People's Counsel of D.C. v. Public Ser.

• Decision Date: 31 January 1984
• Docket Number: No. 82-424.,82-424.
• Citation: 472 A.2d 860
• Parties: PEOPLE'S COUNSEL OF the DISTRICT OF COLUMBIA, Petitioner, v. PUBLIC SERVICE COMMISSION OF the DISTRICT OF COLUMBIA, Respondent, Potomac Electric Power Company, Intervenor.
• Court: D.C. Court of Appeals

472 A.2d 860

PEOPLE'S COUNSEL OF the DISTRICT OF COLUMBIA, Petitioner, v. PUBLIC SERVICE COMMISSION OF the DISTRICT OF COLUMBIA, Respondent, Potomac Electric Power Company, Intervenor.

No. 82-424.

District of Columbia Court of Appeals.

Argued November 30, 1982.

Decided January 31, 1984.

Brian Lederer, Washington, D.C., with whom Elizabeth A. Noel, John T. Schell, Michael W. Beasley and Mark D. Colley, Washington, D.C., were on brief, for petitioner.

Michael E. Geltner, Washington, D.C., with whom Lloyd N. Moore, Jr., Michael D.

Newsom and Roberta Willis Sims, Washington, D.C., were on brief, for respondent.

William Dana Shapiro, Washington, D.C., with whom Edward A. Caine, Betty K. Cauley and Sylvia L. Bateman, Washington, D.C., were on brief, for intervenor.

Before NEWMAN, Chief Judge, TERRY, Associate Judge, and KELLY, Associate Judge, Retired.^*

TERRY, Associate Judge:

The People's Counsel appeals from an order of the Public Service Commission in which the Commission ruled that it had authority to approve the use of automatic fuel adjustment clauses by the Potomac Electric Power Company and that such clauses did not amount to retroactive rate-making. We reject petitioner's arguments and affirm the Commission's order.

In August 1979 the Public Service Commission issued a public notice of its intention to conduct an investigative and evidentiary hearing "for the purpose of reviewing and evaluating the reasonableness of Potomac Electric Power Company's (PEPCO) fuel adjustment clauses." At a prehearing conference the Commission considered petitions for leave to intervene and established a hearing schedule and ground rules for the upcoming proceeding. Following the conference, PEPCO, People's Counsel, and the Commission's staff filed testimony and exhibits. After eight days of hearings, the record was closed on July 30, 1980.

On April 10, 1981, the Commission issued Proposed Opinion and Order No. 7291,¹ in which it ruled that it had the power to authorize the use of fuel adjustment clauses in rate designs and that such clauses were fixed rates and did not constitute retroactive ratemaking. The Commission further found that PEPCO's fuel adjustment clauses" were just, reasonable, and nondiscriminatory. People's Counsel filed exceptions to the proposed order.

On December 23, 1981, the Commission entered Final Opinion and Order No. 7428. That order reaffirmed the Commission's earlier ruling in Proposed Order No. 7291 that it had "substantive authority to approve automatic fuel adjustment clauses." Moreover, Order No. 7428 emphasized that "[a]pproval by the Commission of a fuel adjustment clause render[ed] it applicable to fuel consumed in the future to produce energy. There [was] no element of retroactive ratemaking involved." People's Counsel's application for reconsideration of Order No. 7428 was subsequently denied by the Commission. From that denial People's Counsel appeals.

Petitioner challenges the Commission's decision on two grounds. First, petitioner maintains that the Commission exceeded the scope of its statutory authority by permitting PEPCO to use an automatic fuel adjustment clause in its rate design. In particular, petitioner contends that the fuel adjustment clause is contrary to the fundamental policies and regulatory scheme of the District of Columbia Public Utilities Act and inconsistent with the system of fixed rates which that act requires. Second, petitioner argues that the adoption of a fuel adjustment clause constitutes retroactive ratemaking because it provides for a dollar-for-dollar recovery of past fuel costs and reimburses PEPCO for them.

II

It is the Commission, not this court, which has the responsibility for setting utility rates and establishing rate designs. D.C.Code §§ 43-501, 43-601, 43-611 (1981); United States v. Public Service Comm'n, 465 A.2d 829, 832 (D.C.1983); Metropolitan Washington Board of Trade v. Public Service Comm'n, 432 A.2d 343, 350 (D.C.1981); Washington Public Interest Organization v. Public Service Comm'n, 393 A.2d 71, 75 (D.C.1978), cert. denied, 444 U.S. 926, 100 S.Ct. 265, 62 L.Ed.2d 182 (1979). In fulfilling that responsibility, the Commission must "arriv[e] at a fair balance between competing consumer and investor interests." People's Counsel v. Public Service Comm'n, 399 A.2d 43, 45 (D.C.1979); accord, People's Counsel v. Public Service Comm'n, 455 A.2d 391, 393 (D.C.1982).² Judicial review of a Commission order is "limited to questions of law, including constitutional questions; and the findings of fact by the Commission shall be conclusive unless . . . such findings . . . are unreasonable, arbitrary, or capricious." D.C.Code § 43-906 (1981). See, e.g., People's Counsel v. Public Service Comm'n, 455 A.2d 402, 403 (D.C.1982).³ In discussing the scope of federal court review of decisions by the Federal Power Commission, the Supreme Court has said:

It is not theory but the impact of the rate order which counts. If the total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry . . . is at an end. The fact that the method employed to reach that result may contain infirmities is not then important.[⁴] FPC v. Hope Natural Gas Co., 320 U.S. 591, 602, 64 S.Ct. 281, 288, 88 L.Ed. 333 (1944), quoted in Washington Gas Light Co. v. Public Service Comm'n, 450 A.2d 1187, 1193 (D.C.1982). The Court went on to observe that a rate order, as "the product of expert judgment," was presumptively valid, and would be overturned only upon a "convincing showing" that it failed to meet the statutory criteria. FPC v. Hope Natural Gas Co., supra, 320 U.S. at 602, 64 S.Ct. at 288.⁵

The Commission's authority is not untrammeled. It "has the burden of showing fully and clearly why it has taken the particular ratemaking action." Washington Public Interest Organization v. Public Service Comm'n, supra, 393 A.2d at 75; accord, Metropolitan Washington Board of Trade v. Public Service Comm'n, supra, 432 A.2d at 351.⁶ However, "[w]here the [Commission] has accompanied its ruling with the required full and careful explanation, that ruling is entitled to great deference." Washington Gas Light Co. v. Public Service Comm'n, 452 A.2d 375, 379 (D.C.1982), cert. denied, ___ U.S. ___, 103 S.Ct. 2454, 77 L.Ed.2d 1334 (1983).⁷

III

"Few types of legal proceedings are more complex, intricate and expensive than the full-blown utility rate case, with its myriad problems in valuation, economics, accounting, law and engineering." Foy, Cost Adjustment in Utility Rate Schedules, 13 VAND.L.REV. 663, 663 (1960). A utility's fair rate of return for its services⁸ is determined "on the basis of evidence presented during a public hearing, and changes in the rate schedule ordinarily cannot be made in the absence of such a hearing." Note, Due Process and the Automatic Fuel Adjustment Clause, 52 IND.L.J. 637, 637 (1977) (footnote omitted); see United States v. Public Service Comm'n, supra, 465 A.2d at 833. Accordingly, the operating costs incurred by the public utility will be "passed on to the consumer after a general rate hearing before a public service commission which establishes rates based on costs of production and return on investment." Leafier, Automatic Fuel Adjustment Clauses: Time for a Hearing, 30 CASE W.RES.L. REV. 228, 229 (1980). When inflation and cost fluctuations enter the economic picture, however, such formal rate hearings become inadequate as a means of ensuring a fair rate of return because of the delay inherent in them.

When prices are rising, the time that necessarily elapses between the date when earnings fall below the permissible minimum rate of return and the date when the commission enters its order allowing increased rates, is a time during which the utility earns less than a fair and reasonable return. . . .

The inevitable delay between the happening of an event that entitles a party to legal relief and the date when he gets relief makes it impossible in some kinds of cases for law and equity to do complete justice.

Lynchburg Gas Co., 6 P.U.R.3d 33, 35-36, additional opinion sub nom. Virginia Electric & Power Co., 7 P.U.R.3d 108 (Va.Corp. Comm'n 1954), aff'd sub nom. City of Norfolk v. Virginia Electric & Power Co., 197 Va. 505, 90 S.E.2d 140 (1955), quoted in Comment, The Fuel Adjustment Clause and Its Role in the Regulatory Process, 47 Miss. L.J. 302, 306 (1976). See generally Blair & Kaserman, Automatic Cost Fuel Adjustment Clauses: Issues and Evidence, Pus. UTIL.FORT., November 25, 1982, at 27; Schiffel, Electric Utility Regulation: An Overview of Fuel Adjustment Clauses, PUB.UTIL. FORT., June 19, 1975, at 23. Thus, in order to deal with this regulatory lag,⁹ techniques have been developed to simplify the ratemaking process. "One such technique is a provision which, without formal proceedings, increases or decreases utility rates in proportion to increases or decreases in an operating expense." Foy, supra, 13 VAND.L. REV. at 663. Among the most common of these provisions is the fuel adjustment clause (FAC) in electric utility rate schedules.¹⁰

A fuel adjustment clause, which allows the utility to pass its fuel costs directly to the consumer without a public hearing, "solve[s] the cash flow dilemma resulting from regulatory lag and eliminates the public expense of lengthy administrative hearings." Leaffer, supra, 30 CASE W.RES.L. REV. at 230 (footnote omitted); see Note, supra, 52 IND.L.J. at 638-639.¹¹ Under such a clause, "the electric rate is increased or decreased by a fixed amount for each increase or decrease over or under a certain `base cost' per unit of coal, natural gas or other fuel consumed in the generation of electricity." Foy, supra, 13 VAND.L.REV. at 663. A similar adjustment clause, based on the cost to distributors of purchasing gas, may be found in natural gas schedules. This purchased gas adjustment clause "operates more precisely than the FAC because the commodity purchased is merely resold without...