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June 2, 1992


Petition for Review of Orders of the District of Columbia Public Service Commission.

Before Ferren, Terry, and Schwelb, Associate Judges.

The opinion of the court was delivered by: Ferren

FERREN, Associate Judge Petitioner, the Office of People's Counsel (OPC), challenges two orders of the Public Service Commission (PSC or Commission) issued in Formal Case No. 905. The first, Order No. 9868, issued on October 23, 1991, granted a $19 million rate increase to the Potomac Electric Power Company (PEPCO), including $15 million reflecting costs associated with certain power generating units located at Chalk Point, Maryland. The second, Order No. 9938, issued on January 2, 1992, denied reconsideration of the rate increase granted to PEPCO in Order No. 9868. In this expedited appeal, we review both orders and affirm.

OPC challenges on several grounds PEPCO's including in its rate base the cost of four combustion turbines (CTs), which were still under construction at Chalk Point at the time of PEPCO's application. First, OPC argues that PEPCO had constructed the CTs without obtaining prior PSC approval, as required by D.C. Code § 43-1002 (1990). *fn1 In this connection, OPC contends that the PSC failed to conduct a prudence review of the Chalk Point CTs and that, in the absence of such a review, PEPCO could not lawfully pass along the costs of the CTs to District ratepayers.

Second, OPC challenges the Commission's refusal to receive evidence, or to entertain argument proffered by OPC, demonstrating that the Chalk Point CTs were "Construction Work in Progress" (CWIP) during the 1990 test year. According to PSC policy and precedent, a utility may not include in its rate base the cost of construction not yet completed. OPC argues that the PSC mistakenly treated its denial of OPC's motion for summary Disposition as, in addition, a summary judgment in favor of PEPCO on this issue and thereby deprived OPC of an adequate opportunity to be heard on whether the Chalk Point CTs should be classified as CWIP, requiring its exclusion from PEPCO's rate base.

Finally, OPC contends that the PSC deviated from its own ratemaking principles when it allowed PEPCO a rate increase that included cost recovery for the Chalk Point CTs, and that the Commission failed to articulate a reasoned justification for this departure from precedent. OPC adds that, assuming an out-of-period adjustment for the Chalk Point CTs could be sustained, it should have been counterbalanced with OPC's own proposed adjustments to rate elements based on the 1990 test year. OPC argues that these unbalanced PSC departures from sound ratemaking principles "skewed the ratemaking relationships" and resulted in unjust and unreasonable rates to District ratepayers.

I. Procedural History

On December 28, 1990, PEPCO applied for a rate increase of more than $56.4 million, basing its application on test year 1990. *fn2 PEPCO indicated in its application that "a significant portion" of its increase was associated with its request to recover the costs related to four combustion turbines located at Chalk Point, Maryland. [Order No. 9868 at 1] The PSC held a prehearing conference on February 11, 1991, to define the issues for the Commission's review of PEPCO's application. OPC and PEPCO submitted proposed issues for consideration. On April 12, 1991, the PSC issued an Order and Report on Prehearing Conference, Order No. 9695, stating the issues to be resolved at the hearing. The Commission in that prehearing order rejected OPC's proposal that the PSC "review PEPCO's near-term construction program including energy and demand forecasts, cost estimates and prudence." [Order. No. 9695 at 11.] The Commission determined that Formal Case No. 834, Phase III, had "provided OPC and other parties a full and fair opportunity to raise and litigate the construction program matters." [ Id. at 13.] The PSC agreed, however, to examine "the reasonableness of the cost and timing of PEPCO's new generation" [ id.,] and, specifically, whether PEPCO's ratemaking treatment of its investment in the Chalk Point CTs was reasonable. [ See id. at 18.]

OPC filed a motion for summary Disposition arguing that PSC precedent and policies prevented inclusion of CWIP in the rate base and disallowed out-of-period adjustments that were overly remote in time from the test period. OPC contended that PEPCO, by including the costs of Chalk Point CTs in its rate base, was attempting to recover costs of CWIP that would not be operational until six months after the end of the test period. The PSC rejected OPC's arguments, denied OPC's motion for summary Disposition, and fully resolved the CWIP issue in PEPCO's favor.

In the ratemaking proceeding itself, PEPCO submitted direct testimony, as did OPC, the General Services Administration, District of Columbia Natural Gas, the government of the District of Columbia, the Apartment and Office Building Association (AOBA), Washington Metropolitan Transportation Authority, and the PSC staff. OPC submitted rebuttal testimony, as did every other party except AOBA. Four more days of evidentiary hearings were held to allow for cross-examination. [Order No. 9868 at 1-2] The final result was a 388 page order outlining the evidence, granting a $19 million (out of a requested $56.4 million) rate increase, and explaining the Commission's decision.

II. Scope of Review

The scope of our review of PSC decisions "'is the narrowest judicial review in the field of administrative law.'" Office of People's Counsel v. Public Serv. Comm'n, 571 A.2d 206, 208-09 (D.C. 1990) (quoting Office of People's Counsel v. Public Serv. Comm'n, 482 A.2d 404, 407 (D.C. 1984) (quoting Potomac Electric Power Co. v. Public Serv. Comm'n, 402 A.2d 14, 17 (D.C.) (en banc), cert. denied, 444 U.S. 926 (1979))); accord Washington Gas Light Co. v. Public Serv. Comm'n, 450 A.2d 1187, 1193 (D.C. 1982). Our review is limited by statute to questions of law, and the Commission's findings of fact are conclusive unless those findings are unreasonable, arbitrary, or capricious. D.C. Code § 43-906 (1990). This court's review function "'is normally exhausted when we have determined that the Commission has respected procedural requirements, has made findings based on substantial evidence, and has applied the correct legal standards to its substantive deliberations.'" OPC v. PSC, 571 A.2d at 209 (quoting Atlantic Tel. Co. v. Public Serv. Comm'n, 390 A.2d 439, 441 (D.C. 1978)); accord Williams v. Washington Metropolitan Area Transit Commission, 134 U.S. App. D.C. 342, 362, 415 F.2d 922, 942 (1968), cert. denied, 393 U.S. 1081, 21 L. Ed. 2d 773 (1969).

"It is especially important to accord great respect to the Commission in a complex, esoteric area such as ratemaking in which the Commission has been entrusted with the difficult task of deciding among many competing arguments and policies." OPC v. PSC, 571 A.2d at 209 (quotations omitted); accord Office of People's Counsel v. Public Service Comm'n, 455 A.2d 391, 393 (D.C. 1982)); OPC v. PSC, 482 A.2d at 407; Goodman v. Public Service Comm'n, 162 U.S. App. D.C. 74, 78-79, 497 F.2d 661, 665-66 (1974). "'It is the Commission, not this court, that must balance the competing interests of utility consumers and investors in the ratemaking process.'" OPC v PSC, 482 A.2d at 407 (quoting OPC v PSC, 455 A.2d at 393). Because theories of ratemaking in particular "fall within the special province" of the PSC, such theories are not "subject to the same substantiation principle applicable to fact-finding." Id. (quoting Washington Gas Light, 450 A.2d at 1193).

Finally, it is not the theory "but the impact of the rate order which counts. If the total effect of the rate order cannot be said to be unjust and unreasonable, our inquiry" is finished. OPC v PSC, 571 A.2d at 209. (citing Office of People's Counsel v. Public Service Comm'n, 472 A.2d 860, 862 (D.C. 1984). Of course, the PSC must fully and carefully explain its ruling. Id. However, "in order for a party to overcome the presumption of validity that attaches to fully reasoned PSC orders, the party must ...

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