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In re Cube Yadkin Generation, LLC

Court of Appeals of North Carolina

December 17, 2019


          Heard in the Court of Appeals 8 August 2019.

          Appeal by Complainant from Order entered 16 July 2018 by the North Carolina Utilities Commission. Nos. E-2, Sub 1177; E-7, Sub 1172

          Kilpatrick Townsend & Stockton LLP, by Joseph S. Dowdy, Benjamin L. Snowden, and Phillip A. Harris, Jr., for complainant-appellant.

          The Allen Law Offices, by Dwight W. Allen, Britton H. Allen, and Brady W. Allen, and Kendrick Fentress, Associate General Counsel of Duke Energy Corporation, for respondent-appellee.

          HAMPSON, JUDGE.

         Factual and Procedural Background

         Cube Yadkin Generation, LLC (Cube) is a limited liability company that acquires, develops, and modernizes hydroelectric facilities. The present dispute arises out of Cube's purchase of hydroelectric facilities (the Yadkin Project)[1] from Alcoa Power Generating, Inc. (Alcoa) on 1 February 2017 and Cube's efforts to sell electrical power generated by these facilities to Duke Energy Progress, LLC (Duke). In this appeal, Cube appeals from the Order Granting Motion to Dismiss (Order) entered on 16 July 2018 by the North Carolina Utilities Commission (Commission), dismissing Cube's Verified Complaint, Request for Declaratory Ruling, and Request for Arbitration (Complaint) against Duke. The Record tends to show the following:

         In 1978, Congress enacted the Public Utility Regulatory Policies Act of 1978 (PURPA), which sought, inter alia, to encourage a national policy of energy conservation. See FERC v. Mississippi, 456 U.S. 742, 745, 72 L.Ed.2d 532, 537-38 (1982). "Pursuant to section 210 of [PURPA], regulations of the Federal Energy Regulatory Commission (FERC) promulgated thereunder, and implementation mechanisms of the states, electric utilities are required to purchase power produced by qualifying cogeneration and small power production facilities [(collectively, Qualifying Facilities)] and are required to pay their 'avoided costs' for the power unless the rate is negotiated." State ex rel. Utilities Comm. v. N.C. Power, 338 N.C. 412, 416, 450 S.E.2d 896, 898 (1994); see also 16 U.S.C.A. § 824a-3(d) (West 2010) (defining avoided cost as "the cost to the electric utility of the electric energy which, but for the purchase from such [Qualifying Facilities], such utility would generate or purchase from another source"). Under FERC regulations, a Qualifying Facility can sell its power pursuant to a Legally Enforceable Obligation and can choose to fix the price "at the time the [Legally Enforceable Obligation] is incurred" or at the moment of delivery. 18 C.F.R. § 292.304(d)(2)(i)-(ii) (2019).

         Prior to 2016, the Commission applied a two-part test for determining the establishment of a Legally Enforceable Obligation. See N.C. Utils. Comm'n, Order Establishing Standard Rates and Contract Terms for Qualifying Facilities, Docket No. E-100, Sub 140, at *52 (Dec. 17, 2015) [hereinafter Sub 140 Order]. The Commission required a Qualifying Facility to (1) obtain a Certificate of Public Convenience and Necessity (CPCN)[2] and (2) indicate to the utility that it was "seeking to commit itself to sell its output[.]" N.C. Utils. Comm'n, Order Establishing Standard Rates and Contract Terms for Qualifying Facilities, Docket No. E-100, Sub 136, at *37 (Feb. 21, 2014) [hereinafter Sub 136 Order]; see also N.C. Gen. Stat. § 62-110.1(a) (2017) (requiring a CPCN from the Commission before "construction of any . . . facility for the generation of electricity"). However, because this second prong was vague and difficult to establish, the Commission later created the Notice of Commitment (NOC) Form, demonstrating a Qualifying Facility's commitment to sell its output. Sub 140 Order, at *51-52. Effective 26 January 2016, the Commission thus revised its Legally-Enforceable-Obligation test, ordering that for a Qualifying Facility to establish a Legally Enforceable Obligation, the developer of the Qualifying Facility was required to: "(1) have self-certified with the FERC as a [Qualifying Facility]; (2) have made a commitment to sell the facility's output to a utility pursuant to PURPA via the use of [the NOC Form;] and (3) have received a CPCN for the construction of the facility." Sub 140 Order, at *52. Indeed, relevant to this appeal, Section Three of the NOC Form specifically requires a Qualifying Facility to indicate whether it has applied for or received a CPCN from the Commission.

