PUBLIC UTILITY COMMISSION OF TEXAS аnd Office of Public Utility Counsel, Petitioners, v. GULF STATES UTILITIES COMPANY, Respondent.
No. C-9731.
Supreme Court of Texas.
April 3, 1991.
Rehearing Overruled June 19, 1991.
809 S.W.2d 201
Barry Bishop, John F. Williams, Austin, for respondent.
OPINION
PHILLIPS, Chief Justice.
This case is an administrative appeal from a final order of the Texas Public Utility Commission. Gulf States Utilities Company (GSU) sought the Commission‘s approval of the sale of two of GSU‘s generating units and of GSU‘s proposed rate treatment of certain revenues and expenses associated with that transaction. GSU proposed to sell the two plants to a joint venture comprised of GSU and three of its Louisiana industrial customers; GSU then planned to purchase the entire electrical output from the plants for distribution to its customers. GSU requested the Commission to rule that, in future rate proceedings, it be allowed to recover from its ratepayers its total purchase price for the electricity and furthermore that it be allowed to allocate the proceeds from the sale of the depreciated plants to its shareholders rather than to its ratepayers.
The Commission concluded that the proposed sale was generally in the public interest but imposed twо conditions on GSU‘s treatment of the transaction in future rate proceedings. First, the Commission determined that it was not in the public interest for GSU‘s ratepayers “to pay in excess of GSU‘s avoided cost” for power purchased from the joint venture. Therefore, the Commission held that it would not allow GSU to recover from its Texas ratepayers payments for electricity from the joint venture in excess of GSU‘s avoided cost. Second, the Commission determined that GSU must divide the proceeds from the sale of the plants between the ratepayers and its shareholders in proportion to the amount each group contributed to the cost of the plants.
The district court affirmed the Commission‘s order. The court of appeals then reversed the judgment of the district court and remanded the case to the Commission. 784 S.W.2d 519. The Commission and the Office of Public Utility Counsel now appeal to this court. We must first determine whether the applicable state and federal regulations permit a utility purchasing power from a cogenerator to recover from its ratepayers payments in excess of its avoidеd cost. Second, we must determine whether the Commission‘s allocation of the utility‘s proceeds from the sale of its plants was proper. For the reasons that follow, we affirm the judgment of the court of appeals.
I
A
In 1978, in response to rising energy costs and recent fuel shortages, Congress sought ways to conserve energy to reduce
To encourage cogeneration, Congress enacted section 210 of the Public Utility Regulatory Policies Act of 1978 (PURPA). Pub.L. No. 95-617, 92 Stat. 3117 (1978) (codified as amended at
In section 210, Congress directed the Federal Energy Regulatory Commission (FERC) to prescribe, within one year of the statute‘s enactment, rules requiring electric utilities to purchase power from and sell power to QFs. PURPA § 210(a),
Pursuant to this statutory authority, FERC has adopted regulations governing an electric utility‘s purchases from QFs. See
Because Congress intended that state regulatory authorities be the primary enforcers of PURPA, section 210(f) of PURPA orders each state regulatory authority to implement FERC‘s rules.3
The Texas rules apply to FERC-certified QFs,
The first issue we must address in this case concerns the proper interpretation of the above federal and state regulations governing a utility‘s purchases of electricity from a QF. The questions presented are (1) whether the regulations prohibit a utility from contracting for and paying a rate in excess of its avoided cost and (2) whether, if a utility may pay more than avoided cost, the regulations impose a limitation on how much of these payments the utility can recover from its ratepayers. The controversy arises because both sets of regulations expressly allow a utility and a QF to agree to any rate for purchased power, see
B
We consider these questions in light of the circumstances presented by this case. GSU is a public electric utility located in Texas near the Louisiana border. In 1984, two of GSU‘s largest industrial customers, both situated in Louisiana, notified GSU that they were planning to build a cogeneration facility, which would enable them eventually to withdraw from GSU‘s system.5 Normally, the loss of such major customers from GSU‘s system would result in increases in the rates paid by the remaining customers. These increases would occur because the utility‘s fixed costs would have to be spread over a smaller number of ratepayers. As a way to keep the industrial5 customers in its system and thereby to prevent such rate increases, GSU proposed the formation of a joint cogenеration venture with the customers.
