On February 6, 2014, the Commission entered an Order declining to answer the Material Questions raised in Duquesne’s Petition and returned this matter to the Office of Administrative Law Judge. By Interim Order issued February 7, 2014, the ALJ admitted the Settlement into the record and closed the record. On March 22, 2014, the ALJ, via e-mail, informed counsel for the active Parties that he would reconsider an earlier motion from the Company to sever the Rider No. 18 issues due to the complexity of the issues involved, if such motion were filed by March 25, 2014. On March 25, 2014, Duquesne filed a Motion to Sever from this Base Rate Proceeding the Rider No. 18 Portion of the NRG Companies’ Complaint (Motion to Sever). Duquesne requested that the Rider No. 18 portion of the Complaint be resolved in a separate recommended decision from the base rate increase Settlement. On March 26, 2014, the NRG Companies filed an Answer to Duquesne’s Motion opposing the severance of the Rider No. 18 issues. Also, on March 26, 2014, the BFMA filed an Answer to the Motion to Sever. By Interim Order issued on March 27, 2014, the ALJ reopened the record to reconsider the Company’s Motion to Sever and Answers thereto, and granted the Motion to Sever. The record was then re-closed on March 27, 2014. ALJ Johnson’s Recommended Decision was issued on March 28, 2014. In his Recommended Decision, the ALJ found that the Settlement was in the public interest and should be approved. The ALJ further recommended that the Rider No. 18 portion of the NRG Companies’ Complaint be held in abeyance by the Commission for resolution
Finally, in Section 292.101(b)(6) of its regulations, the FERC defined “avoided cost” as follows: § 292.101(b)(6) (6) Avoided costs means 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. 18 C.F.R. § 292.101(b)(6) (emphasis added). In sum, under these regulations, FERC established parameters applicable to rates for QF purchases, including the following: (1) Utilities could not be required to pay more than the avoided cost but could, with the QF, negotiate any price or term; (2) to the extent practical, consideration was to be given to the encouragement of QF production and reduction of fossil fuel use; (3) rates based upon avoided costs estimated to be incurred over the term of a contract or other legally enforceable obligation did not have to match avoided costs as they would be calculated at the time the power was delivered; (4) a standard, i.e. tariffed, rate was required for small QFs and allowed for others; (5) QFs had the option to choose to deliver power as it became available for purchase or under a legally enforceable obligation, and QFs that chose the latter had the further option to calculate avoided costs at the time of delivery or at the time the obligation was incurred; and (6) an acceptable measure of avoided cost is the cost a utility would incur from the purchase of energy or capacity from another source. This Commission implemented the FERC rules by regulations adopted September 17, 1982, effective January 11, 1983. See 52 Pa. Code §§ 57.31-57.39. These
consistent with the Pennsylvania regulatory scheme following the enactment of the Electricity Generation Customer Choice and Competition Act and the Alternative Energy Portfolio Standards Act? Does the energy purchase price contained in Duquesne Light’s Rider No. 18 reflect a just and reasonable price such that it should continue to remain in Duquesne Light’s tariff with the force and effect of law? NRG M.B. at 5-6. NRG suggested “no” as the answer to both questions. As relief, NRG requested that we remove Rider No. 18 from Duquesne’s Tariff or, in the alternative, revise the effective six cent per kWh rate applicable to the two QF contracts at issue to a “price that approximates the average day-ahead locational marginal pricing in the Duquesne Zone.” NRG R.B. at 14. In their briefs, Duquesne and BFMA argued that (1) under PURPA, the Commission lacked jurisdiction to grant the relief requested by NRG by either modifying the wholesale rates set forth in Rider No. 18 or eliminating the Rider in total; (2) the NRG Companies failed to carry their burden of proving that the rate approved in Rider No. 18 was an unjust, unreasonable, or discriminatory long-term avoided cost rate; (3) the NRG Companies lacked standing to bring the Complaint; and 4) the NRG Companies failed to join indispensable parties, namely the two projects with the PURPA PPAs, Beaver Valley and BFMA. Duquesne M.B. at 13, BFMA M.B. at 10-12. D. Commission Jurisdiction 1. Positions of the Parties The NRG Companies contended that Duquesne’s Rider No. 18 is inconsistent with Pennsylvania law and must be removed from the Company’s tariff as per se unjust and unreasonable. NRG pointed out that Rider No. 18 has been in effect
