Opinion ID: 453189
Heading Depth: 2
Heading Rank: 2

Heading: The Undue Discrimination Claim

Text: 34 Under Sec. 205(b) of the Federal Power Act, 16 U.S.C. Sec. 824d(b), public utilities are prohibited from granting any customer any undue preference or advantage or from maintaining an unreasonable difference in rates. 21 It is well settled, however, that differences in rates are justified where they are predicated upon factual differences between customers and that these differences may arise from differing costs of service or otherwise. Under certain circumstances, the fact that some customers have settled with the utility, while others have chosen to litigate, may constitute such a factual difference. See, e.g., Cities of Bethany v. FERC, 727 F.2d 1131, 1139 (D.C.Cir.1984); City of Frankfort v. FERC, 678 F.2d 699, 706 (7th Cir.1982); Boroughs of Chambersburg v. FERC, 580 F.2d 573, 577 (D.C.Cir.1978); St. Michaels Utilities Commission v. FPC, 377 F.2d 912, 916 (4th Cir.1967). 35 The Commission submits that settlements between customers and utilities are imperative as a practical matter in proceedings before it. See Texas Eastern Transmission Corp. v. FPC, 306 F.2d 345, 347 n. 2 (5th Cir.1962), cert. denied, 375 U.S. 941, 84 S.Ct. 347, 11 L.Ed.2d 273 (1963). In addition to this very substantial practical consideration, there are other strong policy arguments favoring settlement agreements. In United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 332, 76 S.Ct. 373, 100 L.Ed. 373 (1956) (Mobile), and FPC v. Sierra Pacific Power Co., 350 U.S. 348, 76 S.Ct. 368, 100 L.Ed. 388 (1956) (Sierra), the Supreme Court elaborated upon the importance of fixed rate contracts in the course of holding that under parallel provisions of the Federal Power Act and the Natural Gas Act, regulated suppliers of gas and electricity may not unilaterally increase the rates charged to customers whose contracts specified fixed rates. The Court noted that fixed rate contracts foster orderly planning and stable power supply arrangements. Mobile, 350 U.S. at 344, 76 S.Ct. at 380. Reduced litigation expenses to the parties and more rapid resolution of rate issues, the obverse of the easing of the Commission's burden, are other benefits. For these reasons, the Supreme Court in Mobile-Sierra ma[d]e it crystal clear that a heavy burden must be met before a customer who has negotiated a fixed-price contract can be deprived against his will of the benefits of his bargain. Town of Norwood, 537 F.2d at 1310. The policies underlying the Mobile-Sierra doctrine apply with equal force to settlement agreements. Cities of Bethany, 727 F.2d at 1139. 36 A tension between the anti-discrimination mandate of Sec. 205(b) and the essentially pro-settlement bias of the Mobile-Sierra doctrine arises whenever settling customers pay less, as a result of their fixed price arrangement with the utility, than similarly situated non-settling customers. The municipalities' proposed remedy, and the one adopted by the ALJ, was for the Commission to eliminate the discrimination insofar as is compatible with the Commission's duty to establish just and reasonable rates, see Sec. 205(a) of the Federal Power Act, 16 U.S.C. Sec. 824d(a), by lowering Delmarva's rate of return from the municipalities to the lower end of the zone of reasonableness. See FPC v. Conway Corp., 426 U.S. 271, 96 S.Ct. 1999, 48 L.Ed.2d 626 (1976); 17 FERC p 63,044 at 88 (1981) (initial decision by the ALJ). Delmarva resists this proposal vigorously, for it would reduce the utility's rate of return despite the Commission's finding, not disputed by the municipalities, that Delmarva did not advantage itself by settling. 24 FERC p 61,199, at 61,466 (1983). In its opinion, the Commission expressed a reluctance to further increase the inadequacy of Delmarva's rates. Id. The Commission also contends that affording the municipalities relief under the facts of this case would discourage individual customers from settling. 37 Delmarva and the Commission urge that we respect the integrity of the settlement agreement and tolerate the rate disparity resulting therefrom. 22 In adopting this position, the Commission relies principally on its decision in Central Illinois Public Service Company (CIPSCO ), 20 F.E.R.C. p 61,043 (1982) (Opinion No. 142), applications for rehearing denied, 20 F.E.R.C. (CCH) p 61,435 (1982), affirmed as modified, Cities of Bethany v. FERC, 727 F.2d at 1139; United Municipal Distributors Group v. FERC, 732 F.2d 202, 212 (D.C.Cir. April 13, 1984); see also City of Frankfort, 678 F.2d at 706-07; Town of Norwood v. FERC, 587 F.2d 1306, 1312-13 (D.C.Cir.1978). 38 In Cities of Bethany, the Commission confronted a factually similar situation. But cf. infra, typescript at 37 & note 27 (noting distinctions between CIPSCO and the present case). The Commission evaluated the present settlement agreements essentially according to the same standard employed in CIPSCO and affirmed by the court in Cities of Bethany: 39 [W]here a temporary difference in rates or between classes of customers has a logical explanation and where that difference is not due to bad faith or improper conduct on the part of the utility, then the difference should not be held unlawful in the absence of evidence, information or facts which would either demonstrate or permit the Commission to find that the disparity in rates is likely to result in actual competitive harm or would otherwise be unduly discriminatory. 40 24 FERC p 61,199 at 61,465-466. The Commission found all the elements of the Cities of Bethany test met here, and concluded on that basis that there was no undue discrimination in violation of Sec. 205(b). 