Opinion ID: 1863469
Heading Depth: 2
Heading Rank: 3

Heading: The Imprudence Disallowances

Text: Gulf States also contests $1.85 million in combined imprudence disallowances assessed by the Commission in Order No. U-20647. [9] The disallowances stem from four separate power outage extensions which occurred during the Phase I review period, October 1, 1988 through September, 1991, at River Bend, a $4.4 billion, 940 megawatt nuclear plant completed in 1986. [10] Gulf States argues that the outages were not the result of any imprudence on its part, and further that, even conceding imprudence arguendo, the outages caused no harm to ratepayers. Mr. Lane Kollen of Kennedy & Associates filed testimony on behalf of the Commission staff, while Gulf States submitted the testimony of several employees, each in his area of expertise and knowledge of particular events. As an initial matter, we must address the proper standard of imprudence to be applied to a utility's actions. Gulf States proposed, through the testimony of Mr. Bruce M. Louiselle, a two-tiered standard for evaluating the prudence of River Bend's operation. The first tier would measure whether the utility's performance is above or below average, as determined by acceptable industry standards. If a utility's performance is above average, the second tier would require a showing that an event caused by clearly imprudent action, not simply inadvertence or human error, caused an increase in fuel costs before an imprudence disallowance would be proper. If a utility's conduct were below average, a disallowance would be proper only if it were shown that the utility did not act reasonably in the circumstances. Another Gulf States witness, Mr. Donald Derbonne, who at the time of the River Bend outages was the Assistant Plant Manager for Maintenance, proposed an imprudence standard which would require some conscious knowledge that you're doing something wrong. Gulf States' proposed imprudence standard does not comport with this Court's decision in Gulf States Utilities Co. v. Louisiana Public Service Commission, 578 So.2d 71 (La. 1991) [hereinafter Gulf States I], where we explained the prudent investment standard as follows: That standard `essentially applies an analog of the common law negligence standard for determining whether to exclude value from rate base.' That is, the utility must demonstrate that it `went through a reasonable decision making process to arrive at a course of action and, given the facts as they were or should have been known at the time, responded in a reasonable manner.' 578 So.2d at 84-85 [citations omitted]. In that opinion, we made no mention of differing performance standards based on an initial determination of whether the utility's performance is above or below average according to industry standards, nor did we intend that a standard other than reasonableness under the circumstances be applied to the actions of a utility in deciding whether a disallowance should be assessed. Further, it would be nonsensical to require some conscious knowledge of wrongdoing for a finding of imprudence in light of the purpose of imprudence disallowances, which is to act as a substitute for market competition, as outlined in footnote 9 supra. Just as conscious knowledge of its wrongdoing is not always what causes a customer in a competitive market to take his business away from an imprudent, and therefore inefficient, company, and give it to an efficiently operating company, neither should conscious knowledge of wrongdoing be a determining factor in deciding whether an imprudence disallowance should be assessed against a utility. Because ratepayers have only one power supplier, they are dependent on that supplier's management to make reasonable attempts to minimize costs through prudent decisionmaking. Therefore, the proper standard for determining whether a utility was imprudent is whether objectively that utility acted reasonably under the circumstances, because only the utility, and not the ratepayer, is in a position to minimize imprudence and maximize efficiency. A finding of unreasonableness, and therefore imprudence, by the Commission, will be upheld unless it is based on an error of law or is one which the Commission could not have found reasonably from the evidence. CTS Enterprises, 540 So.2d 275. In this case, the Commission found that Gulf States' imprudence caused four different delays, of varying lengths, in two planned refueling outages. Like other nuclear power plants, River Bend must schedule outages to replace spent fuel. During refueling outages, the utility conducts maintenance, inspections and testing that cannot safely be performed while the nuclear reactor is in operation. Since it is planned and scheduled in advance, a refueling outage is considered a planned outage. In contrast, a forced outage occurs when the unit shuts down automatically or manually in response to unplanned problems such as system failures, equipment failures, or an incident such as a fire or explosion. When River Bend suffers an outage, either forced or planned, Gulf States' customers must be supplied with electricity from other sources, either from less efficient facilities on the system (to be described infra ) or with power purchased from other utilities. In Order No. U-20647 at 39-40, the Commission outlined the specifics of a nuclear plant planned outage: In planning a refueling outage, the River Bend outage managers establish a critical path schedule. The various departments identify the tasks that must be performed during the outage. Since all tasks cannot be performed at the same time, and some tasks must be