Petition for review of orders of the District of Columbia Public Service Commission.
Before Ferren and King, Associate Judges, and Weisberg,* Associate Judge of the Superior Court of the District of Columbia.
The opinion of the court was delivered by: Ferren
FERREN, Associate Judge: Petitioner, Potomac Electric Power Company (PEPCO), challenges portions of two orders of the Public Service Commission of the District of Columbia. In ruling on an application for a rate increase, the Commission allowed PEPCO to recover 75% of actual and projected costs associated with the company's demand-side management *fn1 (DSM) programs, and thus denied recovery of 25% of those costs. Order No. 10387 at 164; Order No. 10423 at 11. The Commission also refused to allow PEPCO to recover its projected $1.9 million increase in employee benefit costs for 1994. Order No. 10387 at 93; Order No. 10423 at 41. In this appeal, PEPCO contends that the Commission's decisions to disallow 25% of the DSM costs and all of the 1994 increase in employee benefit costs were arbitrary, capricious, and unsupported by substantial evidence. More specifically, PEPCO contends that (1) the Commission's orders fail to apply clearly articulated criteria, as required by previous decisions of this court; (2) the Commission erred in failing to give PEPCO the benefit of a presumption that its costs were prudently incurred; and (3) the selection of the 25% figure for disallowance of DSM costs was arbitrary. We reject the first two arguments but accept the third. Accordingly, we sustain the Commission's Conclusion that PEPCO has not justified 100% recovery of its DSM costs, but we must remand for reconsideration of the more specific decision that disallows 25% of those costs; the Commission's orders do not provide a full and clear explanation of why 25% represents the appropriate amount for disallowance. We affirm the decision to refuse recovery of the projected 1994 increase in employee benefit costs.
On June 4, 1993, PEPCO filed an application with the Commission for a permanent retail rate increase of $72,573,000 or 10.8%. *fn2 The rate increase was based on a twelve month test period ending on June 30, 1993, comprised of eight months of actual data and four months of projected data. On July 30, 1993, the Commission held a pre-hearing conference to allow the parties *fn3 to clarify the issues proposed for designation. On August 13, 1993, the Commission issued an Order and Report on Prehearing Conference designating the contested issues for the hearing on PEPCO's application. From the beginning of September through the end of November, 1993, the interested parties submitted testimony. The Commission conducted six days of hearings in mid-December, in order to permit cross-examination of all witnesses. The Commission also held community hearings on December 7, 1993, and on January 19 and 26 and February 16, 1994.
On March 4, 1994, the Commission authorized a rate increase of $23,234,000.00, or 3.5%. Order No. 10387. In this Order, the Commission rejected the following costs in the requested rate increase: (1) 25% of PEPCO's costs associated with DSM programs; (2) 100% of the administrative and planning costs associated with the DSM programs; and (3) 100% of PEPCO's increased employee benefit costs for 1994. On April 4, 1994, PEPCO filed an application for reconsideration. On May 4, 1994, the Commission issued an Order and Opinion on Reconsideration, Order No. 10423, authorizing a rate increase totaling $26,692,000, which, contrary to its initial order, allowed PEPCO to recover 100% of its costs associated with the administration and planning of DSM programs. The Commission, however, reaffirmed the earlier decision not to allow recovery of 25% of the costs associated with those programs or recovery of the anticipated increase in PEPCO's 1994 employee benefit costs.
This Court has "jurisdiction to hear and determine any appeal from an order or decision of the Commission." D.C. Code § 43-905 (a) (1990 Repl.). However, the scope of our review is narrowly prescribed by statute:
In the determination of any appeal from an order or decision of the Commission the review by this court shall be limited to questions of law, including constitutional questions; and the findings of fact by the Commission shall be conclusive unless it shall appear that such findings of the Commission are unreasonable, arbitrary, or capricious.
