Opinion ID: 2632596
Heading Depth: 3
Heading Rank: 3

Heading: Regulatory Compact

Text: [¶ 28] PacifiCorp argues that the Commission misinterpreted the concept of the regulatory compact. The regulatory compact provides the fundamental basis for utility regulation. In general, the compact is a theoretical agreement between the utilities and the state in which, as a quid pro quo for being granted a monopoly in a geographical area for the provision of a particular good or service, the utility is subject to regulation by the state to ensure that it is prudently investing its revenues in order to provide the best and most efficient service possible to the consumer. In exchange, the utility is allowed to earn a fair rate of return on its rate base. See generally United States Gypsum, Inc. v. Indiana Gas Co., 735 N.E.2d 790, 797 (Ind.2000). [¶ 29] PacifiCorp argues that the Commission used the theory of the regulatory compact as a justification for holding that PacifiCorp's failure to implement the Commission's pass-on mechanism precluded PacifiCorp from recovering its extraordinary and unforeseen excess purchased power costs. In other words, PacifiCorp argues that the Commission has interpreted the theoretical regulatory compact as requiring PacifiCorp shareholders to bear the risk (and benefits) of any rate movement between rate cases absent the acceptance by PacifiCorp of the Commission's pass-on mechanism. PacifiCorp continues that never before has the Commission required, nor do general utility regulation principles require, the Commission's pass-on mechanism be in place before extraordinary and unforeseen costs can be recovered by a utility. PacifiCorp concludes by arguing that the Commission, by adopting its pass-on mechanism as the exclusive and mandatory method for recovering past costs, has abdicated its responsibility to determine the justness and reasonableness of requested rate increases. [¶ 30] By way of background, a pass-on mechanism allows a utility to obtain an adjustment of its rates to reflect fluctuations in purchased power costs without undergoing a formal rate proceeding. It permits a utility to pass along to its customers on a dollar-for-dollar basis any fluctuations in the purchased power costs experienced by the utility. The mechanism allows for rate changes when there is either an overrecovery or an underrecovery, thus ensuring utilities can recover net excess power costs and also ensuring that ratepayers are not overcharged. See generally Montana Dakota Utilities Co., 847 P.2d at 989. The Commission's pass-on mechanism is reflected in Commission rules and regulations in Sections 249 and 250: Section 249. Electric, Gas and Water Wholesale Utility Commodity Purchase Pass on Procedure. Pursuant to W.S. 37-3-106 (1977) as may be amended and the rate filing requirements of this Chapter, a utility may file an application to pass on to its utility customers in their rates, known or prospective cost increases or decreases in the utility's wholesale utility commodity; and the same may be authorized, subject to public notice, opportunity for hearing, and refund, if the evidence of record shows that: (a) The pass on is for wholesale utility commodity cost increases and decreases not under this Commission's jurisdiction; (b) The pass on will not increase the utility's rate of return, and its rate of return is at or below that last authorized by the Commission (if the rate of return is in excess of that authorized the pass on amount will be reduced accordingly); (c) The pass on is applied on an equal or proportionate basis to all class rates and the rate therein (excluding minimum charges); (d) All pass on charges are filed as a separate cumulative rate rider or surcharge which will be blended into base rates at appropriate intervals in general rate case proceedings or as otherwise ordered by the Commission; (e) There is provision for interest on over-collections to be made part of the refund. Interest will include any interest received by the utility as ordered by the Federal Energy Regulatory Commission and, otherwise or in addition thereto, interest as determined by the Commission; and (f) As a part of all pass on filings under this rule and balancing account filings under Section 250, the applicant utility must provide documentation that the gas, electric or water commodity costs supporting the proposed rate change are the most economical option reasonably available to the utility and its rate payers. The documentation should demonstrate all efforts and options available to the utility to serve its customers at the lowest possible cost consistent with safe and reliable service. Section 250. Electric, Gas and Water Wholesale Utility Commodity Balancing Account as the Basis for Periodic Pass on Filings. (a) This regulation shall apply only to electric, gas or water wholesale utility commodity purchases not under this Commission's jurisdiction which are proposed to be passed on by a utility to its customers on a periodic basis. Any electric, gas or water utility may file an application for a proposed tariff pursuant to this Commodity Balancing Account regulation and the tariff filing provisions of this Section. This Commodity Balancing Account regulation does not preclude the Commission from duly issuing orders governing special problems involving the recovery of future gas, power, fuel or water costs. (b) The proposed Commodity Balancing Account tariff applied for by a utility shall include a description of the planned method of calculating the cost increases or decreases of wholesale commodity purchases utilizing an energy unit measurement (Btu, etc.) uniform with its authorized rates, and setting forth as is appropriate general provisions for determinations of volumes, purchase sources including storage, and taxes. At the time of the initial filing by a utility of its proposed Commodity Balancing Account tariff, the utility will refile its rate sheets with all separately stated surcharges or riders being combined and blended into its base rates. The Commission authorized Commodity Balancing Account tariff effective date shall be the commencement and anniversary date of the periodic Commodity Balancing Account. (c) Upon authorization of its tariff, the utility shall establish its Commodity Balancing Account and shall monthly calculate the actual wholesale commodity purchases and adjust the Commodity Balancing Account for over and under recoveries. The Commodity Balancing Account shall on a current basis reflect all monthly credits and debits and be available for audit by the Commission at any time. (d) For each period as set forth in the utility's Commodity Balancing Account tariff, the utility shall file an application conforming with