Appalachian Power co. v. State Corp. Comm'n ( 2012 )

Present: Kinser, C.J., Lemons, Millette, McClanahan and Powell,
JJ., and Russell and Lacy, S.JJ.
APPALACHIAN POWER COMPANY
v. Record No. 120394 OPINION BY SENIOR JUSTICE
ELIZABETH B. LACY
STATE CORPORATION COMMISSION, November 1, 2012
ET AL.
FROM THE STATE CORPORATION COMMISSION
In this appeal, we consider whether the State Corporation
Commission properly construed and applied Code § 56-
585.1(A)(5)(e) to deny rate adjustment clause recovery for
certain costs incurred by Appalachian Power Company (“APCO” or
“the Company”).
Background
Prior to 1999, the State Corporation Commission (“the
Commission”) determined the rates electric utility companies
charged consumers pursuant to Chapter 10, Article 2 of Title 56,
Code §§ 56-234 through -245.1:1. Under that regulatory regime,
the rates could be changed following a review initiated by the
Commission or upon an application filed by an electric utility.
The Commission had broad discretion in selecting the methodology
for determining rates including the rate of return on equity
guided by the principle that the rates were to be just and
reasonable, allowing the utility a reasonable return and
imposing just rates on the consumer. Code § 56-235.2.
In 1999, the General Assembly enacted the Virginia Electric
Utility Restructuring Act, former Code §§ 56-576 et seq., which
was designed to deregulate parts of the electric utility
industry and introduce competition among the providers of
electric generation. 1999 Acts ch. 411; Potomac Edison Co. v.
State Corp. Comm’n, 276 Va. 577, 580, 667 S.E.2d 772, 773
(2008). The legislation established a transition period, during
which the base rates of electric utilities were held constant or
“capped.” 1 However, utilities were allowed to file annual rate
applications to recover incremental costs incurred for system
reliability and for compliance with governmental environmental
laws or regulations. Code § 56-582(B)(vi); 2004 Acts ch. 827.
In 2007, the General Assembly ended its program of
deregulation and enacted Code § 56-585.1 which prescribed a new
regulation regime. 2007 Acts chs. 888, 933. The new
legislation reaffirmed the Commission’s authority to regulate
electric utility rates but prescribed certain procedures and
methodologies which the Commission must follow in establishing
such rates.
1
The initial transition period extended from January 1,
2001 to July 1, 2007, but was extended to December 31, 2008,
“unless sooner terminated by the Commission pursuant to the
provisions of subsection C; however, rates after the expiration
or termination of capped rates shall equal capped rates until
such rates are changed pursuant to other provisions of this
title.” Code § 56-582(F); 2007 Acts chs. 888, 933.
2
Under the 2007 regulatory regime each utility was required
to undergo an initial review by the Commission in 2009. In this
proceeding, the Commission conducted a review of each company’s
2008 performance, set a rate of return and determined the rates
to be charged going forward “until such rates are adjusted.”
Code § 56-585.1(A). The methodology for adjusting rates in this
initial proceeding was set out in the statute. Id.
The legislation requires that, after the initial review
proceeding, the performance of electric utility companies is
reviewed every two years. In the biennial review, the
Commission considers the company’s rates, terms, and conditions
for the provision of generation, distribution and transmission
services for the preceding two years. Id. While the biennial
review has some characteristics of the Chapter 10 base rate
proceeding, the statute imposes significant limitations on the
Commission’s discretion in adjusting rates. Id.
If the utility earned more than 50 basis points below the
authorized fair combined rate of return, the Commission “shall
order increases to the utility’s rates necessary to provide the
opportunity to fully recover the costs of providing the
utility’s services and to earn not less than such fair combined
rate of return . . . .” Code § 56-585.1(A)(8)(i). If the
utility earned more than 50 basis points above the fair combined
rate of return established by the Commission, 60 percent of the
3
amount of the earnings above the fair rate of return must be
credited to customers’ bills and the electric utility may retain
the remaining 40 percent of the excess earnings. Code § 56-
585.1(A)(8)(ii). The Commission may not order a rate reduction
unless it finds that the electric utility earned more than 50
basis points above the fair rate of return in two consecutive
biennial reviews. Code § 56-585.1(A)(8)(iii).
