Nw. Corp. v. Mont. Dep't of Pub. Serv. Regulation

• Decision Date: 27 September 2016
• Docket Number: DA 15-0612
• Citation: 2016 MT 239,385 Mont. 33,380 P.3d 787
• Parties: NorthWestern Corporation, doing business as NorthWestern Energy, Petitioner and Appellant, v. The Montana Department of Public Service Regulation, Montana Public Service Commission, Respondent and Appellee, Natural Resources Defense Council, Human Resource Council, District XI, and Montana Consumer Counsel, Intervenors.
• Court: Montana Supreme Court

385 Mont. 33

380 P.3d 787

2016 MT 239

NorthWestern Corporation, doing business as NorthWestern Energy, Petitioner and Appellant,

v. The Montana Department of Public Service Regulation, Montana Public Service Commission, Respondent and Appellee,Natural Resources Defense Council, Human Resource Council, District XI, and Montana Consumer Counsel, Intervenors.

DA 15-0612

Supreme Court of Montana.

Submitted on Briefs: August 10, 2016

Decided: September 27, 2016

For Appellant: Al Brogan, NorthWestern Corporation d/b/a/ NorthWestern Energy, Helena, Montana.

For Appellee: Jason Brown, Jeremiah Langston, Justin Kraske, Montana Public Service Commission, Helena, Montana.

For Intervenors: Robert A. Nelson, Montana Consumer Counsel, Helena, Montana, Charles Magraw, Human Resource Council, District XI, Natural Resources Defense Council, Helena Montana.

Justice Jim Rice

delivered the Opinion of the Court.

¶ 1 Appellants NorthWestern Corporation, doing business as NorthWestern Energy (NorthWestern), the Natural Resources Defense Council (NRDC), and Human Resources Council, District XI (HRC), appeal the decision of the Second Judicial District Court affirming the Final Order of the Montana Public Service Commission (Commission), which disallowed $1,419,427 in claimed excess electric regulation costs and adjusted energy efficiency savings calculations. We affirm, considering the following issues:

1. Did the Commission apply the correct legal standard in reviewing NorthWestern's claim for excess outage costs?

2. Were the “free ridership” and “spillover” calculations adopted by the Commission supported by substantial evidence?

FACTUAL AND PROCEDURAL BACKGROUND

¶ 2 This matter involves a challenge to the Commission's Final Order in NorthWestern's 2011–2012 annual tracker filing.¹ Therein, NorthWestern requested, inter alia, a $1,419,427 increase in rates for unexpected electricity supply costs due to an outage at its Dave Gates Generating Station (DGGS), located near Anaconda.² As part of the proceeding, the Commission also ordered NorthWestern to present evidence for purposes of conducting a “true-up” to actual costs for lost revenues that had been previously estimated in NorthWestern's demand-side management (DSM) programs. Ultimately, the Commission (1) denied NorthWestern's request to include the DGGS outage costs in customer rates, and (2) rejected NorthWestern's expert's conclusion that the “free ridership” and “spillover” values of its DSM programs were perfectly offsetting, adopting instead the same expert's actual calculations used in a draft report.

DGGS Outage Costs

¶ 3 In 2008, NorthWestern sought Commission approval to build the DGGS. The DGGS was intended to provide regulation and frequency response service in NorthWestern's service area. The Commission approved the project in 2009, and the DGGS commenced commercial operation on January 1, 2011.

¶ 4 The DGGS was a first-of-its-kind facility that NorthWestern presented as having “the potential to be a model facility for the supply of regulation service.” It consisted of three generation units made by Pratt & Whitney Power Systems, Inc. (PWPS) and was an application of a simple cycle natural gas turbine generator designed to increase or decrease generation (ramp) in response to variations in NorthWestern's load, “on a moment-by-moment basis.” NorthWestern's General Manager of Generation testified that the plant had a “very unique” control mechanism and “early on we knew that the plant was going to have a very unique control application.”

¶ 5 NorthWestern was aware that the ramp capabilities of the DGGS were critical to its operation and that the DGGS was a first-of-its-kind application, stating:

[The DGGS] is one of the first power plant installations to be built specifically for electrical transmission grid regulation duty. The design requirements for grid regulation are stringent since they require the plant to continually change load in a short time frame (seconds to minutes).

This load requirement was necessary because NorthWestern “anticipated variable operating conditions,” largely due to wind generation variations, and the DGGS needed to be able to ramp up or down by at least 15 mega-watts (MW) per minute per unit to “offset the continuous variation between system generation and system load.”

