Opinion ID: 2284798
Heading Depth: 4
Heading Rank: 3

Heading: Alleged Differences in Class Rates of Return

Text: The objections raised by petitioners and in dissent relating to class rates of return are based entirely on a data analysis prepared by Washington Gas Light itself that is seriously flawed, was never adopted by the Commission, and which the Commission was under no obligation to adopt. Even if the PSC had adopted it as an aid in rate design, it does not follow that those rate of return estimates would become the legal benchmark for judicial assessment of whether the rates are impermissibly discriminatory under the D.C. Code or the Constitution. While the choice of a rate designwithin wide boundsis for the Commission to make, the standards for judging where the bounds lie, i.e., what is discriminatory, are for the court to establish. Finally, even if one hypothesizes the impossiblea single, objective, agreed upon method for allocating costsdifferences in the resulting class rate of return estimates would not satisfy petitioners' burden of proving illegally discriminatory rates. If, as here, the asserted differences flow from a reasonable application of legitimate cost and non-cost policies, they are permissible. Indeed, if the non-cost factors are given weight at all, differences in class rates of return are virtually inevitable. The record contains no decisive projection of the several rates of return reasonably to be expected under the instant rate order. During the hearings, Mr. Smallwood, vice-president of WGL, presented evidence indicating a range of rates of return from firm service customers varying from a negative 8.42% from residential non-heating customers to 26.11% from commercial and interruptible fuel users. On cross-examination, however, Mr. Smallwood renounced the figures he had earlier espoused, due to the erroneous methodologythe misallocation of mains to individually metered apartments [22] that he had relied upon in calculating those figures. [23] WGL Exh. N, at 26. He testified further that he had not, since learning of the error, recomputed the rates of return, and could not state with certainty whether the resulting rate would be negative. The Commission, acting within the scope of its allowed discretion, accordingly disregarded WGL's erroneous projection of class rates of return in fashioning the rate order. [24] Since the Company's cost causation analysis failed to pass muster, and despite the extensive consideration the Commission gave to cost allocations and cost causation during the rate hearings, no specific cost data clearly underlie the rate order. This lack of specificity does not alone imperil the validity of the order. We have previously held that [i]t is not necessary that differences in rate of return be specifically and quantitatively supported by customer class-cost considerations. The Supreme Court has stated that [a]llocation of costs is not a matter for the slide-rule. It involves judgment on a myriad of facts. It has no claim to an exact science. [ Apartment House Council of Metropolitan Washington, Inc. v. Public Service Commission, supra at 57 (1975) (quoting Colorado Interstate Gas Co. v. Federal Power Commission, 324 U.S. 581, 589, 65 S.Ct. 829, 833, 89 L.Ed. 1206 (1945)).] Accord, Midwest Gas Users Association v. State Corporation Commission, supra, 3 Kan.App.2d at 391, 393, 595 P.2d at 746, 747. Apart from the problems of accounting for individually-metered vs. group-metered apartments, the Washington Gas Light analysis is based on more fundamental assumptions that the Commission is not compelled to accept as a guide to rate design. Neither is this court compelled to accept those assumptions as the foundation for determining what is impermissibly discriminatory under the Constitution or D.C. Code. [25] In particular, petitioner's approach assumes that fixed costs must be allocated on a per-consumer basis, without regard to how much each consumer used the system. Even if one corrects the error of failing to account for the fact that individually-metered homes should not pay the same share as an entire building of group-metered apartments, see note 10 supra, it is not obvious that a per-unit allocation would be the only permissible one. For example, one might rationally allocate fixed costs, other than those directly attributable to particular customers or groups of customers, [26] in proportion to consumption. Indeed, this is the cost recovery method that overwhelmingly predominates in the sale of consumer goods and services generally. In the typical business, there is no customer charge and therefore one hundred percent of fixed costs are covered by the commodity chargethe price of the good or service in question. Most observers would not consider it unfairly discriminatory that a customer who buys one dollar's worth of goods contributes less to the overhead costs of the store than the customer who buys $100's worth of goods. Indeed, it might be considered unfairly discriminatory if the two were required to pay a separate and equal fee for overhead. If the Commission or this court adopted the principle of cost allocation in proportion to consumption, then the current set of rates would result in higher estimated rates of return for the classes of smaller consumers than for the classes of smaller consumers than for the other categories. Under the utilities' terminology, this would reflect a suspiciously unjust cross-subsidy of the large by the small user. It would be eliminated by recovery of all fixed costs through the