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State Supreme Court Says PUC Erred In Finding "Overriding" Purpose Of Restructuring Law Was To Introduce Competition In Generation

Court Says "Most Compelling" Reason For Restructuring Was To "Reduce Costs"

Court Says PUC Erred In Elevating "Functional Separation" Of Generation Services From T&D

Court Ruling Implicates Default Service Procurement and Utility Long-Term Contracting, As Well As Future Utility Product Offerings

May 23, 2018

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Copyright 2010-17 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

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In a decision with potentially wide-ranging implications, the Supreme Court of New Hampshire has issued a decision finding that the PUC erred in concluding that the "overriding" purpose of that state's restructuring law was to introduce competition in generation, and ruling that, as a result, the PUC erred in elevating the "functional separation" of generation services from transmission and distribution above other statutory goals, such as price reductions, when the PUC denied an application from Algonquin Gas Transmission, LLC and Public Service Company of New Hampshire d/b/a Eversource Energy (Eversource) for approval of a proposed contract for natural gas capacity, as well as a program to set parameters for the release of capacity and the sale of liquefied natural gas made available to electric generators, and/or an associated tariff

Eversource had applied for PUC approval of firm gas transportation and storage services from Algonquin's Access Northeast project, with Eversource proposing to release such capacity for use by electric generation facilities, with costs recovered by ratepayers. Eversource said that the additional gas capacity would reduce electricity costs to customers

The PUC dismissed Eversource's petition, finding that it conflicted with the "functional separation" restructuring policy principle set forth in RSA 374-F:3, III, as the PUC ruled that, "the overriding purpose of the Restructuring Statute is to introduce competition to the generation of electricity."

The Supreme Court found that the PUC erred in this conclusion.

The Court said in its opinion on an appeal that, "The issue we address is a narrow one — whether the PUC erred when it determined as a matter of law that, on its face, 'the proposal brought forward by Eversource is fundamentally inconsistent with the purposes of restructuring' and, thus, is prohibited under RSA chapter 374-F. In denying Eversource’s petition, the PUC first ruled “that the overriding purpose of the Restructuring Statute is to introduce competition to the generation of electricity” with the 'long-term results [to] be lower prices and a more productive economy.' The PUC then further ruled that '[t]o achieve that purpose, RSA 374-F:3, III directs the restructuring of the industry, separating generation activities from transmission and distribution activities, and unbundling the rates associated with each of the separate services.' Given these rulings, the PUC concluded that 'the basic premise of Eversource’s proposal -- having an EDC purchase long-term gas capacity to be used by electric generators -- runs afoul of the Restructuring Statute’s functional separation requirement.' We disagree."

The Court said that, "As set forth in the statute, '[t]he most compelling reason to restructure the New Hampshire electric utility industry is to reduce costs for all consumers of electricity by harnessing the power of competitive markets.' RSA 374-F:1, I (emphasis added [by Court]). 'The overall public policy goal of restructuring is to develop a more efficient industry structure and regulatory framework that results in a more productive economy by reducing costs to consumers while maintaining safe and reliable electric service with minimum adverse impacts on the environment.' Id. (emphasis added [by Court]).

The Court said that, "To that end, the statute identifies 'interdependent policy principles' that 'are intended to guide the New Hampshire public utilities commission in implementing a statewide electric utility industry restructuring plan, . . . and in regulating a restructured electric utility industry.' RSA 374-F:1, III. These 15 'Restructuring Policy Principles' (policy principles) include: 'System Reliability'; 'Customer Choice'; 'Regulation and Unbundling of Services and Rates'; 'Open Access to Transmission and Distribution Facilities'; 'Universal Service'; 'Benefits for All Consumers'; 'Full and Fair Competition'; 'Environmental Improvement'; 'Renewable Energy Resources'; 'Energy Efficiency'; 'Near Term Rate Relief'; 'Recovery of Stranded Costs'; 'Regionalism'; 'Administrative Processes'; and 'Timetable.' RSA 374-F:3, I-XV"

The Court noted that the statutory language regarding Regulation and Unbundling of Services and Rates states, "When customer choice is introduced, services and rates should be unbundled to provide customers clear price information on the cost components of generation, transmission, distribution, and any other ancillary charges. Generation services should be subject to market competition and minimal economic regulation and at least functionally separated from transmission and distribution services which should remain regulated for the foreseeable future. However, distribution service companies should not be absolutely precluded from owning small scale distributed generation resources as part of a strategy for minimizing transmission and distribution costs." [emphasis by Court]

The PUC noted that statute, "does not prioritize the 15 restructuring policy principles contained in section 3. Nor does the chapter reflect any legislative intent that the 'functional separation' policy principle is meant to 'direct' the PUC in the exercise of its authority in implementing the chapter to the exclusion of the 14 remaining principles. The policy principles are identified as being 'interdependent.'"