The 2007 legislation also creates a new proceeding allowing
a utility to petition the Commission for approval of a rate
adjustment clause for the “timely and current” recovery from
customers for costs incurred in certain identified programs.
Code §§ 56-585.1(A)(4) through (6). As relevant here, the
Commission is directed to make rate adjustments allowing a
company to recover projected and actual costs of projects which
the Commission finds necessary to comply with state or federal
environmental laws or regulations. Code § 56-585.1(A)(5)(e).
Once granted, a rate adjustment clause is combined with the
company’s costs, revenues and investments in a biennial review
proceeding if there are adjustments to the rates until the
amounts of the adjustment clause are fully recovered. Code
§ 56-585.1(A)(3).
Proceedings
Pursuant to the regulatory review regime outlined above,
APCO filed its petition for its initial review in 2009. In that
4
proceeding APCO sought a rate increase of approximately $167
million based on the Company's performance in the 2008 test
year. The Commission’s order implementing APCO’s adjusted rates
included recovery for some, but not all the amounts sought by
APCO for compliance with various state and federal environmental
laws and regulations. These rates became effective in August of
2010. In re Appalachian Power Co., Case No. PUE-2009-00030,
(July 15, 2010). 2
In March of 2011, APCO filed a petition pursuant to Code
§ 56-585.1(A)(5)(e), seeking a rate adjustment clause to recover
$77 million, which it asserted represented the 2009 and 2010
actual costs incurred by the Company, but not recovered through
base rates, to comply with state and federal environmental
requirements. 3 The recovery APCO sought was incurred either
directly by APCO for environmental projects required for
compliance or through the capacity equalization charges it paid
to its affiliates which included costs incurred by the
2
A copy of this order may be found using the Commission’s
docket search website,
http://docket.scc.state.va.us/CyberDocs/Libraries/Default_Librar
y/Common/frameviewdsp.asp?doc=103033&lib=CASEWEBP%5FLIB&mimetype
=application%2Fpdf&rendition=native (last visited September 28,
2012).
3
APCO contemporaneously made its biennial filing pursuant
to Code § 56-585.1(A)(3). That proceeding is not at issue in
this appeal.
5
affiliates for compliance with state or federal environmental
laws or regulations. 4
The Commission published an order calling for notice and
hearing, scheduled public hearings associated with the petition,
established a procedural schedule for the case, and assigned a
hearing examiner to conduct all further proceedings on behalf of
the Commission. A number of parties filed notices of
participation including the Old Dominion Committee for Fair
Utility Rates and the Office of the Attorney General Division of
Consumer Counsel, appellees in this appeal. Public hearings and
evidentiary hearings were conducted by the Commission and the
hearing examiner.
In his report and recommendations to the Commission, the
hearing examiner concluded that Code § 56-585.1(A)(5)(e)
entitled APCO to recover the environmental compliance costs it
sought but, based on the testimony and evidence received, the
hearing examiner recommended that the appropriate amount of
4
Capacity equalization charges are charges APCO pays to
acquire supplemental generation capacity to meet its native load
demand. The supplemental generation is acquired from facilities
owned by APCO’s affiliates which, like APCO, are subsidiaries of
American Electric Power Company, Inc. The amount of the
capacity equalization charges is determined through an
Interconnection Agreement between APCO and its affiliates
approved by the Federal Energy Regulatory Commission. The
Interconnection Agreement sets out a formula to show the
affiliates’ costs of owning, operating and maintaining the
generation facilities that supply the capacity purchased by
APCO.
6
revenue recovery should be $63.3 million rather than the
approximately $77 million sought by APCO. 5
The Commission rejected the hearing examiner’s construction
and application of Code § 56-585.1(A)(5)(e) and held that the
section did not authorize recovery of those costs which the
Company had already been given the opportunity to recover
through its base rates.
The Commission also concluded that, even if APCO was
entitled to recover actual compliance costs associated with
categories of projects included in, but not recovered by the
base rates, it could not recover the $27.3 million alleged as
embedded in the capacity equalization charges because APCO
failed to establish the actual amount of the environmental costs
embedded in those charges.
