El Paso Elec. Co. v. Federal Energy Regulatory Commission
| Decision Date | 08 February 1982 |
| Docket Number | No. 80-1763,80-1763 |
| Citation | 667 F.2d 462 |
| Parties | EL PASO ELECTRIC COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. . Unit A * |
| Court | U.S. Court of Appeals — Fifth Circuit |
Carl W. Ulrich, Chapman, Duff & Paul, Washington, D. C., for petitioner.
John A. Cameron, Jr., Atty. F.E.R.C., Washington, D. C., for respondent.
Miller, Balis & O'Neil, P.C., Robert A. O'Neil, Washington, D. C., for Rio Grande Elec. Co-op., intervenor.
Petition for Review of Orders of the Federal Energy Regulatory Commission.
Before CHARLES CLARK, GARZA and SAM D. JOHNSON, Circuit Judges.
We are called upon to review Opinion Nos. 85 1 and 85-A 2 of the Federal Energy Regulatory Commission 3 denying petitioner's request to include within its rate base expenditures on construction work in progress and establishing 13.75 percent as the rate of return to which petitioner is entitled on common equity. Having found no merit to the contentions raised by the petitioner, we affirm the decision of the Commission.
Because El Paso challenges the exercise by the Commission of its authority to regulate the recovery of certain carrying charges on capital used in the construction of utility plants, a review of the ratemaking principles involved in the Commission's determination is warranted.
Normally, a regulated utility is entitled to recover from its ratepayers certain costs related to the construction of utility plants. One of the costs which a utility recovers from its ratepayers is the debt interest and reasonable equity return on the capital investment used to finance construction. There are, however, two mutually exclusive ratemaking methodologies by which these carrying charges on construction capital may be recovered in rates.
One method capitalizes the carrying charges incurred during the construction period as an Allowance for Funds Used During Construction (AFUDC). Under this method the cost of the completed plant will include all carrying charges recorded during the construction period, as well as the direct costs of land, labor and construction materials. Actual rate payments from ratepayers to cover the carrying charges begin only when the completed plant goes into operation. Then, the entire cost of plant (including AFUDC) is added to the rate base, which earns a rate of return on investment and is depreciated over the life of that plant.
The second method for recovering carrying charges incurred during the construction period permits the utility to include the uncompleted plant within the rate base. Under this method construction work in progress (CWIP) is treated as though it were a plant in service. The utility recovers carrying charges currently from ratepayers, rather than adding them to the cost of construction. The carrying charges are determined by the allowable return (debt and equity) that is applied to utility investment in an operating plant. The return on CWIP is recorded as income on a current basis (just as AFUDC) and actual cash payments are made by the ratepayers currently (unlike AFUDC).
Each method assures the utility that it will recover from ratepayers the carrying charges associated with construction investment. The difference between the two concerns the timing of that recovery. Traditionally, the Commission has required a utility to recover its carrying charges under the AFUDC method. The underlying reason for this policy is that the CWIP method, unlike AFUDC, produces a mismatch between the benefits of the construction program, which inure to future ratepayers, and the costs of financing that program, which are borne by present customers.
In Order Nos. 555 and 555-A, 4 the Commission set forth three limited situations in which it would permit a utility to recover construction costs pursuant to the CWIP methodology. Two of these permit relief under criterion not presented by these facts: where CWIP is associated with construction of (1) pollution control facilities and (2) fuel conversion facilities. Order Nos. 555 and 555-A also permit CWIP relief as part of a very limited third exception: where a utility "clearly and convincingly" establishes that it is in "severe financial distress" which "cannot otherwise be alleviated without materially increasing the cost of electricity to customers." Under this narrowly defined exception, a utility is permitted to include within its present rate base certain costs of work in progress permitting it to obtain the necessary cash flow to avoid severe financial difficulty.
Petitioner, El Paso Electric Company (El Paso) is a vertically-integrated electric utility company providing service in Texas and New Mexico, in and around the city of El Paso. Its sales of electricity are subject to rate regulation by three separate jurisdictions. The Public Utility Commission of Texas regulates sales to Texas retail customers who account for 78 percent of El Paso's total annual sales. The New Mexico Public Service Commission also regulates retail sales to customers within its jurisdiction accounting for approximately 18 percent of El Paso's annual sales. El Paso has two wholesale customers including intervenor Rio Grande Electric Cooperative which receive service subject to FERC regulation. This wholesale class accounts for the remaining 4 percent of El Paso's total annual sales.