¶ 6 The contract between NorthWestern and PWPS included a waiver of consequential damages, but NorthWestern purchased, with customer revenue, an extended warranty to cover the innovative technology. NorthWestern did not purchase or evaluate the feasibility of outage insurance in case the DGGS had an operational failure.

¶ 7 On January 31, 2012, thirteen months after NorthWestern brought the DGGS online, it suffered a complete outage. Unit cycling had caused “thermal stresses” by going from a cold state to a very high temperature, damaging the rotating equipment. PWPS concluded the outage resulted from ramp rates “much greater” than anticipated, excessive temperatures, and cycle-related hardware failures. The Commission was unable to precisely examine the ramp data because NorthWestern failed to maintain minute-by-minute records.

¶ 8 Pursuant to the extended warranty, PWPS repaired the damaged turbines at its cost, including removal, installation, and shipping costs. However, due to the waiver of consequential damages in the contract, PWPS was not obligated to cover the costs associated with purchasing replacement regulation service during the outage. On February 3, 2012, NorthWestern began purchasing replacement service from Powerex Corp. (Powerex) and Avista Corp. (Avista). PWPS took “extraordinary measures” to repair the DGGS as soon as possible. Individual generators were put back online as PWPS restored them and NorthWestern proportionally decreased its regulation service purchases accordingly. The DGGS was fully back online on May 1, 2012.

¶ 9 During the outage, NorthWestern customers continued to pay the fixed costs for the operation of the DGGS ($6,742,625), including NorthWestern's usual rate of return, as well as the variable costs ($1,527,714) NorthWestern did not actually incur, but would have incurred had the plant been operational. However, the outage caused NorthWestern to incur an additional $1,419,427 in charges to Powerex and Avista for regulation service. NorthWestern requested reimbursement of these costs, arguing they were reasonably incurred because it obtained an extended warranty that covered all repairs, it purchased regulation service on the competitive market at 2011 rates, it structured its regulation market purchases to enable it to incrementally reduce the purchases as generators were repaired, and it had worked quickly to get the DGGS back online.

¶ 10 The Montana Consumer Counsel (MCC) opposed reimbursement of the replacement service costs, contending that NorthWestern failed to undertake risk mitigation by failing to investigate whether outage insurance was available. The MCC offered the testimony of Dr. John Wilson:

No. I don't fault the company for not procuring it [outage insurance]. What I think was imprudent was not looking into it, not evaluating it, not finding out whether it was available and what the cost would be for a plan like this. I think you have to do that before you make a determination as to whether you acquire it or not.

The MCC argued that evaluation of insurance was fundamental to risk management where the contract contained an exclusion for consequential damages:

[T]he most imprudent thing that occurred here, is the failure of the company to take steps to protect itself against the outage, given the fact that they had this exclusion under the warranty, given the fact that they knew ... that there were unknowns about this plant and where it was going to go and how it was going to operate.

¶ 11 NorthWestern responded by providing evidence that in its experience it had never purchased replacement power insurance and, instead, always relied on the market for replacement power. NorthWestern's General Manager of Generation testified that after receiving inquiry from the Commission and the MCC regarding insurance, he “went and solicited input from other utilities ... [a]nd they indicated that they simply do not get outage insurance because it is not economical to do so.” NorthWestern put on evidence that outage insurance could be $1 million per year, thus potentially costing more than the replacement power itself, but acknowledged it did not “investigate or purchase insurance that might have covered the additional electricity supply costs.”

¶ 12 The Commission inquired into NorthWestern's operation of the DGGS through data requests and found that NorthWestern was aware the units needed to change load quickly, that quick response was critical, and that the units could experience unique thermal stresses due to ramping up and down. The outage was directly tied to “ramp rates ‘much greater’ than anticipated, excessive temperatures and cycle-related hardware failures,” yet NorthWestern used software allowing excessive ramping and did not retain precise ramp rate data.

¶ 13 The Commission determined that NorthWestern's management of the DGGS was not reasonable and that the excess regulation costs were not prudently incurred because NorthWestern (1) failed to prudently manage risks; and (2) did not “exhibit the level of situational awareness that the Commission would expect from a utility managing a one-of-its-kind power plant.” The Commission reasoned:

Given the warranty's exclusion of consequential damages and the uniqueness of DGGS, NorthWestern should have identified the risk of incurring replacement costs in the event of an outage.... [NorthWestern's] failure to identify risk ensured that incremental costs of replacement service would be incurred in the event of an outage.

The Commission found that outage insurance was available and, even though it may not have been cost-effective, because NorthWestern failed to “evaluate the availability, price and terms...