January 5 2010
DA 09-0108
IN THE SUPREME COURT OF THE STATE OF MONTANA
2010 MT 2
WHITEHALL WIND, LLC, a Montana
Limited Liability Corporation,
Plaintiff and Appellee,
v.
THE MONTANA PUBLIC SERVICE COMMISSION,
an Agency of the State of Montana,
Defendant and Appellant,
and
NORTHWESTERN ENERGY,
Intervenor.
APPEAL FROM: District Court of the Fifth Judicial District,
In and For the County of Jefferson, Cause No. DV 03-10080
Honorable Loren Tucker, Presiding Judge
COUNSEL OF RECORD:
For Appellant:
Robin A. McHugh, Special Assistant Attorney General, Montana Public
Service Commission, Helena, Montana
For Appellee:
Marc G. Buyske and Michael J. Uda; Doney Crowley Bloomquist Payne
Uda, P.C.; Helena, Montana
Submitted on Briefs: October 21, 2009
Decided: January 5, 2010
Filed:
__________________________________________
Clerk
Justice Brian Morris delivered the Opinion of the Court.
¶1 The Montana Public Service Commission (PSC) and NorthWestern Energy
(NorthWestern) appeal an order of the Fifth Judicial District Court, Jefferson County,
reversing and remanding the PSC’s order setting a standard tariff rate for NorthWestern
Energy’s purchase of electricity from Whitehall Wind (Whitehall). We affirm.
¶2 We review the following issues on appeal:
¶3 Was the District Court’s order for remand a final judgment under M. R. App. P. 6(1)?
¶4 Did the District Court properly determine that the PSC’s tariff was unlawful and
unreasonable?
¶5 Did the District Court properly allow Whitehall to augment the record?
¶6 Did federal law preempt the PSC’s order setting the standard tariff rate?
FACTUAL AND PROCEDURAL BACKGROUND
¶7 Congress enacted § 210 of the Public Utility Regulatory Policies Act (PURPA) in
1978 to encourage development of small electrical generation facilities. 16 U.S.C. § 824a-3
(2006). PURPA requires large utilities to purchase energy from smaller qualifying facilities
at rates that allow the small facilities to become and remain viable suppliers of electricity.
Whitehall is a qualifying facility under PURPA. 18 C.F.R. § 292.204 (2008).
¶8 Whitehall attempted unsuccessfully to negotiate a contract with NorthWestern for the
sale of wind-generated electricity from Whitehall’s 50 megawatt wind generation facility
near Whitehall, Montana. Whitehall petitioned the PSC in August of 2002 to determine the
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rates and conditions for the sale following the unsuccessful negotiations with NorthWestern.
¶9 State utility regulatory agencies implement PURPA through rulemaking. As the state
utility authority for Montana, the PSC must set rates for electric utilities over which it has
authority. The Montana Legislature enacted §§ 69-3-601 through 604, MCA, to facilitate the
PSC’s implementation of PURPA. Section 69-3-603, MCA, requires the PSC to set rates
and conditions for sales between qualifying facilities and large utilities.
¶10 The PSC determined that Whitehall constituted a qualifying facility under PURPA.
This determination entitled Whitehall to sell electricity to NorthWestern at the wholesale
rate. The PSC held a contested case proceeding to determine the wholesale rate. The PSC
set the rate for the sale at the short-term standard avoided cost tariff rate for transactions
between NorthWestern and qualifying facilities. NorthWestern had not submitted a least
cost plan since 1996. As a result, the PSC considered avoided cost data from 1996 when it
set the 2002 rate. The PSC’s Order no. 6444c set a rate of $10.639 per megawatt hour
(MWh).
¶11 Whitehall petitioned for judicial review. Whitehall claimed that the PSC had reached
an unreasonably low rate determination in light of data submitted by Whitehall and the PSC
that supported a higher rate. Whitehall argued that a reasonable 2002 rate should have been
between $31 and $40 per MWh.
¶12 Whitehall moved to augment the record. Whitehall claimed that the PSC’s failure to
require NorthWestern to produce avoided cost data since 1996 in compliance with statutory
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and regulatory provisions constituted a procedural irregularity that supported its effort to
augment the record. Whitehall further requested permission to conduct limited discovery to
produce evidence of NorthWestern’s current avoided costs. The District Court granted
Whitehall’s motion to augment.
¶13 The PSC’s staff economist submitted a report in response to the District Court’s order
to augment the record. The report confirmed that a reasonable 2002 rate would have been
approximately $31 to $32 per MWh. Whitehall requested that the District Court remand the
case to the PSC with instructions to set a new rate based on current data for the project’s
rescheduled completion date of 2009. The PSC and NorthWestern argued that the District
Court’s jurisdiction extended only to a review of the 2002 rate data.
¶14 The District Court found that the PSC’s rate determination was unreasonable because
it was not supported by substantial evidence. The court found that the evidence of the PSC’s
own staff economist contradicted the PSC’s rate determination. The District Court
determined that the PSC had not based the rate determination on current avoided cost data.
