West Penn Power Co. v. Pennsylvania Public Utility Com'n

• Citation: 659 A.2d 1055
• Parties: Util. L. Rep. P 26,474 WEST PENN POWER COMPANY, Petitioner, v. PENNSYLVANIA PUBLIC UTILITY COMMISSION, Respondent.
• Decision Date: 25 May 1995
• Court: Commonwealth Court of Pennsylvania

Page 1055

659 A.2d 1055

Util. L. Rep. P 26,474

WEST PENN POWER COMPANY, Petitioner, v. PENNSYLVANIA PUBLIC UTILITY COMMISSION, Respondent.

Commonwealth Court of Pennsylvania.

Argued April 4, 1995.

Decided May 25, 1995.

William J. Murphy for petitioner.

Kathryn G. Sophy, Asst. Counsel, for respondent.

Steven F. Baicker-McKee, for intervenor Alleghey Ludlum Corp.

Robert F. Shapiro, for intervenor Washington Power Co. L.P.

Clifford B. Levine, for intervenor Mon Valley Energy Corp.

Michael L. Kurtz, for intervenor Armco Advanced Materials Company, a Business Unit of Armco, Inc.

John G. Short, for intervenor Milesburg Energy, Inc.

Before PELLEGRINI and FRIEDMAN, JJ., and DELLA PORTA, Senior Judge.

PELLEGRINI, Judge.

West Penn Power Company (West Penn) petitions for review of an order of the Pennsylvania Public Utility Commission (PUC) dismissing a complaint filed by West Penn requesting the rescission of prior orders approving rates associated with three qualifying facilities (QFs), the Burgettstown Power Station, the Shannopin Power Station, and the Milesburg Power Station. See Section 210 of the Public Utility Regulatory Policies Act of 1978 (PURPA), 16 U.S.C. § 824a-3.

I.

PURPA was enacted as part of the National Energy Act during a time of nationwide energy crisis. Congress sought to lessen the dependence of electric utilities on foreign oil and on natural gas by encouraging the development of alternative power sources in the form of cogeneration and small power production facilities. ¹ Section 210(a) of PURPA directs the Federal Energy Regulatory Commission (FERC) to promulgate rules to encourage the development of the alternative sources of power, including rules requiring utilities to offer to buy electricity from qualifying cogeneration facilities and small power production facilities, and requiring the setting of rates that are just and reasonable to consumers. The determination of rates under Section 210(b) of PURPA is not to exceed the incremental cost to the utility of alternative electric energy. Additionally, Section 210(e) directs FERC to adopt rules exempting QFs from most state public utility regulation. For further discussion of PURPA and the federal regulations implementing PURPA, see Barasch v. Pennsylvania Public Utility Commission, 119 Pa.Commonwealth Ct. 81, 546 A.2d 1296 (1988), petition for allowance of appeal denied, 523 Pa. 652, 567 A.2d 655 (1989) (Milesburg I ).

To further encourage these alternate power sources, Congress also sought to reduce the burden of state and federal regulation on these new types of power generators. FERC v. Mississippi, 456 U.S. 742, 102 S.Ct. 2126, 72 L.Ed.2d 532 (1982). Section 210(e) of PURPA requires FERC to implement regulations exempting QFs from regulations to which traditional electric utilities are subject, including most provisions of the Federal Power Act and "[s]tate laws and regulations respecting the rates, or respecting the financial or organizational regulation, of electric utilities." 16 U.S.C. § 824a-3(e)(1). ²

PURPA had the unintended consequence of promoting competition in the electric industry in that non-utility, independent power producers ³ are entering the market to supply electrical power both to utilities and to large customers. To promote this emerging competition, Congress enacted the Energy Policy Act of 1992 ⁴ giving FERC certain powers to open the wholesale electrical market. Implementing the expanded "wheeling" ⁵ authority it was given in the Energy Policy Act, FERC issued a policy statement increasing competition by establishing transmission pricing policies. See Policy Statement at Docket No. RM93-19-000 (October 26, 1994).

If this move to competition is fully implemented, traditional vertically integrated monopolistic territorial utilities may be impacted if they have "stranded investment" because it is non-competitive or if there is need for less capacity because of less demand. Stranded investment represents that portion of capacity which has capital costs and operating costs so great that the power is produced at a cost that will not be competitive in the coming competitive marketplace and has the potential to be written off. As to loss of demand, potential independent power producers or, for that matter, other utilities will have the ability to wheel power into their market, taking away, at least initially, their large industrial and commercial customers by offering lower priced power, thereby lowering the demand and need for capacity.

