Opinion ID: 566757
Heading Depth: 3
Heading Rank: 1

Heading: The First Proceeding

Text: 18 In October 1975, Edison filed for a $16.9 million increase in its wholesale rates for R-1 (small resale) and R-2 (large resale) customers. FERC accepted the rates for filing effective February 1, 1976, subject to a hearing. Earlier, in June 1974, Edison had applied to the California Public Utility Commission (CPUC) for an increase in its A-8 rate for very large power retail customers. Although Edison's costs of service for R-2 and A-8 customers were similar, the rate filings differed; the proposed R-2 rate was somewhat higher, primarily because of differences in state and federal rules on the timing of cost pass-throughs. This rate disparity was compounded when the CPUC delayed full approval of the new retail rate until January 1977. 19 The Cities intervened before FERC, claiming, among other things, that the disparity between the R-2 and A-8 rates caused a regulatory price squeeze. An administrative law judge (ALJ) agreed with the Cities on traditional cost-of-service and rate-of-return issues but rejected the price squeeze claim. 3 F.E.R.C. p 63,033 (1978). 20 In Opinion 62, the Commission substantially affirmed the ALJ's cost-of-service and rate-of-return conclusions. 8 F.E.R.C. at 61,677-84. As to price squeeze, it found that Edison and the Cities were competitors, and that the Cities had made a prima [291 U.S.App.D.C. 323] facie showing under 18 C.F.R. § 2.17(a), which Edison had failed to rebut. Id. at 61,687-94. The Commission rejected any focus on filed rates and ruled that the proper rates for a price discrimination comparison are the effective retail rates (the rates authorized and in effect during the relevant period) and the just and reasonable but for price squeeze wholesale rate. Id. at 61,689-90. The Commission invoked the Connecticut Light presumption of anticompetitive effects and remanded to the ALJ to determine whether a price discrimination existed using the appropriate rates. Id. at 61,693-94. On rehearing, the Commission expanded the scope of the Phase II proceedings, in part so that Edison could offer additional evidence to rebut the newly adopted presumption of anticompetitive effect. Opinion 62-A, 10 F.E.R.C. at 61,510-11. We affirmed the traditional Phase I rate issues decided in Opinion 62 in Anaheim v. FERC, 669 F.2d 799 (D.C.Cir.1981). 21 The ALJ on remand found that a regulatory price squeeze had existed for the first eleven to eleven-and-a-half months that the R-2 rate was in effect, and he ordered Edison to refund approximately $3.8 million to its wholesale customers, principally the Cities. See Phase II Initial Decision, 34 F.E.R.C. p 63,086, at 65,303-04 (1986). For the remaining two-and-a-half years of the locked-in period (which ended when Edison's next R-2 rate filing became effective on August 16, 1979), the ALJ found that the R-2/A-8 rate relationship was highly favorable to the R-2 customers. Id. at 65,294. In the Phase II hearing, the Cities introduced a new analysis that quantified price discrimination between the R-2 rate and a composite of all of Edison's retail rates. The ALJ, however, excluded the evidence as outside the scope of the remand. See 23 F.E.R.C. p 63,109 (1983), reconsid. denied, 34 F.E.R.C. at 65,279-80. 22 On review, the Commission agreed that the R-2 rate as modified in Phase I was unduly discriminatory from February 1, 1976, until January 12, 1977, when the retail rate increased and the disparity was reversed. See Opinion 284, 40 F.E.R.C. at 62,160-63. In confirming the existence of price discrimination, the Commission affirmed the use of an analysis comparing Edison's rate of return (the margin of revenues above costs) on the just and reasonable but for price squeeze R-2 rate with its rate of return on the effective A-8 rate. The Commission summarily affirmed the exclusion of the Cities' broader, composite rate-of-return analysis. To derive the wholesale rate of return, the Commission used the estimated costs for test year 1976 that Edison had filed with its original rate application rather than the actual R-2 costs of service experienced by Edison. Id. at 62,152-55, 62,182 n. 22. 23 The Commission summarily affirmed the ALJ's treatment of two adjustments Edison included in its rate-of-return analysis. Id. at 62,157-60. First, Edison wanted to increase the retail rate of return to compensate for tax accounting differences: FERC permitted Edison to pass the cost of tax obligations on to its R-2 customers before the taxes were actually paid (tax normalization), while the CPUC allowed only flow-through tax accounting. Because FERC required consistent treatment of wholesale and retail costs in the comparative rate-of-return analysis, the retail rate of return was distorted, according to Edison. The ALJ rejected the tax normalization adjustment. See 34 F.E.R.C. at 65,274-75. 