PacifiCorp v. Wash. Utilities & Transp. Comm'n

• Decision Date: 27 April 2016
• Docket Number: No. 46009–2–II.,46009–2–II.
• Citation: 194 Wash.App. 571,376 P.3d 389
• Court: Washington Court of Appeals
• Parties: PACIFICORP d/b/a Pacific Power & Light Company, Appellant, v. WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION, a Washington State agency, Respondent, Public Counsel Division of the Washington Attorney General's Office, Intervenor–Respondent, Packaging Corporation of America f/k/a Boise White Paper, L.L.C., Intervenor–Respondent.

194 Wash.App. 571

376 P.3d 389

PACIFICORP d/b/a Pacific Power & Light Company, Appellant

v.WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION, a Washington State agency, Respondent

Public Counsel Division of the Washington Attorney General's Office, Intervenor–Respondent

Packaging Corporation of America f/k/a Boise White Paper, L.L.C., Intervenor–Respondent.

No. 46009–2–II.

Court of Appeals of Washington, Division 2.

April 27, 2016.

Katherine Anne McDowell, McDowell Rackner & Gibson PC, Sarah Elizabeth Wallace, PacifiCorp, Portland, OR, for Petitioner.

Julian Hua Beattie, Attorney General's Office, Olympia, WA, for Respondent.

Tyler Case Pepple, Attorney at Law, Portland, OR, Lisa Watson Gafken, Attorney General's Office of Washington, Seattle, WA, for Respondent Intervenor.

LEE

, J.

PacifiCorp appeals the Washington Utilities and Transportation Commission's (the Commission) final order (Final Order) in its 2013 general rate case.¹ PacifiCorp challenges two aspects of the Final Order. First, PacifiCorp challenges the Commission's refusal to accept PacifiCorp's proposed revisions to its West Control Area interjurisdictional cost allocation methodology. Second, PacifiCorp challenges the Commission's refusal to accept its proposed revision to PacifiCorp's capital structure used by the Commission in rate-making, specifically the equity component in the debt-to-equity ratio. Because PacifiCorp has not demonstrated that the Commission erred, we affirm.

FACTS

A. The Parties

¶ 2 The parties to this appeal are:

(1) Appellants: PacifiCorp, doing business as Pacific Power & Light. PacifiCorp serves retail customers in Washington, Oregon, California, Idaho, Utah, and Wyoming.

¶ 4 (2) Respondents: The Commission.² The Commission is the regulatory agency charged by statute with setting public utility rates in this state. RCW 80.01.040

; US W. Commc'ns v. Wash. Utils. & Transp. Comm'n, 134 Wash.2d 48, 53, 949 P.2d 1321 (1997) (US W. Commc'ns I ). The Commission has jurisdiction over PacifiCorp's business activities in Washington. See RCW 80.01.040.

¶ 5 (3) Intervenor–Respondent: Public Counsel Division of the Washington Attorney

General's Office (Public Counsel). Public Counsel is the statutory representative of PacifiCorp's electric customers in Washington.³

¶ 6 (4) Intervenor–Respondent: Packaging Corporation of America⁴ (Packaging Corp.). Packaging Corp. is PacifiCorp's largest customer in Washington.

B. Background of PacifiCorp and the Commission

¶ 7 In 1987, PacifiCorp merged with Utah Power. In approving the merger, the Commission expressed concern about the effects on ratepayers of merging PacifiCorp with a higher cost system, but determined that it “was satisfied with the use of [PacifiCorp's] pre-merger average system cost as the basis for” Washington rates.⁵

¶ 8 In 2005, MidAmerican Energy Holdings Company (MEHC) acquired PacifiCorp.⁶ In re Joint Application of MidAmerican Energy Holdings & PacifiCorp,

Docket UE–051090, Order 07 (Feb. 22, 2006) at ¶¶ 1, 3. The Commission, MEHC, and PacifiCorp agreed that “MEHC and PacifiCorp will not advocate for a higher cost of capital as compared to what PacifiCorp's cost of capital would have been, using Commission standards, absent MEHC's ownership.” Docket UE–051090, Order 07 (Feb. 22, 2006) (Appendix A at 5).

1. 2006 Rate Case

¶ 9 In PacifiCorp's 2006 general rate case,⁷ PacifiCorp proposed the “Revised Protocol,” an interjurisdictional cost allocation methodology for use in Washington. Wash. Utils. & Transp. Comm'n v. PacifiCorp, Docket UE 050684, Order 04 (April 17, 2006) at ¶ 26. “The Revised Protocol is a method or plan for allocating the costs and wholesale revenues associated with PacifiCorp's generation, transmission and distribution system among the six states in PacifiCorp's jurisdiction for the purpose of setting retail rates.” Docket UE 050684, Order 04 at ¶ 27. Under the proposed Revised Protocol, PacifiCorp's six jurisdictions would each bear a share of PacifiCorp's system-wide costs.

