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Monticello Wind Farm, LLC v. Public Service Commission of Utah

Supreme Court of Utah

August 12, 2019

Monticello Wind Farm, LLC, Petitioner,
v.
Public Service Commission of Utah, Respondent.

          On Petition for Review of Agency Decision

          Mary Anne Q. Wood, Stephen Q. Wood, Salt Lake City, for petitioner

          Michael J. Hammer, Salt Lake City, for respondent Public Service Commission

          Sean D. Reyes, Att'y Gen., Justin Jetter, Asst. Att'y Gen., Salt Lake City, for respondent Division of Public Utilities

          Sean D. Reyes, Att'y Gen., Robert J. Moore, Asst. Att'y Gen., Salt Lake City, for respondent Office of Consumer Services

          R. Jeff Richards, Yvonne R. Hogle, D. Matthew Moscon, R. Chad Pugh, Salt Lake City, for respondent PacifiCorp d/b/a Rocky Mountain Power

          Justice Pearce authored the opinion of the Court in which Chief Justice Durrant, Associate Chief Justice Lee, Justice Himonas, and Justice Petersen joined.

          OPINION

          PEARCE, JUSTICE.

         INTRODUCTION

         ¶1 PacifiCorp entered into an agreement with Monticello Wind Farm, LLC (MWF) for the purchase of wind energy. Under Utah and federal law, PacifiCorp and MWF could set the terms for that agreement in one of two ways. They could follow the procedure set by the Public Service Commission (Commission) and fix pricing based on PacifiCorp's avoided costs; that is, what it would cost PacifiCorp to produce the energy itself or obtain it from another source. In this event, the Commission, pursuant to its procedure, would review any executed agreement to ensure it did not exceed those costs. Or PacifiCorp and MWF could operate outside the Commission's framework. They could negotiate their own pricing terms and contractually limit the scope of the Commission's review. This case requires us to decide which type of contract MWF and PacifiCorp signed.

         ¶2 PacifiCorp submitted the agreement to the Commission for approval. The Commission reviewed the pricing to ensure consistency with PacifiCorp's avoided costs. The pricing, however, was based on a methodology the Commission had discontinued. And the information underlying that methodology had not been updated for several years. For those reasons, the Commission concluded the pricing could not be deemed consistent with PacifiCorp's avoided costs. The Commission denied the application.

         ¶3 On appeal, MWF asks us to review the Commission's order. MWF primarily asserts the parties opted out of the Commission's framework and, as a result, the Commission was obligated to approve the agreement unless its terms would seriously harm the public interest. This case turns on a question of contract interpretation and asks what type of contract the parties penned. We conclude the agreement was one negotiated within the Commission's framework. And was therefore an agreement the Commission could reject if it obligated PacifiCorp to purchase energy at a price higher than its avoided costs. The remainder of MWF's challenges are not properly before us and therefore do not provide MWF a path to victory. We affirm.

         BACKGROUND

         ¶4 This is not the first time we have seen these parties or been asked to weigh in on a conflict between the two. PacifiCorp[1] and MWF share a contentious history, more fully outlined in an opinion addressing a prior chapter in this litigation.[2] See Ellis-Hall Consultants v. Pub. Serv. Comm'n, 2016 UT 34, ¶¶ 1-16, 379 P.3d 1270 (Ellis-Hall II). We relate only the facts relevant to this stage of the proceedings.

         Regulatory Background

         ¶5 "To encourage the development of alternative energy resources, federal law requires a utility to purchase wind energy and other forms of alternative power from qualifying facilities at its avoided cost-what it would have cost the utility to generate the power itself or purchase it from another source."[3] Ellis-Hall II, 2016 UT 34, ¶ 3 (footnote omitted) (citing 16 U.S.C. § 824a-3; 18 C.F.R. § 292.101). The Federal Energy Regulatory Commission prescribes rules governing these transactions, including rules ensuring that the rates for such purchases "shall be just and reasonable to the electric consumers of the electric utility and in the public interest."[4] 16 U.S.C. § 824a-3(a), (b)(1). And state regulatory agencies are required to implement those rules. Id. § 824a-3(f)(1).

