The Commonwealth Court has ruled that electricity distribution companies may purchase default electricity generation service for their customers from a single source, despite statutory language that requires default service plans to include a "prudent mix" of spot market purchases, long-term contracts and short-term contracts.

In Popowsky v. Public Utility Commission, an en banc panel ruled 5-2 to affirm the Pennsylvania Public Utility Commission's finding that requiring Pike County Light & Power Co., to purchase a fixed-price hedge contract for default electricity generation service could result in higher costs to consumers than purchasing service solely from the more volatile spot market.

Judge Renée Cohn Jubelirer, writing for the majority, said the case exposed "a latent ambiguity" in Section 2807(e)(3.2) of the Electricity Generation Customer Choice and Competition Act, which states that default service plans "'shall include a prudent mix'" of spot market purchases, short-term contracts and long-term contracts.

While the word "prudent" would seem to preclude the purchase of default service from more than one source, Jubelirer said, the word "mix" would seem to imply the opposite is true.

But the PUC, in determining that Pike may purchase its default service solely on the spot market, properly examined whether a mix of sources that was truly prudent could be achieved and found that, in this instance, it could not, according to Jubelirer.

"The PUC's application of Section 2807(e)(3.2) does not reflect that it has read the word 'mix' out of the term 'prudent mix,'" Jubelirer said. "Rather, the PUC properly considered the possibility of including short-term contracts and determined that to do so would not be prudent. We believe the PUC is correct that, in interpreting the term 'prudent mix,' the PUC must exercise some balance and discretion under the circumstances of the case in order for the 'mix' in question to be 'prudent.'"

Jubelirer was joined by Judges Bernard L. McGinley, Bonnie Brigance Leadbetter, Robert Simpson and Anne E. Covey.

But President Judge Dan Pellegrini dissented, saying he believes Section 2807(e)(3.2) clearly requires default service plans to include spot market purchases, short-term contracts and long-term contracts and that the phrase "'shall include'" does not give the PUC the power to pick and choose.

Similarly, Pellegrini said, the word "mix" in Section 2807(e)(3.2) means exactly what it says.

"If you bought a can of 'mixed nuts' that only had peanuts, that would not be mixed nuts but consumer fraud," Pellegrini said. "It would still not be mixed nuts even if it was established that peanuts were better for you than cashews or almonds or any other type of nut just as it is not a 'prudent mix' in purchasing energy of one default service product because the commission believed it would result in lower customer costs. If the General Assembly wanted that, it would have given the commission that discretion."

Pellegrini was joined by Judge Patricia A. McCullough.

In Popowsky, according to Jubelirer, Pike was obligated under the Competition Act to select a default electricity generation supplier for all of its customers who did not choose their own suppliers.

In June 2011, Jubelirer said, Pike submitted a default service plan for the period from June 1, 2012, through May 31, 2014, seeking approval by the PUC to continue purchasing all of its default service on the spot market, as it had done in the past.

Pike said in the petition for approval it submitted to the PUC that the small number of its customers who required default service made it difficult to estimate default service requirements and to negotiate favorable long-term contracts, according to Jubelirer.

Purchasing all of its default service on the spot market, Pike argued, reduces the danger that it will overbuy default service, forcing it to pass those unnecessary costs on to its customers, Jubelirer said.

But Pennsylvania Consumer Advocate Irwin A. Popowsky objected, according to Jubelirer, arguing that because of the day-to-day volatility of the spot market, Pike should be required to also purchase some of its default service via fixed-price, short-term hedge contracts in an effort to balance price stability with low customer costs while complying with the Competition Act.

The administrative law judge issued a decision in February 2012 recommending that the PUC require Pike to purchase some of its default service through short-term hedge contracts, according to Jubelirer.

But the PUC, in May 2012, approved the default service plan submitted by Pike, saying the ALJ's recommendation placed too much emphasis on price stability and not enough emphasis on maintaining low customer costs.

Jubelirer said the PUC's determination was supported by substantial evidence, including testimony by Ivan Kimball, the director of electricity supply for Pike's parent company, Consolidated Edison Co. of New York Inc., and Matthew I. Kahal, an energy, utility and telecommunications consultant.

Both Kimball and Kahal testified that requiring Pike to incorporate hedge contracts into its default service plan would result in higher prices for consumers than allowing Pike to continue purchasing service solely on the spot market, according to Jubelirer.

Moving to the statutory construction question, Jubelirer disagreed with Popowsky's assertion that the language of Section 2807(e)(3.2) is unambiguous.

"For instance, none of the parties argues that it would be prudent to include long-term contracts in Pike's plan," Jubelirer said. "Yet, the consumer advocate does not explain why the term 'mix' requires a combination of two of the three enumerated sources, but not all three."

Jubelirer also disagreed with Popowsky's claim that the PUC focused too heavily on keeping prices low and failed to give proper weight to price stability.

"While not discounting the importance of price stability, the PUC concluded that the additional benefits of a financial hedge would not be justified by the additional costs," Jubelirer said. "Such a determination is within the PUC's discretion and, as discussed above, is supported by substantial evidence."

A spokesperson for the PUC said it was "pleased that [the] Commonwealth Court upheld our order allowing us to apply our expertise and discretion in determining which power purchase techniques will result in the lowest price over time."

Pennsylvania's Acting Consumer Advocate Tanya J. McCloskey could not be reached for comment at press time.

Zack Needles can be contacted at 215-557-2493 or zneedles@alm.com. Follow him on Twitter @ZNeedlesTLI.

(Copies of the 15-page opinion in Popowsky v. Public Utility Commission, PICS No. 13-2296, are available from Pennsylvania Law Weekly. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •