SCHUMAN, P.J.
Petitioner Wah Chang entered into a special contract with PacifiCorp whereby PacifiCorp agreed to supply Wah Chang with electricity at rates different from its standard industrial tariff. For the first three years of the five-year contract, Wah Chang was to receive a rate that was substantially lower than PacifiCorp's standard industrial rate; for the remaining two years, Wah Chang was to be charged a rate tied to the Dow Jones California/Oregon Border (DOW COB) index, a market index that purported to reflect the average price for "day ahead" wholesale power transactions at the Oregon-California border. The PUC approved the agreement, and the special tariff went into effect in September 1997.
By the end of the third year of the tariff, when the rates shifted to variable pricing based on the Dow COB index, the electricity market was in the throes of the so-called "Western Energy Crisis of 2000-01." The prevailing dysfunction in the western energy
The relevant background facts are undisputed, unless otherwise noted. Wah Chang is a large industrial manufacturer located in Millersburg, Oregon. The company's second-highest operating cost is electricity, and it has always purchased its electricity from PacifiCorp, which services the territory where Wah Chang is located. Until 1997, Wah Chang was purchasing electricity from PacifiCorp at the same rate as PacifiCorp's other industrial customers, under PacifiCorp's standard industrial tariff, "Schedule 48T."
In the mid-1990s, as part of an effort to reduce its power costs, Wah Chang explored the possibility of obtaining power from a source other than PacifiCorp. At Wah Chang's urging, the Millersburg City Council commissioned a feasibility study to evaluate the economics of forming a municipal utility. That study showed that the City of Millersburg could establish an electricity distribution system that would allow Wah Chang to purchase electricity on the open market for less than what it was paying under PacifiCorp's standard industrial tariff. After that study, PacifiCorp and Wah Chang entered into the Master Electric Service Agreement (MESA) pursuant to ORS 757.230, a statute that allows the PUC to authorize special rate schedules for individual customers who have a "service alternative."
The MESA covered a five-year period. For the first three years of the contract, Wah Chang was to pay a fixed price based on PacifiCorp's estimated production costs, plus an "adder" of $11 per megawatt hour (MWh) for transmission, distribution, and other services, and to contribute to PacifiCorp's profits. However, PacifiCorp was unwilling to predict its costs beyond three years, so, for the final two years of the contract, the parties agreed to use a variable index rate rather than a fixed cost. The parties chose the Dow COB index, a market index published by The Wall Street Journal that reflects the daily average of power prices at the California-Oregon border, to which they then added $11 per MWh.
On September 9, 1997, the PUC reviewed and accepted the provisions of the MESA, approving a special tariff that incorporated its terms. The MESA rates became effective three days later.
For the first three years under the special tariff — when the rates were based on a fixed price — Wah Chang's payments were approximately $6 million less than they would have been under Schedule 48T. Things changed significantly, however, once the tariff rates shifted to pricing based on the Dow COB index on September 12, 2000. By that time, California and neighboring states were in the midst of an energy crisis. Among other contributing factors, California had restructured its electricity market and promulgated regulations that were subject to manipulation by market participants — including, notoriously, Enron. Consequently, the Dow COB index, which is heavily influenced by wholesale bulk power transactions in California, had skyrocketed and, along with it, so did the special tariff rates. In a single month, Wah Chang paid nearly $5.8 million for electricity that, under Schedule 48T, would have cost less than $500,000. In a single year, Wah Chang saw a 600-percent increase in electricity costs, from $4.5 million to nearly $31.5 million.
On December 1, 2000, Wah Chang petitioned the PUC for relief from the special tariff rates.
While that petition for judicial review was pending, Wah Chang filed a motion with the Marion County Circuit Court requesting permission to present new evidence to the PUC. Specifically, Wah Chang sought permission to present evidence that had surfaced about Enron's participation in market manipulation, as well as evidence that PacifiCorp, doing business as Pacific Power, had filed complaints with the Federal Energy Regulatory Commission (FERC) seeking relief from its own power purchase contracts. In those FERC complaints, Pacific Power alleged — like Wah Chang before the PUC — that market dysfunction had caused those contract rates to be unjust and unreasonable.
