E-15 Commissioner James Danly Dissent Regarding Blue Ridge Power Agency

Commissioner James Danly Statement
October 20, 2022
EL21-97-000

I dissent from today’s order.[1]

We are asked to issue a declaratory order to “‘terminate a controversy or remove uncertainty’” as to whether four Commission-jurisdictional wholesale power supply agreements permit the use of battery storage for load management purposes.[2]  That is, we are asked to adjudicate four contract disputes,[3] over which the courts and the Commission enjoy concurrent jurisdiction.[4]

We should have exercised our discretion either to dismiss, or decline to act upon, this petition for a declaratory order because there is no need for the Commission to issue a generic statement regarding battery storage or demand response programs.[5]  Failing that, we should have exercised our sole discretion to decline primary jurisdiction over these contract disputes.[6]  While the Commission has authority under the Federal Power Act (FPA) to approve and interpret these contracts, our “authority under the FPA is not ordinarily impaired by the pendency of private state court litigation” on contract disputes.[7]  I would have declined to exercise primary jurisdiction over these contracts and allowed these disputes to be resolved by the courts, which are more than capable of doing so.  Nothing in Arkla[8] counsels otherwise.

Nevertheless, the Commission asserts jurisdiction, in part, on the grounds it has special expertise regarding the rules that govern battery storage and the use of demand response to shift or reduce load.[9]  Yet, the majority concedes there are no such rules even at issue in three of the four agreements[10] as they “do not expressly mention battery storage investments.”[11]  Moreover, the later-executed fourth agreement (i.e., the Virginia Tech Agreement)[12] expressly defines new generation to include batteries and limits the use of battery storage technology and efforts to reduce or shift peak load by such new generation.[13]

The majority finds that, “read in context,” such investments are permitted under the three agreements since they focus on generation and the term Full Requirements Electric Service is defined solely as to generation and includes all generation-related services and schedules.[14]  Relying on NCEMPA, [15] the majority declares that battery storage does not produce energy and just shifts loads and, since retail load can fluctuate and must be met unless there is above normal load growth, battery storage technology is permitted.[16]  The majority further contends that “[w]hile the Agreements do not expressly provide for Customers’ ability to reduce usage or peak shave, the Agreements also do not limit Customers’ ability to reduce usage or to peak shave.”[17]  To declare that the mere fact that retail load can fluctuate requires us to read into contracts any method one might choose to meet that fluctuation, regardless of whether the contract contemplated it,[18] is self-evident overreach.  This is especially true here when the battery storage is not even intended to follow in real-time but will instead be used to reduce or shift peak load use.  The order’s additional finding that there are no terms that guarantee Appalachian Power Company (APCO) a minimum payment or minimum peak load usage is just a red herring and is not dispositive.[19]

I believe it would be more accurate to read the three agreements in the context of the Virginia Tech Agreement, executed less than two years later, that expressly defines new generation to include batteries and imposes limits on their use.[20]  And, notably, even the three agreements preclude the use of newly constructed or purchased generation resources or new power purchase agreements to reduce the respective customers’ retail load.[21]  The parties’ obvious understanding that batteries were generation was reasonable at the time.  None of the parties to any of the four agreements had the benefit of the NCEMPA orders declaring batteries are not inherently generation[22] at the time of execution of the agreements.

Regardless, NCEMPA is inapposite because the full requirements agreement at issue there expressly included provisions regarding demand-side management and demand response.  The majority even recognizes that the three agreements here “differ materially from the NCEMPA agreement, and that the NCEMPA orders, standing alone, do not dictate the outcome in the instant position.”[23]