GSU and three of its Louisiana-based industrial customers eventually entered into an agreement to form the Nelson Industrial Steam Company Project (the Venture). Under the terms of this agreement, GSU agreed to sell two of its electrical generating plants to the Venture and to run the plants on behalf of the Venture.6 GSU further agreed to purchase the entire electric output from the plants for its general power supply at a price calculated by a contractual formula.7 In return for GSU‘s undertakings, the three industrial members of the Venture agreed to continue as GSU‘s customers. FERC later certified the Venture as a QF, contingent on the Venture‘s reaching certain milestones in converting the plants from natural gas to petroleum coke operation.
Completion of the agreement to form the Venture was made contingent on the Commission‘s approval of GSU‘s proposed rate treatment of certain revenues and expenses arising out of the sale. GSU requested such approval under section 63 of the Texas PURA. This section requires public utilities to reрort to the Commission any sale of a plant when the total consideration exceeds $100,000. The Commission then must determine if the transaction “is consistent with the public interest.”
After a hearing, the Hearing Examiner determined that the sale of the plants to the Venture was generally in the public interest. The Examiner then found that GSU‘s purchased power payments might at times exceed GSU‘s avoided cost. The Examiner determined that avoided cost was the maximum rate that would be deemed just and reasonable and in the public interest under Rule 23.66(e). However, she concluded that GSU should be allowed to seek recovery of any purchased power payments in excess of its avoided cost in future rate or fuel-reconciliation proceedings.8 In order to recover the payments, GSU would have to show that the
costs were necessary as a means to keep its industrial load on the system, that the ratepayers benefited by the retention of the industrial load on the system, that the costs in excess of avoided costs were at a minimum, and that given these circumstances, its fuel costs were at their lowest reasonable level.
Tex.Pub.Util.Comm‘n, Application of Gulf States Utils. Co. for Approval of a Joint Venture Cogeneration Project and Treatment of Revenues, Docket No. 7147, 14 TEX.P.U.C.BULL. 49, 66-67 (Mar. 21, 1988) [hereinafter Docket No. 7147]. The Examiner further determined that it would be unreasonable for the ratepayers to absorb all the costs associated with the purchased power payments. As to the allocation of the sale proceeds, the Examiner concluded that the ratepayers should be credited with 83 percent of the proceeds because they paid for 83 percent of the cost of the plants. The ratepayers’ 83 percent share of the proceeds would be deemed “other electric utility income” and would be used to offset the amount of revenue otherwise required to be generated by the rates.
The Commission‘s final order deleted the Hearing Examiner‘s findings that GSU could seek recovery of the full amount of its purchased power payments and substituted findings that GSU could not recover anything above avoided cost. The final order thus stated that “[i]t is not in the public interest for GSU‘s Texas ratepayers to pay in excess of GSU‘s avoided cost for purchased power from a qualifying cogeneration project” and that “[i]n future rate proceedings, [GSU] is limited to recovering those purchased power payments to the Venture that do not exceed GSU‘s avoided costs.”9 Docket No. 7147, supra p. 10, at 98. The parties to the Venture later went ahead with the transaction despite the Commission‘s disallowance of the requested rate treatment.
GSU appealed to the district court, which affirmed the Commission‘s order. GSU then appealed to the court of appeals, which reversed the judgment of the district court and remanded to the Commission. The court of appeals held that the Commission‘s interpretation of Rule 23.66 as imposing a ceiling on negotiated purchased power payments was unreasonable under the text of the provision and contrary to the provisions and purposes of the Texas
II
We first address that part of the Commission‘s order holding that GSU cannot recover from its ratepayers purchased power payments in excess of avoided cost. The Commission‘s ruling is based on its interpretation of the state regulations, in particular Rule 23.66. As described above, Rule 23.66(b)(2)(A) allows utilities and QFs to agree to any rate, while Rule 23.66(e) states that purchases of energy from QFs shall not exceed avoided cost. Thus, the two rules appear to conflict. The Commission attempts to harmonize the two rules by interpreting them to permit a utility and a QF to contract only for rates below avoided cost. The Commission also argues that, even if Rule 23.66(b) allows a utility to pay a rate above avoided cost, Rule 23.66(e) prohibits a utility from recovering from its ratepayers any payments, whether negotiated or compelled, in excess of avoided cost. According to the Commission, Rule 23.66(e) provides that only those payments that are equal to avoided cost are just, reasonable, and in the public interest. Therefore, it is not just, reasonable, or in the public interest for the ratepayers to pay more than avoided cost under any circumstances. Finally, the Commission argues that FERC‘s regulations also place a limit of avoided cost on purchased power payments.
The Commission‘s interpretation of its own regulations is entitled to deference by the courts. See Udall v. Tallman, 380 U.S. 1, 16, 85 S.Ct. 792, 801, 13 L.Ed.2d 616, 625 (1965); Lloyd A. Fry Roofing Co. v. State, 541 S.W.2d 639, 644 (Tex.Civ.App.—Dallas 1976, writ ref‘d n.r.e.). Our review is limited to determining whether the administrative interpretation “is plainly erroneous or inconsistent with the regulation.”10 United States v. Larionoff, 431 U.S. 864, 872, 97 S.Ct. 2150, 2155, 53 L.Ed.2d 48, 56 (1977) (quoting Bowles v. Seminole Rock Co., 325 U.S. 410, 414, 65 S.Ct. 1215, 1217, 89 L.Ed. 1700, 1702 (1945)). However, if the Commission has failed to follow the clear, unambiguous language of its own regulation, we must reverse its action as arbitrary and capricious. See Sam Houston Elec. Coop., Inc. v. Public Util. Comm‘n, 733 S.W.2d 905, 913 (Tex.App.—Austin 1987, writ den‘d); see also Lewis v. Jacksonville Bldg. & Loan Ass‘n, 540 S.W.2d 307, 310 (Tex.1976), and Ex parte Roloff, 510 S.W.2d 913, 915 (Tex.1974).10
We hold that the Commission acted arbitrarily in adopting an interpretation contrary to the plain language of its regulation. Rules 23.66(b)(2)(A) and 23.66(e) can be harmonized, but not in the manner suggested by the Commission. We read Rule 23.66(e) as operating solely to set the rates that the Commission can compel a utility to pay for a QF‘s power if the utility and the QF are unable to reach a voluntary agreement. Rule 23.66(e) does not impose a ceiling on the amount a utility can contract to pay for a QF‘s power, nor does it limit the amount a utility can recover from its ratepayers under such voluntary arrangements.
Our interpretation is based on the interaction between Rule 23.66(e) and Rules 23.66(d) and 23.66(b). Rule 23.66(d) obligates a utility to purchase power from a QF if the QF makes such power available. Subsection (d) also provides that the rates for purchases made under that subsection are governed by Rule 23.66(e). See
We must also consider the application of PURPA and the federal regulations because the transaction between GSU and the Venture is governed by federal law as well as by Texas law. The interstate activities of GSU clearly bring it within the reach of the federal regulations. FERC v. Mississippi, 456 U.S. 742, 757, 102 S.Ct. 2126, 2136, 72 L.Ed.2d 532, 545 (1982). In addition, to the extent thаt the state regulations implement PURPA, the federal regulations serve as a guideline to and may control the scope of the state regulations.