In June 2002, the Marion County Circuit Court granted Wah Chang's motion to present additional evidence, concluding that the evidence was material and not available at the time of the PUC's initial decision. The court remanded the case to the PUC to reopen the record for Wah Chang to present its additional evidence, unless the PUC determined on remand that the evidence would not change its decision under any foreseeable circumstances.
On remand, the PUC concluded that it was at least conceivable that additional evidence regarding the manipulation of the wholesale power market might change its view of Wah Chang's petition. The PUC explained that "it is theoretically possible that the California wholesale electricity market became dysfunctional because of PacifiCorp's manipulation, deceit, illegal conduct, and fraud in that market." But rather than consider the question at that time, the PUC elected to wait until after FERC completed its investigation, and it invited Wah Chang to file a motion to reopen the record once that federal investigation was complete.
The following year, FERC investigative staff issued a report on price manipulation in western markets. That report recommended that 38 utilities and marketers, including PacifiCorp, be required to show cause why they should not be found in violation of their tariffs and required to return related profits. Subsequently, the PUC's staff issued a report recommending that the PUC not pursue misconduct or mismanagement cases against PacifiCorp. The PUC staff concluded that PacifiCorp had only limited involvement in the specious buy/sell transactions, which had occurred over a five-month period beginning in July 2000. PUC staff determined that the transactions represented less than one percent of PacifiCorp's wholesale power purchases or sales for 2000, and that PacifiCorp voluntarily terminated them in mid-November 2000 when it became increasingly aware that the deals involved a single point of delivery.
In January 2004, Wah Chang filed a motion asking the PUC to reopen this proceeding, which the PUC granted. After Wah Chang and PacifiCorp further supplemented the evidentiary record and their arguments, the PUC again denied Wah Chang's request for relief from the indexed-based rates, over a dissent by one of the commissioners.
In its final order, the PUC explained that the "primary question presented by Wah Chang's complaint" was whether "the Commission [should] exercise its ratemaking authority to revise Wah Chang's rates under the special tariff." That question, the PUC concluded, turned on the interplay between two statutes, ORS 756.040 and ORS 757.230. The former statute states the general requirement
The PUC reasoned that, considering those two statutes together, Wah Chang is "entitled to rates that are fair and reasonable" but that "rates that are fair and reasonable for a unique customer like Wah Chang are not necessarily the same as rates that are fair and reasonable for other customers." The PUC explained:
(Footnotes omitted; emphasis in original.)
The PUC further observed that ratemaking is "a zero sum game." That is, if Wah Chang's rates were to be reduced, it would come out of the pockets of PacifiCorp's shareholders or the utility's remaining customers. Of the three — Wah Chang, PacifiCorp's shareholders, and PacifiCorp's remaining customers — the PUC concluded that only Wah Chang and PacifiCorp's shareholders should be in a position to bear the risk of rising energy costs, considering that the remaining customers had no say in the special tariff. And, as between Wah Chang and PacifiCorp, the PUC concluded that Wah Chang had assumed the risk of rising energy costs under the MESA, and that market dysfunction alone was not enough to entitle Wah Chang to relief. Rather, the PUC ruled, "Wah Chang may recover from PacifiCorp [by] show[ing] conduct amounting to bad faith on the part of the utility, so only the utility's shareholders are exposed to the costs of any revision we make in the special tariff."
The PUC then considered whether PacifiCorp had, in fact, acted in bad faith. The PUC reasoned that PacifiCorp's questionable trading activities were limited in scope, voluntarily terminated, and not directed at the COB market. Thus, the PUC found that "PacifiCorp did not act in bad faith" and, further, that "Wah Chang has failed to demonstrate that PacifiCorp's trading activity materially impacted the Dow COB Index price."
After concluding that PacifiCorp had not acted in bad faith, the PUC then offered an "alternative ground" that "mandates [the] dismissal of Wah Chang's complaint under a different analysis than the one we have presented above." Under that separate "economic
One commissioner dissented. He concluded that the majority's decision erroneously held Wah Chang to its bargain, and that the reasonableness of rates cannot be set by private contract ("Simply put, there is no such thing as a `deal is a deal' when it comes to utility regulation."); that ORS 757.230 "does not apply in this case, much less abrogate Wah Chang's right to a just and reasonable rate"; and that nothing in Oregon law requires Wah Chang to prove that PacifiCorp acted in "bad faith" as a prerequisite to obtaining just and reasonable rates.
