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Calpine Energy Solutions LLC v. Public Utility Commission of Oregon

Court of Appeals of Oregon

June 19, 2019

PUBLIC UTILITY COMMISSION OF OREGON and PacifCorp, dba Pacifc Power, Respondents, and INDUSTRIAL CUSTOMERS OF NORTHWEST UTILITIES and Citizens Utility Board of Oregon, Intervenors below.

          Argued and Submitted March 6, 2017

          Public Utility Commission of Oregon UE296

          Gregory M. Adams argued the cause for petitioner. Also on the briefs were Peter J. Richardson and Richardson Adams, PLLC.

          Dustin Buehler, Assistant Attorney General, argued the cause for respondent Public Utility Commission of Oregon. Also on the brief were Ellen F. Rosenblum, Attorney General, and Benjamin Gutman, Solicitor General.

          Katherine McDowell argued the cause for respondent PacifCorp. Also on the brief were Matthew McVee and McDowell Rackner Gibson PC.

          Jesse E. Cowell and Davison Van Cleve, PC, fled the brief amicus curiae for The Industrial Customers of Northwest Utilities.

          Carl Fink and Blue Planet Energy Law, LLC, fled the brief amicus curiae for Oregon Business Coalition.

          Before Armstrong, Presiding Judge, and Tookey, Judge, and Shorr, Judge.

         [298 Or.App. 144] Case Summary:

         Plaintiffs appeal from a judgment dismissing their breach of contract action seeking coverage under an insurance policy for damage to plaintiffs' combine. The damage occurred when the combine rolled down a hill at a high rate of speed with its engine off, causing components to fail because they were not being lubricated with oil. State Farm denied the claim, asserting that the loss was subject to the policy's exclusion for "mechanical breakdown." The trial court agreed and granted State Farm's motion for summary judgment. On appeal, plaintiffs contend that the damage did not occur during a mechanical breakdown, as that term is commonly understood by the ordinary purchaser of insurance. Held: The court explained that the term "mechanical breakdown," as used in the policy, would have been understood by plaintiffs to describe a breakdown in the machinery during its regular functioning. That is, a breakdown during its normal operation, and not a breakdown that occurs as a result of other movement. Because the combine was not performing its normal operation at the time the damage occurred, the trial court erred in determining that the "mechanical breakdown" exclusion applied.

         Reversed and remanded.

         [298 Or.App. 145] ARMSTRONG, P.J.

         Petitioner Calpine Energy Solutions LLC is an electricity service supplier that provides direct-access electricity to customers who opt out of purchasing electricity from utilities regulated by the Public Utility Commission of Oregon (PUC), including PacifiCorp dba Pacific Power (PacifiCorp). As part of the regulatory regime under which direct-access customers are allowed to opt out of purchasing electricity from PacifiCorp, direct-access customers are required to pay an "opt-out charge" to PacifiCorp to allow PacifiCorp to prevent the shifting of costs of investments to customers who do not opt out. In this case, petitioner seeks judicial review of PUC Docket UE 296, Order No. 15-394, that approved PacifiCorp's opt-out charge.

         On review, petitioner contends that (1) the PUC's approval of the opt-out charge is based on an implausible construction of the applicable statutes; (2) the PUC's order lacks sufficient findings, and, even if the findings are sufficient, the PUC's order is not supported by substantial evidence or substantial reason; and (3) the PUC improperly concluded that prior PUC orders precluded consideration of petitioner's arguments.[1] As explained below, we conclude that the PUC's ultimate finding in PUC Order 15-394 that PacifiCorp's opt-out charge calculation is reasonable lacks substantial evidence. Accordingly, we reverse and remand.

         We first summarize the regulatory landscape, as applicable to this case, to provide context for the PUC order on review. Under ORS 756.040(1), the PUC is directed to "balance the interests of the utility investor and the consumer in establishing fair and reasonable rates" charged by public utilities.[2] See also ORS 757.210(1)(a) ("The commission [298 Or.App. 146] may not authorize a rate or schedule of rates that is not fair, just and reasonable.").[3] When the PUC sets utility rates, "it is performing a quasi-legislative function." Gearhart v. PUC, 356 Or. 216, 221, 339 P.3d 904 (2014). "[R]atemaking is a unique enterprise that is governed by statute but largely left to the PUC's discretion." Id. In calculating rates, "there is no single correct sum, but rather a range of reasonable rates." Id. at 220. "However, the PUC does not have discretion to misinterpret or misapply the law, and we will not affirm if the formula used by the PUC was based on an erroneous interpretation of the law, or was specifically precluded by some source of law." Utility Reform Project v. PUC, 277 Or.App. 325, 341, 372 P.3d 517 (2016).

