Boroughs of Ellwood City, Grove City, New Wilmington, Wampum, and Zelienople, Pa. v. F.E.R.C.

• Decision Date: 18 April 1984
• Docket Number: Nos. 80-2364,83-1196 and 83-1414,s. 80-2364
• Citation: 731 F.2d 959
• Parties: BOROUGHS OF ELLWOOD CITY, GROVE CITY, NEW WILMINGTON, WAMPUM, AND ZELIENOPLE, PENNSYLVANIA, Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Pennsylvania Power Company, Intervenor. (Two cases) BOROUGHS OF ELLWOOD CITY, GROVE CITY, NEW WILMINGTON & ZELIENOPLE, PENNSYLVANIA, Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Pennsylvania Power Company, Intervenor.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 959

731 F.2d 959

235 U.S.App.D.C. 257

BOROUGHS OF ELLWOOD CITY, GROVE CITY, NEW WILMINGTON, WAMPUM, AND ZELIENOPLE, PENNSYLVANIA, Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent,

Pennsylvania Power Company, Intervenor. (Two cases)

BOROUGHS OF ELLWOOD CITY, GROVE CITY, NEW WILMINGTON &

ZELIENOPLE, PENNSYLVANIA, Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Pennsylvania Power Company, Intervenor.

Nos. 80-2364, 83-1196 and 83-1414.

United States Court of Appeals, District of Columbia Circuit.

Argued Jan. 9, 1984.

Decided March 30, 1984.

As Amended April 18, 1984.

Petitions for Review of an Order of the Federal Energy Regulatory commission.

Woodrow D. Wollesen, Washington, D.C., with whom Charles F. Wheatley, Jr. and William Steven Paleos, Washington, D.C., were on the brief, for Boroughs of Ellwood City, et al., petitioners in Nos. 80-2364, 83-1196 and 83-1414 and intervenors in No. 83-1294.

Steven A. Berger, Philadelphia, Pa., with whom James R. Edgerly and Stephen L. Feld, New Castle, Pa., were on the brief, for Pennsylvania Power Company, petitioner in No. 83-1294 and intervenor in Nos. 80-2364, 83-1196 and 83-1414.

John H. Conway, Attorney, F.E.R.C., Washington, D.C., with whom Stephen R. Melton, Acting General Counsel, and Barbara J. Weller, Deputy Sol., F.E.R.C., Washington, D.C., were on the brief, for respondent.

Before WALD and GINSBURG, Circuit Judges, and McGOWAN, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge WALD.

WALD, Circuit Judge:

This case marks the latest episode in the ongoing saga of the "price squeeze" doctrine in federal utility ratemaking. Several Pennsylvania municipalities ¹ ("Boroughs") petition for direct review of decisions by the Federal Energy Regulatory Commission ("FERC" or "the Commission") approving with minor modifications wholesale rates filed by Pennsylvania Power Company ("Penn Power" or "the Company") under sections 205 and 206 of the Federal Power Act. 16 U.S.C. Secs. 824d, 824e. The proceedings before the Commission were bifurcated into a "cost-of-service" phase and a price discrimination phase. Boroughs appeal from several aspects of the Phase I proceedings, in which the Commission set just and reasonable rates for Penn Power aside from any considerations of unlawful discrimination. In Phase II, the Commission considered allegations of price discrimination. Boroughs' primary claim was that the wholesale rate it was charged by Penn Power was unjustifiably high in comparison with the rate Penn charged certain retail customers for which Boroughs competed, thus creating a "price squeeze." Although the Commission found non-cost-justified price discrimination by Penn Power against its municipal competitors for nearly a year, it refused to issue a price squeeze remedy. It concluded that the discrimination was not "undue" because it was the result of a company decision to take advantage of a change in the state law governing its retail rates. We vacate the Commission's decision not to remedy the price squeeze, but we uphold its decision in all other respects.

I. BACKGROUND

Penn Power supplies electrical power to both retail customers, whose rates are under the jurisdiction of the Pennsylvania Public Utility Commission, and wholesale customers, including Boroughs, whose rates are under the jurisdiction of FERC. Penn Power and its municipal customers are both potential suppliers, and thus in competition, for many retail customers.

Penn Power filed with the Commission a rate increase for its wholesale customers in July, 1977. ² The rates were accepted for filing, suspended for two months, and allowed to go into effect subject to refund on September 11, 1977; they remained in effect until January 23, 1982. The Commission scheduled a public hearing on the lawfulness of the proposed rates under sections 205 and 206 of the Federal Power Act, 16 U.S.C. Secs. 824d, 824e, which proscribe rates that are unjust, unreasonable or unduly discriminatory. Boroughs intervened in these proceedings, alleging among other things that the new rates were anticompetitive and discriminatory in relation to the retail rates that Penn Power charged industrial customers for whom Boroughs competed.

