Mid-Tex Elec. Co-op., Inc. v. F.E.R.C., MID-TEX

CourtUnited States Courts of Appeals. United States Court of Appeals (District of Columbia)
Writing for the CourtBefore BORK and STARR; BORK
Citation773 F.2d 327
Parties, 70 P.U.R.4th 62 ELECTRIC COOPERATIVE, INC., et al., Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, West Texas Utilities Company, Southwestern Electric Power Company, Edison Electric Institute, Potomac Electric Power Company, Dennis J. Roberts, II, Attorney General of the State of Rhode Island, et al., Intervenors. ALABAMA ELECTRIC COOPERATIVE, INC., et al., Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, West Texas Utilities Company, Edison Electric Institute, Southwestern Electric Power Company, Potomac Electric Power Company, Dennis J. Roberts, II, Attorney General of the State of Rhode Island, et al., Intervenors. AMERICAN PUBLIC POWER ASSOCIATION, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, West Texas Utilities Company, Southwestern Electric Power Company, Edison Electric Institute, Attorney General of the State of Rhode Island, et al., Potomac Electric Power Company, Intervenors. NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Edison Electric Institute, Attorney General of the State of Rhode Island, et al., Southwestern Electric Power Company, et al., Potomac Electric Power Company, Intervenors. PUBLIC SYSTEMS, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Edison Electric Institute, Southern California Edison Company, Southwestern Electric Power Company, et al., Dennis J. Roberts, II, Attorney General of the State of Rhode Island, et al., State Corporation Commission of the State of Kansas, Intervenors. CITIES OF ALTAMONT, Bethany, Bushnell, Cairo, Carmi, Casey, Flora, Greenup, Marshall, Metropolis, Newton, Rantoul, and Roodhouse, Illinois; the Town of Norwood, Massachusetts, the New Mexico Cities of Gallup and Farmington; and the Pennsylvania Cities of Ellwood City, Grove City, and Zelienople, Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Edison Electric Institute, Southwestern Electric Power Compa
Docket Number83-2106,83-2158 and 83-2248,MID-TEX,83-2134,83-2151,Nos. 83-2058
Decision Date04 October 1985

Page 327

773 F.2d 327
249 U.S.App.D.C. 64, 70 P.U.R.4th 62
MID-TEX ELECTRIC COOPERATIVE, INC., et al., Petitioners,
v.
FEDERAL ENERGY REGULATORY COMMISSION, Respondent,
West Texas Utilities Company, Southwestern Electric Power
Company, Edison Electric Institute, Potomac Electric Power
Company, Dennis J. Roberts, II, Attorney General of the
State of Rhode Island, et al., Intervenors.
ALABAMA ELECTRIC COOPERATIVE, INC., et al., Petitioners,
v.
FEDERAL ENERGY REGULATORY COMMISSION, Respondent,
West Texas Utilities Company, Edison Electric Institute,
Southwestern Electric Power Company, Potomac Electric Power
Company, Dennis J. Roberts, II, Attorney General of the
State of Rhode Island, et al., Intervenors.
AMERICAN PUBLIC POWER ASSOCIATION, Petitioner,
v.
FEDERAL ENERGY REGULATORY COMMISSION, Respondent,
West Texas Utilities Company, Southwestern Electric Power
Company, Edison Electric Institute, Attorney
General of the State of Rhode Island, et
al., Potomac Electric Power
Company, Intervenors.
NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION, Petitioner,
v.
FEDERAL ENERGY REGULATORY COMMISSION, Respondent,
Edison Electric Institute, Attorney General of the State of
Rhode Island, et al., Southwestern Electric Power
Company, et al., Potomac Electric Power
Company, Intervenors.
PUBLIC SYSTEMS, Petitioner,
v.
FEDERAL ENERGY REGULATORY COMMISSION, Respondent,
Edison Electric Institute, Southern California Edison
Company, Southwestern Electric Power Company, et al., Dennis
J. Roberts, II, Attorney General of the State of Rhode
Island, et al., State Corporation Commission of the State of
Kansas, Intervenors.
CITIES OF ALTAMONT, Bethany, Bushnell, Cairo, Carmi, Casey,
Flora, Greenup, Marshall, Metropolis, Newton, Rantoul, and
Roodhouse, Illinois; the Town of Norwood, Massachusetts,
the New Mexico Cities of Gallup and Farmington; and the
Pennsylvania Cities of Ellwood City, Grove City, and
Zelienople, Petitioners,
v.
FEDERAL ENERGY REGULATORY COMMISSION, Respondent,
Edison Electric Institute, Southwestern Electric Power
Company, et al., Potomac Electric Power Company,
Intervenors.
Nos. 83-2058, 83-2106, 83-2134, 83-2151, 83-2158 and 83-2248.
United States Court of Appeals,
District of Columbia Circuit.
Argued Nov. 5, 1984.
Decided Sept. 24, 1985.
As Amended Oct. 4, 1985.