The court remanded the case with instructions to the PSC to set a new rate that would take
into account the avoided cost data submitted by Whitehall and the PSC.
STANDARD OF REVIEW
¶15 A district court reviews an administrative decision in a contested case to determine
whether the agency’s findings of fact are clearly erroneous and whether its interpretation of
the law is correct. Clouse v. Lewis and Clark County, 2008 MT 271, ¶ 23, 345 Mont. 208,
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190 P.3d 1052. We employ the same standard when reviewing a district court order
affirming or reversing an administrative decision. Clouse, ¶ 23.
DISCUSSION
¶16 Was the District Court’s order for remand a final judgment under M. R. App. P. 6(1)?
¶17 Whitehall argues as a threshold issue that the District Court’s order constitutes an
interlocutory judgment that should not be appealable by the PSC. An interlocutory judgment
determines a preliminary issue, but does not finally decide the case. M. R. App. P. 4(1)(b).
Whitehall emphasizes the fact that the District Court’s order did not set a rate or direct the
PSC to set a particular rate. Whitehall contends that the PSC must amend its rate
determination in compliance with the District Court’s order before it may appeal.
¶18 A party may appeal only a district court’s final judgment. M. R. App. P. 6(1). A
“final judgment” conclusively determines the rights of the parties and settles all claims in
controversy. M. R. App. P. 4(1)(a). Section 2-4-702, MCA, provides for judicial review of
an agency decision in a contested case. The District Court reviewed Whitehall’s case and
decided in Whitehall’s favor based on the standards set out at § 2-4-704, MCA. The District
Court’s review of the whole record led it to conclude that the PSC’s rate was unreasonable.
To force the PSC to recalculate the rate in accordance with the District Court’s specific
instructions before allowing it to appeal would undermine the PSC’s right to appeal under
§ 2-4-711, MCA. The District Court’s order constitutes a final order from which the PSC
has a right of appeal. M. R. App. P. 4(1)(a).
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¶19 Did the District Court properly determine that the PSC’s tariff was unlawful and
unreasonable?
¶20 Federal law requires that rates for utility purchases of qualified facility-generated
electricity must be reasonable. 16 U.S.C. § 824a-3(b)(1) (2006); 18 C.F.R. §
292.304(a)(1)(i) (2008). The PSC must set rates based on 16 U.S.C. § 824a-3 and 18 C.F.R.
§ 292. Federal regulations require rates to be based on avoided costs. 18 C.F.R. §
292.304(b)(2) (2008).
¶21 Montana law allows the PSC to take avoided costs into account when setting rates and
has adopted by reference the relevant federal regulations. Section 69-3-604, MCA; Admin.
R. M. 38.5.1901-1905. The PSC requires utilities to submit avoided cost data every other
year within thirty days of submitting an integrated least cost resource plan. Admin R. M.
38.5.1905, 2012. Thus, under both state and federal law, rates for purchases from qualifying
facilities must be reasonable and based on current avoided least cost resource data.
Independent Energy Producers Ass’n v. California Pub. Utils. Comm’n, 36 F.3d 848, 851-
852 (9th Cir. 1994); 18 C.F.R. § 292.304; § 69-3-604, MCA. At the time that Whitehall
petitioned the PSC in 2002, NorthWestern had not submitted avoided least cost data since
1996.
¶22 A district court may review an agency’s final decision in a contested case hearing.
Section 2-4-702, MCA. The court generally must confine its review to the administrative
record. Section 69-3-404, MCA. The court may reverse or modify an agency decision if the
appellant’s substantial rights have been prejudiced by a clearly erroneous decision “in view
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of the reliable, probative, and substantial evidence on the whole record.” Section 2-4-
704(2)(a)(v); Montana-Dakota Utils. Co. v. Montana Dept. of Pub. Serv. Reg., 223 Mont.
191, 198, 725 P.2d 548, 553 (1986).
¶23 The PSC claims that the District Court ignored or misinterpreted the information
provided by the PSC’s economist. The PSC argues that a meaningful distinction exists
between a “lawful rate” and a retrospectively determined “reasonable rate.” The PSC
acknowledges that the definition of a “reasonable rate” changes over time, but asserts that the
PSC’s determined rate remains lawful until it amends that rate. The PSC therefore claims
that the “legal rate” of $10.639 per MWh should remain in effect until the PSC implements a
new “legal rate” based on updated data.
¶24 The PSC’s argument ignores the rules it has implemented and is empowered to
enforce. An administrative agency must comply with its own administrative rules. Mont.
Solid Waste Contrs. v. Mont. Dep’t. of Pub. Serv. Reg., 2007 MT 154, ¶ 18, 338 Mont. 1, 161
P.3d 837. A district court may overturn a clearly erroneous agency decision notwithstanding
any deference due to the agency. Section 2-4-704, MCA.
¶25 The PSC predicates its argument that the rate was valid on the fact that its Order No.
