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Alpine Energy, LLC v. Matanuska Electric Ass'n

Supreme Court of Alaska

March 4, 2016

ALPINE ENERGY, LLC, Appellant,
v.
MATANUSKA ELECTRIC ASSOCIATION and the REGULATORY COMMISSION OF ALASKA, Appellees

          Appeal from the Superior Court of the State of Alaska, Third Judicial District, Anchorage, Michael Spaan, Judge. Superior Court No. 3AN-13-06239 CI.

         Robert K. Reiman, Law Offices of Robert K. Reiman, Anchorage, for Appellant.

         David J. Mayberry, Crowell & Moring, LLP, Anchorage, for Appellee Matanuska Electric Association.

         Stuart W. Goering and Emma K. Pokon, Assistant Attorneys General, Anchorage, and Craig W. Richards, Attorney General, Juneau, for Appellee Regulatory Commission of Alaska.

         Before: Stowers, Chief Justice, Fabe, and Bolger, Justices. [Winfree and Maassen, Justices, not participating.].

          OPINION

Page 246

          BOLGER, Justice.

         I. INTRODUCTION

         Federal law requires electric utilities to purchase power generated by cogeneration facilities that meet certain standards and provides a method of calculating the purchase rate that the utilities must pay. To qualify for this treatment, a facility must be certified that it meets the standards. It may self-certify, by filing a form describing the project and asserting that it believes it meets the standards, or it may request a formal determination that it meets the standards. The Regulatory Commission of Alaska implements this certification scheme on the state level, but the determination whether a facility qualifies falls within exclusive federal jurisdiction.

         The main issue presented in this appeal is whether a self-certification constitutes a federal determination that a facility meets the standards and whether the Commission must defer to this self-certification. We conclude that a self-certification does not constitute a federal determination and that the Commission's broad discretion to implement the federal scheme means it has the power to require a developer to formally certify its projects.

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         II. FACTS AND PROCEEDINGS

         A. Regulatory Background

         Congress enacted the Public Utility Regulatory Policies Act (PURPA) in 1978 to increase conservation of energy, make electric utilities more efficient, and encourage equitable rates for electric customers.[1] Section 210 of PURPA[2] seeks to accomplish this by " encourag[ing] the development of cogeneration and small power production facilities." [3] Cogeneration facilities produce electric energy along with some other types of useful energy, such as heat.[4] PURPA encourages development of these facilities by requiring electric utilities to purchase electric energy from and sell electric energy to " qualifying" cogeneration and small power production facilities,[5] and by exempting these qualifying facilities from state and federal regulation as utilities.[6]

         PURPA charges the Federal Energy Regulatory Commission (FERC) with implementation,[7] and directs state regulatory authorities to implement FERC's rules in turn.[8] In Alaska, this task falls to the Regulatory Commission of Alaska (the Commission).[9]

         Under FERC's regulations implementing PURPA, " qualifying facilities" are facilities that both meet certain efficiency, operating, and use standards, and are certified.[10] Facilities can become certified in two different ways: They may file a notice of self-certification with FERC, asserting that they meet the relevant standards, or they may apply to FERC for certification.[11] If a certified facility is " substantial[ly] alter[ed] or modifi[ed]," it must recertify.[12] Self-certification is free,[13] while formal certification carries a filing fee of $24,070 for cogeneration facilities.[14] Other parties may challenge a self-certified or formally certified facility's qualifying-facility status; [15] a challenge carries a filing fee of $24,370.[16]

         FERC's regulations implementing PURPA also control the rates that utilities must pay qualifying facilities for energy. Purchase rates must not exceed the utility's " avoided costs," [17] which are " the incremental costs to an electric utility of electric energy or capacity or both which, but for the purchase from the qualifying facility . . ., such utility would generate itself or purchase from another source." [18] In other words, the utility is obligated to purchase a qualifying facility's energy, but it is not obligated to pay any more for that energy than it would have paid if it obtained the energy from a different source.

