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November 28, 2016

Maine Court Restricts T&D Utility Affiliation with Merchant Generation

In 1997,  Maine enacted legislation (‘the Restructuring Act”) deregulating electric generation and generally requiring the state’s utilities to divest their generation holdings.[1] However, the law permitted limited forms of affiliation between utilities and entities owning generation and left in place an earlier law giving the Public Utilities Commission (Commission) sweeping powers to impose conditions on utility reorganizations that create affiliate relationships. [2]  In a 2014 decision, the Commission  used that conditioning authority to approve a proposed transaction that the Commission found would otherwise result in an impermissible utility affiliation with merchant generation, finding that with those conditions, the transaction would further the pro-competitive purposes of the Restructuring Act.[3]

In a decision handed down on November 17, 2016, the Maine Supreme Judicial Court overturned the Commission’s decision, holding in effect that the Restructuring Act placed curbs on the Commission’s conditioning authority. [4] While the Court paid lip service to its duty to defer to agency decisions, in fact it appears to have done just the opposite.  It also completely ignored the Commission’s explanation of how the transaction advanced the purposes of the Act.

The case grew out of petitions filed by Emera Maine and its predecessor entities in 2011 for approval of two affiliate transactions, one of which is pertinent to this discussion. (Emera Maine subsequently canceled the second transaction.)  Emera Maine operates a transmission and distribution (T&D) utility in Northern Maine and is itself a subsidiary of  Emera, a Canadian entity with regulated and non-regulated operations in Canada and several states. In the transaction at issue, Emera sought to increase its ownership in another energy holding company, Algonquin Power & Utilities Corp. (APUC), from about 8 percent to 25 percent. APUC’s holdings included merchant generation serving the Maine market, and the transaction required the Commission’s approval under its reorganization statute.

The Commission initially approved the transactions in 2012 subject to approximately 50 conditions designed to protect against (1) incentives for favoritism by Emera Maine toward affiliated generation, and any resulting harm to the competitiveness of the market, and (2) harm to Emera Maine ratepayers which might result in the form of higher transmission and distribution rates.[5]Conditions relating to the former included requirements that APUC not permit Emera to participate in decision-making regarding APUC’s generation in Maine; that, to the extent APUC’s operations relate to utility operations in Maine, APUC provide the Commission with access to books and records, respond to discovery requests and participate in Commission proceedings without being allowed to contend that the Commission lacks jurisdiction; and that the Commission have authority to order APUC to divest certain generation units.

Among the issues addressed at that time was whether the APUC transaction was consistent with the provision of the Restructuring Act restricting utility ownership of generation, 35-A M.R.S.A. § 3204(5). That section provides, “[e]xcept as otherwise permitted under this chapter, on or after March 1, 2000, an investor-owned transmission and distribution utility may not own, have a financial interest in or otherwise control generation or generation-related assets.”  Reading that section to prohibit investor-owned transmission and distribution utilities from affiliations that afford the utilities control over generation, the Commission held that the APUC transaction was lawful because Emera Maine (as opposed to its parent, Emera) would not have an equity interest or voting position in APUC.[6]

Certain intervenors appealed the Commission’s order to the Maine Supreme Judicial Court, which reversed and remanded, finding that the Commission had misinterpreted Section 3204(5).[7]  Rather than making that section’s restriction on utility affiliation with generation turn solely on whether the utility would be able to exercise control, the Court held that it prohibits the T&D utility from becoming affiliated with an electricity generator if the affiliation will become “likely to produce [in the T&D utility] incentives for favoritism that would undermine the purpose of the [Restructuring] Act.”[8]

On remand, the Commission again approved the transaction, subject to the same set of conditions.[9] The Commission concluded that while the APUC transaction would result in Emera Maine having an indirect ‘financial interest’ in generation as a result of its parent company’s stake in APUC, the conditions, together with federal and state standards of conduct applicable to T&D utility employees and others, would ensure that there were no significant incentives for Emera Maine to engage in favoritism toward APUC’s generating facilities.[10]

The Commission explained why allowing the transaction would advance the purposes of the Restructuring Act:

[W]ith the appropriate safeguards imposed through the Section 708 conditions, the Transactions will further… the Restructuring Act’s pro-competitive goals. … Generators compete in a daily and day-ahead markets … to sell their electricity onto the New England grid. …. Many generators also compete in the capacity markets for capacity payments … and some in the ancillary service markets to provide energy reserves, voltage support, and frequency regulation. Renewable generators can market renewable energy credits (RECs) under a separate non-centralized market …. Each of these markets is fundamentally regional in nature ….We are mindful that each State may, through restrictions or restraints it places under its State authority, unilaterally place utilities or generators at a competitive disadvantage in these regional markets … if those restrictions are dissimilar to those in other states. The result of greater restrictions would almost certainly be less investment and less competition in that State’s generation sector.

