Kentucky Utilities Co. v. F.E.R.C.

• Decision Date: 03 May 1985
• Docket Number: No. 84-1028,84-1028
• Citation: 760 F.2d 1321
• Parties: KENTUCKY UTILITIES COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Cities of Barbourville, et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1321

760 F.2d 1321

245 U.S.App.D.C. 297

KENTUCKY UTILITIES COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Cities of Barbourville, et al., Intervenors.

No. 84-1028.

United States Court of Appeals, District of Columbia Circuit.

Argued Dec. 6, 1984.

Decided May 3, 1985.

Leonard W. Belter, Washington, D.C., with whom Malcolm Y. Marshall, Louisville, Ky., was on the brief, for petitioner.

A. Karen Hill, Atty., F.E.R.C., Washington, D.C., with whom Jerome M. Feit, Sol., F.E.R.C., Washington, D.C., was on the brief, for respondent.

Thomas C. Trauger, James N. Horwood and Patricia E. Stack, Washington, D.C., were on the brief, for intervenors Cities of Barbourville, et al.

Before ROBINSON, Chief Judge, STARR, Circuit Judge, and WILKEY, ^* Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge STARR.

STARR, Circuit Judge:

This petition for review takes us once again into the labyrinthine depths of ratemaking regulation in the electric utility industry. Specifically, we are called upon to determine whether Kentucky Utilities Company, an electric utility subject to the jurisdiction of the Federal Energy Regulatory Commission (FERC or the Commission), may include in its rate base capitalized carrying charges on investment in a new power plant to the extent that such carrying charges were incurred after the plant went into service but prior to the effective date of the new rates. In the Commission's Initial Decision, the Administrative Law Judge (ALJ) held that such charges were not recoverable. The Commission affirmed the ALJ's decision without opinion. After its petition for rehearing was summarily denied, Kentucky Utilities Company filed a petition for review in this court. For the reasons that follow, we deny the petition.

I

Kentucky Utilities Company (KU) is an investor-owned electric utility. It generates and supplies electricity to a number of retail and wholesale customers; among the latter are the intervenors, various small communities or entities served by KU, referred to collectively as the Kentucky Municipalities. At a cost of over $250 million, KU constructed its Ghent 3 generating plant, a 500 megawatt coal-fired unit. The plant was placed in service on May 31, 1981; as of that date, just over $28 million of the construction cost represented accumulated "AFUDC." ¹ AFUDC, which is shorthand for "allowance for funds used during construction," is a method of deferring, in a capital account, costs associated with plants under construction for inclusion in a utility's rate base once the plant is put into service. ² In March 1981, shortly before the Ghent 3 plant was to go into service, KU submitted to FERC a revised schedule for its wholesale rates. The rate filing, designated WPS-81, carried a proposed effective date of June 1, 1981. The new rates reflected, for the first time, inclusion of the Ghent 3 unit in KU's rate base.

Had FERC allowed KU's proposed new rates to become effective on the date sought by the utility, the present case presumably would not have arisen; instead, there would have been only a one-day delay between the time the Ghent 3 facility went into service (May 31) and the time the new rates reflecting the new plant became effective (June 1). FERC's initial examination of the filing, however, led the Commission to conclude that KU's proposed rate increase was likely to be more than ten percent in excess of the "just and reasonable" amount permitted by the Federal Power Act ("the Act"), 16 U.S.C. Sec. 791a et seq. (1975), and applicable Commission regulations. Acting pursuant to its authority under section 205(e) of the Act, 16 U.S.C. Sec. 824d(e), FERC suspended the proposed rates for the maximum period allowable, namely five months. In consequence, instead of becoming effective on June 1, 1981, the new rates did not go into effect until November 21, 1981. The result of this FERC-imposed suspension period was to preclude KU from enjoying, as to its jurisdictional rate base, a return on its investment in the completed Ghent 3 unit for that five-month period.

The present case arises from KU's effort, in a later rate filing, to recoup the AFUDC it accrued during the five-month period when its earlier WPS-81 filing was suspended. On July 23, 1982, KU filed with FERC a proposed revision of its wholesale rates. Included within the jurisdictional rate base was a sum--$1,568,000--representing the AFUDC claimed by KU to have accrued during the earlier suspension period. Once again, the Commission suspended the proposed new rates, which eventually became effective in a two-step process on September 23, 1982 and February 22, 1983. Certain of KU's wholesale customers, including the Kentucky Municipalities, challenged a number of items contained in the new filing, but all issues save for the present one were resolved in a compromise settlement.

