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02/09/82 Cities of Batavia, v. Federal Energy Regulatory

February 9, 1982

CITIES OF BATAVIA, NAPERVILLE, ROCK FALLS, WINNETKA, GENEVA, ROCHELLE AND ST. CHARLES, ILLINOIS, PETITIONERS

v.

FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT COMMONWEALTH EDISON CO., INTERVENOR; CITIES OF

BATAVIA, NAPERVILLE, ROCK FALLS, WINNETKA, GENEVA, ROCHELLE AND ST. CHARLES, ILLINOIS, PETITIONERS

v.

FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT COMMONWEALTH



Before: TAMM, WALD and GINSBURG, Circuit Judges.

UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT 1982.CDC.26

EDISON CO., INTERVENOR

No. 80-1072; No. 81-1270

February 9, 1982; As Amended

Petition for Review of an Order of The Federal Energy Regulatory Commission

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE WALD

Opinion for the Court filed by Circuit Judge WALD.

WALD, Circuit Judge: The Cities of Batavia, Naperville, Rock Falls, Geneva, Rochelle, St. Charles and Winnetka, Illinois ("Cities") bring this consolidated appeal challenging decisions of the Federal Energy Regulatory Commission ("Commission" or "FERC") approving a wholesale rate increase filed by Commonwealth Edison Company ("Com Ed"). Cities, wholesale Rate 78 customers and retail Rate 6 competitors of Com Ed, allege that the wholesale rate increase violates the Federal Power Act section 205 requirement that rates be "just and reasonable." 16 U.S.C. 824d(a). They allege certain defects in the calculation of rate base, cost of service, rate design and rate of return, which they claim produce a wholesale rate so excessive that Cities are "price squeezed" from the large industrial retail Rate 6 market. Our review reveals that the rate increase was reasonable and so we affirm all but one of the Commission's many rulings challenged in this appeal. We remand to the Commission one cost of service issue, involving a fuel adjustment clause no longer in effect, because the Commission appears to have misunderstood the extent of its powers under the statute. I. BACKGROUND

This case has taken over ten years to travel through the administrative process. It began in 1970, when Com Ed departed from a 1968 proposed settlement agreement with Cities, whereby wholesale Rate 78 and retail Rate 6 were brought into parity. *fn1 The departure took the form of a wholesale Rate 78 increase unaccompanied by a comparable retail Rate 6 increase. An ALJ sustained a challenge by Cities to the increase, Commonwealth Edison Co., 51 F.P.C. 97 (1972), finding it discriminatory, and ordered the wholesale rate to be brought back into parity with the retail rate. Id. at 116. However, the Commission reversed, ruling (1) that it lacked jurisdiction to compare jurisdictional rates (wholesale Rate 78) with non-jurisdictional rates (retail Rate 6),2 and (2) that service to the two customer groups was not comparable because the Cities' (Rate 78) peak demand tended to coincide with the Com Ed system's peak, while the retail industrials' (Rate 6) peak did not. Commonwealth Edison Co., 51 F.P.C. 86 (1974).

Shortly thereafter, Com Ed submitted a revised Rate 78, which went into effect on October 31, 1974 subject to refund. Cities intervened, R. 3795, challenging the revised rate as discriminatory and alleging defects in rate design, cost of service and rate of return. R. 3799-3815. Before completion of the Commission's investigation of the revised rate, Com Ed made a further filing, revising its old fuel adjustment clause,3 which had been lifted from a formally approved rate schedule.4 The Commission, thereupon, terminated a section 206 investigation5 of the old fuel adjustment clause and accepted the new filing, suspended the revised clause for one day and then allowed it to become effective subject to refund. See pp. 18-23 infra.

Meanwhile, this court issued its opinion in Conway Corp. v. Federal Power Commission, 510 F.2d 1264 (D.C. Cir. 1975), aff'd, 426 U.S. 271 (1976) (hereinafter Conway). That case held that although the Commission lacked jurisdiction to fix a utility's retail rates, its jurisdiction to set a utility's wholesale rates allowed it to take the utility's retail rates into consideration and to press wholesale rates to the lower end of the range of reasonableness when wholesale customers who compete with the utility for retail customers were price squeezed from the retail market. On the basis of Conway, we remanded, Cities of Batavia v. Federal Power Commission, 548 F.2d 1056 (D.C. Cir. 1977) (hereinafter Batavia), and the Commission, finding already submitted evidence sufficient to require further study of the price squeeze issue, reopened proceedings in the case so that additional evidence could be taken on that issue. R. 4003-04.

