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decided: August 22, 1988.


Appeals from the Order of the Pennsylvania Public Utility Commission, in the case of Petition of West Penn Power Company -- Re: Milesburg Energy, Inc., Docket No. P-870216, dated September 17, 1987.


Pamela B. Sarvey, Assistant Consumer Advocate, with her, Irwin A. Popowsky, Assistant Consumer Advocate, and David M. Barasch, Consumer Advocate, for petitioner, David M. Barasch, Consumer Advocate.

Michael L. Kurtz, with him, F. Bruce Abel and David F. Boehm, Steer, Strauss, White & Tobias, for petitioners, Armco, Inc. and Allegheny Ludlum Corporation.

Michael D. McDowell, with him, Deborah M. DePaul, Thomas K. Henderson, John L. Munsch and Robert T. Vogler, for petitioner, West Penn Power Company.

Billie E. Ramsey, Assistant Counsel, with her, Bohdan R. Pankiw, Deputy Chief Counsel, and Daniel P. Delaney, Chief Counsel, for respondent, Pennsylvania Public Utility Commission.

Stephen C. Braverman, with him, John M. Elliott, Charles W. Bowser, Christopher J. Churchill and James P. Cousounis, Baskin, Flaherty, Elliott & Mannino, P.C., for intervenor, Milesburg Energy, Inc.

Henry R. MacNicholas, with him, Richard S. Kahlbaugh, McNees, Wallace & Nurick, for amicus curiae, West Penn Power Industrial.

President Judge Crumlish, Jr., and Judges Craig, Doyle, Barry, Palladino, McGinley and Smith. Opinion by Judge Craig.

Author: Craig

[ 119 Pa. Commw. Page 84]

These consolidated cases are appeals by industrial ratepayers and the Office of Consumer Advocate (OCA) from an order of the Pennsylvania Public Utility Commission (PUC or commission) that (1) approved the terms of a proposed contract for the purchase of electric power by West Penn Power Company (West Penn) from Milesburg Energy, Inc. (MEI) as being in the public interest, (2) authorized West Penn to recover payments made to MEI under the contract from its ratepayers through the mechanism of the Energy Cost Rate (ECR), and (3) declared in effect that the generating capacity West Penn would acquire under the contract should not be considered by the commission in excess capacity determinations regarding West Penn during the term of the contract. West Penn itself appeals the PUC's refusal to publish the order in the Pennsylvania Bulletin.

West Penn's proposed purchase of power from MEI is covered by the federal Public Utility Regulatory Policies Act of 1978 (PURPA).*fn1 The issues raised are (1) whether the procedure by which the PUC considered West Penn's petition for approval of a contract covered by PURPA respected due process rights, and (2) whether the commission's decisions (a) to disregard the generating capacity acquired by this purchase when resolving West Penn excess capacity issues in the future, and (b)

[ 119 Pa. Commw. Page 85]

    to approve West Penn's payment of levelized capacity charges under the contract, violated the prohibition in the Public Utility Code against rate recovery of costs for capacity that is excess.

I. Background

A. Section 210 of the Public Utility Regulatory Policies Act of 1978

Congress enacted the Public Utility Regulatory Policies Act of 1978 as part of a package of five pieces of legislation, known collectively as the National Energy Act, designed to combat the nationwide energy crisis resulting from the quadrupling of oil prices in the early 1970's and the severe shortage of natural gas in 1977. Section 210 of PURPA, 16 U.S.C. § 824a-3, is designed to lessen the dependence of electric utilities on foreign oil and on natural gas by encouraging the development of alternative power sources in the form of cogeneration and small power production facilities.

Section 201 of PURPA, 16 U.S.C. § 796(17)-(22), defines "cogeneration facility" as one that produces both electric energy and steam or some other form of useful energy, such as heat. 16 U.S.C. § 796(18)(A). The same section defines "small power production facility" as one that has a production capacity of no more than 80 megawatts and uses as a primary energy source biomass, waste, geothermal resources or renewable resources such as wind, water or solar energy to produce electric power. 16 U.S.C. § 796(17)(A).