On judicial review in this court, Wah Chang echoes many of the points made by the dissenting commissioner, arguing that the PUC's decision to deny relief from the MESA rates derived from an erroneous interpretation of ORS 757.230, and was then compounded by a "bad faith" standard that finds no support in the law. As we will explain, we disagree with Wah Chang's (and the dissenting commissioner's) characterization of the PUC's decision. We conclude that the PUC understood and correctly applied the relevant statutes, that it acted within its discretion to require "bad faith" by PacifiCorp as part of its analysis of Wah Chang's petition for relief, and that none of Wah Chang's other arguments is well taken.
We begin with Wah Chang's most fundamental disagreement with the PUC decision: the majority's reliance on ORS 757.230. That statute, according to Wah Chang, concerns the initial decision to authorize a special rate for an individual customer and applies "only when [that] special contract rate is established, not when an established rate is challenged as unreasonable." Moreover, Wah Chang submits, the statute only establishes criteria for deciding whether a proposed contract rate is too low to approve, not whether it has become unreasonably high. So, by applying ORS 757.230 to a subsequent challenge that established rates are too high — and, in fact, treating that statute as an exception to the general "unjust and unreasonable" standard in ORS 756.040 — the PUC "renounced" its duty to protect Wah Chang from "unjust and unreasonable exactions and practices," ORS 756.040(1).
In response, the PUC and PacifiCorp take issue with Wah Chang's reading of the majority's decision, and with Wah Chang's interpretation of ORS 757.230. In their view, the PUC did not abrogate its duty to protect Wah Chang from unjust and unreasonable rates. Rather, it applied ORS 757.230 and ORS 756.040 to determine whether, under all the circumstances, Wah Chang's rates remained just and reasonable; in other words, it harmonized the two statutes rather than treating ORS 757.230 as an exception that permits unjust and unreasonable rates for special tariff customers. And, they contend, the PUC was permitted to do so, because nothing in ORS 757.230 limits the considerations in that statute to the initial tariff approval.
The parties' arguments, so framed, require us to answer two related questions. First, we must determine what the PUC actually decided with regard to the meaning and application of ORS 757.230 — that is, which of the competing characterizations of the ruling is correct. Only then, after determining what the PUC actually decided, can we assess the second question: whether the PUC erred in that understanding or application of the law.
With regard to the initial question — what the PUC decided — we reject Wah Chang's argument that the PUC renounced its duty under ORS 756.040 to protect Wah Chang from unjust and unreasonable rates. Throughout the majority opinion, the PUC presumes that all customers, including those under special tariffs, are entitled to fair and reasonable rates under the general directive of ORS 756.040. Moreover, the order expressly states that "[t]he fact that we find
Because we agree with the PUC's characterization of its reasoning, we likewise agree with the PUC and PacifiCorp that the order is entitled to more deference than Wah Chang proposes. The PUC's process of determining a formula for evaluating whether rates have become unjust or unreasonable is the consummate delegative task, and the PUC "`is not obligated to employ any single formula or combination of formulas to determine what are in each case "just and reasonable rates."'" Gearhart v. PUC, 255 Or.App. 58, 63, 299 P.3d 533 (2013) (quoting Pacific N.W. Bell v. Sabin, 21 Or.App. 200, 214, 534 P.2d 984, rev. den. (1975)); id. ("[T]he factors involved in ratemaking are `so many and so variable that it is impossible to fix rates that will be mathematically correct or exactly applicable to all the new conditions that may arise even in the immediate future.'" (Quoting Hammond Lbr. Co. v. Public Service Com., 96 Or. 595, 609, 189 P. 639 (1920))); see also Springfield Education Assn. v. School Dist., 290 Or. 217, 230, 621 P.2d 547 (1980) (citing ORS 756.040(1) as an example of "delegative" statutory language; explaining that the legislature "could set utility rates from time to time by statute, but it does not," and that "the agencies are empowered to regulate and, in so doing, to make delegated policy choices of a legislative nature within the broadly stated legislative policy"). In other words, so long as the factors in ORS 757.230(1) were permissible considerations in determining "just and reasonable" rates, we will not second-guess the PUC's use of those factors in combination with, or to the exclusion of, other factors.
