ORDER NO. 98-546

ENTERED DEC 31 1998

This is an electronic copy. Appendices and footnotes will not appear.

UA 58/UA 60

DISPOSITION: APPLICATIONS DENIED

On May 1, 1998, Central Lincoln People’s Utility District (CLPUD) filed an application for allocation of unserved territory pursuant to ORS 758.435. After publication of notice of the application, CLPUD filed a motion to stay further activity alleged to be in violation of ORS 758.450(3) and a motion to expedite the hearing on the stay. That motion was directed against construction by Douglas Electric Cooperative (Douglas) to serve International Paper Company (IP). Douglas and IP responded to CLPUD’s motion, stating that ORS 758.450(3) does not apply to CLPUD’s application because the territory it applied for is not exclusively served.

By Order No. 98-212, the Commission denied CLPUD’s motion for a stay of activities on the ground that it was not clear that ORS 758.450(3) applied to the territory for which CLPUD had applied. It was unclear without a factual record whether that territory was exclusively served.

CLPUD amended its application on May 28, 1998, and on the same date filed a new motion for an order staying activity alleged to be in violation of ORS 758.450(3) and a motion for an expedited hearing on the motion for a stay.

Lane Electric Cooperative, Georgia Pacific West Corporation (Georgia Pacific), and IP requested a hearing on CLPUD’s application. On June 12, 1998, CLPUD filed a second amended application along with a motion for an order staying activity alleged to be in violation of ORS 758.450(3) and a motion to expedite hearing on the motion for an order to stay further activity.

On June 12, 1998, Douglas and IP moved to dismiss CLPUD’s application on the basis that CLPUD has not properly invoked the jurisdiction of the Commission.

On June 18, 1998, Lane Electric Cooperative withdrew its objection to CLPUD’s application.

A prehearing conference was held on CLPUD’s application and motions on June 29, 1998, before Ruth Crowley, Administrative Law Judge (ALJ). At the conference, parties agreed to a schedule for CLPUD’s motion to stay and for the hearing and briefs.

On August 7, 1998, and again at hearing on October 27, 1998, CLPUD amended its application in UA 58 to eliminate territory served by other utilities. The amendment at hearing revised the Map, Page 3 of Staff Exhibit 3, submitted with CLPUD’s third amended application to conform to the verbal description of the third amended application.

By Order No. 98-344, dated August 21, 1998, the Commission denied CLPUD’s motion to stay and Douglas and IP’s motion to dismiss and accepted an additional filing by CLPUD for a territory allocation including only the area immediately around and including the IP mill (the IP-only application). This application was docketed as UA 60.

Another prehearing conference before Ruth Crowley, ALJ, was held on September 2, 1998. At that conference it was decided that UA 58 and UA 60 would be processed simultaneously and consolidated for hearing.

On September 18, 1998, CLPUD filed a motion for an order staying activity alleged to be in violation of with ORS 758.450(3) and a motion to expedite hearing on the motion for an order for a stay. The motion for a stay was denied on September 24.

A hearing was held in this matter on October 27, 1998, before Ruth Crowley, ALJ. Appearances were entered by:

David Gordon for CLPUD

Bradley Van Cleve for IP

Melinda Horgan for Georgia Pacific

Roland Johnson for Douglas

Scott Kaplan for PacifiCorp

Paul Graham for Commission Staff

Based on the preponderance of evidence in the record, the Commission makes the following:

CLPUD was formed in 1940 and began providing power to just over 5,000 customers in 1943. Since that time CLPUD’s political boundaries have been expanded. The most recent annexation of territory occurred in 1960, when territory including the future site of the IP Mill at Gardiner was added. CLPUD now serves upward of 30,000 customers. CLPUD’s application in UA 58 covers most of the territory within CLPUD’s current political boundaries.

In 1961, the Oregon Legislature passed the Territory Allocation Law, now codified at ORS 758.400 to 758.475. The Territory Allocation Law allowed utilities that were exclusive utility service providers in their territories to obtain an allocation from the Commission. It also allowed utilities to allocate territory among or between themselves by contract, subject to Commission approval of the contracts and any amendment to the contracts. In the years from 1961 to 1965, many utilities applied for territory allocations under the new law. CLPUD did not apply.