D.C. Code § 43-906 (1990 Repl.). By this provision, Congress vested sole ratemaking authority in the expertise of the Public Service Commission. See Potomac Elec. Power Co. v. Public Serv. Comm'n, 457 A.2d 776, 782 (D.C. 1983); Potomac Elec. Power Co. v. Public Serv. Comm'n, 402 A.2d 14, 17 (D.C.), cert. denied, 444 U.S. 926 (1979). Accordingly:
The Commission, not this court, has the sole responsibility for balancing consumer and investor interests in designing rate structures and approving specific charges . . . . While we must ascertain that, in striking a balance between the competing consumer and investor interests, the Commission has given reasoned consideration to each of the pertinent factors, . . . . we must not substitute our judgment for that of the Commission.
Potomac Elec. Power Co., 457 A.2d at 782. (citations and internal quotations omitted). We have said, therefore, that "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, 610 A.2d 240, 243 (D.C. 1992) (quoting 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 at 407 (quoting Potomac Elec. Power Co. v. Public Serv. Comm'n, 402 A.2d at 17); accord Washington Gas Light Co. v. Public Serv. Comm'n, 450 A.2d 1187, 1193 (D.C. 1982).
In light of the Commission's expertise, its rate orders are presumptively valid, and "the petitioner challenging an order carries the heavy burden of demonstrating clearly and convincingly a fatal flaw in the action taken." *fn4 Potomac Elec. Power Co., 457 A.2d at 783 (citing Federal Power Comm'n v. Hope Natural Gas Co. 320 U.S. 591, 602, 88 L. Ed. 333, 64 S. Ct. 281 (1944)). In order to ensure that judicial review can be meaningful, however, we have imposed a separate and independent burden on the Commission to explain its actions fully and clearly. See Washington Pub. Interest Org. v. Public Serv. Comm'n, 393 A.2d 71, 75 (D.C. 1978), cert. denied, 444 U.S. 926 (1979) ("the court, when presented with a non-frivolous petition for review, has a responsibility to hold the Commission accountable - through as many remands as necessary - for satisfying a burden all its own: to explain its actions fully and clearly. A utility rate cannot be deemed 'reasonable' simply because an expert agency says it is.").
A full and clear explanation of a ratemaking decision must include the following components. First, the Commission must announce the criteria governing the rate determination, and, second, it must explain "how the particular rate order reflects application of these criteria to the facts of the case. Id.; Potomac Elec. Power Co., 457 A.2d at 783. As to application of ratemaking criteria, the Supreme Court has held that, "unless the overall effect of a rate is 'unjust and unreasonable,' the Commission's order should be approved, irrespective of 'infirmities' in the methodology used to calculate it." Federal Power Comm'n v. Hope Natural Gas Co., 320 U.S. 591, 602, 88 L. Ed. 333, 64 S. Ct. 281 (1944), cited in Washington Pub. Interest Org., 393 A.2d at 75. While the reasonableness of the "overall effect" of the rate order remains the primary consideration, however, the Commission nonetheless has an obligation to disclose the methodology by which that decision was reached, for the actual methodology used may have a bearing on the court's overall judgment as to the reasonableness of the order:
Absent precise explanation of methodology as applied to the facts of the case, there is no way for a court to tell whether the Commission, however expert, has been arbitrary or unreasonable.
Washington Pub. Interest Org., 393 A.2d at 77.
Finally, the Commission must demonstrate that its rate order is "in accordance with the reliable, probative, and substantial evidence." D.C. Code § 1-1509 (e) (1992 Repl.). We have said that this substantial evidence test is satisfied if there is "a demonstration in the findings of a 'rational connection between facts found and the choice made."' Washington Pub. Interest Org., 393 A.2d at 77 (citing Brewington v. District of Columbia Bd. of Appeals and Review, 299 A.2d 145, 147 (D.C. 1973)) (emphasis in original).
With these principles in mind, we turn to the Commission's orders and PEPCO's ...