Opinion ID: 489534
Heading Depth: 3
Heading Rank: 1

Heading: Fixed-cost Recovery

Text: 50 Under the Seaboard method of rate design, the commodity charge includes fixed production costs and 50 percent of fixed transmission costs, which include equity return, related taxes, depreciation, and debt cost. The remaining fixed costs are recovered through the demand charge. The Commission found that Transwestern's fixed-cost minimum bills could not be justified on the basis that they recovered fixed costs because the minimum bills recovered costs which did not warrant risk-free recovery. Specifically, the Commission determined that the costs of depreciation and servicing the debt should be guaranteed, but that equity return, related taxes, and fixed production costs should be subject to risk. 8 Since Transwestern's minimum bills guaranteed recovery of all fixed costs, they could not be justified on this basis. 51 To permit fixed-cost recovery which is warranted, the Commission adopted the modified fixed variable rate design. Under this method, all fixed costs are assessed as parts of the demand charge, except equity return, related taxes, and fixed production costs. Thus, all fixed costs which Transwestern should recover will be recovered through the demand charge without the imposition of a minimum bill. 52 Transwestern responds that the Commission cannot prescribe a new mechanism for the recovery of fixed costs merely because it prefers it. Transwestern asserts that the Commission must first find the existing provision unlawful under Sec. 5 of the NGA. The Commission, however, did not eliminate Transwestern's minimum bills because it preferred the modified fixed variable rate design to the Seaboard method. It first found the minimum bills unlawful because they unreasonably restrained trade. It further found that Transwestern's minimum bills were not justified on the ground that they permitted recovery of fixed costs that should not be guaranteed, not because a new method of rate design would better accomplish the purpose. 53 Transwestern next contends that there was no record evidence that the modified fixed variable rate design would assure the recovery of fixed costs assigned to the commodity component. Transwestern claims there was no evidence that its sales levels without minimum bills would remain sufficient to recover those fixed costs the Commission left at risk. This begs the issue. The point of the Commission's determination was to subject certain fixed costs to market risks. The Commission placed equity return at risk, because it did not think Transwestern should be guaranteed any profit. Rather, Transwestern will earn profits only when it makes sales. Similarly, the Commission's conclusion that fixed production costs should be fully at risk is based on a determination that Transwestern should have the incentive to minimize costs; such an incentive will motivate Transwestern to make prudent gathering and production expenditures. 9 54 Transwestern does not really dispute the underlying determination of cost allocation, but maintains that it should be guaranteed a reasonable opportunity to earn a return on its investment. The Commission's decision here does not deny Transwestern such a reasonable opportunity. The Commission has only refused to protect Transwestern's profit from competition and provided Transwestern what the Commission determined to be the appropriate incentive to run its business efficiently. [R]egulation does not insure that the business shall produce net revenues. FPC v. Natural Gas Pipeline Co., 315 U.S. 575, 590, 62 S.Ct. 736, 745, 86 L.Ed. 1037 (1942). 55