Indiana Municipal Elec. Ass'n v. Federal Energy Regulatory Commission, 79-1997

• Decision Date: 22 August 1980
• Docket Number: No. 79-1997,79-1997
• Citation: 629 F.2d 480
• Parties: INDIANA MUNICIPAL ELECTRIC ASSOCIATION et al., Petitioners, v. FEDERAL ENERGY REGULATION COMMISSION, Respondent. Public Service Company of Indiana, Inc., Intervenor.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 480

629 F.2d 480

INDIANA MUNICIPAL ELECTRIC ASSOCIATION et al., Petitioners, v. FEDERAL ENERGY REGULATION COMMISSION, Respondent.

Public Service Company of Indiana, Inc., Intervenor.

No. 79-1997.

United States Court of Appeals, Seventh Circuit.

Argued May 28, 1980.

Decided Aug. 22, 1980.

Peter K. Matt, Washington, D. C., for petitioners.

Stephen R. Melton, Federal Energy Regulatory Comm., George F. Bruder, Washington, D. C., for respondent.

Before CUMMINGS and PELL, Circuit Judges, and CAMPBELL, Senior District Judge. ^*

CUMMINGS, Circuit Judge.

The Indiana Municipal Electric Association and its 24 municipal electric system members (Association) ¹ have asked us to review two orders of the Federal Energy Regulatory Commission. ² The Public Service Company of Indiana, Inc. (the Company) became an intervenor in these proceedings on September 19, 1979. The Association has asked us to reverse two of the Commission's orders and remand the cause for further consideration, whereas the Company has asked us to affirm the orders. We affirm.

In September 1975, the Company applied to the Commission for an increase in its wholesale electric rates from February 24, 1976, ³ to January 27, 1979. Pursuant to the applicable regulations, ⁴ the Company filed actual cost of service data for Period I and projected cost of service data for Period II. ⁵

To understand the problem presented by this case, it should be remembered that during periods of high demand, a utility may have to purchase short-term power from other utilities to meet additional demands of its own customers. This cost is treated as an operating expense for which the Company is entitled to compensation. At other times, a utility may have generated more power than its own customers need and consequently will sell the excess power to other utilities. The revenues from these sales are used to reduce the overall operating costs of the Company by crediting the amount of revenues received to purchased power expense. Of course, as the Administrative Law Judge (ALJ) realized, a utility may be a net importer of power in one year and a net exporter in the next year. Therefore it is rather tricky for a utility to project the exact position in which it is likely to be in terms of necessary net purchases. But to be successful in securing an adjustment, the party challenging the proposed utility rates has the burden of proving the projections "substantially in error." As the ALJ put it, the "substantiality" requirement has been imposed because "a certain degree of latitude is required in deference to the fact that unanticipated subsequent events normally cut both ways, i. e., overstated estimates will (as here) almost certainly be balanced by other offsetting understatements by the company" (Joint App. 30, quoting from Commission Opinion No. 783, Ass'n App. B-2 at 13).

In its September 1975 rate application, the Company projected revenue from wholesale short-term sales of power for Period II at approximately $11.5 million (Joint App. 3 n. 6). This figure was used to offset the $11,475,697 costs that the Company expected to incur in making short-term power purchases during high demand intervals (Joint App. 95). When this administrative hearing commenced in October 1976, the actual data for part of Period II was available. At that time, the Association intervened to show that during the first nine months of Period II, the Company already received $13,755,064 from utilities to which it made short-term sales of power. Therefore, the Association sought an adjustment of $3,273,406 in the Company's short-term purchased power expense estimate (see infra ).

The Company introduced rebuttal evidence on this subject. Its comptroller testified that these larger than projected revenues resulted from the sale of short-term power to the Tennessee Valley Authority (TVA) for $2,896,000 (Joint App. 3). Because two of TVA's generating units had been damaged by fire, as he noted, such sales were atypical and not a true reflection of normal operations. The Company also introduced actual overall wholesale cost of service data for Period II. This material showed that on the basis of the Company's rates which were in effect subject to refund, ⁶ estimated overall wholesale operating revenues for Period II had been $48,303,000 and actual operating revenues were $44,263,000. The actual adjusted revenues for that period were therefore about $4,040,000 less than estimated, while actual pre-tax expenses were about $4,400,000 less than estimated (Joint App. 97).

