Opinion ID: 1526377
Heading Depth: 2
Heading Rank: 1

Heading: Customer Charge

Text: Establishing cost of service for rate design is a complex process. The methodology employed here by Central Maine, and adopted by the Commission as to this issue, entails three steps. All of Central Maine Power's costs are first designated according to their function, i. e., power supply, transmission, subtransmission or distribution. Each of these functionalized costs is then classified according to its demand, energy or customer components. Finally, all costs are allocated among the various customer classes by use of allocation factors, which are derived by various methods depending upon the function and classification of the cost. [54] In the proceeding below, as a complement to its decision to discard the existing declining block rate structure [55] and impose a flat energy rate, the Commission established a $5.70 monthly customer charge. The Consumer Coalition and the Natural Resources Council of Maine, intervenors below, challenge that action. Specifically, they dispute the classification of certain parts of the distribution system sometimes called the minimum or phantom distribution systemto customer costs. These costs, they argue, are properly classified to demand rather than customer costs, a revision which they contend would lower the monthly customer charge from $5.70 to $3.15. The Commission argues that while the intervenors' proposed designwhich seeks to track as closely as possible the marginal energy and demand costs of producing electricitymay have merit, it faced the different problem of producing an equitable rate structure once declining block rates had been abolished. Prior to the rate proceeding presented for review here, Central Maine Power charged each residential customer $3.40 per month for customer costs. This minimum bill included the right to use 25 kilowatt hours of energy at no additional charge. In its original filings, Central Maine proposed increasing that customer charge to $4.00 and providing no free energy at all. At the same time, the Company observed that while its actual customer cost was  considerably more per month, the difference would be recovered in the first energy blocks of their proposed declining block-rates. [56] When the Commission suggested the use of a flat energy rate, Central Maine Power witness Anderson stated that in that event the customer charge should be $5.68. The Commission ultimately found that if there ever was a cost justification for declining blocks, that justification no longer applies to residential customers, and, therefore,. . . the declining block structure should be eliminated from the residential class rate. [57] The Commission, therefore, determined to accept Central Maine's customer cost figure of $5.68, rounded to $5.70, as the residential customer charge to be assessed in connection with the new schedule employing flat energy rates. There is little dispute over the definition of what costs should be classified as a customer cost. The Company defines customer costs as . . . fixed costs which vary on a total company basis with the number of customers serviced and . . . not. . . with demand (KW) and energy (kwh) consumption. In addition, these costs have no time dimension at all. Or, as the Commission Decree paraphrases it, costs that vary with the number of customers in the rate class, regardless of the energy or demand use. The Consumer Coalition seeks to refine the definition somewhat by citing Professor James Bonbright to the effect that the customer charge should be composed only of those costs which are clearly allocable as such and which vary directly with the number of customers regardless of consumption. Bonbright, Principles of Public Utility Rates, 347-348 (1969). These nuances are of some significance to the intervenor's arguments. In any event, the major dispute focuses upon determining which costs meet this general definition and should thus be included in the customer charge. No party disputes inclusion of such items as meters and meter reading, billing and customer service costs. What is hotly contested is inclusion of a minimum distribution system , consisting, according to the Commission, of a minimum amount of poles and wires needed, on average, to connect a residential customer to the Company's distribution system. In its Decree the Commission quoted Professor Bonbright, supra, at some length as to the propriety of including the minimum distribution system costs in customer costs: But the really controversial aspect of customer-cost imputation arises because of the cost analyst's frequent practice of including, not just those costs that can be definitely earmarked as incurred for the benefit of specific customers but also a substantial fraction of the annual maintenance and capital costs of the secondary (low-voltage) distribution systema fraction equal to the estimated annual costs of a hypothetical system of minimum capacity. The minimum capacity is sometimes determined by the smallest sizes of conductors deemed adequate to maintain voltage and to keep from falling of their own weight. In any case, the annual costs of this phantom, minimum-sized distribution system are treated as customer costs and are deducted from the annual costs of the existing system, only the balance being included among those demand-related costs to be mentioned in the following section. Their inclusion among the customer costs is defended on the ground that, since they vary directly with the area of the distribution system (or else with the lengths of the distribution lines, depending on the type of distribution system), they therefore vary indirectly with the number of customers. What this last-named cost imputation overlooks, of course, is the very weak correllation between the area (or the mileage) of a distribution system and the number of customers served by this system. For it makes no allowance for the density factor (customers per linear mile or per square mile). Indeed, if the company's entire service area stays fixed, an increase in the number of customers does not necessarily betoken any increase whatever in the costs of a minimum-sized distribution system. While, for the reason just suggested, the inclusion of the costs of a minimum-sized distribution system among the customer-related costs seems to be clearly indefensible, its exclusion from the demand-related costs stands on much firmer ground. For this exclusion makes more plausible the assumption that the remaining cost of the secondary distribution system is a cost which varies continuously (and, perhaps, even more or less directly) with the maximum demand imposed on this system as measured by peak load. Bonbright, Principles of Public Utility Rates, supra, at 347-348 (1961). While recognizing the difficulties of properly allocating the minimum distribution system costs, the Commission found inclusion of such costs as customer costs to be the most reasonable solution, saying: We find that the most cost-related rate structure for the residential class is one that recovers the full customer cost in the customer charge and the demand and energy costs in a uniform charge for every kilowatt-hour consumer. We find that there is no justification for continuing to use a declining block rate structure for this class. We direct Central Maine to file a residential rate with a minimum customer charge of $5.70 and a flat energy charge designed to generate the necessary revenues for the residential class. Challenging this action, the Consumer Coalition