Opinion ID: 444344
Heading Depth: 3
Heading Rank: 1

Heading: The Reconciliation Methodology

Text: 13 FERC asserts that the new rate design will serve the public interest by more closely tracking the utility's cost incurrence than the traditional non time-differentiated average cost methodology. J.A. 46. This contention is hardly surprising because FERC has previously considered cost tracking to be the primary feature of a just and reasonable rate structure. 6 Nevertheless, it is clear in this case that, under WEPCO's proposal of modified marginal cost pricing, costs will be tracked less accurately than under average cost pricing. 14 For instance, WEPCO's Exhibit 20, J.A. 572, shows that demand costs approximate 41% and energy costs approximate 59% of the actual cost of service. Under WEPCO's proposal, however, demand charges will equal about 20% of the revenues and energy charges will equal 80%. WEPCO's own witness acknowledged the total lack of correlation between the demand cost and the demand charge, J.A. 146, stating under cross-examination that it is difficult to calculate an accurate marginal demand cost and inasmuch as our philosophy is as it is to shrink the demand cost first, we didn't pay a lot of attention to the theoretical niceties of that calculation. J.A. 241 (emphasis added). 15 WEPCO's witness also testified that the reconciliation necessitated by the revenue constraint should be made where it will have the least adverse impact on the allocation of resources, and argued that the demand charge represents that part of the rate structure. The Commission accepted two of three reasons put forth by WEPCO to support the reconciliation methodology chosen, placing primary reliance on WEPCO's stated excess capacity: 16 The excess capacity argument is the key factor in our conclusion. Because there is currently excess capacity, WEPCO's shortrun marginal cost of capacity is zero. The logical conclusion of this fact, all other things being equal, would be a zero demand charge both on-peak and off-peak. But even with energy costs priced at their margin, that would produce a revenue shortfall below the company's revenue requirement. This revenue short-fall [sic] should be avoided by increasing the demand charge. 17 J.A. 58. In accepting this rationale, however, the Commission appears to treat the demand charge like modeling clay in order to force the application of marginal cost pricing to the energy component. 18 The Commission's second rationale is equally conclusory. Again noting the present excess capacity, the Commission simply asserts that it is legitimate in setting a demand charge to focus on the short-term. J.A. 58. The Commission fails to explain why a short-term focus is acceptable, or to discuss the potential effects of this short-term approach. We believe that this approach poses serious potential problems, including the future possibility of a sudden rate surge when additional capacity is required. FERC has totally failed to address these problems in any meaningful fashion. 7 19 Accordingly, we find that the record lacks substantial evidence to support the reconciliation methodology chosen, and that the Commission's stated reasons for its approval are almost wholly conclusory, largely short-sighted and patently unpersuasive.