"As Algonquin points out, the PUC’s order 'does not . . . discuss any of the other' policy principles, and, 'by erroneously focusing on the Functional Separation Principle,' the PUC did not consider whether 'many, if not all, of the other fourteen [policy principles] would be advanced' by the proposed agreement," the Court said

The Court noted that in certain instances in the restructuring statute, the statute provides that certain actions "must" or "shall" be performed, such as, "[a]ny prudently incurred costs arising from compliance with the renewable portfolio standards . . . for default service or purchased power agreements shall be recovered through the default service charge”

"By contrast, other policy principles state only that the PUC 'should' take certain factors into consideration, including that '[g]eneration services should be . . . at least functionally separated from transmission and distribution services,' RSA 374-F:3, III," the Court said

"The use of the word 'should' allows the PUC to exercise its discretion and judgment; in contrast, the word 'shall' establishes a mandatory duty," the Court said

"Had the legislature intended to require the PUC to prioritize the 'functional separation' policy principle above all other principles identified in the statute, and to require 'functional separation' in all circumstances, it would have said so," the Court said

"Pursuant to its plain language, and reading the statute as a whole, we discern that the primary intent of the legislature in enacting RSA chapter 374-F was to reduce electricity costs to consumers. See RSA 374-F:1, I. We disagree with the PUC’s ruling that the legislature’s 'overriding purpose' was 'to introduce competition to the generation of electricity.' Rather, as the statute provides, the legislature intended to 'harness[ ] the power of competitive markets,' RSA 374-F:1, I, as a means to reduce costs to consumers, not as an end in itself," the Court said

"Under the PUC’s construction, the restructuring statute would preclude approval of Eversource’s petition based upon the functional separation principle even if the agency were to conclude, following a full hearing, that the other policy principles identified in the statute clearly outweighed functional separation and that the proposal would produce more reliable electric service at lower rates for New Hampshire consumers than presently exists without any significant adverse consequences. We do not believe that RSA chapter 374-F can sensibly be construed in this fashion," the Court said

"Likewise, we disagree with the PUC’s ruling that RSA 374-F:3, III directs the 'functional separation' of generation services from transmission and distribution services and elevates that single policy principle over the others identified in the statute," the Court said

Although not addressed in the Court's decision, this finding has the potential for broader application beyond the instant case. To the extent that functional separation of generation services from transmission and distribution may no longer be used by the PUC as the overriding principle in the retail electric market, and instead other principles, such as a reduction in costs, must be considered, additional means of procuring default service (long-term utility contracts or a return to utility-owned generation) become more palatable from a statutory (if not necessarily policy) perspective. Moreover, due to statutory principles and goals providing for a reduction in costs as well as customer "choice", the utilities' offering of generation-related services (dynamic pricing, distributed generation, home energy services) could also be more easily approved as the issue of functional separation is balanced against other objectives, especially if the PUC were to find that a competitive market has not developed for such innovative services.

Brian Murphy, IBEW Local 104 Business Manager, has already said that the Court's decision shows that the PUC erred in denying, on similar functional separation grounds, a proposed Eversource/Hydro-Quebec PPA associated with the Northern Pass transmission project. The power from the PPA associated with the Northern Pass, as originally proposed, was not proposed to be used for default service, but would have been sold into the wholesale market, with nonbypassable cost recovery or credits.

In summation in the Algonquin case, the Court ruled, "We hold that the PUC erred in dismissing Eversource’s petition as a matter of law. In light of our decision, we need not address the appellant’s remaining arguments. Accordingly, we reverse the PUC’s dismissal of the petition and remand to the agency for further proceedings consistent with this opinion."

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