In 1962, IP constructed a pulp and paper production facility (the IP mill or the Gardiner mill) in Gardiner, Oregon. In the same year IP and CLPUD executed a power sale contract for service to the IP mill. On January 1, 1989, IP and CLPUD entered into their second power sale contract, to expire on December 31, 1998.

On September 18, 1997, Douglas and IP entered into a new power sale agreement under which Douglas will serve the electricity requirements of the Gardiner Mill beginning January 1, 1999. IP met with and notified CLPUD by letter that it had entered into the IP/Douglas contract on September 23, 1997. On December 4, 1997, Douglas and IP filed a joint complaint in Douglas County Circuit Court, asking for declaratory relief stating that CLPUD does not have the exclusive right to serve the Gardiner Mill. At the time the power sale agreement was executed, Douglas had a wholesale point of delivery from Bonneville Power Administration (BPA) and a distribution system 280 feet from IP’s switching facilities. At the time of hearing, in October 1998, Douglas's construction to serve IP was substantially finished.

On May 1, 1998, CLPUD filed its first application for an allocation of exclusive service territory with the Commission. The application was docketed as UA 58. On May 28, 1998, the Douglas County Circuit Court found that CLPUD does not have an exclusive service territory and that Douglas may lawfully serve IP (final judgment issued on July 6, 1998).

Douglas broke ground for its substation to serve IP on May 5, 1998, after the original CLPUD application was filed. To serve IP, Douglas will have to construct a VAR correction capacitor bank, 200 amp wire bussing, wire buss supporting structures, 200 amp load disconnect switches, safety fencing, and miscellaneous hardware. BPA will have to duplicate a 200 amp feeder position including associated line and load side group operated disconnect switches, a 2000 amp power circuit breaker, a 13.8 kv metering system, and miscellaneous 2000 amp buss and hardware. Over two miles of transmission line will be constructed to provide power to the pumps. Most of this construction is already complete.

Douglas serves 55 commercial and residential customers in the Reedsport-Gardiner area, within CLPUD’s political boundaries but not within the boundaries in the third or fourth amended applications. Douglas has made an offer to serve River Cities Taxi, a radio transmitter within the area included in CLPUD’s most recent amended application. CLPUD has constructed facilities to serve that customer and is currently serving that customer. Douglas has wholesale points of delivery and a distribution system capable of serving additional customers in the Reedsport-Gardiner area.

 CLPUD argues that the switchover from CLPUD to Douglas will pose safety problems. The changeover can either be done by shutting down the mill or by using parallel systems, also called dual source systems. Douglas maintains dual source or parallel systems with CLPUD and the city of Drain at other locations and has experienced no problems for 26 years. Douglas recently received the Safety and Health Achievement Recognition Program designation from Oregon Occupational Safety and Health Administration, the first electric utility in Oregon to receive the designation. Douglas's facilities at the Gardiner mill comply with all applicable safety requirements of the National Electric Safety Code and meet or exceed normal utility industry design standards for electric power substations. CLPUD and Douglas have potential dual feeders at other locations where their systems interconnect, and a similar situation exists between CLPUD and other utilities.

Georgia Pacific has a mill at Toledo, Oregon (the Toledo mill) located 1.5 miles from Consumers Power, Inc.’s (CPI) distribution system. CLPUD has been Georgia Pacific’s service provider for electricity but has informed Georgia Pacific that after 2001 it will no longer provide electricity to the Toledo mill. CPI has entered into a memorandum of understanding with Georgia Pacific agreeing to negotiate in good faith to complete a power purchase agreement for electric service to the Toledo mill. Since February 26, 1997, the Toledo mill has experienced over 13 power outages, which have cost the company over $850,000 in lost production. Representatives of CLPUD have told Georgia Pacific that there was nothing CLPUD could do to improve the reliability of Georgia Pacific’s power supply.

CPI and CLPUD have entered into agreements with each other to allocate customers and transfer facilities. The Toledo mill area is included in these agreements. These agreements have not been approved by the Commission.

At hearing, IP noted that the mill is temporarily out of operation but that it wishes to continue its power sales agreement with Douglas.

