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In re Application of Union Electric Co.

Court of Appeals of Missouri, Western District, Third Division

October 22, 2019



          Before Gary D. Witt, P.J., Edward R. Ardini, and Thomas N. Chapman, JJ.


         The Missouri Office of the Public Counsel (OPC) appeals the Report and Order of the Missouri Public Service Commission (PSC) allowing Union Electric Company[1] (Ameren) to recapture fifteen percent of its interim depreciation expenses associated with the building of the High Prairie Wind Farm (Wind Farm) by an interim rate adjustment (a surcharge) before Ameren's next rate case -- as may be provided by the Renewable Energy Standard Cost Recovery Mechanism (RESRAM). [2]

         OPC does not challenge approval of construction of the Wind Farm. OPC agrees that Ameren's election to utilize the Plant in Service Accounting (PISA) procedure permitted by §393.1400.2(1)[3] entitled (and, in fact, required) Ameren to defer a fixed eighty-five percent of the interim Wind Farm depreciation expenses and returns as a regulatory asset to be considered in calculating its rate base in Ameren's next rate case. The OPC does not contest that Ameren is entitled to pass on to its customers up to 100% of its other prudently incurred costs and benefits of the Wind Farm that are not subject to PISA deferral through an interim rate adjustment as provided by RESRAM.

         In its appeal, OPC only challenges the PSC's decision to allow Ameren to recover by RESRAM's interim rate adjustment the fifteen percent of interim depreciation expenses related to the Wind Farm that is not accounted for in the PISA procedure. OPC maintains that, once elected, § 393.1400's PISA accounting procedure is the exclusive means for Ameren to recover the interim depreciation expenses and return associated with the Wind Farm construction. We affirm the PSC's Report and Order.

         Statement of Facts

         Ameren is an electrical corporation as defined in § 386.010, subject to regulation by the PSC. Ameren applied for a Certificate of Convenience and Necessity to build the High Prairie Wind Farm in 2018. While the location, design and parameters of this facility were the subject of substantial comment and argument, the stakeholders ultimately entered into a stipulation and agreement (later approved in a formal order of the PSC) that left only the one issue (now on appeal) to be resolved by the PSC.[4] In order to put this issue into its proper context, a brief survey of Missouri's regulatory scheme for utilities is required.

         Missouri's Regulation of Utility Corporations

         Missouri established the PSC and requires a "just and reasonable" rate structure mandated under § 393.130.1, in recognition that utility providers, while often private companies, provide an essential public good and enjoy a quasi-monopoly on that good. Reasonable rates should balance utility investor and consumer interests, compensating the utility company for its operating and maintenance expenses, servicing its debt, and allowing a reasonable rate of return (profit) for its investors. State ex rel. Office of Public Counsel v. Public Service Commission, 367 S.W.3d 91, 108 (Mo. App. S.D. 2012); Fed Power Comm'n v. Hope Natural Gas Co., 320 U.S. 591, 603 (1944). Utility rates are established periodically by proceedings before the PSC known colloquially within the industry as "rate cases." Rates are based on the amount of revenue necessary to build, maintain, and operate the utility plants and associated infrastructure (referred to as "rate base"), plus a reasonable rate of return for utility company investors. Hope Natural Gas Co., 320 U.S. at 603. Unless otherwise provided for by law, an electrical corporation is not permitted to adjust the rate it charges customers until its next rate case. Even if an electrical corporation found it necessary to build a new power plant years before its next rate case, unless expressly permitted to by statute, it would not ordinarily be allowed to recoup its expense or earn profit on that capital investment in the interim. This phenomenon is referred to as "regulatory lag."

         At issue in this appeal is the interplay of two means which may allow Ameren to incorporate interim Wind Farm expenses and return into its rate structure: (1) PISA, which, if elected, requires them to defer eighty-five percent of interim depreciation expenses and returns (on qualifying plants) into a regulatory asset that is later taken into account at Ameren's next general rate case; and (2) RESRAM, which permits an interim adjustment to the previously approved rate to reflect Ameren's prudently incurred costs, as well as any benefits.