         This case specifically concerns the rates the PUC approved as part of PacifiCorp's direct-access program. See generally ORS 757.600 - 757.691 (direct access regulation). Direct access, as defined by statute, "means the ability of a retail electricity consumer to purchase electricity and certain ancillary services, as determined by the commission for an electric company or the governing body of a [298 Or.App. 147] consumer-owned utility, directly from an entity other than the distribution utility." ORS 757.600(6). That means eligible electricity customers served by PacifiCorp can "opt out" of purchasing electricity from PacifiCorp and can, instead, purchase electricity directly from a certified electricity service supplier, using PacifiCorp's distribution system. See ORS 757.601(1) ("All retail electricity consumers of an electric company, other than residential electricity consumers, shall be allowed direct access beginning on March 1, 2002."); ORS 757.632 ("Every electricity service supplier is authorized to use the distribution facilities of an electric company on a nondiscriminatory basis after the retail electricity consumers of the electricity service supplier are afforded direct access pursuant to ORS 757.601.").

         Because direct-access programs allow eligible customers to opt out of purchasing electricity from electric companies such as PacifiCorp, those programs can cause the shifting of costs to pay for investments made by the utility before the customer opted out to those customers that do not opt out. See PGE v. Duncan, Weinberg, Miller & Pembroke, P.C., 162 Or.App. 265, 270, 986 P.2d 35 (1999) (discussing how "stranded costs" or "transition costs" occur when an electric utility transitions from a regulated monopoly to a competitive environment). To avoid that consequence, the legislature authorized the PUC to allow electric companies to include transition adjustments in direct-access program rates. Specifically, ORS 757.607(1) directs that the PUC "shall ensure" that "[t]he provision of direct access to some retail electricity consumers must not cause the unwarranted shifting of costs to other retail electricity consumers of the electric company." That statute further provides that

"direct access, portfolio or rate options and cost-of-service rates may include transition charges or transition credits that reasonably balance the interests of retail electricity consumers and utility investors. The commission may determine that full or partial recovery of the costs of uneconomic utility investments, [4] or full or partial pass-through[298 Or.App. 148] of the benefits of economic utility investments[5] to retail electricity consumers, is in the public interest."

ORS 757.607(2); see also ORS 757.600(31) ("'Transition charge' means a charge or fee that recovers all or a portion of an uneconomic utility investment."); ORS 757.600(32) ("'Transition credit' means a credit that returns to consumers all or a portion of the benefits from an economic utility investment."). The PUC has adopted rules that require transition charges or credits "equal to 100 percent of the net value of the Oregon share of all economic utility investments and all uneconomic utility investments of the electric company as determined pursuant to * * * an ongoing valuation." OAR 860-038-0160(1). An "ongoing valuation" means "the process of determining transition costs or benefits for a generation asset by comparing the value of the asset output at projected market prices for a defined period to an estimate of the revenue requirement of the asset for the same time period." OAR 860-038-0005(41). This proceeding involves the PUC's approval of PacifiCorp's calculation of transition charges using an ongoing valuation, and, more specifically, PacifiCorp's opt-out charge as a component of transition charges for its five-year opt-out program.

         Before we turn to the order on review (PUC Order 15-394), we must first recount what occurred in a prior proceeding (PUC Docket UE 267) and the two orders that [298 Or.App. 149] resulted from that proceeding (PUC Order 15-060 and PUC Order 15-195). In 2012, the PUC directed PacifiCorp to "file a tariff for a 'five-year opt-out program that allows a qualified customer to go to direct access and pay fixed transition charges for the next five years, and then to be no longer subject to transition adjustments-for so long as that customer remains a direct access customer (on the [PacifiCorp] system).'" In re PacifiCorp Transition Adjustment, Five-year Cost of Service Opt-Out, PUC Docket No UE 267, Order No 15-060, 1 (Feb 24, 2015) (PUC Order 15-060).[6]

         In 2013, PacifiCorp filed its tariff, Schedule 296, with the PUC for its five-year opt-out program, which initiated PUC Docket UE 267 (UE 267). Petitioner intervened in that proceeding. After a hearing, the PUC staff and several intervenors, including petitioner, entered into a stipulation that resolved all the issues in UE 267. PacifiCorp did not agree to the stipulation and, instead, filed a modified version of Schedule 296. PUC Order 15-060 at 2.

