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COA affirms denial of solar energy application

The Utilities Commission’s denial of approval for a company to generate additional solar energy based on the cost of upgrading the region’s electric grid to accommodate additional transmission was not arbitrary and capricious, a panel of the North Carolina Court of Appeals has ruled.
Friesian Holdings, LLC, an independent energy company, applied to the North Carolina Utilities Commission for a certificate of public convenience and necessity (CPCN) to build and operate a solar energy plan, which would sell and distribute electricity through an existing electric grid.
Although the Commission initially granted the CPCN, Friesian withdrew the first application and filed a new CPCN as a “merchant plant,” meaning that it would sell its energy to North Carolina Electric Membership Corporation (NCEMC) on a wholesale basis.
Friesian and Duke Energy Progress, who owns and operates the energy grid servicing Scotland County, entered into an agreement about the necessary upgrades to the existing electrical grid to accommodate the new facility.
Pursuant to the agreement, Friesian would bear sole responsibility for $100 million of the estimated $250 million needed for construction. However, a crediting policy provided by the Federal Energy Regulatory Commission (FERC) requires Duke to reimburse Friesian for the upgrade costs by passing along the costs in higher rates charge to its wholesale and North Carolina retail customers.
In June 2020, the Commission denied Friesian’s application. It concluded that Friesian’s generating facility project was not in the public convenience or need, in part because the network upgrade costs, to be passed on to the ratepayers under FERC’s crediting policy, were unreasonably high.
The denial was the first ever issued by the Commission to an energy generator for a CPCN. Friesian appealed.
Judge Lucy Inman affirmed.
“The record reveals the Commission considered and weighed the benefits of Friesian’s contract with NCEMC and Duke,” she wrote. “Nonetheless, the Commission concluded the project was not in the public interest: ‘the cost of the Network Upgrades dwarfs the costs of the generating plant’ and ‘the scale of the costs associated with the Facility relative to the size and projected revenue from the Facility raises concerns regarding economic viability of the project.’ While reasonable minds may disagree about the Commission’s judgment call, the applicable standard of review does not afford this court the authority to ‘second guess the Commission’s determination’ in this regard.”
Power reserved to states
Inman began with Friesian’s argument that the Commission’s denial of its CPCN was preempted by federal law because it was based, in large part, on the upgrade costs that would be charged to ratepayers as required by FERC’s crediting policy.
The Commission’s order stands in the way of FERC’s policy of preventing discrimination by incumbent energy producers against smaller, independent producers like Friesian seeking to enter the energy market, Friesian told the court.
While acknowledging this policy, Inman pointed out that the Federal Power Act (FPA) “leaves to the states alone” the regulation of any retail sale of electricity, taking it out of the hands of FERC. North Carolina statute permits the Commission to consider factors such as benefit to the public and the life of facilities, as well as total costs of construction — including to upgrade the existing network.
“Because the Commission has the sole authority to determine the need for new energy generation in North Carolina … a power reserved for the states by Congress under the FPA, we hold the Commission’s decision to deny Friesian’s CPCN is not preempted by federal law,” she wrote.
Nor did the denial stand in as an obstacle to FERC’s crediting policy goals, she added, as “nothing in the FPA precludes states from considering the cost of network upgrades in the preliminary determination of the most cost-effective location for a generating facility or whether energy generation is in the public convenience and need for its residents.”
Further, the Commission’s order reflects that the upgrade costs were not the only reason for the denial, Inman said.
“Instead, the Commission compared the unprecedented magnitude of upgrade costs to be borne by ratepayers to accommodate Friesian’s proposed facility with the facility’s expected output, and concluded they were too burdensome to be in the public convenience,” she wrote. “So, we hold that in denying Friesian’s application, the Commission did not usurp or alter FERC’s crediting policy.”
Public need not demonstrated
As part of its needs determination, the Commission adopted the levelized cost of transmission (LCOT) test to evaluate the reasonableness of the network upgrade costs associated with interconnecting a new generating facility.
Friesian argued that the Commission failed to weigh the potential future electricity generation created by the network upgrades, which would have increased its value. But the Commission did consider and weigh the potential for additional energy generation, Inman said – it simply determined “it was too speculative” to support the approval of Friesian’s CPCN.
“In its discretion, the Commission concluded that the potential additional generation was subject to many variables and ‘there is nothing in the record to conclude that any of the proposed generating facilities, much less all of them, will actually be constructed and placed into service,’” she explained.
Finally, Inman determined that the Commission did not err in concluding that Friesian did not demonstrate public need.
Friesian contended that because it presented evidence of an executed purchase power agreement (PPA) with NCEMC — and the Commission has never before denied a CPCN where a PPA existed to demonstrate need — the denial was arbitrary and capricious.
There was no evidence that the Commission applied the wrong need standard, Inman said. In 2001, the Commission adopted a new rule requiring that a merchant plant applying for a CPCN provide a description of the need for the facility with supporting determination, expressly overruling the prior rule which required a PPA.
“[U]nder the Commission’s current rule, the presence or absence of an existing contract is simply not dispositive of the need for a facility,” she wrote. “That the Commission has yet to deny an application supported by an executed PPA makes this a case of first impression, but it does not establish an outright prohibition.”
The Commission afforded “some weight” to the existence of the PPA as a demonstration of need, but decided it was not sufficient in and of itself to base the approval of a CPCN.
Inman affirmed the order of the Commission.
Judge Hunter Murphy filed a separate opinion, concurring in result only.
Commission attorneys Layla Cummings and Robert Josey said they were pleased with the decision.
Addressing Friesian’s preemption argument, Josey highlighted Inman’s rejection that FERC had jurisdiction.
“While FERC has a crediting policy, Congress has given the states the power to site these energy generating facilities,” he said. “And under state law, the Commission can look at all of the costs included in the building and siting.”
Cummings noted the importance of the holding on the discretion of the Commission.
“The decision recognized that the Commission has wide discretion to balance the public interest when determining where to site an energy facility and whether the facility would be in the interest of ratepayers,” she explained.
Karen M. Kemerait of Fox Rothschild in Raleigh, who represented Friesian, did not respond to a request for comment.
The 26-page decision is State ex rel. Utilities Commission v. Friesian Holdings, LLC (Lawyers Weekly No. 011-012-22). The full text of the opinion is available online at nclawyersweekly.com.


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