We hold that the federal regulations do not grant the Commission any more authority to regulate negotiated purchases than do the state regulations.11 Like the Texas regulations, the federal regulations do not authorize the Commission to alter the terms of a purchased power contract between a utility and a QF. Neither do they set a limit of avoided cost on the amount of such payments a utility can recover from its ratepayers. Thus, section 292.303(a) of the federal regulations provides that a utility is obligated to purchase any energy and capacity made available from a QF. Such purchases must be made in accordance with section 292.304, which sets the rate for purchases at avoided cost. Because section 292.304 is applied through section 292.303, the avoided-cost limit applies only to compelled purchases. This interpretation of sections 292.303 and 292.304 is in harmony with the language of section 292.301(b)(1), which provides that nothing is to limit the authority of a utility or QF “to agree to a rate for any purchase . . . which differ[s] from the rate . . . which would otherwise be required by this sub-
Our holding that the state and fedеral regulations governing a utility‘s purchases of power from a QF do not apply to voluntary arrangements between a utility and a QF does not deprive the Commission of its regulatory authority over the amount of such contractual payments that a utility may recover from its customers. GSU may contract for any purchase price it wishes; however, whether such cost will be fully recoverable from the ratepayers will be subject to the Commission‘s ordinary ratemaking powers. GSU‘s purchase of electricity from the Venture is a fuel cost, see
The Commission suggests that it would never be fair to the ratepayers for a utility to pay in excess of its avoided costs for power since by definition the utility could obtain the same amount of power elsewhere by paying avoided cost. But using this argument to set an absolute ceiling on purchased power payments ignores the plain language of the Commission‘s own rules, which do not authorize the Commission to impose a ceiling of avoided cost on such payments. Under the rules, the Commission must conduct an independent, factual inquiry in each case to determine whether payments in excess of avoided cost are reasonable and necessary, considering the effects of the transaction as a whole.16
Because the Commission was not called upon to set rates in the section 63 proceeding from which this case arose, we do not remand this part of the case to the Commission. Instead, we order the Commission to allow GSU to recover purchased power payments in excess of its avoided cost in future rate procеedings if GSU establishes to the Commission‘s satisfaction that the payments are reasonable and necessary expenses. The Commission contends that, since GSU and the industrial customers have already gone ahead with the Venture, GSU can no longer justify the payments on the grounds that they are necessary to retain the customers in the system. However, we believe that it may still be possible for GSU to establish the necessity of the Venture and the contractual rates. GSU should be allowed to show that, absent the Venture, the industrial customers would have left its system because independent cogeneration was economically more attractive than remaining in the system, that the contractual rates are necessary to make the Venture more attractive than independent cogeneration, and that such rates are at the minimum level. If GSU is able to satisfy the Commission that payments above avoided cost are justified, then the Commission should determine what portion of the costs of the Venture it is reasonable and necessary for the ratepayers to bear, given the distribution of benefits from the Venture tо the ratepayers and to the shareholders.17
III
The second issue we must resolve is whether the Commission properly allocated the gains from the sale of the plants between GSU‘s ratepayers and its shareholders. Under the agreement, the Venture is to pay for the plants in twenty annual installments of $6.35 million each (the fixed asset payments), for a total income stream of $127 million. GSU requested that it be allowed to allocate the entire amount of each fixed asset payment, i.e., the entire proceeds of the sale, to its shareholders. The Commission instead ordered that GSU allocate 83 percent of each fixed asset payment, or 83 percent of the total sale proceeds, to its ratepayers, thereby reducing the amount the utility was entitled to recover through its rates by that amount.
We must reverse the Commission‘s allocation of the profits if it is not
The Commission‘s decision to allocate 83 percent of the fixed asset payments to the ratepayers is based on the testimony of the Office of Public Utility Counsel‘s witness Dr. Steven Anderson and of the Commission‘s staff accountant Paul Bellon. GSU has indirectly recovered 83 percent of the cost of the plants from the ratepayers through depreciation expense allowed for the plants and figured into the rate base. Both Anderson and Bellon testified that “because the Company and the shareholders have recovered 83 percent of the costs related to [the generating facilities], the ratepayers should receive 83 percent of the fixed asset рayment GSU receives from the sale of the units.” Docket No. 7147, supra p. 10, at 56.
We hold that the Commission‘s decision is not reasonably supported by substantial evidence in the record. The Commission based its decision solely on conclusory testimony that cites only the evidence of the ratepayers’ contribution to depreciation. The Commission did not consider any other factors that would be relevant to allocation of a utility‘s proceeds from the sale of assets. The issue of the proper allocation of such proceeds is a complicated one that cannot be resolved simply by reference to who paid for the property. See Washington Pub. Interest Org. v. Public Serv. Comm‘n, 393 A.2d 71, 72 (D.C.1978); see also Democratic Cent. Comm. v. Washington Metro. Area Transit Comm‘n, 485 F.2d 786 (D.C.Cir.1973); Kansas Power & Light Co. v. State Corp. Comm‘n, 5 Kan.App.2d 514, 620 P.2d 329 (1980). A proper allocation of proceeds can be determined only by an analysis of all the equities involved. See, e.g., Democratic Cent. Comm., 485 F.2d at 821; Kansas Power & Light Co., 620 P.2d at 340.