41 The tension between the anti-discrimination mandate of Sec. 205(b) and the pro-settlement bias of the Mobile-Sierra doctrine is not easily resolved in this case. We are troubled by the fact that the municipalities are paying a somewhat higher rate to Delmarva than the cooperatives for a reason not related to cost of service as determined under the 12-CP method of demand allocation adopted by the Commission in this case. There is thus a discrimination. But the question before us is whether there has been an undue discrimination, which is what Sec. 205(b) proscribes. We think that the factors utilized by the Commission in this proceeding (and approved by the court in Cities of Bethany ) appropriately inform our judgment on the question whether the discrimination was undue, not only because the notion of undue discrimination itself gives rise to flexibility in interpretation by the Commission, but also because of our perception of the Cities of Bethany test as one that is sharply circumscribed, limited in time, not harsh in application, and that serves important public interests. While the test may have no broader compass than is necessary to accommodate the facts of this case, for the reasons that follow, we find it dispositive here and hold that the Commission's decision to tolerate the discrimination is not arbitrary and capricious. 42 The municipalities challenge both the content and the application of the Cities of Bethany test. Before reaching the matter of the application of the standard, we consider the municipalities' objection to the requirement that, absent evidence of bad faith or improper conduct, they must show actual competitive harm as a prerequisite to obtaining relief. Cities of Bethany, 727 F.2d at 1139. See also United Municipal Distributors Group v. FERC, 732 F.2d 202, 212 (D.C.Cir.1984). The municipalities submit that Cities of Bethany is distinguishable from the present case, and that in any event the District of Columbia Circuit in that case did not properly interpret the requirement of Sec. 205(b). 43 The municipalities contend that a showing of potential competitive harm should suffice to establish undue discrimination, and that they have made such a showing. They point out that Delaware is a small state, and that the municipalities are in proximity to the cooperatives. An industry or commercial establishment seeking to locate in Delaware may choose locations in various parts of the state, influenced in substantial part by the cost of electricity. 23 In their submission, the municipal systems are at a competitive disadvantage so long as their rates are discriminatorily higher than cooperative rates, even if only for a discrete, locked-in period. However, the municipalities have adduced no evidence of actual competitive harm, properly defined by the Commission as failing to attract customers or losing existing customers to the cooperatives. 44 The court in Cities of Bethany addressed and squarely rejected the potential harm standard. As that court pointed out, the application of this standard is reserved to a particular class of situations, designated as price squeezes, in which there is competition between a utility and its customers in a common market. The court stated: 45 The Cities' reliance on FERC's presumption of anti-competitive effects in a price squeeze context is misplaced. The price squeeze cases, in which anti-competitive effects are presumed to result from price discrimination, originally arose under the antitrust laws. The anti-competitive danger in price squeeze situations is that a dominant utility supplier which competes with a wholesale customer in retail market will charge such high rates to the wholesale customer that the customer can no longer compete with the utility in the retail market.... Any anti-competitive danger from the rate disparity here is considerably more attenuated than is the harm in a price squeeze situation. 46 727 F.2d at 1140-41 (footnote omitted). In the instant case, as in Cities of Bethany, there is no allegation that the company is attempting to gain a competitive advantage in a retail market in which both the municipalities and Delmarva compete. Thus, the court's reasoning in Cities of Bethany should apply equally here. The price squeeze is a specifically defined kind of situation which is not present in this record. 24 47 The short of it is that we do not consider the Commission's requirement that there be proof of actual harm to be unreasonable. The Commission contends that a potential competitive harm standard which, we note, may well be procrustean in its stretch, would seriously undermine the incentives for settlement. We are not prepared to substitute our judgment for the Commission's in this respect. Accord Cities of Bethany, 727 F.2d at 1139. 25 48 We turn to the municipalities' objections to the application of the Commission's standard. They raise two principal arguments. First, the municipalities argue that it was unreasonable for Delmarva to file a rate increase and to settle on the basis of a 4-DCP method of demand allocation, asserting that such a method had never been accepted by the Commission in a litigated case, that it was contrary to Commission precedent, and that the record shows that Delmarva had undertaken no study to determine its reasonableness. Joint Appendix at 188-89. These facts, according to the municipalities, should have demonstrated to a reasonable utility that a successful claim of discrimination would be made if [Commission] precedent held. Brief of Petitioner at 14. In terms of the standard applied by the Commission, the tenor of this argument is that the discrimination is due to improper conduct on Delmarva's part in the original filing and settlement. 49 We find the municipalities' objections to the application of the Cities of Bethany standard to be without merit, and indeed are satisfied that the Commission's opposite conclusion is supported by substantial evidence. In particular, it is clear that when Delmarva filed the rate increase on May 31, 1978, and entered into the settlement agreement with the cooperatives on September 11, 1978, there was no firmly defined Commission policy on demand allocation, as the ALJ acknowledged. 