Southern California Edison Co. v. F.E.R.C.

• Citation: 805 F.2d 1068
• Decision Date: 25 November 1986
• Docket Number: No. 85-1718,85-1718
• Parties: , 55 USLW 2308 SOUTHERN CALIFORNIA EDISON COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Cities of Anaheim, et al., Intervenors.
• Court: United States Courts of Appeals. United States Court of Appeals (District of Columbia)

Page 1068

805 F.2d 1068

256 U.S.App.D.C. 364, 55 USLW 2308

SOUTHERN CALIFORNIA EDISON COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Cities of Anaheim, et al., Intervenors.

No. 85-1718.

United States Court of Appeals District of Columbia Circuit.

Argued Oct. 15, 1986.

Decided Nov. 25, 1986.

Brian J. McManus, Washington, D.C., with whom Richard M. Merriman and Daniel John Regan, Jr. and Frank J. Cooley, were on the brief, for petitioner.

Joel M. Cockrell, Atty., F.E.R.C., Washington, D.C., for respondent. Jerome M. Feit, Solicitor and A. Karen Hill, Atty., F.E.R.C., were on the brief, for respondent.

James N. Horwood, P. Daniel Bruner, Arnold Fieldman and John Michael Adragna, Washington, D.C., were on the brief, for intervenors, the Cities of Anaheim, et al.

Before STARR and SILBERMAN, Circuit Judges, and McGOWAN, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge STARR.

STARR, Circuit Judge:

This case calls upon us to review an agency reading of a provision commonly found in electric utility contracts. Specifically, the issue is whether the Federal Energy Regulatory Commission correctly interpreted a fuel adjustment clause to require a regulated utility to remit to its wholesale customers refunds received by the utility from its fuel suppliers. For the reasons that follow, we conclude that the Commission's decision was correct. We therefore deny the petition for review.

I

Southern California Edison Company ("Edison") is a large, investor-owned electric utility that provides service in Southern and Central California. In addition to substantial retail sales, Edison makes wholesale sales of electricity subject to the regulatory jurisdiction of the Federal Energy Regulatory Commission. Among Edison's wholesale customers are the intervenors, six California cities, including the communities of Anaheim and Riverside.

At all times relevant to this proceeding, Edison employed a fixed-rate fuel adjustment clause in computing its bills to wholesale customers. As its name suggests and this court has described it, "[a] fuel adjustment clause is a device that allows a utility to pass on to its customers the increasing cost of fuel without filing a new rate schedule each time the price of fuel rises." Anaheim v. FERC, 669 F.2d 799, 806 (D.C.Cir.1981). FACs, as they appear to be called in the parlance of the industry, are thus sensible management-efficiency devices aimed at reducing the flow of paper from across the Nation to agency offices at the seat of government.

We gather that two genres of fuel adjustment clauses are in use these days: the type presently before us, namely fixed-rate clauses, and cost-of-service clauses. Under fixed-rate clauses, billings for a particular period are calculated by adjusting the energy charge to reflect the price of fuel in a previous period, known as the "test period." The actual price of fuel during the test period functions as a "proxy," as it were, for the cost of fuel used during the service period. Under a cost-of-service clause, in contrast, billings are constantly adjusted to reflect the full and actual cost of fuel during the billing period. Cost-of-service clauses are more finely calibrated, more accurate, and thus more complex to administer than fixed-rate tariffs. In contrast, fixed-rate clauses are more efficient and less unwieldy, but less accurate.

Over a period extending from 1974 to 1981, Edison received refunds from its fuel suppliers totaling approximately $4.4 million. ¹ Upon discovering this fact, intervenors petitioned the Commission to require Edison to pass along those refunds. Edison resisted, arguing that it was not required to make such refunds because the fixed-rate FAC barred any billing adjustments after the close of the billing period. As a fallback position, Edison argued that it should be permitted to retain the refunds as partial compensation for the approximately $17.7 million in undercollections occasioned by its switch in 1981 from a fixed-rate to a cost-of-service fuel adjustment clause. Intervenors, on the other hand, contended that Edison's retention of the refunds resulted in the wholesale customers' being saddled with unlawfully excessive fuel costs.