Before PURPA, entities contemplating cogeneration or small power production faced three principal deterrents: (1) traditional electric utilities, customarily regarded and regulated by the states as natural monopolies in terms of both generation and distribution of electric

[ 119 Pa. Commw. Page 86]

    power,*fn2 either could refuse to buy power from these nontraditional facilities, or they could offer unfairly low rates for such purchases; (2) traditional utilities could refuse to sell essential backup power to alternative producers of electricity, or they could charge discriminatorily high rates for such sales; and (3) the alternative producers could become subject to state and federal regulation as public utilities, giving rise to significant financial and administrative burdens that could readily offset expected savings. Section 210 of PURPA addresses each of these problems.

Section 210(a) directs the Federal Energy Regulatory Commission (FERC) to promulgate rules to encourage the development of the alternative sources of power, including rules requiring utilities to offer to buy electricity from, and to sell electricity to, qualifying cogeneration and small power production facilities (QFs). Section 210(b) directs FERC to set rates for utility purchases of power from QFs that are (1) just and reasonable to the electric consumers of the utility and in the public interest, (2) not discriminatory against QFs, and (3) not to exceed the incremental cost to the utility of alternative electric energy. Rates for utility sales to QFs are to be just and reasonable and in the public interest and not discriminatory against QFs under section 210(c). Section 210(e) directs FERC to adopt rules exempting certain QFs from most state and federal public utility regulation.

Congress chose state regulatory authorities, with their expertise and unique knowledge of local conditions, to be the primary enforcers of PURPA. Section

[ 119 Pa. Commw. Page 87210]

(f) requires each state regulatory authority and non-regulated utility to implement FERC's rules. At the same time, section 210 and FERC's regulations give wide latitude to the state agencies in many areas in order to permit flexibility in accommodating local circumstances and to encourage experimentation in the development of this new national program.

In Federal Energy Regulatory Commission v. Mississippi, 456 U.S. 742 (1982), the United States Supreme Court upheld section 210 as a valid exercise of Congress' power under the Commerce Clause to act in what the court previously had determined to be a fully pre-emptible field. The Court concluded that the grant of power to FERC to exempt QFs from state laws and regulations was nothing more than a form of traditional pre-emption. Further, because FERC permitted the states to implement PURPA by designating their regulatory agencies for the adjudication of disputes arising under the statute -- the very type of activity customarily engaged in by these authorities -- the majority held that the statute did not intrude upon state sovereignty in violation of the Tenth Amendment.

In two major rulemakings, FERC adopted regulations implementing PURPA,*fn3 codified at 18 C.F.R. §§ 292.101-292.602. The regulation adopted by FERC relating to purchases of power by utilities from QFs requires a rate of payment to the QFs equal to the utility's full "avoided cost" (FAC). 18 C.F.R. § 292.304(b)(2). "Avoided costs" are defined in § 292.101(b)(6) as "the incremental costs to the electric utility of electric energy or capacity*fn4 or both which, but for the purchase from

[ 119 Pa. Commw. Page 88]

    the qualifying facility or qualifying facilities, such utility would generate itself or purchase from another source."*fn5 (Emphasis supplied; footnote added.)

FERC considered and expressly rejected proposals that the rates it prescribed pursuant to section 210 should result in some savings to utility customers. Rather, FERC preferred to allocate the full savings typically realized by the cogeneration and small power production processes to the alternative producers themselves, noting that this allocation would provide the maximum encouragement of development of these resources, and that "ratepayers and the nation as a whole will benefit from the decreased reliance on scarce fossil fuels, such as oil and gas, and the more efficient use of energy." 45 Fed. Reg. 12222.

In American Paper Institute, Inc. v. American Electric Power Service Corporation, 461 U.S. 402 (1983), the Supreme Court upheld FERC's exercise of its authority under section 210(b) of PURPA to require a rate for utility purchases from QFs equal to the full avoided cost, that is, FERC's decision that FAC is just and reasonable to electric consumers and in the public interest. The Court determined that Congress did not intend

[ 119 Pa. Commw. Page 89]

    that the phrase "just and reasonable" in section 210(b), relating to rates for purchases by electric utilities from QFs, be given its traditional ratemaking meaning, although Congress did intend that the same phrase be interpreted according to its traditional meaning in section 210(c), relating to sales by utilities to QFs. American Paper Institute, 461 U.S. at 414-15.*fn6

The regulatory scheme adopted by FERC also permits utilities and QFs to negotiate agreements for utility purchases of power independently of the prescribed rates. 18 C.F.R. § 292.301. Thus, even if a state chooses to implement the FERC regulations by adopting rules of its own prescribing a purchase rate in detail, a utility and a QF may still negotiate a different rate, using the state-prescribed rate as a baseline. Because no large utility is exempt from the FERC regulation that requires filing of detailed utility cost data and projections with the state regulatory authority, 18 C.F.R. § 292.302, a QF negotiating an agreement with a utility knows what rate it could compel if the utility failed to bargain in good faith.

