672 F.2d 64 (D.C. Cir. 1982), 80-1072, Cities of Batavia, Naperville, Rock Falls, Winnetka, Geneva, Rochelle and St. Charles, Ill. v. Federal Energy Regulatory Commission

Docket Nº:80-1072, 81-1270.
Citation:672 F.2d 64
Party Name: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,
Case Date:February 09, 1982
Court:United States Courts of Appeals, Court of Appeals for the District of Columbia Circuit
 
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672 F.2d 64 (D.C. Cir. 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 Edison Co., Intervenor.

Nos. 80-1072, 81-1270.

United States Court of Appeals, District of Columbia Circuit

February 9, 1982

Argued Dec. 9, 1981.

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Charles F. Wheatley, Jr., Washington, D. C., with whom Woodrow D. Wollesen, Washington, D. C., was on the brief, for petitioners.

Joshua Z. Rokach, Atty., Federal Energy Regulatory Commission, Washington, D. C., with whom Jerome Nelson, Acting Gen. Counsel, and Stephen R. Melton, Atty., Federal Energy Regulatory Commission, Washington, D. C., were on the brief, for respondent.

Clark Evans Downs, Chicago, Ill., with whom Richard G. Ferguson and David M. Stahl, Chicago, Ill., were on the brief, for intervenor.

Before TAMM, WALD and GINSBURG, Circuit Judges.

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

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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. 1 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, Record (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 investigation 5 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. 75-77 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, 96 S.Ct. 1999, 48 L.Ed.2d 626 (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

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of allocating demand costs 6 among classes of customers was inappropriate, R. 4656-61; (5) Com Ed's proposed 100% and 75%-23 month ratchets 7 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.

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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...

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