24 Second, the ALJ accepted Edison's proposed synchronization of fuel costs and revenues. The A-8 rate tariff approved by the CPUC included an energy cost adjustment clause (ECAC) and a related ECAC balancing account. The ECAC allowed Edison to recover estimated rises in fuel and purchased power costs without filing for a rate increase. The R-2 rate included a comparable fuel cost adjustment (FCA). The ECAC balancing account reflected amounts that Edison under- or overcollected in its ECAC recoveries due to errors in cost estimation. These amounts were amortized and included as charges or credits in subsequent retail billings. The ALJ agreed with Edison that in deriving the rate of return, the retail revenues should be adjusted to match the corresponding [291 U.S.App.D.C. 324] fuel costs that were subject to recovery under the ECAC or that were held in the balancing account, and he approved a similar adjustment in wholesale revenues to account for the FCA. He rejected analyses submitted by the Cities and FERC staff that failed to include the ECAC adjustment. See id. at 65,271-74. 25 On the question of anticompetitive effects, the Commission decided to retract the Connecticut Light presumption, but only prospectively. 40 F.E.R.C. at 62,166-67. It concluded that the presumption was no longer valid because [p]rice differences of limited magnitude and duration may not result in an injury to competition, and the Supreme Court's decision in Conway makes clear that the anticompetitive effect of utility rates should be our concern. Id. at 62,166. Although such a presumption might have made sense in the context of predatory price squeeze, the Commission reasoned, it was inconsistent with the regulatory price squeeze policy announced in Order 474, which contemplates a critical evaluation of effects evidence. See id. 26 Henceforth, those alleging price squeeze would have the burden in Phase II of demonstrating, via wholesale and retail market analyses, that the utility possesses monopoly power and that the alleged price discrimination will likely exacerbate market concentration at the expense of the utility's competitors. Id. at 62,167-68. The Commission stated its intention that such proceedings would focus on objective criteria and would be guided by antitrust principles. Id. at 62,168. Although the Commission recognized that it could have applied the new rule to the present case, it decided not to do so because [e]vidence has been submitted on this issue in reliance on our prior policy, and it would be inappropriate in this proceeding to depart from the standards enunciated in Opinion Nos. 62 and 62-A. Id. at 62,167. 27 The Commission then found that Edison failed to rebut the Connecticut Light presumption. Id. at 62,170-72. The Commission ruled that it was not enough that the Cities had lost no actual retail load; Edison also had to show that there was no adverse effect on potential competition--that is, no reasonable probability of competitive harm. See id. at 62,165, 62,168-69. Edison introduced expert testimony indicating that the decisions of large power customers are made on the basis of long-term cost relationships and would not have been affected by a rate disparity of the amount and duration at issue. But the Commission rejected this testimony as conjecture; it relied instead on the ALJ's reasoning that witnesses have testified persuasively in other proceedings that the only valid basis for analyzing price squeeze is to evaluate what was confronting the wholesale customer from day-to-day. Id. at 62,172. 28 Edison argued that any potential anticompetitive effect resulting from the eleven-and-a-half months of price discrimination was offset by the subsequent two-and-a-half years of favorable wholesale rates. The Commission disagreed, reasoning that a mere price preference in a later period will not erase the earlier harm to competition because the antitrust laws were enacted for the protection of competition--not competitors. Id. at 62,169-70 (emphasis in original). Although it did not reject the notion that a subsequent reversal in a rate disparity might dissipate[ ] an anticompetitive effect, the Commission ruled that a mere showing of reverse price discrimination is not sufficient; the utility must show that the reverse rate disparity is or is likely to be of sufficient magnitude and duration to have a countervailing effect on competition so that, overall, during the entire course of the wholesale/retail rate relationship, competition in the relevant market has not been harmed. Id. at 62,170. 29 The Commission quantified the price discrimination suffered by the Cities as approximately $2.6 million. See id. at 62,164-65. It found the discrimination undue and ordered a refund. It required Edison to reduce its R-2 rate of return for the relevant period and, if necessary, eliminate the effects of tax normalization. See id. at 62,178-79. The refund was ordered for all members of the R-2 class, including those [291 U.S.App.D.C. 325] customers, like Vernon, that had not intervened. Id. at 62,180.