Court Opinion

ID: 9770216
Source: CourtListenerOpinion
Date Created: 2023-08-29 15:54:37.583602+00
Date Added: 2024-06-11T07:31:15.825349
License: Public Domain

GONZALEZ, Justice,
concurring and dissenting.
I concur with the court that PUC’s allocation of the fixed asset payments is not supported by the record. However, I disagree with the court’s conclusion that PUC’s interpretation of its own rule was erroneous or arbitrary. In my opinion, PUC correctly interpreted its own Rule 23.-66 to hold that GSU cannot recover from its ratepayers an amount exceeding its “avoided costs.” 1 For this reason, I dissent from part II of the court’s opinion.
FEDERAL LAW — THE AVOIDED COST RULE
In 1978, the United States Congress enacted the Public Utility Regulatory Policies Act of 1978 (PURPA). PURPA established the utility’s incremental cost of alternative electric energy as the ceiling on payments to cogenerators. The term incremental cost is defined in the Act as the cost of the energy which, but for the purchase from the cogenerator, such utility would generate or purchase from another source. 16 U.S.C. § 824a-3(d) (1988). Incremental cost is referred to as “avoided cost” in the Texas Public Utility Regulatory Act (PURA). Tex.Rev.Civ.Stat.Ann. art. 1446c (Vernon Supp.1991). With respect to rates for purchases of electricity from qualifying facilities (QFs), Congress provided that the rate
(1) shall be just and reasonable to the electric consumers of the electric utility and in the public interest, and
(2) shall not discriminate against qualifying cogenerators or qualifying small power producers.
*213No such rule prescribed under subsection (a) of this section shall provide for a rate which exceeds the incremental cost to the electric utility of alternative electric energy-
16 U.S.C. § 824a-3(b) (1988). In enacting PURPA, Congress was mindful to maintain the balance between encouraging cogeneration and not shifting the burden of cost to the ratepayer. The congressional intent for the incremental cost limitation “was to ensure that PURPA did not become a utility-funded welfare program for QFs, since such ‘funding’ would essentially come from the pockets of electric consumers.” Greensboro Lumber Co. v. Georgia Power Co., 643 F.Supp. 1345, 1369 n. 30 (N.D.Ga.1986), aff'd, 844 F.2d 1538 (11th Cir.1988). The concept of limiting purchased power payments to QFs at or below avoided cost maintains that balance. Pursuant to the authority granted to it by PURPA, the Federal Energy Regulatory Commission (FERC) adopted rules and regulations pertaining to cogeneration and small power production. 18 C.F.R. Part 292 (1990). These regulations require the rates for the purchase of electricity from federal qualifying cogeneration facilities to be based on avoided cost and establish avoided cost as the maximum rate. 18 C.F.R. § 292.304(b)(3) (1990). The United States Supreme Court has found that FERC has the authority to adopt a full avoided cost rule, and to set full avoided cost as the maximum rate. American Paper Inst., Inc. v. American Elec. Power Serv. Corp., 461 U.S. 402, 103 S.Ct. 1921, 76 L.Ed.2d 22 (1983).2 FERC has done so. Thus, federal law sets avoided cost as the maximum rate.3
THE PUBLIC UTILITY REGULATORY ACT
In section 41A of the Public Utility Regulatory Act, the Texas legislature enacted similar provisions controlling transactions between electric utilities and qualifying co-generators. Section 41A states in pertinent part:
(b) If an electric utility and a qualifying facility enter into an agreement providing for the purchase of capacity ... the commission shall determine whether:
(1) the payments provided for in the agreement over the contract term are equal to or less than the utility’s avoided costs as established by the commission and in effect at the time the agreement was signed....
PURA, § 41A(b)(l) (emphasis added). Section 41A of PURA requires an automatic determination that prices paid for power from a qualifying facility that are at or below avoided cost are just and reasonable.4 The PUC’s prohibition on prices in *214excess of avoided cost conforms to the requirement of PURA § 41A which obligates the PUC to approve an agreement between a QF and a utility so long as it determines that payments “are equal to or less than the utility’s avoided cost.”
RULE 23.66(e)(2) — THE AVOIDED COST LIMITATION
Pursuant to its obligation under PURA § 16(g), the PUC enacted rules governing the recovery of fuel costs and agreements between electric utilities and QFs. The PUC limited a utility’s recovery of purchased power payments to a QF to that utility’s “avoided cost.” Tex.Pub.Util. Comm’n, 16 Tex.Admin.Code §§ 23.-23(b)(4)(A), 23.66(e) (West Sept. 1, 1988). In pertinent part, section 23.66(e) states:
(1) Rates for purchases of energy and capacity from any qualifying facility shall be just and reasonable to the consumers of the electric utility and in the public interest, and shall not discriminate against qualifying cogeneration and small power production facilities.
(2) Rates for purchases of energy and capacity from any qualifying facility shall not exceed avoided cost; ....
