Cities of Riverside and Colton, Cal. v. F.E.R.C., s. 84-7184

• Decision Date: 18 July 1985
• Docket Number: 84-7220 and 84-7576,Nos. 84-7184,s. 84-7184
• Parties: CITIES OF RIVERSIDE AND COLTON, CALIFORNIA, Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, and Cities of Vernon and Anaheim, and Southern California Edison Company, Intervenors.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1434

765 F.2d 1434

CITIES OF RIVERSIDE AND COLTON, CALIFORNIA, Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent and Cities of Vernon and Anaheim, and Southern California Edison Company, Intervenors.

Nos. 84-7184, 84-7220 and 84-7576.

United States Court of Appeals Ninth Circuit.

Argued and Submitted May 10, 1985.

Decided July 18, 1985.

Duncan, Allen & Mitchell, Donald R. Allen, David P. Yaffe, Richard M. Gittleman, Washington, D.C., for Riverside and Colton, Cal.

Joseph S. Davis, William H. Satterfield, Gen. Counsel, Barbara J. Weller, Deputy Sol., Joel M. Cockrell, Washington, D.C., for F.E.R.C.

David B. Brearley, El Monte, Cal., Arnold Fieldman, Goldberg, Fieldman, & Letham, P.C., Washington, D.C., for intervenor City of Vernon.

Wallace L. Duncan, James D. Pembroke, John W. Griggs, Charles F. Holum, Duncan, Weinberg & Miller, P.C., Washington, D.C., for Anaheim, Cal.

Petition for Review of the Decision of the Federal Energy Regulatory Commission.

Before KENNEDY, HUG and FERGUSON, Circuit Judges.

HUG, Circuit Judge:

The cities of Riverside and Colton, California (the "Cities") appeal from a Federal Energy Regulatory Commission (the "Commission") order approving Southern California Edison Company's ("Edison") multi-class rate design.

The Cities, which are wholesale customers of Edison and intervenors in Edison's rate increase proceedings before the Commission,

do not challenge the rate of return on common equity or the overall return on rate base approved by the Commission as a part of Edison's cost of providing service to its wholesale customers. Rather, the Cities argue that the multi-class rate design approved by the Commission is arbitrary and capricious because the Commission purportedly departed from previously established standards applied in determining whether a single-class rate design is appropriate and failed to explain adequately its rationale for approving a multi-class rate design. The Cities also contend that the Commission's order is not justified by substantial evidence. We affirm.

FACTS

On January 15, 1979, Edison filed with the Commission a proposed rate increase pursuant to Section 205 of the Federal Power Act, 16 U.S.C. Sec. 824d (1982) (the "Act"), seeking to increase the rates charged to nine of its wholesale customers. Under its proposed rate increase, Edison's wholesale customers were given the option of being served under Rate Schedule R ("Resale") or Rate Schedule TOU-R ("Time of Use-Resale").-- Customers would be automatically served under Rate Schedule R unless they elected to be served under Rate Schedule TOU-R. Rate Schedule R is based upon a customer's highest demand during the month, while Rate Schedule TOU-R is based upon a customer's highest demand during a specified "peak" period. ¹ The Cities, along with the cities of Anaheim, Banning, and Azusa, filed a joint protest and petition to intervene in Edison's rate case. Another wholesale customer, the city of Vernon, also intervened in protest to Edison's application.

On March 15, 1979, the Commission accepted Edison's rates for filing and suspended the proposed rate increase for five months pending an evidentiary hearing on the lawfulness of the proposed rates. Hearings on Edison's application were held between May 13 and November 6, 1980.

During the proceedings before the administrative law judge ("ALJ"), opposing positions on rate design were presented. The city of Vernon sought the creation of two separate wholesale classes based on load diversity, while the Cities argued that no such diversity existed and that Edison should design rates for only one class. In his November 6, 1981 Initial Decision, the ALJ adopted a rate design, which had not been urged by any party, and ordered Edison to design a Schedule TOU-R demand rate and a Schedule R demand rate for each individual customer; the customer would then select the rate that best suited its load characteristics.

On September 10, 1982, the Commission issued Opinion No. 145, reversing the ALJ's decision on rate design and adopted the rate design proposed by Edison. The Commission noted that there was no evidence in the record to support the ALJ's decision to establish a rate for each wholesale customer, and rejected Vernon's proposed design, finding it "interesting," but not "sufficiently fleshed out to merit its adoption." The Commission concluded as follows:

Any proposal that would establish more than one customer class should reflect the customer's relative status concerning diversity, the voltage level each customer is served under and the customer's load factors. These are factors we found important in El Paso Electric Co., supra, in adopting separate rate classes for wholesale customers.

