Opinion ID: 2284798
Heading Depth: 3
Heading Rank: 2

Heading: Differentiation Among Customer Classes

Text: The petitioners ground their opposition to the rate design established by the Commission, first, on the Commission's substantial reliance on factors other than cost causation in formulation of the rate design, and second, on the closely related problem of the alleged disparity among the rates of return the Company will receive from different classes of customers under the order. The disparity, it is asserted, renders the rate design unconstitutionally confiscatory in that, as a concomitant of that disparity, certain groups are compelled to subsidize others' gas usage, instead of merely paying for their own purchases.
By now, the permissibility of relying on non-cost factors in rate design is beyond serious dispute. Inasmuch as the differences in customer charges among the various consumer classes, and the alleged differences in class rates of return derive from reasonable consideration of such factors, they do not render the rates invalid. [15] Preliminarily, we note that the use of non-cost factors in addition to cost causation does not amount to a rejection of the latter. Contrary to petitioners' contention, the Commission did not repudiate the significance of the principles of cost causation for utility ratemaking. The Commission's specific denial that it was rejecting cost-causation principles, Order 6060, at 16; Order 6051, at 90, attains credence from its discussion of the lack of cost justification for discriminating between residential heating and cooling customers who consume above and below 100 Ccf of gas per year, as was proposed by WGL, id. at 96, and from its discussion of the conflict between the principles of cost causation and countervening considerations of the value of service, historic rate patterns, and equity, in setting rates for residential non-heating and non-cooling customers, id. at 97. Furthermore, relevant cost considerations are not limited to historic costs (the cost already paid for existing fuel stocks), but include replacement costs (the cost of purchasing new fuel stocks to replace those currently being consumed). The Commission has expressed concern with escalating gas replacement costs. In Formal Case 647, the basic facts and rationales of which were reaffirmed in the instant case, Order 6051, at 89-90, [16] a two-part rate structure was first substituted for the traditional declining block rate structure. The Commission, commenting upon the increasing complexity of the economic equation for utility rate designs, which impelled this transition, stated: Complicating the cost picture are several factors. One is that existing and new supplies of gas are becoming more and more costly. To the extent that the company must replace gas sold on a promotional basis with higher priced gas, its average costs will escalate. Another factor is that the company's service is limited by gas supply, as well as by pipeline capacity. In these circumstances, traditional allocation techniques must be reevaluated; customers' responsibility for fixed costs must be related more closely to their gas usage. [ In re Washington Gas Light Co., supra at 278-79 (citing Consolidated Gas Supply Corp. v. Federal Power Commission, 172 U.S.App.D.C. 162, 520 F.2d 1176 (1975)).] Accord, Midwest Gas Users Association v. State Corporation Commission, 3 Kan. App.2d 376, 382-83, 393, 595 P.2d 735, 740, 747 (1979); United States Steel Corp. v. Pennsylvania, 37 Pa.Commw.Ct. 195, 207-10, 390 A.2d 849, 856-57 (1978); In re Laclede Gas Co., 25 P.U.R.4th 51, 58 (Mo.P.U.C. 1978). Although the Commission projected increasing gas supplies in the near-term future, Order 6051, at 84-85, it noted too the rising cost of the commodity. Id. at 99. It is anticipated that as local supplies of gas are depleted, the Company will eventually have to replenish its commodity supplies from more exotic and expensive sources. See Order 6051, at 88. Because gas is a limited and wasting resource, see In re Washington Gas Light Co., supra at 279, it is foreseeable too that rising recovery costs will contribute to increased commodity replacement costs, regardless of the economic climatefor we note also the effect of inflation on replacement costs. [T]he cost of recovering natural gas can no longer be treated as just another cost of doing business. Although there is considerable controversy over the amount of natural gas which can be ultimately recovered domestically, there is little difference of opinion that the amount of natural gas ultimately recovered will cost considerably more per Mcf than gas recovered in the past. This is a reasonable assumption because not only are the factors of production (land, labor, and capital) involved in gas exploration and development increasing in cost, but the process itself is becoming more costly. Where gas could once be recovered onshore in porous wells at shallow depths and in great quantities, the depletion of these resources has forced the natural gas industry to drill deeper in tighter formations, drill offshore, or look to supplies beyond the continental limits of this country. Hence, even if the traditional costs of production level off or decrease, the cost of recovering natural gas will continue to increase or, in other words, putting an end to inflation will not put an end to