Opinion ID: 1321950
Heading Depth: 1
Heading Rank: 11

Heading: The Mathematics of Allocation

Text: In this portion of the order, the Commission described the competing allocation methodologies presented by the companies and the intervenors for determining Nantahala's demand and energy costs. In general, the method proposed by the companies' witness Vander Veen derived the demand and energy charges from the demand and energy entitlements allocated to Nantahala under the NFA and 1971 Apportionment Agreement. Vander Veen's Nantahala-Tapoco roll-in cost of service study differs fundamentally from the study submitted by the intervenors' witness Springs in that Vander Veen includes the entire Alcoa load served by Tapoco and TVA for purposes of computing the Nantahala-Tapoco system's demand allocation factor. In other words, Vander Veen adjusted Tapoco's 1975 book figures to reflect a non-utility, 235 Mw direct power purchase by Alcoa from TVA pursuant to a separate, non-Fontana Alcoa-TVA purchase contract as if it were part of the Nantahala-Tapoco system's generating resources. With this non-utility addition to the system's power supply, Vander Veen performed a demand allocation which assumed that the system peak occurred at the hour of the Nantahala system peak in 1975, and that at that hour Tapoco had available to serve the Alcoa load both Tapoco's NFA entitlements and the full amount of the Alcoa purchase contract (as adjusted) of 235 Mw. In addition, for demand cost allocation purposes, Vander Veen's method recognizes the distinction between firm and nonfirm NFA entitlements. He used only the firm power available under the NFA to meet system demand, thus removing entirely the amount of capacity that can be curtailed and interrupted from the capacity available to serve system load. As the Commission found, the upshot of this technique is to render 90 Mw of actual return entitlements valueless for meeting the system demand at any time, whether or not power is actually curtailed, and even when there may be additional make-up demand. Another 1/16th ( i.e., 15 Mw) of the 90 Mw interruptible power returned by TVA under the NFA was also taken out of Tapoco's demand allocation, so that a total of 105 Mw was removed for both the curtailable and interruptible power, and rendered valueless for cost allocation purposes. The effect on Nantahala's costs of Vander Veen's technique is to dramatically increase Nantahala's proportionate share of the demand charges even though both Nantahala and Tapoco take under the NFA and Tapoco takes three times as much power as Nantahala. In contrast to the foregoing cost of service analysis, the intervenors' evidence showed, and the Commission accepted, that the non-utility direct industrial purchases that Alcoa makes from TVA are not properly considered a utility function of either Tapoco, Nantahala or the combined utility system of both and so are not properly includable in the cost of service allocation. Furthermore, the demand credit Vander Veen assigns to Alcoa because of the interruption and curtailment features of the NFA is not supported by the actual features of the unified system. The Commission adopted the view taken by the intervenors' witness Springs that use of only firm power available to meet system demand distorts rather than reflects customer cost responsibility. Although it is not unusual for an industrial customer to receive a credit for accepting interruptible power, the rationale for this is that the utility providing the service to that customer will save the cost of carrying reserves. The ability of a utility to provide such credits is limited by its need for reserves. There should be no credit for interruptions which do not result in cost savings to the supplying utility. Mr. Vander Veen's demand credit unfairly assigns to other customers the fixed costs necessary to generate the power traded to TVA for this curtailable and interruptible power. The fixed costs of investment, operation, and maintenance for these plants do not cease when TVA curtails delivery to Alcoa under the contractual arrangements. The Commission accepted the intervenors' evidence that the return entitlements result from the investment, maintenance and operation costs necessary to make the hydroelectric generation of Nantahala and Tapoco available for TVA's demands. Ultimately, the companies' approach was found to unfairly burden the public customers by requiring them to bear costs properly assignable to Alcoa for the fixed costs necessary to generate the power traded to TVA. The Commission again described the reasons why the NFA tradeoff distorted customer cost responsibility, and was therefore improper to use as a basis for computing Nantahala's demand and energy costs. In essence, the NFA is a trade-off of certain firm power and secondary power, available less than 50% of the time, for lesser