Sierra Club v. Public Service Commission of West Virginia , 241 W. Va. 600 ( 2019 )

IN THE SUPREME COURT OF APPEALS OF WEST VIRGINIA
January 2019 Term
_______________
No. 18-0863 FILED
_______________ April 22, 2019
released at 3:00 p.m.
EDYTHE NASH GAISER, CLERK
SIERRA CLUB, SUPREME COURT OF APPEALS
OF WEST VIRGINIA
Petitioner
v.
PUBLIC SERVICE COMMISSION OF WEST VIRGINIA, and
AMERICAN BITUMINOUS POWER PARTNERS, L.P.,
Respondents
________________________________________________________
Appeal from West Virginia Public Service Commission
Case No. 17-0631-E-P
AFFIRMED
________________________________________________________
Submitted: February 5, 2019
Filed: April 22, 2019
Evan D. Johns, Esq. Jessica M. Lane, Esq.
Appalachian Mountain Advocates J. Joseph Watkins, Esq.
Charlottesville, Virginia Charleston, West Virginia
J. Michael Becher, Esq. Counsel for the Public Service
Appalachian Mountain Advocates Commission
Charleston, West Virginia
Counsel for the Petitioner Robert R. Rodecker, Esq.
John R. McGhee, Esq.
Kay Casto & Chaney PLLC
John McCuskey, Esq.
Shuman McCuskey & Slicer PLLC
Charleston, West Virginia
Counsel for American Bituminous Power
Partners, L.P.
JUSTICE HUTCHISON delivered the Opinion of the Court.
SYLLABUS BY THE COURT
1. “‘The principle is well established by the decisions of this Court that
an order of the public service commission based upon its finding of facts will not be
disturbed unless such finding is contrary to the evidence, or is without evidence to support
it, or is arbitrary, or results from a misapplication of legal principles.’ United Fuel Gas
Company v. Public Service Commission, 143 W.Va. 33 (99 S.E.2d 1).” Syl. Pt. 5, Boggs
v. Pub. Serv. Comm’n, 154 W.Va. 146, 174 S.E.2d 331 (1970).
2. “The detailed standard for our review of an order of the Public Service
Commission contained in Syllabus Point 2 of Monongahela Power Co. v. Public Service
Commission, 166 W.Va. 423, 276 S.E.2d 179 (1981), may be summarized as follows: (1)
whether the Commission exceeded its statutory jurisdiction and powers; (2) whether there
is adequate evidence to support the Commission’s findings; and, (3) whether the
substantive result of the Commission’s order is proper.” Syl. Pt. 1, Cent. W.Va. Refuse,
Inc. v. Pub. Serv. Comm’n of W.Va., 190 W.Va. 416, 438 S.E.2d 596 (1993).
3. Under West Virginia Code of State Rules § 150-3-12.6 (2018), also
known as Rule 12.6 of the Public Service Commission’s “Rules for the Government of
Electric Utilities,” before a traditional electric utility may pass on to its retail customers the
rates it is paying to a qualifying facility because of an electric energy purchase agreement,
the Commission may require the utility to show the rates are just and reasonable to the
utility’s customers, in the public interest, and do not exceed the utility’s avoided costs.
This is permitted regardless of whether the agreement with the qualifying facility was
reached voluntarily or was compelled by the Commission.
i
HUTCHISON, Justice:
In this appeal from the Public Service Commission (“the PSC”), we are asked
to examine the PSC’s interpretation and application of regulations it adopted to give effect
to the federal Public Utility Regulatory Policies Act, also called “PURPA.” In two orders
that are under appeal, the PSC interpreted its PURPA-based regulations as applying to a
voluntary agreement between a small power plant and a traditional electric utility, and
applied the regulations to find that the agreement, with modification, was just and
reasonable to the electric utility’s consumers.
We find no error in the PSC’s decision and affirm.
I. Factual and Procedural Background
Respondent American Bituminous Power Partners, L.P. (“AmBit”), operates
a small electricity-generating plant in Grant Town, West Virginia. A large traditional
electric utility, Monongahela Power Company (“Mon Power”), buys the electricity
generated by AmBit. Mon Power feeds the electricity produced by this small plant into its
transmission lines and distributes that electricity (along with electricity from its own power
plants and other sources) to its retail customers in West Virginia.
This appeal concerns the fee or rate that Mon Power pays to AmBit to buy
AmBit’s electricity. In 2017, the companies agreed to increase substantially the fee on the
condition that the PSC allow Mon Power to pass the entire fee on to its retail customers.
As we explain in detail later, AmBit and Mon Power sought approval of a fee based on an
1
avoided capacity cost of $40.00 per megawatt-hour. In two orders entered in 2018, the
PSC approved a lesser fee, one based on an avoided capacity cost of $34.25 per megawatt-
hour, and said that Mon Power could pass the lesser fee on to its customers. Without the
PSC’s approval, the avoided capacity cost would have been $27.00 per megawatt-hour
pursuant to a 2006 PSC order.
Petitioner Sierra Club disputes the method that the PSC employed to analyze
and approve that fee increase. To understand the parties’ arguments, we must first examine
the historical statutory and regulatory framework behind the construction of AmBit’s Grant
Town plant.
A. Public Utility Regulatory Policies Act of 1978 (“PURPA”)
Since adoption of the Federal Power Act of 1935, the Federal government
has exercised “the exclusive authority to regulate ‘public utilities’ that sell electric power
at wholesale in interstate commerce.” Freehold Cogeneration Assocs., L.P. v. Bd. of
Regulatory Comm’rs of State of N.J., 44 F.3d 1178, 1182 (3rd Cir. 1995) (quoting 16 U.S.C.
§ 824(e)). Then, in the mid-1970s, the United States faced a “nationwide energy crisis”
caused by foreign oil embargoes and shortages of natural gas. Fed. Energy Regulatory
Comm’n v. Mississippi, 456 U.S. 742, 745 (1982). Electric utilities were “plagued with
increasing costs and decreasing efficiency in the use of their generating capacities”
resulting in adverse impacts on consumers and the national economy. Id. at 745-46.