increases in the price of gas. [ In re Laclede Gas Co., supra at 88.] Under this analysis, the inclusion of substantial fixed costs in the commodity charge is cost-justified. [17] The high usage customers contribute disproportionately to the exhaustion of relatively inexpensive commodity sources, and thus accelerate future increases in commodity prices for all utility customers. See id. A higher commodity price would tend to decrease consumption, thereby reducing the upward pressure on gas prices. Petitioners allege that due to the inclusion of fixed costs in the commodity charge, customers who consume greater quantities of gas are compelled to subsidize lesser consumers. The high usage customer, however, if charged solely on the basis of current commodity prices at any given time, never covers the gas replacement costs for which he is responsible. The price system is thus distorted, with the smaller consumer absorbing higher costs caused by the greater consumer, or, in effect, subsidizing the greater gas consumer. The Commission's inclusion of substantial fixed costs in the commodity charge tends to mitigate the distortions in cost allocations caused by rising replacement costs. By attributing to each customer the expenses for which he is responsible, the consumer has before him the correct price indicators upon which to base his purchase and resource consumption decision. The Commission expressed concern in Formal Case 647 that [p]romotional rate structures tend to foster a misallocation of scarce resources. In re Washington Gas Light Company, supra at 279. See In re Laclede Gas Co., supra at 88-89. If every customer on [the] company's system must pay at least the cost of replacing any gas he consumes, then those customers have the proper price information to decide whether the benefits of conserving that gas are equal to the price. If any customer on [the] company's system does not have to pay at least the cost of replacing the gas that customer consumes, then that customer is permanently insulated from the cost impact his consumption has upon [the] company's entire system. By recovering more than historic cost in the commodity charge, the Commission's order moves toward long-term cost-reflective pricing, which contributes to a more efficient allocation of resources. [18] We would be compelled to reject the petitioners' contention that a utility rate order depends for its validity upon a predominantly cost-based foundation, even if that concept is expanded to encompass replacement cost. On the contrary, historic and replacement costs are not the only criteria in the establishment of a rate structure, see Apartment House Council of Metropolitan Washington, Inc. v. Public Service Commission, supra at 57, and it is a function of the Commission to determine the relative weight to accord the various factors that it considers in the ratemaking process, see Association of American Publishers, Inc. v. Governors of the United States Postal Service, supra, 157 U.S.App.D.C. at 403-04, 485 F.2d at 774-75. The value of service to the consumer is one of the valid non-cost factors. The Commission's reliance upon value of service as a relevant factor [19] in the determination of whether there has been unlawful discrimination is supported by precedent, see, e.g., In re Washington Gas Light Co., 99 P.U.R.3d 139, 144 (D.C.P.S.C.1973); and this court has previously endorsed consideration by the Commission of whether customers have paid different amounts for the same service under the same circumstances.... So long as the classifications are reasonable, a difference in rates may exist between different classes of customers. Atlantic Telephone Co. v. Public Service Commission, D.C.App., 390 A.2d 439, 444 (1978). See also Florida Retail Federation, Inc. v. Mayo, 331 So.2d 308, 312 (Fla.1976); Midwest Gas Users Association v. State Corporation Commission, supra, 3 Kan.App.2d at 381-91, 595 P.2d at 739-46; New England Telephone and Telegraph Co. v. Public Utilities Commission, 390 A.2d 8, 59 (Me.1978); In re Arkansas Louisiana Gas Co., 558 P.2d 376 (Okl.1976); United States Steel Corp. v. Pennsylvania, supra 37 Pa.Cmwlth. at 207-09, 390 A.2d at 856. [E]ach unit of natural gas has the same energy value and the same economic value no matter how many units of gas a customer may purchase. In re Arkansas Louisiana Gas Co., supra at 378. The intrinsic value of service to the customer may conflict with the cost of service to the utility, but is, we conclude, a valid equitable consideration, which the Commission not unreasonably included in the utility rate equation. The Commission's consideration of historical rate patterns in fashioning the order was likewise not inappropriate. See Apartment House Council of Metropolitan Washington, Inc. v. Public Service Commission, supra at 58. While structuring utility rates solely on the basis of the ability of different groups of customers to pay would comprise a manner of social legislation and subsidy best left to the legislative branch of government, see United States Steel Corp. v. Pennsylvania, supra 37 Pa.Cmwlth. at 173, 390 A.2d at 871; In re Rate Design for Electric Corporations, 26 P.U.R.4th 280 (N.Y.P.S.C.1978), in the instant case we find no abuse of discretion in the Commission's refusal to impose high gas rates on residential customers where the Company, through past advertising