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Sierra Club v. Public Service Commission of West Virginia

Supreme Court of West Virginia

April 22, 2019

SIERRA CLUB, Petitioner
v.
PUBLIC SERVICE COMMISSION OF WEST VIRGINIA, and AMERICAN BITUMINOUS POWER PARTNERS, L.P., Respondents

          Submitted: February 5, 2019

          Appeal from West Virginia Public Service Commission Case No. 17-0631-E-P

          Evan D. Johns, Esq. Appalachian Mountain Advocates Charlottesville, Virginia J. Michael Becher, Esq. Appalachian Mountain Advocates Charleston, West Virginia Counsel for the Petitioner.

          Jessica M. Lane, Esq. J. Joseph Watkins, Esq. Charleston, West Virginia Counsel for the Public Service Commission.

          Robert R. Rodecker, Esq. John R. McGhee, Esq. Kay Casto & Chaney PLLC John McCuskey, Esq. Shuman McCuskey & Slicer PLLC Charleston, West Virginia Counsel for American Bituminous Power Partners, L.P.

         SYLLABUS BY THE COURT

         1. "'The principle is well established by the decisions of this Court that an order of the public service commission based upon its finding of facts will not be disturbed unless such finding is contrary to the evidence, or is without evidence to support it, or is arbitrary, or results from a misapplication of legal principles.' United Fuel Gas Company v. Public Service Commission, 143 W.Va. 33 (99 S.E.2d 1)." Syl. Pt. 5, Boggs v. Pub. Serv. Comm'n, 154 W.Va. 146, 174 S.E.2d 331 (1970).

         2. "The detailed standard for our review of an order of the Public Service Commission contained in Syllabus Point 2 of Monongahela Power Co. v. Public Service Commission, 166 W.Va. 423, 276 S.E.2d 179 (1981), may be summarized as follows: (1) whether the Commission exceeded its statutory jurisdiction and powers; (2) whether there is adequate evidence to support the Commission's findings; and, (3) whether the substantive result of the Commission's order is proper." Syl. Pt. 1, Cent. W.Va. Refuse, Inc. v. Pub. Serv. Comm'n of W.Va., 190 W.Va. 416, 438 S.E.2d 596 (1993).

         3. Under West Virginia Code of State Rules § 150-3-12.6 (2018), also known as Rule 12.6 of the Public Service Commission's "Rules for the Government of Electric Utilities," before a traditional electric utility may pass on to its retail customers the rates it is paying to a qualifying facility because of an electric energy purchase agreement, the Commission may require the utility to show the rates are just and reasonable to the utility's customers, in the public interest, and do not exceed the utility's avoided costs. This is permitted regardless of whether the agreement with the qualifying facility was reached voluntarily or was compelled by the Commission.

          OPINION

          HUTCHISON, JUSTICE.

         In this appeal from the Public Service Commission ("the PSC"), we are asked to examine the PSC's interpretation and application of regulations it adopted to give effect to the federal Public Utility Regulatory Policies Act, also called "PURPA." In two orders that are under appeal, the PSC interpreted its PURPA-based regulations as applying to a voluntary agreement between a small power plant and a traditional electric utility, and applied the regulations to find that the agreement, with modification, was just and reasonable to the electric utility's consumers.

         We find no error in the PSC's decision and affirm.

         I. Factual and Procedural Background

         Respondent American Bituminous Power Partners, L.P. ("AmBit"), operates a small electricity-generating plant in Grant Town, West Virginia. A large traditional electric utility, Monongahela Power Company ("Mon Power"), buys the electricity generated by AmBit. Mon Power feeds the electricity produced by this small plant into its transmission lines and distributes that electricity (along with electricity from its own power plants and other sources) to its retail customers in West Virginia.

