CF&I Steel, L.P. v. Public Utilities Com'n of State of Colo.

• Decision Date: 22 December 1997
• Docket Number: No. 96SA410,96SA410
• Citation: 949 P.2d 577
• Parties: Util. L. Rep. P 26,641, 97 CJ C.A.R. 3336 CF&I STEEL, L.P.; and Cyprus Climax Metals Company, Petitioners-Appellants, v. The PUBLIC UTILITIES COMMISSION OF THE STATE OF COLORADO; Robert J. Hix, Vincent Majkowski and Christine E.M. Alvarez, Commissioners thereof, individually in their official capacity, Respondents-Appellees.
• Court: Colorado Supreme Court

Page 577

949 P.2d 577

Util. L. Rep. P 26,641, 97 CJ C.A.R. 3336

CF&I STEEL, L.P.; and Cyprus Climax Metals Company Petitioners-Appellants, v. The PUBLIC UTILITIES COMMISSION OF THE STATE OF COLORADO Robert J. Hix, Vincent Majkowski and Christine E.M. Alvarez Commissioners thereof, individually in their official capacity, Respondents-Appellees.

No. 96SA410.

Supreme Court of Colorado En Banc.

Dec. 22, 1997.

Dufford & Brown, P.C., Richard L. Fanyo, Lisa A. Lee, Denver, for Petitioners-Appellants.

Gale A. Norton, Attorney General, Martha Phillips Allbright, Chief Deputy Attorney General, Richard A. Westfall, Solicitor General, Linda L. Siderius, Deputy Attorney General, Richard Djokic, First Assistant Attorney General, Eugene C. Cavaliere, Senior Assistant Attorney General, Regulatory Law Section, Denver, for Respondents-Appellees.

Justice HOBBS delivered the Opinion of the Court.

This appeal, taken directly to us under section 40-6-115(5), 11 C.R.S. (1997), is from a district court order upholding a rate setting decision of the Colorado Public Utilities Commission (PUC). At issue is only one aspect of the PUC's decision, the electrical rates that Public Service Company of Colorado (PSCo) charges to large commercial and industrial customers who elect to receive interruptible rather than firm service to meet part or all of their electricity requirements. Appellants, CF&I Steel (CF&I) and Cyprus Climax Metals Company (Cyprus), contend that the interruptible service rates which the PUC set are unreasonable, unjust, an abuse of discretion, and not supported by substantial evidence in the record, primarily because these rates do not match the cost of providing electrical service to the interruptible customers and, instead, act unreasonably to lower the cost of service to firm customers at the expense of the interruptible customers. ¹

Upon reviewing the record and considering the issues raised, we affirm the district court's order upholding the PUC's decision.

I.

In 1994, PSCo submitted its rate design and cost allocation proposals to the PUC in Phase II of a comprehensive rate setting proceeding. Originally, this proceeding involved rates for gas, steam, and electric service. As a result of settlement, only the electric service issues were tried to the PUC. In Phase I of its rate proceeding, the PUC reviewed PSCo's proposed revenue requirement of $1,115,793,901, calculated to include its proposed 9.4% rate of return. In Phase II, the PUC spread the approved revenue requirement among PSCo customers by setting rates for the different classes of electric service. At issue here are the rates adopted for interruptible service.

Interruptible service is available only to large commercial and industrial consumers who agree under certain conditions to have their electric service curtailed when PSCo is unable to meet the demands of all customers. A customer must have at least 500 kilowatts of demand to be eligible for this category of service. Because these customers have agreed to be curtailed during peak demand periods, they are billed a substantially reduced amount for their electric service in comparison to charges they would incur for non-interruptible, or firm, service.

PSCo's power supply is largely generated by base load coalfired generation units, and is supplemented by a small amount of gas-fired peaking generation units and purchases of electricity from other suppliers. In the first part of this decade, PSCo and the PUC began to engage in an integrated resource planning process as the result of a 1991 order of the PUC approving a settlement among multiple parties, see 126 Public Utilities Reports 9 (4th ed.1991), and the PUC's integrated resource planning regulation, see 4 C.C.R. 723-21. ²

Traditional utility regulation has focused on adjusting the prices that electric utilities can charge; integrated resource planning adds to decisionmaking the dimension of the efficient use of electricity and the resources used to produce it. See Scott F. Bertschi, Comment, Integrated Resource Planning and Demand-Side Management in Electric Utility Regulation: Public Utility Panacea or a Waste of Energy?, 43 Emory L.J. 815, 815 (1994). The term "integrated resource planning" refers to a "set of regulations designed to ensure that electricity is produced and used in the most efficient way." Id.