Congress thereafter embarked on a comprehensive legislative effort focused on
encouraging electric utilities to reduce consumption of oil and natural gas. Id.
2
In 1978, Congress modified the Federal Power Act by passing the Public
Utility Regulatory Policies Act (“PURPA”)1 to encourage the “conservation of electric
energy.” 16 U.S.C. § 2601 [1978]. Congress also intended for PURPA to encourage the
adoption of alternative energy sources, including small power production facilities2 and
cogeneration facilities.3 A power plant that meets PURPA definitions is called a
“qualifying facility.”4 The parties agree that AmBit’s Grant Town power plant is a
qualifying facility under PURPA.
When it adopted PURPA, Congress found that traditional electric utilities
(like Mon Power) might be reluctant to buy electricity from qualifying facilities. In
response, Congress required the Federal Energy Regulatory Commission (“FERC”) to
1
Pub.L. 95-617, 92 Stat. 3117 (Nov. 9, 1978).
16 U.S.C. § 796 (17)(A) [2005] defines a “small power production facility”
2
as “a facility which is an eligible solar, wind, waste, or geothermal facility” or which “(i)
produces electric energy solely by the use, as a primary energy source, of biomass, waste,
renewable resources, geothermal resources, or any combination thereof; and (ii) has a
power production capacity which, together with any other facilities located at the same site
. . . is not greater than 80 megawatts[.]” See also, 18 C.F.R. § 292.204 [2010] (“Criteria
for qualifying small power production facilities.”).
16 U.S.C. § 796 (18)(A) [2005] defines a “cogeneration facility” as one
3
which produces both electricity and “steam or forms of useful energy (such as heat) which
are used for industrial, commercial, heating, or cooling purposes[.]” See also, 18 C.F.R. §
292.205 [2011] (“Criteria for qualifying cogeneration facilities.”).
4
The Federal Energy Regulatory Commission, the PSC, and other courts
often abbreviate the term “qualifying facility” as “QF.” See, e.g., W. Penn Power Co., 71
FERC ¶ 61153, 61495 (May 8, 1995) (“It is up to the States, not this Commission, to
determine the specific parameters of individual QF power purchase agreements[.]”). For
the ease of the reader, we avoid the use of this abbreviation.
3
promulgate rules designed to impel traditional electric utilities to connect to and buy from
qualifying facilities. See 16 U.S.C. § 824a-3(a) [2005] (“[T]o encourage cogeneration and
small power production,” FERC was to create rules that “require electric utilities to offer
5
to . . . purchase electricity from such facilities.”).
Additionally, Congress required FERC to adopt rules aimed at regulating the
fees paid by traditional electric utilities to qualifying facilities. Congress provided the
following guidelines for the rates that traditional utilities would be required to pay:
[I]n requiring any electric utility to offer to purchase electric
energy from any qualifying cogeneration facility or qualifying
small power production facility, the rates for such purchase—
(1) shall be just and reasonable to the electric consumers of the
electric utility and in the public interest, and
(2) shall not discriminate against qualifying cogenerators or
qualifying small power producers.
16 U.S.C. § 824a-3(b).
Furthermore, Congress indicated that FERC could not require a traditional
electric utility to pay a qualifying facility a fee that “exceeds the incremental cost to the
electric utility of alternative electric energy.” Id. Congress defined “incremental cost” in
this way:
[T]he term “incremental cost of alternative electric energy”
means, with respect to electric energy purchased from a
5
When Congress enacted PURPA, the requirements pertaining to qualifying
facilities were contained in Section 210 of the Act. While the requirements have since
been codified in 16 U.S.C. § 824a-3, many courts and commentators continue to refer to
them as Section 210.
4
qualifying cogenerator or qualifying small power producer, the
cost to the electric utility of the electric energy which, but for
the purchase from such cogenerator or small power producer,
such utility would generate or purchase from another source.
16 U.S.C.A. § 824a-3(d).
At this point, we introduce a term of art: “avoided costs.” The meaning of
“avoided costs,” as well as the underlying questions of how and when those costs are
measured, are the focus of the parties’ arguments. FERC substituted the term “avoided
costs” in place of the term chosen by Congress (“incremental cost”) when it adopted rules
to implement PURPA. Accordingly, “incremental” and “avoided” costs are synonymous.6
FERC defines “avoided costs” as “the incremental costs to an electric utility
of electric energy or capacity or both which, but for the purchase from the qualifying
facility or qualifying facilities, such utility would generate itself or purchase from another
source.” 18 C.F.R. § 292.101(b)(6) [1995]. Despite that definition, it remains a nebulous
term.
6
See, e.g., Am. Paper Inst., Inc. v. Am. Elec. Power Serv. Corp., 461 U.S.
402, 406 (1983) (“[T]he term full ‘avoided costs’ used in the regulations is the equivalent
of the term ‘incremental cost of alternative electric energy’ used in § 210(d) of PURPA.”);
N.Y. State Elec. & Gas Corp. v. Saranac Power Partners L.P., 117 F. Supp. 2d 211, 217
(N.D.N.Y. 2000) (“The incremental cost described by Congress in PURPA is defined in
the accompanying regulations as ‘avoided costs,’ or those costs which the utility ‘avoided’
incurring itself by purchasing power from a [qualifying facility]. See 18 C.F.R. §
292.101(b)(6).”).
5
We understand “avoided costs” to be all of the costs that a traditional electric
utility would incur to generate or buy electricity, if the utility did not instead buy the
electricity from the qualifying facility. In other words, avoided costs are expenses a utility
escapes by purchasing electricity for resale from a qualifying facility instead of either
building and operating a new plant or purchasing electricity from another wholesale
supplier. Viewed in the context of this case, “avoided costs” roughly consists of two parts:
the long-term capital cost of building a plant, and the daily fuel and operating costs of the
foregone plant. “By setting a ceiling of incremental [or avoided] cost on the amount a
utility could be forced to pay for a [qualifying facility’s] power, Congress intended to
encourage cogeneration [and small power facilities] without requiring a utility’s ratepayers
to subsidize cogenerators [and small power facilities].” Pub. Util. Comm’n of Tex. v. Gulf
States Utils. Co., 809 S.W.2d 201, 203 (Tex. 1991).
