Pennsylvania Court Denies Retail Supplier's Appeal Of PUC Decision Concerning Allocation Of Costs Between Delivery Rates, Default Service

PUC Had Rejected Supplier's Proposal To Re-allocate $100 Million From PECO Distribution Rates To Default Service

June 12, 2020

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Reporting by Paul Ring • ring@energychoicematters.com

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The Commonwealth Court of Pennsylvania has affirmed a decision from the Pennsylvania PUC which had, in a final order in a PECO rate case, denied a proposal from NRG Energy to re-allocate approximately $100 million in costs at PECO which NRG had argued are attributable to electricity default service and thus should be allocated to generation rates rather than nonbypassable distribution rates, as is done currently

See background on the PUC's decision and NRG's proposal in our prior story here

In a brief before the PUC, NRG had said that, "The effect of this reallocation, which relies on commonly utilized allocators of revenues and number of customers, would be an increase in the PTC for residential default service from 7.15 cents per kWh to 8.40 cents per kWh, a 15 percent increase."

In the rate case order, in which the PUC rejected NRG's proposal, the PUC had found that, "(1) the Company [PECO] has carried its burden of proof regarding the justness and reasonableness of its underlying cost allocations, as presented in its cost of service study, which is used as a guide in allocating the final revenue increase among the various customer classes; (2) NRG has not carried it’s burden of proof to re-allocate to default service certain administrative costs as proposed in this proceeding; and (3) the 1997 restructuring proceeding does not support NRG’s proposal."

NRG appealed the decision to the Commonwealth Court ("Court"). The Court affirmed the PUC's decision.

The Court found that, "The Competition Act was intended to help consumers by creating a more competitive electric market through the unbundling of the three functions of the market. However, the Competition Act also created a safety net, a DSP [default service provider], to provide electricity for distribution customers should they choose not to shop for generation services or should an EGS fail to provide service. While we acknowledge NRG’s desire to promote what it believes would be a fairer market that would enhance competition, the Commission was not persuaded by NRG’s evidence and arguments."

The Court found that the PUC's order complied with the Competition Act

"Reviewing the Competition Act and the Commission’s Opinion and Order, we discern no error in the Commission’s determinations. The Competition Act was enacted to unbundle generation, transmission, and distribution, the three main components of providing electricity service. Although NRG contends that PECO’s PTC does not provide 'adequate and accurate' information as is required for 'consumers to make informed choices,' see 66 Pa.C.S. § 2807(d)(2), the Commission has repeatedly reviewed PECO’s default and distribution cost allocations and found them to be reasonable and lawful. In this matter, the Commission thoroughly analyzed PECO’s and NRG’s proposals and, per its special expertise '[a]s the administrative body charged with implementing the Competition Act,' ... determined PECO’s cost allocations were just, reasonable, and supported by the required evidence. The Commission’s determination in this regard was not clearly erroneous and is supported by the record, and, therefore, it will not be overturned," the Court said

"Additionally, NRG’s assertion that the Commission’s Opinion and Order allows PECO to engage in anti-competitive conduct was rebutted by the credited testimony of [PECO witness] Mr. Cohn. Mr. Cohn testified that, under the Competition Act and the Regulations, PECO cannot make a profit from its default service, and PECO does not seek to compete or maintain certain levels of default customers. (R.R. at 343a, 348a-49a.) The Commission was persuaded by the differences between an EGS and PECO and concluded that an EGS’s rate structure 'is irrelevant to this proceeding.' (Opinion and Order at 69.) As recognized by the Commission, 'virtually all of the revenue received from default service customers [is passed through] to wholesale suppliers under contract with PECO.' (R.R. at 355a.) 'Thus, as it relates to the re-allocation of certain indirect costs that NRG raises, the question is not whether the alternative suppliers’ cost structure is the same as [PECO]’s, but whether PECO incurs a cost that should be recovered from all customers,'" the Court said

