NRG Energy, Inc. v. Pa. Pub. Util. Comm'n

233 A.3d 936

NRG ENERGY, INC., Petitioner

v.PENNSYLVANIA PUBLIC UTILITY COMMISSION, Respondent

No. 58 C.D. 2019

Commonwealth Court of Pennsylvania.

Argued December 11, 2019

Decided June 2, 2020

Karen O. Moury and James H. Cawley, Harrisburg, for Petitioner.

Kenneth M. Kulak and W. Craig Williams, Philadelphia, for Intervenor PECO Energy Company.

Christy M. Appleby, Harrisburg, for Intervenor Tanya J. McCloskey.

Ria M. Pereira, Harrisburg, for Intervenor Coalition for Affordable Utility Services and Energy Efficiency in Pennsylvania (CAUSE-PA).

Robert F. Young, Deputy Chief Counsel, Harrisburg, for Respondent.

BEFORE: HONORABLE MARY HANNAH LEAVITT, President Judge, HONORABLE RENÉE COHN JUBELIRER, Judge, HONORABLE P. KEVIN BROBSON, Judge, HONORABLE PATRICIA A. McCULLOUGH, Judge, HONORABLE ANNE E. COVEY, Judge, HONORABLE MICHAEL H. WOJCIK, Judge, HONORABLE ELLEN CEISLER, Judge

OPINION BY JUDGE COHN JUBELIRER

NRG Energy, Inc. (NRG) seeks review of the December 20, 2018 Final Opinion and Order (Opinion and Order) issued by the Pennsylvania Public Utility Commission (Commission) in the proceeding on PECO Energy Company's (PECO) proposed Tariff Electric – Pa. P.U.C. No. 6 (Tariff No. 6), in which NRG had intervened. Tariff No. 6 proposed a base rate increase for PECO's electric distribution services. NRG challenged certain cost allocations in Tariff No. 6. PECO, as a default service provider (DSP), is responsible for obtaining sufficient electricity for those of its distribution customers who do not "shop" for an electric generation supplier (EGS) or distribution customers who lose their generation service. NRG owns five affiliate EGS companies that sell electricity to customers in PECO's distribution service area who choose to shop for their electricity. NRG alleged that PECO's Price to Compare (PTC)¹ was too low, did not reflect all of the costs incurred by PECO for providing this service, and made the distribution rates for PECO's residential customers too high, which placed NRG's EGS companies at a competitive disadvantage. NRG proposed a modification that employed an alternative methodology to allocate a percentage of indirect costs between PECO's distribution and default services, effectively treating those services as two separate sections of PECO's operations. The Commission did not agree with NRG's proposed methodology, accepted PECO's allocation of indirect costs, and approved a partial settlement agreement (Settlement) filed under PECO's Tariff No. 6.

On appeal, NRG argues the Commission erred in accepting PECO's cost allocations and rejecting NRG's alternative methodology because the Commission did not apply the proper burdens of proof; the Commission's approval is inconsistent with, among other things, the Electricity Generation Customer Choice and Competition Act² (Competition Act) and prior decisions of this Court and the Commission; and the Commission's determinations are not supported by substantial evidence.

I. Background

NRG contends that PECO's actions and the Commission's Opinion and Order violate the Competition Act, subsequent regulations, and relevant case law, and allow PECO to use funds to subsidize its default service resulting in an artificially low PTC against which the EGSs must compete. To resolve NRG's arguments, a review of the Competition Act, the Commission's efforts to effectuate the Competition Act's requirements, and PECO's history as an electric utility prior to its issuance of Tariff No. 6 is necessary.

A. The Competition Act

Before the passage of the Competition Act in 1996, electric utilities offered a single, regulated price for generation, transmission, and distribution services. Section 2802(13) of the Competition Act, 66 Pa.C.S. § 2802(13). "These ‘bundled’ services were performed by one local utility that held a monopoly over its service area. However, to encourage a competitive wholesale electric market and to provide cost savings to consumers, in December 1996, the Competition Act was enacted to establish competition in the sale of electric power."

ARIPPA v. Pa. Pub. Util. Comm'n , 792 A.2d 636, 642 (Pa. Cmwlth. 2002).