B. State regulation of PURPA facilities
The federal government regulates the sale of electric power at wholesale in
interstate commerce. The States, however, through agencies like the PSC, regulate the sale
of power by traditional utilities to retail customers. Hence, Congress directed state
regulatory authorities to adopt rules applying PURPA’s requirements to the utilities they
regulate, and to drive those utilities to procure electricity from qualifying facilities.
“Congress intended that state regulatory authorities be the primary enforcers of PURPA[.]”
Id., 809 S.W.2d at 204. Congress provided that, within one year of FERC’s adoption of a
6
PURPA rule, “each State regulatory authority shall . . . implement such rule . . . for each
electric utility for which it has ratemaking authority.” 16 U.S.C. 824a-3(f)(1).
Shortly after passage of PURPA, the West Virginia Legislature directed the
PSC to “perform those duties expressly conferred upon a state regulatory authority by the
. . . ‘Public Utilities Regulatory Policy Act of 1978[.]’” W.Va. Code § 24-2-13 [1979].
The PSC complied with the legislative mandate and incorporated PURPA’s requirements
into Rule 12 of its “Rules for the Government of Electric Utilities.” See generally, W.Va.
Code R. § 150-3-12.1 to -12.9.3 [2018]. In accordance with PURPA, the PSC’s rules
require traditional electric utilities to “purchase . . . any energy and capacity which is made
available from a qualifying facility[.]” W.Va. Code R. § 150-3-12.4.1. The rules also
require traditional electric utilities to “make such interconnection with any qualifying
facility as may be necessary to accomplish purchases[.]” W.Va. Code R. § 150-3-12.4.3.a.
Regarding the fees that a traditional electric utility pays to a qualifying
facility to purchase electricity, Rule 12.6.1 of the PSC’s Rules follows FERC’s PURPA-
based avoided-cost standard and provides:
12.6.1. Rates for purchases -- Rates for purchases shall:
12.6.1.a. Be just and reasonable to the electric
consumer and in the public interest, and
12.6.1.b. Not discriminate against qualifying
cogeneration and small power production facilities:
however, nothing in this rule shall require an electric
utility to pay more than the avoided costs for
purchases[.]
7
W.Va. Code R. § 150-3-12.6.1. Further, the PSC’s Rules provide that if the rates paid by
the traditional electric utility to the qualifying facility “equal the avoided costs” of the
utility, then the rate “satisfies the requirements of Rule 12.6.1.” W.Va. Code R. § 150-3-
12.6.2.b. Similar to FERC’s rules, our PSC defines “avoided costs” in Rule 12 as “the
incremental costs to an electric utility of electric energy or capacity or both which, but for
the purchase from the qualifying facility or qualifying facilities, such utility would generate
itself or purchase from another source.” W.Va. Code R. § 150-3-12.1.1.f.
In summary, under PURPA and the PSC’s rules, traditional electric utilities
(like Mon Power) may be compelled to purchase electricity from nontraditional producers
(like AmBit) that operate qualifying facilities. Under PURPA and the PSC’s Rule 12.6,
and in the context of this case, any fee that the traditional electric utility pays to the
qualifying facility must meet these goals: the fee must be just and reasonable to the retail
customers of the electric utility; the fee must be in the public interest; and the fee must not
exceed the avoided capital and operating costs to the electric utility. Finally, if the fee is
equal to the utility’s avoided costs, then it is automatically considered to be just and
reasonable to customers and in the public interest.
C. The Grant Town Plant
In 1987, AmBit began planning to build an 80-megawatt power plant in
Grant Town. The plant was designed to burn a mixture of coal and waste coal. Under
PURPA and PSC rules, the plant meets the definition of a “qualifying facility.”
8
As part of its planning, AmBit sought to enter into a contract to sell electricity
from the plant to Mon Power. However, Mon Power refused to agree to buy the electricity
at the rates proposed by AmBit. AmBit thereafter filed a complaint with the PSC.
In two orders, the PSC ordered Mon Power to purchase the electricity
generated by AmBit’s Grant Town plant. The PSC also ordered the parties to enter into a
contract with two important terms.7 First, in a November 1987 order, the PSC required
Mon Power to buy AmBit’s power for thirty-five years. Since the Grant Town plant did
not begin full operations until May 1993, the PSC determined that the contract bound the
parties until the year 2027. Second, in an order entered in November 1988, the PSC
required Mon Power to pay AmBit a fee that was, in part, based upon an avoided capacity
rate of $27.25 per megawatt-hour.8 The PSC found the fee to be “just and reasonable” and
“in the public interest,” as required by Rule 12.6. Accordingly, the PSC allowed the fee
that Mon Power paid to AmBit to “be recovered from Mon Power’s West Virginia
customers[.]”
Based on the PSC’s orders, Mon Power and AmBit later entered into an
7
“Electric Energy Purchase Agreement” or “EEPA.” The parties’ 2017 proposed
modifications to the EEPA are at issue in this case.
8
The PSC also allowed AmBit to charge Mon Power an avoided energy rate
of $19.00 per megawatt-hour, tied to a capped tracking account. The avoided energy rates
are only tangentially related to this appeal.
9
In January 2006, AmBit and Mon Power jointly petitioned the PSC for
approval to modify their contract.9 To the PSC, AmBit “represented its financial condition
[was] dire.” AmBit asserted that debt service payments were coming due between 2006
and 2017, and said it would cease operations without an increase in revenue.
