to-be Constructed Facility 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, U.S., (0). Under U.S.C. a-(h)()(b), "[a]ny... qualifying small power producer may petition [FERC] to enforce the. requirements of [ a-(h)()(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 0 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. a-(h)()(b). Winding Creek has done so here. See SAC. soli citati on/remat/index. shtml. The Commissioners' argument that Winding Creek failed to exhaust administrative remedies is based on their assertion that Winding Creek is not a "qualifying small power producer." MTD. However, because a "qualifying small power producer" is the owner and operator of a "qualifying small power production facility," U.S.C. ()(D), and because the Lodi facility 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." CASE No. C--0 JD OPPOSI'T'ION TO MOTION TO DISMISS THE SECOND AMENDED COMPLAINT

11 Case:-cv-0-JD Document Filed0// Page of A "qualifying small power producer" is defined in PURPA as "the owner or operator of a ~ ~ qualifying small power production facility," U.S.C. ()(D), and a "qualifying small power production facility" is defined in ()(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 0 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 C.F.R... 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 U.S.C. JENNHR AND BLOCK ()(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 located at the same site (as determined by the Commission), is not greater than 0 megawatts. U.S.C. ()(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 ()(A) defines a "small power production facility"' to include "an eligible solar, wind, waste, or geothermal facility," which itself is defined in Subsection ()(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 CasE No. C--0 JD

12 Case:-cv-0-JD Document Filed0// Page of.facility commences not later than December,, 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. ()(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 0 concluded ayet-to-be-constructed facility could be a "small power production facility," notwithstanding that it did not already "produce[] electric energy." Id. ()(E). The best reading of Section (), 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.. To the Extent the Statute Is Ambiguous, the Court Must Defer to FERC'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., U.S., - (). 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 The Lodi facility claims to be a "small power ~ production facility" under Subsection ()(A)(i) &(ii), rather than under'subsection ()(A) &(E). But there is no reason why the word "produce" should be read any differently in Section (A)(i) than in Section ()(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 the same act are intended to have the same meaning," Sorenson v. Sec'y of Treasury, U.S., 0 ()(internal quotation marks omitted), gand that rule has all the more force when the CasE No. C--0 JD

13 Case:-cv-0-JD Document Filed0// Page of ~~~ 0 Internet Servs., U.S., 0 (0). Determining whether an agency's interpretation is reasonable requires a court to assess the "legislature's revealed design," United States v. Haggar Apparel Co., U.S. 0, () (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, U.S. at 0. As discussed above, one of the primary purposes of PURPA was to promote the development of small power production facilities, see supra p. -, 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. -, at 0 (). In, when PURPA was enacted, "there was very little non-utility generation; virtually all new generating capacity was provided by traditional electric utilities." JD Wind, FERC,,, (0); see also FERC v. Mississippi, U.S., 0- ()(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 0 of the Public Utility Regulatory Policies Act of, Order No., Fed. Reg.,,, (0), "[t]he mandate of PURPA [is] to encourage cogeneration and small power production." See also id. at,. 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, (emphasis added); see also JD Wind, 0 FERC,,, (0). 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--0 JD

14 Case:-cv-0-JD Document Filed0// Page of interpretation. See Brower v. Evans, F.d 0, 0 (th Cir. 0) ("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 C.F.R..(b)(), 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 0 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, FERC,,,,, (). (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. at - (collecting numerous FERC decisions). Indeed, ironically, one of the cases cited by the Commissioners, North Little Rock Cogeneration, L.P. v. Entergy Services Inc., FERC,,,0 (), 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.. CPUC's May Order The Commissioners' position before this Court is particularly perplexing, because it is impossible to square with CPUC's own May 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 Order at. 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," 0 CasE No.~C--0 JD

