Scope
For decades, investor-owned utilities functioned as vertically-integrated, regulated monopolies providing electricity. Firms charged “bundled” rates to furnish end-users with all three components of electric power service – – generation, transmission, and the retail provision of power. Energy shortages, improvements in technology, and shifting economics, however, propelled forward a wave of laws by the mid- to late-1990s to “unbundle” rates, deregulate, and restructure the industry. Restructuring aimed to foster competition and reduce electric costs, while boosting supply, conservation and efficiency. To ease the transition, these measures granted utilities a right to recover uneconomic sunk (“stranded”) costs prudently invested in power generation assets under regulation. With billions of dollars at stake, litigation often ensued. Thus, for example, in Office of Public Utility Counsel v. Public Utility Com’n of Texas, 303 S.W.3d 904, Util. L. Rep. P 27,085 (Tex.App.-Austin Jan 15, 2010), the court resolved questions of which items did and did not qualify as recoverable “stranded costs”, and how the burden of payment of “stranded costs” should be allocated among residential, commercial and industrial ratepayers.
The Federal Energy Regulatory Commission (“FERC”) in 1994 found that “stranded” costs which regulated utilities would be entitled to recoup during restructuring consisted predominantly of costs of building generation capacity, which the vertically integrated utilities incurred with the expectation that they would use the additional capacity to serve existing customers. Because of the increased competition in the generation market that would result from open access, this capacity would likely become underutilized or uneconomical, i.e., “stranded.” Stranded costs also include nonrecurring costs approved by regulators that, in order to avoid rate increases, were recovered over a period of years instead of at the time the expenditures were made. Known as “regulatory assets,” these costs include deferred income taxes, deferred pension and other employee benefit and retirement costs, research and development, extraordinary property losses, and the phase-in of new plant costs. Nuclear decommissioning costs and costs to buy out high-priced fuel and power contracts may also become stranded as a result of open access.
The magnitude of stranded costs has proven to be enormous. In 1996 the Federal Energy Regulatory Commission estimated that the total amount of utilities’ stranded costs in the United States was greater than $135 billion. That estimate was equal to approximately seventy-five percent of the total investor-owned equity in the United States’ utility industry. A vested right to recover stranded costs therefore became a cornerstone of the changed regulatory structure in which the electric power industry has operated in the United States since the mid-1990s. The U.S. Department of Energy reported as of 2010 that 22 states and the District of Columbia had either active or suspended electricity restructuring regimes. Those jurisdictions then included many of the largest by population, including Texas, California, New York, Illinois, Ohio, Michigan, Pennsylvania, New Jersey, Massachusetts, and Virginia.
The issue of whether stranded cost recovery is appropriate as a matter of fairness, or wise as a matter of policy, has stirred a significant volume of litigation. Roger’s lengthy examination of this topic was first published in 2012, in book form and online, by Thomson Reuters (West Publishing Co.), in the company’s American Law Reports (6th) series. Roger’s treatment of it collects and analyzes all the federal and state court cases that have addressed the recovery of “stranded costs” by utilities. For purposes of citation in law-related materials, the article is cited as:
Special Commentary: Recovery of “Stranded Costs” by Utilities, 80 A.L.R. 6th 1 (2012).
Table of Contents
I. PRELIMINARY MATTERS
- § 1. Scope
- § 2. Summary and comment
- § 3. Practice pointers
II. SUBSTANTIVE ISSUES IN JUDICIAL REVIEW OF REGULATORY AGENCY ACTION RELATING TO RECOVERY OF “STRANDED COST” RECOVERY
- A: Right to Recover Stranded Costs
- § 4. Federally recognized right
- § 5. State statutory law recognition
- § 6. State regulatory recognition
- B: Definition of “Stranded Costs”
- § 7. Basic economic concept
- § 8. As including “regulatory assets”
- § 9. As including “power purchase” commitments
- C: Basis for Grant of Right
- § 10. Congressionally-delegated power to regulate interstate wholesale market for electricity
- § 11. State government’s police power
- D: Standards of Judicial Review
- § 12. Deferential standards – – “substantial evidence” standard – – in general
- § 13. Deferential standards – – “substantial evidence” standard – – application when evidence in record is conflicting
- § 14. Deferential standards – – “Chevron” deference
- § 15. Review of agency action in policy-making or “legislative” function.
