Opinion ID: 2202769
Heading Depth: 1
Heading Rank: 3

Heading: OPC's CONTENTIONS

Text: Construction of Chalk Point Unit 4 was begun in 1972 and completed in late 1981. [3] In the rate proceeding, PEPCO sought to include in the rate base the full amount of its end-of-test-period investment. [4] A majority of the Commission decided instead to allow PEPCO to include the average amount of test-period investment in the rate base. Chairwoman Ruth Hankins-Nesbitt dissented. She maintained that because CP-4 had operated only once during the test period, it was not used and useful, and therefore PEPCO should not be allowed to recover the full average value of CP-4 in rate base. . . . Order No. 7716, dissent at 4 (emphasis added). OPC adopts the argument in the dissent that CP-4 was not used and useful, but carries it a step further and contends that the Commission should not have allowed PEPCO to include any allowance for additional CWIP in its rate base. [5] Specifically, OPC argues that CP-4 was not used and useful because it rendered extremely minor service and because it was not until July 1982 that the unit provided  some service and demonstrated that it was reasonably free from significant design or construction defects and would continue to function in the proximate future. [A]n item may be included in a rate base only when it is `used and useful' in providing service. In other words, current rate payers should bear only legitimate costs of providing service to them. Tennessee Gas Pipeline Co. v. Federal Energy Regulatory Commission, 196 U.S.App. D.C. 187, 202, 606 F.2d 1094, 1109 (1979), cert. denied, 445 U.S. 920, 100 S.Ct. 1284, 63 L.Ed.2d 605 (1980); accord, Washington Gas Light Co. v. Public Service Commission, supra, 450 A.2d at 1226. In determining whether an item is used and useful, i.e., whether it benefits ratepayers, the Commission must consider the most recent available material, which would normally be found in post-test-year data. Potomac Electric Power Co. v. Public Service Commission, supra, 402 A.2d at 18. The Commission noted that CP-4 was being operated as a peaking unit and that it would continue to be in operation during the period that the rates resulting from this case [would] be in effect. Order No. 7716 at 62-63. The Commission also observed that Paul Waltz, an expert on its own staff, [6] had inspected the unit twice and . . . [found] it to be a good fuel oil cycling unit with good flexibility of operation. Id. at 63-64. Furthermore, it considered the testimony of a PEPCO witness, Edward Mitchell, who stated that CP-4 incorporates heat rate improvement features not found in other units designed for cycling, and . . . that CP-4 [had] the most useful design for meeting installed reserve and supply of peak period energy requirements. Id. Thus, while it is true that CP-4 was in service for only a minuscule portion of 1981, post-test-year data demonstrated that CP-4 provided service to ratepayers. CP-4 functions as a peaking unit. The Commission found that [h]ad CP-4 been delayed, projected reserves [in 1982] would have been 5.8%  far below the minimum necessary to maintain reliability of service. Order No. 7716 at 65. It considered alternative ways to treat CP-4 in determining the rate base and decided to permit PEPCO to include the average end-of-period value. OPC has not sustained its burden of showing that the Commission's decision in this respect was arbitrary or unreasonable. OPC also assails the Commission's treatment of CP-4 on the ground that PEPCO's decision to complete it was imprudent. Specifically, it argues that [a]s a result of PEPCO's demonstrated failure to conduct, during the course of its planning and construction of Chalk Point Unit 4, the kind of timely economic studies that the Commission has held are required to assure properly efficient service, there can be no doubt that PEPCO has not proved the prudency of its investment in Chalk Point Unit 4. OPC recognizes that the Commission relied on two studies performed by PEPCO, one in 1975 and the other in 1979, in concluding that the record [did] not support a finding that CP-4 was an imprudent investment. Order No. 7716 at 66. OPC contends, however, that this reliance was improper because those same studies were criticized in Formal Case No. 737 by the Commission. Its argument is misdirected. Formal Case No. 737 was divided into two phases. [7] The first phase culminated in Order No. 7425, in which the Commission found that, given the inadequacy of generating reserves, CP-4, which was virtually completed, should be brought on line as soon as operational. Order No. 7425 at 7. The order also said, however: [T]he Commission will proceed to take appropriate action on the question of conversion of CP-4 to coal-fired capability. The record clearly establishes the economic desirability of conversion, and we agree that PEPCO should have begun its evaluation far sooner. We cannot understand why PEPCO did not and we question the wisdom or prudence of PEPCO's management in this regard. Id. at 8. After receiving additional information, the Commission concluded in Order No. 7795 not to require conversion of CP-4 from oil to coal. That order, which ended the second phase of Formal Case No. 737, was affirmed by this court in People's Counsel v. Public Service Commission, 474 A.2d 835 (D.C.1984). In its order denying OPC's application for reconsideration in this case, the Commission observed: Essentially OPC is attempting here to parlay our criticism of PEPCO's system planning methodologies made in [Formal Case] No. 737 into a finding of imprudence with respect to the specific system planning decisions made by PEPCO in the 1970's and early 1980's.       