         Because potential qualifying facilities and investors need to predict purchase rates to

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be able to estimate the return on a potential investment, FERC's regulations require utilities to " make available data from which avoided costs may be derived." [19] These data are not the same as a purchase rate; rather, they are " the first step in the determination of such a rate." [20]

         B. Facts

         In May 2008, Alpine Energy self-certified five proposed cogeneration facilities. Only two of these facilities are at issue in this case: Pioneer Energy #1, later renamed " Goose Creek Energy Project," and Pioneer Energy #4, later renamed " Pioneer Energy Project." Alpine anticipated selling the thermal energy from Pioneer Energy #1 to local businesses, residences, and greenhouses for the purpose of space heating. It intended to sell the thermal energy from Pioneer Energy #4 to the Alaska State Fair and to various commercial customers and greenhouses, again for the purpose of space heating.

         Shortly after filing the notices of self-certification, Alpine requested the local electric utility, Matanuska Energy Association (MEA), to interconnect with its facilities -- that is, to physically connect the cogeneration facilities with MEA's utility network to facilitate the purchase of electric energy.[21] Alpine also requested MEA to provide certain avoided-cost information required by the Commission's regulations, and to open good-faith negotiations for the purchase of power from Alpine's facilities.

         Under Alaska regulations, a qualifying facility's request for interconnection triggers a 60-day period within which the utility must provide the qualifying facility with a tariff setting out rates for interconnection, purchases, and sales.[22] Accordingly, in its reply to Alpine, MEA requested certain engineering information from Alpine that it stated was necessary to determine the costs of interconnection. MEA also stated that the avoided-cost information Alpine had requested was available in its then-effective tariff, on file with the Commission.

         Alpine did not provide the requested engineering information in its response. Instead, Alpine reiterated its request to enter negotiations for the purchase of energy. As a result, MEA filed a petition with the Commission requesting a waiver of the 60-day period. Alpine did not oppose the petition, and the Commission granted the waiver, suspending MEA's obligations under 3 AAC 50.790(b) " until at such time as it voluntarily provides the interconnection to [Alpine] or until in a future order, in response to a filing by [Alpine] or otherwise, we revoke the waiver, whichever first occurs."

         Alpine and MEA continued to correspond about negotiating power purchase agreements. The discussions focused on two of the projects that Alpine had initially proposed: Pioneer Energy #4, to be sited at the Alaska State Fair, and the Goose Creek Energy Project (formerly Pioneer Energy #1), intended to provide heat and electric energy for the Goose Creek Correctional Facility.[23]

         At the outset, MEA expressed doubts about the qualifying-facility status of Alpine's projects and about Alpine's ability to successfully develop them. MEA specifically mentioned Alpine's history of proposing cogeneration projects without commitments for the purchase of thermal energy. The parties disputed the projects' qualifying-facility status for several months. In May 2009, however, Alpine provided MEA with letters of interest from two potential thermal energy customers, or thermal hosts -- the Alaska

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State Fair and the Department of Corrections. MEA subsequently agreed to begin negotiations with Alpine for the purchase of electric energy.

         Alpine sent MEA a draft power purchase agreement for the Goose Creek project in June 2010, but the parties did not negotiate the terms of the agreement. Instead, in August 2010, Alpine and MEA entered into " Precedent Agreements" for the projects at issue here. Under these agreements, negotiations were halted, and Alpine was required to meet certain conditions before negotiations would resume. The agreements required Alpine to obtain binding contractual commitments for the sale of the thermal energy that its proposed projects would produce, receive commitments for all financing necessary to construct and operate the projects, and obtain all permits, authorizations, and rights needed to construct and operate the projects. If Alpine met the conditions by December 31, 2011, the parties agreed to negotiate power purchase agreements. If Alpine did not meet the conditions by that date, the agreements would terminate.

         While it was communicating with Alpine, MEA was also planning its own power generation project, the Eklutna Generation Station. It put out a Request for Proposals in October 2009, seeking contractors for the project. And in March 2011, MEA signed a contract committing to the first stage of the project.

         In December 2011, Alpine self-recertified the Pioneer and Goose Creek projects, and again requested interconnection from MEA. The recertifications stated that both projects would sell the bulk of their thermal energy to Mat-Su Produce. According to Alpine, Mat-Su Produce was to be an Alpine subsidiary that operated greenhouses.[24] The Pioneer project would sell the remainder of its thermal energy to the Alaska State Fair, the City of Palmer, Matanuska-Susitna Borough Schools, and other commercial customers, and the Goose Creek project would sell the remainder of its energy to Valley Utilities and other commercial customers.