"The Commission also credited [OCA witness] Mr. Johnson’s testimony that PECO, as the DSP, must 'stand ready' to serve '100% of residential customers at any time.' (Id. at 44.) Thus, all of PECO’s residential distribution customers benefit from this reliable safety net that PECO provides as a DSP. Given the Commission’s findings, we cannot find that NRG demonstrated an anti-competitive benefit to PECO resulting from the Commission’s approval of PECO’s rate change. Accordingly, there was no violation of the Competition Act that requires the reversal of the Commission’s Opinion and Order," the Court said

The Court also said, "The Commission has the administrative expertise to review the Competition Act and its own orders and, absent clear error, we defer to that expertise. See Energy Conservation Council of Pa., 995 A.2d at 478; George, 735 A.2d at 1288. No such error appears here."

NRG had also argued that the adopted allocation contravened PECO's 1997 "Restructuring Order", addressing the separation of generation and distribution, insofar as default service and distribution service are not being treated as functionally separate divisions.

The PUC held that, unlike generation, default service is inherently a part of the distribution service and cannot be independently supported if it was to be functionally separated. "Because PECO’s default service differs greatly from PECO’s former generation sector, we discern no clear error in the Commission’s conclusion that the Restructuring Order was not applicable here," the Court said

The Court also found that the PUC did not violate its Default Service Regulations, 2007 Price to Compare Policy Statement, nor the Retail Market Investigation End State Order

"Mr. Cohn’s testimony and the Commission’s historical review, and approval, of PECO’s distribution rates and default service programs reflect the Commission’s compliance with the Regulations and 2007 Policy Statement. We are also unpersuaded by NRG’s argument regarding the RMI End State Order because NRG was permitted to present evidence and argue its alternative cost allocation methodology in this distribution rate case," the Court said

The Court found that the PUC's order did not contravene the Court's prior finding in Lloyd v. Pennsylvania Public Utility Commission, in which the Court had previously held that the Competition Act requires setting separate rates for each type of service. In particular, NRG argued that in adopting the allocation between default service and distribution, the PUC improperly allowed the "avoided cost theory" advanced by PECO and OCA to be applied

However, the Court found that, "It is apparent from a review of the Opinion and Order that the Commission did not rely on an 'avoided cost theory' because the Commission identified 'cost causation' as the appropriate method to determine rates and makes no mention of 'avoided cost' except when explaining parties’ positions."

"Furthermore, the Commission’s conclusion that 'the distinction [] NRG wishes to draw between shopping and non-shopping customers is not a definable classification' because 'customers move from shopping to default service and back again, but all customers use [PECO’s] distribution services . . .' is supported by the record," the Court said

"In other words, PECO must 'stand ready' to serve all of its distribution customers should the need arise, regardless of the customers’ status of shopping or non-shopping, given the fluid nature of shopping and non-shopping customers," the Court said

The Court also addressed arguments from NRG that the PUC impermissibly shifted the burden of proof in the case to NRG

"[W]e discern no error in the Commission’s application of the relevant burdens of proof in this matter," the Court said

"Acting in its role as factfinder and arbiter of evidentiary weight, Borough of Duncannon v. Pennsylvania Public Utility Commission, 713 A.2d 737, 739 (Pa. Cmwlth. 1998), the Commission weighed all the evidence presented, as is required, and concluded that PECO met its burden under Section 315(a). Upon determining that PECO met its burden to prove that its proposed rate was just and reasonable, the Commission separately considered whether NRG presented 'some evidence' to support its own position, a standard that NRG acknowledges is correct," the Court said

"Examining NRG’s evidence and the rebuttal evidence presented by PECO and OCA, the Commission held that NRG did not meet its burden because NRG’s witness, Mr. Peterson, was not credible as to the reasonableness of NRG’s proposed adjustment. In particular, the Commission explained that '[i]n this proceeding, Mr. Peterson could not identify specific additional costs related to providing service, having done no analysis of the costs that PECO actually incurs to provide default service,'" the Court said

NRG Energy, Inc. v. PA PUC - 58 C.D. 2019

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