completed before others can be started, the outage management group must align the tasks in the sequence that will result in the completion of all of the tasks in the shortest time. The critical path then is the schedule of specific tasks that determines the potential duration of the outage. While other work items may be performed in parallel with the critical path items, the critical path items are those that must be completed before the next sequence or phase of necessary projects can be started. As a result, if an item on the critical path takes longer to complete than planned, there may be an extension of the outage. If completion of a non-critical path item is delayed, it can become the critical path by delaying activities on the critical path. The critical paths of River Bend's Refueling Outage Two (RFO-2) and Refueling Outage Three (RFO-3) were delayed on four separate occasions at issue herein. The Commission determined that those delays were the result of imprudence on the part of Gulf States, and thus disallowed $1.85 million in purchased power costs incurred during those delays. The Commission found Gulf States imprudent in causing: (1) eleven days of critical-path delay resulting from the negligent repair of a diesel generator during RFO-2; (2) sixteen days of critical-path delay due to the explosion of its B Preferred Transformer during RFO-2; (3) sixty-four total hours of outage from the installation of improper O-rings in its Electro-Hydraulic Control system during RFO-2; and (4) two days of delay related to a fire in a diesel generator during RFO-3. [11] After reviewing the record, we determine that the Commission's imprudence disallowances were not arbitrary or capricious, but were rather fully supported by the evidence. The specifics of the four outages, and our reasons for upholding the Commission's disallowances therefrom, are fully set out in an unpublished appendix to this opinion. Having determined that all four of the imprudence disallowances assessed against Gulf States were proper, we now turn to Gulf States' unique position that, even conceding its imprudence arguendo, it should not have to return any amounts to its ratepayers because the ratepayers actually pay less when River Bend does not run. This no harm, no foul argument [12] is premised on the unusual posture of the Louisiana-jurisdictional portion of River Bend, described below. On December 15, 1987, after forty days of hearings before a Hearing Examiner, the Commission issued an order finding that Gulf States' investment in River Bend was imprudent. Based on its consultants' estimates of the cost of the alternatives that had been available to Gulf States, the Commission disallowed, as imprudent, $1.4 billion of Gulf States' $3 billion investment and excluded the Louisiana share of that amount, approximately $677 million (approximately $723 million was the Texas share) from the company's Louisiana rate base. That disallowance was affirmed by this Court in Gulf States I. However, the company was not forced to write-off that entire $677 million. Rather, a compromise was struck between the Commission and Gulf States which largely removed the sting of the disallowance. A part of the River Bend plant's capacity equivalent to the portion of Gulf States' imprudent investment (approximately 46.6%) was excluded from the rate base and treated as a deregulated asset. By Order No. U-17282-K, the Commission promulgated this deregulated asset plan, by which the Commission guaranteed that energy produced by the deregulated asset would be purchased by Louisiana ratepayers at the rate of 4.6 cents per kilowatt hour (kWh), while retaining the option to return the deregulated asset to the rate base at its fully depreciated cost at any time. Upon approval by the Commission, Gulf States was thereupon allowed to sell the 46.6% portion of River Bend's capacity off-system, but would have to allocate 50% of the corresponding receipts above 4.6 cents/kWh (should they ever generate such receipts) to the regulated entity to reduce rates through the operation of the fuel clause. Should the Commission disapprove of any given off-system, non-economy sale, it retained the right to have Louisiana retail ratepayers purchase the power and energy, at the rate of 4.6 cents/kWh plus 50% of the increment above 4.6 cents/kWh offered by a third party. [13] Note, however, that Gulf States, despite having the option to sell its deregulated capacity off-system, has never done so. [14] Every kilowatt hour of its deregulated capacity has been sold to the regulated asset at the rate of 4.6 cents/kWh. Gulf States recovers its operating costs for River Bend in two components: (1) the regulated portion recovers its fuel costs through fuel adjustment, and other costs through the base rates; (2) the deregulated portion recovers its costs only through the sale of the electricity it producesGulf States is not allowed to recover any portion of the deregulated asset's costs through base rates. Gulf States concedes that, because it recovers its costs for the deregulated capacity only when the deregulated asset operates, it bears the risk of any imprudence in the operation of the deregulated asset. In other words, because it recovers costs for that 46.6% only when it produces electricity and sells it at 4.6 cents/kWh, it recovers nothing for that 46.6% when the plant does not run, unlike the regulated portion, for which it still recovers fixed costs through base rates even when the plant is out of service. Nevertheless, Gulf States argues that, to determine whether any imprudence disallowance is warranted in this case, the average cost of generating