Ark. Elec. Energy Consumers, Inc. v. Ark. Pub. Serv. Comm'n

• Decision Date: 30 May 2012
• Docket Number: No. CA 11–496.,CA 11–496.
• Citation: 2012 Ark. App. 264,410 S.W.3d 47
• Parties: ARKANSAS ELECTRIC ENERGY CONSUMERS, INC., and Arkansas Gas Consumers, Inc., Appellants v. ARKANSAS PUBLIC SERVICE COMMISSION; Entergy Arkansas, Inc.; Centerpoint Energy Resources Corp.; and Audubon Arkansas, a Division of the National Audubon Society, Inc., Appellees.
• Court: Arkansas Court of Appeals

2012 Ark. App. 264

410 S.W.3d 47

ARKANSAS ELECTRIC ENERGY CONSUMERS, INC., and Arkansas Gas Consumers, Inc., Appellants

v.ARKANSAS PUBLIC SERVICE COMMISSION; Entergy Arkansas, Inc.; Centerpoint Energy Resources Corp.; and Audubon Arkansas, a Division of the National Audubon Society, Inc., Appellees.

No. CA 11–496.

Court of Appeals of Arkansas.

April 18, 2012.

Rehearing Denied May 30, 2012.

H. Edward Skinner, Wright, Berry, Moore & White, P.A., Arkadelphia, Attorneys for Appellants.

Eric G. Hughes, Hughes & Hughes Law Firm, Arkadelphia, Attorney for Appellee, Audubon Arkansas.

Derrick W. Smith, Mitchell, Williams, Selig, Gates & Woodyard, P.L.L.C., Little Rock, and Kenny Henderson, Stephanie Elmore, CenterPoint Energy Resources Corp., Little Rock, Attorneys for Appellee.

JOHN B. ROBBINS, Judge.

As part of a larger effort to establish energy-efficiency policies and requirements for Arkansas utilities, the Arkansas Public Service Commission opened Docket No. 08–137–U to consider innovative approaches to utility regulation necessitated by the shift toward energy conservation. In doing so, the Commission issued Orders 15 and 18, which approved a general policy to award incentives to utilities for their achievement in delivering essential energy-conservation services. The Commission also established specific goals to be used as standards for awarding or not awarding the incentives during the 2011–13 program years. Appellants Arkansas Electric Energy Consumers, Inc., and Arkansas Gas Consumers, Inc., appeal from Orders 15 and 18, arguing that the incentives were not authorized by law and constituted an improper abandonment of traditional ratemaking practices. We affirm the Commission's orders.

To place the Commission's ruling in context, we begin with the passage of the Energy Conservation Endorsement Act (ECEA) almost thirty-five years ago during the oil crisis of the 1970s. See Act 748 of 1977, codified at Ark.Code Ann. §§ 23–3–401 to –405 (Repl.2002). The ECEA declared that the United States was confronted with a “severe and very real” energy crisis; that the demand for fuels was outstripping supplies; that enormous amounts of energy were being wasted due to inadequate insulation and other inefficiencies; and that the President of the United States had established energy conservation as a high-priority national goal. Ark.Code Ann. § 23–3–402. In light of these considerations, our General Assembly determined that a “proper and essential function” of regulated utilities was to engage in energy-conservation programs, projects, and practices. Ark.Code Ann. § 23–3–404. The ECEA defined “energy conservation and program measures” as including, but not limited to, insulation programs; programs that improved load factors and contributed to reductions in peak power demands; and programs that encouraged the use of renewable energy technologies or sources. Ark.Code Ann. § 23–3–403.

In section 405, the ECEA established the authority of the Public Service Commission to “propose, develop, solicit, approve, require, implement, and monitor” energy-conservation measures that caused utility companies to incur “costs of service and investments.” Ark.Code Ann. § 23–3–405(a)(1). The Commission was granted the power to approve such programs and measures, following proper notice and hearings, and to order them into effect if it determined that they would be “beneficial to the ratepayers of such public utilities and to the utilities themselves.” Ark.Code Ann. § 23–3–405(a)(2). In those instances, the Commission was required to declare that the costs of such conservation measures were proper costs of providing utility service. Further, once the programs or measures were approved or ordered into effect, the Commission was required to

order that the affected public utility company be allowed to increase its rates or charges as necessary to recover any costs incurred by the public utility company as a result of its engaging in any such program or measure.