         As relevant to this proceeding, the stipulation and PacifiCorp's modification addressed the opt-out charge for direct-access customers in the five-year opt-out program as a component of the rate for the program. PacifiCorp and the stipulating parties agreed that, "during the five-year transition period, a direct access customer should be subject to delivery charges, generation fixed costs (calculated pursuant to Schedule 200[7]), and a transition adjustment." Id. at 4. The parties also agreed that, after the five-year period, a direct-access customer would pay PacifiCorp only for delivery service. However, the stipulating parties argued that PacifiCorp should not be allowed to charge those direct-access customers the additional opt-out charge. Id. at 4-5.

         As proposed, PacifiCorp's opt-out charge was "intended to represent the fixed generation costs incurred by the company to serve all customers offset by the value [298 Or.App. 150] of freed-up power made available by the departing customers for years six through 20 after a customer's departure" to direct access. Id. at 4. In response to the stipulation, PacifiCorp modified its proposal for the opt-out charge to cover only years six through 10. Essentially, as provided through illustrative calculations by PacifiCorp, [8] the opt-out charge is calculated by PacifiCorp by taking the Schedule 200 fixed generation costs at the time of the customer's departure to direct-access electricity and increasing those costs at the rate of inflation to project the costs for years six through 10. Those costs are then reduced to a "net present value" that also takes into consideration an offset for the "value of freed-up power" from the customer's departure to determine the opt-out charge, which is then divided equally over the five-year opt-out period. PacifiCorp contended that the opt-out charge was "necessary to minimize cost shifting to nonparticipating customers" because, without the charge, "PacifiCorp estimates that, between years six and ten, the transition costs associated with 175 MW of departing direct access load approximate $58.9 million on a nominal basis, or $35.4 million on a net present value basis." Id. at 4-5.

         The stipulating parties, including petitioner, argued that PacifiCorp should not be permitted to seek transition costs through the opt-out charge for years six through 10 from departing customers because PacifiCorp's evidence to support its calculation of stranded costs was inadequate as based on illustrative examples and not real data; PacifiCorp could adjust its system to match load loss within five years; the charge permits PacifiCorp to avoid its duty to mitigate transition costs; and "imposing ten years of alleged costs in a five-year period of recovery would present a negative value proposition for participants and ensure that the program would be doomed to fail." Id. at 5-6.

         The PUC allowed PacifiCorp's modified opt-out charge in Schedule 296. The PUC reasoned, as follows:

"We conclude that the consumer opt-out charge is necessary pursuant to implementation of the state's direct access laws by our rules. The inclusion of an opt-out charge [298 Or.App. 151] is consistent with our request that PacifiCorp design a five-year opt-out program that would protect other customers from cost-shifting. We also find that, even with the opt-out charge, PacifiCorp will have an incentive to minimize transition costs, having reduced the period for recovery from 20 to 10 years.
"The Stipulating Parties failed to rebut PacifiCorp's evidence of transition costs, up to approximately $60 million, in years six to ten of the program, and rely too heavily on mere assertions about how transition costs beyond year five can be reduced or erased. Moreover, we reject the Stipulating Parties' arguments that PacifiCorp's system load growth will completely mitigate any transition costs. As PacifiCorp notes, GRID[9] considers forecasted system load growth in calculating both the transition adjustments and the consumer opt-out charge."

Id. at 6-7. After resolving other issues that are not relevant to this case, the PUC ordered PacifiCorp to file a revised tariff consistent with the order. Id. at 13.

         Several parties, including petitioner, sought clarification or, alternatively, reconsideration of PUC Order 15-060. In re PacifiCorp Transition Adjustment, Five-year Cost of Service Opt-Out, PUC Docket No UE 267, Order No 15-195, 1 (June 16, 2015) (PUC Order 15-195). Those parties sought clarification of the opt-out charge, arguing that PacifiCorp's calculation of that charge is unclear "because PacifiCorp presented it in exhibits that were illustrative in nature," and, thus, requested "that [the PUC] clarify that approval of the consumer opt-out charge is without prejudice to further the development of the underlying rate calculation." Id. at 2. In the alternative, the parties sought reconsideration "on two issues integral to calculation of the consumer opt-out charge: 1) the treatment of load growth; and 2) the treatment of depreciation in the assumptions underlying the consumer opt-out charge." Id.

         The PUC declined to clarify its order and considered the purpose of the docket to be complete because [298 Or.App. 152] PacifiCorp had filed a revised Schedule 296 for its five-year opt-out program as ordered, ...

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