The PSC entered an order in April 2006 approving three changes to the
contract between AmBit and Mon Power. First, the PSC allowed the parties to extend the
term of the contract for eight years, from 2027 to 2035. Second, the PSC allowed an
increase in the avoided capacity rate from $27.25 to $34.25 per megawatt-hour, but only
until September 30, 2017. Third, once AmBit completed payments on its debt, effective
October 1, 2017, the avoided capacity rate would drop to $27.00 per megawatt-hour.
D. PSC Order Under Appeal
In May 2017, AmBit and Mon Power again jointly petitioned the PSC for
approval to modify their contract.10 Important to this appeal, the parties sought to adjust
the amount paid in relation to Mon Power’s avoided capacity rate. Under the then-existing
9
The record reflects that, between 1988 and 2005, several other proceedings
occurred before the PSC regarding alterations to the Ambit-Mon Power contract. We do
not see these other proceedings as critical to our analysis.
The PSC’s May 3, 2018 order indicates that the joint petition sought
10
“Commission approval for Monongahela Power Company (Mon Power) and The Potomac
Edison Company (PE) to pass-through . . . rates to utility customers.” (Emphasis added.)
Mon Power and Potomac Edison are currently subsidiaries of FirstEnergy Corporation, and
both utilities provide service to customers in West Virginia. However, because the parties’
arguments and the PSC’s orders are centered on AmBit’s contractual relationship with Mon
Power, we have omitted Potomac Edison from our discussion.
10
contract, the avoided capacity rate was scheduled to drop from $34.25 to $27.00 per
megawatt-hour in October 2017. However, AmBit declared that it still held debt totaling
$20.8 million and, without an increase in rates, that it would close the Grant Town plant
by the end of 2017 or early 2018. Mon Power agreed to support any increase in rates, but
only to the extent the PSC allowed full recovery of the increase from Mon Power’s retail
customers. AmBit and Mon Power proposed to increase the avoided capacity rate in
October 2017 to $40.00 per megawatt-hour for the remainder of the contract, until 2035.
Petitioner Sierra Club subsequently intervened in the PSC action to oppose the joint
petition.
In a detailed, thirty-five-page order dated May 3, 2018, the PSC partly
approved and partly rejected the proposed contract modifications. AmBit had presented
evidence to the PSC suggesting the proposed avoided capacity rate was reasonable when
measured against the “levelized avoided costs” incurred over the life of the contract. The
PSC gave this definition of that phrase in its order: “A levelized cost calculation is a number
generated from the discounted present value of expected per unit payments over the term
of an agreement.” Essentially, AmBit asserted that taking all of the avoided capacity and
operating costs approved by the PSC in 1987 and 1988, adjusting those costs for inflation,
and then averaging them for the forty-three-year life of the contract, results in a levelized,
per-megawatt-hour measure of avoided costs that could be fairly charged over the life of
the contract under PURPA and PSC rules.
11
The math proposed by AmBit’s expert looked like this: in 1987 and 1988,
the PSC approved an avoided capacity rate of $27.25 per megawatt-hour, but also approved
an avoided energy rate of $19.00 per megawatt-hour. Adding these costs together results
in a total avoided cost of $46.25 per megawatt-hour, in 1988 dollars. However, by
adjusting the data underlying these figures for inflation and by applying a discount rate,
the expert opined that the “all-in levelized avoided cost rate” was $53.82 per megawatt-
hour for the entire amended contract period ending in 2035. The record does not outline
what the “all-in” costs were, but the parties seem to agree this means the aggregate of all
avoided costs.
The PSC noted that levelized avoided cost rates over the term of the contract
were not specifically discussed in its 1987 or 1988 orders. However, the rates in those
orders involved projections of future avoided costs. Moreover, the PSC found the record
supporting those orders showed “the underlying information necessary to generate an all-
in levelized avoided cost was part of the negotiations between AmBit and Mon Power.”
Accordingly, the PSC adopted AmBit’s levelized avoided cost approach to analyzing the
parties’ modified contract.
Nonetheless, the PSC rejected AmBit’s inflation and discount rates and
adopted its own, lower measures for “the time value of money,” and as a result calculated
different levelized avoided costs over the life of the contract. The PSC calculated that a
proper levelized avoided cost rate was $52.74 per megawatt-hour, and construed this figure
as a “levelized avoided cost rate ceiling.” The PSC then reasoned that if the parties agreed
12
upon an avoided capacity rate that, when added to avoided energy costs, is “at or below the
all-in levelized cost rate of $52.74 per [megawatt-hour] for the entire current contract term
ending in 2035,” then that avoided capacity rate “is ‘just and reasonable’ as provided in the
PURPA Avoided Cost Standard.”
The record reflects that staff members of the PSC prepared tables calculating
various avoided capacity and energy costs for Mon Power, based on past data and future
projections. Using this data, the PSC found that AmBit’s proposal to increase the avoided
capacity cost to a rate of $40.00 per megawatt-hour would, when combined with the
avoided energy costs, exceed the levelized cost rate of $52.74 per megawatt-hour and
would not be “just and reasonable” for Mon Power customers.11 Accordingly, the PSC
rejected AmBit’s and Mon Power’s request to raise the avoided capacity rate to $40.00 per
megawatt-hour.
Instead, the PSC calculated that a just and reasonable avoided capacity rate
would be $34.25 per megawatt-hour (the same rate AmBit had been receiving since 2006).
The PSC reasoned that if Mon Power paid AmBit a rate equivalent to $34.25 for avoided
capacity costs, and that cost was combined with varying projected avoided energy costs
over the years, Mon Power would end up paying no more than $52.74 per megawatt-hour
11
The PSC data showed that if Mon Power began paying AmBit $40.00 per
megawatt-hour in avoided capacity costs in 2017, and that figure was combined with the
PSC’s projected avoided energy costs, then over the entire life of the contract AmBit would
have collected $53.35 per megawatt-hour (or 61 cents per megawatt-hour in excess of the
acceptable, levelized rate).
13
over the entire span of the contract. Averaging and discounting the total fee paid by Mon
Power, from 1993 until 2035, AmBit will have received $52.74 for every megawatt-hour
of electricity it supplied.