The equitable principles commonly used to resolve allocation problems are that “benefits should follow burdens” and that “gain should follow risk of loss.” Democratic Cent. Comm., 485 F.2d at 806; Washington Pub. Interest Org., 393 A.2d at 92. In other words, in the general case, the gain should be allocated to that group (as between shareholders and ratepayers) that has borne the financial burdens (e.g., depreciation, maintenance, taxes) and risks of the asset sold. In addition to these two general equitable factors, courts have also considered numerous other factors, including whether the asset sold had been included in the rate base over the years, whether the asset was depreciable property, nondepreciable property, or a combination of the two types, the impact of the proposed allocation on the financial strength of the utility, the reason for the asset‘s appreciation (e.g., inflation, a general increase in property values in the area), any advantages enjoyed by the shareholders because of favored treatment accorded the asset, the dividends paid out to the shareholders over the years, and any extraordinary burdens borne by the ratepayers in connection with that asset. See Democratic Cent. Comm., 485 F.2d at 791-92, 821-22; id. at 831-32, 841-44 (MacKinnon, J., concurring in part and dissenting in part); Washington Pub. Interest Org., 393 A.2d at 89, 91-92; Kansas Power & Light Co., 620 P.2d at 341.
In the present case, the Commission allocated the sale procеeds in direct proportion to the amount the shareholders and the ratepayers contributed to the cost of the plants. This formula is based on only one of the above principles, that benefits should follow burdens. In addition to ignoring the
IV
For the reasons stated above, we affirm the judgment of the court of appeals. This case is therefore remanded to the Commission for it to determine the proper allocation between the shareholders and ratepayers of the fixed asset payments after consideration of the factors the Commission determines are appropriate. The Commission is further ordered to allow GSU to recover its purchased price payments in future rate proceedings if GSU shows that the payments are reasonable and necessary expenses.
GONZALEZ, Justice, concurring and dissenting.
I concur with the court that PUC‘s allocation of the fixed asset payments is not supported by the record. However, I disagree with the court‘s conclusion that PUC‘s interpretation of its own rule was erroneous or arbitrary. In my opinion, PUC correctly interpreted its own Rule 23.66 to hold that GSU cannot recover from its ratepayers an amount exceeding its “avoided costs.”1 For this reason, I dissent from part II of the court‘s opinion.
FEDERAL LAW—THE AVOIDED COST RULE
In 1978, the United States Congress enacted the Public Utility Regulatory Policies Act of 1978 (PURPA). PURPA established the utility‘s incremental cost of alternative electric energy as the ceiling on payments to cogenerators. The term incremental cost is defined in the Act as the cost of the energy which, but for the purchase from the cogenerator, such utility would generate or purchase from another source.
(1) shall be just and reasonable to the electric consumers of the electric utility and in the public interest, and
(2) shall not discriminate against qualifying cogenerators or qualifying small power producers.
No such rule prescribed under subsection (a) of this section shall provide for a rate which exceeds the incremental cost to the electric utility of alternative electric energy.
THE PUBLIC UTILITY REGULATORY ACT
In section 41A of the Public Utility Regulatory Act, the Texas legislature enacted similar provisions controlling transactions between electric utilities and qualifying cogenerators. Section 41A states in pertinent part:
(b) If an electric utility and a qualifying facility enter into an agreement providing for the purchase of capacity . . . the commission shall determine whether:
(1) the payments provided for in the agreement over the contract term are equal to or less than the utility‘s avoided costs as established by the commission and in effect at the time the agreement was signed. . . .