- § 16. Review de novo – – Disputes over agency interpretation of statute
- § 17. Review de novo – – Review of agency’s interpretation of agency’s administrative rules
- § 18. Question of whether agency exceeded scope of its statutory authority
- § 19. Agency construction of statute
- § 20. Standards established by statute
- § 21. Constitutionally-derived standards – – Facial attack alleging constitutional infirmity
- § 22. Constitutionally-derived standards – – Substantive due process test of “rational relationship” to permissible legislative purpose
- E: Stranded Cost Valuation Principles
- § 23. Overview
- § 24. Agency’s implied authority in valuation matters
- § 25. Federal Energy Regulatory Commission (FERC) stranded cost rulings
- F: Stranded Cost Determinations and Imposition of “Stranded Cost” Recovery Charges
- § 26. Findings of categorical specific inclusion
- § 27. Determinations that particular categories of items qualified as “stranded costs”
- § 28. Determinations of stranded cost amounts
- § 29. Determinations that items did not qualify as “stranded costs” – – Specific instances
- § 30. Determinations that items did not qualify as “stranded costs” – – Costs incurred “imprudently”
- § 31. Determinations that item did not constitute a “stranded cost”
- § 32. Determinations that utility had no net stranded costs
- § 33. Time at which process of determination of amount of recoverable stranded costs becomes definitive
- § 34. Approved methods for utilities’ imposition of “stranded cost” recovery charges
- § 35. Duty to mitigate to lower book value of generation assets
- § 36. Methods for mitigating stranded costs – – Use of depreciation to reduce book value of generation assets
- § 37. Methods for mitigating stranded costs – – Shifting depreciation from transmission or distribution affiliates to generation affiliates
- § 38. Methods for mitigating stranded costs – – Capacity auctions
- § 39. Methods for mitigating stranded costs – – Applying utility’s excess earnings to reduction of book value of generation assets
- § 40. Methods for mitigating stranded costs – – Other “commercially reasonable means”, including renegotiation of above-cost fuel and purchased power contracts
- § 41. Methods for mitigating stranded costs – – Applying present value of utility’s federal investment tax credit account balance to reduction of book value of generation assets
- § 42. Duty to mitigate stranded costs – – Methods for mitigating stranded costs
- § 43. Duty to mitigate – – error for agency to require party to make mitigation efforts that are futile
- G: Securitization
- § 44. Securitization – – as method to mitigate stranded costs by lowering book value of generation assets
- § 45. Securitization – – categories of costs approved for inclusion in “stranded costs” being securitized
- § 46. Securitization – – categories of costs categorically excluded from securitized “stranded costs”
- § 47. Securitization – – necessity for applying offsets against stranded costs to be securitized before net principal of bonds is fixed
- § 48. Securitization – – challenges to allocation of securitization-related charges
- § 49. Securitization – – disposition of proceeds of sales of bonds in securitization of stranded costs
- H: “Stranded cost” recovery
- § 50. Approved methods of “stranded cost” recovery
- § 51. Distinction between stranded-cost protection and ratemaking
- § 52. Regulatory treatment of excess of market value over book value of generation assets – – Rejection of notion of “negative stranded costs” which would be reimbursable or refundable to ratepayers
- § 53. Regulatory treatment of excess of market value over book – – Limited affirmance of notion of “negative stranded costs” which would be reimbursable or refundable to ratepayers
- § 54. Approved methods for utilities’ imposition of “stranded cost” recovery charges – – Surcharges to present customers
- § 55. Approved methods for utilities’ imposition of “stranded cost” recovery charges – – Special charges to departing customers
- § 56. Allocation of “stranded costs” payment responsibility among classes or categories of electric power users (consumers) – – Litigation between residential and nonresidential consumers – – Principles of allocation
- § 57. Allocation of “stranded costs” payment responsibility among classes or categories of electric power users (consumers) – – Disparity as among different ratepayer classes insufficient to invalidate scheme
- § 58. Allocation of “stranded costs” payment responsibility among customer classes – – Limits on regulatory reallocation
- § 59. Interest on recoverable “stranded cost” amounts – – Interest accruing on recoverable “stranded cost” reimbursement by one customer class to another