The ALJ issued his initial decision on May 22, 1978. He found, inter alia, that (1) Com Ed's rate base was not inflated by allegedly excessive generating capacity reserves, R. 4646; (2) Cities' claim regarding the old fuel adjustment clause was no longer viable, R. 4653; (3) Cities' attack upon Com Ed's attempt to normalize its taxes was an inappropriate collateral attack upon the Commission's policy permitting tax normalization, R. 4648-51; (4) Com Ed's method of allocating demand costs6 among classes of customers was inappropriate, R. 4656-61; (5) Com Ed's proposed 100% and 75%-23 month rachets7 were unjustified, R. 4661-64; (6) a 13% rate of return on common equity was reasonable, R. 4666-69; and (7) the prima facie case of price squeeze established after the Batavia decision, R. 4003-04, was not sustained because there was no showing that Com Ed specifically intended to restrain competition for industrial retail customers, R. 4677. The Commission subsequently upheld the ALJ's findings on rate base, R. 4969-76, fuel adjustment, R. 4983-84, tax normalization, R. 4981-82, and rate of return, R. 4992-96. However, it departed from the ALJ's decision and approved Com Ed's method of allocating demand, R. 4985-89, and its use of a 100% ratchet, R. 4989-91. It also held that specific anticompetitive intent was not material to a finding of illegal price discrimination, found that Cities had established a prima facie price squeeze case and shifted the burden to Com Ed to refute the existence of an illegal price squeeze, requiring it to submit additional evidence. R. 4997-5022. On January 16, 1980, Cities appealed the Commission's price squeeze as well as non-price squeeze decisions to this court. Meanwhile, it continued to fight the price squeeze issue during further agency proceedings.

To refute Cities' price squeeze allegation, Com Ed first submitted a cost of service study comparing the rate of return earned by Com Ed from a select group of 52 large industrial retail customers with that earned from the seven cities. See R. at 2462-81. That study indicated that the difference between wholesale and retail prices for customers with similar cost and demand characteristics was cost justified. Cities responded, in turn, by disputing the Company's sample as unrepresentative because it allegedly included customers whose demand exceeded the maximum load of the largest municipality and excluded customers whose demand was comparable to that of the Cities. See R. at 2833-37. They submitted an alternate study which eliminated five members of Com Ed's select group of 52, said to have demands not comparable to the municipalities, and included 146 additional customers whose demands allegedly fell within the same demand range as the Cities. Id.; See also R. at 5006. Cities' study indicated unjust price discrimination. Using Com Ed's study, but substituting a different method of demand allocation,8 the Commission's Staff concluded that the Cities were being price squeezed from the large industrial retail market, R. 4350. The Staff nevertheless refused to recommend relief because the problem was caused by the actions of the state regulatory commission which apparently resulted in a retail rate considered by the Staff to be unreasonably low. R. 4351-52. Although the ALJ's decision against Cities was ultimately based upon Cities' failure to prove specific anticompetitive intent, the ALJ observed:

Com Ed serves about 225,000 customers under Rate 6. Depending on which industrial customers are selected for cost of service analysis purposes, and depending also upon the impact of the demand charge, it is possible to calculate that Com Ed derives a lower return from a selected group of retail customers than it earns from Cities. It is also possible to select other groups of industrial customers from whom materially higher returns are earned. The fact is that the group of industrial customers considered by Com Ed and Staff is reasonably representative of industrial customers with electric demand and use patterns that are comparable to Cities, and the results of this study are acceptable for the purpose of this proceeding.

R. 4678. The Commission rejected the specific intent requirement, R. 5016-18, and requested the submission of additional evidence. That request was based upon its view that the parties had misapplied the rate of return methodology for determining whether price discrimination existed:

The parties have carved out a group of retail customers similar to the wholesale customer in terms of billing demand and then attempted to use that group in determining relative rates of return. The rate of return test for price discrimination does not depend on retail and wholesale customers having comparable cost-determining characteristics.

This is in contrast to a test for price discrimination wherein the retail rates are compared directly with the wholesale rates. A precondition to this comparison is a determination that the costs to serve the retail class are the same as the costs to serve at wholesale. If cost causative factors, such as diversity, coincidence or load factors are shown to be comparable between retail and wholesale service, then a detailed retail to wholesale cost analysis and comparison can be avoided. This test was not used here, even though a group of retail customers of the same size as the wholesale customers (in terms of billing demands) was selected for rate of return comparisons.

Ordinarily, where the evidence is not adequate to sustain a finding on a significant issue, it would be necessary to remand the proceeding for further development. This is not the case here, however, since the rate of return comparison is sufficient to provide a framework for analysis in determining the presence of price discrimination.

Under a rate of return analysis, the relevant question is which retail customers comprise the group for which there is competition between Com Ed and the Cities, not which group of retail customers is of like size to the wholesale customers. If there is price discrimination in the rate under which this group is served with respect to the wholesale rate, then that is the price discrimination that should be the focus of the price squeeze proceedings. We understand that, in this case, all types of customers served under retail Rate 6 are potential targets of competition between Com Ed and the Cities.36 Certainly there is no evidence that the Cities compete only to serve those types of retail customers with billing demands similar to their own. Under these circumstances, the rate of return comparisons should be made between all customers served under Rate 6 (not just the selected group of industrials) and the customers served under the wholesale rate. The wholesale rate to be used for this comparison is the rate found to be just and reasonable, prior to a consideration of whether there exists price discrimination.

R. 5006-09.

Applications for rehearing of this Commission decision were denied. R. 5278. In defending the theory upon which its evidentiary request was based against Cities' charge that Conway and Batavia were being evaded, the Commission stated:

In Opinion No. 63, we took a close look at whether an intra-class subsidy possibly imposed by Rate 6 in favor of the customers most similar to the wholesale customers would give Com Ed a competitive advantage over Cities. Our analysis was based on two premises. The first premise, which is not disputed by Cities, is that there is competition between Cities and Com Ed for the entire Rate 6 class. The second premise, which cannot yet be proven but is said by Cities to be irrelevant, is that the realized rate of return for serving the Rate 6 class is the same as the realized rate of return for serving the wholesale class. Under these sets of conditions, if a subgroup of the Rate 6 class is subsidized by other members of that class, then to the extent there is a competitive disadvantage to the Cities in their efforts to serve the subsidized group within the Rate 6 class, there is a compensating competitive advantage in serving those members of the Rate 6 class who are forced to subsidize other Rate 6 customers. We do not see this situation as ousting Cities from the market, because the market includes the subsidizing customers as well as the subsidized customers.

We should emphasize that the record in this proceeding gives us no reason to believe that Cities are more interested in serving the industrial customers that look like themselves than they are in serving the other members of the Rate 6 class.

R. 5281.

Com Ed made its compliance filing on November 13, 1979. R. 5027-43. The filing indicated that the price discrimination between wholesale and retail customers was cost justified:

The rate of return under the "Demand Responsibility" related to Annual System Peak method is 7.95% for the Cities and 8.41% for the retail customers based on the rate level in effect on October 31, 1974. The rates of return for the retail customers based on four other rate levels of Rate 6 effective in the locked-in period of the wholesale rate are 10.14%, 11.83%, 13.83% and 14.78% as shown on Pages 1 and 2 of Schedule 1.

The 7.95% rate of return for the Cities is less than the 8.87% return authorized by the Commission in Opinion No. 63 and less than any of the returns computed for the retail Rate 6 customers.

