Opinion ID: 1961826
Heading Depth: 1
Heading Rank: 1

Heading: Procedural History, Facts and Issues

Text: This rate case was previously before us in Central Maine Power Company v. Public Utilities Commission, Me., 405 A.2d 153 (1979). On that consolidated appeal, the utility and several intervenors challenged the Commission's disallowance of the revised schedule of rates filed by the utility on January 16, 1978. In this original rate schedule, filed pursuant to 35 M.R.S.A. § 64, the utility requested increased revenues of approximately 25 million dollars and proposed a new rate design by which the utility would allocate the requested revenue increase by varying percentages among its seven major classes of customers [2] in such a way as to decrease alleged disparity in the rates of return among those customer classes. The proposed design was supposed to bring each class closer to the system average rate of return so that no class would have to shoulder more than its fair share of the utility's cost of providing electricity. The increases ranged from 3.7% for the GS-1 and GST classes to 17% for the residential class. In support of its proposed allocation of the revenue increase by varying percentages, the utility submitted to the Commission a cost of service study prepared by Frederick E. Anderson, Director of the utility's Rate Department [the Anderson Study]. This cost of service study, based on a 1977 test year, purported to show the relationship of the rates of return among the various customer classes. The Anderson study attempted to assign responsibility to the various rate classes for the embedded costs of providing each class with service. By comparing the total costs assigned to each class with the revenues collected from each class, the utility determined the rate of return it earns from each class of service. The proposed rates allocated the greatest portion of the revenue increase to the classes generating the lowest rate of return and the least portion to those generating the highest rate of return. In this way, the utility hoped to relate the electric rate paid by each class more closely to the cost of providing electricity. The process of determining the rate of return for each class was complex. All costs were divided into one of several functions (e. g., power supply, transmission, distribution). Each of the functions was then classified in order to determine whether it had demand, energy, or customer components. Finally, all costs were allocated to the various customer classes by means of allocation factors which are derived by various methods depending upon the function and classification of the cost. A significant portion of the overall costs of providing electrical service is classified by the utility as demand cost. The Anderson Study employed the so-called one-hour coincident peak method in allocating to each class its portion of total demand costs generated during the 1977 test year. Under this method, the utility first determined the one hour during the entire test year when demand for electricity was at its peak. In 1977, the one-hour coincident peak occurred between 5:00 P.M. and 6:00 P.M. on December 12. The utility next determined the number of kilowatts each class was demanding at that particular peak hour, and from this information calculated the proportion of each class's contribution to the utility's demand costs during that one hour. The one-hour coincident peak method of allocation assumes that the load usage during the single hour of the annual system peak is representative of each class's responsibility for costs over the entire year. The Anderson study, therefore, took the proportionate contribution to cost of each class during the one peak hour and assigned total test year costs to each class in the same proportions. It then compared the costs assigned to each class with the revenues collected from each class and determined their various rates of return. The utility employed the results of the Anderson Study in designing the allocation among the classes of its proposed revenue increase. The utility compared the rates of return calculated by Anderson with its overall average rate of return, and assigned the proposed additional revenues in varying amounts to the different classes in such a way as to bring each class's rate of return closer to the system average. [3] From May 8, 1978, through August 9, 1978, the Commission held 27 days of hearings, pursuant to 35 M.R.S.A. § 69, on the utility's revised schedule of rates. Much of the testimony and many of the exhibits concerned the new rate design proposal. The utility and the Intervenors presented several expert witnesses and introduced into evidence a number of exhibits on the issue of rate design. The Commission staff also presented its own expert witness. The witnesses were in general agreement that the allocation of revenues to each customer class should reflect the cost of serving that class; that the rates of return among the customer classes were not currently equivalent; and that the evidence tended to show the residential rate of return was below the system average and the general service transmission (GST) rate of return was above the system average. There were, however, significant differences of opinion as to the best method of computing accurate rates of return. Much of the testimony was grossly technical and need not be elaborated upon in this opinion. A sampling of the varied opinions with which the Commission was faced, however, follows. Frederick E. Anderson, the author of the Anderson Study, testified in great detail in support of the one-hour coincident peak method. He said that his objective in preparing the study was to aid the utility in making its rates more cost-related. Dr. John W. Wilson, an expert in electric utility rate design, testified