Potomac Edison Co. v. STATE CORP. COM'N

Citations: 667 S.E.2d 772; 276 Va. 577; 2008 Va. LEXIS 121Docket: Record 080727.

Court: Supreme Court of Virginia; October 31, 2008; Virginia; State Supreme Court

Original Court Document: View Document

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The case involves an appeal by The Potomac Edison Company, operating as Allegheny Power (AP), against a decision by the State Corporation Commission regarding the electric retail rate set below what AP requested for recovering purchased power costs under Code § 56-582(B)(i). The central issue is whether the Commission accurately interpreted a prior order that integrated an agreement between AP and the Commission Staff.

The historical context includes the Virginia Electric Utility Restructuring Act of 1999, which aimed to deregulate the electricity market and establish capped rates for customers from January 1, 2001, to July 1, 2007. The Act mandated the separation of generation, retail transmission, and distribution functions of electric utilities, while allowing the Commission to impose conditions on the approval of functional separation plans. AP’s plan, approved in 2000, involved transferring its generation facilities to an affiliate, Allegheny Energy Supply Company, LLC (GENCO), under a divestiture order that incorporated a memorandum of understanding (MOU) with the Staff. This MOU included AP's commitment to ensure reliable service at reasonable rates during the transition to a competitive market, with a core pledge to contract for sufficient generation to meet service demand at a frozen unbundled generation rate during the capped rate period.

Paragraph 4 of the MOU outlines the treatment of Virginia's default service load for ratemaking purposes, establishing that this load will initially be served from a maximum of 367 MW from GENCO’s generation facilities, reflecting the allocation of generation costs to Virginia retail customers. During the capped rate period, this 367 MW will be priced based on the Virginia unbundled frozen generation rate, transitioning to current generation costs after the cap expires. Following the Commission's divestiture order, AP contracted with GENCO to fulfill its default service obligations until the contract's expiration on June 30, 2007. However, the 2004 amendment to Code 56-582 extended the capped rate period to 2010, allowing AP to adjust capped rates for purchased power costs, subject to the divestiture order's terms. In April 2007, AP applied for an adjustment to capped rates to recover purchased power costs, but the Commission ruled that it was not legally required to adjust the rates, a decision later affirmed by the Court. Subsequently, in September 2007, AP filed for a rate adjustment to recover projected purchased power costs, requesting a 26% increase to cover $44.9 million in wholesale costs for the load exceeding 367 MW. The Commission scheduled a hearing, during which various parties, including the Consumer Counsel and local businesses, submitted comments and evidence regarding differing interpretations of the MOU's provisions related to the 367 MW threshold.

AP's evidence indicated that before divestiture, its Virginia generation facilities operated at approximately 66% capacity due to weather-related outages and maintenance. In 2006, these facilities maintained the same output level. AP argued that if it had retained ownership of these facilities, it would need to purchase wholesale power for loads exceeding an average of 242 MW, which is 66% of the 367 MW mentioned in the MOU. The Staff submitted comments asserting that AP's calculations, based on the 66% capacity factor, justified recovery of purchased power costs for loads above 242 MW. Staff member Thomas E. Lamm clarified that the 367 MW figure in the MOU was a negotiated construct unrelated to actual operational capabilities of specific units. He noted that the MOU did not obligate AP to contract for generation service from specific units nor did it account for operational performance reductions. Lamm's testimony was supported by Mark A. Mader, who confirmed the MOU's lack of obligation for AP to contract with GENCO. The Staff highlighted that in 2000, AP's demand exceeded 367 MW and that the embedded generation costs charged to retail customers were significantly higher than the costs associated solely with the 367 MW. The Staff recommended allowing AP to recover about $9.48 million in purchased power costs for loads exceeding 367 MW, translating to a 5.6% rate increase. The Commission ruled that the 2004 amendments to Code 56-582(B) authorized AP to seek recovery of increased costs from July 1, 2007, and concluded that the Staff's calculations adhered to the MOU's ratemaking framework, granting AP the $9.48 million recovery. AP appealed the Commission’s decision, arguing that the retail rate was inconsistent with the MOU and that the Commission's ruling was a legal error, misinterpreting statutory references to specific generation facilities and their operational capabilities.

AP argues that the Commission's decision contradicts the intent of the Memorandum of Understanding (MOU), which aimed to treat AP as if it had not divested its generation assets in 2000. AP claims its generation facilities produced an average of 66% of 367 MW prior to the divestiture and contends it should recover costs for purchasing power exceeding 242 MW. AP asserts that the MOU specifically references its pre-divestiture generation facilities, and the term "367 MW" pertains to the total output allocated to Virginia default service customers. Moreover, AP interprets "up to 367 MW" as acknowledging the variable output of the divested facilities.

In contrast, the Commission and Consumer Counsel argue that the evidence supports the Commission's decision, emphasizing its expertise. They state that the capped rates from 2000 covered AP's costs to supply all electrical demand, including amounts beyond 367 MW, and that the MOU guaranteed at least 367 MW would continue at cost-based rates post-capped period. Consumer Counsel clarifies that "367 MW" refers to demand (load) rather than supply (generated electricity) and that "up to 367 MW" accounts for potential decreases in load if customers switch to competitors.

The document highlights the broad powers of the Commission under the Virginia Constitution in regulating public service corporations. It notes that the Commission is recognized as an expert tribunal and that its decisions are afforded a presumption of correctness, particularly when based on its expertise. The standard of review varies depending on whether the decision involves legal principles, with affirmation required for correct legal application.

A Commission's decision must be reversed if it is based on a legal error. The Commission exercises legislative functions when fixing utility rates, and its decisions are subject to review for abuse of discretion only if they do not involve legal issues. In this case, the decision involved the application of legislative authority rather than legal principles. AP requested the Commission to adjust its capped rates, indicating a legislative function. The Commission's interpretation of the MOU, which stated it applied for ratemaking purposes, was not a legal issue but part of its legislative duty. The MOU's terms provided the framework for adjusting capped rates without requiring legal resolution.

The Commission concluded that the MOU allowed for pricing above 367 MW without a capacity factor adjustment, permitting AP to recover approximately $9.48 million in purchased power costs. AP's challenge regarding the Commission's reliance on Staff's methodology was dismissed, as the Commission's acceptance of calculations was within its discretion and AP did not adequately contest these calculations. Furthermore, AP's arguments concerning the reasonableness of the rate and its financial condition were not addressed, as they were not properly assigned as errors. Consequently, the Commission's order is affirmed.