In his decision of June 27, 1978, the ALJ found that the Company's projected purchased power expense should be used as a basis for determining its rate of return for the period beginning February 24, 1976, to January 27, 1979. He concluded that the Company had proved that its purchased power expense estimate was a reasonable projection upon which to base rates for the time period they would be in effect, and that this estimate was not substantially in error because the Company "attempted to balance the fluctuation(s) and reflect costs that are typical of the Company's operating costs over a span of time longer than the (Period II) test year" (Joint App. 30).

Before the Commission, the Association excepted to the ALJ's decision on the ground that the disparity between the actual and projected purchased power expense required an adjustment. On June 28, 1979, the Commission handed down Opinion No. 44 rejecting the Association's claim (Joint App. 42-71). In that opinion, the Commission indicated that valid test period projections would not be considered substantially in error unless the use of such projections would yield unreasonable results (Joint App. 46). It found that the Company had established that its estimated purchased power expense for Period II was reasonable when made (Joint App. 4-5) and that the Company had presented evidence of actual total Period II expenses which supported the use of its projections as yielding a reasonable rate result (Joint App. 49). The Association's petition for rehearing was denied by order of August 27, 1979 (Joint App. 88-99). The Association has asked us to reverse the Commission's June 28, 1979, order accompanying Opinion No. 44 and to reverse the Commission's order of August 27, 1979, denying a rehearing of Opinion No. 44. We hold that the Commission's order of June 1979 resulted in just and reasonable rates and therefore rehearing was properly denied.

I. The Commission's Determination of Wholesale Electric Rates on Projected Cost of Service Data for a One-Year Test Period Was Proper.

The opinion under attack was based on test year rate-making concepts. Under the applicable regulations (n. 4 supra ), a utility wishing to raise its wholesale electric rates must file cost of service data for two time periods. Period I is to contain actual data for the most recent 12 months available. Period II, the test year, is to contain estimated cost of service data for any 12 consecutive months beginning after the end of Period I but no later than the proposed effective date of the rate filing, here February 24, 1976 (Ass'n App. A 12). The test year rule embodied in Period II was initiated by a December 14, 1972, notice from the Commission and was incorporated in the regulations in July 1973 because the historic test period exclusively used in the past was too rigid to result in the truly just and reasonable rates mandated by Section 205(a) of the Federal Power Act (16 U.S.C. § 824d(a)).

As noted, the Association has challenged the projected Period II rates submitted by the Company regarding its short-term purchased power expense because the actual figures for that period differed from the projections. In effect it contends that the Federal Power Act requires available actual cost ratemaking, but this argument was rejected in American Public Power Association v. Federal Power Commission, 522 F.2d 142 (D.C.Cir.1975), upholding these regulations. We agree with that decision that Congress did not compel the Commission to set rates solely on the basis of historic test period costs but gave the Commission "broad discretion in regard to the methodology of testing the reasonableness of rates." 522 F.2d at 146. To require a reworking of a utility's estimated costs in light of subsequent actual costs not only would result in interminable delays in already lengthy rate proceedings but would encourage dilatoriness in challengers in the hope that history would spoil the utility's estimated cost of service.

Since rate proceedings often are unfortunately of long duration, actual Period II data sometimes becomes available during the administrative hearings. However, as the Commission properly noted, actual costs are not really more reliable than projected costs because, as here, the actual costs for Period II may reflect a unique situation. Therefore the Commission requires a utility to "substantiate the Period II figure in terms of its typicality not only for the test period but also for the projected effective term of the tendered rates." ⁷ However, if a utility always had to adjust its Period II projections because of actual experience as the Association contends, the Commission would be forced to return to historic cost even though Congress did not so intend. American Public Power Association v. Federal Power Commission, supra, 522 F.2d at 146. In accord with the D.C. Circuit, we hold that public utilities may file for wholesale electric power rates "based on estimates of future costs as well as past actual costs, rather than upon past actual costs alone" (522 F.2d at 143) and that the test year method employed here was reasonable as a rate-fixing device.

II. The Company's Protected Short-Term Public Power Costs Were Typical and Its Actual Purchased Power Costs Were Atypical.

The Association submits that during the first nine months of Period II the Commission must consider the Company's $13,755,064 gain from...