amounts of firm and secondary power that are curtailable and interruptible but available more than 50% of the time, since any power available more than 50% of the time is usable by Alcoa in its aluminum smeltering operations. The trade-off result is a considerable improvement in the value of Tapoco's energy useable for Alcoa's aluminum production. The trade-off has no value to the public load. Alcoa (Tapoco) should, therefore, take full cost responsibility for the demand-related costs associated with the capacity traded off. In conclusion, the Commission stated that the companies' proposed demand allocation technique would result in a gross inequity to Nantahala and the public load customers, and that demand and energy charges should properly be based upon the capabilities and needs of Nantahala and Tapoco outside of the TVA return entitlements. Next, the Commission discussed the intervenors' proposed cost allocation methodology and concluded that in view of the entire evidence of record with respect to the assignment of cost, this method would be employed to determine Nantahala's demand and energy related costs. The data accepted by the Commission as representing the capabilities and needs of the Nantahala-Tapoco unified system appropriate for use in the allocation of demand related costs is as follows: A. Dependable Capacity for NP & L Projects 85.4 Mw B. Dependable Capacity of Tapoco Projects 302.8 Mw C. Total (A + B) 388.2 Mw D. Less Reserve at 3% 11.3 Mw ________ E. Net Firm Capacity Available to Meet the Load (C - D) 376.9 Mw F. Purchase Power of NP & L from TVA 50.4 Mw G. Losses on F above (assumed 5%) 2.5 Mw ______ H. Total Net Firm Capability Available at Generation to Meet the System Requirements of NP & L and Tapoco (E + F + G) 429.8 Mw Nantahala's peak load during the test year was 105,747 kw, which figure represents its maximum need during the year. Nantahala's demand responsibility for costing purposes was then calculated by dividing the total Nantahala-Tapoco system demand responsibility into Nantahala's maximum demand responsibility. Dividing 429,800 kw into 105,747 kw produces a Nantahala demand allocation of 24.60% of the system's demand responsibility. Using this allocation factor, the Commission assigned 24.60% of the Nantahala-Tapoco unified system demand costs to Nantahala and the balance to Tapoco (Alcoa). While demand charge allocations must be computed based upon production capacity and capacity needs, energy charge allocations must be computed based upon the average energy available for the Nantahala-Tapoco unified system plus Nantahala's separate purchases from TVA. The data accepted by the Commission as appropriate for use in the allocation of energy related costs is as follows: A. Average Energy Available from NP & L Projects (New Fontana Agreement Apportionment Study) 391,500 Mwh B. Average Energy Available from Tapoco's Projects (New Fontana Agreement Apportionment Study) 1,373,600 Mwh C. Total Average Energy Available from NP & L and Tapoco's Projects (A + B) 1,765,100 Mwh D. NP & L Purchase of Energy from TVA 81,265 Mwh E. Losses on D above (assumed 5%) 4,063 Mwh _________ F. Total Average Energy Available to Meet System Load (C + D + E) 1,850,428 Mwh Nantahala's energy requirement during the 1975 test year was 453,548 mwh. Nantahala's energy responsibility for costing purposes was then calculated by dividing the total Nantahala-Tapoco system energy responsibility into Nantahala's energy responsibility. Dividing 1,850,428 mwh into 453,548 mwh produces a Nantahala energy responsibility of 24.51%. Using this allocation factor, the Commission assigned 24.51% of the Nantahala-Tapoco unified energy costs to Nantahala and the balance to Tapoco (Alcoa). The methods, procedures and results of the intervenors' jurisdictional cost allocation methodology were adopted by the Commission in all material respects for determining Nantahala's retail costs of service. The practical effect of basing Nantahala's costs on actual combined system capabilities and needs was a decrease in the percentage of costs associated with the NFA and 1971 Apportionment Agreement recoverable from Nantahala's retail rate payers. The other costs actually incurred by the unified system under the agreements were effectively allocated for rate making purposes to the systems' industrial customer, Alcoa, on whose behalf the Commission determined they were incurred. To summarize, this matter was remanded for the purpose of determining whether a roll-in methodology was appropriate for Nantahala and Tapoco. Having determined that it was, and having identified those total system costs related to the supply of energy and those related to the demand for energy, the Commission was left with the task of allocating the appropriate demand and energy costs as between the North Carolina and Tennessee jurisdictional customers. The Commission