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Pennsylvania Court: Single Product Can Meet Definition of "Prudent Mix" A Pennsylvania court has affirmed that a default service portfolio containing only a single product -- in this case, spot market pricing -- can meet the statutory "prudent mix" standard required of default service plans.
The Commonwealth Court of Pennsylvania, in a 5-2 decision, affirmed the PUC's prior adoption of a default service plan at Pike County Light & Power which relies solely on New York ISO spot market purchases. The PUC had specifically found that, "a prudent mix can include only one product when it is the option most likely to produce the least cost over time."
Given that about 70% of customers at Pike County are on competitive supply (plus Pike County's small load and NYISO location), the PUC found that short-term or long-term hedges for default service would include an unacceptable premium.
The Office of Consumer Advocate had appealed the PUC's decision on the grounds that sole reliance on the spot market did not constitute a "prudent mix" of spot market purchases, short-term contracts, and long-term contracts as required by the Act 129 statute (see prior story).
"This Court owes deference to the PUC's interpretation of the statutes with whose enforcement it is charged," the Court said. "Where this Court determines that a given issue 'has not been addressed by the legislature, we are not to impose our own construction on the statute as would be necessary in the absence of an administrative interpretation, but review the agency's construction of the statute to determine whether that construction is permissible.'"
The Court found that this precedent is particularly applicable with the default service standards because, "the statutory scheme is technically complex."
While the OCA argued that the term "prudent mix" is unambiguous, and requires a "mix" of products (meaning more than one), the Court found that the case revealed a "latent ambiguity" in the statute, in that the legislature did not define what constituted a "prudent" mix, nor did it explicitly define how many of the different product types (spot market purchases, short-term contracts, and long-term contracts) must be included in the "prudent mix" to meet the statutory standard.
The Court found that OCA's argument that the term "prudent mix" is unambiguous is undermined by OCA's own concession that long-term contracts are not appropriate for Pike County default service under current circumstances.
"[T]he Consumer Advocate does not explain why the term 'mix' requires a combination of two of the three enumerated sources, but not all three," the Court said.
"The Consumer Advocate argues that the word 'mix' must not be read out of the term 'prudent mix'; however, the word 'prudent' must not be disregarded either," the Court said. "The PUC's application of Section 2807(e)(3.2) does not reflect that it has read the word 'mix' out of the term 'prudent mix.' Rather, the PUC properly considered the possibility of including short-term contracts and determined that to do so would not be prudent. We believe the PUC is correct that, in interpreting the term 'prudent mix,' the PUC must exercise some balance and discretion under the circumstances of the case in order for the 'mix' in question to be 'prudent.' The Consumer Advocate tacitly adopted this approach itself when it did not urge that long-term contracts be included in Pike's Plan. For these reasons, we must offer deference to the PUC's interpretation," the Court said.
While affirming the PUC's order, the Court's decision is notable in that it does not reject the consideration of price stability as a factor to consider when evaluating a prudent mix. Price stability is listed as a goal of default service in the preamble to Act 129, and OCA said that spot-based default service is contrary to this policy. Retail suppliers had argued that language in a statute's preamble cannot be elevated above the text of the actual statute.
Rather than dismissing price stability as an appropriate consideration in default service plans, the Court only noted that the PUC, while not discounting the importance of price stability, "concluded that the additional benefits of a financial hedge would not be justified by the additional costs," given the circumstances at Pike County.
"Such a determination is within the PUC's discretion and ... is supported by substantial evidence," the Court said.
Docket No. 1179 C.D. 2012
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Reporting by Karen Abbott • kabbott@energychoicematters.com
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