a kilowatt hour of capacity at River Bend should be calculated by combining the 1 cent/kWh cost of the 53.4% of its regulated capacity with the 4.6 cents/kWh cost of the 46.6% deregulated capacity. The midpoint between 1 cent and 4.6 cents is 2.8 cents, but because the 1 cent weighs 6.7% more than the 4.6 cents, the merged fuel clause cost of one kilowatt hour of capacity from River Bend stands at approximately 2.6 cents. At the time of the outages at issue, the average market cost of replacement capacity was 1.8 cents/kWh. The merged fuel clause cost of self-generated capacity to Gulf States ratepayers (2.6 cents/kWh) was therefore higher than the replacement cost capacity at the time of these outages (1.8 cents/kWh). Accordingly, Gulf States argues that its ratepayers were actually better off as the result of the plant's shutdowns, and thus contends that it should not be required to compensate its customers for a harm that they did not sustain. [15] First of all, the RFO-2 outages all occurred in 1989, prior to the adoption of the deregulated asset plan in March of 1990. We agree with the Commission in that applying an offset based on a plan that did not exist at the time to the outagesthose prior to March, 1990would unduly stretch an already dubious concept. The plan's effects on the overall fuel clause recovery by Gulf States will therefore not be considered with regard to the Commission's imprudence disallowances in those three outages. [16] However, unlike the RFO-2 delays, the RFO-3 diesel generator fire occurred in December, 1990, subsequent to the adoption of the deregulated asset plan. The parties' arguments concerning the effect of the deregulated asset plan therefore apply in full force to the calculation of the disallowance for RFO-3. Regarding those effects, the Commission contends that the entire difference between the 1 cent/kWh avoided cost of capacity from River Bend's regulated 53.4%, and the 1.8 cents/kWh market cost of providing capacity for Gulf States' ratepayers, should be disallowed. In other words, for every kilowatt hour of regulated replacement power made necessary by the generator fire, the Commission disallowed .8 cents. The Commission would therefore disallow all regulated purchased power costs, in excess of avoided cost, which resulted from the two days of delay in RFO-3 caused by Gulf States' imprudence. Gulf States' contention that none of the purchased power costs from RFO-3 should be disallowed ignores its previous concession that it is to bear the risk, as to the deregulated 46.6% of its capacity, of any River Bend outage, and mistakes the nature of the exclusionary plan under which 46.6% of the Louisiana-jurisdictional portion of River Bend is unregulated. The essence of the plan is that such 46.6% of the plant's capacity is kept separate and apart from the oversight and regulation of the Commission, but that Gulf States may obtain rate support for its imprudent investment in that 46.6% capacity by selling, to off-system purchasers or to the regulated asset, at a rate of 4.6 cents/kWh, its electricity from the unregulated portion of River Bend. To use Gulf States' merged fuel clause approach would be to allow the company to mask the effects of its imprudence with regard to the regulated portion, leaving the Commission powerless to protect Gulf States' ratepayers from Gulf States' imprudence, and removing Gulf States' sole incentive to act prudently with regard to its regulated operations. See footnote 9 hereinabove. The Commission properly separates the regulated portion of River Bend from the deregulated portion by disallowing the difference between the 1 cent/kWh cost of capacity generated by the regulated portion and the 1.8 cents/kWh market cost of purchased power, pursuant to Mr. Kollen's recommendation that [i]n the case of River Bend and the RFO-3 outage addressed in my direct testimony, the utility's imprudent actions directly increased the fuel costs of the regulated portion of River Bend.... The amounts related to RFO-3 should be allocated between regulated and deregulated. Thus, the Commission correctly recognized that only 53.4% of its capacity is generated at the approximate cost of 1 cent/kWh. The other 46.6% capacity, which has never been sold anywhere but on-system, costs the ratepayers 4.6 cents/kWh. Therefore, as to deregulated 46.6% of the amount of replacement energy required during RFO-3, no disallowance was assessed because Gulf States' Louisiana-jurisdictional ratepayers did, in fact, save moneythey were able to buy capacity off-system for a price much lower than the 4.6 cents/kWh guaranteed to the deregulated portion. Regarding the other 53.4% of the required replacement regulated capacity, however, Gulf States' Louisiana-jurisdictional ratepayers did not save money, but rather paid approximately .8 cents/kWh more than they would have, had the regulated plant been operating. Gulf States should be held responsible for the full extent of its imprudence with regard to the regulated portion of River Bend. To accomplish that end, the Commission adopted Mr. Kollen's recommendation, in which he bifurcated the regulated and deregulated portions, to disallow only $71,000 of the total Louisiana-retail disallowance of $156,000, plus interest, for a total of $79,000. By means of that disallowance, Gulf States was held responsible for its imprudence in the regulated portion, while also suffering the effects of its deregulated imprudence, represented by the loss of sales from the deregulated portion. The disallowance was fully supported in the record, and was therefore not arbitrary, capricious, or abusive of authority.