The Commission accepted the Cities' contention, concluding that Edison's retention of refunds amounted to imposing excessive fuel costs on its jurisdictional sales. The Commission rejected Edison's arguments on two grounds: first, that under a fixed-rate tariff, the price of fuel in the test period must, in the agency's view, reflect the actual price paid for fuel used during the test period; second, that Edison was not entitled to retain the supplier refunds as partial compensation for the approximately $17 million in undercollections. Such undercollections could not be recovered, the Commission determined, by directly charging the wholesale customers. Such a charge, the Commission opined, would run afoul of the well-established "filed rate" doctrine. ² As a result, the agency concluded, Edison could not properly recover such amounts indirectly by retaining the fuel supplier refunds. Accordingly, the Commission required Edison to remit the fuel supplier refunds to its wholesale customers. See City of Vernon v. Southern California Edison Co., 31 F.E.R.C. p 61,113, rehearing denied, 32 F.E.R.C. p 61,372 (1985).

Edison sought rehearing. In addition to its previous, unsuccessful arguments, Edison asserted that by imposing refund obligations the Commission was in effect amending its regulations without following the requisite steps under the Administrative Procedure Act, 5 U.S.C. Sec. 553 (1982). Edison further argued that, even if the Commission's order were considered an adjudication rather than a rulemaking, the Commission had unlawfully failed to justify its departure from prior practice. See id. Sec. 554(b).

In denying Edison's request for rehearing, the Commission rejected Edison's argument that the Commission was retroactively applying a new policy. There was, to the contrary, no new policy at all. Existing regulations, the Commission stated, required utilities to comply with their respective fuel adjustment clauses, and existing regulations required that only just and reasonable charges be collected under a fuel adjustment clause. To remove excessive fuel costs charged to Edison's wholesale customers and thereby comply with the utility's FAC, Edison was obliged, the Commission determined, to make refunds to its wholesale customers. See City of Vernon, 32 F.E.R.C. p 61,372. This petition followed.

II

The principal contention pressed by Edison is that the Commission has improperly blurred the distinction between fixed-rate and cost-of-service FACs. Edison argues that, although billing under a cost-of-service clause is constantly revised and adjusted to reflect the actual cost of fuel during the billing period, billing under a fixed-rate clause is, as its name suggests, fixed. As Edison sees it, the use of a fixed-rate clause bars billing adjustments after the close of the billing period, thus making the proxy, in effect, virtually immune to post-billing adjustments. Notwithstanding the surface appeal of Edison's argument, we have come, upon reflection, to a different view.

First. Edison admits, as it must, that two exceptions exist to what it otherwise broadly asserts to be the inviolate nature of fixed-rate clauses. (1) A utility must, under settled precedent, refund costs that are improperly collected under the utility's fuel adjustment clause. See Delmarva Power & Light Co., 24 F.E.R.C. p 61,199, at 61,461 (1983) (refunds ordered for costs associated with disposal of nuclear fuel); Electric Cooperatives of Kansas, 14 F.E.R.C p 61,176, at 61,320 (1981) (refunds ordered for costs associated with pollution control devices); Public Service Co. of New Hampshire, 1 F.E.R.C. p 63,039, at 65,294 (1977) (refunds ordered for imprudently incurred costs). (2) Edison volunteers, and common sense would suggest, that corrections to the proxy period also may be permissible "when there have been mathematical errors" in calculating the bill. ³ Brief for Petitioners at 24.

The principle that ineluctably emerges from both Commission precedent and Edison's own position in this case is that billings under a fixed-rate clause are not inviolate after all. That is to say, fixed-rate clauses are not completely unlike cost-of-service fuel clauses since under the former, the proxy-period veil, as it were, may be pierced. The line between the two clauses is indeed blurred, as opposed to bright and clear. The question thus becomes whether the Commission, consistent with its statutory mandate and the requirement of reasoned decisionmaking, could properly blur the line in this case so as to require the utility to reopen its proxy periods to flow through a refund. Upon briefly disposing of Edison's indictment that the Commission has been unfaithful to its own decisions, we shall return to this, the bedrock issue in the case.

Second. Quite apart from its contention that the Commission has eviscerated fixed-rate clauses, Edison argues that the Commission's decision has departed from prior precedent. Not so. By Edison's own admission, no agency precedent expressly addresses this precise issue. We thus see no need to treat agency precedent that concededly does not squarely control the situation at hand. Analogously to the process of judicially divining Congressional intent, see Chevron U.S.A. Inc. v. Natural Resources Defense Council, 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984), we are unable to discern any clear, prior Commission statement or position on the precise issue before us. Not only is there a dearth of precedent on this subject, no Commission rule speaks to the question before us. We are in new territory here. ⁴

Third. In the absence of clear precedent, the Commission interpreted Edison's fuel adjustment clause in light of the agency's...