         This appeal concerns the fee or rate that Mon Power pays to AmBit to buy AmBit's electricity. In 2017, the companies agreed to increase substantially the fee on the condition that the PSC allow Mon Power to pass the entire fee on to its retail customers. As we explain in detail later, AmBit and Mon Power sought approval of a fee based on an avoided capacity cost of $40.00 per megawatt-hour. In two orders entered in 2018, the PSC approved a lesser fee, one based on an avoided capacity cost of $34.25 per megawatt-hour, and said that Mon Power could pass the lesser fee on to its customers. Without the PSC's approval, the avoided capacity cost would have been $27.00 per megawatt-hour pursuant to a 2006 PSC order.

         Petitioner Sierra Club disputes the method that the PSC employed to analyze and approve that fee increase. To understand the parties' arguments, we must first examine the historical statutory and regulatory framework behind the construction of AmBit's Grant Town plant.

         A. Public Utility Regulatory Policies Act of 1978 ("PURPA")

         Since adoption of the Federal Power Act of 1935, the Federal government has exercised "the exclusive authority to regulate 'public utilities' that sell electric power at wholesale in interstate commerce." Freehold Cogeneration Assocs., L.P. v. Bd. of Regulatory Comm 'rs of State of N.J., 44 F.3d 1178, 1182 (3rd Cir. 1995) (quoting 16 U.S.C. § 824(e)). Then, in the mid-1970s, the United States faced a "nationwide energy crisis" caused by foreign oil embargoes and shortages of natural gas. Fed. Energy Regulatory Comm'n v. Mississippi, 456 U.S. 742, 745 (1982). Electric utilities were "plagued with increasing costs and decreasing efficiency in the use of their generating capacities" resulting in adverse impacts on consumers and the national economy. Id. at 745-46. Congress thereafter embarked on a comprehensive legislative effort focused on encouraging electric utilities to reduce consumption of oil and natural gas. Id.

         In 1978, Congress modified the Federal Power Act by passing the Public Utility Regulatory Policies Act ("PURPA")[1] to encourage the "conservation of electric energy." 16 U.S.C. § 2601 [1978]. Congress also intended for PURPA to encourage the adoption of alternative energy sources, including small power production facilities[2] and cogeneration facilities.[3] A power plant that meets PURPA definitions is called a "qualifying facility."[4] The parties agree that AmBit's Grant Town power plant is a qualifying facility under PURPA.

         When it adopted PURPA, Congress found that traditional electric utilities (like Mon Power) might be reluctant to buy electricity from qualifying facilities. In response, Congress required the Federal Energy Regulatory Commission ("FERC") to promulgate rules designed to impel traditional electric utilities to connect to and buy from qualifying facilities. See 16 U.S.C. § 824a-3(a) [2005] ("[T]o encourage cogeneration and small power production," FERC was to create rules that "require electric utilities to offer to . . . purchase electricity from such facilities.").[5]

         Additionally, Congress required FERC to adopt rules aimed at regulating the fees paid by traditional electric utilities to qualifying facilities. Congress provided the following guidelines for the rates that traditional utilities would be required to pay:

[I]n requiring any electric utility to offer to purchase electric energy from any qualifying cogeneration facility or qualifying small power production facility, the rates for such purchase-
(1) shall be just and reasonable to the electric consumers of the electric utility and in the public interest, and
(2) shall not discriminate against qualifying cogenerators or qualifying small power producers.

16 U.S.C. § 824a-3(b).

         Furthermore, Congress indicated that FERC could not require a traditional electric utility to pay a qualifying facility a fee that "exceeds the incremental cost to the electric utility of alternative electric energy." Id. Congress defined "incremental cost" in this way:

[T]he term "incremental cost of alternative electric energy" means, with respect to electric energy purchased from a qualifying cogenerator or qualifying small power producer, the cost to the electric utility of the electric energy which, but for the purchase from such cogenerator or small power producer, such utility would generate or purchase from another source.

16 U.S.C.A. § 824a-3(d).

         At this point, we introduce a term of art: "avoided costs." The meaning of "avoided costs," as well as the underlying questions of how and when those costs are measured, are the focus of the parties' arguments. FERC substituted the term "avoided costs" in place of the term chosen by Congress ("incremental cost") when it adopted rules to implement PURPA. Accordingly, "incremental" and "avoided" costs are synonymous.[6]

         FERC defines "avoided costs" as "the incremental costs 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." 18 C.F.R. § 292.101(b)(6) [1995]. Despite that definition, it remains a nebulous term.