points to the same passage by Professor Bonbright as authority for the proposition that these costs (of the minimum distribution system) are basically unallocable according to the usual standards, and hence must be allocated according to the policy goals the Commission seeks to attain. Instead of doing so, the Coalition charges, the Commission made the purely conclusory statement that allocation to customer costs is reasonable, while providing no supporting findings. Such action, it argues, is arbitrary and contrary to expressions of policy contained in the Commission's decrees and in state and federal legislation. The Natural Resources Council joins in this argument, and notes particularly that Professor Bonbright's conclusion that the lesser of two evils was to include the minimum distribution system costs in customer costs was made in the context of an electric industry with decreasing marginal costs, a situation which has since been reversed. Facing the same issue today, the Council urges, Bonbright would have supported allocating costs of the minimum distribution system to the energy charge, to help achieve marginal-cost based rates. The Commission, in the Council's view, eliminated the declining block structure because it discriminated in favor of electric space heating customers, then inexplicably perpetuated that discrimination by raising the customer charge. [58] By accepting Central Maine Power's cost-of-service study figure for actual customer charges, the Council says, the Commission erroneously assumed it would be left with actual energy charges and therefore appropriate price signals. In fact, they argue, the energy charge has been priced below the Company's incremental cost of providing service, thus moving away from cost-based rates. Now, the Council insists, the energy charge will be whatever revenue requirements dictate, irrespective of any relationship between that charge and the true incremental cost of providing service. Appropriate price signals do not result, since the customer charge affects only the choice whether to take service, and does not affect consumption patterns. A redesign of residential rates along the lines suggested by the Consumer Coalition and the Natural Resources Council is not without merit. The path chosen by the Commission is not without faults. According the Commission due deference in light of its legislative function and expertise, however, we find the result reached and the methodology used to be reasonable, and the rate design to be supported by substantial evidence. Mars Hill, supra, at 588. Marginal cost pricing, as a rate design methodology, attempts to reflect a utility's incremental (or decremental) cost of providing one more (or one less) unit of electricity at a given moment. Although in the fore-front of many contemporary reevaluations of electric rate structures, it is not without its difficulties, most notably that [t]here are enormous definitional problems in determining what is and what is not a marginal cost. A. C. Aman, Jr. & G. S. Howard, Natural Gas and Electric Utility Rate Reform: Taxation Through Ratemaking? 28 Hastings L.J. 1085, 1090 (1977). Before the Commission, marginal costs were defined variously as the cost of producing an additional unit of output and as the first derivative of average cost. Three different calculations of marginal costs, each showing substantially different results, were presented the Commission. It was reasonable for the Commission to decline to attempt implementation of marginal rates, given such difficulties. [59] Recovery of fixed customer costs, including those attributable to the minimum distribution system, through a $5.70 customer charge was also reasonable, and supported by substantial evidence. No party contests Central Maine's establishment of the $5.68 composite customer cost figure, nor disputes that some of that cost was once hidden in the declining block structure. As noted, the focus of dispute is upon proper classification of those costs, particularly those of the minimum distribution system. The Commission, having opted for a flat energy rate, faced the option of classifying such costs to the energy charge (raising the price per kilowatt hour) or segregating them in a distinct charge. The testimony of Mr. Anderson was that elimination of the customer charge and classification of those costs to energy would require an energy charge of 3.16 cents per kilowatt hour, while use of a $5.68 customer charge would allow the energy charge to be set a full 1 cent lower. Central Maine Power presented the following chart illustrating the cross-subsidization which would result from imbedding customer costs in the energy charge. REVENUE CUSTOMER COST EXCESS KWH Actual Recovered (Deficiency) 0 $5.68 $ 0 (5.68) 25 5.68 0.25 (5.43) 100 5.68 1.00 (4.68) 500 5.68 5.00 (0.68) 1000 5.68 10.00 4.32 2000 5.68 20.00 14.32 5000 5.68 50.00 44.32 10000 5.68 100.00 94.32 Obviously, high-use customers would be (unknowingly, in most cases) subsidizing low-use customers. While conservation of electricity is an undisputed goal, it cannot be the justification for discrimination of this sort. So, too, although flat rates for energy are perhaps less effective in encouraging conservation than some other methods might be, [60] they are reasonable when used in conjunction with a customer charge which properly assesses the cost of being tied to the electric service system. Substantial evidence supports the Commission classification of minimum distribution system costs to the customer charge. The NARUC Cost Allocation Manual [61] recognizes two methods of determining the customer cost component of distribution system plant: the minimum size and minimum intercept methods. Central Maine Power used the minimum size method, which entails classification of a minimum distribution system to customer costs. [62] Significantly, a Consumer Coalition witness conceded on cross-examination that his proposal to classify distribution plant cost to demand related cost was not recognized in the NARUC Manual, while use of the minimum size method was. The Commission was faced with the task of allocating what it termed basically unallocable costs. The testimony and evidence supporting classification of the minimum distribution system to customer costs was substantial. The NARUC Manual approves such a choice, and not the intervenors' alternative. Professor Bonbright criticized inclusion in customer costs, but rejected inclusion in demand costs with at least equal fervor. Though the costs of the minimum distribution system vary, at best, only indirectly with the number of customers served, they do not vary at all with demand or energy, leaving the Commission only a Hobson's choice with respect to the allocation of these costs. Facing this dilemma, the Commission was entitled to exercise reasonable discretion in selecting a methodology to account for these costs. Classifying them to the customer charge, in order to implement flat energy rates without exacerbating existing cross-subdization, was a reasonable exercise of that discretion. The use of averaging to produce a flat energy charge which will produce the necessary residential revenue requirement, while perhaps lacking in precision, is a reasonable technique producing a reasonable result. Adoption of the policy urged by the intervenors of classifying the costs of the minimum distribution system to the energy (demand) charge would be equally imperfect, and Commission discretion must, therefore, carry the day. New England Telephone, supra, at 59 (1978).