concluded, relying on Freehold, that the NYPSC was preempted from engaging in any act to reform the contract terms. As stated by the Court: [U]nder PURPA and the regulations adopted by the FERC, qualifying facilities like Crossroads are exempt from state utility-type regulation, including regulation of “rates of electric utilities.” We have interpreted these regulations to prevent state regulatory commissions from modifying the terms of a power purchase agreement between a utility and cogeneration facility after it has been approved by the state. In other words, while PURPA allows the appropriate state regulatory agency to approve a power purchasing agreement, once such an agreement is approved, the state agency is not permitted to modify the terms of the agreement. To do so would be to engage in the utility-type regulation from which PURPA exempts QFs. Crossroads, 159 F.3d at 137-38 (citations omitted). Further relying on Freehold, the Court stated “unless the qualifying authority waives its PURPA rights in the agreement, the federal law prevents the state from ‘reconsideration of its prior approval.’” Crossroads, 159 F.3d at 138. Instructive to our resolution in this proceeding is the Court’s description of the NYPSC’s grounds for asserting jurisdiction over the issue. In order to find a path of relief from the contract’s pricing term, the state commission asserted its traditional jurisdiction over its own prior order rather than asserting jurisdiction over the PPA itself. The NYPSC acknowledged Freehold’s “contract non-interference policy,” but carefully circumscribed its resolution of the parties’ dispute by distinguishing its action as an interpretation of its approval of the agreement and not interference with the agreement itself. Crossroads, 159 F.3d at 138-39. As the Court noted, the NYPSC accepted the QF’s Freehold jurisdictional defense and for that reason “went out of its way to hold that it was without jurisdiction to grant [the relief requested] but that it did have jurisdiction to interpret its approval [of the contract terms].” Id. at 140. The NYPSC itself, “because of the limitations it perceived on its own jurisdiction, deliberately excluded from its
deliberation any interpretation of the contract it approved.” Id. at 139. While finding that the parties retained private rights under substantive contract law, the Court held that the NYPSC was not a forum available to review the continued economic viability of the contract under the guise of revisiting the regulatory order that had approved the contract as opposed to the contract itself. Two additional cases, West Penn, decided in 1995 by our Commonwealth Court shortly after Freehold was released, and Grays Ferry Cogeneration Partnership v. PECO Energy Company, 998 F. Supp. 542 (E.D. Pa. 1998) (Grays Ferry), in which the position we took as a party remains insightful today, were not addressed by the ALJ but are also instructive to our disposition. In West Penn, Commonwealth Court described the then-evolving “legal and market landscape behind the dispute” as follows: These concerns [of non-competitive mandatory QF purchased power in a move to competition] are at the core of the disputes concerning PURPA contracts taking place before courts and regulatory bodies throughout this country.... The fear is either QFs will supply energy that the utility no longer needs because customers have walked away with their demand and are purchasing from independent power producers or that the avoided costs paid for QF power is at a cost higher than the cost of power that may become available in the potential competitive marketplace.... However, despite Congressional intent to foster competition and the concerns of utilities and FERC, Congress has yet to amend or repeal PURPA and the requirement that utilities purchase QF power. West Penn, 659 A.2d at 1059 (citations and footnotes omitted). Reciting what it described as the “overused” but “certainly appli[cable] long and torturous history” of the QF disputes at issue, the Court acknowledged that, while not bound by the Third Circuit’s decision in Freehold, it nonetheless concurred in its effect:
Electric Company Requesting Approval of the Termination of the Power Purchase Agreement With Scrubgrass Generating Company, L.P., Docket No. P-2014-2400828 (Order entered February 20, 2014) (Scrubgrass III). As described in that Order: Penelec further states that the changing economics of the Scrubgrass facility, and the wholesale power markets generally, have made it necessary for Penelec and Scrubgrass to terminate the current contractual arrangement under the PPA. According to Penelec, the parties have engaged in extensive, good faith, arm’s-length negotiations regarding the terms under which a termination of the PPA would be mutually beneficial and have executed a Settlement and Termination Agreement (Termination Agreement) dated December 9, 2013. Scrubgrass III, Slip Opinion at 3-4. As Penelec acknowledged, “unlike the benefits that will be derived from this Termination Agreement, alternative remedies for any party under the contractual terms of the PPA may only be realized, if at all, following protracted and potentially costly legal proceedings.” Id. at 5. Further, Scrubgrass “wholly support[ed] Penelec’s Petition as being in the public interest and critical to the viability of the facility.” Id. at 6. In other words, we approved the voluntarily-filed agreement achieved between the parties to incorporate a better result achieved between them under current wholesale market conditions; we neither coerced nor compelled either party to act as a result of those changing wholesale market conditions. Under the long-standing principle enunciated in Freehold, we may neither unilaterally abrogate pricing terms nor impel negotiations for a new PPA price under our state ratemaking authority or because market conditions have changed. The ALJ’s dismissal of Scrubgrass I on the basis of our actions in Scrubgrass II relies on an erroneous interpretation of our actions.
