Appalachian Power Co. v. State Corp. Comm'n

• Decision Date: 01 November 2012
• Docket Number: Record No. 120394.
• Court: Virginia Supreme Court
• Parties: APPALACHIAN POWER COMPANY v. STATE CORPORATION COMMISSION, et al.

733 S.E.2d 250

APPALACHIAN POWER COMPANY

v.STATE CORPORATION COMMISSION, et al.

Record No. 120394.

Supreme Court of Virginia.

Nov. 1, 2012.

Robert M. Rolfe, Richmond (Richard D. Gary, Richmond; Noelle J. Coates; James R. Bacha; Hector Garcia; Hunton & Williams, on briefs), for appellant.

D. Mathias Roussy, Jr. (William H. Chambliss, Richmond; Mary Beth Adams, on brief) for appellee State Corporation Commission.

Wesley G. Russell, Jr., Deputy Attorney General (Kenneth T. Cuccinelli, II, Attorney General; C. Meade Browder, Jr., Senior Assistant Attorney General; William T. Reisinger, Assistant Attorney General, on brief) for appellee Division of Consumer Counsel, Office of the Attorney General.

(Louis R. Monacell; Edward L. Petrini; James G. Ritter; Christian & Barton, on brief), Richmond, for appellee Old Dominion Committee for Fair Utility Rates.

Present: KINSER, C.J., LEMONS, MILLETTE, McCLANAHAN, and POWELL, JJ., and RUSSELL and LACY, S.JJ.

Opinion by Senior Justice ELIZABETH B. LACY.

In this appeal, we consider whether the State Corporation Commission properly construed and applied Code § 56–585.1(A)(5)(e) to deny rate adjustment clause recovery for certain costs incurred by Appalachian Power Company (“APCO” or “the Company”).

Background

Prior to 1999, the State Corporation Commission (“the Commission”) determined the rates electric utility companies charged consumers pursuant to Chapter 10, Article 2 of Title 56, Code §§ 56–234 through –245.1:1. Under that regulatory regime, the rates could be changed following a review initiated by the Commission or upon an application filed by an electric utility. The Commission had broad discretion in selecting the methodology for determining rates including the rate of return on equity guided by the principle that the rates were to be just and reasonable, allowing the utility a reasonable return and imposing just rates on the consumer. Code § 56–235.2.

In 1999, the General Assembly enacted the Virginia Electric Utility Restructuring Act, former Code §§ 56–576 et seq., which was designed to deregulate parts of the electric utility industry and introduce competition among the providers of electric generation. 1999 Acts ch. 411; Potomac Edison Co. v. State Corp. Comm'n, 276 Va. 577, 580, 667 S.E.2d 772, 773 (2008). The legislation established a transition period, during which the base rates of electric utilities were held constant or “capped.” ¹ However, utilities were allowed to file annual rate applications to recover incremental costs incurred for system reliability and for compliance with governmental environmental laws or regulations. Code § 56–582(B)(vi); 2004 Acts ch. 827.

In 2007, the General Assembly ended its program of deregulation and enacted Code § 56–585.1 which prescribed a new regulation regime. 2007 Acts chs. 888, 933. The new legislation reaffirmed the Commission's authority to regulate electric utility rates but prescribed certain procedures and methodologies which the Commission must follow in establishing such rates.

Under the 2007 regulatory regime each utility was required to undergo an initial review by the Commission in 2009. In this proceeding, the Commission conducted a review of each company's 2008 performance, set a rate of return and determined the rates to be charged going forward “until such rates are adjusted.” Code § 56–585.1(A). The methodology for adjusting rates in this initial proceeding was set out in the statute. Id.

The legislation requires that, after the initial review proceeding, the performance of electric utility companies is reviewed every two years. In the biennial review, the Commission considers the company's rates, terms, and conditions for the provision of generation, distribution and transmission services for the preceding two years. Id.While the biennial review has some characteristics of the Chapter 10 base rate proceeding, the statute imposes significant limitations on the Commission's discretion in adjusting rates. Id.

If the utility earned more than 50 basis points below the authorized fair combined rate of return, the Commission “shall order increases to the utility's rates necessary to provide the opportunity to fully recover the costs of providing the utility's services and to earn not less than such fair combined rate of return....” Code § 56–585.1(A)(8)(i). If the utility earned more than 50 basis points above the fair combined rate of return established by the Commission, 60 percent of the amount of the earnings above the fair rate of return must be credited to customers' bills and the electric utility may retain the remaining 40 percent of the excess earnings. Code § 56–585.1(A)(8)(ii). The Commission may not order a rate reduction unless it finds that the electric utility earned more than 50 basis points above the fair rate of return in two consecutive biennial reviews. Code § 56–585.1(A)(8)(iii).