15 Case:-cv-0-JD Document Filed0// Page of 0 which CPUC determined were necessary to "ensure that only viable projects participate in the ~ program." Id. at -0. Number five among the six "project viability criteria" is "Online Date: ~ months with one -month extension for regulatory delays." Id. at 0. Thus, CPUC's own May 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 -. 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. Under Section ()(D), its owner, Winding Creek, is therefore a qualifying small power producer and has statutory standing to bring its claim for preemption. On June,, Winding Creek petitioned FERC to bring an enforcement action against CPUC pursuant to a-(h)()(a), which FERC declined to do, SAC. 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.. 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. U.S. at. 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 () at the time the electricity was delivered, or () at the time the initial term contract was entered. See C.F.R..0(d)(). 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. But there is no CasE No. C--0 JD

16 'i Case:-cv-0-JD Document Filed0// Page of 0 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 U.S.C. a-(x() 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, -. Winding Creek does not dispute. that CPUC has. satisfied its obligations under C.F.R..0(d)()(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.0(d)()(i) or the avoided-cost rate described in Subsection.0(d)()(ii), see, e.g., JD Wind, 0 FERC, at,, 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.0(d)()(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 -, -. Yet, under C.F.R..0(d)()(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 ".0(d)() 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 (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.0(d)() makes clear. See Indep. Energy Producers Ass 'n v. CPUC, F.d, (th Cir. ) ("[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 C.F.R..0(d) or anywhere in PURPA or FERC's regulations." MTD. But by fixating on the industry's shorthand term, the CASE No. C--0 JD

17 Case:-cv-0-JD Document Filed0// Page of ~ ~ 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. C.F.R..0(d)()(ii) (emphasis added). The Commissioners also argue that amarket-based rate can be permissible. See MTD at.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 0 ~ 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., 0 FERC,,, ()(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 0-; Indep. Energy ProduceYs, F.d at. JENNF.R AND BLOCK. ~ None of the FERC decisions. cited by Commissioners stands for the proposition that marketbased rates are necessarily avoided cost rates. In Revised Regulations Governing Small Power Production and Cogeneration Facilities, FERC,0,,0 (0), FERC merely noted in passing "many sales made pursuant to bilateral contracts between QFs and electric utilities (including contracts at market-based rates) are made pursuant to a state regulatory authority's implementation of PURPA." Id. This quote says nothing about the circumstances under which amarket-based rate can be an avoided-cost rate, or whether the Re-MAT scheme represents PG&E's avoided costs. The.Commissioners' citation to Noah Little Rock Cogeneration, FERC,, is even further afield. There, the owners of a proposed qualifying facility complained that a rate given to anon-qualifying facility was discriminatory. CaSE No. C--0 JD

18 Case:-cv-0-JD Document Filed0// Page of 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 ; see also id. (alleging the prices 0. 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.. 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,. 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." C.F.R..0(a)() (emphasis added); see Indep. Energy Producers, F.d at ("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 -. The Commissioners' note the existence of an "`all-source' standard offer contract with a rate based on short-run avoided cost or SRAC." MTD. 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..0(d)() (emphasis added); JD Wind,0 FERC,,,..Those regulations do not allow CPUC to make only one of those two avoided cost rates available on an unlimited basis.. Winding Creek Has Article III Standing. Finally, combining their various arguments, the. Commissioners,wrongly assert that CasE No. C--0 JD

19 Case:-cv-0-JD Document Filed0// Page of 0 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, but that argument is parasitic on their statutory standing claim, which is answered ~ above. See supra at -. Second, the Commissioners argue that Winding Creek lacks standing ~ because "federal law does not `guarantee' a contract based on LRAC." MTD. 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 C.F.R..0(d)()(ii). Plaintiff has alleged that the Re-MAT program is inconsistent with that requirement, for the reasons given above. See supra at -. Third, the Commissioners focus on the status of Winding Creek's financing. MTD -. 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. That lost opportunity which federal law protects is its injury-infact. Cf. McCollum v. Cal. Dept of Corrections, F.d 0, (th Cir. ) ("McCollum's injury in fact is clear: he was denied the opportunity to apply fora paidchaplaincy 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 -. 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. 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. Dated: July, Respectfully submitted, JENNER &BLOCK By: /s/ Matthew E. Price Matthew E. Price (admitted pro hac vice) Attorneys for Plaintiff CasE No. C--0 JD