We reverse the judge. In Opinion No. 62, supra, the Commission ordered Edison to use rates containing one customer class. No party proposing a change from a unitary customer class has provided us with a persuasive alternative. We adopt Edison's filed one-class rate Opinion No. 145. 20 FERC p 61,301, 61,594 (CCH) (1982); (emphasis added).

design. Finally, we direct Edison to demonstrate in its compliance filing that its rate design produces the same approximate earned rate of return for each customer.

Rehearing of Opinion No. 145 was sought by the Cities, Edison, and Vernon. The Commission denied rehearing, and attempted to clarify its holding regarding rate design.

Both Edison and Cities request that we clarify the Rate Design portion of our Opinion. Our holding on that issue was that we generally adopted the rate design proposed by Edison in its filing, including R and TOU-R rate schedules. As to the language requiring a compliance filing that produced the same approximate earned rate of return for each customer, our intention was that this statement was a general directive, not necessarily requiring any drastic changes in the filed rate design. However, if any specific problems arise concerning the rate design that is eventually filed, they will be addressed in the compliance process.

Opinion No. 145-A. 21 FERC p 61,211, 61,475 (CCH) (1982) (emphasis added).

On March 18, 1983, Edison submitted its compliance filing, which contained revised rates intended to comply with the Commission's directives contained in Opinion Nos. 145 and 145-A (the "First Compliance Filing"). Two alternatives were submitted: Alternative A placed all wholesale customers--Rate Schedule R customers--in a single wholesale class. Alternative B divided the wholesale customers into two groups--Rate Schedule R and Rate Schedule TOU-R customers. Although both Alternative A and Alternative B produced the overall test year rate of return of 10.09%, there were variations in the rates of return Edison would earn from individual customers.

The Commission rejected both alternatives in its "Order Rejecting Compliance Filing," issued November 30, 1983, 25 FERC p 61,324 (CCH) (1983), holding that neither alternative complied with its earlier directive that Edison demonstrate that its rate design produces the same approximate earned rate of return from each customer.

In its proposed compliance filing, Edison submitted alternative A & B rate designs. We find neither alternative A nor B to be in compliance with Opinion Nos. 145 and 145-A. In those Opinions, we directed Edison "to demonstrate in its compliance filing that its rate design produces the same approximate earned rate of return for each customer." The instant proposed compliance filing contains earned return disparities of 2.47% in alternative A and 2.21% in alternative B. Such disparities exceed the limits of a reasonable range of earned returns among customers. Therefore, we order Edison to file revised alternative B rates which divide the seven R customers into groups in order to produce earned rates of return as close as practicable to the 10.09% overall rate of return we found appropriate in Opinion Nos. 145 and 145-A. Such a filing should eliminate any unreasonable earned return disparities between customers.

Id. at 61,734 (footnotes omitted; emphasis added). The Commission indicated that Alternative B was selected as the starting point because "it already breaks the R and TOU-R customers into groups that produce earned returns of 10.09%." Id. at n. 4. The Commission also directed Edison to the Commission's decision in Alabama Power Company, Opinion No. 54-A, 23 FERC p 61,392 (CCH) (1983), "for guidance as to [the Commission's] views regarding reasonable earned return disparities." Id. at n. 6.

The Cities sought rehearing of the Commission's rejection order, contending that the Commission improperly reversed Opinion No. 145 by requiring that wholesale customers be divided into several classes. The Cities' petition was denied on January 30, 1984. Thereafter, Riverside and Colton filed petitions for review of the rejection order with this court.

On December 23, 1983, Edison submitted to the Commission a revised compliance filing ("Second Compliance Filing"). The Second Compliance Filing was withdrawn prior to the Commission's consideration and a revised second filing was submitted on April 11, 1984 ("Revised Second Compliance Filing"). The Revised Second Compliance Filing grouped the Rate Schedule R customers into three classes and minimized the variation in rates of return earned from each of these customers to .26%.

The city of Anaheim and the city of Vernon filed comments in support of the Revised Second Compliance Filing. The Cities also filed their comments, urging the Commission to return to the single-class rate design purportedly adopted in Opinion Nos. 145 and 145-A.

On July 20, 1984, the Commission issued its "Letter Order" accepting Edison's Revised Second Compliance Filing. 28 FERC p 61,206 (CCH) (1984). The Cities sought rehearing, which was denied by the Commission on August 22, 1984. Thereafter, the Cities filed a joint petition for review, which was subsequently consolidated with the...