Anaheim, Riverside, Banning, Colton and Azusa, Cal. v. Federal Energy Regulatory Commission

• Decision Date: 11 December 1981
• Docket Number: 80-1527,Nos. 80-1334,s. 80-1334
• Citation: 216 U.S.App.D.C. 1,669 F.2d 799
• Parties: ANAHEIM, RIVERSIDE, BANNING, COLTON, AND AZUSA, CALIFORNIA, Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Southern California Edison Company, Intervenor. SOUTHERN CALIFORNIA EDISON COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Anza Electric Cooperative, Inc., the Cities of Anaheim, Riverside, Banning, Colton and Azusa, California, Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 799

669 F.2d 799

216 U.S.App.D.C. 1

ANAHEIM, RIVERSIDE, BANNING, COLTON, AND AZUSA, CALIFORNIA, Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Southern

California Edison Company, Intervenor.

SOUTHERN CALIFORNIA EDISON COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent,

Anza Electric Cooperative, Inc., the Cities of Anaheim,

Riverside, Banning, Colton and Azusa, California,

Intervenors.

Nos. 80-1334, 80-1527.

United States Court of Appeals District of Columbia Circuit.

Argued Sept. 28, 1981.

Decided Dec. 11, 1981.

Sandra J. Stiebel with whom Bonnie S. Blair, Stephen C. Nichols and Peter K. Matt, Washington, D. C., were on the brief for Cities of Anaheim, Riverside, Banning, Colton and Azusa, Cal., petitioners in No. 80-1334 and intervenors in No. 80-1527.

William E. Marx, Rosemead, Cal., with whom Richard M. Merriman, Brian J. McManus, Washington, D. C., and Irwin F. Woodland, Los Angeles, Cal., were on the brief for Southern California Edison Co., petitioner in No. 80-1527 and intervenor in No. 80-1334.

Jerome Nelson, Acting Gen. Counsel, and Barbara J. Weller, Asst. Sol., Federal Energy Regulatory Commission, Washington, D. C., were on the brief for respondent. Stephen R. Milton, Federal Energy Regulatory Commission, also entered an appearance for respondent.

Richard A. Solomon and Dennis Lane, Washington, D. C., entered appearances for Anza Elec. Co-op., Inc., intervenor in No. 80-1527.

Before MacKINNON, WALD and MIKVA, Circuit Judges.

Opinion for the Court filed by Circuit Judge WALD.

WALD, Circuit Judge:

The Federal Power Act regulates "the sale of electric energy at wholesale in interstate commerce," 16 U.S.C. § 824, and requires rates to be "just and reasonable," 16 U.S.C. § 824d, i.e., ample to allow recovery of a utility's operating costs and a fair rate of return on capital investment. See, e.g., Public Systems v. FERC, 606 F.2d 973, 978 n.24 (D.C.Cir.1979). The only costs recoverable under federal rates are those allocable to the wholesale transactions, subject to federal jurisdiction, and not those allocable to retail sales, regulated by the state. See 16 U.S.C. § 824(b). In these consolidated appeals, we review two orders ¹ of the Federal Energy Regulatory Commission ("FERC" or "Commission") which approved increases in wholesale electric power rates of Southern California Edison Company ("Edison" or "Company"). In No. 80-1527, Edison urges that FERC (1) set an unreasonably low rate of return, (2) understated the Company's rate base by excluding non-cash expenses from the working cash allowance, and (3) improperly disallowed recovery of certain operating costs. In No. 80-1334, five California cities ("Cities") ² assert that the approved rate erroneously allowed Edison (1) to charge wholesale customers for operating costs associated exclusively with retail transactions subject to state regulation, and (2) to recover from wholesale customers a portion of losses stemming from a retail fixed-rate contract. For the reasons set forth below, we reject the contentions of petitioners in each case and affirm the Commission's actions.

I. BACKGROUND

The Cities, wholesale-for-resale customers of Edison, operate publicly-owned utilities which distribute electricity to retail customers within and near their respective jurisdictions. On October 31, 1975, Edison filed After "(m)assive discovery," ⁵ Edison, the Cities and Commission staff participated in hearings held throughout the month of August, 1977, "producing 2,477 pages of transcript, 219 Exhibits and 17 Items by Reference." ⁶ In June, 1978, the Initial Decision of the Administrative Law Judge ("ALJ") decided a "host of more or less traditional electric rate issues" substantially in favor of the Cities ⁷ and directed Edison to revise its filed cost of service figures and rate schedules accordingly. All parties took exception to the Initial Decision on various issues including those raised in these petitions for review. More than a year later, on August 22, 1979, the Commission issued Opinion No. 62, affirming the ALJ on the cost issues. Both Edison and the Cities applied for rehearing as provided by section 313(a) of the Federal Power Act, 16 U.S.C. § 825l (a). Opinion No. 62-A followed on March 20, 1980, again affirming, with clarification, the Initial Decision.