         ¶6 The Utah Code contains similar provisions.[5] Utilities are required to "offer to purchase power from qualifying power producers." Utah Code § 54-12-2(1). And pursuant to section 54-12-2, the terms for agreements between utilities and qualifying facilities are set in one of two ways. Under subsection (2), the Commission creates the process for determining the agreement's terms and conditions, including the power purchase rates: "The commission shall establish reasonable rates, terms, and conditions for the purchase or sale of electricity or electrical generating capacity, or both, between a purchasing utility and a qualifying power producer." Id. § 54-12-2(2).

         ¶7 "In establishing these rates, terms, and conditions, the commission shall either establish a procedure under which qualifying power producers offer competitive bids . . . or devise an alternative method which considers the purchasing utility's avoided costs." Id. And Utah law defines "avoided costs" in the same manner as federal law-the cost to the utility of generating the power itself or purchasing it from another electrical corporation. See id. § 54-2-1(1). Thus, under subsection (2), a utility fulfills its must-purchase obligation by agreeing to purchase power from a qualifying facility in accordance with the terms, conditions, and methodology the Commission sets.

         ¶8 Under subsection (3), in contrast, the Utah Code provides for contracts formed outside of the Commission's framework. See id. § 54-12-2(3). Rather than agreeing to the purchase or sale of power pursuant to the Commission's process and conditions, a utility and qualifying facility may reach an agreement on their own terms. See id. And they may set the pricing: "Purchasing utilities and qualifying power producers may agree to rates, terms, or conditions for the sale of electricity or electrical capacity which differ from the rates, terms, and conditions adopted by the commission under Subsection (2)." Id.

         ¶9 Subsection (3) thus mirrors a federal regulatory provision addressing "the regulation of sales and purchases between qualifying facilities and electric utilities." See 18 C.F.R. § 292.301(a). The federal regulation provides that "[n]othing in this subpart . . . [l]imits 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 which would otherwise be required by this subpart." Id. § 292.301(b)(1).

         ¶10 Section 54-12-2 does not further define the Commission's role with respect to these agreements. It merely provides that "[t]he commission may adopt further rules which encourage the development of small power production and cogeneration facilities." Utah Code § 54-12-2(4). But other provisions of state law vest the Commission with "power and jurisdiction to supervise and regulate every public utility in this state," "to supervise all of the business of every such public utility in this state, and to do all things, whether herein specifically designated or in addition thereto, which are necessary or convenient in the exercise of such power and jurisdiction." Id. § 54-4-1. And state law requires that "[e]very public utility shall . . . provide . . . service . . . as will be in all respects adequate, efficient, just and reasonable," and that "[a]ll rules and regulations made by a public utility affecting or pertaining to its charges or service to the public shall be just and reasonable." Id. § 54-3-1.

         ¶11 Under this framework, the Commission thus administers the state and federal laws requiring utilities to purchase power from qualifying facilities. Ellis-Hall Consultants, LLC v. Pub. Serv. Comm'n, 2014 UT 52, ¶ 21, 342 P.3d 256 (Ellis-Hall I). Accordingly, "[t]he Commission establishes the methodology for determining avoided cost. It also promulgates regulatory tariffs establishing the rules for the negotiation and approval of power purchase agreements." Ellis-Hall II, 2016 UT 34, ¶ 3. And, as noted above, the Commission operates under "a statutory mandate to set a rate that is in the public interest." Ellis-Hall I, 2014 UT 52, ¶ 21 (citation omitted).