Accordingly, the PSC concluded that “the pass-through of a $34.25 per
[megawatt-hour] fixed . . . capacity rate to the Mon Power . . . customers is consistent with
the PURPA Avoided Cost Standard, and therefore just and reasonable.” In summary, the
PSC approved a contract rate whereby Mon Power would continue paying AmBit $34.25
per megawatt-hour for avoided capacity costs until 2035, and allowed Mon Power to
continue passing that expense on to its retail customers.
Various parties to the proceedings below, including petitioner Sierra Club,
asked the PSC to reconsider or clarify its order.12 In an order dated September 5, 2018, the
PSC clarified that its rate approval was effective from October 1, 2017. “[An avoided]
capacity rate of $34.25 per [megawatt-hour] for periods subsequent to October 1, 2017
resulted in an all-in levelized payment to AmBit over the life of the [parties’ contract] of
$52.74 per [megawatt-hour] and was, therefore, reasonable for rate recovery under the
PURPA Avoided Cost Standard[.]”
The PSC’s staff filed a petition for reconsideration. The Consumer
12
Advocate Division of the PSC, the West Virginia Energy Users Group, and Sierra Club
later filed letters supporting the staff’s petition. AmBit and Mon Power filed a joint request
for clarification.
14
Sierra Club now appeals the PSC’s May 3 and September 5, 2018 orders, and
argues that the orders are based upon a misapplication of legal principles.
II. Standard of Review
The decisions of this Court firmly establish that “an order of the public
service commission based upon its finding of facts will not be disturbed unless such finding
is contrary to the evidence, or is without evidence to support it, or is arbitrary, or results
from a misapplication of legal principles.” Syl. Pt. 5, Boggs v. Pub. Serv. Comm’n, 154
W.Va. 146, 174 S.E.2d 331 (1970). Our standard for reviewing an order of the PSC is laid
out in detail in Syllabus Point 2 of Monongahela Power Company v. Public Service
Commission, 166 W.Va. 423, 276 S.E.2d 179 (1981), but it “may be summarized as
follows: (1) whether the Commission exceeded its statutory jurisdiction and powers; (2)
whether there is adequate evidence to support the Commission’s findings; and, (3) whether
the substantive result of the Commission’s order is proper.” Syl. Pt. 1, Cent. W.Va. Refuse,
Inc. v. Pub. Serv. Comm’n of W.Va., 190 W.Va. 416, 438 S.E.2d 596 (1993). “The court’s
responsibility is not to supplant the Commission’s balance of these interests with one more
nearly to its liking, but instead to assure itself that the Commission has given reasoned
consideration to each of the pertinent factors.” Syl. Pt. 2, in part, Monongahela Power Co.,
166 W.Va. at 423, 276 S.E.2d at 180.13
This Court’s detailed standard of review is set forth in Syllabus Point 2 of
13
Monongahela Power Co., which provides in full:
15
III. Discussion
Petitioner Sierra Club assigns two points of error to the PSC’s orders
regarding the agreement modifications reached by Mon Power and AmBit. First, Sierra
Club argues that Rule 12.6, the PSC’s PURPA-based avoided-cost standard, does not apply
to voluntary agreements between traditional utilities and qualifying facilities. Instead, it
takes the position that Rule 12.6 applies only to compelled purchases of power from
qualifying facilities. Second, Sierra Club argues that if Rule 12.6 does apply to the
agreement between Mon Power and AmBit, then the PSC should have measured the
avoided costs as of 2017, at the time the parties entered into the contract, and not using
data from 1987-88. As we discuss below, we reject both of these arguments.
In reviewing a Public Service Commission order, we
will first determine whether the Commission’s order, viewed
in light of the relevant facts and of the Commission’s broad
regulatory duties, abused or exceeded its authority. We will
examine the manner in which the Commission has employed
the methods of regulation which it has itself selected, and must
decide whether each of the order’s essential elements is
supported by substantial evidence. Finally, we will determine
whether the order may reasonably be expected to maintain
financial integrity, attract necessary capital, and fairly
compensate investors for the risks they have assumed, and yet
provide appropriate protection to the relevant public interests,
both existing and foreseeable. The court’s responsibility is not
to supplant the Commission’s balance of these interests with
one more nearly to its liking, but instead to assure itself that the
Commission has given reasoned consideration to each of the
pertinent factors.
166 W.Va. at 423, 276 S.E.2d at 180.
16
Sierra Club’s first argument challenges the application of Rule 12.6 of the
PSC’s rules to the facts of this case. Sierra Club contends that PURPA’s avoided-cost
standard in Rule 12.6 applies only to fees a traditional utility is compelled to pay under
PURPA’s mandate. Sierra Club argues that the avoided-cost standard does not apply to a
voluntary agreement between a traditional utility and a qualifying facility – particularly an
agreement that voluntarily amends an existing, already-approved agreement. Additionally,
Sierra Club maintains that the PSC’s authority terminated once the PSC forced the original
PURPA agreement upon the parties in 1987-88, and that there is no authority for the PSC
to apply Rule 12.6 to voluntary amendments to an existing PURPA agreement.
Furthermore, Sierra Club argues that the PSC failed to consider the effect of
the fee paid by Mon Power under its statutory “ratemaking” authority, that is, its power to
regulate electricity rates paid by retail consumers. Sierra Club notes that the PSC is charged
by the Legislature with regulating traditional utilities, and in doing so with “[e]nsur[ing]
that rates and charges for utility services are just, reasonable, applied without unjust
discrimination or preference, . . . and based primarily on the costs of providing these
services[.]” W.Va. Code § 24-1-1(a)(4) [2015].14 In this case, Sierra Club notes that the
PSC allowed Mon Power to “pass through” to retail customers the fee it pays AmBit
without making any of the specific findings listed in West Virginia Code § 24-1-1(a)(4).
