Electricity Consumers Resource Council v. F.E.R.C., s. 84-1006
| Decision Date | 20 November 1984 |
| Docket Number | 84-1007,Nos. 84-1006,s. 84-1006 |
| Citation | 747 F.2d 1511 |
| Parties | ELECTRICITY CONSUMERS RESOURCE COUNCIL, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Wisconsin Electric Power Company, Public Service Commission of Wisconsin, Intervenors. The CITIES, VILLAGES AND TOWNS OF CEDARBURG, et al., Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Wisconsin Electric Power Company, Public Service Commission of Wisconsin, Intervenors. |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
Petitions for Review of an Order of the Federal Energy Regulatory commission.
Philip A. Fleming, Washington, D.C., with whom Diane K. Rogell, Washington, D.C., was on brief, for petitioner in No. 84-1006.
J. Leroy Thilly, Madison, Wis., with whom Michael P. May, Madison, Wis., was on the brief, for petitioners in No. 84-1007.
Andrea Wolfman, Atty., F.E.R.C., Washington, D.C., with whom Jerome M. Feit, Sol., F.E.R.C., Washington, D.C., was on brief, for respondent. Joseph S. Davies, Jr., Washington, D.C., also entered an appearance for respondent.
George F. Bruder, Washington, D.C., for intervenor, Wisconsin Electric Power Company. James E. Hickey, Jr., Washington, D.C., also entered an appearance for intervenor.
Philip J. Mause, Washington, D.C., and Steven M. Schur, Madison, Wis., were on brief for intervenor, Public Service Commission of Wisconsin.
Rigdon H. Boykin, New York City, and Robert F. Shapiro, Washington, D.C., entered appearances for American Paper Institute, Inc., movant for petition for rehearing.
Before TAMM and EDWARDS, Circuit Judges, and MacKINNON, Senior Circuit Judge.
Opinion for the Court PER CURIAM.
Petitioners, the Electricity Consumers Resource Council ("ELCON"), an organization of large industrial users of electricity, and the Cities, Villages and Towns of Cedarburg, et al. ("the Cities"), a group of wholesale customers, challenge two orders of the Federal Energy Regulatory Commission ("FERC"). The first order, Opinion No. 186, 1 accepted and adopted in full a new rate design proposed by the Wisconsin Electric Power Company ("WEPCO"), reversing the initial decision of the Administrative Law Judge ("ALJ") on all issues. 2 The second order, Opinion No. 186-A, 3 denied rehearing on the ground that the rehearing applications raised no new issues. The principal issue presented by these consolidated appeals is whether FERC's finding--that WEPCO's proposed new rate design adopting two new pricing methods is just, reasonable, non-preferential and non-prejudicial--is based upon substantial evidence in the record and is within a zone of reasonableness.
This case arises under the Federal Power Act, 16 U.S.C. Sec. 791a, et seq. (1982), ("the Act"), and associated regulations. Section 205(a) of the Act 4 requires that all rates subject to the Commission's jurisdiction be "just and reasonable," and declares rates that do not meet these standards to be unlawful. In addition, section 205(b) mandates that rates not be unduly preferential or prejudicial. Section 205(e) imposes on the public utility the burden of proving that any proposed rate is just and reasonable.
For the reasons set forth below, we affirm FERC's implementation of the time-of-day pricing component of the new rate design but reverse FERC's adoption of the marginal pricing component. We find that, with regard to the marginal pricing component, the Commission failed to comply with its statutory mandate to ensure that rates are just, reasonable, non-discriminatory and non-preferential. Moreover, we find that FERC both failed to offer a reasoned explanation for its decision and failed to develop record support, based on the facts of this case, for the adoption of the new marginal pricing ratemaking methodology. Accordingly, we remand this case for further proceedings consistent with this opinion.
On July 30, 1980, WEPCO filed a wholesale electric rate increase which was made the subject of a FERC investigation under section 205(e). All aspects of WEPCO's rate proposal were satisfactorily resolved by settlement negotiations prior to hearing except for the two new concepts in the rate design that are at issue here: the substitution of time-of-day energy charges for unitary energy charges, and the use of marginal cost pricing concepts 5 instead of the traditional embedded or average cost pricing. The new rate design still recognizes two discrete types of costs: (1) demand or fixed costs, i.e., building and maintenance expenses, and (2) energy or variable costs, i.e., the cost of generating electricity.