758.400 Definitions for ORS 758.015 and 758.400 to 758.475. As used in ORS 758.015 and 758.400 to 758.475 unless the context requires otherwise:

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(3) "Utility service" means service provided by any equipment, plant or facility for the distribution of electricity to users for the distribution of natural or manufactured gas to consumers through a connected and interrelated distribution system. "Utility service" does not include service provided through or by the use of any equipment, plant or facilities for the production or transmission of electricity or gas which pass through or over but are not used to provide service in or do not terminate in an area allocated to another person providing a similar utility service.

758.405 Purpose of ORS 758.400 to 758.475. The elimination and future prevention of duplication of utility facilities is a matter of statewide concern; and in order to promote the efficient and economic use and development and the safety of operation of utility services while providing adequate and reasonable service to all territories and customers affected thereby, it is necessary to regulate in the manner provided in ORS 758.400 to 758.475 all persons and entities providing utility services.

758.410 Contracts for allocation of territories and customers between suppliers of utility service and for transfer of facilities. (1) Any person providing a utility service may contract with any other person providing a similar utility service for the purpose of allocating territories and customers between the parties and designating which territories and customers are to be served by which of said contracting parties; and the territories and customers so allocated and designated may include all or any portion of the territories and customers which are being served by either or both of the parties at the time the contract is entered into, or which could be economically served by the then existing facilities of either party, or by reasonable and economic extensions thereto.

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758.435 Application, by person providing exclusive utility service, for allocation of territory; hearing; notice. (1) Any person providing a utility service in a territory that is not served by another person providing a similar utility service may make application to the Public Utility Commission for an order allocating such territory to it. The application may include any adjacent area that it is more economical and feasible to serve by an extension of the applicant's existing facilities than by an extension of the facilities of another person.

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758.440 Order of commission on application. (1) On the basis of the application, or, if there is a hearing, on the record made at the hearing held pursuant to ORS 758.435, the Public Utility Commission shall enter an order either approving or disapproving the application as filed, or as amended, together with findings of the facts supporting such order. (2) The commission, before approving an application for the allocation of territory, shall find that the applicant is exclusively serving the territory covered by the application and in the case of an adjacent unserved area that it is more economical and feasible to serve by an extension of the applicant's existing facilities than by an extension of the facilities of another person.

758.450 Contract required for allocation of territory; allocated territory exclusive; activity prohibited during pendency of application; exception; third party financing. (1) Territory served by more than one person providing similar utility service may only become an allocated territory by a contract approved by the Public Utility Commission.

(2) Except as provided in subsection (4) of this section, no other person shall offer, construct or extend utility service in or into an allocated territory.

(3) Except as provided in subsection (4) of this section, during the pendency of an application for an allocation of exclusively served territory, no person other than applicant shall offer, construct or extend utility service in or into the territory applied for; nor shall any person, without the express consent of the commission, offer, construct or extend utility service in or into any unserved territory which is the subject of a filing pending before the commission under ORS 758.420 or 758.435.

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John H. Socolofsky, Senior Assistant Attorney General, discussed the function and interactions of the provisions of the Territory Allocation Law in a Department of Justice Interoffice memorandum to Karl Craine, Hearings Officer, dated June 28, 1991. We agree with Mr. Socolofsky’s analysis of the Territory Allocation Law.

There are only two methods to acquire unallocated territory. They are found in ORS 758.410 and 758.435. The first method, under ORS 758.410, is used when two companies are serving the same area. We’ll call that a "mixed service area." The second method is used when one company is exclusively serving an area. We’ll call that an "exclusive service area."

Where there is a mixed service area, the companies by contract can separate themselves. * * * The idea of ORS 758.410 is to allow the companies, by contract, to voluntarily break apart these mixed service areas and eliminate the duplication of facilities. The end products of this exercise are two separated service areas of two utilities. But when the exercise begins, the assumption is that between the two utilities there is an area which both of them are serving even though both might not be serving all of each other’s service territory. * * *

The second method for obtaining an allocation from the Commission is under ORS 758.435. This method is premised upon the assumption that the utility is serving an existing territory exclusively, that is, without competition. So the statutory distinction between the two methods is dependent upon whether there are any mixed service areas involved. One method depends upon agreement; the other exclusive service. They reflect a desire to avoid contests between utilities. * * *

ORS 758.450 was not a third method of obtaining territory. It was only a codification of the foregoing policy that no utility could acquire territory also being served by another utility, except by the contract under ORS 758.410.