on behalf of Keyes Fibre Company regarding a marginal cost study he had performed on the utility's system in which he calculated the marginal running cost [4] for all customers on the system from hour to hour during 1977, using a peak period that encompassed the hours between 8:00 A.M. and 9:00 P.M. on workdays, or 37.7 percent of all hours in the year. Dr. Wilson testified that he used this broad-based peak period in order to avoid the unnecessarily speculative and, perhaps, unfairly representative procedure of assigning peak costs on the basis of a single hour; and that since marginal cost rates are equally applicable to all customers on the system, he avoided the potential arbitrariness involved in assigning demand costs between customer classes . .. Addressing himself to the Anderson Study, Dr. Wilson stated that in comparison with what other electric utility companies around the country are doing, he would give the Anderson proposal a grade of B; in comparison with the best scientific methods available, he would give the study a C minus or D; and, if the Commission wanted to receive an A with the industry, it would have to do better than the Anderson Study. Nevertheless, Dr. Wilson said that his rates tend[ed] to confirm the company's cost of service study. Michael J. Ileo, an economist and public utility consultant, offered expert testimony on behalf of Maine Oil Dealers Association. [5] He compared the marginal cost study prepared by Dr. Wilson with the Anderson Study. When asked if he thought the Anderson Study was an appropriate basis upon which to determine the utility's costs, he responded, I would not call it appropriate. I would prefer to call it a method and an acceptable method by which it could be done. He stated that he thought Dr. Wilson's study represented costs more fairly, but stated that if the Commission could not adopt Dr. Wilson's proposal, then he would urge the Commission to adopt the utility's proposal. Mr. Ileo testified that he was in general agreement with the direction in which the utility was moving with regard to rate design because it reflected an attempt to deal with the problem of price discrimination; however, he was unable to support the specific methods employed in the Anderson Study, particularly the time definition of the peak period. George Sterzinger testified as an expert witness on rate design on behalf of the Consumer Action Coalition. [6] Mr. Sterzinger maintained that the Anderson Study's use of the one-hour coincident peak method of determining demand costs resulted in a substantial overstatement of the residential class's responsibility for demand. He advocated the use of the so-called Average and Excess Demand Allocation method. Bruce M. Louiselle, vice president of a consulting firm specializing in public utilities economics, testified on behalf of the Commission staff. He maintained that the one-hour peak was far too narrow a time frame to fairly represent relative demand. He offered evidence to show that on December 12, 1977, the day of the system's one-hour peak, during the entire 13-hour period from 8:00 A.M. to 9:00 P.M., the demand for electricity was in excess of 90% of the one-hour peak between 5:00 P.M. and 6:00 P.M. He concluded that slight changes in the pattern of use for even a single class could shift the one-hour peak and thereby change the relative levels of use as between classes. He recommended that a far broader period of time be used for purposes of allocating costs. Finally, Dr. Mark Drazen, a consultant in the field of public utility regulation, testified on behalf of St. Regis Paper Company. He had reviewed the Anderson Study and conducted what he called a sensitivity study for the GST class to check the accuracy of the utility's calculated rate of return. He computed the rate of return using a demand allocation factor for the GST class 10% greater than the 1977 coincident peak factor, and found that the rate of return for that class was still above the system average. Mr. Drazen also offered an exhibit in response to Mr. Louiselle's testimony concerning the possible effect upon demand allocation of the use of a 13-hour peak demand period on December 12, 1977 (from 8:00 A.M. through 9:00 P.M.), rather than the single peak hour. His exhibit shows a change in the peak allocation factor for the GST class of only 5%. He concluded that the sensitivity study and the cost study show that even under the utility's proposed rates, the residential rate of return is below average and the GST rate is above average. By decree dated October 13, 1978, the Commission disallowed the utility's schedule dated January 16, 1978, and, acting pursuant to powers conferred by 35 M.R.S.A. § 294, authorized the utility to file revised rate schedules to generate an increase in gross revenue by an aggregate of approximately 15.5 million dollars. The Commission also rejected the utility's proposed rate design. After reviewing all the evidence relevant to a realignment of the rates among the classes, again purporting to act pursuant to 35 M.R.S.A. § 294, the Commission decided to make no change, finding. . .: that the use of the one hour coincident peak method for allocating demand costs is so flawed and yet is so significant in the overall result of the cost-of-service study that we are unable to rely on the study as a basis for allocating the revenue increase among the various rate classes. Were the 90 percent of peak method we have found to be fairer to be used, it is conceivable that the returns earned from the various classes would be very different from the figures the company has presented to us. But we have no way of knowing what they would be. Having rejected the cost-of-service study as a basis for allocation of the revenue increase, we are left in the position of having to make allocations