(3) Rates for purchases satisfy the requirements of paragraph (1) of this subsection if they equal avoided cost.
The PUC interprets this rule to mean that only if a utility’s purchased power payments to the QF equal avoided costs or are lower than the avoided costs may those rates be deemed just and reasonable and in the public interest. Because GSU’s purchased power payments to the QF were not tied to its avoided cost but rather to a contractual rate, the PUC rejected GSU’s request for an automatic pass-through under section 63 of PURA and limited GSU’s recovery for those payments from its Texas ratepayers to its avoided cost.
GSU contends that section 23.66(b)(2)(A) allows it to contractually agree to a rate in excess of its avoided cost. Section 23.-66(b)(2)(A) provides:
Nothing in this subsection:
(A) shall limit the authority of any electric utility or any qualifying facility to agree to a rate for any purchase, or terms or conditions relating to any purchase, which differ from the rate or terms or conditions that would otherwise be required by this subsection.
GSU argues that pursuant to section 23.-66(b)(2)(A), the avoided cost ceiling in Rule 23.66(e) applies only to contracts that are initiated under the mandatory terms of the rule, as opposed to voluntarily negotiated contracts between electric utilities like GSU and QFs. The PUC rejected this argument. I agree with the PUC.
In a seemingly innocuous statement purporting to interpret Rule 23.66(d), the majority states that “Rule 23.66(e)’s avoided-cost rules ... do not apply to voluntary contracts arranged outside the requirements of Rule 23.66(d).” at 207-08. Although Rule 23.66(d) does require utilities to purchase power when a QF makes it available, the language of the rule does not support the majority’s contention that “the avoided-cost limit applies only to compelled purchases.” Id. at 208. The conclusion that the avoided-cost rules do not apply to voluntary contracts is without foundation. PURA simply does not distinguish between voluntary and involuntary agreements. Subsection 23.66(b)(2) in no way provides that rule 23.66 does not apply to a “negotiated” rate. It merely makes clear that the parties can negotiate a rate other than the avoided cost. See, e.g., 16 Tex.Admin.Code § 23.66(d)(l)(F)(iv) (West Sept. 1, 1988) (when purchasing capacity parties can negotiate for price lower than avoided cost). Nothing in rule 23.66 provides that the utility may recover an amount greater than the avoided cost from the ratepayers.
Further, the court’s construction would effectively destroy the avoided cost rule. The court’s interpretation allows the utility and QF freedom to agree on a rate as provided for in section 23.66(b)(2)(A) to trump the rule that rates for purchases shall not exceed avoided costs (Rule 23.-66(e)(2)), yet still requires the agreed rate to “be just and reasonable,” as is required *215in Rule 23.66(e)(1). There is no logical reason to interpret Rule 23.66(2)(a) to trump Rule 23.66(e)(2), yet be subject to the requirement of Rule 23.66(e)(1). Further, the very avoided cost limitation of Section 23.-66(e)(2) which GSU asserts to be inapplicable to “negotiated contracts” contains explanatory language referring to “estimates of avoided costs over the specific term of the contract or other legally enforceable obligation.” Thus, the drafters of section 23.66 envisioned the application of an avoided cost standard to negotiated contracts.
To allow GSU to pass on the costs of production from the venture even if they exceed the avoided cost rule allows utilities to make a complete end run around the rule and in the process completely eviscerate it. In other words, GSU is restricted from raising its rates by the avoided cost rule so it sells its plants to a joint venture in which it maintains an ownership interest. GSU then repurchases the electricity at a higher rate than its avoided cost and, because of the majority’s opinion, is allowed to pass through that extra expense to its Texas ratepayers while creating windfall earnings for GSU’s investors. GSU is having its cake and eating it too. It receives management fees, a percentage of the price that is paid to the venture, and it receives a profit when that very same energy is sold at higher rates as a result of the production costs that are passed through to ratepayers even though those costs are in excess of the avoided cost rule. This is exactly the type of activity that is prohibited by the avoided cost rule.
An agency’s interpretation of its own regulations should be given deference by the courts. See United States v. Larionoff 431 U.S. 864, 872-73, 97 S.Ct. 2150, 2155-56, 53 L.Ed.2d 48 (1977); Calvert v. Kadane, 427 S.W.2d 605, 608 (Tex.1968); Lloyd A. Fry Roofing Co. v. State, 541 S.W.2d 639, 644 (Tex.Civ.App.—Dallas 1976, writ ref’d n.r.e.). In my opinion, the PUC’s interpretation of its rules is not arbitrary, capricious nor plainly erroneous. Accordingly, I would hold that the PUC correctly interpreted Rule 23.66 to limit GSU’s recovery to its avoided costs.