In ensuring the structure of the transactions with appropriate safeguards to eliminate opportunities for favoritism, we view our decision as fulfilling one of the purposes of the Restructuring Act, “ . . . to effectuate the Legislature’s goal of encouraging competition and innovation in the generation of electrical power.”[11]

The intervenors once again appealed to the Maine Supreme Judicial Court, this time arguing that the Commission could not lawfully use its authority under section 708 to transform a reorganization that violates section 3204(5) into one that satisfies the requirements of that statute.  The Court agreed.[12]

While the Court acknowledged its duty to accord “great deference” to Commission decisions,  overturning them  “only when the Commission abuses the discretion entrusted to it, or fails to follow the mandate of the legislature, or to be bound by the prohibitions of the constitution,”  the Court found that the Commission had overstepped its bounds.[13] “Here,” the Court stated, “the conditions crafted by the Commission that are directed toward APUC constitute forms of agency oversight and control that are contrary to both the letter and purpose of the Restructuring Act. That the Commission even saw the need to explicitly articulate particular controls over APUC as a condition to approving an increase in Emera’s stock ownership of APUC is itself a demonstration that most or all of those conditions do not exist by operation of statute or otherwise.”[14]

The Court did not dispute the breadth of the Commission’s statutory powers:

…. the Legislature has conferred general grants of authority to the Commission in several statutes. …[F]or example, the Commission is deemed to have “all implied and inherent powers.. . necessary and proper to execute faithfully its express powers and functions …” Additionally …, the Commission, when approving a reorganization, has the authority to “impose such terms, conditions or requirements as, in its judgment, are necessary to protect the interests of ratepayers.”[15]

However, the Court held that the Commission’s authority under these statutes “is circumscribed by the principle that the agency’s action must not be inconsistent with… the  foundational legislative framework that gives electricity generators the freedom to operate with only minimal regulatory constraint:”[16]

…..The Commission has attempted to materially expand the scope of its regulatory authority ….for example, by requiring APUC to exclude Emera, which would own a significant ownership stake in APUC, from participating in certain decisions regarding power generation; by requiring APUC to authorize the Commission to direct that it divest itself of power generation facilities; and by requiring APUC to participate in Commission proceedings without the right to object on the ground that the Commission is without jurisdiction. The scope and depth of the Commission’s regulatory weight affecting APUC as a generator is contravened by the Restructuring Act.[17]

While the Court’s role as the final arbiter of statutory construction is beyond dispute, in this case it is the Court itself, and not the Commission, that appears to have overstepped its bounds. To be sure, the Court was correct in finding in Section 3204(5) a purpose to deregulate electric generation. However, absent from the Court’s opinion is any mention—let alone a refutation—of the Commission’s articulation of the Restructuring Act’s broader purpose of promoting competition, a purpose which the Commission found would be undermined by denying Emera the opportunity to expand its investment in APUC.

Unlike the Court, which construed the Restructuring Act to override the Commission’s use of its conditioning authority, the Commission found a way to give effect to both statutes, consistent with an oft-stated rule of statutory construction.[18]  It is also noteworthy that the Court did not dispute the Commission’s conclusion that the conditions, together with standards of conduct, ensured that there would be no incentives on Emera Maine to engage in favoritism. Thus, the end result of the Court’s decision is that there may be less investment in generation in the Maine market, with no change in undesirable incentives on T&D utility conduct.

Given the choice between the approach advocated by the Commission, which broadens competition and investment, and the Court’s position in overruling the Commission Order, which focuses on a narrower objective of the Restructuring Act, it seems likely that the proponents of Maine’s Restructuring Act would have preferred the former. It may fall to the legislature to codify the Commission’s approach.
[1] Maine Stats., c. 316 (1997).  At that time, the author was Executive Vice President of Central Maine Power Company and advocated on behalf of the Company before the Maine legislature.

[2] 35-A M.R.S.A. §708.

[3] Bangor Hydroelectric Co., Request for Exemptions and for Reorganization Approvals, Maine PUC Docket No. 2011-00170 (Order, October 9, 2014)(2014 Order).

[4] Houlton Water Co.. v. Public Utils. Comm’n, 216 Me. 168, ___A.3d ____ (2016)(Houlton II).

[5] Bangor Hydroelectric Co., Request for Exemptions and for Reorganization Approvals, Maine PUC Docket No. 2011-00170 (Redacted Order, April 30, 2012)(2012 Order).

[6] 2012 Order at 19.

[7] Houlton Water Co.. v. Public Utils. Comm’n, 214 Me. 38, 87 A.3d 349 (2014)(Houlton I).

[8] Houlton I, ¶¶ 35, 37.

[9] Bangor Hydroelectric Co., Request for Exemptions and for Reorganization Approvals, Maine PUC Docket No. 2011-00170, supra note 2.

[10] 2014 Order at 9-13.

[11] 2014 Order at 13-15.

[12] Houlton II.

[13] Houlton II, ¶¶ 27-33.

[14] Houlton II, ¶ 31.

[15] Houlton II, ¶ 32 (citations omitted).

[16] Houlton II, ¶ 33 (citation omitted).

[17] Houlton II, ¶ 33 (citation omitted).

[18] See, e.g., Bowler v. Maine, 2014 Me. 151, 108 A.3d 1257, 1263 (2014).

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