Discussion: "providing a similar utility service"; safety concerns

The applications docketed as UA 58 and UA 60 both include the territory on which the IP mill at Gardiner is located. Pursuant to ORS 758.440(1), the Commission must either approve or disapprove a territory allocation as filed or as amended. We do not have the option to make a partial or conditional allocation of territory. If we find that the territory including the IP mill at Gardiner is a mixed service area, both applications must be denied. If we find that the IP mill territory is exclusively served by CLPUD, the UA 60 application may be granted and the record must be examined to determine whether the remainder of the UA 58 application concerns a mixed service area or an exclusive service territory. Therefore, we begin our analysis with the IP mill territory.

The key factor in deciding whether ORS 758.410 or ORS 758.435 applies to the territory in question is determining whether another utility besides the applicant is "providing a similar utility service" in the territory. ORS 758.435(1). The parties vary greatly in their interpretation of "providing a similar utility service."

Positions of the Parties. CLPUD’s Position. According to CLPUD, the phrase means that a utility provides similar utility service only through actual delivery of electrons. As of May 1, 1998, the date the first CLPUD application was filed with the Commission, Douglas had constructed no facilities capable of providing IP with electrical service. CLPUD argues that any facilities constructed after May 1 should not be considered in determining whether CLPUD is the exclusive service provider. Construction activities undertaken after an application is filed cannot be used to defeat exclusivity of territory. CLPUD argues that it would defeat the purposes of the Territory Allocation Act, which are to prevent and eliminate duplicative electrical facilities and load pirating, to allow a nearby utility to defeat an exclusive service application by rushing into a territory and constructing facilities during the pendency of an application.

CLPUD also argues that the Legislature intended to eliminate all duplicative facilities. CLPUD contends that another utility would necessarily have to duplicate facilities and create a doughnut hole in otherwise contiguous CLPUD served territory. See UF 2464, holding that if an unserved area is completely surrounded by an applicant’s service area, it is unlikely that any other utility can economically serve that area.

CLPUD maintains that granting its application will promote the goals sought by the territory allocation statutes in that it will promote the provision of safe, efficient, and economic electrical service to all its ratepayers. It will also enable CLPUD to issue bonds at favorable rates. CLPUD notes that granting the requested territory allocation will ensure that CLPUD can continue to provide low cost, high caliber service.

CLPUD also argues that if Douglas is permitted to serve IP, CLPUD will still have a duty to serve IP because IP is within its boundaries. According to CLPUD, this will require additional expense and duplication of facilities.

Finally, CLPUD refutes the other parties’ argument that areas "subject to competition" (see parties’ arguments below) may not be considered exclusively served. CLPUD contends that the standard for determining whether a territory is a mixed service territory is whether electrons are actually flowing to customers from other service providers within that territory. CLPUD notes that the Commission has granted deviations or amendments with respect to applications where a number of customers were served by a utility other than the utility applying for a territory allocation.

CLPUD also maintains that it is potentially unsafe to allow Douglas to serve the Gardiner mill. Backfeed into CLPUD’s lines could occur.

IP’s Position: IP argues that the Commission may not allocate the requested territory to CLPUD under either application, UA 58 or UA 60, because Douglas is providing the IP mill with utility service, as defined in ORS 756.101(8) and 758.400(3), pursuant to contract. IP also argues that the existence of the contract for service between itself and Douglas is sufficient to defeat CLPUD’s application and that Douglas is competing to serve other customers in the geographic area.

IP urges the Commission to resolve ambiguity in the language "served by more than one person" in favor of preserving existing competition. IP argues that state regulators may create a legal monopoly only when the legislature has expressed a clear intent to displace competition, citing Columbia Steel v. Portland General Electric, 1121 F3d 1427 at 1436 (9^th Cir. 1997), cert. denied, 118 S.Ct. 1688 (1998) ("The state action doctrine cloaks anticompetitive conduct only if the state’s intent to displace competition with regulation is ‘clearly articulated and affirmatively expressed as state policy’"). IP argues that the Territory Allocation Law does not displace competition where it exists.