Page 330

Petitions for Review of Orders of the Federal Energy Regulatory commission.

Robert A. O'Neil, Washington, D.C., with whom Wallace F. Tillman, Frederic Lee Klein, Douglas F. John, Edward W. Hengerer, Ted. M. Handel and Frederick H. Ritts, Washington, D.C., were on joint brief, for petitioners Nat. Rural Elec. Co-op. Ass'n, et al. in Nos. 83-2058, 83-2134 and 83-2151. Alan H. Richardson, Washington, D.C., entered an appearance for petitioners in No. 83-2058. Mark D. Nozette, Washington, D.C., entered an appearance for petitioners in No. 83-2134.

Thomas J. Bolch, Raleigh, N.C., was on brief, for petitioners Ala. Elec. Co-op., Inc., et al., in No. 83-2106.

Thomas N. McHugh, Jr., Washington, D.C., with whom Ben Finkelstein, Washington, D.C., was on brief, for petitioner Public Systems in No. 83-2158.

Philip B. Malter, Washington, D.C., with whom Charles F. Wheatley, Jr., Washington, D.C., was on brief, for petitioners Cities of Altamont, et al. in No. 83-2248.

A. Karen Hill, Atty., F.E.R.C., Washington, D.C., with whom Jerome M. Feit, Sol., F.E.R.C. and Michael E. Small, Atty., F.E.R.C., Washington, D.C., were on brief, for respondent in Nos. 83-2058, et al.

Carl D. Hobelman, Washington, D.C., for intervenors in Nos. 83-2058, et al. Clark Evans Downs, Carolyn Y. Thompson, Edward H. Comer, Brian J. McManus and Amy S. Koch, Washington, D.C., were on joint brief, for intervenors Edison Elec. Institute, et al. in Nos. 83-2058, et al.

Edward A. Caine, Washington, D.C., was on brief, for intervenor Potomac Elec. Power Co. in Nos. 83-2058, 83-2106, 83-2134, 83-2151 and 83-2248. George M. Knapp and Edward H. Comer, Washington, D.C., entered appearances for intervenor Edison Elec. Institute in Nos. 83-2058, et al.

Dennis J. Roberts, II, Providence, R.I., Paula Savren and J. William W. Harsch, Washington, D.C., entered appearances for intervenor Dennis J. Roberts, II, Atty. Gen. of State of R.I., et al. in Nos. 83-2058, et al.

Richard M. Merriman, Washington, D.C., and Clyde E. Hirschfeld, Rosemead, Cal., entered appearances for intervenor Southern Cal. Edison Co. in No. 83-2158.

Brian J. Moline, Topeka, Kan., entered an appearance for intervenor State Corp. Com'n of the State of Kan. in No. 83-2158.

Before BORK and STARR, Circuit Judges, and CORCORAN, * United States Senior District Judge for the District of Columbia.

Opinion for the Court filed by Circuit Judge BORK.

BORK, Circuit Judge.

The petitioners in these consolidated cases are wholesale customers of electric utilities whose wholesale rates are regulated by the Federal Energy Regulatory Commission. 1 After notice and comment rulemaking, FERC ruled that electric utilities may generally include in their rate bases amounts equal to 50% of their investments in construction work in progress ("CWIP") 2. We affirm in part, and vacate and remand in part.