These concerns are at the core of the disputes concerning PURPA contracts taking place before courts and regulatory bodies throughout this country. See, e.g., Freehold Cogeneration Associates v. Board of Regulatory Commissioners of the State of New Jersey, 44 F.3d 1178 (3rd Cir.1995). Because those contracts are "take or pay" at "avoided cost" ⁶, there is a concern that QF contracts may be another form of stranded investment. The fear is either QFs will supply energy that the utility no longer needs because customers have walked away with their demand and are purchasing from independent power producers or that the avoided costs paid for QF power is at a cost higher than the cost of power that may become available in the potential competitive marketplace. See Part III B discussion relating to In re Southern California Edison Company, F.E.R.C. No. EL95-16-000 and No. EL95-19-000, 1995 WL 169000, issued February 23, 1995. However, despite Congressional intent to foster competition and the concerns of utilities and FERC, Congress has yet to amend or repeal PURPA and the requirement that utilities purchase QF power.

II.

While that is the legal and market landscape behind the dispute, the phrase that a case has a long and torturous history, though overused, certainly applies. It all began when West Penn negotiated and signed electric energy purchase agreements (EEPAs) in 1987 with Washington Power Company, L.P. (Washington) as the developer of the Burgettstown Power Station, with Mon Valley Energy Corporation (Mon Valley) as the developer of the Shannopin Power Station, and with Milesburg Energy, Inc. (Milesburg) as the developer of the Milesburg Power Station. The EEPAs incorporated rates agreed on in principle in 1986 which were based on West Penn's own determination of its avoided costs and were calculated to be at or below those avoided costs as of 1986. The EEPAs were made conditional on the promulgation of a rule or the issuance of an order by the PUC approving the legality of the agreements and specifically determining that the purchase of power would not result in excess capacity. ⁷

Related litigation began when West Penn filed a petition seeking the PUC's approval of the EEPA for the Milesburg facility and the rates therein. The PUC held that West Penn's agreement was consistent with PURPA, that the rate payments were lower than what West Penn would otherwise incur and that the payments were recoverable. On appeal from the PUC's order, this court held that customer notice and hearings were required on the issues of whether West Penn's payments could be lower through other sources of energy or of whether West Penn needed the capacity. Milesburg I.

The PUC then held hearings on those issues for all three QF projects. At these hearings, Milesburg and Washington requested that milestone deadlines ⁸ related to their EEPAs be extended. Despite its earlier agreement to the contrary, West Penn argued that it no longer had a need for capacity from the QFs and that in fact it did not have such a need at the time it signed the EEPA. At the conclusion of the hearing process for the projects, the PUC approved recovery of the costs associated with all three QFs finding that the rates associated with the QFs were reasonable, that West Penn needed the capacity and that the projects proposed were reasonable to meet that capacity. The PUC also found that the calculation of avoided costs was locked in at the time of serious negotiations. The PUC additionally held that it had the authority to extend the deadlines so that the projects could continue. In doing so, the PUC ordered West Penn to enter contracts integrating the milestone date extensions.

On appeal, this court in an unpublished decision affirmed the PUC's authority to modify the EEPAs and to order West Penn to enter into contracts reflecting the milestone extensions. ⁹ In a separate appeal, we reversed the PUC's determination that avoided costs should be calculated as of the time of serious negotiations and held that the calculation should be done as of the date of a legally enforceable obligation, that is when the QFs have made a binding commitment to delivering energy and capacity. ¹⁰ We determined that because West Penn legally agreed it had a need for capacity when it made the agreements with the QFs, it cannot now change the terms of the agreements because it believes, based on hindsight information, that it made an erroneous decision. West Penn Power Company v. Pennsylvania Public Utility Commission, 150 Pa.Commonwealth Ct. 349, 615 A.2d 951 (1992), petition for allowance of appeal denied, 536 Pa. 631, 637 A.2d 291 (1993), cert. denied, 513 U.S. 925, 115 S.Ct. 311, 130 L.Ed.2d 274 (1994) (Shannopin II ). Based upon our decision in Shannopin II, in Burgettstown II this court affirmed the PUC's decision to exclude evidence of current avoided costs as irrelevant to determining avoided costs at the time of a legally enforceable obligation.

Even though our opinions in Shannopin II and Burgettstown II, affirmed the PUC's calculation of avoided costs, on November 3, 1994, West Penn filed a complaint with the PUC challenging the avoided cost rate for power produced by the three QFs and seeking further review and rescission by the PUC of the prior orders that require West Penn to purchase capacity from the QFs. The gravamen of its complaint was that the purchases from the QFs would result in baseload capacity not needed...