ORDER NO. 99-498

ENTERED AUG 17 1999

This is an electronic copy and appendices and footnotes may not appear.

UP 158

DISPOSITION: SCHEDULE IN UP 158 WILL NOT BE SET WITH RESPECT TO UE 102

On March 19, 1999, Portland General Electric Company (PGE) applied for Commission approval for the sale of its 20 percent ownership share of Colstrip generating units 3 and 4 along with associated transmission assets to PP&L Global, Inc., a subsidiary of PP&L Resources, Inc. PGE's sale of its share of Colstrip 3 and 4 generating units was part of the auction of all Montana Power Company’s (MPC) generating assets.

At the prehearing conference in this matter, held on April 27, 1999, the parties agreed to certify a question to the Commission in order to have guidance for the remainder of the docket. The parties have certified the following question to the Commission:

Therefore, PGE and the PUC Staff need guidance from the Commission on the following question: "Does the Commission want to set the procedural schedule in UP 158 to leave the option open for the PUC Staff to use some, or all, of the findings and conclusions in the forthcoming UE 102 order concerning auction design?"

Positions of the Parties. The parties submitted opening and reply briefs on their positions. Parties agree that there are three answers to the certified question: yes, maybe, and no. If the Commission answers yes or maybe, the schedule in UP 158 will be set to allow Staff to use the forthcoming UE 102 order as guidance in UP 158. If the Commission answers no, the schedule in UP 158 will be set without regard for the outcome of UE 102.

PacifiCorp argues that the Commission should not apply the UE 102 findings to the Colstrip auction. PacifiCorp argues, first, that the Commission has already concluded that its UE 102 findings should not be applied generally to other asset sales.

UE 102 addresses PGE’s Customer Choice Plan. In that docket, PGE seeks authorization to restructure its operations. Part of PGE’s application involves the potential sale of all PGE’s supply resources. On August 5, 1998, the ALJ granted a Staff motion to set a separate schedule within UE 102 to consider PGE’s proposed auction process. On November 25, 1998, PGE moved for a generic proceeding to consider the auction process "for the sale of all or a substantial part of a Supply Portfolio."

On December 17, 1998, by Order No. 98-534, the Commission denied PGE's motion for generic consideration of the auction process. The Commission noted that applying general guidelines for asset sales in a restructuring proceeding would be difficult for sales of different types of assets in different contexts. Order at 2. PacifiCorp maintains that the Commission’s ruling on PGE's motion undermines any proposal that the final UE 102 auction design guidelines should apply to discrete plant sales.

Further, PacifiCorp contends that the UE 102 auction process rulings should not be applied retroactively, for several reasons. First, the factors influencing the divestiture guidelines of UE 102 are different from the factors that have shaped discrete asset sales such as the Colstrip sale. PacifiCorp maintains that the final UE 102 restructuring guidelines for sale of all of a utility’s supply portfolio will not readily lend themselves to application to sale of discrete interests in limited generating facilities.

Second, full or partial divestiture of generating resources under restructuring gives rise to differing views on how to realize the highest possible total purchase price (that is, whether bundling of facilities as a sale package or affording bidders the ability to selectively bid on discrete plant units will result in a higher price). The nature of the restructuring model can also influence the auction method by influencing the means and timing of divestiture related sales.

Third, the scope of the current docket is to determine whether sale of PGE’s share of Colstrip is in the public interest, regardless of any restructuring model. The public interest standard for discrete asset sales has been established through the Commission’s processing many sales applications. That precedent should set the guidelines for this docket. ORS 757.480 governs the sale of property by public utilities. Historically, the Commission has applied the public interest standard to filings made under that statute. The Commission has considered issues such as whether ratepayers will be harmed by transaction, whether the sale is made through arms length negotiations resulting in fair market price (Order No. 98-129: sale of PacifiCorp facilities to Wah Chang); or whether the sale will impair a company’s ability to provide public utility service (Order No. 95-519, sale of PacifiCorp transmission facilities to PGE, and Order No. 95-856, sale of PacifiCorp’s Lloyd Tower interests). Imposing a standard requiring a particular type of auction process on a sale that has already taken place would constitute an abrupt departure from Commission practice.

PacifiCorp argues that other legitimate grounds also support the use of historical standards. PGE has invested much time and money in participating in the Montana Power Company auction process. It is reasonable to require PGE to show that the sale meets the historical public interest standard in Oregon. It is also reasonable for PGE to assume during participation in MPC sale that no new standard requiring a particular type of auction process would be applied retroactively. If the Commission embraces a particular type of auction process in its final decision in UE 102, and the process is very different from the auction process used by PGE to sell Colstrip, the retroactive application of the new standard would impose a significant burden on PGE. If PGE's sale is denied due to the type of auction process, the company would have to conduct another sale. Retroactive application of a new process standard would also generate a significant ratemaking issue, viz., the inclusion into rates of utility costs associated with initial auction effort. Moreover, retroactive application of the new process may be perceived by some potential bidders as an arbitrary act, thus increasing perceived regulatory risk associated with the sale transaction.