commodity charge. We do not raise this possibility for the purpose of suggesting that it be adopted by the Commission as a guide to rate design. Nor do we adopt it as the standard for finding unconstitutional discrimination. If we did, we would have to reject the proposed rates and require the elimination of the customer charge, thus moving further from the result sought by the utility. Rather, we raise it to refute the suggestion that the imprecision in cost allocation is only a matter of technical differences in methodology. It is also a question of fundamental choices among alternate basic assumptions, no one of which can objectively be identified as the correct one. Under these circumstances, the dissent's unexamined presumption that we are compelled to rely on the petitioner's preferred choice, after correction of certain acknowledged errors, is specious. Even if one hypothesizes an objective, agreed-upon standard for estimating class rates of return, substantial disparities among the resulting estimates would not satisfy petitioners' burden of making a convincing showing of unlawful discrimination. Discriminatory rates cannot simply be equated with differences in estimated rates of return from subparts of the utility's business. [27] We have never imposed a requirement of uniformity among the rates of return from different customer classes; differences have indeed traditionally been tolerated. Our scrutiny of the legality of allegedly discriminatory differences in charges imposed upon utility customers focuses rather upon the reasonableness of the customer classifications. Metropolitan Washington Board of Trade v. Public Service Commission, supra at 360-61; Atlantic Telephone Co. v. Public Service Commission, supra at 444; Apartment House Council of Metropolitan Washington, Inc. v. Public Service Commission, supra at 57. [28] Indeed, insofar as the Commission may permissibly consider factors other than cost causation in structuring the rate design, it is inevitable that differences among rates of return will exist. Because the utility's revenue requirement is based on cost (expenses plus capital return) and because customer rates are designed to provide the revenue requirement, it is apparent that consideration by the commission of any factor other than cost will result in some customers paying less while others necessarily pay more than cost. Having discretion to consider factors other than cost, the commission must necessarily create some disparity among users.... [ California Manufacturers Association v. Public Utilities Commission, 24 Cal.3d 251, 261, 595 P.2d 98, 103, 155 Cal.Rptr. 664, 669 (1979) (en banc).] Only a minor part of the differences in class rates of return, as calculated by petitioners, is due to the differences in the customer charges applied to various classes. The differences are predominately due to the fact that a substantial part of fixed costs is recovered through the commodity charge. As a result, a larger absolute amount of fixed costs is borne by large users. However, they bear a smaller proportion of such costs in relation to their consumption, since part of fixed costs are borne through flat customer charges. Thus, if there are permissible grounds for recovering a portion of fixed costs in the commodity charge, notwithstanding a cost causation theory that allocates fixed costs on a flat per-customer basis, the rates must be upheld. The discussion in subsection a, supra, shows that there are indeed adequate bases for the Commission decision to recover a substantial portion of fixed costs through the commodity charge. It will suffice simply to summarize them here. One reason is conservation of energy resources. The higher the marginal cost of gas to the consumer (the commodity charge), the greater the incentive to reduce energy waste or to shift to lower cost energy sources. Concern that commodity prices cover replacement costs is another permissible consideration. As existing sources of gas are exhausted, finding and exploiting new ones becomes increasingly expensive. If the commodity charge is not higher than the historic cost, it will fail to cover the higher replacement cost, leading to an undesirable allocation of resources. Moreover, high demand is a contributing factor to higher resource prices. It is therefore not unjust that those who consume more and therefore are more responsible for overall consumer demand bear a proportionately higher burden of replacement costs. Value to the consumer, ability to pay, and historical rate patterns are additional reasons for not recovering fixed costs exclusively through the customer charge. [29] Finally, at each juncture the Commission has balanced countervailing criteria, and in so doing has satisfied the independent burden imposed on it by Washington Public Interest Organization v. Public Service Commission, supra at 75-77, to announce the criteria governing the rate determination and to explain how the order reflects application of these criteria to the facts before it. The Commission acted within the scope of its discretion in balancing the various criteria upon which it relied. Mathematical formulae are not required. Allocation of costs is not a matter for the slide-rule. It involves judgment on a myriad of facts. It has no claim to an exact science. Colorado Interstate Gas Co. v. Federal Power Commission, 324 U.S. 581, 589, 65 S.Ct. 829, 833, 89 L.Ed. 1206 (1945). As petitioners have failed to demonstrate that the order is unjust and unreasonable in its total effect, the rate design must be sustained.