Papago Tribal Utility Authority v. F.E.R.C., O

• Decision Date: 10 October 1985
• Docket Number: No. 7,84-7155,No. O,E,No. 3,R,84-7278 and 84-7310,No. 6,84-7119,No. 1,Nos. 84-7012,P,O,3,6,7,1,s. 84-7012
• Citation: 773 F.2d 1056
• Parties: PAPAGO TRIBAL UTILITY AUTHORITY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Arizona Public Service Company, Intervenors. ARIZONA PUBLIC SERVICE COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Arizona Power Authority, et al., Intervenors. ARIZONA POWER AUTHORITY, Electrical Districtne, Electrical Districtlectrical Districtlectrical Districtoosevelt Irrigation District, Buckeye Water Conservation District, Maricopa County Municipal Water Conservation Districtetitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1056

773 F.2d 1056

PAPAGO TRIBAL UTILITY AUTHORITY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Arizona Public Service Company, Intervenors.

ARIZONA PUBLIC SERVICE COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Arizona Power Authority, et al., Intervenors.

ARIZONA POWER AUTHORITY, Electrical District No. One,

Electrical District No. 3, Electrical District No. 6,

Electrical District No. 7, Roosevelt Irrigation District,

Buckeye Water Conservation District, Maricopa County

Municipal Water Conservation District No. 1, Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent.

Nos. 84-7012, 84-7119, 84-7155, 84-7278 and 84-7310.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Dec. 14, 1984.

Decided Oct. 10, 1985.

Arnold D. Berkeley, Richard I. Chaifetz, Washington, D.C., for petitioners.

Arlene Pianko Groner, Washington, D.C., William H. Satterfield, Gen. Counsel, Jerome M. Feit, Sol., Arlene Pianko Groner, Atty., F.E.R.C., Washington, D.C., for respondent.

Melvin Richter, James T. McManus, Wright & Talisman, Daniel J. Wright, Brian J. McManus, Reid & Priest, Washington, D.C., for intervenors.

On Petition for Review of Orders of the Federal Energy Regulatory Commission.

Before WRIGHT and POOLE, Circuit Judges, and TAKASUGI, District Judge. ^*

POOLE, Circuit Judge:

The Arizona Public Service Company (APS), a utility company that supplies power to most of Arizona, and several of its wholesale customers, appeal from two ratemaking decisions of the Federal Energy Regulatory Commission (FERC). APS had proposed a rate increase that the wholesale customers opposed. APS and the wholesale customers now challenge various aspects of the FERC's resolution of the ratemaking dispute.

FACTS

A. The Parties

APS is an investor-owned public utility that sells wholesale and retail electricity to customers throughout Arizona. Its wholesale sales are regulated by the FERC under the Federal Power Act, 16 U.S.C. Secs. 824 et seq. The remaining petitioners are all wholesale purchasers of electricity from APS. Papago Tribal Utility Authority (Papago) provides electrical service for the Papago Indian reservation located near Tucson, Arizona. Arizona Power Authority (APA) is a state agency that provides electricity to municipalities and other jurisdictions within Arizona. The districts primarily provide electricity for pumping water used in irrigation.

B. The Proceedings

On December 18, 1980, APS filed proposed wholesale rate increases with the FERC. The proposed increases amounted On February 27, 1981, the FERC issued an order allowing the rate increases to take effect as of March 2, 1981, subject to APS' promise to refund any amounts collected under rates that proved to be excessive. The FERC granted motions of Papago, APA, and the districts to intervene, and set the matter for a hearing before an administrative law judge (ALJ).

to $14.7 million, or 25.5 percent. Papago, APA, and the districts challenged the proposed rate increases and moved to intervene in the matter.

The hearing ("phase I") was convened on November 17, 1981, and concluded a month later. Among the issues included were whether the FERC's "test year" procedures should be modified to reflect certain planned sales of power by APS, whether the savings from certain of APS' investment tax credits should be passed on to ratepayers, and whether ratepayers should be required to pay for the construction of Palo Verde nuclear power plant.

On March 8, 1982, before the ALJ had disposed of the case, the FERC's Staff Counsel moved to reopen the matter for the purpose of exploring ratemaking issues arising out of a sale of tax benefits by APS. The transaction was structured so that APS sold its newly completed Cholla 4 steam electric generating station to General Electric Company (General Electric) for a $50.6 million cash downpayment and a note that provided for installment payments by General Electric. General Electric immediately leased Cholla 4 back to APS, the lease payments equaling the installment payments. The net result was that General Electric paid $50.6 million for the tax benefits of owning Cholla 4, pursuant to the Economic Recovery Tax Act of 1981 (ERTA), while APS retained use and control of the facility. The ALJ ordered that a second hearing be held ("phase II") to consider the Cholla 4 transaction. The phase II hearing was held on May 17-21, 1982.