The Commission entered an order allowing APCO to recover
$30 million for actual environmental compliance costs over a
one-year period and denying recovery of the remaining
approximately $6 million APCO claimed it incurred directly but
did not recover through base rates to comply with environmental
regulations and laws and approximately $27.3 million alleged to
be environmental compliance costs embedded in the capacity
adjustment charges paid to its affiliates. APCO filed an appeal
5
APCO did not challenge the amount of recovery recommended
by the hearing examiner before the Commission and does not do so
in this appeal.
7
with this Court pursuant to Rule 5:21(a) naming the Commission
and intervenors, Old Dominion Committee for Fair Utility Rates
and the Office of the Attorney General Division of Consumer
Counsel, as appellees.
Discussion
1. Application of Code § 56-585.1(A)(5)(e)
APCO raises three assignments of error containing a number
of subpoints. The overarching challenge which APCO advances is
that the ratemaking methodology adopted by the Commission to
implement Code § 56-585.1(A)(5)(e) ignored the plain and
unambiguous language of the statute.
The Constitution of Virginia vests administrative, judicial
and legislative powers in the Commission in the exercise of the
control and regulation of public utility companies. Potomac
Edison, 276 Va. at 586, 667 S.E.2d at 777. In considering the
appropriate standard of review to be applied when reviewing a
Commission decision, we begin by giving a decision in which the
Commission has exercised its expertise a presumption of
correctness. Id. Our standard of review, however, will depend
on the nature of the decision under review. Id. The decision
under review here is the Commission’s construction and
application of Code § 56-585.1(A)(5)(e). This statutory
construction issue is a question of law reviewed by this Court
8
de novo. Christian v. State Corp. Comm’n, 282 Va. 392, 396-97,
718 S.E.2d 767, 769 (2011).
The Commission and other appellees, however, assert that we
have limited the de novo standard of review in certain cases
citing opinions in which we have recited that “the practical
construction given by the Commission to a statute it is charged
with enforcing is entitled to great weight by the courts and in
doubtful cases will be regarded as decisive.” Piedmont Envtl.
Council v. Virginia Elec. & Power Co., 278 Va. 553, 563, 684
S.E.2d 805, 810 (2009) (citations and internal quotation marks
omitted); Appalachian Voices v. State Corp. Comm’n, 277 Va. 509,
516, 675 S.E.2d 458, 461 (2009); Commonwealth v. Appalachian
Elec. Power Co., 193 Va. 37, 45, 68 S.E.2d 122, 127 (1951).
Acknowledging that an agency cannot advance an interpretation
that contradicts the statute, Davenport v. Little-Bowser, 269
Va. 546, 554-55, 611 S.E.2d 366, 370-71 (2005)(citing Superior
Steel Corp. v. Commonwealth, 147 Va. 202, 206, 136 S.E. 666, 667
(1927)), the Commission suggests that our prior cases require
that we treat the Commission’s decision as “decisive.” 6 We
disagree with the suggestion that in this case the Commission’s
statutory interpretation must be considered as “decisive.”
6
The arguments raised by the other appellees in this appeal
are substantially similar to those raised by the Commission.
9
The Commission’s statutory construction was first
characterized as “decisive” in Appalachian Elec. Power Co., 193
Va. at 45, 68 S.E.2d at 127. In that case, the Commission
construed a tax statute and held that electric utilities doing
business in this state could deduct certain monies derived from
operations in other states before computing their liability for
the tax at issue. The Commission had applied this construction
of the statute for approximately a decade. After concluding
that the statute was ambiguous, the Court not only described the
Commission’s interpretation as being decisive, it explained the
reason for ascribing this level of deference to the Commission’s
decision in that case. Id. Citing a number of previous cases,
the Court explained that the “[l]egislature is presumed to be
cognizant of such construction and when long continued, in the
absence of legislation evincing a dissent, the courts will adopt
that interpretation.” 7 Id. at 45-46, 68 S.E.2d at 127. In that
7
Miller v. Commonwealth, 180 Va. 36, 41-42, 21 S.E.2d 721,
723 (1942)(public official’s statutory construction accepted by
bench and bar for long period of time is canon of construction,
unless paramount reason is found for change in construction);
Commonwealth v. Stringfellow, 173 Va. 284, 289, 4 S.E.2d 357,
359 (1939)(great weight afforded tax department’s long-standing
and uniform statutory construction); Hunton v. Commonwealth, 166
Va. 229, 242, 183 S.E. 873, 878 (1936)(court defers to tax
official’s practical construction of tax laws when, for over 30
years, neither legislature nor tax commission recommended change
in law due to constitutional conflict); Smith v. Bryan, 100 Va.
199, 204, 40 S.E. 652, 654 (1902)(court regards public
official’s construction of statute of doubtful import as correct
10
case, as in others using this principle, the General Assembly
had not altered the agency’s interpretation although it had the
opportunity to do so during the intervening years. Id.
The Commission’s construction of the statute in this case
is not a long-standing one and is not a construction which the
General Assembly has had the opportunity to consider. Thus, the
presumption of legislative acquiescence does not apply. Compare
Beck v. Shelton, 267 Va. 482, 492, 593 S.E.2d 195, 200
(2004)(when General Assembly was aware of interpretation of
statute embodied in an Opinion of the Attorney General for five
years and “fail[ed] to make corrective amendments” to statute
during that time, such “failure . . . evinces legislative
acquiescence in the Attorney General’s view”)(quoting Browning-
Ferris, Inc. v. Commonwealth, 225 Va. 157, 161-62, 300 S.E.2d
603, 605-06 (1983)).
In any case involving statutory construction we begin with
the language of the statute. Code § 56-585.1(A)(5)(e) provides
in pertinent part:
5. A utility may at any time, after the
expiration or termination of capped rates, but
not more than once in any 12-month period,
petition the Commission for approval of one or
more rate adjustment clauses for the timely and
current recovery from customers of the
following costs:
when that construction remains unchanged by legislature or
judicial decision over time).
11
. . . .
e. Projected and actual costs of projects
that the Commission finds to be necessary to
comply with state or federal environmental
laws or regulations applicable to generation
facilities used to serve the utility’s native
load obligations. The Commission shall
approve such a petition if it finds that such
costs are necessary to comply with such
environmental laws or regulations . . . .
The Commission contends that because Code § 56-
585.1(A)(5)(e) “is silent on the intersection of base rate
recovery and adjustment clause recovery,” subsection (C) of Code
§ 56-585.1 requires the Commission to adopt a “ratemaking
methodology” to implement the adjustment rate clause section
which will produce just and reasonable rates as directed in
Chapter 10 of Title 56 of the Code. 8 Noting that nothing in the
statute gives a utility the right to recover all of its actual
environmental compliance costs, the Commission reasons that by
including such costs in its base rates, a company has the
opportunity to recover such costs, which can be supplemented by
costs for projects not already included in the base rates. This
8
Code § 56-585.1(C) provides:
Except as otherwise provided in this section, the
Commission shall exercise authority over the rates,
terms and conditions of investor-owned incumbent
electric utilities for the provision of generation,
transmission and distribution services to retail
customers in the Commonwealth pursuant to the
provisions of Chapter 10 (§ 56-232 et seq.),
including specifically § 56-235.2.
12
result, the Commission concludes, is “fully supported by the
plain language of the Act.”
The Commission also contends that the ratemaking
methodology it chose is consistent with Code § 56-585.1 when
read as a whole. Subdivision (7) of Code § 56-585.1(A) requires
the Commission to consider a petition for a rate adjustment
clause for environmental compliance costs “on a stand-alone
basis without regard to the other costs, revenues, investments,
or earnings of the utility.” Thus, the Commission continues,
the base rate and rate adjustment clause proceedings are
separate proceedings and incorporation of base rate items when
setting adjustment clause rates “would exceed the Commission’s
authority in adjustment clause proceedings.” According to the
Commission, other “costs, revenues, investments, or earnings”
are appropriately disregarded by limiting the adjustment clause
rates only to environmental costs not already included in base
rates.
The primary objective in statutory construction is to
determine and give effect to the intent of the legislature as
expressed in the language of the statute. Halifax Corp. v.
