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In re Petition of Atlantic City Electric Co.

May 01, 1998


Before Judges Keefe and P.g. Levy.

The opinion of the court was delivered by: P.g. Levy, J.A.D.

[9]    Argued: March 31, 1998

On appeal from the New Jersey Board of Public Utilities.

A group of county utility authorities, townships, and private entities, denominated the Rate Intervention Steering Committee (RISC), appeals from a final decision of the New Jersey Board of Public Utilities (BPU) approving a rate increase sought by the Atlantic City Electric Company. In doing so, RISC alleges the BPU: (1) incorrectly applied federal caselaw in reaching its decision; (2) arbitrarily concluded that the increase was warranted; (3) erroneously concluded that Atlantic City Electric did not have "excess capacity," the costs for which the electric company should not be able to recover; and (4) failed to provide adequate notice or opportunity to comment when approving contracts between the electric company and other producers of electricity from whom the electric company purchased power.

We agree with Administrative Law Judge (ALJ) Gural and the BPU and hold that after the BPU approved a contract for the Atlantic City Electric Company to buy energy at regulated costs, federal law preempted the BPU's reconsideration due to a reduction of market rates to levels below the original contract rates.

Contracts of Atlantic City Electric to buy electric energy were governed by the rules of the Federal Energy Regulatory Commission (FERC), pursuant to 16 U.S.C.A. §§791-828c (the Public Utility Regulatory Policies Act of 1978, also referred to as PURPA). PURPA was part of a comprehensive effort to combat a national energy crisis, and was intended to reduce the country's reliance on oil and gas by increasing the use of more abundant, domestically produced fuels. Hence, PURPA requires that FERC adopt rules requiring public utilities to buy electric energy from qualified cogeneration facilities (QF), also known as non-utility generators of power (NUG). Freehold Cogeneration Assocs., L.P. v. Board of Regulatory Commissioners of New Jersey, 44 F.3d 1178, 1182 (3d Cir.), cert. denied, 516 U.S. 815, 116 S. Ct. 68, 133 L. Ed. 2d 29 (1995); 16 U.S.C.A. § 824a-3(a). *fn1

The rules adopted by FERC must insure that the rates an electric utility pays a NUG to purchase energy shall be "just and reasonable to the electric consumers of the electric utility and in the public interest." 16 U.S.C.A. § 824a-3(b). Moreover, no such rule may provide for a rate which exceeds the "incremental cost to the electric utility of alternative electric energy." Ibid. The phrase "incremental cost of alternative electric energy" is defined as "the cost to the electric utility of the electric energy which, but for the purchase from [a NUG], such utility would generate or purchase from another source." 16 U.S.C.A. § 824a-3(d). Another term for the phrase "incremental cost of alternative electric energy" is the electric utility's "avoided cost," defined as the cost the utility would have incurred had it generated the electricity itself or purchased it from another source. American Paper Institute v. American Elec. Power Svc. Corp., 461 U.S. 402, 404, 103 S. Ct. 1921, 23, 76 L. Ed. 2d 22, 27 (1983); Freehold Cogeneration, supra, 44 F.3d at 1183. In sum, PURPA requires that utilities purchase energy from NUGs at a rate equal to or less than a utility's avoided cost. American Paper Institute, supra, 461 U.S. at 406, 103 S. Ct. at 1924, 76 L. Ed. 2d at 28.

The rules require that "standard rates" be established for purchases of electric power from NUG's. 18 C.F.R. 292.304(c)(1). Further, each NUG may provide energy to a purchasing utility pursuant to a legally enforceable agreement for the delivery of energy over a specified term. 18 C.F.R. 292.304(d)(2). The rates charged by the NUG for that energy shall be based on either the "avoided cost calculated at the time of delivery," or on the "avoided cost calculated at the time the obligation is incurred." 18 C.F.R. 292.304(d)(2)(i) and (ii).

Pursuant to PURPA, the BPU set out to establish standard rates for the purchase by utilities of electric energy from NUG's. Specifically, on May 12, 1981, the BPU conducted a hearing to receive public comment on the issue. The BPU also requested electric utilities to provide data regarding their avoided costs. On October 14, 1981, the BPU issued an order establishing a methodology for the calculation of the avoided costs a utility would incur by purchasing energy from a NUG. That methodology involved using the Pennsylvania-New Jersey-Maryland (PJM) *fn2 billing rate, plus ten percent, to determine avoided energy costs, and the PJM capacity deficiency rate to determine avoided capacity costs. This avoided cost methodology was referred to as the standard pricing methodology. There were no appeals from the BPU's order establishing the standard pricing methodology. In December 1983, the BPU issued another order reaffirming the October 1981 order. No appeal was taken from that order either.

In New Jersey, utilities generally increase their rates through base rate proceedings initiated by the filing of a petition. However, electric utilities such as Atlantic City Electric may also seek an annual increase in their rates by petitioning for a modification of their "fuel adjustment clause," also known as a "levelized energy adjustment clause," or "LEAC." Application of Rockland Elec. Co., 231 N.J. Super. 478, 483-84 (App. Div.), certif. denied, 117 N.J. 129 (1989). The LEAC is defined in the regulations cited above as "the mechanism employed by electric utilities whereby a charge or credit is made when the estimated average cost of energy produced, purchased or interchanged for the applicable period is above or below the base cost of energy." N.J.A.C. 14:3-13.2. Thus, a LEAC is a:

widely used and judicially accepted rate-making mechanism used to recover certain components of fuel costs incurred by a utility. Originating during the energy crisis of the 1970's, energy adjustment clauses are designed to permit a utility to include in rates initial estimates as to future fuel costs and to make subsequent periodic adjustments to reflect actual costs when ascertained.

[Application of Rockland, supra, 231 N.J. Super. at 484].

In sum, a constant LEAC charge is included in a utility's overall rate tariff "based on estimated prospective 12-month energy costs. This charge is subject to periodic adjustment to reflect actual costs." In re Jersey Central Power & Light Co. Petition, 85 N.J. 520, 524 (1981).

In 1987, when Atlantic City Electric sought approval of its proposed agreements with several NUGs, a settlement required Atlantic City Electric to use an agreed standard pricing methodology to set prices when it contracted with a NUG. In 1988, another BPU settlement grandfathered Atlantic City Electric's NUG contracts, and those contracts did not require re-negotiation until seven years later in ...

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