                                            DA 14-0454                                       May 5 2015

               IN THE SUPREME COURT OF THE STATE OF MONTANA
                                            2015 MT 119
                                                                                         Case Number: DA 14-0454




WHITEHALL WIND, LLC, a Montana
Limited Liability Corporation,

                Plaintiff and Appellee,

         v.

THE MONTANA PUBLIC SERVICE COMMISSION,
an Agency of the State of Montana,

                Defendant and Appellant,

         and

NORTHWESTERN ENERGY,

                Intervenor and Appellant.


APPEAL FROM:            District Court of the Fifth Judicial District,
                        In and For the County of Jefferson, Cause No. DV 03-10080
                        Honorable Loren Tucker, Presiding Judge


COUNSEL OF RECORD:

                 For Appellant:

                        Justin W. Kraske, Montana Public Service Commission, Helena, Montana

                        Sarah N. Norcott, NorthWestern Energy, Helena, Montana

                 For Appellee:

                        Michael J. Uda, Brown, Uda, Dinwiddie & Mazurek, PLLC, Bozeman,
                        Montana



                                                    Submitted on Briefs: February 18, 2015
                                                               Decided: May 5, 2015


Filed:

                        __________________________________________
                                          Clerk
Justice Beth Baker delivered the Opinion of the Court.

¶1     The Montana Public Service Commission (the Commission) and NorthWestern

Energy appeal a Fifth Judicial District Court decision reversing the Commission’s

determination that Whitehall Wind, LLC (Whitehall) did not incur a legally enforceable

obligation during contract negotiations with NorthWestern for the sale and purchase of

electric energy generated by a proposed wind facility. On appeal, we address whether the

District Court erred in reversing the Commission’s determination that Whitehall had not

established a legally enforceable obligation to deliver energy to NorthWestern. We

reverse.

                  PROCEDURAL AND FACTUAL BACKGROUND

¶2     In 1978, Congress enacted Section 210 of the Public Utility Regulatory Policies

Act (PURPA) to encourage cogeneration and small power production.                   16 U.S.C.

§ 824a-3(a). PURPA requires large electric utilities to purchase available energy from

“qualifying cogeneration facilities and qualifying small power facilities.” 16 U.S.C.

§ 824a-3(a).   Under Federal Energy Regulatory Commission (FERC) regulations, a

“qualifying facility” may provide energy, capacity, or both to a utility pursuant to a

contract or a “legally enforceable obligation.” 18 C.F.R. § 292.304(d). In 1981, the

Montana Legislature enacted §§ 69-3-601 through -604, MCA, to facilitate the

Commission’s implementation of PURPA.               Section 69-3-603, MCA, requires the

Commission to set rates and conditions “if a qualifying small power production facility

and a utility are unable to mutually agree to a contract for the sale of electricity.”



                                           2
¶3     Whitehall is a qualifying facility. NorthWestern is a public utility operating in

Montana and subject to the Commission’s jurisdiction. In the summer of 2002, Whitehall

contacted NorthWestern and attempted to negotiate a contract to sell energy from a

proposed fifty-megawatt wind-generating facility near Whitehall, Montana. In August

2002, after Whitehall and NorthWestern were unable to reach an agreement, Whitehall

petitioned the Commission to set a long-term avoided cost rate1 for electricity that

Whitehall proposed to generate and sell to NorthWestern. On January 2, 2003, after the

parties conducted discovery and the Commission held a public hearing, the Commission

issued an order setting a short-term rate of $0.010639 per kilowatt hour. On January 31,

Whitehall petitioned the District Court for judicial review of that order, seeking an order

for the Commission to set a long-term contract rate.

¶4     On December 22, 2008, the District Court issued an order reversing and

remanding the Commission’s decision.             The court held that the Commission’s rate

unreasonably relied on stale data and directed the Commission to determine whether

Whitehall had established a legally enforceable obligation.               The Commission and

NorthWestern appealed the District Court’s decision to this Court, and we affirmed.

Whitehall Wind, LLC v. Mont. PSC, 2010 MT 2, 355 Mont. 15, 223 P.3d 907.

¶5     On June 4, 2010, the Commission issued an Order on Remand, concluding that

Whitehall had not incurred a legally enforceable obligation. The Commission determined


1
  The Commission defines “avoided costs” as “the incremental costs as determined by the
commission to an electric utility of electric energy or capacity or both which, but for the
purchase from the qualifying facility or qualifying facilities, such utility would generate itself or
purchase from another source.” Admin. R. M. 38.5.1901(2)(a).