IP further argues that the Gardiner mill is served by more than one utility within the meaning of ORS 758.450(1) and that the territory is not subject to allocation absent a contract between the competing utilities. IP contends that it is currently receiving service from Douglas even though electrons may not yet be flowing. According to IP, it began receiving utility service from Douglas on signing the power sale agreement in September of 1997. IP points out that CLPUD has made an issue of the timing of Douglas's construction of facilities under the contract. Construction was planned and materials ordered, IP notes, long before CLPUD filed its first application. At the date of its last amended application, CLPUD was certainly not the exclusive service provider in the disputed area.

IP further argues that the Commission should decline to invalidate the IP/Douglas contract and allow competition to continue where it exists.

Georgia Pacific’s Position. Georgia Pacific argues that CLPUD cannot receive an exclusive service territory allocation and refuse service to someone within its applied for territory. CLPUD does not intend to serve Georgia Pacific’s Toledo mill after 2001. Georgia Pacific advocates deciding whether there is competition in a service area by determining whether more than one utility is ready, willing, and physically able to serve customers in that area. A utility’s capacity to serve with existing facilities in an area should be the Commission’s criterion, according to Georgia Pacific. Based on its memorandum of understanding, Georgia Pacific argues that CPI is ready, willing, and able to serve Georgia Pacific.

Georgia Pacific also contends that CLPUD does not provide adequate and reasonable service and that its application for territory allocation should therefore be rejected.

Finally, Georgia Pacific alleges that the agreements between CPI and CLPUD allocating customers and transferring facilities without Commission approval are antitrust violations. Georgia Pacific argues that the Commission should not find that there is no competition in the Toledo mill area when the lack of competition results from illegal agreements in restraint of trade.

Douglas's Position. Douglas subscribes to the definition of competition that IP and Georgia Pacific advance: that competition exists when another utility is ready, willing, and able to serve customers in the subject area. Like IP and Georgia Pacific, Douglas contends that an area subject to competition may not be allocated by the Commission.

Douglas also argues that the area subject to competition in CLPUD’s application includes much more than the Gardiner Mill site. Douglas currently provides service to 55 commercial and residential customers in the Reedsport-Gardiner area within CLPUD’s political boundaries. Douglas is prepared to serve more customers in that area. Douglas contends that CLPUD may not exclude from its application those portions of the area where Douglas currently has customers and obtain an exclusive allocation of all other portions. According to Douglas, the entire Reedsport-Gardiner area is subject to competition.

As to CLPUD’s safety argument, Douglas contends that it can safely serve the Gardiner mill. The only technical hurdle to implementation, according to Douglas, would be if CLPUD were to refuse to follow safe procedures during the transition of service providers to the mill. Douglas contends that BPA would be able to adopt procedures to adequately protect CLPUD’s facilities during the transition. Douglas notes that it maintains parallel (dual source) systems with CLPUD and the city of Drain at other locations and has had no safety problems in those locations for 26 years.

Commission Disposition. We address CLPUD’s safety concerns first. We are confident that BPA and Douglas will be able to design procedures to make the transition to a different service provider safe. Testimony indicates that switchovers from one provider to another raise no serious safety concerns for either provider. Douglas has a good safety record. Both utilities have experience with parallel systems. We do not believe that safety concerns are justified in this matter.

The focus of these two applications is how to interpret the statutory language, "providing a similar utility service." This phrase implies two decisions, one as to time and one as to what constitutes providing service. We conclude that under the statutes, we must look at the state of affairs in the subject territory as of the date of application for territory allocation.

The Territory Allocation Law mandates that the Commission either accept or reject the application as filed or as amended. We conclude that each amendment constitutes a new filing. On October 27, 1998, when CLPUD made its final amendment, Douglas's facilities were essentially complete. By August 21, 1998, when the Commission accepted CLPUD’s UA 60 filing, construction was well underway. On the basis of such construction under a power sales agreement, we would not hesitate to find that Douglas was providing service to IP under the statute, and to conclude that we could not, therefore, allocate the territory subject of either application to CLPUD.

Even if we go back to May 1, 1998, however, on the facts before us we find that Douglas was providing service to IP on that date. We reject both CLPUD’s argument that providing service means delivering electrons and the arguments of the other parties, who contend that it means another utility is ready, willing, and able to provide service. We reason that a power sale agreement is a complex matter, entailing negotiation, construction, and finally delivery of power. Electrons do not flow from a provider to a customer without a great deal of preparation.