On October 15, 1982, the ALJ issued the decision in phase I. On February 25, 1983, the ALJ issued the decision in phase II. The FERC affirmed both decisions, and the parties timely appealed to this court, where their appeals were consolidated.

DISCUSSION

I. STANDARD OF REVIEW

In a complex ratemaking case such as the present one, we defer to the FERC's substantial expertise. See Gainesville Utilities Dep't. v. Florida Power Corp., 402 U.S. 515, 528, 91 S.Ct. 1592, 1599, 29 L.Ed.2d 74 (1971). The findings of the Commission as to the facts, if supported by substantial evidence, shall be conclusive. 16 U.S.C. Sec. 8251 (1982); Cities of Riverside and Colton v. FERC, 765 F.2d 1434, 1438 (9th Cir.1985). Moreover, "the breadth and complexity of the Commission's responsibilities demand that it be given every reasonable opportunity to formulate methods of regulation appropriate for the solution of its intensely practical difficulties. * * * [T]herefore * * * the Commission's orders may not be overturned if they produce 'no arbitrary result.' " Nevada Power Co. v. FPC, 589 F.2d 1002, 1005-06 (9th Cir.1979) (quoting Permian Basin Area Rate Cases, 390 U.S. 747, 790-92, 88 S.Ct. 1344, 1372-73, 20 L.Ed.2d 312 (1968)); see Cities of Riverside and Colton, 765 F.2d at 1438. "If the total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry under the Act is at an end. * * * [T]he Commission's order * * * is the product of expert judgment which carries a presumption of validity." Nevada Power, 589 F.2d at 1006 (quoting FPC v. Hope Natural Gas Co., 320 U.S. 591, 602, 64 S.Ct. 281, 287, 88 L.Ed. 333 (1944)). In reviewing a Commission order, the court has three responsibilities.

First, it must determine whether the Commission's order, viewed in light of the relevant facts and of the Commission's broad regulatory duties, abused or exceeded its authority. Second, the court must examine the manner in which the Commission has employed the methods of regulation which it has itself selected, and must decide whether each of the order's essential elements is supported by substantial evidence. Third, the court must determine whether the order may reasonably be expected to maintain financial integrity, attract necessary capital, and fairly compensate investors for the risks they have assumed, and yet provide appropriate protection to the relevant public interests * * * * The court's responsibility is not to supplant the Commission's balance of these interests with one more nearly to its liking, but instead to assure itself that the Commission has given reasoned consideration to each of the pertinent factors.

Permian Basin Area Rate Cases, 390 U.S. 747, 791-92, 88 S.Ct. 1344, 1372-73, 20 L.Ed.2d 312 (1968).

II. PHASE I OF THE PROCEEDINGS

A. Application of the Test Year Procedure.

When a regulated utility proposes a wholesale rate increase, the FERC requires the utility to submit cost of service data for two time periods. Period I contains actual data for the most recent twelve months. Period II, the test year, contains estimated cost of service data for any twelve consecutive months beginning after the end of Period I but no later than the proposed effective date of the rate filing. 18 C.F.R. Sec. 35.13 (1984); Indiana Municipal Electric Association v. FERC, 629 F.2d 480, 481 (7th Cir.1980). The FERC adopted the test year approach because the historic test period exclusively used in the past was too rigid to result in just and reasonable rates. Id. If, as is often the case, the actual data for the test year becomes available during the course of ratemaking proceedings, the FERC need not adjust the test year estimates. Boroughs of Ellwood City v. FERC, 731 F.2d 959, 966 (D.C.Cir.1984). Rather, the FERC determines whether the test year estimates were reasonable when they were made. If so, the FERC will follow the estimates unless they are substantially in error and would yield unreasonable results. Id.; Indiana Municipal Electric Association, 629 F.2d at 483-85.

In December, 1980, when APS filed its proposed rate increases with the FERC, it submitted projected financial data for 1981 as its test year estimates. Those test year estimates did not include revenues that APS was planning to receive in the future from post-test year layoff sales of power to third parties. Papago challenges the FERC's refusal to provide an automatic rate adjustment of APS' rates for revenues received from layoff sales which occur after the test year. Papago contends that APS will be paid twice for the same capacity if no such provision is made because the test year estimates included the costs associated with the capacity that will be sold to third party purchasers in the future.

The ALJ found that the post-test year layoff sales should not be considered part of this case, and ruled that the issue was moot. Rather, the ALJ found that the issue should be reserved for separate proceedings arising out of a rate increase filed by APS on April 29, 1982. In affirming the ALJ's decision, the Commission held that whether or not the issue was moot, the facts were not egregious enough to warrant a departure from its "longstanding policy" of determining rates based on test year estimates. Indeed, the Commission stated that it might not be fair to require a credit for post-test year layoff sales without considering possible post-test year cost increases.

As the Commission recognized, Papago's concern that APS would be paid twice for the same capacity...