         ¶12 In our earlier opinion, we addressed the regulatory process the Commission used in its administration of must-purchase agreements. Ellis-Hall II, 2016 UT 34, ¶¶ 1-16, 34-42. We examined the Commission's regulatory tariff Electric Service Schedule No. 38 (Schedule 38), which governs negotiations between a qualifying facility and PacifiCorp. Id. ¶ 4. And as we noted there, under Schedule 38, a party seeking to enter into a power purchase agreement with PacifiCorp must first request and obtain "indicative pricing," which "is aimed at allowing the producer to make determinations regarding project planning, financing, and feasibility." Id. ¶¶ 1, 5 (citation omitted) (internal quotation marks omitted). PacifiCorp is required to provide indicative pricing to a qualifying facility "once the facility submits certain information regarding a proposed project." Id. ¶ 5. After a party receives the indicative pricing, that party should take "specific subsequent steps [identified by the Commission] . . . to be entitled to receive a draft power purchase agreement and to proceed toward final negotiation." Id. ¶ 6.

         Prior Litigation

         ¶13 Sometime in 2012 or early 2013, MWF requested indicative pricing from PacifiCorp. Id. ¶¶ 2, 9. At that time, the Commission authorized "a 'market proxy' methodology for determining the avoided cost for wind power projects." Id. ¶ 8. And in early 2013, MWF received indicative pricing based on that methodology. Id. ¶ 12.

         ¶14 But before MWF executed a power purchase agreement with PacifiCorp, the Commission changed its approach. Id. The Commission issued an order discontinuing use of the market proxy method in favor of a new method, "which allowed [PacifiCorp] to determine its avoided cost based on current energy production cost rather than the cost of the most recently executed proposal" for the supply of wind energy. Id. ¶¶ 8, 12. "This new methodology was expected to lower [PacifiCorp's] avoided costs." Id. ¶ 12.[6] PacifiCorp then rescinded its indicative pricing proposal with MWF "on the ground that the [Commission] had since issued an order adopting a new pricing methodology." Id. ¶ 2.

         ¶15 MWF challenged PacifiCorp's decision. Id. The Commission denied the challenge. Id. We reversed. Id. In Ellis-Hall II, we reviewed Schedule 38's provisions setting out the process by which a qualifying facility may obtain indicative pricing from PacifiCorp. Id. ¶¶ 4-7. We also examined two orders the Commission issued that are relevant to that process, including the "Phase Two" order providing that the market proxy method would be discontinued. Id. ¶¶ 11-12, 34-42. And we concluded that MWF was "not required to submit a request for new indicative pricing." Id. ¶ 43. MWF was "entitled to proceed in reliance on the methodology set forth in the indicative pricing proposal it received from [PacifiCorp]." Id. In so holding, we opined that those documents "yield a right to a wind power developer to rely on the methodology set forth in the 'indicative pricing proposal'" it had received from PacifiCorp. Id. ¶ 37.

         ¶16 We explicitly and pointedly did not reach other conclusions about the process. We expressly left open whether MWF would have "a right to require [PacifiCorp] to enter into a power purchase agreement" and whether the Commission would be "require[d] . . . to approve such an agreement." Id. ¶ 44. "Those questions [were] not properly presented for our review," and we "decline[d] to reach them." Id. We likewise concluded that the scope of PacifiCorp's discretion, if any, not to enter into such an agreement was "not properly presented" for resolution. Id. ¶¶ 45-46.

         ¶17 Moreover, we expressly left unresolved the Commission's assertion that any agreement reached on "a now-outdated indicative pricing proposal [would] ultimately be thwarted by an inevitable decision by the Commission to decline to approve a power purchase agreement based on such methodology." Id. ¶ 47. "The Commission ha[d] not as yet declined to approve a power purchase agreement," and we declined "to offer an advisory opinion on a matter that [was] not yet ripe for our review." Id.