. “Avoided costs” is defined by the substantive rules of the PUC as:
The incremental costs to an electric utility of electric energy or capacity or both, which, but for the purchase from the qualifying facility or qualifying facilities, such utility would generate itself or purchase from another source.
Tex.Pub.Util.Comm’n, 16 Tex.Admin.Code § 23.66(a)(2) (West Sept. 1, 1988) (Arrangements Between Qualifying Facilities and Electric Utilities).

. In referring to contractual agreements, the Court cited 18 C.F.R. § 292.301(b)(1), which is identical to § 23.66(b)(2)(A), for the principle that "a qualifying facility and a utility may negotiate a contract setting a price that is lower than a full-avoided-cost rate.” 461 U.S. at 416, 103 S.Ct. at 1930 (emphasis added). Thus, the full-avoided-cost rule sets the maximum rate that applies in the absence of a FERC waiver. Nowhere in American Paper is there any indication that a utility and a QF may negotiate a rate that is above avoided cost.

. All parties agree that the FERC regulations preempt a contrary interpretation by the PUC. The PUC and the Office of Public Utility Counsel (OPC) contend that the PUC has no authority under federal law to approve a rate in excess of avoided cost. GSU argues that the PUC is misinterpreting the FERC regulation. GSU’s interpretation is contrary to the stated purpose of PURPA. If GSU is given free rein to charge the public for QF purchases in excess of avoided cost, the revenue collected from the utility's customers will exceed the revenues that would have been collected if the utility had procured power from other sources. Such a free rein would permit a utility and willing cogenerator to circumvent the rule’s protection of the general public by simply converting the transaction into contractual form. So long as the utility may freely pass-through excessive QF prices to the general public, there is no inherent motivation for either the utility or the cogenerator to protect ratepayers from rapidly escalating revenue requirements. This result is inconsistent with the congressional intent behind PURPA.

.Section 41A(c) requires the PUC to certify that the agreement meets the avoided cost limitation of subsection (b)(1). Subsection (c) provides that "[i]n setting the electric utility’s rates for a period during which the certification is effective, the regulatory authority shall consider payments made under the agreement to be reasonable and necessary operating expenses of the electric utility.”