Court Opinion

ID: 6374431
Source: CourtListenerOpinion
Date Created: 2022-06-24 23:52:12.964057+00
Date Added: 2024-06-11T15:50:07.165715
License: Public Domain

Judge PELLEGRINI,
dissenting.
I respectfully dissent. The PUC should have taken into consideration, before granting Mon Valley’s request to modify its negotiated power purchase agreement to extend milestone dates, the PURPA mandate that negotiated purchase agreements by an electric utility from a qualifying co-generator facility be just and reasonable to the ratepayers and in the public interest.
In 1978, Congress enacted the Public Utility Regulatory Policies Act of 1978 (PURPA), 16 U.S.C. § 796, which requires, inter alia, electric utilities to purchase power from certain types of independently owned electric generating facilities (QFs)1 in order to encourage alternative energy sources. Pursuant to the federal policy of encouraging privately negotiated PURPA agreements, on October 17, 1987, West Penn Power Company (West Penn) and Mon Valley Energy Corporation (Mon Valley) entered into an Electric Energy Purchase Agreement (Purchase Agreement) to take for 35 years up to 80 megawatts of power from an electric-generating facility fueled by coal to be built by Mon Valley. West Penn entered the Purchase Agreement because it projected that it would need the base-load capacity to be supplied by Mon Valley by 1995.
While PURPA does not require PUC approval of these type of agreements, the Purchase Agreement, however, specifically provided that West Penn was under no obligation to purchase power until the Pennsylvania Public Utility Commission approved it and entered a final order beyond appeal that:
• the Purchase Agreement was in compliance with law and public policy;
*375• the purchase of power would not result in excess capacity; 2 and
• the amounts paid by West Penn to purchase the power from Mon Valley could be fully passed on to West Penn ratepayers.
By requiring PUC approval of these conditions, West Penn transferred all risk to its ratepayers that if the power received under this “take or pay” Purchase Agreement was not needed, then the burden to pay for the power would shift on its ratepayers, not its shareholders.
On July 18, 1988, without a hearing, the PUC entered a tentative order approving the Purchase Agreement. Because of our decision in Barasch v. Pennsylvania Public Utility Commission, 119 Pa.Commonwealth Ct. 81, 546 A.2d 1296 (1988) (Milesburg I) requiring a due process hearing before the approval of any agreement to purchase power from co-generation facilities, the PUC withdrew its tentative order. After providing the required hearing, the PUC again entered an order approving the Purchase Agreement. Armco Advanced Metals Corporation and Allegheny Ludlum Corporation (Industrials), two large industrials, both appealed the decision to this court.
By an unpublished Memorandum Opinion in Armco Advanced Materials Corporation v. Pennsylvania Public Utility Commission, 135 Pa.Cmwlth. 15, 579 A.2d 1337 (1990) (Shannopin I), this court modified the PUC approval by providing *376that the calculation of capacity costs reflect factors in existence at the time the Purchase Agreement was executed rather than at the time serious negotiations were conducted between the parties. On the same date that we issued our decision in Shannopin I, we issued our opinion in Armco Advanced Materials Corporation v. Pennsylvania Public Utility Commission, 135 Pa.Commonwealth Ct. 15, 579 A.2d 1337 (1990) (Milesburg II), which dealt with that issue, as well as other issues that are relevant here.
Before we issued our decision in Shannopin I, Mon Valley filed a Petition for Modification of an Electric Purchase Agreement and a Motion to Enjoin West Penn Power from requiring them to make a good faith deposit as required by the Purchase Agreement. At the hearing before the Administrative Law Judge (ALJ) in 1991, West Penn admitted that it made an error in its 1987 projection that it would need the base load power in 1995.3 Instead, it now projected that it would only need low cost combustion turbine peaking units sometime in 1999-2000. Finding that the current need for capacity could not be considered because that issue was determined in Shannopin I, the ALJ refused to allow into evidence that this capacity was not now needed. The ALJ, however, did recommend granting Mon Valley’s request for modifications, as supplemented,' as well as a stay from payment by Mon Valley of good faith money to West Penn. The PUC, by order, adopted the ALJ’s recommendations. West Penn and the Industrials then filed the instant appeal.
In Milesburg I, we decided a hearing was required for PUC approval on purchase power agreements; in Milesburg II, we decided that the PUC had the authority to modify negotiated purchase agreements to compensate for litigation delay; and here, we are called upon to decide what limits are placed on the PUC in granting modifications and what factors it has to *377take into consideration when exercising that authority to modify.
I do not disagree that the PUC can extend milestone dates set forth in a purchase agreement if necessitated by litigation delay to foreclose the purchase agreement to prevent it from lapsing under its own terms. However, I believe that the PUC, when asked to modify an agreement, must also consider if such extensions are in the best interest of ratepayers and the public. PURPA requires that purchase power agreements “be just and reasonable to the electric consumers of the electric utility and in the public interest.” 16 U.S.C. § 824a-3(b)(1) and 18 C.F.R. § 292.304(a). Unlike what the PUC appears to believe, it does not mandate that QFs be built at all costs.4
West Penn attempted to show before the PUC5 that modifying the Purchase Agreement was not in the ratepayers’ best interest because the 1987 projection that it would need additional base rate power in 1995 that Mon Valley would supply has proven to be erroneous. Because its forecast was erroneous, the avoided costs,6 upon which the amount West Penn would pay Mon Valley was calculated, was also incorrect. If *378required to pay that rate for that power, $500,000,000 more in rates would have to be charged to its ratepayers to cover the cost of this unneeded capacity.
The PUC and the majority find that the original purchase agreement forms the basis of the continued obligation on the part of the utility to acquire energy from the QF, even though at the same time allowing alterations for the benefit of the QF to mitigate the effects of litigation delay.7 This position does not recognize that there is a third party to these agreements, whose interest under PURPA, must also be protected — the ratepayers. Because the Purchase Agreement is “take or pay”, West Penn ratepayers, not West Penn, will be forced to pay an additional $500,000,000 in rates for unneeded power.
We have previously held that by bringing the Purchase Agreement before the PUC for modification, the Purchase Agreement became subject to scrutiny to determine if the purposes of PURPA are being fulfilled. In Milesburg II, addressing the extent of power that the PUC has to rescue a QF from a bad bargain, and the risk that a utility takes by making a purchase agreement subject to PUC approval to insure that all costs are passed to ratepayers, we stated:
The question underlying most of the Phase Two issues is the degree to which a QF has the power to bargain away the rights and advantages conferred on it by PURPA, or, conversely, the extent of the power of the PUC to rescue a QF from a bad bargain. Where a utility privately negoti*379ates and executes a contract with a QF, the parties may agree to virtually anything, and the terms of their agreement are legal and enforceable. However, when the utility chooses not to accept the risk that rates it has negotiated will be proper and recoverable, but conditions its obligations on pre-approval by the PUC, then the utility subjects the entire agreement to the scrutiny of the PUC and incurs the risk that the PUC may modify other provisions of the contract if its concludes that they are not in accordance -with PURPA and the FERC regulations.
This concept, that by the parties making the Purchase Agreement subject to PUC approval, the utility incurs a risk that the PUC may rescue the QF from its bad bargain, is equally applicable to recusing the ratepayers from a purchase agreement that is no longer “just and reasonable” or in the public interest. When the QF requests the PUC to grant modifications to the negotiated Purchase Agreement, it also should similarly incur the risk that the PUC will modify the contract if it finds that the utility made a bad bargain with the QF in calculating the amount of avoided costs and the Purchase Agreement is no longer fair and reasonable to ratepayers as mandated by PURPA. If the PUC can modify a contract to protect a QF from the bad bargain it negotiated for itself, then the PUC can modify a bad bargain for ratepayers, one in which they had no part in negotiating and which they are innocent victims.
I would remand to the PUC to receive evidence as to whether this project will result in excess capacity and if rates negotiated should be modified so that they will be fair and reasonable to the ratepayers.
SMITH and FRIEDMAN, JJ., join in this dissent.

