Opinion ID: 402460
Heading Depth: 2
Heading Rank: 1

Heading: Full Avoided Cost26

Text: 23 Section 210, Cogeneration and small power production, of PURPA reads in relevant part: 24 (b) RATES FOR PURCHASES BY ELECTRIC UTILITIES 25 The rules prescribed (by FERC) ... shall ensure that, in 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 purpose- 26 (1) shall be just and reasonable to the electric consumers of the electric utility and in the public interest, and 27 (2) shall not discriminate against qualifying cogenerators or qualifying small power producers. 28 No such rule prescribed ... shall provide for a rate which exceeds the incremental cost to the electric utility of alternative electric energy. 27 29 Sections 292.304(b)(2) and (b)(4) of FERC's rules require utilities to purchase electricity from qualifying facilities at a rate that equals each utility's full avoided cost. 28 By requiring the utility to pay the cogenerator exactly what it would have cost the utility to produce the power itself or buy from another source, these rules foreclose the states, unless they apply for and receive a waiver from FERC, from ordering the sharing of any of the benefits of the transaction with the other customers of the utility. 30 The question before us is whether this result is consistent with the statutory mandate that the rates set by the Commission must, in addition to not discriminating against cogenerators, also be just and reasonable to the electric consumers of the electric utility and in the public interest. We hold that FERC has not adequately justified its adoption of the full avoided cost standard. Therefore the FERC rule is vacated and the matter remanded to the Commission. 31 Congress could have required the Commission to set rates at full avoided cost. However, Congress did not do so. Instead it specified the three other criteria-the public interest, and the interests of cogenerators and electric consumers of electric utilit(ies)-which the Commission was to consider in setting rates. It is apparent that the Commission did not do this, or at least if it did its rationale and process of consideration were never made explicit. Instead the Commission came to the simplistic and uniform conclusion that the full avoided cost standard would be just and reasonable in every case and that this was necessary to encourage cogeneration in every case. 32 Congress' Conference Report on the Public Utility Regulatory Policies Act 29 makes clear that section 210(b)'s incremental cost limitation is not to become a substitute for the just and reasonable standard. 33 (T)he utility would not be required to purchase electric energy from a qualifying cogeneration or small power production facility at a rate which exceeds the lower of the rate described above, namely a rate which is just and reasonable to consumers of the utility, in the public interest, and nondiscriminatory, or the incremental cost of alternate electric energy. This limitation on the rates which may be required in purchasing from a cogenerator or small power producer is meant to act as an upper limit on the price at which utilities can be required under this section to purchase electric energy. 30 34 By ordering that the purchase rate be equal to the full avoided cost in every case, FERC has, without convincing explanation, simply adopted as a uniform rule the maximum purchase rate specified in the statute. Congress made a clear distinction between a just and reasonable rate and a rate based on the full avoided cost, though the two may coincide. It has long been held that the essence of the just and reasonable standard is a balancing of the interests of the affected parties. 31 Although FERC was not to subject cogenerators to complex, traditional utility-type regulation, it was compelled to consider the hard questions which the standard necessarily raises. 35 The Commission's brief points out, correctly, that the Conference Report stated that the purchase by the utility of the cogenerator's or small power producer's power should not be burdened by the same examination as are utility rate applications, but rather in a less burdensome manner. 32 This sentence, however, does not stand for the proposition that cogenerator applications are to be given no examination, but-as the sentence itself says-that these examinations are simply to be conducted in a less burdensome manner. However unburdensome this manner might be, it requires at a minimum that the Commission make clear and explain how the rates it sets are consistent with the statutory criteria. In the case at hand this was not done. 36 The Commission gave only three reasons for the adoption of its standard. It stated that any benefits to utility customers would lead to insignificant rate reductions, that a split-the-savings rule would result in precisely the sort of utilities-type regulation which PURPA was designed to avoid, and that allocating all the savings to cogenerators may provide a significant incentive for a higher growth rate of these technologies. 33 We find these reasons inadequate. 37 Since the Commission is required by statute to consider the impact of its rate setting on electric consumers of the electric utility it is especially necessary for FERC to demonstrate the factual basis for its conclusion of insignificant savings for them. The Commission should bear in mind, as Congress surely knew, that inevitably the impact of FERC's rules per consumer will be less than their impact per cogenerator. Moreover, it is possible that if cogeneration becomes substantial, a rate uniformly set at the statutory ceiling may be quite costly to electric consumers. The Commission may be right in its conclusion, but it needs to make its reasoning and findings explicit. 