                                             3
that “the touchstone of a legally enforceable obligation . . . is an absolute, unconditional

commitment to deliver energy, capacity, or energy and capacity.” Examining the totality

of the circumstances, the Commission found that Whitehall failed to demonstrate an

unconditional commitment.        The Commission further concluded that Whitehall’s

attempted negotiations with NorthWestern merely constituted an effort to seek

information to ascertain the viability of its proposed project.

¶6     Whitehall petitioned for judicial review of the Commission’s order. On May 21,

2014, the District Court issued an order reversing and remanding the Commission’s

decision. The court determined that NorthWestern’s refusal to negotiate created a legally

enforceable obligation entitling Whitehall to a long-term avoided cost rate.             The

Commission and NorthWestern appeal.

                               STANDARDS OF REVIEW

¶7     Section 2-4-704, MCA, governs the District Court’s review of the Commission’s

decision. “The court may not substitute its judgment for that of the agency” in weighing

factual evidence.   Section 2-4-704(2), MCA.        The court may reverse or modify an

agency’s decision if “substantial rights” of the appellant have been prejudiced because,

among other factors, the agency’s decision exceeds its statutory authority, is affected by

legal error, or is clearly erroneous in light of the record. Sections 2-4-704(2)(a)(ii), (iv),

and (v), MCA.

¶8     We apply the same standards of review that a district court applies, Molnar v. Fox,

2013 MT 132, ¶ 17, 370 Mont. 238, 301 P.3d 824, “and must accordingly determine

whether an agency’s findings of fact are clearly erroneous and whether its conclusions of

                                          4
law were correct,” Mont. Solid Waste Contrs. v. Mont. Dep’t of Pub. Serv. Regulation,

2007 MT 154, ¶ 17, 338 Mont. 1, 161 P.3d 837. “A finding of fact is clearly erroneous if

it is not supported by substantial evidence in the record, if the fact-finder misapprehended

the effect of the evidence, or if a review of the record leaves the court with a definite and

firm conviction that a mistake has been made.” Williamson v. Mont. Pub. Serv. Comm’n,

2012 MT 32, ¶ 25, 364 Mont. 128, 272 P.3d 71.

                                       DISCUSSION

¶9     Congress required FERC to prescribe “such rules as it determines necessary to

encourage cogeneration and small power production” within one year of PURPA’s

enactment, and to revise those rules periodically. 16 U.S.C. § 824a-3(a). Section 210 of

PURPA requires electric utilities to purchase electric energy from qualifying facilities.

16 U.S.C. § 824a-3(a). FERC interpreted this requirement to mean that a utility must

purchase “any energy and capacity which is made available,” either directly or indirectly,

from a qualifying facility. 18 C.F.R. § 292.303(a) (emphasis added). FERC regulations

provide that a qualifying facility has the option to sell energy as available or pursuant to a

legally enforceable obligation. 18 C.F.R. § 292.304(d). If a qualifying facility sells its

energy pursuant to a legally enforceable obligation, it may choose a rate based on the

avoided costs calculated at the time of delivery or the avoided costs calculated at the time

the obligation is incurred. 18 C.F.R. § 292.304(d)(2).

¶10    Though PURPA is a federal law, “[i]t is up to the States, not [FERC], to determine

the specific parameters of individual [qualifying facility] power purchase agreements,

including the date at which a legally enforceable obligation is incurred under State law.”

                                          5
Metro. Edison Co., 72 F.E.R.C. ¶ 61,015, ¶ 61,050 (1995). In its June 2010 order on

remand, the Commission noted, “Determining the date at which [a legally enforceable

obligation] is incurred requires determining what establishes [a legally enforceable

obligation] under state law. This is a matter of first impression for the Commission.”

The Commission thoroughly considered each party’s arguments, the language of the

statutes, and relevant case law from other jurisdictions to conclude:

       [T]he touchstone of a legally enforceable obligation . . . is an absolute,
       unconditional commitment to deliver energy, capacity, or energy and
       capacity at a future date. Any commitment that is conditional fails to
       establish [a legally enforceable obligation].

