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Pacific Northwest Solar, LLC v. Northwestern Corp.

United States District Court, D. Montana, Helena Division

August 20, 2018

PACIFIC NORTHWEST SOLAR, LLC, Plaintiff,
v.
NORTHWESTERN CORPORATION, A DELAWARE CORPORATION DBA NORTHWESTERN ENERGY, Defendant.

          ORDER

          SAM E. HADDON, UNITED STATES DISTRICT JUDGE

         This case arises from a contract dispute between Plaintiff Pacific Northwest Solar, LLC ("PNW") and Defendant Northwestern Corporation ("NWE"). NWE has moved to dismiss for failure to join the Montana Public Service Commission ("PSC") as an indispensable party.[1] For the following reasons, the motion is denied.

         Facts and Procedural History[2]

         The Federal Power Act ("FPA")[3] provides "any person who owns or operates facilities used to transmit or sell electric energy in interstate commerce at wholesale is subject to the jurisdiction and regulator power of the [Federal Energy Regulatory Commission ("FERC")]."[4] The FPA was amended in 1978 with the Public Utility Regulation Policies Act ("PURPA"), in part to "encourage the development of cogeneration and small power production facilities," and thereby diminish the United States' reliance on fossil fuels.[5]

         PURPA "creates a market for [a QF's] energy by requiring that [a state's] Commission establish regulations that obligate public utilities to sell electric energy to and purchase electric energy from QFs."[6] A facility that produces both "electric energy" and "steam or forms of useful energy (such as heat) which are used for industrial, commercial, heating or cooling purposes" qualifies as a cogeneration facility.[7] QFs include cogenerating facilities that satisfy the FERC's operating, efficiency, and ownership requirements as designated by section 201 of PURPA.[8]

         PURPA delegates expansive authority to state regulatory commissions. "[T]he states play the primary role in calculating avoided costs and in overseeing the contractual relationship between QFs and utilities"[9] Montana's regulatory commission, the PSC, has "full power of supervision, regulation, and control" of public utilities.[10]

         PURPA requires public utilities such as NWE to purchase electric energy and capacity from QFs like PNW to provide for a market for QF's energy.[11] The process obligates the utility to purchase all of the power generated from a particular QF at the utility's avoided cost rate.[12]

         QFs may enter into long-term contracts for the sale of energy and capacity where the rate is calculated by the utility's avoided costs over the term of the contract.[13] "'Avoided costs' are a utility's incremental costs for electric energy or capacity which, but for the purchase from the QF, the utility would generate itself or purchase from another source."[14] Avoided cost rate schedules must be approved by the PSC.[15]

         Prior to the commencement of this action, the PSC "approved NWE's Electric Tariff [("Schedule QF-1")], which reflects the standard rates available to developers of [QFs] up to three (3) megawatts in size."[16] NWE alleges its system typically requires: (1) an executed Power Purchase Agreement ("PPA") between the QF and NWE, and (2) interconnection to NWE's distribution system for the development of a QF.[17]

         Plaintiff filed suit against NWE on November 16, 2016, in the Montana First Judicial District Court for Lewis and Clark County.[18] Removal to this Court took place on January 5, 2017.[19]

         PNW and NWE commenced PPA negotiation for facilities not to exceed three megawatt production in January 2016.[20] At that time, the PSC's Schedule QF-1 included the standard non-negotiated tariff rate for QFs of this size.[21] NWE alleges that "[i]n March 2016, [it] received multiple applications requesting PPAs using the standard rate tariff in Schedule QF-1."[22]

         In May, 2016, NWE filed its Motion for Emergency Suspension of the QF-1 Tariff for New Solar Qualifying Facilities with Nameplate Capacities Greater than 100 kW[23] with the PSC in which it alleged that without suspension of the Schedule QF-1 standard rates, NWE's customers would suffer harm.[24]

         The PSC granted NWE's motion and "suspended [NWE's] obligations under QF-1 tariff option 1(a) standard rates for solar projects greater than 100 kW pending issuance of a final order."[25] Following the temporary suspension, NWE claims it warned PNW that it could not execute PPAs for any solar QF's of PNW's size that sought a contract with the standard long-term rate.[26] As of June 16, 2016, PNW had not submitted a signed interconnection agreement.[27]