38 Similarly, the Commission's assertion that a split-the-savings rule would require utilities-type regulation in contravention of the purpose of PURPA is inadequate. FERC appropriately rejected a split-the-savings approach, which would involve calculation of cogenerator costs, since such rate setting would indeed veer toward the public utilities-style rate setting that Congress wanted to avoid. But as the Commission recognizes, there are alternatives to the full avoided cost rule besides the split-the-savings approach, and these may require no consideration of the cogenerator's costs. The Commission recognizes, for instance, that it could have permitted state authorities to set purchase rates at some percentage of avoided cost. 34 This approach would not necessarily require any inquiry into the cogenerator's costs, but only into those of the utility. 39 Finally, in rejecting even this percentage alternative to the full avoided cost rule, the Commission asserts that any rate below the statutory maximum it has adopted might be insufficient to induce some potential cogenerators either to begin or to continue to cogenerate. 35 Thus, the Commission holds that the bare, unquantified possibility that a rule permitting rates at less than full cost might be insufficient to encourage the last kilowatt hour of cogeneration justifies shutting the utility's customers out of any share of the benefits. But this seems entirely inconsistent with the clear intent of section 210(b), which seeks to strike a balance among the interests of cogenerators, electric consumers of electric utilit(ies), and the public interest. FERC should allocate the benefits more evenly between the cogenerators and the utilities if the utilities can demonstrate that, under a percentage of avoided cost approach, an allocation less heavily favoring the cogenerators is in the public interest and the interest of the utilities' electric consumers, and will not disproportionately discourage cogeneration. 40 It is clear that FERC has failed to meet its obligation to provide the public with the reasoned consideration, decisionmaking, and opinion which it is required to give. 36 On remand we expect the Commission to take a harder look at, especially, the percentage of avoided cost approach. Such an approach might, for example, entail FERC setting a specific percentage, or FERC might permit state commissions to set rates within a range-e.g., 80-100 percent-authorized by the Commission. 41 We shall now outline some additional concerns raised by the full avoided cost rule, which the Commission should address in its subsequent rulemaking. 42 It is clear that at least the possibility exists that setting the rates which utilities must pay to cogenerators at too high a level may hurt both the electric consumers of the electric utility and the public interest. This may occur, for example, where the utility is subject to higher pollution control standards than are cogenerators, or when it pays taxes at a higher rate than will cogenerators. In such cases the Commission's rule would presumably violate both the public interest and the just and reasonable standards of the Act, unless FERC found that the cogenerator provided sufficiently countervailing external public benefits. While we recognize that such costs may not be easily quantifiable, especially at this initial stage of regulation, the Commission may find it possible to take them into account. 43 Furthermore, if a utility has excess capacity the additional cogeneration encouraged by full avoided cost payments will result in higher rates for all remaining customers of the utility, because that cogeneration will reduce the number of customer-purchased kilowatt-hours over which the utility can spread a share of the fixed costs of that extra capacity. While the regulations will not thereby increase the utility's total cost, they will increase the share of those costs borne by each remaining customer. So long as the regulations largely preclude those remaining customers from receiving any offsetting benefit that would result from purchase rates below full avoided cost, the regulations will make those customers-the beneficiaries of the just and reasonable standard-worse off. 44 Likewise, the full avoided cost rule may disadvantage utility customers in other ways. But for FERC's regulations, the utility may have paid a cogenerator a market purchase rate of something less than the full avoided cost, under a standard industry practice. 37 Since a rate which is below full avoided cost, but still above the cogenerator's cost, could suffice to induce cogeneration, a full avoided cost rule would not be required to meet the statutory directive to encourage cogeneration. Thus, by requiring the payment of full avoided cost to any new cogeneration facility (including those which would have been installed even though purchase rates are less than full avoided cost), the regulations could both fail to induce additional cogeneration and leave the utility and its customers worse off than they might otherwise have been. 45 We do not say, of course, that the Commission must adopt rules which have no adverse impact on electricity consumers. But we do say that the Commission must consider the rules' impact on these consumers and the public interest in striking the proper balance. 