Public Utility Com'n of Texas v. Gulf States Utilities Co.

• Decision Date: 03 April 1991
• Docket Number: No. C-9731,C-9731
• Citation: 809 S.W.2d 201
• Parties: Util. L. Rep. P 26,056 PUBLIC UTILITY COMMISSION OF TEXAS and Office of Public Utility Counsel, Petitioners, v. GULF STATES UTILITIES COMPANY, Respondent
• Court: Texas Supreme Court

Page 201

809 S.W.2d 201

Util. L. Rep. P 26,056

PUBLIC UTILITY COMMISSION OF TEXAS and Office of Public Utility Counsel, Petitioners, v. GULF STATES UTILITIES COMPANY, Respondent.

No. C-9731.

April 3, 1991.

Rehearing Overruled June 19, 1991.

Dan Morales, Susan D. Bergen, C. Kingsbery Ottmers and John L. Laakso, Austin, for petitioners.

Barry Bishop, John F. Williams, Austin, for respondent.

OPINION

PHILLIPS, Chief Justice.

This case is an administrative appeal from a final order of the Texas Public Utility Commission. Gulf States Utilities Company (GSU) sought the Commission's approval of the sale of two of GSU's generating units and of GSU's proposed rate treatment of certain revenues and expenses associated with that transaction. GSU proposed to sell the two plants to a joint venture comprised of GSU and three of its Louisiana industrial customers; GSU then planned to purchase the entire electrical output from the plants for distribution to its customers. GSU requested the Commission to rule that, in future rate proceedings, it be allowed to recover from its ratepayers its total purchase price for the electricity and furthermore that it be allowed to allocate the proceeds from the sale of the depreciated plants to its shareholders rather than to its ratepayers.

The Commission concluded that the proposed sale was generally in the public interest but imposed two conditions on GSU's treatment of the transaction in future rate proceedings. First, the Commission determined that it was not in the public interest for GSU's ratepayers "to pay in excess of GSU's avoided cost" for power purchased from the joint venture. Therefore, the Commission held that it would not allow GSU to recover from its Texas ratepayers payments for electricity from the joint venture in excess of GSU's avoided cost. Second, the Commission determined that GSU must divide the proceeds from the sale of the plants between the ratepayers and its shareholders in proportion to the amount each group contributed to the cost of the plants.

The district court affirmed the Commission's order. The court of appeals then reversed the judgment of the district court and remanded the case to the Commission. 784 S.W.2d 519. The Commission and the Office of Public Utility Counsel now appeal to this court. We must first determine whether the applicable state and federal regulations permit a utility purchasing power from a cogenerator to recover from its ratepayers payments in excess of its avoided cost. Second, we must determine whether the Commission's allocation of the utility's proceeds from the sale of its plants was proper. For the reasons that follow, we affirm the judgment of the court of appeals.

I

A

In 1978, in response to rising energy costs and recent fuel shortages, Congress sought ways to conserve energy to reduce the nation's dependence on foreign oil and on natural gas. See Federal Energy Regulatory Comm'n v. Mississippi, 456 U.S. 742, 745-46, 102 S.Ct. 2126, 2130, 72 L.Ed.2d 532, 538 (1982). One possible remedy was to increase the use of cogeneration. Cogeneration involves the simultaneous production of electrical power and thermal energy, such as heat or steam, usually at an industrial site. Id. at 750 & n. 11, 102 S.Ct. at 2132 & n. 11, 72 L.Ed.2d at 541 & n. 11. By making productive use of the "waste" heat produced in the generation of electricity, cogeneration can reduce fuel consumption by as much as one half. See C. PHILLIPS, THE REGULATION OF PUBLIC UTILITIES: THEORY AND PRACTICE 452 n. 92 (1988); see also 45 Fed.Reg. 12,215 (1980).

To encourage cogeneration, Congress enacted section 210 of the Public Utility Regulatory Policies Act of 1978 (PURPA). Pub.L. No. 95-617, 92 Stat. 3117 (1978) (codified as amended at 16 U.S.C. § 824a-3 (1988)). An obstacle to the development of cogeneration facilities in the past had been the reluctance of the traditional utilities to purchase excess power from, or sell backup power to, these nontraditional facilities. FERC v. Mississippi, 456 U.S. at 750-51, 102 S.Ct. at 2132-33, 72 L.Ed.2d at 541. Section 210 of PURPA attempts to remove this obstacle by requiring that electric utilities purchase electrical energy from qualifying cogenerating or small power production facilities ¹ (QFs) and provide back-up power to QFs on a nondiscriminatory basis. ²