That said, the PUC does not have discretion to misinterpret or misapply the law. We will not affirm the PUC's decision that Wah Chang's rates remained "just and reasonable" if we conclude that the formula employed by the PUC was based on an erroneous interpretation of ORS 757.230(1), or was specifically precluded by some source of law. See ORS 183.482(8)(a), (b); Citizens' Utility Board. v. PUC, 154 Or.App. 702, 716-17, 962 P.2d 744 (1998), rev. dismissed, 335 Or. 91, 58 P.3d 822 (2002) (reversing and remanding PUC decision because "[t]he general
As described above, Wah Chang offers various reasons why it was error for the PUC to reject its petition for relief based on the criteria in ORS 757.230(1)(a) and (b). For one, Wah Chang argues that ORS 757.230 is triggered only by a tariff filing and does not apply to a subsequent challenge to the reasonableness of the special tariff rates. The statute provides, in relevant part:
ORS 757.230(1) (emphasis added).
Wah Chang points to the last sentence of ORS 757.230 to argue that the "trigger" for the PUC to consider factors (a) and (b) is a "tariff filing under ORS 757.205." That cross-referenced statute, in turn, imposes an obligation on "[e]very public utility" to file "within a time to be fixed by the commission, schedules which shall be open to public inspection, showing all rates, tolls and charges which it has established and which are in force at the time for any service performed by it within the state, or for any service in connection therewith or performed by any public utility controlled or operated by it." ORS 757.205(1). "[T]he only such filing with respect to the MESA," Wah Chang submits, "occurred in 1997"; thus, its later request for relief from the scheduled rates did not trigger ORS 757.230 but is instead governed by the general protections in ORS 756.040 against unjust and unreasonable rates.
In light of the PUC's broad discretion to determine the formula for ratemaking, Wah Chang's challenge is not well taken. Whether or not ORS 757.230 is directly triggered in this circumstance, there is nothing in the statute that precludes the PUC from exercising its discretion to consider the same statutory factors in a subsequent complaint challenging the reasonableness of the established tariff rates.
We agree with that view of the statute and PUC's ratemaking authority. In the absence of some statutory prohibition that precludes
Wah Chang alternatively argues that, even if it was permissible for the PUC to look to ORS 757.230(1), the PUC misapplied the statute, because the statutory criteria were intended to protect remaining utility customers by establishing a floor beneath which rates cannot fall; thus, the criteria are entirely inapposite in determining whether rates have become excessively high. Wah Chang argues:
(Emphasis in original.) The PUC and PacifiCorp, meanwhile, argue that the PUC acted within its discretion to ensure, under ORS 757.230(1), that any modification of special tariff rates would not impose costs on PacifiCorp's remaining customers.
Wah Chang is correct that ORS 757.230(1)(a) and (b) protect remaining customers by ensuring that special tariff rates do not become too low. Both paragraphs of the statute are phrased in terms of the sufficiency of the revenue generated for the utility, with an eye toward how the special tariff will affect remaining customers. It does not follow, however, that the PUC misinterpreted ORS 757.230 or that the statute was irrelevant to the question before the PUC — i.e., whether PacifiCorp's special tariff rates, under all the circumstances, were "unjust and unreasonable" under ORS 756.040.