46 While Congress chose to regulate the market because utilities in the past acted to prevent the participation of cogenerators in the market, 38 the statute does not preclude all consideration of market forces. Indeed, the command that the interests of consumers and the public be taken into account contemplates consideration of the degree to which market forces may encourage utilities to purchase, and cogenerators to sell, a substantial amount of cogenerated power at a price lower than the statutory limit. 47 Cogenerative facilities are no monopoly. They are variously located, they depend on various types of power generation, they have varying excess of power at different times to sell, and the public utilities to which they sell also have varying demands for additional power. There is nothing very uniform about either the cost or quantity or location or availability of the power generated by any cogenerative source, and the utility to which it sells has many other power sources, including other cogenerators, from which to choose. 48 This is precisely the type of situation which, assuming that utilities are similarly competitively constrained, the market pricing system admirably regulates, without the intervention of any government agency. The cogenerative sources are not monopolies in any way, for they simply compete in selling power to the public utility, much as the coal companies or the petroleum companies sell power to the public utility. Thus, if the market were competitive, regulation would be unnecessary and market forces would adjust between the public utility's demand and the cogenerative sources' supply to yield the price and quantity of cogenerative power sold to the public utility. If the public utility's need in a particular area were less, it would buy less, and possibly a smaller amount of cogenerative power would be encouraged. But by this price mechanism the consumer would benefit by having available additional power at a lower cost than the utility could itself generate that power, and the cogenerative source would benefit by selling power it did not need. It may be possible for the Commission to examine the market forces and set a price, or a price range, for cogenerated power that will allocate to the consumer some of the benefits of a competitive market. 49 It is this sensitive market mechanism which historically and repeatedly the federal regulatory agencies have found so extremely difficult to replicate. Congress clearly wanted to avoid the stultifying effects of complete public utility regulation in the competitive situation here where it was obviously not needed, although a purely market pricing mechanism for cogenerative power might have been thought incompatible with public utility regulation of the principal source. The mandate of the agency is to balance the interests of cogenerators, consumers, and the public interest. This will be a complex matter, but it is the duty of the agency to try, which apparently it has not done so far. If the agency finds it impossible to achieve by regulatory rules an equitable balance of interests, then it should advise Congress of what is needed in the way of statutory change to achieve the congressional objectives of consumer protection and development of additional power sources. 50 The upshot of the above is that where competitive forces exist, the Commission should take them into account in determining the degree and type of regulation necessary. Cogenerators are in the same position as coal or oil producers-if they are offered a sufficient price by the public utilities and are relieved from burdensome utility-type regulation, they will produce the needed power and sell it to the public utilities. One reason that these sources have not done so before is that they feared regulation as public utilities. The law which Congress passed was intended to correct the market distortions caused by government regulations and by the utilities-not to create new ones. 51 The above discussion assumes that the utilities, as well as the cogenerators, are subject to some competitive restraints. If, on the other hand, the utilities are monopsonists with respect to cogenerators, then the Commission may be justified in its present regulation of rates charged by utilities. However, this is precisely the sort of determination which FERC should make explicit and explain, and it has not done so. Moreover, even if the utilities are monopsonists, it does not necessarily follow that the proper rate level is at full avoided cost. Again, the Commission must explain why the level was set here rather than somewhere else. 52 We hold therefore that FERC must justify and explain its decision to prohibit in an across-the-board manner rates below full avoided cost. Since it has failed to do so, its rule is vacated. 53 We recognize that it would probably be an untoward burden and expense to determine permissible rates on a case-by-case, or perhaps even on a cogeneration method-by-cogeneration method basis. Such a requirement would, in fact, be inconsistent with the overarching congressional intent to streamline rather than impede the implementation of cogeneration. Thus our holding should not be read as requiring FERC to establish different standards for a variety of cogeneration cases and methods. A general rule is acceptable, but the Commission must justify and explain it fully, particularly in its balancing of the interests of cogenerators, the public interest, and electric consumers of the electric utilit(ies).