Villages of Chatham and Riverton, Ill. v. Federal Energy Regulatory Commission

• Decision Date: 11 August 1981
• Docket Number: No. 80-1826,80-1826
• Parties: VILLAGES OF CHATHAM AND RIVERTON, ILLINOIS, Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Central Illinois Light Company, Intervenor.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 23

662 F.2d 23

213 U.S.App.D.C. 178

VILLAGES OF CHATHAM AND RIVERTON, ILLINOIS, Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Central Illinois Light Company, Intervenor.

No. 80-1826.

United States Court of Appeals District of Columbia Circuit.

Argued May 7, 1981.

Decided Aug. 11, 1981.

Petition for Review of an Order of the Federal Energy Regulatory commission.

James K. Mitchell, Washington, D. C., with whom Richard M. Merriman, Washington, D. C., was on brief for intervenor.

Robert A. O'Neil, Washington, D. C., for petitioners.

Luis S. Konski, Atty., Federal Energy Regulatory Com'n, Rockville, Md., with whom Robert R. Nordhaus, Gen. Counsel, Federal Energy Regulatory Com'n, was on brief for respondent.

Before McGOWAN and ROBB, Circuit Judges, and JAMESON, ^* Senior District Judge for the District of Montana.

Opinion for the Court filed by Circuit Judge McGOWAN.

McGOWAN, Circuit Judge:

The villages of Chatham and Riverton, Illinois, seek direct review in this court of certain determinations by the Federal Energy Regulatory Commission (FERC) that were made in its consideration of a wholesale electric power tariff filed by Central Illinois Light Company (Cilco) under section 205 of the Federal Power Act, 16 U.S.C. § 824d (1976). As part of its proposal of higher rates, Cilco, in accordance with Commission regulations, submitted projections of its expenses and the villages' demand for electricity. The villages challenge several of those estimates, as well as the Commission's decision that the utility did not have excess generating capacity.

For the reasons appearing below, we vacate and remand for further consideration the Commission's adoption of the projections made by the utility of the villages' coincident peak demand, but we affirm the Commission with respect to Cilco's estimates of purchased power credits and income tax expense. We also find that substantial evidence supports the Commission's conclusion that the utility did not have excess reserve generating capacity.

I

On July 29, 1976, Central Illinois Light Company filed with the former Federal Power Commission ¹ a tariff increasing rates for wholesale electric service to three customers, the Villages of Chatham and Riverton, Illinois, and the Corn Belt Electric Cooperative. See Central Illinois Power Company Initial Decision on Rate Increases, No. ER76-819, at 1 (Jan. 24, 1979) (hereinafter referred to as Initial Decision). Cilco stated that the proposed tariffs would increase wholesale rates to Chatham by 68% or $333,000, to Riverton by 68% or $195,000, and for the Corn Belt Cooperative by 48% or $187,000. Initial Decision at 2. On August 27, 1976, the Commission suspended the rate increase until February, 1977. In a series of orders, the FPC set the new tariff for hearing and permitted the two municipalities and the cooperative to intervene in the administrative proceedings. Id. Corn Belt did not file exceptions to the Initial Decision, Record at 2428, and is not a party to this direct review proceeding.

Following a hearing, the Commission's administrative law judge issued an Initial Decision on Jan. 24, 1979, which ruled upon, inter alia, several of the issues that form the basis of the instant petition for review: (1) Cilco's reserve generating capacity, (2) the discrepancy between Cilco's projected and actual purchased power revenues, and (3) Cilco's projections of the villages' peak demand. In rejecting the villages' contention that Cilco had too much reserve capacity and should not be allowed to charge customers for the allegedly useless excess, the ALJ noted that record evidence indicated Cilco's actual 1977 reserve capacity to be 20.2% of its total generating capacity, a figure "only slightly higher than the margins of 15-20% typically recommended by the Commission." Initial Decision at 12.

The other issues that were resolved by the Initial Decision and that the villages contest in this court were rooted in Cilco's use of a future test period to estimate its expenses and its wholesale customers' demand for power, as required by FERC regulations, 18 C.F.R. § 35.13(b)(4)(iii) (1980). In addition to filing actual data for calendar year 1975, or period I, Cilco proffered expense and demand estimates for period II, a test period comprising the twelve months from July 1, 1976 to June 30, 1977. Record at 38. By the time of the hearing, May 3-4, 1978, actual figures for period II were available, see id., and the villages used them in an effort to cast doubt upon the reliability of Cilco's estimates. Record at 89-97.