Reviewing the record under this standard, the Commission determined that Whitehall had

not incurred a legally enforceable obligation.

¶11    The Commission found support for its conclusion from other jurisdictions, many

of which have determined that a qualifying facility establishes a legally enforceable

obligation when it cannot abandon a project without incurring a liability. See Rosebud

Enters. v. Idaho Pub. Util. Comm’n, 951 P.2d 521, 526 (Idaho 1997) (upholding a public

utilities commission’s determination that a qualifying facility did not establish a legally

enforceable obligation by merely seeking information in order to assess the viability of a

project); A.W. Brown Co. v. Idaho Power Co., 828 P.2d 841, 843 (Idaho 1992) (citing a

public utilities commission’s determination that a legally enforceable obligation occurred

once “the project was substantially mature to the extent that the developer was ready,

willing, and able to sign a contract” and had “actively negotiated for a contract which, but

for the reluctance of the utility, would have been executed”); Appeal of Pub. Serv. Co.,


                                         6
539 A.2d 275, 280-81 (N.H. 1988) (upholding a public utilities commission’s

determination that a legally enforceable obligation was created by a timely and eligible

rate petition, demonstrating that most developmental problems had been resolved and that

the project was viable, accompanied by an interconnection agreement signed by a

qualifying facility).

¶12    Relying on this precedent and statutory language, the Commission rejected

Whitehall’s argument that Whitehall incurred a legally enforceable obligation based on

“its offer of a detailed long-term contract to [NorthWestern] in October 2002, its good

faith attempt to negotiate that contract with [NorthWestern], and its ultimate petition to

the Commission and the Commission’s resultant decision.” In rejecting Whitehall’s

argument, the Commission determined that cases on which Whitehall relied did not

actually support its position.    See A.W. Brown, 828 P.2d at 846-47 (upholding a

commission’s determination that “a qualifying facility is entitled to receive avoided cost

rates if it obligates itself to the delivery of energy or capacity and if that obligation is

legally enforceable,” and that “preliminary, tentative, or general” discussions between a

facility and a utility did not establish a legally enforceable obligation); Armco Advanced

Materials Corp. v. Pa. Pub. Util. Comm’n, 579 A.2d 1337, 1347 (Pa. Commw. 1990)

(determining that a qualifying facility incurs a legally enforceable obligation when it “has

done everything within its power to create such an obligation, either by tendering a

contract to the utility or by petitioning the [public utilities commission] to approve a

contract or to compel a purchase,” so that “only an act of acceptance by the utility or an

act of approval by the [commission] remains to establish the existence of a ‘contract.’”).

                                         7
The Commission determined that the courts in these jurisdictions required a qualifying

facility to make a binding commitment before finding that the facility had incurred a

legally enforceable obligation.

¶13    In its order, the Commission also announced a prospective bright-line rule: A

facility seeking to establish a legally enforceable obligation must “tender an executed

power purchase agreement to the utility with a price term consistent with the utility’s

avoided costs, with specified beginning and ending dates, and with sufficient guarantees

to ensure performance during the term of the contract, and an executed interconnection

agreement.”     The Commission explicitly declined to apply this bright-line rule

retroactively. Instead, for its review of Whitehall’s petition, the Commission examined

the “totality of the circumstances to determine if the [qualifying facility] has made an

unconditional commitment to deliver energy, capacity[,] or energy and capacity.”

¶14    Several factual findings led the Commission to conclude that Whitehall had not

incurred a legally enforceable obligation.   The Commission relied on testimony by

Whitehall employees indicating that Whitehall intended to use the rate set by the

Commission to determine whether Whitehall feasibly could proceed with the project.

The Commission found that, of the two contracts that Whitehall submitted to

NorthWestern, one was unsigned and one was meant to stimulate negotiations rather than

to present a firm commitment. Moreover, although Whitehall performed a wind analysis

of the proposed site, it had not conducted avian studies or obtained any actual site

control.   Ultimately, the Commission concluded, “Taken as a whole, the record

establishes that [Whitehall] was merely seeking information from which it could make a

                                        8
decision whether or not to proceed. This falls short of establishing [a legally enforceable

obligation].”