         ¶18 Accordingly, we reiterated that "we [were] in no position to decide whether [MWF] ha[d] an ultimate right to enter into a power purchase agreement with [PacifiCorp] or to secure approval from the Commission." Id. ¶ 48. We concluded only that, "for now," MWF was "entitled . . . to rely on the indicative pricing proposal it was provided" and "ha[d] no obligation to submit a request for new indicative pricing as it move[d] forward in negotiations over a power purchase agreement with [PacifiCorp]." Id.

         Revisions to Schedule 38

         ¶19 Nearly a year before we issued our opinion in Ellis-Hall II, and while that case was pending before this court, the Commission revised Schedule 38 (Revised Schedule 38). See Rocky Mountain Power Electric Service Schedule No. 38 (2015).[7] Before the revision, Schedule 38 did not include a specified timeframe for the expiration of indicative pricing proposals. See Rocky Mountain Power Electric Service Schedule No. 38 (2012).[8]

         ¶20 In addition, Schedule 38 stated that "such prices are merely indicative and are not final and binding." Id. I.B.3. Schedule 38 further provided: "Prices and other terms and conditions are only final and binding to the extent contained in a power purchase agreement executed by both parties and approved by the Commission." Id.

         ¶21 Following the changes, however, Revised Schedule 38 included a set six-month timeframe for the parties to execute a power purchase agreement using a particular pricing proposal. "The prices in the proposed power purchase agreement . . . shall be recalculated . . . using the most recent available pricing inputs and methods approved by the Commission" if a power purchase agreement has not been executed "within six (6) months after indicative pricing was provided." Rocky Mountain Power Electric Service Schedule No. 38 I.B.9 (2015).

         ¶22 Revised Schedule 38 retained language indicating that pricing is not final and binding until "contained in a power purchase agreement executed by both parties and approved by the Commission." Id. I.B.4. And it expressly authorized the Commission to "at any time make changes to this Schedule, [qualifying facility] pricing methods and inputs, or terms and conditions applicable to [qualifying facility] pricing and power purchase agreements." Id.

         ¶23 We issued our opinion in Ellis-Hall II in July of 2016. More than a year later, in late 2017, MWF and PacifiCorp entered into a power purchase agreement (PPA). In that agreement, MWF expressed its intent to operate as a qualifying facility. And PacifiCorp agreed to purchase the wind energy MWF generated as well as any associated green tags.[9]

         ¶24 The PPA provided that "[t]he rates, terms[, ] and conditions in [the PPA] [were] in accordance with the rates, terms, and conditions approved by the Commission in Docket No. 03-035-14 for purchases from Qualifying Facilities." That docket includes several orders issued by the Commission between 2003 and 2013, including the Commission's 2005 order "resolv[ing] differences . . . regarding methods by which . . . indicative prices are determined for the purpose of negotiating agreements pursuant to Schedule No. 38." See Utah Pub. Serv. Comm'n, Docket No. 03-035-14 (In the Matter of the Application of PacifiCorp for Approval of an IRP-based Avoided Cost Methodology for QF Projects Larger than One Megawatt), Oct. 31 2005 Report and Order, at 7. In that order, the Commission approved the "market price proxy [method] for determination of avoided costs" for certain wind facilities "up to [PacifiCorp's] . . . target megawatt level of wind resources." Id. at 33.

         ¶25 The PPA also expressly provided that it would not become effective until the Commission approved it: "This Agreement shall become effective when it is executed and delivered by both Parties and has been approved by the Commission . . . ."

         ¶26 And in a provision addressing the rights of the parties if PacifiCorp were to default, the PPA provided that MWF could "seek a new power purchase agreement with PacifiCorp . . ., though PacifiCorp shall not be obligated to provide in such power purchase agreement avoided cost prices that are higher than the avoided cost prices contained in this Agreement."

         ¶27 In addition, the PPA included a Mobile-Sierra clause, providing that the power purchase rates would "remain in effect . . . absent agreement of the parties" and that "the standard of review for changes hereto . . . shall be the 'public interest' application of the 'just ...


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