Potomac Elec. Power Co. v. Public Serv. Com'n

• Decision Date: 09 November 1977
• Docket Number: No. 10490.,10490.
• Citation: 380 A.2d 126
• Parties: POTOMAC ELECTRIC POWER CO., Petitioner, v. PUBLIC SERVICE COMMISSION of the District of Columbia, Respondent, People's Counsel, Intervenor.
• Court: D.C. Court of Appeals

380 A.2d 126

POTOMAC ELECTRIC POWER CO., Petitioner, v. PUBLIC SERVICE COMMISSION of the District of Columbia, Respondent People's Counsel, Intervenor.

No. 10490.

District of Columbia Court of Appeals.

Argued April 30, 1976.

Decided November 9, 1977.

Rehearing En Banc Granted March 2, 1978.

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Edward A. Caine, Washington, D. C., with whom Alan G. Kirk, II, Susan H. Power, Washington, D. C., and Carl D. Hobelman, New York City, were on the brief, for petitioner.

Linus H. Deeny, Asst. Corp. Counsel, Washington, D. C., when briefs were filed and the case was argued, with whom John R. Risher, Jr., Corp. Counsel, and Louis P. Robbins, Principal Deputy Corp. Counsel, Washington, D. C., were on the brief, for respondent.

Annice M. Wagner, People's Counsel when briefs were filed and the case was argued, for intervenor.

Before NEBEKER, YEAGLEY and HARRIS, Associate Judges.

HARRIS, Associate Judge:

Potomac Electric Power Company (Pepco) has petitioned this court pursuant to D.C. Code 1973, § 43-705, to set aside as confiscatory the rates prescribed by the Public Service Commission of the District of Columbia (the Commission) for its retail sales of electric energy to District of Columbia customers. The rate rulings were established by a two-to-one vote of the Commission in Order No. 5739 on November 12, 1975. Re Potomac Electric Power Co., 11 P.U.R.4th 215 (PSC D.C.1975). Pepco's request for reconsideration was denied by Order No. 5759 dated January 12, 1976. Concluding that the Commission arbitrarily and unreasonably set the company's rate base at a level insufficient to allow Pepco a reasonable opportunity to earn the rate of return which the Commission itself found to be just and necessary, we vacate the orders appealed from and remand for further proceedings.

I. PROCEDURAL HISTORY

On December 20, 1974, Pepco filed an application for an increase in its retail rates. The application was based upon a calendar 1974 test year, and sought an increase of approximately $50,832,000 in gross operating revenues annually.¹ Such additional revenues theoretically would have resulted in a 9.75% rate of return on the company's 1974 year-end rate base. Following a series of postponements and delays, a prehearing conference was held on May 6, 1975. As an outgrowth of that conference, the Commission granted intervention to 13 parties, one of whom, People's Counsel, is an intervenor on appeal.² Twenty-two days of public hearings ultimately were held from June 4 through July 24, 1975. On July 18, 1975, Pepco filed with its rebuttal testimony an updated test period reflecting actual operating figures for the 12 months ended June 30, 1975. Thereafter, further cross-examination was conducted, briefs were filed, and oral argument was heard by the Commission on September 3, 1975.

After filing its original application, Pepco twice sought interim rate increases (by applications dated March 12, and July 3, 1975) based upon (1) the adverse impact of accelerating attrition,³ and (2) the length of time which obviously would elapse before the Commission's final decision. Both of those applications were dismissed summarily by the Commission.⁴

On November 12, 1975, the Commission issued its opinion and order. It (1) found an overall 9.1% rate of return to be reasonable and necessary, (2) authorized an increase in Pepco's gross annual operating revenues of $27,657,000, and (3) determined the basic design of the new rates. Calculations pertaining to the revenue increase were based essentially upon a calendar 1974 test period. Commissioner Stratton vigorously dissented, citing the majority's refusal to allow properly for attrition as the principal reason for the Commission's failure to set rates at a level which would be sufficient to permit Pepco the opportunity to earn a reasonable rate of return. 11 P.U. R.4th at 237-51.

Pursuant to the Commission's opinion, Pepco filed a new schedule of rates on November 7, 1975. Thereafter, on December 3, 1975, Pepco petitioned the Commission for expedited review of those rates. The Commission approved the rate schedules on December 12, 1975, to become effective the following day.

Also on December 12, 1975, Pepco filed an Application for Reconsideration of Order No. 5739. That was denied in all relevant respects by the Commission in Order No. 5759 on January 12, 1976.