Everyone should be troubled by the fact that today’s order deprives the parties the benefit of their negotiated agreement.  As the majority properly recognizes, “[c]ourts may not read into a contract a covenant that doesn’t follow inexorably from its terms.  Nor may they rewrite a contract to include terms that a party, with the benefit of hindsight, would have or should have included.”[24]  As the majority notes, “[e]nergy storage was not a new technology in 2017, the year these three Agreements were executed” and “APCO did not address its potential use in these contracts.”[25]  Today’s order rewrites the three agreements to impose terms that were not contemplated by the parties at the time of execution or that they chose not to address, particularly given their apparent belief in the fourth agreement that battery storage was generation and the three agreements precluded new generation whether new generation resources or new power purchase agreements.  The three agreements provide that matters of interpretation should be addressed by the Commonwealth of Virginia courts.[26] This counsels very strongly in favor of allowing the courts to settle these disputes.

As to the second and third Arkla factors, the majority determines that “‘there is a need for uniformity of interpretation of the type of question raised by the dispute,’ as exemplified by the recent NCEMPA litigation, and that that this case is important in relation to the Commission’s regulatory responsibilities, in particular with regard to its authority over and interpretation of the terms, rates and conditions of wholesale sales contracts.”[27]  I disagree.  The majority already recognizes that NCEMPA is not dispositive.  The contract disputes are limited to four unique agreements and are based on specific circumstances and negotiated provisions involving the parties to those agreements. [28]  A generic statement on compatibility of full requirements contracts and battery storage or demand response programs to reduce or shift load is simply not warranted here.[29]  The matter at issue is narrow:  the only question here is what the contracting parties intended at the time that they consummated their respective agreements.  The courts can determine that.

At root, this order is not really meant to resolve a contract dispute.  In actuality, the majority has opportunistically seized upon this proceeding in order to promote their preferred policies on battery storage and demand response.  The import of this order is that if your full requirements contract is silent as to this or that matter or if it fails to expressly prohibit a particular thing, then any such practice, might it later be at issue, can now be permitted by the Commission, when it wants.  This is absurd; this is not how contracts work.  This decision will inevitably lead to confusion and disruption of other full requirements contracts and will encourage a slew of future petitions for declaratory orders seeking to reform extant contracts by inserting unnegotiated, uncontemplated, and unanticipated elements.  Contracting parties beware.

I also note the majority’s summary dismissal of APCO’s claims that, if the petition is granted, approximately $8.5 million in costs will be shifted to its other wholesale generation customers.[30]  According to APCO, “APCO estimates that if 34 Megawatts of storage were procured, as indicated in the request for proposals, and the Customers were successful in shaving their load in that amount during the monthly system peaks, they could avoid approximately $5 million a year in their contractually obligated fixed costs under the Agreements and another $3.5 million in transmission costs.”[31]

APCO points to section 4.6(a) of the three agreements and Appendix B, A-1, Line 11, in support of its claim and explains that “[t]he Agreements provide that APCO’s fixed costs to provide full firm service, as calculated in accordance with the agreed-upon formula rate template, will be billed based on the amount of energy that APCO provides each Customer at each of APCO’s twelve-monthly peaks.”[32]  As APCO further explains, “[i]n other words, each Customer is allocated a share of the demand-related costs incurred to provide full electric requirements service based on the Customer’s monthly usage during those twelve monthly system peaks.  The so-called 12-CP allocation is a longstanding and well-recognized methodology for allocating fixed demand costs to requirements customers.”[33]  According to APCO, “[t]o the extent that one customer’s usage is lower than normal during a monthly peak, a greater share of APCO’s transmission costs and the fixed demand costs recovered from its other wholesale generation customers automatically is allocated to other customers.”[34] 

The majority states that “APCO’s speculative losses” and cost-shifting assertions are not “relevant to the central question of the dispute.”[35]  To the contrary, we have a statutory obligation to ensure that rates are just and reasonable and in the public interest.[36]  Not only are we obligated under the Administrative Procedure Act to respond to every argument, when a party claims that a particular resolution of a contract dispute will result in unexpected cost-shifting, we owe the litigants a response.

For these reasons, I respectfully dissent.