As part of its integrated resource plan, PSCo identified interruptible service not only as a competitive means for attracting, holding, and serving large customers, but also as a resource to be evaluated and employed along with other resources in reducing demand ³ or adding supply. ⁴ PSCo has approximately fifty commercial and industrial interruptible accounts for a current total of 158 megawatts of what it characterizes as "interruptible rate resource," with CF&I's allocation consisting of 100 megawatts. PSCo plans to have 200 megawatts of interruptible rate resource by the year 2004.

PSCo's Manager of the Industrial and Affiliates Marketing Unit, Kent M. Schuler, testified that the interruptible rate resource can be valued by estimating the cost the company might be required to invest in additional capacity to meet peak power requirements. PSCo proposed to credit the interruptible customers with the projected avoided costs of adding another gas turbine unit to its existing Valmont plant. PSCo valued this interruptible resource credit at $9,167,688. Since it would take PSCo approximately five to six years to bring a new combustion turbine on-line, the length of proposed contracts for interruptible service would be for a comparable time period.

PSCo had offered a form of interruptible service for large customers as a load management tool since 1973 but discovered, as described by Schuler, that its "without notice" interruption classification--which allowed PSCo to interrupt a customer's service an unlimited number of times and without prior notice--did not hold sufficient attraction for some of its large load commercial and industrial customers that sought "greater value in the form of customized choices, better service, and a range of price options."

Accordingly, the company developed and proposed to the PUC in this proceeding a "menu of interruptible service options" and a "different interruptible costing methodology for this rate case." These new service options offered a variety of limitations on the large customer's interruptibility, including the requirement of a thirty minute advance notice prior to the start of an interruption, a limitation on the number of curtailments annually, a limitation on the hourly duration of each curtailment, or a combination of the above. Each such limitation reduces the value of the interruptible service to PSCo and its overall customer base as a demand side resource. Thus, PSCo proposed a more attractive rate for the no notice interruption option, with the differential between firm and interruptible rates reduced in gradations according to the limitations on interruptibility chosen by the customer.

At the hearing, the PUC heard testimony from a wide spectrum of interested parties, including CF&I and Cyprus. CF & I purchases electricity from PSCo for use in its steel manufacturing facility in Pueblo, and Cyprus for use in two molybdenum mines located near Leadville and Empire. Both companies purchase a combination of firm and interruptible electric service. CF&I and Cyprus suggested several modifications to PSCo's rate proposal and questioned the company's characterization of interruptible service as a "resource" instead of a "lower value service". However, they agreed with PSCo's basic proposal to essentially assign 100% of the avoided gas turbine costs to the interruptible accounts in the form of a discount from firm rates.

In modifying the PSCo proposal, the PUC paid particular attention to the testimony of witnesses called by two public interest organizations. Gretchen McClain, a Research Associate with the Tellus Institute, testified on behalf of the Office of Energy Conservation (OEC). She suggested that the method proposed by PSCo for calculating interruptible rates should be abandoned in favor of a bidding process, which would allow the market value of interruptible service to determine the appropriate rate. In support of this proposal, she emphasized the relatively low risk that an interruption would be necessary in any given year, and predicted that PSCo's proposed rates would provide a windfall to large commercial and industrial customers to the detriment of all other PSCo customers. McClain testified that "the Company is likely paying too much for interruptibility.... [A] well-designed bidding program could reduce the cost of interruptibility." She provided an exhibit demonstrating the number of interruptions which had actually occurred for capacity-related reasons over the course of eleven years ⁵ and testified that only eight percent of total interruption hours over the study period were capacity-related. ⁶

Under the OEC proposal, qualified interruptible customers would bid for interruptible service. McClain said that an auction conducted for the Pacific Gas & Electric Company in California suggested that such a bidding process could lower the cost of "acquiring" this resource. On the other hand, failure to utilize such a mechanism would be "unfair" to all of PSCo's ratepayers because they would not be obtaining interruptible service "at fair market prices." Furthermore, if PSCo needed a supply side resource, such as an additional combustion turbine, it should be expected to select the vendor who offered the unit at the lowest cost in open competition between suppliers. In contrast, noted McClain, the use of avoided costs as a proxy for calculating the price advantage given to the interruptible customers could represent an inflated estimate because "competition is completely absent in PSCo's approach to the acquisition of interruptible supply."

Dr. Ben Johnson,...