In section 210, Congress directed the Federal Energy Regulatory Commission (FERC) to prescribe, within one year of the statute's enactment, rules requiring electric utilities to purchase power from and sell power to QFs. PURPA § 210(a), 16 U.S.C. § 824-3(a) (1988). Congress further provided that the rates established by FERC for the purchases of electricity by a utility (1) shall be just and reasonable to the utility's customers, and (2) shall not discriminate against QFs. PURPA § 210(b), 16 U.S.C. § 824-3(b) (1988). Section 210(b) also provides that "[n]o ... rule prescribed under subsection (a) of this section shall provide for a rate which exceeds the incremental cost to the electric utility of alternative electric energy." Id. The "incremental cost of alternative electric energy" is defined as the cost the utility would have incurred if it had generated itself or purchased from another utility the same amount of power it purchased from the QF. PURPA § 210(d), 16 U.S.C. § 824a-3(d) (1988). By setting a ceiling of incremental cost on the amount a utility could be forced to pay for a QF's power, Congress intended to encourage cogeneration without requiring a utility's ratepayers to subsidize cogenerators. H.R.CONF.REP. NO. 1750, 95th Cong., 2d Sess. 98, reprinted in 1978 U.S.CODE CONG. & ADMIN.NEWS 7659, 7797, 7832.

Pursuant to this statutory authority, FERC has adopted regulations governing an electric utility's purchases from QFs. See 18 C.F.R. pt. 292 (1990). The regulations require that each electric utility "purchase, in accordance with § 292.304, any energy and capacity which is made available from a qualifying facility." Id. § 292.303. Section 292.304 sets the rate of payment for such purchases equal to the utility's full avoided cost unless the state regulatory authority (or an unregulated utility) determines that a lower rate is in the public interest and is sufficient to encourage cogeneration. Id. § 292.304(b)(2). (The term "full avoided cost" is equivalent to PURPA's "incremental cost.") Finally, the regulations provide that "[n]othing in this subpart ... [l]imits the authority of any electric utility or any [QF] to agree to a rate for any purchase ... which differ[s] from the rate ... which would otherwise be required by this subpart." Id. § 292.301(b)(1).

Because Congress intended that state regulatory authorities be the primary enforcers of PURPA, section 210(f) of PURPA orders each state regulatory authority to implement FERC's rules. ³ 16 U.S.C. § 824-3(f) (1988). In 1981, the Texas legislature added a provision to the Texas Public Utility Regulatory Act (Texas PURA) to the effect that the Commission "shall make and enforce rules reasonably required to implement the rules and regulations of the Federal Energy Regulatory Commission pertaining to the production of electric energy by [QFs]." Act of Apr. 1, 1981, 67th Leg., R.S., ch. 31, § 2, 1981 Tex.Gen.Laws 70, 71. This provision was later amended to order the Commission to "make and enforce rules to encourage the economical production of electrical energy by [QFs]." Act of May 26, 1983, 68th Leg., R.S., ch. 274, § 1, 1983 Tex.Gen.Laws 1258, 1280 (codified at TEX.REV.CIV.STAT.ANN. art. 1446c, § 16(g) (Vernon Supp.1991)). Pursuant to these directives, the Commission has enacted its own rules governing a utility's purchases of power from a QF. Tex.Pub.Util.Comm'n, 16 TEX.ADMIN.CODE § 23.66 (West Sept. 1, 1988) ("Rule 23.66").

The Texas rules apply to FERC-certified QFs, id. § 23.66(a)(15), and are very similar to FERC's rules. Rule 23.66(d) of the Texas rules provides that "[i]n accordance with subsections (e)--(h) of this section, each electric utility shall purchase any energy and capacity that is made available from a qualifying facility...." Id. § 23.66(d)(1)(A). Rule 23.66(e) requires that rates for such purchases "shall be just and reasonable to the consumers of the electric utility and in the public interest, and shall not discriminate against" QFs. Id. § 23.66(e)(1). The rates "shall not exceed avoided cost." Id. § 23.66(e)(2). "Avoided cost" has the same meaning as in FERC's regulations. Id. § 23.66(a)(2). Rates which equal avoided cost are deemed to be just and reasonable, id. § 23.66(e)(3), and such payments are considered "reasonable and necessary operating expenses of [the] utility." Id. § 23.66(e)(5). ⁴ Finally, as in FERC's rules, the Texas rules provide that nothing in the rules "shall limit the authority of any electric utility or any qualifying facility to agree to a rate for any purchase, or terms or conditions relating to any purchase, which differ from the rate or terms or conditions that would otherwise be required by this subsection." Id. § 23.66(b)(2)(A).

The first issue we must address in this case concerns the proper interpretation of the above federal and state regulations governing a utility's purchases of electricity from a QF. The questions presented are (1) whether the regulations prohibit a utility from contracting for and paying a rate in excess of its avoided cost and (2) whether, if a utility may pay more than avoided cost, the regulations impose a limitation on how much of these payments the utility can recover from its ratepayers. The controversy arises because both sets of regulations expressly allow a utility and a QF to agree to any rate for purchased power, see 18 C.F.R. § 292.301(b)(1) (1990); 16 TEX.ADMIN.CODE § 23.66(b)(2)(A) (West Sept. 1, 1988), but in subsequent provisions limit purchased power payments to avoided cost. See 18 C.F.R. § 292.304(a)(2) (1990); 16 TEX.ADMIN.CODE § 23.66(e)(2) (West Sept. 1, 1988).

B

We consider...