CLPUD argues that adopting a standard other than delivery of electrons for "providing service" would lead to absurd results. We disagree. The fact that Douglas began construction on May 5, 1998, indicates that it had already purchased materials, incurred expenses, and invested considerable time in getting ready to perform under the power sale contract. We conclude that if, as here, the contracting parties have engaged in substantial preparation and changed position in performance of their power sale agreement, the utility is providing service under ORS 758.435(1).

CLPUD maintains that the Territory Allocation Law bans all duplication of facilities. Again, we disagree. The Territory Allocation Law clearly permits competition to exist. In a mixed service area, territory can be allocated only by contract between the utilities. ORS 758.410. If the utilities do not contract to allocate territory and receive Commission approval for those contracts pursuant to ORS 758.415 et seq., two or more service providers may well duplicate facilities. If the legislature had intended to eliminate all duplication of facilities, it would have eliminated mixed service territories. However, the legislature left mixed territories in place. We conclude that duplication of facilities, per se, is not enough to grant CLPUD’s application. Moreover, duplication of facilities is not a statutory standard for granting exclusive service territory. The statutory standard is exclusivity of service, which we find does not exist here.

In any case, we find that the duplication of facilities involved in this application is minor. CLPUD also argues that allowing Douglas to serve IP may raise rates to CLPUD’s other customers. Like the duplication of facilities argument, arguments about the effect of competition on the applicant utility’s other customers is not a statutory standard. Nor are arguments about the applicant utility’s bond rates.

Finally, CLPUD argues that it has a universal duty to serve within its boundaries. Presumably it means its political boundaries. The authority it cites for this proposition is 17 Op. Atty. Gen. 665 (1936). 45 Op. Atty. Gen. 209 (1987) at 215 specifically refutes that argument. The more recent opinion points out that the 1936 opinion construes a duty on the part of PUDs to provide service on equal terms to applicants within its geographic boundaries. Allocation of territory to another service provider, absent a desire on the part of the persons in the territory to be served by the PUD, does not prevent the PUD from complying with a present statutory duty. By the same token, allowing another provider to serve a customer who does not wish to take service from the PUD in an unallocated territory does not prevent the PUD from complying with a statutory duty. We note that CLPUD’s refusal to serve Georgia Pacific’s Toledo mill after 2001 undermines CLPUD’s position on this issue.

Georgia Pacific raises the issue of possible antitrust violations by CPI and CLPUD, who have divided up customers under unapproved contracts and who have thus, according to Georgia Pacific, illegally restrained trade. While the holding of Columbia Steel, supra, supports Georgia Pacific’s reasoning, we do not have jurisdiction to adjudicate antitrust violations. Georgia Pacific asks us not to find that there is no competition in the Toledo mill area when lack of competition results from illegal contracts. We make no such finding. Because we have determined that Douglas is providing service to IP at the Gardiner mill, both the larger territory application in UA 58 and the IP-only application in UA 60 fail.

CLPUD argues that the Commission has granted deviations or amendments in territory allocation cases where customers were served by a utility other than the utility applying for the allocation. CLPUD cites UA 19 (Order No. 86-545) and UF 2516 (Order No. 42889, 1966) as examples. In both of those cases agreements existed between the affected telephone companies acknowledging the deviations and assigning the customers to the company to which the territory was allocated, subject to the contracts between the companies. No such contracts exist in the present case, distinguishing the present facts from those in the cases CLPUD cites.

We conclude that CLPUD’s applications should be denied.

ORDER

IT IS ORDERED that the applications of Central Lincoln People’s Utility District for allocations of exclusively served territory in UA 58 and UA 60 are denied.

 Made, entered, and effective ________________________.

 A party may request rehearing or reconsideration of this order pursuant to ORS 756.561. A request for rehearing or reconsideration must be filed with the Commission within 60 days of the date of service of this order. The request must comply with the requirements in OAR 860-014-0095. A copy of any such request must also be served on each party to the proceeding as provided by OAR 860-013-0070(2). A party may appeal this order to a court pursuant to applicable law.