17 F.E.R.C. p 63,044, at 47. See Idaho Power Co., 3 FERC p 61,108 at 61,301 n. 44 (1978) (choice of appropriate demand allocation methodology depends upon facts and circumstances relating to particular utilities). An extensive evidentiary hearing was necessary to develop the facts supporting the ALJ's and Commission's determination that the 12-CP method was appropriate for Delmarva. The initial decision was issued over three years after the filing, and after FERC approval of the settlement agreement. 50 In fact, a number of the Commission precedents relied upon by the ALJ and the Commission in finding the 12-CP method to be appropriate were issued after the consummation of the settlement agreement. E.g., Louisiana Power & Light Co., Opinion No. 110, issued Jan. 28, 1981; Lockhart Power Co., Opinion No. 29, issued Sept. 22, 1978, Illinois Power Co. Docket No. ER77-531, issued Apr. 10, 1981. See also Carolina Power and Light Co., Opinion No. 19, issued Aug. 2, 1978 (issued after Delmarva's rate filing but prior to settlement agreement). 51 Additionally, the record indicates that the 4-DCP method had been accepted by the three state regulatory commissions (those of Delaware, Maryland and Virginia) charged with regulating Delmarva's retail sales of electricity. The municipalities correctly point out that such determinations are not controlling on the Commission. See Alabama Power Co., Opinion No. 54, issued August 1, 1979. However, the Commission relied on the state law proceedings only insofar as they are evidence that Delmarva's advocacy of the 4-DCP was not illogical. 52 The Commission also relied on the fact that Delmarva offered the municipalities the same discount from its filed rates as it offered to the cooperatives. This is not a case, therefore, where a utility enters into a sweetheart deal based on terms not extended equally to all its customers. See United Municipal Distribution Group v. FERC, 732 F.2d 202, 212-13 (D.C.Cir.1984) (settlement not based on bad faith or improper conduct where offer was extended to all customers). Apart from the fact that the 4-DCP method was later found to be inappropriate, the municipalities cite no evidence of bad faith or improper conduct. 53 We conclude that substantial evidence supports the Commission's finding that Delmarva's advocacy of the 4-DCP method was not illogical or improper. To be sure, the Commission ultimately rejected the 4-DCP method. But Delmarva is in fact a summer-peaking company, see supra typescript at 6 and note 5, and (a) in the absence of a prior Commission determination relating to Delmarva's system; and (b) in the presence of conflicting state commission determinations, we cannot say that the Commission acted unreasonably in refusing to characterize Delmarva's advocacy of the 4-DCP method as beyond the pale. 54 The municipalities attempt to distinguish Cities of Bethany by noting that the differential between the cooperative and municipal rates in the instant case is substantially larger than the differential in the Cities of Bethany case. While the differential is somewhat larger in this case, 26 we do not view this factor as decisive. More significantly, we do not think it amounts to an undue burden justifying a remedy. 55 Additionally, we note that there is no evidence that Delmarva was overreaching and benefitting itself in settling, and the Commission so found. 21 F.E.R.C. p 61,199, at 61,466 (reprinted in Joint Appendix at 89). The Commission ultimately established rates which allowed Delmarva a 13.3 percent return on equity. The Commission's rate decision was issued at a time when other utilities were receiving up to 17 percent on equity. See, e.g., Connecticut Yankee Atomic Power Co., Opinion No. 148, 20 FERC p 61,373 (1982) (17 percent return on equity); Arizona Public Serv. Co., Opinion No. 177-A, 25 FERC p 61,166 at 61,459 (1983) (16.86 percent return on equity); New England Power Company, Opinion No. 158, 22 FERC p 61,123 (1983) (16.14 percent return on equity). Moreover, by settling with only the cooperatives, Delmarva exposed itself to the risk that the Commission subsequently would settle on an allocation methodology that allocated to the cooperatives substantial demand costs not accounted for in the settlement agreement, thereby lowering the demand costs allocable to the municipalities and the revenues obtainable from them. Indeed, this is precisely what occurred. 56 We are well aware, of course, that a utility may not use a fixed-rate contract as a device to render unassailable an otherwise prohibited undue preference. Town of Norwood, 587 F.2d at 1313. On the other hand, the determination whether there is an undue burden requires a decisionmaker to weigh the effects of a particular decision against the impact it will have on future settlements. Given these considerations, it seems appropriate for us to accord a certain amount of deference to the Commission's judgment in this regard. 27 Additionally, the discriminatory effects of the settlement in this case are readily quantifiable and are limited to a two-year period. In its more recent filings, Delmarva has employed the 12-CP method. Thus it appears unlikely that the issue in this case will recur. 57 We conclude that the Commission acted reasonably in applying the Cities of Bethany standard to this case. The standard strikes an appropriate balance between the Federal Power Act's proscription of undue discrimination and the strong policies favoring settlements of rate cases. We also conclude that the Commission applied the standard correctly, and that its findings of fact are supported by substantial evidence. A fortiori, the Commission's action was in conformity with the statute and was not arbitrary and capricious. The petition for review will be denied.