. A "qualifying co-generation facility” (QF) is an electric power producer that meets minimum operating and efficiency standards, as well as certain ownership criteria. 18 C.F.R. §§ 292.203(b), 292.205, 292.206.

. Where the PUC determines that a utility is producing excess capacity, it may exclude the value of the property producing the excess from the rate base and disallow the utility’s return on that property. Section 1310(d) of the Public Utility Code, 66 Pa.C.S. § 1310(d), states that:
Whenever the commission, ... shall be of the opinion that any rates of such public utility are producing a return in excess of a fair return upon the fair value of the property of such public utility, used and useful in its service, the commission may, by order, prescribe for a trial period of at least six months, ... temporary rates ...
“Used and useful in its service” is interpreted by the PUC to mean whether a property’s total capacity is commensurate with the requirements for peak demand, plus a reasonable reserve margin relative to the system and obligation. Pennsylvania Power and Light Company v. Pennsylvania Public Utility Commission, 101 Pa.Commonwealth Ct. 370, 516 A.2d 426 (1986).

. A utility’s load is the sum of all customer demands at a given time. “Base load” is the amount of demand that is needed to be met at all times. "Peak load” is the highest point of demand over a period of time, e.g., annual or daily peak load. "Capacity” is the amount of power the utility has available to meet all its needs. See: Pennsylvania Public Utility Commission Rate Case Handbook, pp. 12-14.

. I recognize that the purpose of PURPA was to remove barriers erected by utilities to the entry of QFs in the market place. However, Congress did not intend the ratepayers to subsidize their construction or operation. The Conference Committee stated:
The conference recognizes that cogenerators and small power producers are different from electric utilities, not being guaranteed a rate of return on their activity generally or on their activities vis-a-vis the sale of power to the utility and whose risk in proceeding forward in the cogeneration or small power production enterprise is not guaranteed to be recoverable.
The provisions of this section are not intended to require the ratepayers of- a utility to subsidize cogenerators or small power producers.
H.R.Conf.Rep. No. 95-1750 p. 97-98 (1978); reprinted in 1978 U.S.C.C.A.N. 7659, 7831-7832.

. The ALJ struck written testimony of two West Penn witnesses covering West Penn's future capacity needs and avoided costs.

. "Avoided costs” means the incremental cost to an electric utility of electric energy or capacity or both, which, but for the purchase from the qualifying facility, such utility would generate itself or purchase from another source. 18 C.F.R. § 292.101(b)(6)(4-l-86).

. The majority discounts West Penn’s contention that the power is unneeded and excess, finding that "[tjhis argument appears to be disingenuous based on West Penn’s conduct and contract it entered into with Mon Valley for Shannopin's capacity when it first sought approval [1987] of the original [purchase agreement].” By saying that West Penn is disingenuous for claiming that the base load to be supplied by Mon Valley is not needed, it makes, in effect, a finding without having the benefit of evidence West Penn was precluded from offering to show that this power was not needed, that it is needed. Moreover, rather than lacking in candor, by this statement, West Penn is properly informing the PUC that the passage of time has shown that its projection of expected base capacity demand was erroneous. The majority’s statement is like telling a weather reporter that he or she is disingenuous for telling you it’s sunny outside when he or she forecast rain yesterday.