See also, W.Va. Code § 24-2-2(a) [2018] (“The commission may
14
investigate all rates . . . of public utilities. . . . The commission may change any intrastate
rate, charge or toll which is unjust or unreasonable. . . . But in no case may the rate, toll,
or charge be more than the service is reasonably worth, considering the cost of the
service.”).
17
The PSC never made findings that the fee resulted in electricity rates for retail customers
that were just, reasonable, non-discriminatory, or based on the costs of providing services.
Instead, the PSC approved the contract modifications based upon its PURPA-
based avoided-cost guidelines found in Rule 12.6. The PSC found that under Rule 12.6,
the fee paid by Mon Power to AmBit was just and reasonable, and in the public interest,
because the fee was equal to or less than the “levelized avoided cost” over the entire term
of the contract. See W.Va. Code R. § 150-3-12.6.1. Rather than measure whether the
agreement was just and reasonable to retail consumers under the PURPA-based avoided-
cost standard in Rule 12.6, Sierra Club asserts that the PSC should have measured whether
the increased rate was just and reasonable to retail customers under its traditional rate-
making authority in West Virginia Code § 24-1-1(a)(4).
Respondents AmBit and the PSC respond by pointing out that, under
PURPA, the Grant Town plant is a qualifying facility, and has been since its inception.
Respondents further point out that PURPA was designed to encourage the development
and continued use of alternative sources of power, and to drive traditional utilities to
purchase power from qualifying facilities. They argue that the goals of PURPA do not end
when a traditional utility begins buying power from a qualifying facility. Respondents
maintain that measuring whether the fee paid by that utility is just and reasonable to the
utility’s retail customers under the PSC’s PURPA-based avoided-cost standard in Rule
12.6 is a mandate that continues so long as the qualifying facility produces power.
Respondents contend that so long as the fees paid by the traditional utility to a qualifying
18
facility meet the PURPA requirements in Rule 12.6, the utility may recoup those fees from
its retail customers.
We begin our analysis by looking to the language of FERC’s and the PSC’s
PURPA-based avoided-cost rules. FERC’s rules provide the following guidance for rates
paid by traditional utilities to qualifying facilities.
(a) Rates for purchases.
(1) Rates for purchases shall:
(i) Be just and reasonable to the electric consumer of
the electric utility and in the public interest; and
(ii) Not discriminate against qualifying cogeneration
and small power production facilities.
(2) Nothing in this subpart requires any electric utility to pay
more than the avoided costs for purchases.
18 C.F.R. § 292.304(a) (emphasis added). FERC’s rules provide that “a rate for purchases
satisfies the requirements of paragraph (a)” – the paragraph quoted above – “if the rate
equals the avoided costs[.]” 18 C.F.R. § 292.304(b)(2).
The PSC’s PURPA-based avoided-cost rules are similar to FERC’s rules.
The PSC’s Rule 12.6 states (with emphasis added):
12.6.1. Rates for purchases – Rates for purchases shall:
12.6.1.a. Be just and reasonable to the electric
consumer and in the public interest, and
12.6.1.b. Not discriminate against qualifying
cogeneration and small power production facilities:
however, nothing in this rule shall require an electric
19
utility to pay more than the avoided costs for
purchases[.]
W.Va. Code R. § 150-3-12.6.1. Rule 12.6 further provides, in pertinent part:
12.6.2. Relationship to avoided costs: . . .
12.6.2.b. Rates for purchases . . . shall equal the avoided
costs[.] . . . A rate so determined satisfies the
requirements of Rule 12.6.1.
W.Va. Code R. § 150-3-12.6.2. To be clear, the term “purchase” in these regulations means
“the purchase of electric energy or capacity or both from a qualifying facility by an electric
utility.” W.Va. Code R. § 150-3-12.1.1.b.
In support of its first argument, Sierra Club relies on a 1991 Texas Supreme
Court opinion interpreting state utility regulations similar to the PSC’s regulations. In
Public Utility Commission of Texas v. Gulf States Utilities Company, Gulf States Utilities
(“GSU”) devised a scheme to avoid losing several large industrial customers. GSU formed
a joint venture with the customers, and then sold two old GSU power plants to the venture.
GSU agreed to operate the plants for the venture, and to convert the plants into qualifying
facilities under PURPA guidelines. Finally, GSU voluntarily agreed to buy power from
the venture’s two qualifying facilities. Gulf States, 809 S.W.2d at 205.
As part of this complicated scheme to keep its industrial customers, GSU
agreed to buy power from the venture at rates that would exceed GSU’s avoided costs. The
overall terms of the agreement provided that it was contingent upon receiving approval of
the Texas Public Utility Commission (“PUC”). The PUC, going beyond the agreement
20
between GSU and the joint venture, looked at the effect of the agreement on other GSU
retail customers. The PUC ruled “that GSU could not recover anything above avoided
cost” from its retail customers and rejected the agreement. Id. at 206.
On appeal, the Texas Supreme Court examined avoided-cost regulations
similar to West Virginia’s Rule 12.6. The Gulf States court outlined two questions raised
by the PUC’s decision interpreting those avoided-cost regulations:
(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.
Id. at 205 (emphasis in original).
Regarding the first question, the Gulf States court read the Texas PURPA-
based avoided-cost standard “as operating solely to set the rates that the [PUC] can compel
a utility to pay for a [qualifying facility’s] power if the utility and the [qualifying facility]
are unable to reach a voluntary agreement.” Id. at 207 (emphasis in original). Conversely,
the court found that the avoided-cost standard “does not impose a ceiling on the amount a
utility can contract to pay for a [qualifying facility’s] power, nor does it limit the amount
a utility can recover from its ratepayers under such voluntary arrangements.” Id. The Gulf
States court concluded that, so long as the agreement was voluntary, a traditional utility
and qualifying facility were not bound by the rules and could agree to rates “above, below,
or equal to avoided cost.” Id. at 208.
