The Formation of Legally Enforceable Obligations: The Year in Review (2018)

The Legally Enforceable Obligation (LEO) concept is a construct of FERC that is used in one of FERC’s avoided cost pricing regulations, i.e., 18 CFR § 292.304(d)(2)(ii).  The date a LEO is formed is the date a QF is entitled to have its avoided cost rate determined, if it so elects.  Through the decades, state utility commissions have adopted a quite broad array of standards for when a QF has established a LEO with a purchasing electric utility.  In providing non-binding guidance on the topic, FERC has had relatively little to say about the LEO standard other than that the purchasing utility cannot control LEO formation by its own action or inaction, such as a refusal to sign a contract.  For example, FERC has opined that the LEO standard cannot depend on the willingness of the purchasing utility executing a contract with the QF, whether it be a power purchase agreement.  In 2016, FERC expanded on that view, opining that a state may not require that a purchasing utility sign an interconnection agreement before a LEO is formed.  In 2018, several states examined their LEO standards. Early in the year, the Vermont Public Utility Commission upheld its rule that a LEO cannot be formed until regulatory approval of a proposed power purchase agreement by the Vermont PUC. As a result of various legal actions, the Colorado Public Service Commission eventually changed its regulations to ensure that a QF could obtain a LEO without winning a competitive solicitation. In a case before the Minnesota Public Utilities Commission, the state commission looked for a QF to have made a “substantial commitment” and found that one had been made (and a LEO formed) when a QF:  (1) had paid for the Facility Study, which established how interconnection could be achieved, (2) had executed a Land Lease and Wind Easement, (3) had obtained necessary approvals from government entities, (4) had wind study results, (5) had reserved equipment, and (6) had filed the Complaint with the Commission. In light of FERC’s 2016 opinion on its LEO standard that required a utility to have signed an interconnection agreement, the Montana Public Service Commission in 2018 adopted a new LEO standard that requires:

1. That the QF unilaterally sign and tender a PPA containing a standard price term or non-standard price term consistent with avoided costs that was calculated within 14 days;
2. That the QF establish site control for the length of the LEO, all required land use and environmental permits, and permission to construct the facility;
3. That the QF has submitted an interconnection request; and
4. That the QF has taken one of four definitive steps towards interconnection.

In an opinion issued in November, a federal district court in Montana agreed with FERC that the Montana PSC's original LEO standard, requiring a purchasing utility-signed interconnection agreement unlawful (2018 WL 6267772). The court found that the plaintiffs’ request for an injunction ordering the Montana PSC to adopt a new LEO standard has been mooted by the completed rulemaking process.  The court refused, however, to address whether the plaintiffs had established LEOs, as outside its jurisdiction. In New Mexico, a QF tried to rely on FERC guidance, but failed to convince the state commission to change its rule that a QF must demonstrate that it is ready to interconnect and deliver energy before a LEO is recognized. Thus, the QF has now turned to FERC, as is required, before it could challenge the state commission’s ruling at federal court.  Specifically, Great Divide Wind Farm 2 LLC has filed a Petition for Enforcement seeking an order that the New Mexico Public Regulation Commission’s (NMPRC) LEO standard violates PURPA.  The Petitioner relies heavily on the FERC decisions rejecting the requirement of signed interconnection or power purchase agreements, despite the fact that the NMPRC does not appear to require either to establish a LEO.  Rather the NMPRC standard seems quite close to that of Texas, which is that unless otherwise agreed, the QF must be 90 days away from being operable to establish a LEO.  Given that the Fifth Circuit found the Texas rule properly implemented FERC’s regulations regarding when a LEO is created, there is a likelihood that FERC will not act on the this Petition. In 2019 more LEO decisions are expected. The Michigan Public Service Commission has indicated that it will examine the LEO issue in a new rulemaking focused on Interconnection Rules, LEOs, distributed generation, and legacy net metering.