Appalachian Power Co. v. State Corp. Comm'n, Record No. 210391

• Docket Number: Record No. 210391, Record No. 210634
• Decision Date: 18 August 2022
• Citation: Appalachian Power Co. v. State Corp. Comm'n, 876 S.E.2d 349 (2022)
• Parties: APPALACHIAN POWER COMPANY v. STATE CORPORATION COMMISSION, et al. Office of the Attorney General, Division of Consumer Counsel, et al. v. State Corporation Comission, et al.
• Court: Virginia Supreme Court

876 S.E.2d 349

APPALACHIAN POWER COMPANY

v.STATE CORPORATION COMMISSION, et al.

Office of the Attorney General, Division of Consumer Counsel, et al.

v.State Corporation Comission, et al.

Record No. 210391

Record No. 210634

Supreme Court of Virginia.

AUGUST 18, 2022

Robert M. Rolfe(Timothy E. Biller ; James G. Ritter; Noelle J. Coates ; James R. Bacha ; Hunton Andrews Kurth, on briefs), for appellant in 210391.

John F. Dudley, Counsel to the Commission (Andrea B. Macgill, Deputy Director, on brief), for appelleeState Corporation Commission in 210391.

(Mark R. Herring, Attorney General; Erin B. Ashwell, Chief Deputy Attorney General; Samuel T. Towell, Deputy Attorney General; C. Meade Browder Jr., Sr. Assistant Attorney General; C. Mitch Burton Jr., Assistant Attorney General, on brief), for appelleeOffice of the Attorney General, Division of Consumer Counsel in 210391.

(Matthew L. Gooch; William T. Reisinger ; ReisingerGooch, on brief), for appellee Virginia Poverty Law Center in 210391.

(Robert D. Perrow ; John L. Walker, III ; Williams Mullen, on brief), for appellee The VML/VACo APCo Steering Committee in 210391.

C. Mitch Burton Jr, Assistant Attorney General(Mark R. Herring, Attorney General; Erin B. Ashwell, Chief Deputy Attorney General; Samuel T. Towell, Deputy Attorney General; C. Meade Browder Jr., Sr. Assistant Attorney General, on briefs), for appellantOffice of the Attorney General, Division of Consumer Counsel in 210634.

(Matthew L. Gooch; William T. Reisinger ; ReisingerGooch, on briefs), for appellant Virginia Poverty Law Center in 210634.

(Evan Dimond Johns; Appalachian Mountain Advocates, on briefs), for appellantSierra Club in 210634.

John F. Dudley, Counsel to the Commission (Andrea B. Macgill, Deputy Director, on brief), for appelleeState Corporation Commission in 210634.

Robert M. Rolfe(Timothy E. Biller ; James G. Ritter; Noelle J. Coates ; James R. Bacha ; Hunton Andrews Kurth, on brief), for appelleeAppalachian Power Company in 210634.

PRESENT: Powell, Kelsey, McCullough, and Chafin, JJ., and Mims, Russell and Millette, S.JJ.

OPINION BY JUSTICE D. ARTHUR KELSEY

Appalachian Power Company("Appalachian") and the Office of the Attorney General, Division of Consumer Counsel("Consumer Counsel"),¹ both challenge different rulings made by the State Corporation Commission("Commission") during its triennial review of Appalachian's rates, terms, and conditions pursuant to Code§ 56-585.1.For the following reasons, we reverse in part, affirm in part, and remand for further proceedings consistent with this opinion.

I.BACKGROUND

A.Triennial Review

Under Code§ 56-585.1, the Commission is required to conduct a review every three years² of Appalachian's rates, terms, and conditions for providing generation, distribution, and transmission services.The Commission must determine Appalachian's earned return for the three-year period and then compare it to a 140-point band around Appalachian's approved return on equity ("ROE").Code§ 56-585.1(A)(8).If the earnings fall more than 70 points below or above the approved ROE, the Commission must conduct a going-forward rate case to determine how much to adjust rates.If the earnings are more than 70 points below the approved ROE, the Commission must order an increase in the rates to recover the revenue reduction, and if the earnings are more than 70 points above the approved ROE, the Commission must order bill credits for customers.SeeCode§ 56-585.1(A)(8)(a)-(b).But if the earnings fall within the 140-point band, the statute dictates that the Commission does not conduct a going-forward rate case and that no bill credits are issued.SeeCode§ 56-585.1(A)(8).

On March 31, 2020, Appalachian filed its application with the Commission for a triennial review pursuant to Code§ 56-585.1.For the 2017-2019 triennial-review period at issue in this case, Appalachian's approved ROE was 9.42%.In its application, Appalachian requested an increase in its base rates totaling nearly $65 million because its earnings were more than 70 points below its authorized ROE for the triennial-review period.Appalachian claimed that it had earned a return of 8.24% on its common equity, which was the equivalent of $23.6 million in pre-tax earnings below 8.72%, the bottom of its authorized ROE band.

