Maine Public Service Co. v. Federal Power Commission

• Decision Date: 26 June 1978
• Docket Number: No. 77-1438,77-1438
• Citation: 579 F.2d 659
• Parties: MAINE PUBLIC SERVICE COMPANY, Petitioner, v. FEDERAL POWER COMMISSION, Respondent.
• Court: U.S. Court of Appeals — First Circuit

Page 659

579 F.2d 659

26 P.U.R.4th 299

MAINE PUBLIC SERVICE COMPANY, Petitioner, v. FEDERAL POWER COMMISSION, Respondent.

No. 77-1438.

United States Court of Appeals, First Circuit.

Argued March 7, 1978.

Decided June 26, 1978.

Leon A. Allen, Jr., Washington, D. C., with whom Roger A. Putnam, Portland, Maine, David R. Poe, LeBoeuf, Lamb, Leiby & MacRae, New York City, and Verrill & Dana, Portland, Maine, were on brief, for petitioner.

John J. Lahey, Atty., Washington, D. C., with whom Robert R. Nordhaus, Gen. Counsel, and Howard E. Shapiro, Sol., Washington, D. C., were on brief, for respondent.

Before COFFIN, Chief Judge, CAMPBELL and BOWNES, Circuit Judges.

LEVIN H. CAMPBELL, Circuit Judge.

Maine Public Service Company (MPSC), an electric utility, petitions for review of Federal Power Commission ¹ orders denying it permission to retain a surcharge collected from its wholesale customers in 1975-76. The object of the surcharge was to recover fuel costs which were not collectable by operation of the fuel adjustment clause that forms part of MPSC's rate schedules. ²

At the root of the present dispute is the rapid increase in fuel prices which took place in the mid-1970's causing MPSC to shift in 1975 from one fuel adjustment clause to another. Under the earlier formula, customers had been billed monthly on the basis of fuel prices averaged over a previous twelve-month period. Given the upward surge of prices, this formula resulted in mounting losses to the utility, which, because of the time lag, was obliged to bill its customers on the basis of price data that was unrealistically low by the time each successive bill was computed. To avert this problem MPSC finally adopted a new fuel adjustment formula calling for billings based on the price of fuel just one month prior to the billing month. By requiring reimbursement based on prices closer in time to the billing date, and hence more nearly in tune with actual costs at that moment, the utility could obtain from its customers more nearly what was needed to offset the current cost of fuel. But while adoption of the new formula in 1975 enabled the utility to keep from going deeper in the hole (assuming continued price increases), it provided no means to recoup the unbilled fuel costs which had been permitted to build up while the old clause was in effect: indeed, switching to the new formula and thus interrupting the operation of the old can be said, in a sense, to have "frozen" the collection of the unbilled costs which by then amounted to nearly half a million dollars, a sum equal to one-fifth of MPSC's annual revenues.

MPSC's attempted answer to the problem was to impose upon its wholesale customers ³ for a twelve-month period in 1975-76 the surcharge presently in dispute this being in addition to regular fuel adjustment charges computed under the new formula. The surcharge was calculated so as to recover the sum total of the previously uncollected charges. Intended to be spread among the various customers' bills during the twelve months, the surcharge was placed on file with the Commission as part of MPSC's rate schedule.

The Commission permitted MPSC to collect the surcharge provisionally. But it ordered a hearing to review the legality of the surcharge and eventually disapproved it, ordering MPSC to make a full refund to its customers. We are now asked to review the correctness of that administrative decision.

In the Commission's view, the build-up of unbilled fuel costs had been due simply to misjudgment by MPSC, which was free to have adopted a more satisfactory fuel adjustment formula than it did in the period prior to 1975. The Commission sees the surcharge as impermissible "reparations" for the consequences of an ill-considered rate formula.

MPSC, on the other hand, likens the old fuel clause to a deferred billing system which was simply too slow to cope with the rapidly rising, inflationary market. As under the old clause MPSC would over time have recovered all or most of the fuel costs attributable to the relevant periods (whatever cash flow problems it might experience in the meantime), its customers should not so MPSC argues receive the windfall of never having to pay the full actual costs of fuel. Thus MPSC views the surcharge as an equitable device to bridge the earlier and later formulae, and permit it to catch up in its billings.