         Missouri's Renewable Energy Standard

         In 2007, Missouri enacted § 393.1030[5] establishing Missouri's Renewable Energy Standard (RES) which required the PSC to "prescribe by rule a portfolio requirement for all electric utilities to generate or purchase electricity generated from renewable energy resources." § 393.1030.1. The statute established what share of an electric utility's sales must be comprised of renewable energy (requiring increased minimum percentages over time) and also set penalties for failure to meet those requirements. §§ 393.1030.1(1)-(4), 2(2). Subsection 393.1030.2(4) directed the PSC to create a "[p]rovision for recovery outside the context of a regular rate case of prudently incurred costs and the pass-through of benefits to customers of any savings achieved by an electrical corporation in meeting the requirements of this section." In response to this dictate, the PSC promulgated Commission Rule 4 CSR 240-20.100, which provides for the establishment of a Renewable Energy Standard Rate Adjustment Mechanism (RESRAM), which is defined by 4 CSR 240-20.100(1)(P) as "a mechanism that allows periodic rate adjustments to recover prudently incurred RES compliance costs and pass-through to customers the benefits of any savings achieved in meeting the requirements of the Renewable Energy Standard."

         RESRAM not only serves as a mechanism to impose rate adjustments (prior to the next rate case) for up to 100% of the prudently incurred interim costs (depreciation) associated with capital investments in renewable source plants; but may also allow interim surcharges for other prudently incurred costs associated with renewable energy compliance.[6] While requiring an electrical corporation to go through the process of requesting an interim rate adjustment and establishing that all costs were prudently incurred, the RESRAM mechanism permits utility companies to lessen the impact of regulatory lag by permitting interim rate increases (surcharges) outside the context of (and in advance of) the next regular rate case.

         The Plant in Service Accounting Statute

         In 2018, the Missouri legislature adopted § 393.1400. This statute permitted electrical corporations to elect to defer eighty-five percent of interim depreciation expenses and returns for qualifying electric plants[7] ("plant-in-service") to a regulatory asset that (in addition to the balance of that asset) would be included as part of its rate base in the next general rate case. § 393.1400.2(1). If an electrical corporation elects to employ the "plant-in-service" accounting (PISA) permitted by § 393.1400 to make these deferrals, it is required to defer a set amount of depreciation expense in the following manner:

Notwithstanding any other provision of this chapter to the contrary, electrical corporations shall defer to a regulatory asset eighty-five percent of all depreciation expense and return associated with all qualifying electric plant recorded to plant-in-service on the utility's books commencing on or after August 28, 2018, if the electrical corporation has made the election provided for by subsection 5 of this section by that date, or on the date such election is made if the election is made after August 28, 2018. In each general rate proceeding concluded after August 28, 2018, the balance of the regulatory asset as of the rate base cutoff date shall be included in the electrical corporation's rate base without any offset, reduction, or adjustment based upon consideration of any other factor, other than as provided for in subdivision (2) of this subsection, with the regulatory asset balance arising from deferrals associated with qualifying electric plant placed in service after the rate base cutoff date to be included in rate base in the next general rate proceeding.


         Once elected, "plant-in-service" accounting (PISA) requires an electrical corporation to defer eighty-five percent of the interim depreciation expense and return on investment ("return") associated with a new qualifying electric plant until its next rate case. Those deferred costs and returns are included as a regulatory asset in calculating the electric company's rate base when setting rates in the subsequent rate case. This enables the electrical corporation to account for eighty-five percent of the regulatory lag on qualified interim infrastructure investment, without requiring a request for a rate adjustment (surcharge) outside the context of (and in advance of) the next regular rate case.

         Interplay of RES and PISA with High Prairie Wind Farm

         Because the High Prairie Wind Farm was part of Ameren's effort to comply with Missouri's Renewable Energy Standards (RES), as part of its initial request for a Certificate of Convenience and Necessity (CCN), Ameren included a proposed RESRAM to pass on the costs as permitted by the RES statute and PSC rule. However, while the CCN for the High Prairie Wind Farm was under consideration by the PSC, the PISA statute was enacted by the Missouri legislature. After enactment of the PISA statute, Ameren filed a notice with the PSC stating that it intended to have its interim depreciation expense and expected return be deferred by the PISA accounting procedure, which would then have eighty-five percent of those costs accounted for in the next rate case. Ameren amended its requested RESRAM, so that the portion of the prudently incurred costs it sought to recover via RESRAM, which was related to depreciation expense and return, was limited to the balance (fifteen percent) not deferred via PISA. The OPC objected, maintaining that the two statutory schemes were mutually exclusive and that, once Ameren opted to proceed under the PISA ...

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