without the aid of any competent cost evidence. Under these circumstances, we find that the only reasonable and fair result is to require that rates be designed so as to give all classes of service the same percentage increase over total test-year revenues. Central Maine Power Company Re: Proposed Increase in Rates, F.C. # 2332, 26 P.U.R. 4th 388, 424-425 (1978). The utility thereupon filed new rate schedules in accordance with this decree. By Supplemental Orders Nos. 1 & 2, dated October 31, 1978, and December 5, 1978, respectively, the Commission approved the substitute rate schedules. The utility and several intervenors seasonably appealed pursuant to 35 M.R.S.A. §§ 303 and 305 from those final orders. See id., 405 A.2d 155-158. St. Regis Paper Co. was a § 303 Appellant on that first appeal, challenging the propriety of the Commission's allocation on a uniform basis to all customer classes the rate increases permitted by Supplemental Orders Nos. 1 and 2. In an opinion filed August 6, 1979, we sustained in part the appeal of the utility, authorizing the utility to file revised rate schedules to increase its proposed revenues by an additional $880,000. Id., 405 A.2d at 164-179. In view of this disposition, we declined to express any opinion as to the propriety of the Commission's action on the rate design issue, concluding that the issue could become moot were the utility, in filing its revised rate schedules, to choose to seek a uniform percentage increase or to present revised studies supporting its proposed realignment; or were the Commission, in reviewing the revised schedules, to find a revised study persuasive, or to accept some other form of realignment. Id. at 158, 186. In its Order on Remand, dated August 14, 1979, the Commission authorized the utility to file revised rate schedules in accordance with this Court's August 6, 1979, mandate. The order further noted that [w]hile the Commission does not require a particular rate design at this point, it does favor an equal percentage increase to all classes of service with no increase in the current residential class customer charge. On August 15, 1979, the utility filed a new schedule of rates in compliance with the Commission's Order on Remand; the new schedule, however, contained the following disclaimer: Consistent with the Commission's preference expressed in this Order, and given the relatively small amount of additional revenue allowed, the enclosed rates have been designed to spread the increase in as nearly equal percentages as practicable to the several customer classes. The proposed rate design for various classes of customers which the Company submitted in this case did not provide for the same percentage increase for the several classes of customers, but attempted to reflect the costs of serving different customer groups. This filing should not be construed as an acceptance by the Company of the Commission-mandated rate structure based on an across-the-board increase as more appropriate than that proposed by the Company. St. Regis Paper Company immediately filed a request for rehearing before the Commission on the rate design issue. St. Regis was joined in its request by Scott Paper Company and Keyes Fibre Company. On August 22, 1979, the Commission issued Supplemental Order No. 4, approving the utility's revised rate schedule without a hearing. In this final decision, the Commission specifically recognized its duty to approve and order into effect without delay substitute rates which have been found to be just and reasonable. See Central Maine Power Co. v. Public Utilities Commission, Me., 382 A.2d 302, 324 (1978). The Order states: We have received requests for hearing on allocation of revenue among customer classes from St. Regis Paper Co., Keyes Fibre Company and Scott Paper Company. At this point we believe we have a responsibility to approve a revised schedule of rates promptly in order that Central Maine may commence collecting the additional annual revenues which the Supreme Court has required. We do not, however, take lightly the requests for hearing on the allocation issue raised by St. Regis, Keyes and Scott. Therefore, we will keep Docket F.C. 2332 open and will plan to hold hearings as soon as the Commission Staff can prepare its affirmative case on the allocation issue. The Commission has applied for funding under the Federal Public Utility Regulatory Policies Act of 1978 to investigate the cost of service and electrical rate design issues. We intend to initiate these further hearings as soon as possible and our sincere hope is that this issue will receive attention during this forthcoming fall. St. Regis Paper Company, Scott Paper Company and Keyes Fibre Company brought timely appeals pursuant to 35 M.R. S.A. § 303 from Supplemental Order No. 4. [7] Although Central Maine Power Company is nominally an Appellee on this appeal, that utility joins with the Appellants in arguing that the Commission's rejection of the utility's original rate design proposal and imposition of a uniform increase was unreasonable and unsupported by substantial evidence. Nevertheless, the utility concedes that the Commission was obligated to implement without delay the rate increase finally approved by this Court. The two issues presented by this appeal overlap to a great degree. These issues are: (1) Whether the Commission's rejection of the utility's proposed allocation of revenues was reasonable and supported by substantial evidence, in light of the fact that neither the Commission staff nor any other witness at the hearings before the Commission offered any alternative allocation design, and (2) Whether the Commission's approval of the utility's allocation of the revenue increase on a uniform percentage basis to all customer classes was reasonable and supported by substantial evidence.