The Commission bifurcated the proceedings. In Phase I, the Commission determined the just and reasonable rate, based on Penn Power's cost of service to the wholesale customers, apart from any price discrimination issues. ³ During the November, 1978, Phase I hearings, Boroughs unsuccessfully contested several elements of Penn Power's rate filing that are now before us on appeal. They argue here (1) that the Commission erred in permitting Penn to include a forty-five-day working capital allowance that was much greater than Penn's actual needs; (2) that the test period estimate of revenues from sales of excess reserves had proved to be inaccurate by $2 million and should have been adjusted accordingly; and (3) that the Commission allowed an excessive rate of return on equity of 13.25%.

In the second phase of the ratemaking proceedings, the Commission considered Boroughs' allegations that the large wholesale rate increase, unmatched by a retail rate increase, resulted in a price squeeze. Boroughs, which are totally dependent on power supplied by Penn, claimed that they had to pay such a high wholesale rate that they could not compete with Penn's lower retail rates for many large customers, especially the industrial customers within the Boroughs' boundaries. Although the Commission agreed with the ALJ that a price squeeze had existed for nearly a year--from September 11, 1977, when the wholesale rate increase went into effect, to August 31, 1978, when the retail increase took effect--it found on the basis of additional filings by Penn ⁴ that no price squeeze existed after August 31, 1978. The Commission also overruled the ALJ's decision to issue a remedy. It held that the price discrimination was not "undue" and was thus excused because it was the result of Penn's decision to delay its retail filing until the effective date of a new state law that imposed a definite suspension period. ⁵

Boroughs contend on appeal, first, that the Commission unfairly applied a test of price discrimination that was not developed until after the record was closed, thus precluding them from demonstrating a longer period of price discrimination than the year-long period ultimately found. They contend further that as to the period for which the Commission did find an actual price squeeze, it unjustifiably denied them a remedy.

II. COST-OF-SERVICE ISSUES

A. Working Capital Allowance

An electric utility may include in its ratebase a cash allowance to permit it to meet current obligations as they arise. As we explained in City of Cleveland v. FPC, 525 F.2d 845, 850 n. 38 (D.C.Cir.1976) (quoting Alabama-Tennessee Natural Gas Co. v. FPC, 203 F.2d 494, 498 (3d Cir.1953), "the need for working capital arises largely from the time lag between payment by the company of its expenses and receipt by the company of payment for service in respect of which expenses were incurred."

A utility's actual need for working capital can be most accurately determined by performing a "lead-lag" study of the average number of days that passes between payment of expenses and receipt of revenues for a given service. One part of this calculation is the "revenue lag," which is in turn made up primarily of the "service lag"--the number of days between the time expenses are incurred for services and the date of billing for those services--and the "payment lag"--the number of days between billing and payment. A utility also experiences "lead time" when it receives payment for services before it pays the expenses associated with those services. The number of lag days minus the number of lead days yields a net lag which represents the utility's actual need for working capital. ⁶

A reliable lead-lag study, however, is a burdensome undertaking. The Commission therefore long ago established the standard practice of permitting a utility in the absence of a lead-lag study to include in its ratebase an amount equal to forty-five days of operating expenses. See, e.g., Interstate Power Co., 2 F.P.C. 71, 85 (1939); Union Electric Co., 47 F.P.C. 144, 175 (1972). ⁷ The Commission found that the use of this estimate yielded reasonable results while avoiding the costs of regularly performing a reliable "lead-lag" study and of litigating the issue. Carolina Power & Light Co., 6 FERC p 61,154, p. 61,295 (1979). The Commission's rule of thumb has been approved by at least one court. See Union Electric Co. v. FERC, 668 F.2d 389, 397 (8th Cir.1982).

In 1979 the Commission initiated a rulemaking to revise the formula, recognizing that it may have become outdated in light of current billing practices. ⁸ Pending that revision, the Commission provided that "[w]here a fully developed and reliable lead lag study is available in the record, we will utilize that study to determine the working capital allowance. When a study meeting these criteria is not available we will continue to apply the forty-five-day convention." Carolina Power & Light Co., 6 FERC at 61,296.

1. The Commission's Decision

In this case Boroughs offered a lead-lag study which they claimed demonstrated a need for a working capital allowance of only thirteen days. The study was one which Penn had prepared for its last retail filing and which Boroughs had "adjusted" in various ways that the ALJ found were "troubling, and taint[ed] the use of that study." ⁹ The ALJ therefore rejected the study. He nevertheless reduced the allowance from forty-five to forty days in recognition of the Commission's proposed revision of the standard formula. ALJ I, 9 FERC at p. 65,160.

The Commission concurred in the ALJ's rejection of Boroughs' lead-lag study, but on a different basis. The Commission pointed to an apparent inconsistency between the study's estimated...