then adopted the technique of cost allocation proposed by the intervenors' witness Springs, and allocated 24.60% of the combined demand costs and 24.51% of the combined energy costs to Nantahala's cost of service. These Nantahala percentages are calculated upon the relative contributions and needs of Nantahala as part of a combined system and not upon how Nantahala and Tapoco share in the New Fontana Agreement entitlements under the 1971 Apportionment Agreement. Although those contracts limit and rearrange the system's energy and demand availability, they do not allocate cost of service percentages between the retail consumers of the combined system's power. The roll-in and allocation of total system costs merely allowed the Commission to assign customer cost responsibility on the features of the actual system and not the system as reshaped by the New Fontana Agreement. The method does not ignore or alter the results of that agreement, it determines who is to bear the responsibility for the costs associated with the facilities and resources obligated thereunder. Having decided that Alcoa in negotiating the NFA effectuated a trade-off of dependable hydro capacity in return for improving the availability of energy for aluminum production, the Commission concluded that the aluminum production load should be assigned the responsibility for the investment costs and operation and maintenance expenses of the generating facilities for that traded capacity. As the Commission stated in its order, one of the purposes for the roll-in method of rate making is to cancel or at least to true up the concealed benefits it found flowing to Alcoa under the power supply agreements. This is but another way of stating that one purpose of the roll-in is to assign the appropriate cost responsibility for the respective customer demands upon the combined system's power supply resources. Obviously, use of the entitlements contained in these agreements, which do not reflect the investment costs and operation and maintenance expenses of the generating facilities upon which customer cost responsibility must be calculated, to then allocate costs would defeat the very purpose of the roll-in. Moreover, as Nantahala itself recognizes in its brief, the 1971 Apportionment Agreement is premised on the fact that Nantahala and Tapoco are separate entities and that the entitlements allocated to Nantahala are deemed to arise in exchange for Nantahala's generation just as the entitlements allocated to Tapoco are deemed to arise in exchange for Tapoco's generation. (Emphasis added). The Commission, in rejecting the fiction that Nantahala and Tapoco were developed, designed and operated as separate corporate entities, also rejected the fiction that return entitlements deemed to arise in exchange for the value of the generation turned over to TVA can be used as accurate measures of the demand and energy related costs fairly attributable to Nantahala's provision of service to its retail rate payers. It was the position of the intervenors' expert witness that the system-wide tradeoff of costs and benefits under the NFA and 1971 Apportionment Agreement was detrimental to Nantahala's ability to provide service at just and reasonable rates to its public customers and unfairly shifted costs within the system to Nantahala which are properly attributable to Alcoa. Based upon substantial evidence of record, the Commission adopted this position and the roll-in technique proposed to measure and assign customer cost responsibility for the combined system's hydroelectric resources. The roll-in technique chosen by the Commission is fully supported by substantial evidence of record and is a determination which essentially rests within the discretion of the Commission in the exercise of its rate making function. As the United States Supreme Court has observed in reviewing a similar regulatory question, judgment and discretion control both the separation of property and the allocation of costs when it is sought to reduce to its component parts a [utility] business which functions as an integrated whole. Colorado Interstate Gas Co. v. FPC, 324 U.S. at 591, 65 S.Ct. at 834, 89 L.Ed. at 1217. The companies do not argue, nor do we find, any error in judgment or abuse of discretion in the action of the Commission in the Sub 29 (Remanded) proceedings regarding the mechanics of the roll-in or the allocation formula utilized. Briefly stated, the principal arguments advanced by the companies are that the roll-in was impermissible under the doctrine of federal preemption because the two principal power supply contracts at issue are regulated by the FERC and that federal law prohibits the results obtained by the Commission under the roll-in as an undue burden on interstate commerce. We turn next to these and other remaining arguments of the companies concerning the order appealed from.