Where an electric power company recorded its costs related to the early retirement of several coal-fired electricity generating plants as asset impairments, the State Corporation Commission erred by concluding that it was unreasonable for the power company to do so.

However, the SCC correctly refused to authorize a 6.5 percent rate increase to residential customers because the power company did not sustain its “burden to show that the expenses it seeks to have included in its rate base are just and reasonable.”

Background

Code § 56.585.1 requires the State Corporation Commission to review Appalachian Power Company’s rates and other matters associated with generating, distributing and transmitting electrical power. The review occurs every three years.

The review at issue covered the 2017-2019 triennial-review period. “These reviews were previously conducted on a biennial basis, but in 2015, the General Assembly enacted legislation that canceled Appalachian’s biennial review scheduled for 2016, froze its rates, and scheduled the next review for 2020, which would cover the years 2017-2019. …

“The years of 2015 and 2016, which were not covered by any review, are referred to as the ‘transitional-rate period.’ Appalachian’s last review was in 2014.”

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Rate increases are tied to Appalachian’s authorized return on investment. If Appalachian underperforms, it can seek a rate increase to make up the shortfall. In its March 2020 application for a review, Appalachian said its earnings for the relevant period were affected by costs associated with retiring several coal-fired plants in 2015, severe weather events and compliance costs related to managing by-products generated by using coal.

Coal plant retirements

The SCC determined that Appalachian’s recording of the plant recovery costs was unreasonable. “In rejecting Appalachian’s recording of the entire $88.3 million within the current triennial-review period, the [SCC] Staff concluded that ‘[t]he event that triggered the 2019 write-off was an evaluation of [Appalachian’s] expected Triennial Period earnings, not an early retirement determination,’ … making the asset impairment not ‘related to early retirement determinations’ as defined by Code § 56-585.1(A)(8).

“A Staff witness testified at the Commission’s hearing on Appalachian’s application that the language of the statute ‘makes it clear’ that an early retirement determination and the recording of an asset impairment ‘are connected’ and should be made simultaneously or contemporaneously with each other.”

2017 depreciation study

“The Commission also held that Appalachian had not met its burden to establish the reasonableness of its depreciation expenses during the triennial period for purposes of determining its reasonable earned return.

“The Commission instead found that its Staff’s revised 2017 Depreciation Study represented reasonable depreciation expenses and implemented the revised depreciation rates as of December 31, 2017.

“The Commission also found that its Staff’s regulatory treatment of the retired units was reasonable and based upon sound professional judgment.

“The Staff’s recommendations included removing the retired units from the 2017 Depreciation Study, implementing a 10-year straight-line amortization of their remaining costs from the date of their retirements, and converting the retired units into regulatory assets.”

Impairment costs

Appalachian’s issues related to the retired coal-fired plants are distilled as follows: “whether impairment costs related to Appalachian’s coal-fired power plants should have been deemed fully recovered in the triennial-review period in which they were recorded pursuant to Code § 56-585.1(A)(8)[.]”

Subsection (A)(8) was amended in 2013 and 2018 to provide that when reviewing a utility’s earnings “‘the following utility generation and distribution costs not proposed for recovery under any other subdivision of this subsection, as recorded per books by the utility for financial reporting purposes and accrued against income, shall be attributed to the test periods under review and deemed fully recovered in the period recorded: costs associated with asset impairments related to early retirement determinations made by the utility for utility generation facilities fueled by coal[.]’ … (emphasis added).

“Appalachian argues that the plain meaning of the 2013 and 2018 amendments applies specifically to this case. …

“[T]he Commission argues that subsection D continues to grant the Commission regulatory discretion to determine on a case-by-case basis whether the shall-be command of subsection A(8) should be understood as a mere suggestion that the Commission has the discretion to either accept the recording and recovery of an asset-impairment cost as reasonable or reject it as unreasonable.” We disagree.

“[T]he 2013 and 2018 amendments to Code § 56-585.1(A)(8) are unlike any other statutory provision governing the Commission’s regulatory authority. These amendments took away the Commission’s regulatory discretion to override [generally accepted accounting practices]-compliant, asset-impairment costs ‘not proposed for recovery under any other subdivision of this subsection.’…

“The plain language of the 2013 and 2018 amendments makes clear that asset-impairment costs ‘shall be attributed to the test periods under review and deemed fully recovered in the period recorded.’ … Prior to these amendments, this would not have been the case.”