¶ 10 The Commission rejected the proposed Revised Protocol, finding that “the resources [PacifiCorp] attempted to assign as costs to Washington were not in fact proven to be used and useful for service in Washington, as required by RCW 80.04.250

.” AR at 857, Wash. Utils. & Transp. Comm'n v. PacifiCorp, Order 05, (Dec. 4, 2013) at ¶ 79; accord Docket UE 050684, Order 04 at ¶ 49. The Commission noted that when the Oregon Utilities Commission approved PacifiCorp's merger with Utah Power, it found: “PacifiCorp agrees, however, that its shareholders will assume all risks that may result from less than full system cost recovery if interdivisional allocation methods differ among the merged company's jurisdictions.” Docket UE 050684, Order 04 at ¶ 56 (quoting Pub. Util. Comm'n of Oregon, Docket UF 4000, Order 88–767 (July 15, 1988)). The Commission found that “[PacifiCorp] admits in the Revised Protocol that it bears the risk of inconsistent allocation methods adopted by the states. In short, any claim of entitlement to a uniform allocation methodology among the states is inconsistent with the ‘deal’ [PacifiCorp] agreed to in the merger [with Utah Power].” Docket UE 050684, Order 4 at ¶ 56 (footnote omitted).

2. 2007 General Rate Case

¶ 11 In PacifiCorp's 2007 general rate case, PacifiCorp proposed the West Control Area interjurisdictional cost allocation methodology (the “WCA methodology”). The WCA methodology separated PacifiCorp's jurisdictions and included Washington, Oregon, California, and select other resources located outside of those three states.⁸ The WCA methodology isolated the costs associated with the assets, purchases and sales in the WCA jurisdictions, and allocated to Washington a proportionate share of the costs based on Washington's relative contribution to the WCA's demand and energy requirements.

¶ 12 Under the WCA methodology, PacifiCorp sought to recover costs attributable to qualifying facility⁹ (QFs) power purchase agreements (PPAs) through customer rates in the state where the QF is physically located. In other words, Washington customer rates include 100 percent of the costs PacifiCorp incurs in buying power from Washington QFs, regardless of whether that cost is higher or lower than market rates, even though power from Washington QFs arguably also serves loads in Oregon and California. But any power attributed to an Oregon or California QF is priced at market rates for Washington customers, not the higher prices from QF production in those states. The Commission adopted the WCA methodology for a five-year trial period.

3. 2011 General Rate Case

¶ 13 In PacifiCorp's 2011 general rate case, PacifiCorp proposed that, for rate-making purposes, the Commission adopt a capital structure with a 52.1 percent equity component and 47.6 percent debt component in the debt-to-equity ratio.¹⁰ The Commission found that PacifiCorp's equity component had increased from 46 percent to 52.1 percent over three years as a result of MEHC infusing PacifiCorp with equity. PacifiCorp expected the infusion of equity and growth to continue. The Commission noted that it understood “MEHC's interest in expanding PacifiCorp's equity ... and reaping the benefit of greater equity returns,” but “this interest is inconsistent with the ratepayer interest in a capital structure that reflects economy.” Wash. Utils. & Transp. Comm'n v. PacifiCorp, Docket UE 100749, Order 06 (Mar. 25, 2011) at ¶ 40. Therefore, the Commission adopted “a hypothetical capital structure for rate-making purposes consisting of 49.1 percent equity” and “50.60 percent long-term debt.” Docket UE 100749, Order 06 ¶ 40. In adopting a hypothetical capital structure for rate-making purposes, the Commission “recognize[d] that the decision on the appropriate actual capital structure for PacifiCorp will be made by the parent company, MEHC, and by the ultimate owner, Berkshire Hathaway.” Docket UE 100749, Order 06 at ¶ 41.

C. PacifiCorp's Rate Case on Appeal

¶ 14 In PacifiCorp's 2013 general rate case, PacifiCorp sought to increase its Washington customer rates by 12.2 percent ($37 million). In relevant part to this appeal, PacifiCorp proposed revisions to the existing WCA methodology and existing hypothetical capital structure used for rate-making. Following evidentiary hearings and testimony, the Commission issued the Final Order determining PacifiCorp's rates.

1. Costs From Out-of-state QFs for Rate-making Purposes

¶ 15 In PacifiCorp's 2013 general rate case, PacifiCorp proposed changes to the WCA methodology. PacifiCorp proposed “that the cost of power from [Oregon and California QF PPAs] should be included” in Washington customer rates.¹¹ Transcripts (TR) at 294. PacifiCorp argued that its Oregon and California QF PPA costs should be included in Washington customer rates because those QF PPAs benefitted Washington customers. PacifiCorp also argued that the Oregon's and California's determinations of its costs were reasonable and comparable to QF PPAs in Washington, and that Washington's energy policies are “substantially aligned with Oregon and California.” AR at 648–89 (boldface omitted) (some capitalization omitted). Further, PacifiCorp asserted “cost recovery of QF contracts is consistent with PURPA [Public Utility Regulatory Policies Act of 1978].” AR at 651 (boldface omitted) (some capitalization omitted).

¶ 16 The Staff, Public Counsel, and Packaging Corp. argued that the Commission should not include PacifiCorp's Oregon and California QF PPA costs, as determined by Oregon and California, in its Washington customer rates. David Gomez, on behalf of the Staff, testified that “[t]he recent and substantial expansion of QF power purchases ... is entirely due to other states' policies designed to rely on the QF requirement of PURPA to considerably increase generation from independent power producers.” AR at 3236. Sebastian Coppola, on behalf of Public Counsel, testified that “the proliferation of QFs in Oregon and California is a reflection of...