Upon the passage of the Competition Act, bundling was no longer permitted and utility monopolies were broken up. Section 2804(3) of the Competition Act mandated that the Commission "require the unbundling of electric utility services, tariffs and customer bills to separate the charges for generation, transmission and distribution." 66 Pa.C.S. § 2804(3). The generation of electricity ceased to be regulated as a public utility in order to ensure greater competition. 66 Pa.C.S. § 2802(14). Under Section 2806(d) and (e) of the Competition Act, electric distribution companies (EDCs) were required to file a restructuring plan with the Commission that demonstrated the separation and allocation of costs between the distribution, transmission, and generation functions. 66 Pa.C.S. § 2806(d) - (e).

Recognizing that not all customers would shop for electricity, the Competition Act appointed the EDC within each certified service territory to be a DSP. Section 2803 of the Competition Act, 66 Pa.C.S. § 2803. Essentially, DSPs must enter into contracts to purchase electric generation services that they distribute to their distribution customers who either do not directly contract for generation services with an EGS or whose EGS cannot provide generation services. These customers are automatically enrolled in the default service program until they contract with an EGS to generate their electrical service that their EDC will then distribute.

B. The Commission's Regulations and 2007 Policy Statement

To effectuate the Competition Act, the Commission enacted various regulations to address default service, the requirements for the PTC, and the procurement process for default service. According to Section 54.185(a) of the Default Service Regulations (Regulations), a default service program must be filed "no later than 12 months prior to the conclusion of the currently effective default service program." 52 Pa. Code § 54.185(a). In accordance with the Regulations, a DSP must file a program with the Commission regarding how it will meet its default service obligations. The program, which must be approved by the Commission, includes various documentation, such as: (1) a default service procurement plan explaining the DSP's strategy for procuring generation supply; (2) an implementation plan identifying the schedule and details of the proposed competitive procurement of default supply; and, most relevant to this case, (3) a rate design plan to recover all reasonable costs of default service. 52 Pa. Code § 54.185(e). In addition, Section 54.187(e) of the Regulations deals directly with the PTC:

The PTC shall be designed to recover all default service costs, including generation, transmission and other default service cost elements, incurred in serving the average member of a customer class. An EDC's default service costs may not be recovered through the distribution rate. Costs currently recovered through the distribution rate, which are reallocated to the default service rate, may not be recovered through the distribution rate. The distribution rate shall be reduced to reflect costs reallocated to the default service rate.

52 Pa. Code § 54.187(e). The Commission issued a Policy Statement (2007 Policy Statement) that listed six general cost elements that should be included in the PTC:

(a) The PTC should be designed to recover all generation, transmission and other related costs of default service. These cost elements include:

(1) Wholesale energy, capacity, ancillary, applicable [Regional Transmission Organization] or [Independent System Operators] administrative and transmission costs.

(2) Congestion costs will ultimately be recovered from ratepayers. Congestion costs should be reflected in the fixed price bids submitted by wholesale energy suppliers.

(3) Supply management costs, including supply bidding, contracting, hedging, risk management costs, any scheduling and forecasting services provided exclusively for default service by the EDC, and applicable administrative and general expenses related to these activities.

(4) Administrative costs, including billing, collection, education, regulatory, litigation, tariff filings, working capital, information system and associated administrative and general expenses related to default service.

(5) Applicable taxes, excluding Sales Tax.

(6) Costs for alternative energy portfolio standard compliance.

52 Pa. Code § 69.1808(a).

C. The 2013 Retail Market Investigation

In 2013, the Commission again addressed the retail electricity market. The Retail Market Investigation (RMI) "stud[ied] how to best address and resolve issues identified by the Commission as being most relevant to improving the current retail electricity market." Investigation of Pennsylvania's Retail Electricity Market: End State of Default Service , Docket No. I-2011-2237952 (Order entered February 15, 2013) (RMI End State Order), at 3. The RMI End State Order acknowledged comments the Commission received related to the further unbundling between the PTC and distribution rates, stating: "the Commission agree[d] with this concept and has strived to address these issues as they have arisen in distribution rate cases." Id. at 21. However, the Commission chose not to promulgate additional regulations to require further unbundling. Id .

D. PECO's History as a Utility and Provider of Default Service

In 1997, in compliance with the Competition Act, PECO submitted its required restructuring plan to the Commission. Application of PECO Energy Company for Approval of its Restructuring Plan Under Section 2806 of the Public Utility Code , Docket No. R-00973953 (Order entered December 23, 1997) ( Restructuring Order ).³ The Commission determined that PECO's proposal did not meet the requirements of the Competition Act. Id . at 53. Relevant here, the Commission concluded that "PECO ha[d] misallocated costs among...