operative term subject to preemption. See Scrubgrass I, 1988 Pa. PUC LEXIS 101 at *1 (petition requesting approval of rate recovery), and at *9 (noting our approval in a prior order of the rates established while pending consideration at a later date of the regulatory out clause in the contract); and West Penn, 659 A.2d at 1066 (acknowledging that PURPA preempts the state from “chang[ing] the rates established for the avoided costs at the time of the agreements”). Under PURPA, we are obliged to approve the power purchase price, not necessarily the entire power purchase agreement. Nothing in federal law or regulations, or state law or regulations, requires approval of the contract. Petition of West Penn Power Company: Re Milesburg Energy, Inc. 1987 Pa. PUC LEXIS 153 at *9 (Milesburg); Petition of Pennsylvania Electric Company Requesting Current Approval of Rate Recovery, Under the Energy Cost Rate, for the Costs Proposed to be Paid Under an Amendment to an Agreement with XIOX Corporation et al., 1989 Pa. PUC LEXIS 69 at *11 (XIOX Corporation) (“As stated in our November 3, 1986 Order, we reviewed and approved only the rate terms set forth in the power purchase agreement between Penelec and XIOX. All other terms were extraneous to our approval[.]”). Therefore, the ALJ’s reliance on that point of distinction to ignore the holding that states lack jurisdiction to revisit a previouslyapproved QF purchase price is unsupported. We clearly approved the price for QF purchases applicable to the Duquesne PPAs when we approved Rider No. 18. The ALJ’s recommendation would have us ignore the fact that we approved the QF purchase price because it is memorialized in a state tariff. However, the rate in Rider No. 18 is incorporated as the operative price of the PPA by general reference to the tariff. NRG Midwest St. 1-S at 7. NRG does not dispute that “parties to a private contract may choose voluntarily to reference a tariff in their agreement[.]” See Brief of the NRG Companies in Opposition of Duquesne Light Company’s Petition for
While the factual nuance here seeks our regulatory reformation of the Duquesne QF contracts not by reformation or reconsideration of the contracts directly but by way of elimination or reformation of the tariff rider that contains the only pricing term applicable to those contracts, we cannot do indirectly what we cannot do directly. But for the memorialization of this pricing term in a state tariff, the issue would be readily framed and resolved as a federal issue under federal law involving a federal contract contesting the long-term price for independently generated hydroelectric power. We cannot assume jurisdiction over a subject matter that PURPA has specifically exempted simply on the basis of the form chosen to memorialize the price. A contract left with either no price term or a substantially revised price term is still an altered contract. As even NRG agreed, removal of the tariff will leave the parties in a legal dispute. NRG M.B. at 15; NRG Midwest St. 1-S (“The Commission should simply remove itself from any contractual dispute between Duquesne Light and NRG Midwest by requiring Duquesne Light to remove Rider No. 18 from its Tariff. Any ensuing legal battles should be of no concern to the Commission.”). We agree with the conclusion of Duquesne’s witness that the NRG Companies’ position that they are not attempting to challenge the PPAs “simply ignores the reality of the relief requested[.]” Duquesne St. 1-RJ at 8. We also agree with the characterization presented by BFMA in its Exceptions: It is of no consequence that the QF price to be changed is in Duquesne's tariff as opposed to a power purchase agreement. The FERC's PURPA regulations make it clear that QF arrangements can lock-in prices for QF sales based on a “legally enforceable obligation” that is not necessarily derived from a contract. Indeed, as noted above, the Commission's 1987 Order “locked in” the $0.06/kWh price in both Rider No. 18 and the PPA. This is clearly the “legally enforceable obligation” envisioned by FERC. The R.D. erroneously posits that the Freehold and Scrubgrass holdings