¶15    The District Court reversed the Commission’s decision, determining that the

Commission “ignored the facts and exceeded its statutory authority,” and that its decision

was “clearly erroneous.” The court determined that “[s]imply refusing to negotiate” can

create a legally enforceable obligation. In reaching this determination, the court relied on

FERC’s declaratory orders in Hydrodynamics, Inc., 146 F.E.R.C. ¶ 61,193 (2014)

(concluding that Montana’s requirement that qualifying facilities must participate in

competitive solicitation to obtain long-term rates for contracts with utilities violated

PURPA); Grouse Creek Wind Park, LLC, 142 F.E.R.C. ¶ 61,187 (2013) (concluding that

an Idaho Public Utilities Commission rule and order were inconsistent with PURPA

where, as a prerequisite to obtaining a legally enforceable obligation, the rule required a

qualifying facility and a utility to sign a purchase and sale agreement or, alternatively, the

order required a qualifying facility to complain “meritoriously” to the commission);

Cedar Creek Wind, LLC, 137 F.E.R.C. ¶ 61,006 (2011) (addressing similar issues as

Grouse Creek and reaching the same conclusion); and JD Wind 1, LLC, 129 F.E.R.C.

¶ 61,148 (2009) (concluding that a Texas law specifying that legally enforceable

obligations were available only to sellers of “firm power” was inconsistent with PURPA).

¶16    Each of the FERC orders on which the District Court relied addresses issues

different from the issue in this case.2 In contrast to Hydrodynamics, this case concerns


2
 Because we do not find the FERC rulings dispositive, we do not discuss the parties’ contentions
regarding their use as precedent.

                                           9
the standard for establishing a legally enforceable obligation when there is no contract,

and it does not involve a competitive solicitation requirement. In contrast to Grouse

Creek and Cedar Creek, the Commission in this case did not require a signed contract or

a formal commission ruling for Whitehall to receive long-term avoided-cost rates.

Unlike JD Wind, the Commission did not reject Whitehall’s petition on the ground that it

would offer power from intermittent resources rather than firm power. Moreover, in JD

Wind, the facility clearly had made a binding commitment because it already was

delivering wind energy to the utility when the facility sued to enforce the legally

enforceable obligation. JD Wind, ¶ 61,633. By contrast, Whitehall has not begun to

build the infrastructure it would need to deliver energy to NorthWestern and has not even

acquired property rights to the proposed site.

¶17    The Commission did not exceed its statutory authority in concluding that evidence

of a utility’s refusal to negotiate, without more, is insufficient to establish that a

qualifying facility has committed itself to the proposed project. This conclusion is not

affected by an error of law—it is supported by statutory language and by judicial

decisions in other jurisdictions.   Further, the Commission’s ruling in this case was

fact-specific. There is substantial evidence in the record to support the Commission’s

finding that Whitehall had not committed itself to the project or established any

obligation that could expose it to liability if Whitehall abandoned the proposed project.

Although Whitehall conducted some wind tests in the area of the proposed project, it did

not conduct avian studies, obtain required permits, or have actual site control over any of

the proposed project areas.     In essence, Whitehall sought to have the Commission

                                         10
establish a long-term avoided cost rate in order to determine the financial viability of the

project before it incurred an obligation to proceed.        But, under applicable FERC

regulations, the long-term rate is tied to the date a legally enforceable obligation is

incurred.   Evidence in the record supports the Commission’s determination that

Whitehall, while pursuing information, had not obligated itself to NorthWestern and

therefore had not established a legally enforceable obligation to deliver energy or

capacity. Accordingly, the Commission’s findings of fact were not clearly erroneous.

Whitehall has failed to demonstrate that its substantial rights were prejudiced for any of

the reasons listed in § 2-4-704(2)(a), MCA.

¶18    Because it is not implicated in this appeal, we decline to opine whether the

Commission’s bright-line prospective test, announced in its order, complies with

PURPA. Additionally, because we reverse the District Court’s decision, we need not

address the appellants’ argument that the District Court’s reliance on Hydrodynamics,

without allowing the appellants to rebut Whitehall’s characterization of that case, violated

their procedural due process rights.

                                       CONCLUSION

¶19    We reverse the District Court’s decision and order and remand for reinstatement of

the Commission’s June 4, 2010 order.



                                                 /S/ BETH BAKER




                                         11
We concur:

/S/ PATRICIA COTTER
/S/ JAMES JEREMIAH SHEA
/S/ LAURIE McKINNON
/S/ JIM RICE




                          12