In assessing whether the special tariff rates had become "unjust and unreasonable," the PUC was not required to ignore the context in which those special tariff rates were negotiated and approved, particularly the fact that Wah Chang received the benefit of special rates that remaining customers did not. The PUC explained that, "for the first three years of the special tariff Wah Chang paid rates designed to give PacifiCorp a lesser return on investment than what ORS 756.040 requires of other customers." (Emphasis in original.) Moreover, the benefit initially was approved with the understanding that it would not impose an unjust burden on remaining customers. That is, the PUC approved the special tariff because the rates, although lower than those of other customers, were at least sufficient to ensure that the other customers paid just and reasonable rates as well. A mid-contract adjustment to the special tariff rates, however, would at least call into question whether that was still the case, especially in light of the fact that Wah Chang had already paid a lower rate than other customers for three years of the MESA; thus, the PUC concluded that its "duty to set fair and reasonable rates in all rate cases under ORS 756.040 must involve rate spread considerations under
The PUC elected to remove remaining customers from the calculus entirely, in an effort to "ensure those customers cannot be harmed by a tariff they had no say in developing." The PUC expressed its reluctance to "turn ORS 757.230 on its head, for it is clear that any special tariff we set under that statute (or, in this case, are asked to reset for the benefit of Wah Chang) must protect — not harm — remaining customers." That, too, was a proper exercise of agency discretion in determining whether Wah Chang's rates were unjust and unreasonable. Again, the PUC was not required to ignore, as part of its inquiry, the fact that Wah Chang, not the remaining customers, assumed certain contractual risks under the MESA. On judicial review, we will not disturb the PUC's discretionary decision as to how to account for that fact, or its balancing of the interests of Wah Chang, PacifiCorp, and other customers in setting fair and reasonable rates.
For related reasons, we reject Wah Chang's challenge to the "bad faith" standard imposed by the PUC. With other customers removed from the calculus, the PUC concluded that, as between PacifiCorp's shareholders and Wah Chang, it was Wah Chang that had "assumed the risk of the wholesale market prices for the final two years of its special tariff." Thus, the PUC explained that it would hold Wah Chang to those special tariff rates unless Wah Chang could show (1) that PacifiCorp acted in bad faith; and (2) that the actions of PacifiCorp were material in affecting the price under the Dow COB index. In that event, the PUC reasoned, "only the utility's shareholders are exposed to the costs of any revision we make in the special tariff." In effect, the PUC adopted a presumption similar, but not identical, to the one employed by FERC under the Federal Power Act: that electricity rates in freely negotiated wholesale-energy contracts are "just and reasonable" until proven otherwise. See Morgan Stanley Capital Group Inc. v. Public Utility District No. 1 of Snohomish County, 554 U.S. 527, 530, 128 S.Ct. 2733, 171 L.Ed.2d 607 (2008) ("Under the Mobile — Sierra doctrine, the Federal Energy Regulatory Commission * * * must presume that the rate set out in a freely negotiated wholesale-energy contract meets the just and reasonable' requirement imposed by law.").
On review, Wah Chang argues that the PUC was unjustified in adopting the "bad faith" standard. Suffice it to say that the PUC's standard was reasonably tailored to the issues presented by Wah Chang's petition for relief and was a permissible exercise of the PUC's discretion in crafting a standard to determine whether the MESA rates had become unreasonable or unjust. For that reason, and the others stated above, we reject Wah Chang's first assignment of error.
In its second assignment of error, Wah Chang alternatively argues that the PUC "erred in failing to give Wah Chang an opportunity to present evidence and arguments responsive to its interpretation of ORS 757.230." However, in June 2008, the ALJ issued an order that stated:
(Emphasis added.) Wah Chang filed a memorandum in response to that order and explained, why "returning Wah Chang to standard rates as of October 2000 or December 2000 will comply with ORS 757.230(a) and (b)."
Wah Chang was on notice that the PUC was considering how to apply the criteria in ORS 757.230 in the context of Wah Chang's petition, and had an opportunity to address that issue. Wah Chang was not entitled, under the circumstances of this case, to more than that; that is, Wah Chang was not entitled to advance notice of the PUC's ultimate reasoning regarding the statute, and another opportunity to refute it. We reject Wah Chang's second assignment of error.
In its third assignment, Wah Chang argues that the PUC failed to consider its argument that PacifiCorp engaged in "unjust practices" — as distinguished from Wah Chang's argument that the special tariff rates were unjust and unreasonable. Wah Chang's "unjust practices" contentions focused on PacifiCorp's participation in manipulative energy-trading schemes. According to Wah Chang, the PUC "should be instructed to consider whether, aside from the MESA's unreasonable rates, Wah Chang is entitled to relief because of PacifiCorp's unjust practices."