R. 5036. Cities objected, arguing that Com Ed's evidence was flawed9 and therefore did not overcome the prima facie price squeeze case that they had previously established and reinforced. Com Ed acknowledged imperfections with the compliance filing, but contended that it was based upon the best evidence available. R. 5403-15. The Commission agreed10 and accepted Com Ed's compliance filing. R. 5416-18. Cities' application for rehearing, again disputing the validity of the data and requesting full hearings, R. 5419, was denied. R. 5489. The Commission reaffirmed its view that the evidence submitted was adequate to overcome Cities' prima facie price squeeze case and the evidence submitted to bolster that case, concluded that Cities used an improper statistical method in their challenge to the compliance filing, and rejected the claimed need for full hearings.11 A petition for review was filed with this court on March 6, 1981. On April 8, we consolidated that appeal with the one filed by Cities on January 16, 1980, raising price squeeze as well as related non-price squeeze issues. II. JURISDICTION

We are met at the outset with a challenge to our jurisdiction to decide the non-price squeeze issues raised by Cities.12 The Commission contends that Cities' January 16, 1980 petition for review of the Commission's Opinion No. 63-A, which concluded agency proceedings on the non-price squeeze issues, was filed one day late.13 The Commission calculates that the final day for filing was January 15, 1980 -- sixty days after Opinion No. 63-A "issued"14 (November 16, 1979).

Section 313(b) of the Federal Power Act, 16 U.S.C. § 825(b), provides that a petition for review of an agency order15 must be filed within sixty days of that order.16 The Commission reminds us that that statutory provision is "jurisdictional and unalterable."17 Nevertheless, under the agency's own regulations, 18 C.F.R. § 1.13(a),

in computing any period of time... the last day of the period... shall be included, unless it is a Saturday, Sunday, or a legal holiday in the District of Columbia, in which event the period shall run until the end of the next day which is not a Saturday, Sunday, or a holiday.18

The Commission (and Cities) lamentably failed to notice that January 15th is the birthday of Dr. Martin Luther King and, under section 28-2701 of the D.C. Code, a legal holiday in the District of Columbia. See also D.C. Code § 1-503; Washington Post, Jan. 14, 1982, at B-7, 60,000 Expected For King Birthday Parade (17 states and the District of Columbia observe Dr. King's birthday). Thus, the statutory period for filing a petition for review of Opinion No. 63-A ran until January 16, 1980.Cities' petition was timely filed and so we reject the Commission's jurisdictional challenge, which has already been rejected by a previous panel of the court. Commonwealth Edison Company v. Federal Energy Regulatory Commission, No. 80-1063 (D.C. Cir. July 7, 1980) (motion to dismiss denied by per curiam order); Cities of Batavia v. Federal Energy Regulatory Commission, No. 81-1072 (D.C. Cir. Aug. 7, 1980) (petition for rehearing of July 7, 1980 per curiam order denying motion to dismiss denied; leave to renew jurisdiction issue before merits panel granted). III.EXCESS GENERATING CAPACITY

Cities contend that Com Ed's excess generating capacity during the test year was 12.9% higher than normal for the longer period during which the proposed rate would be effective, and that the Commission therefore erred in refusing to "normalize" or "adjust" the reserves that it allowed in the test year rate base so that an averaging of excess capacity would be effected.19 Although inartfully advocated in the briefs and not pressed during oral argument, Cities' position appears to be that rates set on the basis of a test year, which is characterized by maximum unused capacity, will allow overrecovery in subsequent years unless an adjustment is made. As rehearsed by the Commission, Cities' argument is:

If no adjustment is made to the test year, the rates are determined by dividing the capital carrying charges on generating plant in the test year by the KW of billed demand during the same period. Rates calculated in this manner will yield the revenue requirement associated with generating plant in the test year. In subsequent years, however, if billable demand increases but generating plant does not (until the next cycle begins), the utility will receive revenues in excess of cost (including permitted return on equity).20

The phenomenon described by Cities cannot be gainsaid. Calculating rates by dividing capital carrying charges on generating plant by demand during a test year, when reserves are highest and demand lowest of any period during which the rates are in effect, will mean increased recovery on generating capacity in subsequent years: demand will grow, reserves will shrink, but the utility will still be allowed to charge the test year unit price, but for many more units.

The Commission nevertheless rejects the argument, acknowledging that the "test year approach" to ratemaking presupposes certain inexactnesses. Depletion of reserve capacity subsequent to the test year will, it says, inevitably be accompanied by some increased costs to serve increased demand as well as increased revenue. Thus, the increased recovery on generating capacity will be somewhat offset. However, the Commission, recognizing that increased costs and revenues will not usually be synchronized, declares itself receptive to ...


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