filing seeking approval of the rate in Rider No. 18 (“The Rider will . . . encourage potential developers of facilities utilizing renewable resources . . . and provide a reasonably priced market for the output of such facilities.”) NRG Midwest Ex. No. 6. Moreover, the calculation of the avoided cost rate was based upon the utility’s estimates at the time they were approved, not as they may have been presented any number of years later. The development of a QF rate for purchase under the “legally enforceable obligations” provisions of Sections 292.304(b)(5) and 292.304(d) allow QFs to choose a purchase price based on the calculation of a levelized, long-term avoided cost rate calculated at the time the obligation is incurred. They do not require that rates equal avoided costs at the time the power is delivered. In approving rates applicable to PPAs, we recognized that at times the applicable purchase price may be above or below then then-current avoided cost rate. We recognized, as did FERC in promulgating its regulations, “in the long run, ‘overestimations’ and ‘underestimations’ of avoided costs will balance out” and nothing in PURPA requires a “minute-by-minute evaluation of costs.” Scrubgrass I, 1988 Pa. PUC LEXIS 101 at *12; Milesburg, 1987 Pa. PUC LEXIS 153 at *2; AES Beaver Valley, Inc. v. West Penn Power Company, 1986 Pa. PUC LEXIS 53 at **6-7. As to the ALJ’s interpretation of Duquesne’s averments regarding its calculations of avoided cost in Duquesne 1987 Order and City of Pittsburgh, it was Duquesne’s then current (e.g. 1986 and 1988) avoided cost rate that exceeded the Rider No. 18 rate. Since we specifically declined to review the rates in 1987, it is not at all clear that they were necessarily the same calculations presented when we approved Rider No. 18 in 1981. Further, the ALJ references our statement in the Duquesne 1987 Order, that a rate contained in a Commission-approved tariff remained just and reasonable until we determined otherwise, as evidence that we “foresaw that as [we] gained experience with
2. ALJ’s Recommendation The ALJ found the Duquesne and BFMA arguments unpersuasive. The ALJ concluded that NRG established that in today’s environment, Rider No. 18’s six cent rate is almost double what is available in the open market, referencing NRG’s evidence of the three cent average PJM DALMP in the Duquesne service area from the year 2009 to the present. R.D. at 36. As addressed above, the ALJ also found that the purchase rate in Rider No. 18 is governed by the “as available” provisions of PURPA since, absent a contract term that is defined by a specified term limit over a calendar period, the ALJ found the contract had no term. Therefore, according to the ALJ, when the QF provides energy as available, “the rates for purchases shall be based upon the purchasing utility’s avoided costs calculated at the time of delivery.” 18 C.F.R. § 292.304(d)(1). As a result, the ALJ concluded that “by necessity the Rider No. 18 purchase rate cannot be a stagnant six cents per kilowatt-hour rate as it has been for over thirty years. The avoided costs purchase rate must be determined at the time of the delivery of the energy.” R.D. at 39. Based upon the above findings, the ALJ concluded that the NRG Companies established their burden of proving that Rider No. 18 is no longer compliant with the Commission’s current regulatory scheme. Further, concluding that “both Duquesne’s and BFMA’s positions rested on legal arguments” that the ALJ found “unavailing,” the ALJ concluded that “Duquesne Light did not present any credible evidence to rebut, in essence, NRG’s prima facie case.” R.D. at 40. As a result, the ALJ found that Rider No. 18 is unjust and unreasonable and not in the public interest. The ALJ recommended that Rider No. 18 be removed from Duquesne’s tariff. In the alternative, the ALJ recommended that Duquesne be permitted to file a revised rider for the Commission’s consideration with due notice to all affected parties. Id.