El Paso is a joint participant in the Arizona Nuclear Power Project (Palo Verde) with an undivided 15.8 percent share. The three generating units of Palo Verde are scheduled to go into service in 1983, 1984, and 1986, at which time it will be the largest nuclear generating station in the world. On July 1, 1977, El Paso filed a proposed unilateral rate increase for service to Rio Grande and its other wholesale customer with the Commission. This increase was based on both the "adjusted operating results of a 1976 test year," and the inclusion within the rate base of CWIP expenditures related to the Palo Verde project. El Paso's rate request was founded upon its allegation that CWIP relief was justified pursuant to the "severe financial distress" exception of Order No. 555.
El Paso's 1977 application for CWIP relief was first heard by an administrative law judge, and 21 days of hearing were conducted. The Commission staff and Rio Grande opposed the application. The ALJ issued an initial decision in August, 1979 denying CWIP relief. El Paso then requested expeditious Commission review of the decision, and on May 19, 1980, the Commission issued Opinion No. 85, affirming the ALJ's decision. This opinion also granted El Paso a 13.75 percent return on common equity, and denied its request to reopen the record. On July 17, 1980, the Commission issued Opinion No. 85-A, which denied rehearing. The instant petition for review followed.
On April 24, 1981, El Paso filed a second application to the Commission for increased rates and CWIP relief asserting new and material evidence in support of its claim of severe financial distress. The Commission accepted El Paso's application for increased rates by order of June 30, 1981 5 but deferred a hearing to consider its CWIP request until after the Commission had completed its anticipated rulemaking addressing the CWIP issue. On July 27, 1981, the Commission issued a notice of proposed rulemaking 6 substantially revising the Commission's method of authorizing CWIP relief currently governed by Order No. 555. This rulemaking proceeding has yet to be concluded and no final rule has been issued.
El Paso initially asserts that the Commission erred in denying El Paso the CWIP relief it requested in its 1977 rate application. The Commission argues, however, that this issue is mooted by El Paso's 1981 application for CWIP relief which has been granted a hearing by the Commission and the pendency of the Commission's rulemaking proceeding which will likely establish new procedures for allowing CWIP relief. Because we are not persuaded by the Commission's argument, we find that El Paso's claim for CWIP relief has not been mooted by subsequent events.
Threshold questions of mootness, standing, ripeness and political questions are admittedly all part of the concept of "justiciability" which the Supreme Court has recognized as "a concept of uncertain meaning and scope." Flast v. Cohen, 392 U.S. 83, 95, 88 S.Ct. 1942, 1950, 20 L.Ed.2d 947, 959 (1968). The mootness doctrine, as an element of justiciability, is comprised of two distinct components. The most recognizable component is jurisdictional, founded in the Article III constitutional requirement that federal courts decide only "cases" or "controversies." See Franks v. Bowman Transportation Co., 424 U.S. 747, 755, 96 S.Ct. 1251, 1259, 47 L.Ed.2d 444, 456 (1976). The second component consists of "policy considerations" which may in an appropriate case effect a court's determination as to whether a particular case should be litigated in the federal court at a particular time. See, International Society for Krishna Consciousness of Atlanta v. Eaves, 601 F.2d 809 (5th Cir. 1979); see also Franks v. Bowman Transportation Co., supra 424 U.S. at 756 n.8, 96 S.Ct. at 1260 n.8; Dow Chemical Company v. EPA, 605 F.2d 673 (3d Cir. 1979); Chamber of Commerce of United States of America v. United States Department of Energy, 627 F.2d 289 (D.C.Cir.1980).
The precise issue before us is whether El Paso's subsequent application for CWIP upon which the Commission has granted, but deferred, a hearing and the notice of proposed rulemaking restating the standards under which CWIP relief can be granted moot or extinguish the necessity for us to determine the propriety of the Commission's prior denial of CWIP relief pursuant to Order No. 555, the vitality of which is seriously jeopardized by the Commission's proposed rulemaking.
It is apparent that at this point in time, the facts before us present a dispute which is sufficiently alive and concrete so as to create a...
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