Petitioners do not challenge the adoption of time-of-day rates in principle. Brief of ELCON, 32-33; Brief of the Cities, 59-60. They argue only that WEPCO has not offered sufficient evidence to support cost differentials in the periods chosen, and that neither Exhibit 5 nor Exhibit 32, offered as record support for the choice of peaking periods, suggests that a 12-hour peak period is justified. Id., J.A. 60-61. FERC, on the other hand, found the selection of peak periods to be reasonable and to be supported by substantial evidence on the record. J.A. 45. We agree and affirm this portion of FERC's order.
Petitioners challenge the adoption of marginal cost pricing in this case on several grounds, the most important of which is that substantial adjustments to the theory were made in order to apply it to this case. These adjustments were necessary because of the "revenue constraint," representing the maximum revenue collectable by the utility in a given period. In this case, the revenue constraint was determined according to the traditional ratemaking method of average costs. Consequently, if WEPCO collects the fixed costs allocated to wholesale customers by a demand charge and the variable costs by an energy charge under marginal cost pricing instead of average pricing, the total revenues generated will exceed the revenue constraint. Therefore, FERC approved the following reconciliation methodology: WEPCO would collect the entire marginal cost of energy and would consider any residual revenue collectable under the revenue constraint to be the demand charge. J.A. 22, 76. The resulting charges are not pegged to the demand or energy costs assigned to the customers in WEPCO's cost-of-service study, and there are no demand charges for off-peak customers. J.A. 22-23.
The scope of our review in this case is limited. We defer to the agency's expertise, particularly where the statute prescribes few specific standards for the agency to follow, so long as its decision is supported by "substantial evidence" in the record and reached by "reasoned decision-making," including an examination of the relevant data and a reasoned explanation supported by a stated connection between the facts found and the choice made. Burlington Truck Lines v. United States, 371 U.S. 156, 168, 83 S.Ct. 239, 245, 9 L.Ed.2d 207 (1962); Memphis Light, Gas and Water Division v. FPC, 504 F.2d 225, 230 (D.C.Cir.1974); 16 U.S.C. Sec. 825l (1982). As this court recently stated in a case arising under the Natural Gas Act, which prescribes a similar "just and reasonable" standard:
This paucity of statutory guidance has resulted in judicial deference to administrative ratesetting. However deferential the judiciary may be, courts have never given regulators carte blanche .... [T]he judiciary has inferred certain requirements from the "just and reasonable" standard [and] ... "[w]hat is basic is the requirement that there be support in the public record for what was done" .... In reviewing the record, this Court engages in an inquiry akin to the "substantial evidence" inquiry mandated by the Administrative Procedure Act, 5 U.S.C. Sec. 706(2)(E) (1976) .... Indeed, this Court has required the Commission to specify the evidence on which it relied and to explain how that evidence supports the conclusion it reached.
City of Charlottesville v. FERC, 661 F.2d 945, 949-50 (D.C.Cir.1981) (citations omitted).
The Commission relied exclusively on economic theory to justify the adoption of a rate design based on marginal costs. But, especially in a case of this sort--where the agency has given lip service to a theoretical design and then inexplicably distorted the theory in its application--mere reliance on an economic theory cannot substitute for substantial record evidence and the articulation of a rational basis for an agency's decision. While we might defer to FERC's application of this new theory in another case, we cannot do so here where the agency failed to address potentially serious problems with the new rate design, especially with WEPCO's reconciliation methodology.
FERC asserts that the new rate design "will serve the public interest by more closely tracking the utility's cost incurrence than the traditional non time-differentiated average cost methodology." J.A. 46. This contention is hardly surprising because FERC has previously considered cost tracking to be the primary feature of a just and reasonable rate structure. 6 Nevertheless, it is clear in this case that, under WEPCO's proposal of modified marginal cost pricing, costs will be tracked less accurately than under average cost pricing.
For instance, WEPCO's Exhibit 20, J.A. 572, shows that demand costs approximate 41% and energy costs approximate 59% of the actual cost of service. Under WEPCO's proposal, however, demand charges will equal about 20% of the revenues and energy charges will equal 80%. WEPCO's own witness acknowledged the total lack of correlation between the demand cost and the demand charge, J.A. 146, stating under...
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