PGE's main argument is that the Commission cannot retroactively apply a decision on auction design. PGE asks the Commission to focus on the public interest standard as the appropriate standard to apply to its asset sale. According to PGE, to determine the public interest, the Commission may consider various aspects including sale price and reliability of service. It may even look at auction design as a consideration in determination whether the auction process resulted in a sale that meets the public interest standard. In applying that standard, Staff and any other party may argue that the sale was not in public interest but may not use auction design rules the Commission later issues as evidence that sale was not in public interest. Such use of rules enacted after the fact would violate due process and would be poor policy.

PGE suggests that the Commission could instead apply a sort of prudence review to the MPC auction. A prudence review has no retroactive aspect, but instead examines whether a "reasonable utility manager, under the same circumstances and acting in good faith, would not have made the same decision." Indiana Municipal Power Agency v. Federal Energy Regulatory Commission, 56 F3d 247, 253 (D.C.Cir. 1995).

Finally, PGE argues that the Commission’s order in UE 102 case will be a rule, because it will state guidelines for conducting auctions of generating assets. Pacific Northwest Bell Telephone Company v. Eachus, 107 Or App 539 (1991). PGE argues that the retroactive application of an administrative rule violates several concepts, including lack of notice of the standard, impossibility of knowing what the standard was at time of sale, and fundamental fairness.

Courts have adopted a balancing test for retroactive application of rules, first stated in Retail, Wholesale and Department Store Union v. National Labor Relations Board, 466 F2d 380, 390 (D.C. Cir. 1972). There the court said:

Among the considerations that enter into a resolution of the problem are (1) whether the particular case is one of first impression; (2) whether the new rule represents an abrupt departure from well established practice or merely attempts to fill a void in an unsettled area of law; (3) the extent to which the party against whom the new rule is applied relied on the former rule; (4) the degree of the burden which a retroactive order imposes on a party; and (5) the statutory interest in applying a new rule despite the reliance of a party on the old standard.

Oregon recently adopted the same balancing approach in Gooderham v. Adult & Family Services Division, 64 Or App 104 (1983). Under this holding, PGE contends, the Commission cannot apply the upcoming UE 102 rule retroactively. All the last four factors weigh in favor of PGE. (PGE notes that the first factor is not well developed.)

PGE points out that additional factors also weigh in favor of not applying the UE 102 findings and conclusions to the Colstrip sale. MPC controlled the auction of MPC’s assets, so PGE could not have dictated the auction design. Furthermore, voiding a contract on the basis of retroactive application of the future rule could also have a negative effect on Oregon’s electric restructuring. Sellers will hesitate to use bidding process if future rules may result in disapproval. Winning bidders know that future conditions may make them less happy with the purchase price but they will not appreciate or support Commission practices that give utility customers a free opt out from a deal. These possible consequences constitute serious prejudice.

In summary, PGE argues that Staff focuses on the auction process and whether the process produced a reasonable price, rather than on the public interest standard. While Staff acknowledges that the appropriate standard is the public interest, it appears to equate that criterion with an acceptable auction process and a fair price. However, these are just two of many factors the Commission may consider in deciding whether a sale is in the public interest and should be approved.

Staff urges the Commission to allow it the option of using the UE 102 order as guidance in reviewing the auction design PGE used in the present proceeding. In the alternative, Staff asks the Commission to conclude it can’t decide the question at this time. Either decision will mean that the procedural schedule in UP 158 will be set to accommodate the decision in UE 102.

The sufficiency of PGE's price for Colstrip 3 and 4 is a key issue in Staff’s investigation of the sale. See ORS 757.480, OAR 860-027-0015(1). PGE relies on the auction process as support justifying the price it will receive for its Colstrip assets. Staff argues that PGE's reliance may be misplaced if the auction itself was flawed. A flawed auction may not render a fair, reasonable market value for auctioned assets.

UE 102 is a generic proceeding commenced to investigate PGE's intended use and design of auctions to sell its generating assets. PGE asserts that "the auction process MPC and Goldman conducted for this sale is the same as that described more fully in PGE's Customer Choice Filing, Docket No. UE 102." In UE 102, Staff expressed concern with PGE's proposed auction process. Staff believes that the Commission’s forthcoming UE 102 order will be applicable and useful in evaluating PGE's auction in UP 158. Therefore, according to Staff, it is reasonable for the Commission to delay the present docket a short time to allow all parties to use UE 102 for guidance in evaluating the auction design in UP 158.