Commission Regulation 249 for a pass on rate increase or decrease for the ensuing period calculated pursuant to its filed Commodity Balancing Account tariff and including interest as required by 249(e). Wyoming Public Service Commission Rules and Regulations, Chapter 2, General Regulations, §§ 249, 250 (July 31, 1992). [¶ 31] PacifiCorp, in arguing that the Commission has made its pass-on mechanism the exclusive means by which extraordinary and unanticipated costs can be recovered, misunderstands the Order. The Commission did not hold that its pass-on mechanism was the exclusive means by which PacifiCorp could have recovered its excess net power costs. Rather, the Commission only discussed PacifiCorp's election to forego the protections provided by the pass-on mechanism in its analysis of whether the proposed surcharges were just and reasonable. [¶ 32] The Commission, as authorized by statute, analyzed PacifiCorp's business practices, especially in the area of wholesale power trading. There is no doubt that PacifiCorp's business strategies as applied to wholesale power trading activities directly impacted the decision of the Commission on whether to grant PacifiCorp's requested surcharges. With regards to the Hunter costs, in ¶ 126 of its Order, the Commission found: PacifiCorp seeks here to include Hunter No. 1 costs in rates through a three year surcharge  an amortization mechanism to collect excess power costs beyond the level of those already allowed for in PacifiCorp's rates. By our Rules 249 and 250, we have long ago established procedures: [i] for passing on to customers changes in wholesale commodity costs which are outside of the Commission's jurisdiction (such as the prices paid in the wholesale power market which is under the exclusive jurisdiction of the federal government); and [ii] accounting for and, over time, collecting those wholesale commodity costs accurately on a dollar-for-dollar basis. PacifiCorp has never elected to establish such a mechanism to provide for the identification and collection of power costs, preferring instead to be content with recovering the level of purchased power costs allowed in the rates established in its general rate cases. In doing so, PacifiCorp has taken on itself the risk that higher power costs between rate cases would not be collected in rates, but also accepted the benefit of the dollars that would accrue to it and its shareholders if wholesale power costs decreased between rate cases. The evidence in this case shows that PacifiCorp has thereby experienced both benefits and detriments over the last decade from its decision. It was only when wholesale power costs increased quickly to very high levels during the 2000-2001 power crisis that PacifiCorp considered seeking reimbursement for the additional power costs it was incurring, including those attributable to the Hunter No. 1 generating unit outage. PacifiCorp's application for a surcharge amounts to no more than a request that ratepayers reimburse it for a previous loss. PacifiCorp argues that this is a matter of fairness; but such fairness is impermissibly one-sided and not in the public interest. Even though there has long been a mechanism available to it in Wyoming to address and accurately collect wholesale purchased electricity costs, PacifiCorp knowingly accepted for itself the risks inherent in not having such a mechanism in place. The Commission carried the same finding over to its discussion of the excess purchased power costs. In its discussion of the excess purchased power costs, the Commission found, at ¶ 196: The deferred power cost portion of this case shares with the Hunter No. 1 portion the common issue of the impact of PacifiCorp's increasing involvement in the wholesale market without a corresponding increase in generation capability which resulted in a worsening balance of loads and resources, increasing the risk in a volatile market. The substantial evidence shows that PacifiCorp's management implemented a specific strategy to emphasize and increase wholesale market activities for the company's own gain which resulted in a sharp decline in the percentage of retail sales in comparison to overall sales. This strategy significantly increased the risk to PacifiCorp ratepayers and shareholders. Because it was PacifiCorp's own choice to seek profit in the wholesale market through a strategy that exposed its rate payers to risk (which was exacerbated by the power crisis but not caused by it), it should not now be allowed to recover for the consequences of its decision. [¶ 33] In analyzing PacifiCorp's business strategy, specifically regarding its wholesale power trading activities, the Commission determined that PacifiCorp engaged in a specific managerial strategy in not implementing the Commission's pass-on mechanism. The Commission noted in ¶ 198 that no evidence had been presented suggesting that PacifiCorp had implemented a pass-on mechanism in any of the states it serves. By not implementing this pass-on mechanism, PacifiCorp's stockholders, and not Wyoming ratepayers, benefited from any profit PacifiCorp could make in its wholesale power market purchases. Conversely, however, PacifiCorp also accepted the risk that any increase in purchased power costs would be born by its stockholders instead of by Wyoming ratepayers. This arrangement ultimately resulted in PacifiCorp earning a net gain in Wyoming (as well as company-wide) during the 1990s. It was only after wholesale power market prices increased dramatically that PacifiCorp sought to require ratepayers to reimburse it for its losses. [¶ 34] The Commission found that PacifiCorp's deliberate business decision to increase its wholesale power market trading activities, without the protection of a pass-on mechanism, dictates against a finding that PacifiCorp's current requested surcharges are just and reasonable. The Commission did not hold that PacifiCorp could only recover its excess purchased power costs through the timely adoption of the Commission's pass-on mechanism. Instead, the Commission fulfilled its obligation to independently determine if the requested surcharges were just and reasonable within the context they were sought. We find no error in the Commission's analysis. Indeed, it would set a poor precedent if PacifiCorp were allowed to recover under these circumstances. PacifiCorp knowingly placed itself in a position which, while earning a profit when things went well, was very risky in that PacifiCorp could incur great losses if the market turned. There would be no risk to this decision if PacifiCorp could turn around and force ratepayers to reimburse it for those losses. PacifiCorp made its bed. It is just and reasonable to require PacifiCorp now to lie in that bed.