The remaining issue--KU's claimed right to accrue AFUDC after the Ghent 3 plant had gone into service--was litigated before an Administrative Law Judge. In August 1983, the ALJ issued an Initial Decision, rejecting KU's contentions that it should be allowed to recover the "lost" AFUDC. The ALJ set forth three legal grounds on which KU's claim, in her view, failed. First, the ALJ concluded that no AFUDC accrual could be permitted for ratemaking purposes once a plant leaves the status of construction work in progress (CWIP) and becomes operational. See supra n. 2. Under this approach, a utility irrevocably loses the right to accrue AFUDC on the date the new facility actually enters service. Second, in the ALJ's view, the cost of service not recovered during a suspension period simply could not, under settled ratemaking principles, be recovered in a subsequent rate filing. Finally, the ALJ concluded that, as a general rule, the Commission adheres to its accounting principles in ratemaking, and that those principles preclude AFUDC accrual for post-CWIP periods. Finding KU's petition without support in law, the ALJ treated it as a petition for relief in equity, but denied relief on the equitable ground that KU must bear the consequences of its own decisions with respect to the timing and magnitude of its rate increase request. Had KU's rate increase been less ambitious, the ALJ reasoned, the Commission would not have been moved to invoke the full extent of its suspension powers.

We agree with the branch of the ALJ's holding, affirmed without opinion by the Commission, that the accrual of AFUDC ceases when a new plant comes into service. In consequence, we need not and do not decide whether the ALJ was correct in holding alternatively that "[t]he cost of service not recovered during a suspension period cannot be recouped in a subsequent filing." Initial Decision at 7, Joint Appendix at 11. ³ We do, however, address the third ground of the agency's decision, namely the propriety of the Commission's adherence to certain accounting principles in the setting of ratemaking, to the extent that FERC's decision in this respect bears upon our determination that as a fundamental principle of ratemaking, accrual of AFUDC ceases as soon as the new plant becomes operational.

II

We turn first to the question whether the Commission was correct in holding that, pursuant to longstanding Commission policy, accrual of AFUDC must stop when a new plant becomes used and useful. ⁴ Following consideration of that issue, we will examine the question whether, under the circumstances present in this case, it was appropriate for the Commission to adhere, in a ratemaking context, to its general principles of accounting.

A

No less than fifty years of agency precedent provide support for the Commission's refusal to permit KU to continue to accrue AFUDC once its Ghent 3 unit became operational. In a case of considerable vintage FERC's predecessor, the Federal Power Commission (FPC), embraced the principle that once a new plant or facility has commenced operation, carrying charges on that new investment cannot be charged to a capital account. Chelan Electric Co., 1 F.P.C. 91, 97 (1933). Two years later, in Safe Harbor Water Power Corp., Licensee, 1 F.P.C. 230, 249-51, 254 (1935), the Commission held that costs associated with the construction of a new plant are to be computed up to the date the plant goes into commercial operation.

If the FPC somehow failed to make this rule clear in Chelan and Safe Harbor, ⁵ the Supreme Court subsequently explained, more broadly, that an inability to obtain a return on investment through operating revenues does not provide justification for capitalizing the loss for inclusion in a later rate base. See FPC v. Natural Gas Pipeline Co., 315 U.S. 575, 590, 62 S.Ct. 736, 745, 86 L.Ed. 1037 (1942). The rationale for the Supreme Court's conclusion--and that of the Commission here--is that the risk of failure to earn a return on investment remains at all times on the utility and its investors, not on the ratepayers. This risk is, indeed, built into the procedures established by the Commission for processing requests for new and increased rate bases. This bedrock principle of risk allocation was restated by the Court in FPC v. Tennessee Gas Transmission Co., 371 U.S. 145, 83 S.Ct. 211, 9 L.Ed.2d 199 (1962), where the Court observed that a utility ⁶ "initiating an increase in rates under Sec. 4(d) assumes the hazards involved in that procedure. It bears the burden of establishing its rate schedule as being 'just and reasonable.' " 371 U.S. at 152, 83 S.Ct. at 215.

Undaunted by all this, KU argues that the Commission's refusal to allow it, in effect, to "recoup its losses by making retroactive the higher rate subsequently allowed," Tennessee Gas, supra, 371 U.S. at 153, 83 S.Ct. at 215, represents a departure from FERC's policy of cost-based rates and that the Commission is therefore required to give a reasoned explanation of what KU deems to be the Commission's novel approach. We cannot, however, fault the...