In its application, Appalachian explained that its earnings during the test period reflected the recordation of three different costs authorized by Code§ 56-585.1(A)(8).Appalachian recorded $88.3 million in December 2019 for "the remaining Virginia jurisdictional share of certain impaired coal generating assets that were retired early,"³ which referred to several coal-fired power plants, or portions thereof, that were retired in 2015. 1 J.A.at 15.Appalachian also recorded $32.6 million for costs associated with severe weather events and $33.7 million for costs associated with projects necessary to comply with laws and regulations related to coal combustion by-product management.According to Appalachian, these three combined categories of costs resulted in its triennial earnings falling below the ROE band by $23.6 million, which was the reason it was requesting a 6.5% residential rate increase for the next 3 years.

Appalachian also asked the Commission to adjust its authorized ROE going forward to 9.9% instead of the existing 9.42%.Appalachian argued that this increase was necessary to reflect investment risks and the need for financial integrity and to ensure that it remained competitive with its peers.Lastly, Appalachian requested changes to existing rate schedules and certain terms and conditions to better reflect the costs incurred by the company.The Commission held an evidentiary hearing for Appalachian's application from September 14-18, 2020.

B.Retirement of Coal-Fired Power Plants

In 2011, Appalachian decided to retire early several of its coal-fired power plants, or portions thereof, in 2015.Appalachian's 2010 depreciation study reflected retirement dates between 2015 and 2019 for these facilities.In 2014, Appalachian confirmed that the planned 2015 retirements should be treated on the books as normal retirements (as opposed to abandonments) and included them in a new depreciation study filed as part of its 2014 biennial review.

In 2015, Appalachian retired these units as planned and ceased recording depreciation on them in accordance with applicable accounting standards.The retired units at that time had a remaining net book value of $88.3 million for Virginia jurisdictional purposes.The company's July 2015 accounting memorandum referred to these retired units as "normal retirements" that were probable of future recovery and not "abandonment[s]."6 id. at 2436.250.As a result, Appalachian did not record an impairment of the units’ remaining net book value in 2015.In 2016, 2017, and 2018, Appalachian continued to report these units as normal retirements, not abandonments, and did not record an impairment.

These decisions led to a significant depreciation-reserve deficiency.

In December 2019, Appalachian recorded these retired units as asset impairments so that all remaining costs would be recorded within the current triennial-review period as permitted by statute.Code§ 56-585.1(A)(8) provides that "costs associated with asset impairments related to early retirement determinations made by the utility for utility generation facilities fueled by coal," which are "recorded per books by the utility for financial reporting purposes and accrued against income" and "not proposed for recovery under any other subdivision of this subsection,""shall be attributed to the test periods under review and deemed fully recovered in the period recorded."⁴

Appalachian explained in interrogatories submitted to the Commission's Staff that it had recorded the asset impairment "[b]ased on management's interpretation of Virginia law and more certainty regarding [Appalachian's] triennial revenues, expenses and resulting earnings upon reaching the end of the three-year review period."6 J.A. at 2436.219;see also id.at 2436.226, 2436.263.Appalachian's accounting manager also stated in written testimony that the company had impaired these assets because, "based upon circumstances at that time," the remaining costs of the units were no longer "probable of future recovery" under generally accepted accounting principles ("GAAP") governing regulated operations because pursuant to Code§ 56-585.1(A)(8), "such recorded costs are deemed to have been recovered from [Appalachian's] customers through rates in effect during" the triennial-review period.Id. at 2902;see also8 id. at 3271(testifying at the five-day hearing before the Commission that management deemed these costs "no longer probable of future recovery" because Appalachian "had sufficient earnings to recover those through [its] current rates through this triennial period").External auditors reviewed Appalachian's financial statements between 2015 and 2019 and issued unqualified opinions that the financial statements conformed with GAAP, and Commission Staff admitted at the Commission hearing on Appalachian's application that Appalachian recorded an asset impairment "[f]or financial reporting purposes,"10 id. at 4240;see also13 id. at 5660("Staff is not questioning the Company's accounting or attempting to force the Company to account for costs in a specific way under GAAP.").

In its response to Appalachian's application, Consumer Counsel's accounting witness proposed expensing the entire $88.3 million prior to 2017 with none of the costs being expensed within the current triennial-review period.Commission Staff proposed a plan that would separately amortize the $88.3 million over 10 years, beginning in 2015, the year that the units were retired.Doing so would mean that approximately 30% of the costs would be expensed within the current triennial review.

In rejecting Appalachian's recording of the entire $88.3 million within the...