         At the same time that it self-recertified, Alpine also informed MEA that the conditions of the precedent agreements had been met and requested to begin negotiating power purchase agreements. Along with its request, Alpine provided MEA with copies of agreements with potential thermal hosts and with copies of agreements with broker-dealer FirstSouthwest for debt placement services. MEA responded that it did not believe the conditions were met; in particular, it noted that Alpine had obtained no financing commitments and had not obtained Commission authorization for either project. On January 9, 2012, MEA informed Alpine that it considered the precedent agreements terminated because Alpine had failed to meet the conditions precedent by the deadline.

         C. Proceedings

         1. Administrative proceedings

         On February 13, 2012, Alpine filed a formal complaint with the Commission,[25] asserting that MEA had failed to comply with its obligations under PURPA and its implementing regulations. Alpine requested relief in the form of (1) an order for MEA to provide the avoided-cost information required by 3 AAC 50.790(d), including the data and methodology used to derive those costs; (2) a declaratory order that MEA may not refuse to negotiate with Alpine based on doubts as to the validity of its projects' qualifying-facility status; (3) an order for MEA to enter into negotiations to purchase power from Alpine's facilities; (4) an order for MEA to set the rates for those purchases based on its avoided costs at the time Alpine initially requested interconnection; and (5) an order that those avoided costs should include the costs of the Eklutna Generation Station, or in the alternative

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an order enjoining MEA from incurring any additional expenses to add capacity.

         MEA denied the allegations in the formal complaint and moved to dismiss. It challenged Alpine's claim that it had met the terms of the precedent agreements, pointing out that Alpine's agreements with thermal hosts were expressly contingent on the negotiation of a power purchase agreement, and were therefore not binding as required by the precedent agreements. It also highlighted the highly speculative nature of both projects' primary thermal host, Mat-Su Produce. And it pointed out that FirstSouthwest had not agreed to finance Alpine's projects; instead, it had agreed to act as a placement agent for any bonds issued by Alpine or its projects, but left it up to Alpine to actually issue such bonds or obtain other financing.

         Accordingly, MEA argued, the Commission should require Alpine to formally certify its projects as qualifying facilities before enforcing rights dependent on their qualifying-facility status. MEA asserted that Alpine's failure to meet the precedent agreements, and the facts underlying its failure, raised legitimate questions about its projects' qualifying-facility status, which should be resolved by FERC in the formal certification process. MEA also claimed it had already provided Alpine with the required avoided-cost information, and that the Commission's waiver of its obligation to provide the information required by 3 AAC 50.790(b) was still valid.

         The Commission dismissed Alpine's claim in part on July 20, 2012. It found no good cause to investigate[26] Alpine's claim of entitlement to a tariff under 3 AAC 50.790(b) because its earlier waiver of that requirement had not been rescinded. The Commission also determined that it did have the authority to require Alpine to obtain formal certification if there was a legitimate claim that the merits of a qualifying facility's self-certification were questionable. It decided that MEA asserted such a legitimate claim here, and dismissed without prejudice Alpine's claims that depended on its projects' qualifying-facility status, instructing Alpine that it could refile its claims after obtaining formal certification.

         The Commission did, however, find good cause to investigate whether MEA was in compliance with the information-publication requirements of 3 AAC 50.790(d). MEA had provided only an average of its avoided costs over the next five years, instead of a year-by-year projection as required. The Commission also expressed concern that MEA's avoided-cost calculations did not consider any part of its recent Eklutna Generation Station project avoidable, although MEA had committed to the project only after its communications with Alpine. Finally, the Commission noted that it was unclear whether MEA actually " maintained" the information as required, or simply generated it upon request.

         On August 23, 2012, MEA filed a Notice of Compliance, informing the Commission that it had made publicly available all information required by 3 AAC 50.790(d).