Although the PUC's order does not separately analyze Wah Chang's "unjust practices" contentions, the majority implicitly considered and rejected those arguments. In describing the parties' respective positions, the order states that "Wah Chang cites the Commission's duty under ORS 756.040 to protect utility customers against `unjust and unreasonable exactions and practices and to obtain for them adequate services at fair and reasonable rates.'" (Emphasis added.) The order later recites, in detail, Wah Chang's assertions about PacifiCorp's involvement in market manipulation through, among other things, phony transactions. The PUC majority simply was not persuaded that there was anything "unjust and unreasonable" about PacifiCorp's practices, when considered in the context of the parties' relationship. The PUC explained:
Later, the PUC explained that "the trading activity addressed by Wah Chang is unlikely to have had any effect on the Dow COB Index, but instead the Cal-ISO. Even if we had concluded that PacifiCorp engaged in unlawful activities during the Western Energy Crisis, we would not grant Wah Chang relief without a showing that the unlawful activities adversely affected the Dow COB Index price."
The PUC's order, like Wah Chang's own petition,
In its final assignment of error, Wah Chang argues that, to the extent that the PUC actually considered PacifiCorp's conduct, "the PUC erred in relying on assertions in materials from other proceedings" — namely, investigative reports and filings by FERC and PUC staff — rather than evidence in the record. Wah Chang concedes that the PUC was authorized by administrative rule to take, and did take, "official notice" of "administrative rulings and reports of the Commission and other governmental agencies," former OAR 860-014-0050(1) (11/18/99).
Wah Chang's argument — including its reliance on Arlington Ed. Assn. — erroneously equates "official notice" with "judicial notice." The PUC's administrative rules contemplate that the commission can take official notice of, and thereby consider even if not offered at the contested case hearing, "administrative rulings and reports of the Commission and other governmental agencies," former OAR 860-014-0050(1)(b) (11/18/99), as well as "[o]rders of the Commission," former OAR 860-014-0050(1)(c) (11/18/99), and "[d]ocuments and records in the files of the Commission which have been made a part of the file in the regular course of performing the Commission's duties," former OAR 860-014-0050(1)(d) (11/18/99). Those subjects of official notice are separate from, and in addition to, the PUC's ability to take official notice of "[a]ll matters of which the courts of the State of Oregon take judicial notice[.]" Former OAR 860-014-0050(1)(a) (11/18/99). Furthermore, under former OAR 860-014-0045(1)(b) (11/18/99), the PUC is entitled to rely on evidence that is "of a type commonly relied upon by reasonably prudent persons in the conduct of their serious affairs," which can include hearsay statements in official reports, see Reguero v. Teacher Standards and Practices, 312 Or. 402, 417, 822 P.2d 1171 (1991) (hearsay evidence is not categorically so unreliable that it cannot be substantial). In light of the relevant administrative rules, we are not persuaded that the PUC erred by taking official notice of, and relying on, the contents of the reports of its own staff and FERC.
Arlington Ed. Assn. is not to the contrary. In that case, we considered whether the Employment Relations Board (ERB) was authorized to take official notice of a letter from the school district that, although not submitted at the evidentiary hearing on a district employee's grievance, had appeared elsewhere in ERB's files. The school district argued that the letter could not be considered by ERB because it was not part of the hearing record and "taking official notice of the letter falls outside the range of discretion delegated to ERB under ORS 183.450(4)." 177 Or.App. at 663, 34 P.3d 1197. That statute provides that "[t]he hearing officer and agency may take notice of judicially cognizable facts, and may take official notice of general, technical or scientific facts within the specialized knowledge of the hearing officer or agency." ORS 183.450(4) (emphasis added). The question before us was whether the letter could be considered a "judicially cognizable fact" within the meaning of the statute. 177 Or.App. at 663, 34 P.3d 1197. We explained that the term was not defined by statute but that a provision of
Here, by contrast, the issue is not whether the PUC took official notice of "judicially cognizable facts" under ORS 183.450(4) from a source "whose accuracy cannot reasonably be questioned." In fact, ORS 183.450(4) does not apply to the PUC at all. See ORS 183.315(6) ("ORS 183.410, 183.415, 183.417, 183.425, 183.440, 183.450, 183.460, 183.470 and 183.482(3) do not apply to the Public Utility Commission."). Rather, as described above, the PUC has its own rules governing official notice, which are different from and much broader than "judicially cognizable facts" under the Oregon Evidence Code.
Affirmed.