         According to Cube's Complaint, the Yadkin Project facilities have been in operation since at least 1958. In 2000, Alcoa acquired the Yadkin Project, and on 22 September 2016, FERC issued a new long-term license to Alcoa for the Yadkin Project, allowing for the operation and maintenance of the Yadkin Project until 31 March 2055. On 30 June 2016, Cube signed a contract with Alcoa to acquire the Yadkin Project, and approximately a month later, Cube submitted an application to FERC seeking approval of the transfer of Alcoa's Yadkin Project license. FERC approved the transfer on 13 December 2016. Cube "formally consummated its agreement to purchase the Yadkin Project" on 1 February 2017. Prior to this transfer, Alcoa self-certified the Yadkin Project as Qualifying Facilities by filing Form 566s with FERC on 28 September 2016, and on 16 March 2017, Cube filed Form 566s with FERC, self-recertifying the Yadkin Project as Qualifying Facilities.

         In March 2016, Cube, as part of its due diligence process, contacted Duke to introduce itself and begin inquiries about entering into a Power Purchase Agreement (PPA) with Duke. The parties subsequently held an in-person meeting to discuss entering into "a potential long-term PPA for the [Yadkin Project Qualifying Facilities]." Cube and Duke continued discussions, and by letter dated 21 September 2016, Duke stated:

You [(a representative for Cube)] informed me that [Cube] does not currently own or operate the Yadkin [Project] system, but anticipates that it will close on the transaction to own and operate the facilities around November 1, 2016. As I communicated to you previously, Duke does not have any current needs for energy or capacity . . . . You further informed me that [Cube] is considering certifying the [Yadkin Project] as [Q]ualifying [F]acilities under [PURPA]. In that regard, I informed you that to the extent [Cube] approached Duke under PURPA, that under PURPA's requirements, Duke would likely have no obligation to purchase any output of energy or capacity from the Yadkin [Project] system units that may be certified as [Q]ualifying [F]acilities.

         On or about 11 October 2016, Cube sent Duke a letter in response, indicating Alcoa had self-certified the Yadkin Project, stating PURPA "require[s] electric utilities, including Duke, to purchase energy and capacity made available from [Qualifying Facilities, ]" and requesting the parties meet "to discuss the process for making sales from [the Yadkin Project] to Duke pursuant to PURPA." Countering Cube's assertions, Duke replied by letter dated 14 October 2016, stating because Cube "neither owns nor is a [Q]ualifying [F]acility with respect to the Yadkin [Project, ]" Cube had no rights to exert under PURPA. Duke further asserted its position that even if Cube eventually acquired the Yadkin Project and rights under PURPA, Duke would be exempted from any purchase obligation under PURPA.

         Duke, however, did represent to Cube "it would enter into good faith negotiations . . . concerning the purchase of the output of the Yadkin [Project] facilities on a non-PURPA basis."[3] These discussions began in November 2016 and continued until 10 August 2017; however, the parties never reached a non-PURPA agreement. According to Cube, "Duke's conduct since the beginning of the discussions between the parties appears to have been designed to discourage [Cube] from pursuing its rights under PURPA." Importantly, on 15 November 2016, Duke filed its "2016 Avoided Cost Proposal" with the Commission, which, Cube claimed, "would have the impact of dramatically reducing the utilities' avoided costs, and, therefore, rates offered to [Qualifying Facilities under PURPA]."

         On 29 March 2018, Cube filed its Complaint against Duke, seeking to enforce its right under PURPA to sell the energy from the Yadkin Project to Duke at the avoided-cost rates as of the date it first established its Legally Enforceable Obligation. Cube asserted the Yadkin Project was self-certified as Qualifying Facilities by Alcoa on 28 September 2016, which certification "attach[ed] to the facility[.]" Cube also asserted it was not required to file the NOC Form because Cube was not required to obtain a CPCN and thus could not make this certification on the NOC Form. Specifically, Cube's position was the CPCN requirement was not applicable because the statute creating the CPCN requirement was enacted after the Yadkin Project had already been constructed and in operation. Cube therefore contended its communications with Duke in September and October established its "commitment to sell the output of the [Yadkin Project] facilities to Duke."

         Thus, Cube contended it established a Legally Enforceable Obligation, at the latest, by 11 October 2016, thereby entitling it to the higher avoided-cost PURPA rates effective on that date rather than the lower avoided-cost rates established by Duke's 15 November 2016 Avoided Cost Proposal. Although Cube asserted the Commission's three-part test was inapplicable because of Cube's unique situation, Cube nevertheless argued it had "substantially complied with the substance of the requirement[s]" and requested the Commission waive the three-part test. In addition, Cube alleged Duke acted in bad faith during negotiations by claiming it was exempt from its PURPA requirements to buy Cube's energy, which Cube contended further supported a waiver of the three-part test.

         On 7 May 2018, Duke filed its Joint Answer and Motion to Dismiss Complaint of Cube Yadkin Generation, LLC (Motion to Dismiss). In its Motion to Dismiss, Duke disagreed with Cube's contentions and asserted Cube failed to establish a Legally Enforceable Obligation prior to the change in its avoided-cost rates because of Cube's noncompliance with the Commission's three-part test. Therefore, ...

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