I.

A.

A regulated utility is, of course, entitled to recover the cost of financing the construction

Page 331

of facilities used to produce and transmit electric power. The "cost" includes interest on debt and a reasonable return on capital investment. What is controversial is the timing of this cost recovery. Under one frequently used method, the utility's rate base does not reflect investment in new facilities until they commence commercial operation. During construction, the investment and accrued carrying charges are carried in an account called "Allowance for Funds Used During Construction" ("AFUDC"). The carrying charges on debt are recorded as an offset to interest expenses, and the carrying charges on equity are recorded as current income--but in fact ratepayers are not making cash payments to the utility. When the plant begins service, the entire value of the investment, including deferred financing charges, is added to the utility's rate base. Once added to rate base, both the investment and the accrued carrying charges earn a reasonable rate of return and are depreciated over the life of the facility.

Under the CWIP method, by contrast, capital investment is added to the utility's rate base when made. Ratepayers pay a return on that investment while the facility is under construction. Thus, under the CWIP method the carrying charges are not accrued and so are not added to rate base when the facility goes into service. Only the investment itself--for which ratepayers do not begin paying until service commences--is added to rate base at that time. Thereafter a return is paid on the investment and it is depreciated over the life of the facility, just as under the AFUDC method.

Until 1976, the Commission authorized use of the AFUDC method only. In Order No. 555, 56 F.P.C. 2939 (1976), the Commission created three exceptions to the rule against CWIP in rate base. The first two exceptions allowed use of the CWIP method for "socially beneficial" investment in (1) pollution control facilities and (2) conversion of plants fueled by oil and natural gas to coal. Id. at 2943-46. The third exception allowed a utility to include CWIP in rate base if the utility made a clear and convincing showing that it was experiencing severe financial problems. Id. at 2946. At the time of the rulemaking in this case, FERC had never issued an order allowing CWIP in rate base on the basis of financial distress. Order No. 298, 48 Fed.Reg. 24,323, 24,338 (1983) (to be codified at 18 C.F.R. Sec. 35.26), Joint Appendix ("J.A.") at 1298. We upheld the rule allowing these exceptional uses of CWIP in rate base without opinion in Oglethorpe Electric Membership Corp. v. FERC, 574 F.2d 637 (D.C.Cir.1978).

In July, 1981, FERC issued a Notice of Proposed Rulemaking "to amend its regulations concerning construction work in progress." 46 Fed.Reg. 39,445 (1981) (proposed July 27, 1981), J.A. at 1. The Commission published a proposed rule in the notice, but it also discussed and sought comments on "alternative changes to our existing rule relating to CWIP." Id., J.A. at 1. The proposed rule left intact the pollution control and fuel conversion exceptions for CWIP, and focused solely on revisions to the financial difficulty exception. The proposed revisions would have set out more detailed criteria for evaluating whether a utility was financially distressed and for determining the amount of CWIP that a distressed utility could include in rate base. Id., J.A. at 2. The Commission emphasized, however, that the rulemaking was not confined to evaluation of the proposed rule: "we intend to explore in this proceeding alternatives of broader scope than financial distress as a basis for allowing CWIP in rate base, as well as alternative formulations based on financial distress." Id., J.A. at 2. Among the alternatives FERC expressly stated it would consider were (1) maintaining the status quo; (2) allowing a straight percentage of CWIP in rate base regardless of financial condition; (3) allowing CWIP for a particular plant to go into rate base for a specified period prior to the time when the plant commenced operation; (4) allowing CWIP in rate base to the extent permitted by the utility's predominant state regulatory authority;

Page 332

and (5) requiring wholesale customers to pay contributions in aid of construction in lieu of CWIP. Id. at 39,425, J.A. at 36-37.

After receiving numerous comments from interested participants, FERC issued Order No. 298 as a Final Rule. The final rule "adopts a fixed percentage approach that allows any utility to file to include up to 50 percent of all CWIP in rate base in addition to any CWIP related to fuel conversion or pollution control facilities." 48 Fed.Reg. at 24,349, J.A. at 1350.

Order No. 298 is some 151 pages long. For...

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