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decided: June 16, 1989.




Alan L. Reed, Thomas P. Gadsden, Paul R. Bonney, Morgan, Lewis & Bockius, (James R. Edgerly, Vice President, Secretary and Gen. Counsel, Stephen L. Feld of Pennsylvania Power Co., of counsel), Philadelphia, for petitioner.

Kevin J. Moody, Asst. Counsel, Bohdan R. Pankiw, Deputy Chief Counsel and John G. Alford, Acting Chief Counsel, Harrisburg, for Pennsylvania Public Utility Com'n.

Scott J. Rubin, Asst. Consumer Advocate, Harrisburg, for intervenor, David M. Barasch, Consumer Advocate.

Crumlish, Jr., President Judge, and Craig, Doyle, Colins, Palladino, McGinley and Smith, JJ.

Author: Craig

[ 127 Pa. Commw. Page 99]

Pennsylvania Power Company (Penn Power or company) appeals from a decision of the Pennsylvania Public Utility Commission (PUC or commission) that refused to allow the company, under the energy cost rate (ECR) mechanism,*fn1 to include in its rates certain expenses incurred by the company as the result of a sale and buyback agreement with another utility. Penn Power raises issues of whether the commission's order is consistent with its subsidiary findings,

[ 127 Pa. Commw. Page 100]

    whether such action by the commission is pre-empted by federal law, and whether the order effects an unconstitutional taking of the company's property.


Penn Power is a regulated Pennsylvania public utility that is a wholly-owned subsidiary of Ohio Edison Company (Ohio Edison). In 1967, in response to predictions of increased demand for electricity, Penn Power joined with four other utilities to form the Central Area Power Coordinating Group (CAPCO),*fn2 for the purpose of constructing additional capacity. CAPCO originally planned to build seven large nuclear generating units. Later events, principally the oil embargo of the early 1970's and the nuclear accident at Three Mile Island, radically changed the outlook both for the growth of demand for electricity and for the use of nuclear power as a means of meeting that demand. In 1980 CAPCO decided to cancel plans for construction of four of the nuclear units. Penn Power asserts that, as part of the overall 1980 cancellation agreement, Cleveland Electric agreed to acquire 12 megawatts (Mw) of Penn Power's original 75 Mw share of Perry Unit No. 1, but in return for its agreeing to purchase that share, Cleveland Electric required Penn Power to buy back the power from that 12 Mw for a period of eighteen months, beginning on the date that Perry 1 achieved commercial operation. Costs of the buyback were to be determined in accordance with the terms and conditions set forth in the CAPCO Basic Operating Agreement on file with the Federal Energy Regulatory Commission (FERC). Perry 1 became operational on November 17, 1987.

On November 16, 1987, Penn Power filed with the PUC an interim energy cost rate to become effective December 1, 1987. Penn Power's interim ECR filing proposed to increase its energy cost rate from 1.741 to 6.768 mills per

[ 127 Pa. Commw. Page 101]

    kilowatt hour (Kwh), attributing the need for such an increase in part to the costs associated with the 12 Mw Perry 1 buyback. The company's ECR filing projected the Perry 1 buyback costs to be approximately $1 million per month,*fn3 or $18 million total over the eighteen-month period of the buyback agreement, although a current market value for the same amount of power from other sources is only about $100,000 per month, or $1.8 million total.

The commission issued an order that initiated an investigation into the reasonableness of the interim ECR filing, accepted the company's proposal to synchronize its next ECR with the new rates to be set in Penn Power's base rate proceeding then pending before the commission, and permitted Penn Power to increase its ECR to 3.579 mills/Kwh temporarily. The temporary ECR increase did not include any allowance of recovery of costs of the Perry 1 buyback. The investigation into the ECR filing was assigned to Administrative Law Judge Michael A. Nemec (ALJ), who was also presiding over Penn Power's concurrent but separate base rate proceeding. The parties to both proceedings were the commission's Office of Trial Staff (OTS), the Office of Consumer Advocate (OCA) and the company.

The ALJ decided that allowing Penn Power to recover all of the costs of the Perry 1 buyback through the mechanism of the ECR would be unreasonable and hence unlawful. The ALJ stated that, because of his approval of the company's proposal to treat the buyback costs through the ECR, the proper evaluation of the claimed costs involved "look[ing] at the transaction in terms of the reasonableness of the purchase at the present time." Supplemental Recommended Decision 23.

The ALJ declined to hold, as urged by OTS and OCA, that the Perry 1 buyback represented excess capacity on Penn Power's system, in part because he had held in the base rate case that the 63 Mw retained by the company was not

[ 127 Pa. Commw. Page 102]

    excess. Further, he acknowledged that OTS and OCA had not formally disputed Penn Power's claim that its decision to sell the 12 Mw share of Perry 1 capacity to Cleveland Electric was prudent. However, the ALJ said that the dispute over including the buyback costs in Penn Power's ECR "centers on the need for the generation and its price in the context of an adjustable rate for the recovery of the costs of energy. Purely and simply, the incurrence of costs by Penn Power does not result in Penn Power being guaranteed recovery of those costs through its rates." Id. at 26. The ALJ noted that Penn Power had made no showing on the record before him that the 12 Mw of Perry 1 capacity would be needed during the eighteen months set by the agreement, nor had the company shown that, even if it were, less expensive power would not be available from other sources.

Consequently, the ALJ recommended that the commission treat the buyback costs according to the alternative method proposed by OCA -- allowing the company to recover, through the ECR, the cost of a comparable volume of generation anticipated over the period of the buyback at a system average rate (thus allowing Penn Power to realize a gain to the extent of the difference between the system average cost of energy and the lower energy component of the price of Perry 1 power), but otherwise disallowing costs associated with the buyback (thus charging the full amount of the high capacity component of the price of power from this particular source to Penn Power's shareholders, rather than to its ratepayers).*fn4

[ 127 Pa. Commw. Page 103]

The commission, on consideration of exceptions and replies to exceptions filed by all of the parties in the ECR case, issued an order essentially adopting the recommended decision of the ALJ. The only difference was the commission's direction that the method for calculating the system average rate to be paid to Penn Power not include the Perry 1 rate. The commission's order had the effect of disallowing over $16 million, or approximately 90%, of the costs that Penn Power will incur under the Perry 1 buyback.

Penn Power filed a petition for review with this court, questioning: (1) the disallowance of 90% of the buyback costs, (2) the commission's refusal to be bound by Federal Energy Regulatory Commission approval of Cleveland Electric's wholesale rate, (3) the alleged confiscatory effect of the commission's decision.

Our scope of review is limited to a determination of whether constitutional rights have been violated, an error of law committed or whether the findings, determinations or order of the commission is supported by substantial evidence in the record. Pennsylvania Power & Light Co. v. Pennsylvania Public Utility Commission, 101 Pa. Commonwealth Ct. 370, 516 A.2d 426 (1986).

Disallowance of Buyback Costs as an Excessive Expense

The PUC operates under a statutory mandate to assure that "[e]very rate made, demanded, or received by any public utility . . . shall be just and reasonable. . . ." Section 1301 of the Public Utility Code, 66 Pa. C.S. ยง 1301. The basic ratemaking formula by which the commission fulfills this duty provides that a utility's revenue requirement (RR) is equal to the amount of ...

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