PURA, § 41A(b)(1) (emphasis added). Section 41A of PURA requires an automatic determination that prices paid for power from a qualifying facility that are at or below avoided cost are just and reasonable.4 The PUC‘s prohibition on prices in
RULE 23.66(e)(2)—THE AVOIDED COST LIMITATION
Pursuant to its obligation under PURA § 16(g), the PUC enacted rules governing the recovery of fuel costs and agreements between electric utilities and QFs. The PUC limited a utility‘s recovery of purchased power payments to a QF to that utility‘s “avoided cost.” Tex.Pub.Util. Comm‘n,
(1) Rates for purchases of energy and capacity from any qualifying facility shall be just and reasonable to the consumers of the electric utility and in the public interest, and shall not discriminate against qualifying cogeneration and small power production facilities.
(2) Rates for purchases of energy and capacity from any qualifying facility shall not exceed avoided cost; . . .
(3) Rates for purchases satisfy the requirements of paragraph (1) of this subsection if they equal avoided cost.
The PUC interprets this rule to mean that only if a utility‘s purchased power payments to the QF equal avoided costs or are lower than the avoided costs may those rates be deemed just and reasonable and in the public interest. Because GSU‘s purchased power payments to the QF were not tied to its avoided cost but rather to a contractual rate, the PUC rejected GSU‘s request for an automatic pass-through under section 63 of PURA and limited GSU‘s recovery for those payments from its Texas ratepayers to its avoided cost.
GSU contends that section 23.66(b)(2)(A) allows it to contractually agree to a rate in excess of its avoided cost. Section 23.66(b)(2)(A) provides:
Nothing in this subsection:
(A) shall limit the authority of any electric utility or any qualifying facility to agree to a rate for any purchase, or terms or conditions relating to any purchase, which differ from the rate or terms or conditions that would otherwise be required by this subsection.
GSU argues that pursuant to section 23.66(b)(2)(A), the avoided cost ceiling in Rule 23.66(e) applies only to contracts that are initiated under the mandatory terms of the rule, as opposed to voluntarily negotiated contracts between electric utilities like GSU and QFs. The PUC rejected this argument. I agree with the PUC.
In a seemingly innocuous statement purporting to interpret Rule 23.66(d), the majority states that “Rule 23.66(e)‘s avoided-cost rules . . . do not apply to voluntary contracts arranged outside the requirements of Rule 23.66(d).” аt 207-08. Although Rule 23.66(d) does require utilities to purchase power when a QF makes it available, the language of the rule does not support the majority‘s contention that “the avoided-cost limit applies only to compelled purchases.”
Further, the court‘s construction would effectively destroy the avoided cost rule. The court‘s interpretation allows the utility and QF freedom to agree on a rate as provided for in section 23.66(b)(2)(A) to trump the rule that rates for purchases shall not exceed avoided costs (Rule 23.66(e)(2)), yet still requires the agreed rate to “be just and reasonable,” as is required
To allow GSU to pass on the costs of production from the venture even if they exceed the avoided cost rule allows utilities to make a complete end run around the rule and in the process completely eviscerate it. In other words, GSU is restricted from raising its rates by the avoided cost rule so it sells its plants to a joint venture in which it maintains an ownership interest. GSU then repurchases the electricity at a higher ratе than its avoided cost and, because of the majority‘s opinion, is allowed to pass through that extra expense to its Texas ratepayers while creating windfall earnings for GSU‘s investors. GSU is having its cake and eating it too. It receives management fees, a percentage of the price that is paid to the venture, and it receives a profit when that very same energy is sold at higher rates as a result of the production costs that are passed through to ratepayers even though those costs are in excess of the avoided cost rule. This is exactly the type of activity that is prohibited by the avoided cost rule.
An agency‘s interpretation of its own regulations should be given deference by the courts. See United States v. Larionoff, 431 U.S. 864, 872-73, 97 S.Ct. 2150, 2155-56, 53 L.Ed.2d 48 (1977); Calvert v. Kadane, 427 S.W.2d 605, 608 (Tex.1968); Lloyd A. Fry Roofing Co. v. State, 541 S.W.2d 639, 644 (Tex.Civ.App.—Dallas 1976, writ ref‘d n.r.e.). In my opinion, the PUC‘s interpretation of its rules is not arbitrary, capricious nor plainly erroneous. Accordingly, I would hold that the PUC correctly interpreted Rule 23.66 to limit GSU‘s recovery to its avoided costs.
MAUZY, Justice, concurring and dissenting.