         We understand "avoided costs" to be all of the costs that a traditional electric utility would incur to generate or buy electricity, if the utility did not instead buy the electricity from the qualifying facility. In other words, avoided costs are expenses a utility escapes by purchasing electricity for resale from a qualifying facility instead of either building and operating a new plant or purchasing electricity from another wholesale supplier. Viewed in the context of this case, "avoided costs" roughly consists of two parts: the long-term capital cost of building a plant, and the daily fuel and operating costs of the foregone plant. "By setting a ceiling of incremental [or avoided] cost on the amount a utility could be forced to pay for a [qualifying facility's] power, Congress intended to encourage cogeneration [and small power facilities] without requiring a utility's ratepayers to subsidize cogenerators [and small power facilities]." Pub. Util. Comm `n of Tex. v. Gulf States Utils. Co., 809 S.W.2d 201, 203 (Tex. 1991).

         B. State regulation of PURPA facilities

         The federal government regulates the sale of electric power at wholesale in interstate commerce. The States, however, through agencies like the PSC, regulate the sale of power by traditional utilities to retail customers. Hence, Congress directed state regulatory authorities to adopt rules applying PURPA's requirements to the utilities they regulate, and to drive those utilities to procure electricity from qualifying facilities. "Congress intended that state regulatory authorities be the primary enforcers of PURPA[.]" Id., 809 S.W.2d at 204. Congress provided that, within one year of FERC's adoption of a PURPA rule, "each State regulatory authority shall . . . implement such rule . . . for each electric utility for which it has ratemaking authority." 16 U.S.C. 824a-3(f)(1).

         Shortly after passage of PURPA, the West Virginia Legislature directed the PSC to "perform those duties expressly conferred upon a state regulatory authority by the . . . 'Public Utilities Regulatory Policy Act of 1978[.]'" W.Va. Code § 24-2-13 [1979]. The PSC complied with the legislative mandate and incorporated PURPA's requirements into Rule 12 of its "Rules for the Government of Electric Utilities." See generally, W.Va. Code R. § 150-3-12.1 to -12.9.3 [2018]. In accordance with PURPA, the PSC's rules require traditional electric utilities to "purchase . . . any energy and capacity which is made available from a qualifying facility[.]" W.Va. Code R. § 150-3-12.4.1. The rules also require traditional electric utilities to "make such interconnection with any qualifying facility as may be necessary to accomplish purchases[.]" W.Va. Code R. § 150-3-12.4.3.a.

         Regarding the fees that a traditional electric utility pays to a qualifying facility to purchase electricity, Rule 12.6.1 of the PSC's Rules follows FERC's PURPA-based avoided-cost standard and provides:

12.6.1. Rates for purchases -- Rates for purchases shall:
12.6.1.a. Be just and reasonable to the electric consumer and in the public interest, and
12.6.1.b. Not discriminate against qualifying cogeneration and small power production facilities: however, nothing in this rule shall require an electric utility to pay more than the avoided costs for purchases[.]

W.Va. Code R. § 150-3-12.6.1. Further, the PSC's Rules provide that if the rates paid by the traditional electric utility to the qualifying facility "equal the avoided costs" of the utility, then the rate "satisfies the requirements of Rule 12.6.1." W.Va. Code R. § 150-3-12.6.2.b. Similar to FERC's rules, our PSC defines "avoided costs" in Rule 12 as "the incremental costs 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." W.Va. Code R. § 150-3-12.1.1.f

         In summary, under PURPA and the PSC's rules, traditional electric utilities (like Mon Power) may be compelled to purchase electricity from nontraditional producers (like AmBit) that operate qualifying facilities. Under PURPA and the PSC's Rule 12.6, and in the context of this case, any fee that the traditional electric utility pays to the qualifying facility must meet these goals: the fee must be just and reasonable to the retail customers of the electric utility; the fee must be in the public interest; and the fee must not exceed the avoided capital and operating costs to the electric utility. ...


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