21
Sierra Club bases its argument solely upon the answer to the first question
discussed by the court in Gulf States, and it argues that the same interpretation should apply
in this case. Sierra Club asserts that we should follow Gulf States and rule that the avoided-
cost rate restrictions in Rule 12.6 apply only to contracts that are compelled, not voluntary
contracts.
We, however, find the Gulf States case to be distinguishable and decline to
follow the Texas Supreme Court’s reasoning, largely because Sierra Club fails to account
for the court’s discussion of the second question in the case. That question concerned
whether, under the Texas PURPA-based avoided-cost rules, a traditional utility could pass
through to its retail customers fees that exceeded avoided costs. In the instant case, Mon
Power explicitly sought the PSC’s approval of the modified agreement so the PSC could
approve the pass-through of the additional avoided costs to its retail customers. That,
however, did not occur in Gulf States; the court in Gulf States avoided answering the
question posed because GSU never asked the Texas PUC to approve the rates it was
charging its retail customers. The Texas Supreme Court stated that the PUC “was not
called upon to set rates[.]” Id. at 210. Nonetheless, in dicta, the Texas court stated the
PUC could, in the future, consider whether to allow GSU to “recover purchased power
payments in excess of its avoided cost in future rate proceedings if GSU establishes to the
Commission’s satisfaction that the payments are reasonable and necessary expenses.” Id.
In other words, the Gulf States court said that in a future proceeding the PUC could do
precisely what the PSC already did in this case: apply the PURPA-based avoided-cost
22
standard as a ceiling to decide the maximum amount that the traditional utility could pass
on to its retail customers.
Another reason that we find the Gulf States decision distinguishable is
because of its factual posture. The complicated scheme in Gulf States was wholly
voluntary. Moreover, the court’s discussion in Gulf States makes clear that GSU’s decision
was driven by its need to retain large industrial customers, and the loss of those industrial
customers would have resulted in drastically higher rates for GSU’s other retail customers.
Id. at 205. In the instant case, the relationship between Mon Power and AmBit has been
subject to the PSC’s compulsion and regulation since 1987, and the PSC’s decision is based
on much simpler considerations. In sum, we decline to follow the reasoning of the court
in Gulf States.
The PSC interprets the PURPA-based avoided-cost standard in Rule 12.6 as
applying to any agreement between a traditional utility and a qualifying facility, regardless
of whether the agreement was reached voluntarily or was compelled by the PSC, before
the traditional utility may pass through the costs of the agreement to its retail customers.
The rule makes no distinction between voluntary and involuntary agreements. The PSC’s
rules do allow traditional utilities and qualifying facilities to enter voluntary agreements
with rates and terms different from those required by Rule 12.15 However, the fact that
15
Rule 12 permits voluntarily negotiated agreements:
23
traditional utilities and qualifying facilities may negotiate a contract does not mean the
utility can recover an amount greater than the avoided cost from its retail customers. We
see little difference in the contract being reviewed upfront to determine if it is “just and
reasonable to the electric consumer” under PURPA and Rule 12.6, or reviewed later to
determine if the rates Mon Power seeks to collect from retail consumers are just and
reasonable under W.Va. Code § 24-1-1(a)(4).
Accordingly, we hold that under Rule 12.6, before a traditional electric utility
may pass on to its retail customers the rates it is paying to a qualifying facility because of
an electric energy purchase agreement, the PSC may require the utility to show the rates
are just and reasonable to the utility’s customers, in the public interest, and do not exceed
the utility’s avoided costs. This is permitted regardless of whether the agreement with the
qualifying facility was reached voluntarily or was compelled by the PSC. See W.Va. Code
R. § 150-3-12.6 [2018].
12.2.2. Negotiated rates or terms -- Nothing in Rule 12 et seq:
12.2.2.a. Limits 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 which would otherwise be required by this
rule; or
12.2.2.b. Affects the validity of any contract entered
into between a qualifying facility and an electric utility
for any purchase.
W.Va. Code R. § 150-3-12.2.2.
24
The PSC’s driving obligation is to ensure that West Virginia’s retail
customers are not paying for uneconomical power purchases. Accordingly, we find no
error with the PSC’s determination to apply the avoided-cost standard in Rule 12.6 to both
voluntary and compelled agreements, and modifications to those agreements, between
traditional utilities and qualifying facilities.
Sierra Club’s second argument on appeal is that the PSC misapplied Rule
12.6 and its avoided-cost standard to the agreement between Mon Power and AmBit.
Sierra Club argues that the avoided-cost standard applies only at the time an obligation to
pay those rates is incurred. In other words, Sierra Club contends that the PSC should have
weighed the 2017 agreement based upon Mon Power’s current avoided costs, and not
looked back some three decades to reconstruct an “avoided cost ceiling” based upon 1987-
88 data.
Sierra Club points to the language of Rule 12.6, which requires that the rates
for a traditional utility’s purchase of electricity from a qualifying facility “shall equal the
avoided costs[.]” W.Va. Code R. § 150-3-12.6.2.b. It asserts that when a qualifying facility
chooses to “lock-in” the fee it will receive in a contract, the rule requires the fee to be based
upon the avoided costs at the time the contract is entered into. Sierra Club maintains that
this conclusion is compelled by Rule 12.6.3, which provides, in part, that a qualifying
facility shall have the option:
12.6.3.b. To provide energy or capacity pursuant to a legally
enforceable obligation for the delivery of energy or capacity
over a specified term, in which case the rates for such
25
purchases shall, at the option of the qualifying facility
exercised prior to the beginning of the specified term, be based
on either:
12.6.3.b.1. The avoided costs calculated at the time of
delivery, or
12.6.3.b.2. The avoided costs calculated at the time the
[legally enforceable] obligation is incurred.
W.Va. Code R. § 150-3-12.6.3. Sierra Club reasons that, under this rule, the PSC could
only consider avoided costs at the beginning of the specified term – that is, when it
approved the 2017 modifications to the parties’ contract.