- § 60. Interest on recoverable “stranded cost” amounts – – Basis of recovery of interest as time value of money
- § 61. Interest on recoverable “stranded cost” amounts – – Rate of interest on recoverable “stranded costs” – – Generally
- § 62. Interest on recoverable “stranded cost” amounts – – Rate of interest on recoverable “stranded costs” – – Agency determination upheld
- § 63. Interest on recoverable “stranded cost” amounts – – Rate of interest on recoverable “stranded costs” – – Remand for determination of reasonable rate of interest
- § 64. Interest on recoverable “stranded cost” amounts – – Commencement date of accrual – – Determining factors
- § 65. Interest on recoverable “stranded cost” amounts – – Commencement of accrual – – From date of conclusion of true-up process
- § 66. Present value of recoverable “stranded cost” amounts
- § 67. Stranded cost valuation – – Reconciliation or “true-up” of historic revenue and cost data with estimates and projections in determination of recoverable “stranded costs” – – Generally
- § 68. Stranded cost valuation – – Reconciliation or “true-up” of historic revenue and cost data with estimates and projections in determination of recoverable “stranded costs” – – Agency decision held erroneous
- I: Taxes and Transactions
- § 69. Distinction between stranded cost and tax
- § 70. Tax treatment of stranded cost recoveries
- § 71. Other tax-related implications of recognition of right to stranded cost recovery
- § 72. Transactions – – “Materiality” of developments related to “stranded cost” charges for purposes of determining enforceability of contractual obligations
- J: Constitutional limitations on powers of agency to order recovery of “stranded costs”
- § 73. Commerce Clause
- § 74. Separation of powers limitation
- § 75. Ban on anticompetition special legislation
- § 76. Substantive due process
- § 77. Takings
- § 78. Obligation of regulator to set just and reasonable rates
- § 79. Use of taxing power for other than public purpose
- § 80. Ban on grant of public money to private corporations
- § 81. Matters held not to be of constitutional dimension
- § 82. Impairment of contracts
- K: Limitations on powers of agency to order recovery of “stranded costs”
- § 83. Prevention of windfall to utilities
- § 84. Rule against retroactive ratemaking (“filed rate” doctrine)
III: Judicial Review of Regulatory Agency Action Relating to “Stranded Cost” Recovery; Procedural Issues
- A: Subject Matter Jurisdiction
- 1: Regulatory
- § 85. Federal – – Generally
- § 86. Federal – – “Retail-turned-wholesale” exception to purview of state regulators over local electric industry affairs
- § 87. “Multi-state” exception to exception to purview of state regulators over local electric industry affairs
- § 88. “Voluntary restructuring” exception to exception to purview of state regulators over local electric industry affairs
- 2: State
- § 89. Generally
- § 90. Allocation of jurisdiction to state administrative agency
- 1: Regulatory
- B: Other Issues
- § 91. Constitutional limitations on powers of agency in connection with “stranded costs”
- § 92. Appellate jurisdiction – – Finality of judicial decision below for purposes of establishing appellate jurisdiction
- § 93. Appellate jurisdiction – – Justiciability – – Standing
- § 94. Appellate jurisdiction – – Justiciability – – Case or controversy
- § 95. Appellate jurisdiction – – Justiciability – – Ripeness
- § 96. Preservation of issues for appeal
- § 97. Abstention
- § 98. Pre-emption
- § 99. Res judicata or collateral estoppel
- § 100. Mootness
- § 101. Judicial review with reference to agency compliance with procedural requirements of administrative law
- § 102. Judicial review of validity of retroactive application of new administrative decisions establishing utilities’ right to recover stranded costs from customers
- § 103. Remedies – – Proper scope of relief – – Remand – – Justification and rationale
- § 104. Remedies – – Proper scope of relief – – Remand – – Statutory basis
- § 105. Remedies – – Available forms of judicial relief – – Reversal and remand to redress absence of substantial evidence to support agency decision
- § 106. Remedies – – Available forms of judicial relief – – Reversal and vacating decisions below – – Scope of matters subject to reversal
- § 107. Remedies – – Available forms of judicial relief – – Mandamus
- § 108. Removal to federal court
- § 109. Intervention in proceeding relating to stranded costs
- § 110. Particular procedural statutory frameworks
IV. MISCELLANEOUS RELATED MATTERS
- § 111. Arbitrability of stranded cost determinations
- § 112. Attorneys’ conflicts of interest
- § 113. Ancillary statutory or regulatory classifications resulting, or alleged to result, from implementation of stranded cost recovery regime
- § 114. Severability of statutory provisions