Independent auditors “verified Appalachian’s reporting of the impaired assets” were GAAP-compliant. …

“We find no merit in the Commission’s conflation of early retired assets and impaired assets. An asset can be retired from service early and never become impaired, and an impaired asset can easily be ‘related’ to a prior early retirement[.] … Nothing in the statute requires these distinct actions to be contemporaneous.”

Depreciation rates

“Appalachian argues that the Commission erred in implementing depreciation rates from a revised 2017 Depreciation Study for the years 2018 and 2019. …

“Appalachian’s sole argument on appeal is that the Commission is bound by the depreciation rates previously approved by the Commission in 2012 because the Commission’s 2014 order did not change the rates at that time and stated that it would revisit the issue at the next review. But nothing in the Commission’s 2014 order alters Appalachian’s burden to show that the depreciation expenses it sought to include in its rate base were reasonable.

“Nor does any language in the Commission’s 2014 order take away the Commission’s discretion to review the reasonableness of Appalachian’s depreciation expenses as part of the present triennial-review proceeding. And no statutory provision expressly limits the Commission’s authority to review the reasonableness of Appalachian’s depreciation expenses in this scenario.”

Consumer Counsel issues

Consumer Counsel argues that Code § 56-585.1(E), which requires the commission to “determine the amortization period for recovery of any appropriate costs due to the early retirement of any electric generation facilities,” should apply retroactively.

“Nothing in the language of subsection E makes it manifest and plain that the General Assembly intended for the subsection to apply retroactively. …

“Consumer Counsel [also] argues that if the Commission had considered Appalachian’s overearnings from 2015 and 2016, it would have found that the early retirement costs had already been recovered by Appalachian through revenues collected in 2015 and 2016. …

“Given our holding above that the Commission erred in finding that the asset-impairment costs were unreasonable, see supra at 28, we need not address Consumer Counsel’s argument as it is now moot. …

“Consumer Counsel’s final issue contends that the Commission erred in finding that Appalachian’s evidence was sufficient to demonstrate that its ICPA [Inter-Company Power Agreement] costs were lower than market costs. …

“Sufficient evidence supports the Commission’s factual finding that Appalachian shouldered its burden of proof on this issue in the 2020 triennial-review proceeding.”

Affirmed in part, reversed in part and remanded.

Appalachian Power Co. v. State Corporation Comm’n, et al., Record No. 210391; Office of the Attorney General, division of Consumer Counsel, et al., Record No. 210634 (Kelsey) (Mims, joined by Powell, dissenting in part) Aug. 18, 2022. From the State Corporation Comm’n.

Counsel for Record 210391: Robert M. Rolfe (Timothy E. Biller; James G. Ritter; Noelle J. Coates; James R. Bacha; Hunton Andrews Kurth, on briefs), for appellant. John F. Dudley, Counsel to the Commission (Andrea B. Macgill, Deputy Director, on brief), for appellee State Corporation Commission. (Mark R. Herring, Attorney General; Erin B. Ashwell, Chief Deputy Attorney General; Samuel T. Towell, Deputy Attorney General; C. Meade Browder Jr., Sr. Assistant Attorney General; C. Mitch Burton Jr., Assistant Attorney General, on brief), for appellee Office of the Attorney General, Division of Consumer Counsel. (Matthew L. Gooch; William T. Reisinger; ReisingerGooch, on brief), for appellee Virginia Poverty Law Center. (Robert D. Perrow; John L. Walker, III; Williams Mullen, on brief), for appellee The VML/VACo APCo Steering Committee.

Counsel for Record 210634: C. Mitch Burton Jr, Assistant Attorney General (Mark R. Herring, Attorney General; Erin B. Ashwell, Chief Deputy Attorney General; Samuel T. Towell, Deputy Attorney General; C. Meade Browder Jr., Sr. Assistant Attorney General, on briefs), for appellant Office of the Attorney General, Division of Consumer Counsel.(Matthew L. Gooch; William T. Reisinger; ReisingerGooch, on briefs), for appellant Virginia Poverty Law Center. (Evan Dimond Johns; Appalachian Mountain Advocates, on briefs), for appellant Sierra Club. John F. Dudley, Counsel to the Commission (Andrea B. Macgill, Deputy Director, on brief), for appellee State Corporation Commission. Robert M. Rolfe (Timothy E. Biller; James G. Ritter; Noelle J. Coates; James R. Bacha; Hunton Andrews Kurth, on brief), for appellee Appalachian Power Company.

VLW 022-6-041, 44 pp.