A Montana District Court judge has ruled that ­NorthWestern Energy did not comply with a state ­mandate to purchase energy from small, locally owned renewable energy projects.

The Aug. 1 decision from Judge James ­Manley ­overturned two annual waivers granted by the ­Montana PSC and triggered a $2.5 million fine on NorthWestern for falling short of the mandate in 2015 and 2016.

Environmental advocates who brought the lawsuit hailed the decision as a victory that will get the attention of NWE executives by hitting the company’s bottom line.

Both NWE and the PSC said they are considering appealing the decision.

NorthWestern has never achieved the 65 MW ­capacity required by the Community Renewable Energy Project mandate. The state’s RPS requires IOU ­portfolios to include a certain amount of renewable energy ­generated by projects no larger than 25 MW and majority-owned by a state resident or residents. The exact amount of capacity required depends on the utility’s size. The state’s other IOU, Montana-Dakota Utilities, is required to have 10 MW of CREPs, a threshold it has met for several years.

In September 2018, the PSC granted NWE ­waivers for falling short of the CREP mandate in 2015 and 2016 [D2016.4.33] by a 3-2 narrow vote, with ­commissioners Travis Kavulla and Roger Koopman dissenting (CU No. 1870 [12]).

The following month, the commission rejected an appeal of its decision filed by the Montana ­Environmental Information Center and the NW Energy Coalition (CU No. 1874 [13]). In November, the MEIC asked a state district court to overturn the waivers.

In a blistering decision, Manley excoriated the ­commission’s approval as “arbitrary and clearly ­erroneous in light of the record evidence.”

The PSC had “failed to reasonably evaluate whether NorthWestern took ‘all reasonable steps’ to achieve ­compliance with the CREP-purchase requirement for 2015,” Manley said in his decision.

For the 2015 compliance year, NWE selected two power purchase agreements—Greycliff and New ­Colony wind farms—and two build-transfer wind projects—Tiger Butte and Judith Gap II, an expansion of the existing Judith Gap wind facility.

Both build-transfer projects had higher viability scores than the PPAs, but the utility began negotiations with the PPAs only, and did not investigate whether they could meet the resident-ownership requirement. Ultimately, neither project met the requirement, and the PPAs were terminated.

Following that, NWE did not start negotiations with the build-transfer projects, which would have met the ownership criteria, Manley noted.

PSC staff recommended commissioners reject ­NorthWestern’s waiver request. However, the PSC approved NWE’s request in a 3-2 vote, with a final order that did not address objections raised by PSC staff and intervenors.

“This omission itself renders the commission’s 2015 waiver decision arbitrary,” Manley wrote.

Defenses presented by NWE and the PSC in district court were “post-hoc rationalizations” and therefore­ ­irrelevant, as the sole issue was the commission’s final order in the 2015 matter, he found.

The commission’s determination that the utility took all reasonable steps to meet the requirement was “­arbitrary and clearly erroneous,” because NWE did not undertake due diligence to determine whether Greycliff and New Colony met CREP criteria, the decision states.

Further, NWE arbitrarily required projects meet an unrealistically short timeline to begin commercial ­operations, Manley added.

NorthWestern’s RFP for the 2015 compliance year, issued in June 2014, required projects to come on line by the end of 2015. The utility set the 18-month ­timeline despite previously acknowledging that moving from ­competitive solicitation to production takes at least 24 months, the decision states.

PSC staff raised the issue in its memo to the ­commissioners, and Kavulla cited the arbitrarily onerous deadline in his dissent.

Manley further found that NorthWestern did not “entertain reasonable negotiations” for the Tiger Butte project, which had a perfect viability score from NWE’s independent consultant. When it applied for a waiver, NWE cited environmental ­concerns with the project, yet it provided no documentation or ­evidence to back up its claim, which PSC staff pointed out to commissioners.

The court found the 2016 waiver to be similarly unjustified, arbitrary and plagued with fatal errors. The PSC’s final order failed to adequately explain the ­commission’s decision and “was clearly erroneous based on the record evidence,” Manley wrote.

NWE rejected all bids, including the resubmitted Tiger Butte projects, claiming that none were “cost ­competitive,” the utility stated in its petition for the 2016 waiver [D2017.8.65].

The court found the state CREP mandate’s cost-cap provision unambiguously requires that a utility accept the lowest cost bid, not that bids be comparted to non-CREP resources.

In its analysis of bids, NWE compared the proposals to existing and much larger generating resources in its portfolio.

Given that, the PSC’s finding that NorthWestern Energy complied with the cost-cap provision relied on an unlawful and incorrect interpretation of the law, Manley said in his decision.

Appeals of Manley’s decision could be forthcoming, though.

“The Public Service Commission is disappointed in the court’s recent decision,” PSC spokesman Drew Zinecker said in a statement. “Our legal team and commissioners are currently reviewing the judge’s decision and, as with most pending legal matters, cannot comment further at this time.”

Similarly, NorthWestern finds the decision “­disappointing, and we are still evaluating the next step,” NWE spokeswoman Jo Dee Black told Clearing Up. “­NorthWestern believes the Montana PSC correctly decided to grant it short-term waivers for 2015 and 2016.”

Since the CREP mandate took effect in 2012, the ­utility “has worked and continues to work to comply” with the law “by taking all reasonable steps” to develop or purchase CREP facilities, she said.

The utility currently has five CREP facilities in its portfolio with a combined nameplate capacity of about 36 MW (CU No. 1874 [13]). In May, NWE signed a PPA with a proposed 20 MW Meadowlark Solar project (CU No. 1902 [7.4]). The developer has asked the PSC to certify the project as CREP qualified.

“Additionally, NorthWestern has upgraded and is in the process of completing several upgrades to its hydroelectric facilities, and those upgrades should qualify as CREPs—further reducing NorthWestern’s outstanding CREP obligation,” Black said.

Environmental advocates are skeptical, though, about NWE’s interest in complying with the mandate. The utility has lobbied lawmakers in recent years to roll back the CREP mandate, arguing that its ownership requirement is too onerous (CU No. 1823 [13]).

To what degree it has CREP resources in its portfolio is a “happy coincidence,” MEIC Clean Energy Program Director Brian Fadie said in an interview.

It is far from clear that Meadowlark Solar will meet the in-state ownership requirement, he said. “On first blush, NWE again is selecting projects that have a ­challenging path to being certified as locally owned ­projects.”