This utility case presents two issues involving the respective burdens of shareholders and ratepayers. In disposing of both issues, the majority heeds the complaints of the utility company, but fails to recognize the burdens borne by the ratepayers. I dissent from part II of the majority opinion, and concur only in the result of part III.
As to the first issue, I agree with Justice Gonzalez that Rule 23.66(e) prohibits a utility from recovering purchased power payments in excess of the utility‘s avoided cost. Nothing in either the language or the history of that rule suggests that its terms are inapplicable to negotiated contracts. Certainly, a utility may contract for a rate which is lower than its incremental cost; but the governing federal statute explicitly prohibits the adoption of a rate which exceeds the utility‘s incremental cost.
As to the allocation of proceeds from asset sales, I agree that the Commission should have considered factors other than the relative contributions to depreciation. I would emphasize, however, that the Commission‘s discretion in this context is sharply limited. By shouldering the main financial burdens associated with utilities, and by assuming the risk of loss, ratepayers establish valid interests in utility assets. Those interests must be taken into account whenever such assets are sold; any failure to do so will necessarily rise to an abuse of discretion.
Notes
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.
Tex.Pub.Util.Comm‘n,(e) Rates for purchases from a qualifying facility.
(1) Rates for purchases of energy and capacity from any qualifying facility shall be just and reasonable to the consumers of the electric utility and in the public interest, and shall not discriminate against qualifying cogeneration and small power production facilities.
(2) Rates for purchases of energy and capacity from any qualifying facility shall not exceed avoided costs; however, in the case in which the rates for purchasе are based upon estimates of avoided costs over the specific term of the contract or their legally enforceable obligation, the rates for such purchases do not violate this subsection if the rates for such purchases differ from avoided costs at the time of delivery.
(3) Rates for purchases satisfy the requirements of paragraph (1) of this subsection if they equal avoided cost.
(4) Rates for purchases from qualifying facilities shall be in accordance with paragraph (1)-(3) of this subsection, regardless of whether the electric utility making such purchases is simultaneously making sales to the qualifying facility.
(5) Payments by a utility to any qualifying facility, if in accordance with paragraphs (1)-(3) of this subsection, shall be considered reasonable and necessary operating expenses by that utility.
The preemption issue has previously arisen in situations where states have tried to impose a compelled rate that is higher than FERC‘s avoided cost ceiling. FERC originally stated that “the States are free . . . to enact laws or regulations providing for rates which would result in even greater encouragement of these technologies,” i.e., rates above avoided cost. 45 Fed.Reg. 12,221 (1980). In 1988, FERC proposed changes to the regulations that would prohibit states from setting a compelled rate higher than avoided cost. 53 Fed.Reg. 9331 (1988); see Occidental Chem. Corp. v. FERC, 869 F.2d 127, 128 (2d Cir.1989). These changes are still pending. Prior to these recent developments, the lower federal courts had disagreed on whether PURPA preempts state regulations that set a price above avoided cost. Compare Consolidated Edison Co. v. Public Serv. Comm‘n, 63 N.Y.2d 424, 436 n. 8, 483 N.Y.S.2d 153, 157 n. 8, 472 N.E.2d 981, 985 n. 8 (1984) with Kansas City Power & Light Co. v. State Corp. Comm‘n, 234 Kan. 1052, 1057-58, 676 P.2d 764, 767-68 (1984). The Supreme Court has declined to address the issue. See Consolidated Edison Co. v. Public Serv. Comm‘n, 470 U.S. 1075, 105 S.Ct. 1831, 85 L.Ed.2d 132 (1985) (dismissing the appeal from the Court of Appeals of New York for want of a substantial federal question).
Paragraph (b)(1) [allowing utilities and QFs to agree to any rate] reflects the Commission‘s view that the rate provisions of section 210 of PURPA apply only if a [QF] chooses to avail itself of that section. Agreements between an electric utility and a [QF] for purchases at rates different than rates required by these rules . . . do not violate the Commission‘s rules under section 210 of PURPA. The Commission recognizes that the ability of a [QF] to negotiate with an electric utility is buttressed by the existence of the rights and protections of these rules.
45 Fed.Reg. 12,217 (1980).