6444c complies with Admin. R. M. 38.5.1902(5). The rule requires the qualifying facility to
be selected through a competitive solicitation process for long term contracts between a
utility and a qualifying facility. Admin. R. M. 38.5.1902(5). The PSC sets the rate for sales
of energy falling between competitive solicitations in accordance with the most recent
avoided cost tariff. Admin. R. M. 38.5.1902(5). The PSC emphasizes that Admin. R. M.
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38.5.1902(5) dictates the procedure that it must follow to set rates for sales of the kind at
issue here. Whitehall does not contend that the PSC failed to follow the procedure set out by
Admin. R. M. 38.5.1902(5). The fact that the PSC complied with Admin. R. M.
38.5.1902(5) does not end the inquiry.
¶26 The PSC’s argument glosses over the issue of how it arrived at the standard avoided
cost tariff of $10.639 per MWh for the Whitehall petition. The PSC’s Order No. 6444c
outlined the process for setting prices for sales of electricity between utilities and qualified
facilities set out by Admin. R. M. 38.5.1902 and 1905. The PSC admitted in its order that
Admin. R. M. 38.5.1905 controls the procedure for establishing the standard avoided cost
tariff rate. The PSC observed correctly that a utility must re-compute the long and short-
term standard avoided cost rates after it submits an updated least cost filing plan. Admin. R.
M. 38.5.1905(1). The PSC further noted in its order that the rate for sales may not exceed
the utility’s avoided costs. Admin. R. M. 38.5.1905(3).
¶27 The PSC failed to note, however, that such avoided costs must be calculated either at
the time of delivery of the energy, or at the time that the utility incurs the obligation. Admin.
R. M. 38.5.1905(3)(i), (ii). The PSC also failed to observe that the short-term standard
avoided cost tariff must be calculated within 30 days of the utility’s filing of its least cost
resource plan. Admin. R. M. 38.5.1905(1). Utilities must file least cost plans every two
years. Admin. R. M. 38.5.2012.
¶28 NorthWestern had not filed a least cost resource plan since 1996. The PSC based the
avoided cost tariff on out-of-date data in violation of Admin. R. M. 38.5.1905. The PSC’s
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staff economist verified that the avoided cost rate set by the PSC was approximately one
third of an appropriate 2002 rate. The District Court properly determined, based on the
whole record, that the PSC’s calculation of the avoided cost rate for the sale between
Whitehall and NorthWestern was clearly erroneous.
¶29 Did the District Court properly allow Whitehall to augment the record?
¶30 Whitehall petitioned the District Court to augment the record to include 2002 avoided
cost data from NorthWestern and data supporting the imposition of revised 2009 rates. A
district court may receive additional evidence relating to a challenged rate in the case of
“alleged irregularities in procedure before the agency not shown in the record.” Section 69-
3-404(2), MCA.
¶31 Whitehall based its motion on the PSC’s failure to require NorthWestern to produce
current avoided cost data in conformance with Admin. R. M. 38.5.1905 and 2012. The
District Court found that the record contained “evidence that NWE has not submitted
avoided cost data to the PSC since 1996.” The court further found that “the evidence is
insufficient for the Court to make a determination whether the procedural irregularity alleged
by [Whitehall] actually occurred.”
¶32 The PSC argued that any procedural irregularities that might have occurred would
have been contained in the record. The PSC further argued that § 2-4-703, MCA, precluded
augmentation of the record because Whitehall had not made the necessary showing. Section
2-4-703, MCA, allows for the receipt of additional evidence on judicial review of an agency
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decision only where such evidence is material and good reasons support why the evidence
had not been presented in the contested case proceeding.
¶33 The District Court concluded that Whitehall had alleged a sufficient procedural
irregularity not shown in the record to justify augmentation. The District Court noted that
Whitehall had predicated its motion to augment the record on § 69-3-404(2), MCA, which
allows for augmentation of the record in case of an alleged procedural irregularity. The court
properly confined its analysis to that statutory provision. The District Court concluded that it
could not determine whether the alleged procedural irregularity had occurred based on the
record before it. The court appropriately granted Whitehall’s motion to augment the record.
¶34 Did federal law preempt the PSC’s order setting the standard tariff rate?
¶35 The PSC claims on appeal that nothing in federal law preempts Admin. R. M.
38.5.1902(5). The PSC raises this argument in response to an issue that Whitehall raised in
its initial brief before the District Court and a short discussion of preemption in the PSC’s
Order no. 6444c.
¶36 Whitehall did not argue that federal law preempted any particular administrative rule.
The District Court never addressed whether federal law preempted any particular
administrative rule. Whitehall argued instead that the PSC’s interpretation of its own
administrative rules placed an inappropriate emphasis on state goals at the expense of the
federal goals embodied by PURPA. We decline to address that argument here, however, in
light of Whitehall’s failure to raise the issue of federal preemption of any specific
administrative rule and the fact that the District Court did not address the issue.
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¶37 Affirmed.
/S/ BRIAN MORRIS
We Concur:
/S/ MIKE McGRATH
/S/ JAMES C. NELSON
/S/ W. WILLIAM LEAPHART
/S/ JIM RICE
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