[ 119 Pa. Commw. Page 90]

Although privately negotiated contracts setting rates for QF power are essentially outside the federal and state rules, state public utility commissions have a duty to examine costs of such contracts claimed by a utility for the purpose of setting its own rates, and will disallow those found to be excessive. Therefore, the state regulatory authority plays an indirect role in the negotiating process. Utilities in Pennsylvania frequently have voluntarily sought preapproval by the PUC of the rates and terms and conditions of proposed contracts with QFs and approval of an automatic pass-through to ratepayers of the charges the utilities will pay under the contracts. Often the negotiated agreements make such advance PUC approval a condition precedent to any obligations on the part of the purchasing utility.

The Pennsylvania Public Utility Commission, after publication of proposed regulations and extensive public comment, implemented the FERC rules by adopting regulations contained in 52 Pa. Code §§ 57.31-57.39. See 12 Pa. B. 4237 (December 11, 1982).

B. Agreement between West Penn and MEI

Under the terms of the Electric Energy Purchase Agreement between West Penn and MEI (agreement or contract), West Penn is to purchase the energy and capacity of a 43-megawatt generating unit (Milesburg project) that is to be installed by MEI at the site of the former Milesburg Power Station, which was owned and operated by West Penn and was retired from service with PUC approval in 1983. MEI is to purchase the facility from West Penn and convert it to be fueled by bituminous coal refuse, employing a circulating fluidized bed boiler technology that makes the economic burning of such waste feasible.

The agreement requires West Penn to purchase all of the capacity and energy from the Milesburg project

[ 119 Pa. Commw. Page 91]

    for a period of thirty years from project completion, expected to occur in 1990. West Penn agreed to pay a variable energy charge for each kilowatt hour produced by the project at a rate equal to actual monthly experienced energy costs of "proxy units" within the Allegheny Power System, of which West Penn is a member utility. In addition, West Penn agreed to make a capacity payment of 3.3 cents per kilowatt hour, which West Penn calculated to be the levelized present value cost (at the time of the signing of the agreement) of the capacity that West Penn could avoid over the term of the contract. West Penn will make no payments to MEI until MEI actually delivers energy to West Penn.

The agreement further provides that MEI is responsible for the construction, ownership and maintenance of the facility, subject to extensive approval and oversight by West Penn, and that MEI will compensate West Penn for the construction and maintenance of all interconnection equipment. West Penn will retain mortgage and security interests in the property of the Milesburg project. Because the agreement provides for direct capacity charges, it contains reserve fund and interruption insurance provisions as well as a provision subjecting MEI to substantial penalties if the facility fails to meet contractual generating requirements. Conditions precedent to West Penn's obligations under the agreement include certification of the Milesburg project by FERC as a qualifying facility under PURPA and the promulgation of a rule by the PUC or the existence of a PUC order, final beyond appeal, approving the legality of the agreement, published in the Pennsylvania Bulletin.

C. Procedural History

On April 2, 1987, West Penn filed a petition with the PUC requesting that the commission publish a declaratory order in the Pennsylvania Bulletin for public

[ 119 Pa. Commw. Page 92]

    review and comment indicating that (1) unless exceptions were filed within thirty days of the date of publication, the commission would approve the agreement with MEI as complying with section 210 of PURPA and with the Public Utility Code, (2) upon the occurrence of the conditions precedent the PUC would authorize West Penn to pass the charges resulting from the agreement through to its customers by the mechanism of the Energy Cost Rate or such other method as might replace the ECR, and (3) the addition of the Milesburg project capacity would not result in an excess capacity determination under the Public Utility Code as to the MEI capacity itself or as to any existing West Penn capacity. West Penn served copies of its petition on the active parties to its most recent base rate ...

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