Genconn Energy v. Pub. Util. Reg. Auth.

• Court: Connecticut Supreme Court
• Writing for the Court: McDONALD, J.
• Citation: Genconn Energy v. Pub. Util. Reg. Auth., 308 A.3d 1018, 348 Conn. 532 (Conn. 2024)
• Docket Number: SC 20716
• Decision Date: 27 February 2024
• Parties: GENCONN ENERGY, LLC v. PUBLIC UTILITIES REGULATORY AUTHORITY
• topic: Administrative Law,Corporate / Commercial,Energy & Natural Resources,Public Sector Law

308 A.3d 1018

348 Conn. 532

GENCONN ENERGY, LLC

v.PUBLIC UTILITIES REGULATORY AUTHORITY

(SC 20716)

Supreme Court of Connecticut.

Argued September 8, 2023

Officially Released February 27, 2024

Jennifer M. DelMonico, with whom were Marilyn B. Fagelson, New Haven, and, on the brief, Proloy K. Das and Daniel J. Sorger, for the appellant (plaintiff).

Seth Hollander, assistant attorney general, with whom were Scott Muska, general counsel, and, on the brief, William Tong, attorney general, for the appellee (defendant).

Thomas H. Wiehl, staff attorney, with whom were William E. Dornbos, legal director, and, on the brief, Jessica Gouveia, staff attorney, for the appellee (intervenor Office of Consumer Counsel).

Robinson, C. J., and McDonald, D’Auria, Mullins, Ecker, Alexander and Moll, Js.

McDONALD, J.

₅₃₅This case concerns the authority of the defendant, the Public Utilities Regulatory Authority (PURA), to review and set the rates for peaking generation facilities within the state. The plaintiff, GenConn Energy, LLC, operates two peaking generation facilities, which are designed to provide additional electric energy to Connecticut consumers at times of increased demand. ₅₃₆Each year, GenConn is required to submit an Annual Fixed Revenue Requirements (AFRR) application to PURA proposing the revenue that it believes is required to recover its allowed costs¹ and for it to receive a reasonable rate of return on equity. When GenConn submitted its 2021 AFRR application, PURA found, under the general rate-making principles of General Statutes § 16-19e, that GenConn sought to overrecover from electric ratepayers. As a result, PURA lowered GenConn’s overall recovery of revenue to ensure that "the level and structure of rates be sufficient, but no more than sufficient, to allow public service companies to cover their operating costs …. " General Statutes § 16-19e (a) (4).

On appeal to this court, GenConn argues that the trial court erred in concluding that PURA had acted within its authority. GenConn contends that PURA acted outside the scope of its authority under General Statutes § 16-243u, which specifically addresses peaking generation facilities, when it applied the general rate-making principles from § 16-19e in adjusting GenConn’s recovery. GenConn also contends that PURA’s change in methodology in evaluating the 2021 AFRR application was arbitrary and capricious. For its part, PURA contends that § 16-243u expressly affords it the authority to use the rate-making principles in § 16-19e, and, because it is statutorily obligated to review GenConn’s recovery each year, its decision to lower GenConn’s recovery was not arbitrary and capricious.² We ₅₃₇conclude that § 16-243u authorized PURA to determine GenConn’s recovery using the general rate-making principles found in § 16-19e and that the "change" in PURA’s methodology does not constitute an arbitrary and capricious decision. Accordingly, we affirm the judgment of the trial court.

An overview of certain aspects of this state’s electric supply industry and relevant statutes is necessary to understand the issues in this appeal. Historically, during times of peak demand, the state had to procure additional electricity from out-of-state providers to satisfy the demand of electric consumers within the state. See 50 S. Proc., Pt. 15, 2007 Sess., p. 5066, remarks of Senator Donald E. Williams, Jr. Importing electricity in this manner was expensive and resulted in higher prices for ratepayers year-round. See id. In 2007, in an effort to reduce electric rates for Connecticut consumers, the General Assembly passed No. 07-242 of the 2007 Public Acts (P.A. 07-242), titled "An Act Concerning Electricity and Energy Efficiency" (act). The purpose of the act was to encourage investment in peaking generation facilities by assuring investors that they would recover their costs. See 50 S. Proc., supra, pp. 4960–62, remarks of Senator John W. Fonfara. By incentivizing the development of these peaking generation facilities, the state would not have to purchase out-of-state electricity at a premium, thereby reducing the cost of electricity for Connecticut ratepayers. See id., p. 5066, remarks of Senator Williams. Section 50 of P.A. 07-242 provides in relevant part that, "[f]rom January 1, 2008, until February 1, 2008, any person may … submit a plan to build peaking generation … to be heard in a contested case proceeding before the Department of Public Utility ₅₃₈Control. …"³ The act was later codified at General Statutes (Supp. 2008) § 16-243u, which provides that the selected peaking generators would fully recover the "prudently incurred costs" of the selected projects, including "capital costs, operation and maintenance expenses, depreciation, fuel costs, taxes and other governmental charges," as well as "a reasonable rate of return on equity." For the purposes of this opinion, the "prudently incurred costs" and the "reasonable rate of return on equity" referenced in § 16-243u will be referred to collectively as the "recoverable capital."