Even if the Commission were to eventually determine that conversion of CP-4 to duel-fuel [ sic ] or coal capability is a feasible, cost effective path, that would not necessarily require a finding that PEPCO was imprudent in bringing the unit on line as an oil-fired unit. Order No. 7751 at 10-11. The Commission did not find, in any phase of Formal Case No. 737, that PEPCO's decision to continue construction of CP-4 as a coal-fired unit was imprudent. On the contrary, in the first phase of that case it agreed that CP-4 should be brought on line as soon as operational. In Formal Case No. 785 (the instant case) it considered two studies by PEPCO which concluded that completion of CP-4 was the most cost-effective course of action. OPC has not convinced us that the Commission's agreement with this conclusion was arbitrary or unreasonable.
In the early 1970's Dickerson Unit 4 was conceived as an 850 MW [megawatt] coal-fired, base load unit to be completed in 1976. As declining load-growth rate projections emerged in the 1970's, it was delayed and work was sharply curtailed on the unit. In 1977 the unit was replanned as an 800 MW joint venture with Baltimore Gas and Electric Co. (BG & E) scheduled for 1985, and later for 1987. In October 1979, BG & E withdrew from the joint venture, PEPCO sought a new partner for the venture without success, and in 1980 cancelled the unit in light of the continuing downward trends in load-growth rate projections. Order No. 7716 at 51. PEPCO sought to make up for the loss resulting from the closing of Dickerson Unit 4 (DU-4) both by amortizing the loss and by including the unamortized portion of the investment in the rate base. The Commission ruled that PEPCO would be allowed to do only the former. OPC argues that PEPCO did not prove that the planning and cancellation decisions involving DU-4 were prudent, and therefore that the Commission's decision to allow PEPCO to amortize its abandonment loss over a ten-year period was arbitrary and unreasonable. The Commission carefully considered OPC's argument and rejected it in the following portions of its order: Mr. Gold for OPC offered an economic analysis of alternative generation planning scenarios from which he concluded that installation of Dickerson Unit 4 in either 1985 or 1987 and the postponement of Chalk Point 4 until 1997 would have been more economic than PEPCO's actual course of conduct. Mr. Gold's study, however, is based upon current load forecasts and assumptions as to fuel and other costs, rather than on reasonable assumptions as of the late 1970's when the decision to cancel was made. This tends to undercut the probative value of the study, since the measure of prudence should be made as of the time the decision was made, not by hindsight.       Finally, we note that PEPCO argues that OPC's underlying premise that Dickerson Unit 4 should have been moved up to replace Chalk Point Unit 4 was not a feasible option, because there was insufficient lead time as of 1980. OPC argues that the decision should have been made earlier than 1980. OPC's contention ignores the fact that prior to 1980, Dickerson Unit 4 was planned as a joint venture with BG & E which put constraints on PEPCO's ability to shift its scheduling. It also ignores the fact that from the end of 1978 PEPCO was anticipating the near-term retirements of the old Benning and Buzzard Point units, producing a future need for cycling-to-peaking units, rather than base-load units such as Dickerson Unit 4 in the early 1980's. We cannot find that PEPCO made an imprudent decision with respect to Dickerson Unit No. 4. To disallow amortization of the project loss would be to apply a standard  not of reasonable prudence, but  of absolute stockholder liability for plant cancellations. We decline to accept this standard, and we approve PEPCO's amortization proposal. Order No. 7716 at 60, 62. These excerpts from the Commission's order fully meet the requirements of Washington Public Interest Organization v. Public Service Commission, supra . OPC has not met its considerable burden of demonstrating error. People's Counsel v. Public Service Commission, supra, 399 A.2d at 46; see Goodman v. Public Service Commission, 309 A.2d 97, 101 (D.C.1973).