On appeal, Pepco accepts the 9.1% rate of return determined by the Commission, but charges that the Commission (1) arbitrarily refused to make use of the company's most recent actual operating data of record for the test period (i. e., data for the 12-month period ended June 30, 1975) or, (2) in the alternative, failed to make adjustments to the calendar 1974 test period data for continuing attrition and for certain known changes of record which occurred during the first six months of 1975. Pepco alleges that it thus was denied a reasonable opportunity to earn the rate of return found necessary by the Commission to maintain the company's financial integrity. The Commission, on the other hand, defends its use of the 1974 test period and its limited allowance for attrition primarily by singling out two "reasons" for Pepco's rapidly declining financial condition during the test year — the energy crisis (which led to reduced consumption) and a decrease in sales of electricity to a pool of interconnected utilities — and by stressing their irrelevancy to forecasts of Pepco's financial needs. The proceeding now before us represents the fourth time in six years that Pepco found it necessary to apply to the Commission for rate increases.

II. SCOPE OF REVIEW

In reviewing orders of the Commission in rate cases, our authority is delineated by D.C. Code 1973, § 43-706. It is limited to questions of law, and to findings of fact insofar as they may be "unreasonable, arbitrary, or capricious."⁵ Congress properly has vested the Commission, not this court, with the primary ratemaking authority, although the Commission is bound both to exercise its powers rationally and lawfully, and to set rates that are "just and reasonable." D.C.Code 1973, §§ 43-301, -401, -411; Chesapeake & Potomac Telephone Co. v. Public Service Commission, D.C.App., 330 A.2d 236, 240 (1974). These standards are the same as those embodied in the Natural Gas Act, 15 U.S.C. §§ 717c and 717d (1970), and the Federal Power Act, 16 U.S.C. §§ 824d and 824e (1970). See Washington Gas Light Co. v. Baker, 88 U.S.App.D.C. 115, 118-19, 188 F.2d 11, 14-15 (1950), cert. denied, 340 U.S. 952, 71 S.Ct. 571, 95 L.Ed. 686, appeal after remand, 90 U.S.App.D.C. 98, 195 F.2d 29 (1951).

The constitutional basis for requiring utility rates to meet the test of reasonableness derives from the Fifth and Fourteenth Amendments. Federal Power Commission v. Natural Gas Pipeline Co., 315 U.S. 575, 582, 62 S.Ct. 736, 86 L.Ed. 1037 (1942) (hereinafter Natural Gas Pipeline). The Supreme Court has held that rates which are not adequate to yield a reasonable return on the value of the property used by a utility company to furnish its service to the public are unjust, unreasonable, and confiscatory, and that their effectuation would deprive the utility of its property without due process or just compensation. Natural Gas Pipeline, supra, at 585-86, 62 S.Ct. 736; McCardle v. Indianapolis Water Co., 272 U.S. 400, 408, 47 S.Ct. 144, 71 L.Ed. 316 (1926) (hereinafter McCardle); Bluefield Water Works & Improvement Co. v. Public Service Commission, 262 U.S. 679, 690, 43 S.Ct. 675, 67 L.Ed. 1176 (1923) (hereinafter Bluefield).

Congress, however, has provided no formula for determining what constitutes rates which are "just and reasonable." To fill that void, the Supreme Court has expanded upon the statutory standard in the Natural Gas Pipeline case and its progeny. It is axiomatic that to be "just and reasonable," rates must be set at a level that permits the company to earn a fair rate of return on its investment. See Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 603, 64 S.Ct. 281, 88 L.Ed. 333 (1944) (hereinafter Hope); Natural Gas Pipeline, supra, 315 U.S. at 596-97, 62 S.Ct. 736; McCardle, supra, 272 U.S. at 408-09, 47 S.Ct. 144; Bluefield, supra, 262 U.S. at 690, 43 S.Ct. 675. While regulation does not guarantee that a utility will achieve its projected revenues, it must provide the utility with a reasonable opportunity to earn a rate of return sufficient to maintain the company's financial integrity, to attract necessary capital at a reasonable cost, and to compensate investors fairly for the risks they have assumed, while protecting the relevant public interests. Hope, supra, 320 U.S. at 605, 64 S.Ct. 281. This involves a delicate balancing of investor and consumer interests. Id., at 603, 64 S.Ct. 281.

No single formula — or combination of formulas — limits a regulatory commission's power to set "just and reasonable" rates. However, a commission is obliged to make pragmatic adjustments where appropriate circumstances exist. Hope, supra, at 602, 64 S.Ct. 281; Natural Gas Pipeline, supra, 315 U.S. at 586, 62 S.Ct. 736. Courts may intervene only upon a "clear showing" of a due process violation. If the commission's order, viewed in its entirety, produces no arbitrary result, judicial inquiry is to be terminated. Natural Gas Pipeline, supra, at 586, 62 S.Ct. 736.

Thus, "it is the result reached not the method employed which is controlling." Hope, supra, 320 U.S. at 602, 64 S.Ct. at 287. Courts are to concern themselves primarily with the overall impact of a rate order, rather than with the theories behind it. Ibid. However, if the total effect of a rate order is found to be unjust or unreasonable, a reviewing court must delve into the details of the order. It must give reasoned consideration to each contested element of the rate order "to determine the possible presence of arbitrary action."⁶ Goodman v. Public Service Commission, D.C.App., 309...