[1] With this background in mind, we turn to the facts and procedural history specific to this case. In February, 2008, GenConn submitted a proposal to PURA with multiple options to construct peaking generation facilities. Included in the proposal were options to construct facilities in the Devon neighborhood of Milford and in Middletown. PURA ultimately selected GenConn to develop, finance, and construct both facilities. The Devon facility became operational in June, 2010, and the Middletown facility became operational in June, 2011. The initial capitalization for GenConn’s facilities was 50 percent equity and 50 percent debt.⁴ Then, in June, 2012, as required by PURA,⁵ GenConn applied to ₅₃₉refinance its outstanding debt, which at the time totaled $236.5 million. PURA approved the refinance, which had a coupon rate of 4.73 percent.⁶ The interest expense for this refinancing is amortized and fixed each year from 2013 through 2041. The actual interest expense for the refinancing in 2021 was $8.573 million.

GenConn, as a peaking generation provider, is required to submit its AFRR application to PURA each year to set out the recoverable capital it seeks for the upcoming year. In determining the allowable recoverable capital, PURA first determines the rate base for the peaking generation facility. The rate base represents the total investment of the generation facility, or, in other words, the value of the property on which the facility is permitted to earn a rate of return. See Federal Energy Regulatory Commission, Cost-of-Service Rates Manual (1999) pp. 8-9, 15, available at https://www.ferc.gov/sites/default/files/2020-08/cost-of-service-manual.pdf (last visited February 20, 2024). The rate base is then divided based on the debt-to-equity ratio to find the portion of the rate base that is attributable to each. In the present case, PURA and GenConn agreed that the 2021 rate base was $225.315 million, and, because GenConn had put forth a 50 percent/50 percent debt-to-equity ratio, the rate base for both debt and equity was approximately $112.658 million. The portion of the rate base that is attributable to debt and the portion that is attributable to equity are then multiplied by the applicable rate—in this case, GenConn sought a debt rate of 7.61 percent and an equity rate of 9.85 percent—to find the total amount the facility should be allowed to recover (recoverable capital).⁷

₅₄₀For each of GenConn’s AFRR applications for 2010 through 2020, it sought and was allowed to recover, as part of the recoverable capital, its actual annual financing costs, which included interest on its long-term and short-term debt. When GenConn submitted its 2021 AFRR application, it sought to recover the $8.573 million actual interest expense for the 2021 refinancing. PURA disagreed that GenConn was entitled to recover the entire actual interest expense for 2021 and determined that a reduction was warranted.

PURA concluded that there were inaccuracies in both the debt-to-equity ratio and the debt rate proposed by GenConn. Regarding the debt-to-equity ratio, PURA found that GenConn had incorrectly determined its debt-to-equity ratio to be 50 percent/50 percent based on its internal balance sheets, when the actual ratio was closer to 75 percent/25 percent. PURA based this finding on the fact that GenConn was financing its rate base with a debt of $172.485 million rather than with $112.658 million, as indicated by the rate base. Regarding the debt rate, PURA found that, although GenConn’s coupon rate on its debt was only 4.73 percent, GenConn was calculating the proposed debt rate using the actual interest owed, $8.573 million, which represented the interest on the $172.485 million in debt rather than on the $112.658 million. This resulted in the higher debt rate of 7.61 percent proposed by GenConn.

PURA determined that the effect of the miscalculations by GenConn in its proposal would result in approval of recoverable capital appropriate for a rate base of ₅₄₁$285.143 million rather than the agreed $225.315 million rate base. The solution imposed by PURA was to keep GenConn’s proposed 50 percent/50 percent debt-to-equity ratio but to reduce the debt rate from 7.61 percent to 5.07 percent,⁸ ultimately reducing GenConn’s recoverable capital by approximately $2.861 million. According to PURA, this result would be more in line with the recovery contemplated by § 16-19e (a) (4), in that the rates paid by customers would be "sufficient, but no more than sufficient," to cover GenConn’s capital costs. PURA therefore approved GenConn’s AFRR application but only authorized a return on interest of approximately $5.712 million rather than the $8.573 million requested by GenConn. It is this reduction that is at issue in this appeal.

GenConn appealed PURA’s final decision, claiming that PURA was not authorized to lower GenConn’s debt rate. The trial court dismissed the appeal after concluding...