Staff filed testimony in UE 102 that explains its concerns with PGE's auction proposal in that docket. Staff believes the auction process is unnecessarily opaque and secretive and may be manipulated to offer special advantages to bidders. Staff argues that it is reasonable to delay UP 158 to await the Commission’s decision on an identical issue.

Staff assures PGE and PacifiCorp that it does not intend to use UE 102 as a trump card. The agreed-on background language to PGE's certified question, given in italics above, shows that Staff intends to use the UE 102 order merely as guidance in evaluating the auction of the Colstrip plant. Staff will recommend approval if the sale is in the public interest.

Staff does not intend to unlawfully apply the UE 102 order. Staff states that it will not be hyper-technical in applying the UE 102 order. Staff will look to the UE 102 order for guidance because it will be the Commission’s latest word on how PGE should construct its auctions. Staff argues that its use of the UE 102 order is like using a new court case as guidance to resolving a current dispute.

Contrary to PacifiCorp’s assertion, Staff maintains that the Commission has not previously limited the application of UE 102. PacifiCorp states that Commission Order No. 98-534, in UE 102, undermines any proposal that final UE 102 auction design guidelines should be applied to discrete plant sales. Staff maintains that PacifiCorp is incorrect. That order denied PGE's motion to create a separate docket from UE 102 to consider generic auction issues for all utilities. The Commission explained the problems with PGE's proposal. The creation of a new docket would take months to complete and would be complex. The Commission noted that because PGE had a detailed auction process plan proposal in UE 102, the resulting UE 102 order would provide sufficient guidance to PGE and other utilities. The Commission’s decision did not preclude the proposed application of the auction design to this sale.

Discussion. We conclude that the answer to the certified question "Does the Commission want to set the procedural schedule in UP 158 to leave the option open for the PUC Staff to use some, or all, of the findings and conclusions in the forthcoming UE 102 order concerning auction design?" is no.

The first aspect of our answer is procedural and is based on practical concerns. We believe that UE 102 and UP 158 should proceed independently of each other. There is no guarantee that the UE 102 auction process order will appear in time to be taken into consideration in this docket. UE 102 is a complex docket with a number of parties, and such dockets often entail delays. It is unfair to the parties in this docket to delay UP 158 in order to accommodate the UE 102 schedule.

The second aspect of our answer is substantive. We believe that strict application of the UE 102 principles to the Colstrip sale is problematic. This docket concerns sale of PGE's Colstrip assets. The Commission in this docket must focus on the Colstrip auction, not on generic auction design as in UE 102. Moreover, this is a sale of discrete assets, as PacifiCorp pointed out, not a global restructuring effort.

That said, however, we agree with Staff that Order No. 98-534 does not preclude application of the UE 102 auction design evaluation to the sale in this docket. Further, the outcome of UE 102 is not, contrary to PGE's arguments, a rule. According to Order No. 98-534 at 2, UE 102 will result in a decision on PGE's plan for its auction process. That order rejects PGE's motion for a generic proceeding to determine what auction processes and procedures utilities may use to sell all or a substantial part of their generating assets. The UE 102 decision will thus apply only to PGE's auction proposal. Such a narrow decision, involving only one company, cannot be considered a rule.

Moreover, the Commission is not precluded from conducting its regulatory review based on policies it adopts after an event. American Can Co. v. Davis, 28 Or App 207, 220-24, rev den 1977) (the fact that Pacific Power and Light Company’s industrial customer had a contract establishing rates did not preclude the Commission from subsequently raising the customer’s rates to a level the Commission found reasonable).

The result of UE 102 with respect to auction design will be a Commission decision on whether the process PGE has proposed in that docket is appropriate and serves the public interest. Order No. 98-534 at 2. The present docket also involves evaluation of an auction to determine whether its results are in the public interest. Because auctions are involved in both the present docket and in UE 102, some of the same or similar criteria may be used to evaluate the auctions. If the auction design evaluation phase of UE 102 is concluded in time for the principles adopted to be applied in this docket, those principles may be applied here if appropriate.

The standard for approving the Colstrip sale, as stated above, is whether the sale is in the public interest. Therefore, any findings Staff makes about the way the auction was conducted in the present case and about its outcomes must be only part of the determination as to whether the sale should be approved. The public interest inquiry is broader than any single factor that might be an input into the decision whether the sale is consistent with the public interest. Auction structure is just one factor of the decision, as is price for the sale. In evaluating auction structure, however, Staff may apply criteria that emerge from UE 102, if such criteria are relevant to the Colstrip auction.

Conclusion. We conclude that the schedule in this docket should not be set with regard to the auction order in UE 102.

IT IS ORDERED that the procedural schedule in UP 158 will be set without regard to the forthcoming UE 102 auction design order.

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.