         The PSC issued an interim Order ("Order No. 7500"), dated June 16, 2016, granting NWE's motion to temporarily suspend Schedule QF-1 rates for QFs unless the QF had submitted and signed a PPA and had signed a final Small Generator Interconnection Agreement on or before June 16, 2016.[28] PNW filed a motion seeking relief from interim Order No. 7500 on April 3, 2017.[29]

         The PSC issued a Final Order ("Order No. 7500c"), [30] dated June 22, 2017, which set new avoided cost rates and denied PNW's motion for relief from Order No. 7500.[31] On July 31, 2017, NWE and PNW submitted a Joint Motion for Reconsideration and Brief in Support on Behalf of Pacific Northwest Solar, LLC and Northwestern Energy ("Joint Motion") which requested confirmation that the Order No. 7500c was not intended to affect prior executed PPAs.[32]

         The PSC issued its Order on Reconsideration ("Order No. 7500d"), [33] dated October 5, 2017, in which it determined that the four PNW projects did not meet the requirements for a legally enforceable obligation as they failed to have executed interconnection agreements prior to June 16, 2016.[34] However, the PSC declined to decide whether the four PPAs constituted contracts, noting that it "still lacks authority over executed contracts under Montana law"[35] and "[a]ny dispute between [NWE] and these projects should be viewed as a contract issue to be resolved in the appropriate court."[36]

         At the parties' request, [37] the Court stayed this case to permit the PSC to resolve pending issues connected to the instant case.[38] Following the PSC's Order No. 7500c, the parties informed the Court that they settled claims relating to 17 unexecuted PPAs.[39] The First Amended Complaint concerns only claims pertaining to the four executed PPAs.[40]

         Discussion

         Federal Rule of Civil Procedure 19 (Required Joinder of Parties) obliges the Court to undertake a three-step test to determine if joinder is required:[41] (1) is the nonparty "necessary" under subsection (a);[42] (2) if "necessary," is joinder "feasible";[43] and (3) if joinder is not "feasible," the Court considers whether the nonparty is "indispensable," or if the action can proceed without the absent party "in 'equity and good conscience.'"[44] "[A]n indispensable absentee is a necessary party whose joinder cannot be effected and in whose absence the court chooses to dismiss rather than proceed."[45] "Indispensability becomes relevant only [if] the court identifies a necessary party [as one] whose joinder cannot be effected.[46]Joinder is "contingent... upon an initial requirement that the absent party claim a legally protected interest relating to the subject matter of the action."[47] Factors a court should consider are:

(1) the extent to which a judgment rendered in the person's absence might prejudice that person or the existing parties;
(2) the extent to which any prejudice could be lessened or avoided by:
(A) protective provisions in the judgment;
(B) shaping the relief; or (C) other measures;
(3) whether a judgment rendered in the person's absence would be adequate; and
(4) whether the plaintiff would have an adequate remedy if the action were dismissed for nonjoinder.[48]

         If the court concludes that the nonparty is a necessary party whose joinder cannot be achieved, the court, on a case-by-case basis, [49] has two options: it may (1) permit the action to proceed without joinder or (2) dismiss.[50]

         Analysis

         I. The PSC is not a necessary party under Federal Rule of Civil Procedure 19(a).

         The four projects, represented by the executed PPAs, do not qualify as legally enforceable obligations.[51] Moreover, if the PPAs were to be treated as enforceable contracts, the PSC asserts lack of jurisdiction over executed contracts.[52]

         In Colstrip Energy Limited Partnership v. Montana Power Company, cited by the PSC in Order 7500d, the state district court considered whether the PSC had jurisdiction over a breach of contract dispute.[53] It concluded that Mont. Code Ann. § 69-3-603(1), which gives "the PSC jurisdiction to determine rates and conditions of a contract for the sale of electricity where a qualifying facility and a utility cannot come to terms, "[54] did not give the PSC jurisdiction over executed contracts.[55] The state court also noted that the PSC's authorization "to review the rates as part of a rate proceeding, [ ]does not confer jurisdiction over executed agreements on the PSC."[56]

         In re Boulder Hydro L.P., the PSC considered issues of contract interpretation.[57] Although it had earlier denied Boulder Hydro's petition for declaratory ruling regarding a price dispute, it underlined:

(b) Negotiated rates or terms. Nothing in [PURPA]:
(1) Limits the authority of any electric utility or any [QF] to agree to a rate for any purchase, or terms or conditions relating to any purchase, which differ from the rate or terms or conditions which would otherwise be required by this subpart;
(2) Affects the validity of any contract entered into between a [QF] and an electric utility for ...

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