First Union Nat’l Bank, 262 Va. 91, 99-100, 546 S.E.2d 696, 702
(2001). When a statute is unambiguous, we must apply the plain
meaning of that language. Id. If the statute is subject to
more than one interpretation, we must apply the interpretation
13
that carries out the legislative intent. Brown v. Lukhard, 229
Va. 316, 321, 330 S.E.2d 84, 87 (1985). Rules of statutory
construction prohibit adding language to or deleting language
from a statute. BBF, Inc. v. Alstom Power, Inc., 274 Va. 326,
331, 645 S.E.2d 467, 469 (2007).
The statute quoted above clearly states the intent of the
legislature. It states that the Commission “shall” approve a
utility’s petition for a rate adjustment clause filed pursuant
to Code § 56-585.1(A)(5)(e) if the three conditions set out in
the statute are met: (1) only one petition for a rate adjustment
clause seeking recovery under the section is filed in any 12-
month period; (2) the costs are actual or projected costs; and
(3) the Commission finds that the costs were necessary to comply
with state or federal environmental laws or regulations.
Further, the statute states that the purpose of the rate
adjustment clauses is to allow for the “timely” and “current”
recovery of qualified costs. Code § 56-585.1(A)(5). The rate
adjustment clause proceeding stands in direct contrast to the
more lengthy base rate proceeding, which under Code § 56-585.1
only occurs every two years. 9
There is no dispute that the costs APCO seeks to recover
were incurred in qualified environmental projects and that these
9
A utility company may still apply for temporary rate
increases at any time. Code §§ 56-585.1(B) and -245.
14
costs have not been recovered and cannot be recovered in the
future through the mechanism of the base rates. Yet, the
ratemaking methodology adopted by the Commission prevents the
recovery of the very costs which the statute identifies as being
recoverable through a rate adjustment clause. Providing a
utility with the opportunity to recover environmental compliance
costs is inconsistent with the statutory mandate providing for
the timely and current actual recovery of such costs which, in
this case, means such costs will never be recovered.
The Commission’s methodology not only contradicts the
intent of the legislature reflected in the statute, it
effectively adds a fourth condition to the statute: the costs
sought were not costs that could have been recovered in the
Company’s base rates. Adding words to a statute in this manner
violates a well-established tenet of statutory construction.
BBF, Inc., 274 Va. at 331, 645 S.E.2d at 469 (courts, in
construing a statute, must apply its plain meaning, and “we are
not free to add [to] language, nor to ignore language, contained
in statutes.”)(quoting SIGNAL Corp. v. Keane Fed. Sys., 265 Va.
38, 46, 574 S.E.2d 253, 257 (2003)).
The Commission’s reliance on the authority contained in
subsection (C) of Code § 56-585.1 as support for its ratemaking
methodology is misplaced. That subsection specifically makes
the Commission’s exercise of its Chapter 10 ratemaking authority
15
subject to the other provisions of Code § 56-585.1. Therefore,
any ratemaking methodology which the Commission adopts to
implement Code § 56-585.1(A)(5)(e) may not contradict that
section. As pointed out above, the ratemaking methodology
adopted by the Commission conflicts with the intent and the
plain language of Code § 56-585.1(A)(5)(e).
Finally, the directive that the Commission consider a
petition for a rate adjustment clause under Code § 56-
585.1(A)(5)(e) on a stand-alone basis does not require the type
of separation the Commission suggests. Indeed, even under the
Commission’s methodology, reference to a utility’s base rates
would be required to determine whether the projects which
incurred the actual or projected costs sought to be recovered
were included in the computation of the base rates.
Furthermore, reference to base rate revenues would be necessary
to ensure that the amount requested as an actual unrecovered
cost had in fact not already been recovered.
Rather, the “stand-alone” language in subdivision (7) of
subsection (A) of the statute means that the utility’s costs,
revenues, investments or earnings should not be considered when
determining the amount of the rate adjustment clause. Nothing
in the language of this subdivision suggests or requires that
actual costs incurred in environmental compliance projects may
16
not include costs associated with such projects if the projects
were included in formulating base rates.