The 2007 legislation also creates a new proceeding allowing a utility to petition the Commission for approval of a rate adjustment clause for the “timely and current” recovery from customers for costs incurred in certain identified programs. Code §§ 56–585.1(A)(4) through (6). As relevant here, the Commission is directed to make rate adjustments allowing a company to recover projected and actual costs of projects which the Commission finds necessary to comply with state or federal environmental laws or regulations. Code § 56–585.1(A)(5)(e). Once granted, a rate adjustment clause is combined with the company's costs, revenues and investments in a biennial review proceeding if there are adjustments to the rates until the amounts of the adjustment clause are fully recovered. Code § 56–585.1(A)(3).

Proceedings

Pursuant to the regulatory review regime outlined above, APCO filed its petition for its initial review in 2009. In that proceeding APCO sought a rate increase of approximately $167 million based on the Company's performance in the 2008 test year. The Commission's order implementing APCO's adjusted rates included recovery for some, but not all the amounts sought by APCO for compliance with various state and federal environmental laws and regulations. These rates became effective in August of 2010. In re Appalachian Power Co., Case No. PUE–2009–00030 (July 15, 2010).²

In March of 2011, APCO filed a petition pursuant to Code § 56–585.1(A)(5)(e), seeking a rate adjustment clause to recover $77 million, which it asserted represented the 2009 and 2010 actual costs incurred by the Company, but not recovered through base rates, to comply with state and federal environmental requirements.³ The recovery APCO sought was incurred either directly by APCO for environmental projects required for compliance or through the capacity equalization charges it paid to its affiliates which included costs incurred by the affiliates for compliance with state or federal environmental laws or regulations.⁴

The Commission published an order calling for notice and hearing, scheduled public hearings associated with the petition, established a procedural schedule for the case, and assigned a hearing examiner to conduct all further proceedings on behalf of the Commission. A number of parties filed notices of participation including the Old Dominion Committee for Fair Utility Rates and the Office of the Attorney General Division of Consumer Counsel, appellees in this appeal. Public hearings and evidentiary hearings were conducted by the Commission and the hearing examiner.

In his report and recommendations to the Commission, the hearing examiner concluded that Code § 56–585.1(A)(5)(e) entitled APCO to recover the environmental compliance costs it sought but, based on the testimony and evidence received, the hearing examiner recommended that the appropriate amount of revenue recovery should be $63.3 million rather than the approximately $77 million sought by APCO.⁵

The Commission rejected the hearing examiner's construction and application of Code § 56–585.1(A)(5)(e) and held that the section did not authorize recovery of those costs which the Company had already been given the opportunity to recover through its base rates.

The Commission also concluded that, even if APCO was entitled to recover actual compliance costs associated with categories of projects included in, but not recovered by the base rates, it could not recover the $27.3 million alleged as embedded in the capacity equalization charges because APCO failed to establish the actual amount of the environmental costs embedded in those charges.

The Commission entered an order allowing APCO to recover $30 million for actual environmental compliance costs over a one-year period and denying recovery of the remaining approximately $6 million APCO claimed it incurred directly but did not recover through base rates to comply with environmental regulations and laws and approximately $27.3 million alleged to be environmental compliance costs embedded in the capacity adjustment charges paid to its affiliates. APCO filed an appeal with this Court pursuant to Rule 5:21(a) naming the Commission and intervenors, Old Dominion Committee for Fair Utility Rates and the Office of the Attorney General Division of Consumer Counsel, as appellees.

Discussion

1. Application of Code § 56–585.1(A)(5)(e)

APCO raises three assignments of error containing a number of subpoints. The overarching challenge which APCO advances is that the ratemaking methodology adopted by the Commission to implement Code § 56–585.1(A)(5)(e) ignored the plain and unambiguous language of the statute.

The Constitution of Virginia vests administrative, judicial and legislative powers in the Commission in the exercise of the control and regulation of public utility companies. Potomac Edison, 276 Va. at 586, 667 S.E.2d at 777. In considering the appropriate standard of review to be applied when reviewing a Commission decision, we begin by giving a decision in which the Commission has exercised its expertise a presumption...