Respondents AmBit and the PSC respond that the levelized avoided cost was,
in fact, calculated based upon avoided costs calculated from the time the parties’ legal
obligation was incurred in 1987-88. Moreover, the respondents assert that there is no one
perfect way to calculate avoided costs, and that use of levelized avoided costs over the life
of the contract was envisioned when FERC crafted the rules implementing PURPA. The
respondents’ argument builds upon the 1980 statement of FERC discussing the adoption
of the PURPA avoided-cost regulation upon which Rule 12.6.3 was based. See 45 Fed.Reg.
12,214 (Feb. 25, 1980). Like Rule 12.6.3, the FERC regulation allows a qualifying facility
to provide power “pursuant to a legally enforceable obligation . . . based on . . . [t]he
avoided costs calculated at the time the obligation is incurred.” 18 C.F.R. § 292.304(d)(ii).
FERC stated that § 292.304(d) was
intended to reconcile the requirement that the rates for
purchases equal the utilities’ avoided cost with the need for
qualifying facilities to be able to enter into contractual
commitments based, by necessity, on estimates of future
26
avoided costs. Some of the comments received regarding this
section stated that, if the avoided cost of energy at the time it
is supplied is less than the price provided in the contract or
obligation, the purchasing utility would be required to pay a
rate for purchases that would subsidize the qualifying facility
at the expense of the utility’s other ratepayers. The
Commission recognizes this possibility, but is cognizant that
in other cases, the required rate will turn out to be lower than
the avoided cost at the time of purchase. The Commission does
not believe that the reference in the statute to the incremental
cost of alternative energy was intended to require a minute-by-
minute evaluation of costs which would be checked against
rates established in long term contracts between qualifying
facilities and electric utilities.
Many commenters have stressed the need for certainty
with regard to return on investment in new technologies. The
Commission agrees with these latter arguments, and believes
that, in the long run, “overestimations” and “underestimations”
of avoided costs will balance out.
45 Fed.Reg. at 12,224.
AmBit and the PSC argue that FERC specifically approved of the use of
levelized avoided costs, or avoided costs measured over the entire term of the parties’
contract. As FERC stated in its 1980 comments:
A facility which enters into a long term contract to
provide energy or capacity to a utility may wish to receive a
greater percentage of the total purchase price during the
beginning of the obligation. For example, a level payment
schedule from the utility to the qualifying facility may be used
to match more closely the schedule of debt service of the
facility. So long as the total payment over the duration of the
contract term does not exceed the estimated avoided costs,
nothing in these rules would prohibit a State regulatory
authority . . . from approving such an arrangement.
Id. (emphasis added).
27
Our research has revealed that neither Congress nor FERC “prescribe a
specific methodology for the states’ calculations of avoided cost. In point of fact, there are
literally dozens of methodologies to calculate avoided cost.” Steven Ferrey, 2 Law of
Independent Power § 7.3 (2014). A nationally recognized study commissioned by the PSC
in 1982 similarly found “a wide diversity of methods of calculating avoided costs.”
National Regulatory Research Institute, “The Appropriateness and Feasibility of Various
Methods of Calculating Avoided Costs,” 103 (June 1982).16 The study noted that the
“various methods of avoided cost calculation differ in their theoretical appropriateness,
conformance to legal requirements, and feasibility.” Id. at ii. “Careful examination of the
avoided cost calculation techniques . . . reveals a multitude of factors that can be considered
in adopting avoided cost methods.” Id. at 6. “In some states the application of avoided
cost methods must reflect special local conditions, such as excess capacity, or the extensive
use of power pooling arrangements.” Id. at 22. Because of this complexity, FERC has
stated that, “[i]t is up to the States, not this Commission, to determine the specific
parameters of individual [qualifying facility] power purchase agreements. . . . Similarly,
whether the particular facts applicable to an individual [qualifying facility] necessitate
modifications of other terms and conditions of the [qualifying facility]’s contract with the
The authors state the study’s report was prepared “under a contract with
16
the West Virginia Public Service Commission.” The report may be found at
http://ipu.msu.edu/wp-content/uploads/2016/12/NRRI-Appropriatness-Feasibility-June-
82-1.pdf .
28
purchasing utility is a matter for the States to determine.” West Penn Power Co., 71 FERC
¶ 61153, 61495 (May 8, 1995).
The PSC is entitled under PURPA to take fact-specific actions reasonably
designed to give effect to FERC’s rules. The PSC did so in this case by evaluating and
applying a levelized avoided cost rate over the life of the parties’ contract, and in doing so
reflected the evidence in existence when it first approved the contract in 1987 and 1988.
The record supports the levelized approach chosen by the PSC. We see no basis to second
guess or invalidate the PSC’s chosen method for evaluating the AmBit-Mon Power
contract. This is because “the rulings, interpretations and opinions” of the PSC “constitute
a body of experience and informed judgment to which courts and litigants may properly
resort for guidance.” Appalachian Power Co. v. State Tax Dep’t of W.Va., 195 W.Va. 573,
583, 466 S.E.2d 424, 434 (1995) (citations omitted). Hence, this Court gives substantial
deference to the PSC’s construction of a statute. See Syl. Pt. 4, Appalachian Power Co.,
195 W.Va. at 579, 466 S.E.2d at 430 (“A valid legislative rule is entitled to substantial
deference by the reviewing court.”). Further, out of deference to the PSC’s expertise,
“[t]his Court will not substitute our judgment for that of the Public Service Commission
on controverted evidence.” Syl. Pt. 2, Chesapeake & Potomac Tel. Co. of W.Va. v. Pub.
Serv. Comm’n of W.Va., 171 W.Va. 494, 300 S.E.2d 607 (1982). Sierra Club fails to show
how the PSC’s decision is contrary to the evidence, is without evidence to support it, or is
arbitrary. Moreover, the levelized approach chosen by the PSC to measure Mon Power’s
29
avoided costs was within the bounds of PURPA’s requirements. Accordingly, we find no
error.
IV. Conclusion
We affirm the PSC’s orders dated May 3 and September 5, 2018.
Affirmed.
30