With respect to the amount of revenues Cilco obtained from the sale of electricity to other utility companies, the utility estimated period II revenues from the sale of power to other utilities, or purchased power credits, of $3.4 million. Initial Decision at 16. The villages noted that in the calendar year 1977, Cilco actually received just under $10 million from these sales and urged an increase in this figure. Id. The villages took an interest in this because Cilco treats these revenues as credits to the production expenses recovered from its customers. See Record at 857 (Cilco cost-of-service study for period II). The ALJ rejected the villages' challenges to the $3.4 million figure by stating that (1) there was "no evidence that the projection was unfounded when made," (2) "(t)he basis of the estimate is not being challenged as deficient," and (3) the difference between actual and projected revenues was "not substantial," especially in view of Cilco's understatements of various production expense items. Initial Decision at 16.

The most significant surviving dispute concerns the estimates of the villages' peak demand that Cilco used to assign responsibility for demand-related costs, such as those incurred in the construction of generating facilities. ² To allocate the wholesale customers' proper share of these capacity-related expenses, Cilco estimated the peak demand of these customers at the time when its entire customer base was demanding the most power. See Record at 49, 873. Since this figure represents the customers' peak at the time of the system peak, the parties refer to it as coincident peak demand. See FERC Br. at 7 & n.2. A higher coincident peak demand leads to greater capacity costs allocated to those customers, who therefore must pay more to cover their increased share of costs. The villages argue that they have been allocated more than their share of capacity costs because the utility's estimates of their coincident peak demands are too high.

At the hearing, the villages had introduced the actual coincident peak demand figures for period II, which were significantly lower than those forecast by Cilco. The Commission, before this court, admitted that "where CILCO projected a growth in the coincident peak demand of the Villages of 15.9 percent, between Period I and Period II, the actual growth was 7.05 percent." FERC Br. at 8; see note 7 infra. The villages raised a number of arguments intended to demonstrate that the Commission should use the actual, rather than the projected, figures. While we discuss some of them in the context of arguments made on this appeal, we note that the ALJ's initial opinion, in its six-paragraph discussion of the coincident peak demand figures, addressed only two of them.

The Administrative Law Judges, mentioning that the villages objected "primarily on the basis of two points," Initial Decision at 16, said, in response to one objection, that the utility's failure to forecast demand growth for the wholesale customers on the same basis as for its retail customers did not render the estimates unusable for ratemaking. Cilco forecasts retail growth by breaking down its customers into classes, such as residential, commercial, and industrial, and projecting demand growth by class. Id. at 16-17. It did not do so in the case of the villages, explaining that it had no statistics on the retail breakdown of the villages' customers, because it did not meter those customers. Id. The ALJ accepted this explanation, stating that the utility's estimates were "based on the best information available at the time." Id. at 17.

The Initial Decision also dismissed the villages' objections to the utility's forecast that the entire Cilco system would peak between 4 and 7 p. m. Id. They had observed that the actual figures for period II and prior years showed a system peak falling at other times in several months, but the ALJ concluded that the projection was "quite accurate," because the actual system peak fell between 4 and 7 p. m. in eight of the twelve months of 1977. Id.

Having considered and rejected the villages' two objections, the ALJ credited Cilco's coincident peak demand estimates because the villages had "not demonstrated that the Company's method of making demand and energy projections was unreasonable," and that the "deviation from actual experience was not substantial enough to warrant a spot adjustment to the estimates." Id. The ALJ did not explicitly determine that Cilco had established the reasonableness of its estimates, as the utility was required to do by section 205(e) of the Federal Power Act, 16 U.S.C. § 824d(e) (1976). See Part II infra.

Both Cilco and the villages excepted to various aspects of the ALJ's decision. In their brief on exceptions, the villages argued, inter alia, that the ALJ erred in finding that Cilco had no excess reserve capacity, that he should have adjusted the purchased power credits from the estimated to the actual figure, and that he should not have accepted Cilco's coincident peak demand estimates. Record at 2304-09, 2310-20. The villages asserted the unreasonableness of these figures on the grounds that (1) the actual figures were considerably different, (2) Cilco made no effort to ask the villages about the composition of their loads or projected growth among various customer classes and (3) the actual system peak...