For these reasons, we hold that Code § 56-585.1(A)(5)(e)
allows recovery of unrecovered costs incurred by a utility for
environmental compliance projects necessary to serve the
utility’s native load obligations even if the projects which
incurred those costs were included in the utility’s base rates.
2. Recovery of Compliance Costs Embedded
in Capacity Equalization Charges
The Commission also denied recovery of the environmental
compliance costs embedded in the capacity equalization charges
that APCO sought because the evidence did not “accurately
reflect actual ‘costs of projects’ used to serve the Company’s
native load customers.” APCO has assigned error to this
alternate holding and we now address that issue.
APCO argues that it produced sufficient evidence to support
recovery for the environmental compliance costs embedded in the
capacity equalization charges. APCO points to uncontradicted
evidence that a portion of the capacity payments included costs
that its affiliates incurred for projects required to comply
with environmental laws and regulations and evidence of the
amount of capacity equalization charges APCO paid to its
affiliates during the time periods in question. APCO also
relies on the testimony and exhibits of its witnesses and
17
Commission Staff which included computations or estimates of the
portion of the capacity equalization charges attributable to
environmental compliance costs incurred by its affiliates. APCO
asserts that the use of different formulae by its witnesses and
Commission Staff to arrive at the amount of environmental
compliance costs embedded in the capacity equalization charges
did not absolve the Commission from weighing the evidence and
determining a proper recovery amount. Finally, APCO asserts
that the evidence and calculations it presented were “identical
in form, detail and scope” to evidence accepted by the
Commission in prior cases under Code § 56-582 during the former
deregulation transition period.
The Commission, in its alternate holding denying these
costs, noted that although Code § 56-585.1(A)(5)(e) allows
recovery for actual and projected costs, in this proceeding APCO
sought recovery of costs it identified as actual, not projected
costs. The Commission’s ruling was based on its determination
that nothing in the testimony or calculations regarding the
capacity equalization charges paid by APCO or the
Interconnection Agreement contains any identification or
specific quantification of the amount of environmental costs
embedded in those charges. In applying the statutory language
referring to “actual costs,” the Commission held that estimates
of environmental compliance costs produced in this case “did not
18
sufficiently demonstrate [the] actual costs” as required by the
statute. The Commission also noted that using “one of the
varying calculations in the record could result in a double
recovery of costs through the Company’s base rates and
adjustment rate clauses.”
The Commission’s decision under review here is that the
evidence was insufficient to prove “actual costs.” This finding
of fact will not be reversed unless it is “contrary to the
evidence or without evidence to support it.” Mutual Sav. & Loan
Ass'n v. Commonwealth, 212 Va. 557, 559, 186 S.E.2d 13, 14
(1972).
In its alternate holding, the Commission applied the plain
language of the statute, which in this case limits rate
adjustment clauses to “actual costs,” and held that the
estimates of environmental compliance costs embedded in the
capacity equalization charges did not meet the statutory
requirement. Acceptance of estimates in proceedings brought
under other statutes which did not require evidence of “actual
costs” does not require or suggest that estimates should be
sufficient in this proceeding. Furthermore, APCO’s argument
that the Commission failed to weigh the evidence and instead
ignored it is without merit. The record is clear that the
Commission considered the evidence and found that it did not
satisfy the statutory requirement of “actual costs.”
19
Based on this record, we cannot say the Commission’s
decision is contrary to the evidence or without evidentiary
support.
Conclusion
In summary, in this appeal APCO sought recovery of $33.3
million in environmental compliance costs that the Commission
denied. For the reasons stated, we hold that APCO is entitled
to a rate adjustment clause for recovery of actual costs it
directly incurred for environmental compliance in 2009 and 2010,
but did not recover through its base rates. We will reverse
that portion of the Commission’s decision denying recovery of
environmental compliance costs on the basis that those costs are
connected with projects included in APCO’s base rates which the
Company had the opportunity to recover.
We will affirm that portion of the Commission’s decision
denying APCO recovery of environmental compliance costs alleged
to be embedded in the capacity equalization charges APCO paid to
its affiliates in 2009 and 2010. Accordingly, we will remand
the case to the Commission for further proceedings consistent
with this opinion.
Reversed in part,
affirmed in part
and remanded.
20