Ark.Code Ann. § 23–3–405(a)(3) (emphasis added). The italicized portion of the statute is a primary point of controversy in this appeal, as is the following, final provision of the ECEA:

Nothing in this subchapter shall be construed as limiting or cutting down the authority of the commission to order, require, promote, or engage in other energy conserving actions or measures.

Ark.Code Ann. § 23–3–405(b).

For reasons best left explained by history, the ECEA did not spark a large, concerted effort toward energy-conservation programs in the decades that followed, either by the utilities or the Public Service Commission. Between 2006 and 2008, however, the utility-regulatory field in Arkansas saw a significant increase in energy-conservation activity, whereby the Commission not only ordered utilities to implement energy-efficiency programs but developed rules that required utilities to submit their programs for approval and explain the anticipated benefits. The Commission also opened numerous dockets to address and explore energy efficiency in all areas of utility use. Included among those dockets was No. 08–137–U, which was styled “In the Matter of the Consideration of Innovative Approaches to Ratebase Rate of Return Ratemaking Including, But Not Limited To, Annual Earnings Reviews, Formula Rates, and Incentive Rates for Jurisdictional Electric and Natural Gas Utilities.” In its first order in Docket 08–137–U, the Commission noted the following:

[W]ithin the national public utility regulatory dialogue there is a growing level of references to and discussion of shifting regulatory paradigms which may necessitate innovative approaches to the traditional ratebase rate of return regulation which for decades has governed the setting of revenues and rates for electric and gas public utilities.

More specifically, the Commission recognized that the increased emphasis on energy efficiency would decrease usage by consumers and could compromise revenue recovery by the utilities. The Commission therefore invited input regarding these concerns from its staff; from the Attorney General; from public utilities; and from appellants.¹

The vast majority of those that filed testimony and comments agreed that the current regulatory framework did not promote energy efficiency and that implementation of energy-efficiency programs warranted adjustments to the traditional ratemaking process. Witnesses explained that a utility is an investor-owned business and entitled to a financial return for its shareholders. They observed that this return, combined with a utility's general cost of doing business, ordinarily formed the basis for establishing consumer rates under traditional rate base/rate of return regulation. They stated, however, that the traditional ratemaking paradigm emphasized increased consumer usage and increased utility investment in physical plant (generation, transmission, and distribution) as means of producing revenue for the utility and providing a basis for investors to receive a return. Energy-conservation measures, they said, upset this paradigm by decreasing consumer usage and decreasing the need for investment in physical plant, thereby reducing the utility's ability to recover its fixed costs and provide a return to its shareholders.

Based on these observations, several parties proposed that three mechanisms were necessary for a beneficial energy-efficiency program: 1) recovery of the program costs incurred by the utility in implementing energy-efficiency measures; 2) recovery of the utilities' lost contribution to fixed costs (LCFC) occasioned by the drop in consumer revenue; and 3) financial incentives paid to the utility in order to either provide a return to shareholders or to promote exemplary performance of conservation programs. Among those recommending or acceding to at least some level of incentives were the electric and gas utilities; the Attorney General; the Federal Executive Agencies; Audubon Arkansas; and the Commission staff. The staff cautioned, however, that incentives should be awarded only in those instances where the utility could demonstrate that its programs met or exceeded performance goals set by the Commission.

By the time of the final hearing, the Commission had approved a bill rider that allowed utilities to recover their program costs and LCFC. Those charges are not at issue on appeal. The need and methodology for incentives, however, continued to be debated. Several witnesses testified that, because energy-efficiency programs cause utility shareholders to forego the traditional means of earning a return on investment, some type of incentive is necessary to promote meaningful performance and to motivate utilities to reject their usual patterns of usage and plant acquisition as a means of generating a return. There was also testimony that incentive plans in which utilities and consumers share the savings engendered by energy conservation programs constitute “good public policy” and serve to align utility and consumer interests, being beneficial to both. The evidence further reflected that the National Action Plan for Energy Efficiency and the National Association of Regulatory Utility Commissioners supported the use of incentives and that several states had crafted incentive plans, with some going so far as to impose penalties on the utilities for failing to meet specified energy-savings goals.

Appellants opposed the use of incentives, arguing that the Commission did not have the authority under the ECEA to award them. Appellants relied on that portion of the Act that allows a utility to recover its “costs” resulting from a conservation program. Ark.Code Ann. § 23–3–405(a)(3). Appellants contended that incentives could not be defined as costs.

In Order No. 15, the Commission determined that it possessed the authority under both the ECEA and general ratemaking statutes to award incentives.² The Commission declared that the ECEA allowed utilities to...