I

While the foregoing suggests the essence of the dispute, amplification of the facts is in order. Until 1972, MPSC furnished electricity to Maine retailers under rates regulated by the Maine Public Utility Commission. Because of a new ownership interest, MPSC in late December 1972 became subject to Commission regulation, See 16 U.S.C. §§ 824a(f), 824b. Accordingly, on June 6, 1973, MPSC tendered for filing its wholesale rate schedule, Rate 0-1, to the Commission. Rate 0-1 included a fuel cost adjustment clause, See supra, by which MPSC undertook to adjust the fuel charge comprised in its base rate to reflect cost fluctuations in its own purchases of fuel and energy. ⁴ The adjustment was to be made, in essence, by (1) calculating the difference between fuel costs actually incurred over a given one-year period, and the fuel costs covered by the base rate over the same one-year period; (2) dividing that cost differential by the total number of kilowatt hours sold by MPSC during that year, to give a figure representing MPSC's increased fuel expenditure per kilowatt hour sold in that year; and (3) applying the adjustment figure in cents per kilowatt hour, as determined in step (2), to the number of kilowatt hours used by the customer in the billing month. The product would then be added to the customer's base rate to find the amount due. The one-year period relied on in step (1) would "roll" forward as the billing month changed: the formula called for price data from the twelve months ending with the second month preceding the billing month. ⁵ Thus, the cost increases borne by MPSC over the year preceding the billing month would gradually be reflected in the customer's bill.

MPSC explains that this "twelve month rolling average" method

"operated to stretch out the recovery of a particular month's fuel costs over a period of a year, with the final portion of recovery being some fourteen months after the costs were actually incurred. In times of relatively stable fuel prices, the twelve-month rolling average tends to damp out seasonal variations in the price of fuel. In times of sharply rising fuel prices, however, this method causes a tremendous buildup of unbilled fuel costs which cannot be fully recovered unless fuel prices fall."

In this case, prices rose sharply in the wake of the Arab oil embargo, and did not recede thereafter. MPSC was stranded, consistently paying out more for fuel than it was receiving for fuel from its customers. Despite its predicament, MPSC continued use of its twelve-month rolling average until March 15, 1975, when it finally proposed a different method of calculating a fuel cost adjustment. Prior to the filing of the new clause, the Commission and MPSC engaged in correspondence concerning various other aspects of MPSC's twelve-month rolling average clause, a rulemaking on the general topic being then in progress. ⁶ MPSC has since claimed that the regulatory confusion which in this period surrounded the standards for fuel clauses generally was a factor which discouraged it from moving more rapidly to streamline its old clause.

The new fuel clause filed early in 1975 and still in effect differs significantly from the old. It offers increased sensitivity to the volatile fuel costs that MPSC must bear, since the clause operates on the basis of more current data. The new clause calculates the total energy costs for the month preceding the billing month, and divides that by the total sales in kilowatt hours for the month preceding the billing month, to give the actual energy costs per kilowatt hour for that month. It then takes the difference between that unit cost and the fuel cost reflected in the base rate, producing a cents per kilowatt hour figure representing the increase (or decrease) from the base rate for fuel that the Company has had to bear during the month preceding the billing month. That cents per kilowatt hour figure is then applied to the number of kilowatt hours used by the customer in the billing month to determine how much in addition to the base rate he must pay for the electricity used during that month. This method keeps the Company's revenues and expenditures in closer accord than did the twelve-month rolling average. Its institution also operated to "freeze" the ever-widening gap between revenues and operating costs that had caught MPSC in a serious cash-flow squeeze.

When the new fuel clause was proposed, the gap between revenues collected under the old clause and actual costs amounted to $456,647. One year and nine months had passed since MPSC's initial filing with the Commission. MPSC sought to bridge the gap by filing with its revised adjustment clause a surcharge under which MPSC would add to customers' bills twelve equal monthly installments of the customers' pro-rated portions of MPSC's unbilled expenditures. The Commission accepted the filing on May 5, 1975, and allowed the new clause and the surcharge to go into effect subject to refund on May 11, after a one-day suspension. MPSC collected the surcharge over the twelve months for which it was designed, and terminated its collections thereunder in May 1976.

After provisionally accepting the filing, the Commission instituted a proceeding under section 205(e) of the Act, 16 U.S.C. § 824d(e), to determine the lawfulness of the surcharge and of an element of the adjustment clause whose invalidity is no longer contested by MPSC. On September 30, 1976, after a hearing in January of that year, an Administrative Law Judge (ALJ) issued an "Initial Decision" finding the surcharge and the element of the...