Mass. Court Cape Wind Decision Addresses Basic Service Procurement, Cost Recovery

The Massachusetts Supreme Judicial Court rejected an appeal by opponents of the long-term PPA between Cape Wind and National Grid, and the DPU's prior decision permitting cost recovery of the contract will be affirmed.

Of most note to the retail market are two arguments which the SJC addressed.

First, the New England Power Generators Association had appealed the DPU's decision due to the application of the PPA's output to basic service customers, and the method under which the contract was negotiated.

NEPGA said that, per statute, contracts for energy supplied to basic service customers must be procured through competitive bidding in order to comply with G.L. c. 164, § 1B (d). However, the Cape Wind PPA resulted from individual negotiations between the developer and National Grid.

While the statute (§§ 83) allowing utilities to enter into long-term the PPAs expressly authorizes the use of individual negotiations, NEPGA said that this provision is still subject to § 1B (d), and that individual negotiations may only be used if the PPAs' output is not being used for basic service, and is instead being sold into the market.

However, the SJC agreed with the DPU that, "it is essentially impossible to read §§ 83 and 1B (d) harmoniously."

"In order to accept [NEPGA's] position ... we would need to ignore the actual language of § 83, which specifically allows a distribution company either to use the energy it purchases for resale to its customers or to sell the associated RECs in the wholesale spot market," the Court said.

Finding that the two statutes cannot be harmonized, the Court agreed with the DPU's approval of the use of the PPA for basic service customers despite the individual negotiations, citing precedent under which more specific and recent statutory provisions shall control.

Second, the Court also approved the "hybrid" cost recovery model used under the Cape Wind PPA, and which has been applied by the DPU for similar long-term contracts.

The statute provides utilities with the option to apply a long-term PPA to basic service customers, or to sell the output into the market, and in the latter case the costs shall be recovered from all distribution customers.

Under the DPU's Cape Wind decision, energy and RECs under the PPA are applied to basic service customers, but basic service customers only pay the "market" value for these resources. Any above-market cost is allocated to all distribution customers, as is the remuneration paid to National Grid for entering into the contract.

The SJC noted that statute does not specify how costs are to be recovered if a utility retains the power and RECs for sale to its basic service customers, as the SJC cited the DPU's discretion to rule on appropriate cost recovery formulas.

While the adopted cost recovery method is "novel," the Court said that, "[t]he department permissibly determined that the environmental benefits of PPA-1, including compliance with RPS and GWSA requirements, will accrue to all National Grid customers, and it is therefore appropriate to require all customers to share in the costs of acquiring these benefits, in accordance with departmental precedent."