         The parties both moved for summary judgment on this remaining issue. Alpine argued that it was entitled to the avoided-cost information as of May 2008, the time of its initial request for interconnection. In particular, Alpine focused on the cost of the Eklutna Generation Station, which MEA had not yet committed to build when Alpine originally requested interconnection. If MEA had agreed to purchase energy from Alpine at that time, Alpine argued, MEA would not have had to build as much additional capacity. Alpine claimed that the costs incurred to build that additional capacity were therefore avoidable, and should be included in the purchase rates for Alpine's electric energy. Alpine also argued that 3 AAC 50.790(d) required MEA to provide the data and methodology underlying its avoided-cost information, and that MEA had not done so.

         In MEA's motion for summary judgment, it directed the Commission to the information it had made available in August 2012, in accordance with its Notice of Compliance. MEA claimed that this information was in compliance with 3 AAC 50.790(d), and that the regulation did not require it to make

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public the underlying data and methodology. It acknowledged, however, that it had not published this information prior to August 23, 2012, instead providing it only upon request. It denied that the Eklutna Generation Station was an avoidable cost, or that Alpine was entitled to a purchase rate based on historic avoided costs. It also pointed out that the Commission had already decided that Alpine must obtain formal certification for its projects before they were entitled to any purchase rate, and that the historic avoided-costs issue was therefore outside of the scope of the proceedings.

         The Commission agreed with MEA that the only remaining issue was whether MEA's publicly available information was currently in compliance with 3 AAC 50.790(d). It found that MEA was fully in compliance, and that it did not need to supply the data and methodology underlying its avoided-cost calculations. Accordingly, the Commission denied Alpine's motion for summary judgment, granted MEA's cross-motion for summary judgment, and closed the docket.

         2. Superior court proceedings

         Alpine appealed the Commission's decision to the superior court. Alpine argued that the Commission lacked the power to require it to formally certify its projects before requiring MEA to treat the projects as qualifying facilities. Instead, Alpine claimed, the Commission should have required MEA to provide a specific tariff for each of Alpine's projects, and to purchase electric energy from these projects at a rate based on the avoided costs at the time it filed the Formal Complaint.[27] Even if the Commission was authorized to require formal certification, Alpine argued, it should have held an evidentiary hearing before doing so. Alpine also reiterated its arguments that the Commission's regulations require utilities to publish a general qualifying facility tariff and to provide the data and methodology underlying their publicly available avoided-cost information.

         The superior court affirmed the Commission in full. It found that the Commission interpreted its own regulations reasonably in finding it had the authority to require formal certification, and that it properly exercised such authority here. It found that no evidentiary hearing was necessary because the Commission simply determined, based on the facts alleged by Alpine, that no good cause existed to open an investigation. And it found that the Commission reasonably interpreted its regulations to contain no general tariff or data-and-methodology requirement. Alpine now appeals.

         III. STANDARD OF REVIEW

          " In an administrative appeal we independently review the merits of the agency's decision." [28] We apply the " reasonable basis" test to the Commission's decision not to conduct an investigation.[29] Under the deferential " reasonable basis" test, we consider whether the agency's decision was " arbitrary, capricious, or unreasonable," [30] and whether the agency " [took] a hard look at the salient problems and . . . genuinely engaged in reasoned decision making." [31]

          " We review an agency's interpretation of its own regulations under the reasonable and not arbitrary standard" [32] when the agency's interpretation " implicate[s] special

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agency expertise or the determination of fundamental policies within the scope of the agency's statutory function." [33] This " deferential standard of review properly recognizes that the agency is best able to discern its intent in promulgating the regulation at issue." [34] " We will affirm the agency's interpretation under this deferential standard if the agency's interpretation is a reasonable one." [35]

         However, " [t]he 'substitution of judgment' test is the appropriate standard for interpreting regulations . . . when the agency interpretation does not concern administrative expertise as to either complex subject matter or fundamental policy." [36] Questions of statutory interpretation are also reviewed under the " substitution of judgment" test unless the agency's " interpretation of law turns on its technical expertise or 'the determination of fundamental policies within the scope of [its] statutory function.'" [37]

         IV. DISCUSSION

         A. The Commission May Require Alpine To Formally Certify Its Projects.

         1. Federal law does not prohibit the Commission from ...


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