with the Federal Power Commission ³ an increase in its wholesale rates and, as required by Commission regulations, 18 C.F.R. § 35.13, supported its filing with both historical cost of service data and estimates for the calendar year 1976, designated as the "test year." Within a month of Edison's filing, the Cities petitioned to intervene, challenging the Company's cost justification for the proposed increase. ⁴

Petitions for review of Opinion Nos. 62 and 62-A were filed with this court pursuant to section 313(b) of the Federal Power Act, 16 U.S.C. § 825l (b). Both Cities and Edison challenge those FERC rulings adverse to their positions and each intervenes on the side of FERC in the appeal brought by the other. The appropriate scope of review is defined by the Administrative Procedure Act, 5 U.S.C. § 706, ⁸ and the Federal Power Act; the court is required to accept as conclusive the "findings of the Commission as to the facts, if supported by substantial evidence." 16 U.S.C. § 825l (b). We must also determine if the Commission's findings are "reasoned inferences from substantial evidence." Memphis Light, Gas and Water Division v. FPC, 504 F.2d 225, 236 (D.C.Cir.1974); City of Chicago v. FPC, 385 F.2d 629, 637 (D.C.Cir.1967), cert. denied, 390 U.S. 945, 88 S.Ct. 1028, 19 L.Ed.2d 1133 (1968).

II. ISSUES

Under regulations adopted in 1973 and approved by this court in American Public Power Assn. v. FPC, 522 F.2d 142 (D.C.Cir.1975), Edison was required to support its proposed rate increase with cost of service data for two time periods: (1) historical data from the most recent twelve months available (Period I) and (2) estimates of costs in a "test year" (Period II), twelve months beginning any time between the end of Period I and the effective date of the rate filing. 18 C.F.R. § 35.13. Consistent with the statutory requirement that a utility seeking to increase its rates bears the burden of proof to show that the new charge is "just and reasonable," 16 U.S.C. § 824d(e), the Commission " 'will not approve rates based on unsubstantiated cost estimations. The burden (is) on such companies to establish the validity and accuracy for each of their cost estimates.' " Village of Chatham v. FERC, 662 F.2d 23, at 28 (D.C.Cir.1981), quoting Filing of Electric Service Tariff Charges, 50 F.P.C. 125, 127 (1973), aff'd sub nom. American Public Power Assn., supra.

Edison failed to meet this burden with respect to a number of cost items. In their stead, the ALJ adopted figures which he derived from the record evidence. We do not find that his determinations, affirmed by the Commission Opinions, are unsupported by substantial evidence or adequate rationale. We decide similarly with respect to the disposition of the allocation issues raised by the Cities.

A. Rate of Return

"Just and reasonable" rates should "enable the company to operate successfully, to maintain its financial integrity, to attract capital, and to compensate its investors for the risks assumed." FPC v. Hope Natural Gas Co., 320 U.S. 591, 605, 64 S.Ct. 281, 298, 88 L.Ed. 333 (1944). Investors should receive returns commensurate with those earned on comparable risk stock. See Bluefield Water Works & Improv. Co. v. Public Service Comm., 262 U.S. 679, 692, 43 S.Ct. 675, 679, 67 L.Ed. 1176 (1923). Edison challenges as inadequate for these purposes the 12.75% rate of return on common equity set by the ALJ and affirmed by the Commission. Edison presented evidence to support three main contentions: first, that the low market value of its stock compared with book value evidenced a need for a much higher rate of return; ⁹ second, that the lower rate would hurt Edison's ability to attract capital on reasonable terms because its bonds would lose the favorable ratings of Moody's ¹⁰ and Standard and Poors ¹¹ utility investment services; and finally, that a reduction in the filed rates was unwarranted because actual recorded costs in the "test year" revealed that the rate of return in fact generated by the filed rates was unreasonably low. We conclude that the Commission has adequately responded to all these contentions, and its decision to reject them is supported by substantial evidence in the record.

The ALJ and the Commission found that a rate of return of 12.75% would allow Edison to adequately compete for the investor's dollar. The ALJ adopted in large part a comparable earnings analysis in the traditional mode, see FPC v. Hope Natural Gas Co., supra, 320 U.S. at 604-05, 64 S.Ct. at 288-89, put forward by the Commission staff and supported by data on seven other large utilities and enterprises in other industries. A 12.75% rate of return was shown to be consistent with that yielded on equity investments in enterprises determined to be of comparable risk on the basis of thirteen financial factors. See Testimony of L. Cumberland, Exhibit 119 at 3-6, R. 3623-26, J.A. 212-15. As such, the Commission's ruling meets the requirements of Hope and Bluefield.

In setting the 12.75% rate of return, the Commission agreed with Edison that the The Commission also disagreed that Edison bonds were in jeopardy of being derated if the filed rates were disapproved. Edison had attempted to demonstrate "the magnitude of the derating problem" with reference to a list of utilities that had lost favorable bond ratings between 1969 and 1975. Testimony of H. Fred Christie, Exhibit 3 at 12, R. 2775, J.A. 118. But the ALJ found that Edison bonds had maintained their high rating in earlier years even when return on equity ranged between 9.56% and 10.14%. The Commission also noted Edison's continued high bond rating...