and favorable rate structures, promoted dependence by these customers on gas usage. Moreover, consideration of an equitable factor such as this is not invalidated simply because the same rationale might apply to certain members of other customer classes. See Metropolitan Washington Board of Trade v. Public Service Commission, supra at 358-59. Such imperfections are inherent in any system employing broad classifications, and the Commission may exercise its discretion to provide relief to those classes which, as a whole, have the greatest claim to it. [20] The Commission also permissibly relied upon the need for resource conservation. Order 6051, at 89. We have previously affirmed the Commission's obligation to aid in the energy crisis. Apartment House Council of Metropolitan Washington, Inc. v. Public Service Commission, supra at 57; see Metropolitan Washington Board of Trade v. Public Service Commission, supra at 358. Although the Commission anticipates a ready supply of gas in the near future, Order 6051, at 84-85, recognizing that gas is a scarce, finite, and wasting resource, and that conservation is in the public interest, see, e.g., In re Washington Gas Light Co., 16 P.U.R.4th at 279, we find reasonable and within the scope of its allowed discretion the Commission's incorporation of a conservation goal into the ratemaking equation. See Central Hudson Gas and Electric Corp. v. Public Service Commission, 447 U.S. 557, 571, 100 S.Ct. 2343, 2354, 65 L.Ed.2d 341 (1980) (We accept without reservation the argument that conservation ... is an imperative national goal. Administrative bodies empowered to regulate electric utilities have the authorityand indeed the duty to take appropriate action to further this goal.); California Manufacturers Association v. Public Utilities Commission, 24 Cal.3d 251 at 260, 155 Cal.Rptr. 664 at 669, 595 P.2d 98 at 103 (Public Utility Commission may properly consider prospective shortages of natural gas and the need to conserve that commodity); Boston Edison Co. v. Department of Public Utilities, 375 Mass. 1, 47, 375 N.E.2d 305, 333, appeal dismissed, 439 U.S. 921, 99 S.Ct. 301, 58 L.Ed.2d 314 (1978) (it was reasonable to conclude that the exemption of the first 384 kilowatt hours of electricity use would encourage energy conservation in the public interest).
It is unnecessary to reiterate in detail the Commission's rationale for its setting of customer charges, which are outlined in section B, supra. Inasmuch as these differences are reasonably based on legitimate cost and non-cost factors already discussed, they do not render the rates invalid. Two areas of contention merit a brief further mention, however: the charges applied to residential non-heating and non-cooling customers, and those applied to interruptible customers. One factor influencing the Commission was the tension inherent between the cost to the Company of providing service, and the value of service to WGL customers. Discussing residential non-heating and non-cooling customers, the Commission commented: Because of the very low volume of gas which this sub-class takes relative to its customer costs, a two-part rate yields an anomaly; this sub-class pays the highest unit price for service at the same time as WGL earns the least return from this service. In designating rates for the residential non-heating/non-cooling sub-class, the Commission faces a direct conflict between the principle of cost causation, on one hand, and historic rate patterns and social considerations on the other hand. [Order 6051, at 96-97 (emphasis in original).] We cannot say that the charge arrived at was based on illegitimate factors or embodies a capricious application of them. On the contrary, the record reflects a reasoned consideration and resolution of an issue as to which reasonable people can differ. It is not for us to substitute our preferences for the judgment confided by law to the Commission. While in the case of residential non-heating and non-cooling customers these cost considerations led the Commission to reduce the customer charge, id., it was drawn by other factors to approve WGL's proposed increase to a thirty cents per therm rate for interruptible customers. Id. at 99-100. These included rising fuel costs, the amount of investment fairly allocable to interruptible service customers, [21] the value of the service provided to these customers, and the closely related factor of the competitiveness of the rate charged interruptible customers for gas with the price of other forms of fuel. Order 6051, at 99-100. Utility companies operating under public franchises and having monopolistic characteristics are subject to special regulation. Public Utilities Commission v. Capital Transit Co., 94 U.S.App.D.C. 140, 145, 214 F.2d 242, 247 (1954). Although such regulation protects utility companies to a degree from ordinary market pressures, realities of the marketplace, including the company's competitive position and, in this context, the price of alternative fuels, may be considered in establishing or assessing the reasonableness of a rate structure. See United States Steel Corp. v. Pennsylvania, supra, 37 Pa. Cmwlth. at 207-09, 390 A.2d at 856. We find that the Commission acted reasonably in predicting the interruptible rate upon the above enumerated facts, and that the rate works no unfair discrimination. As it is neither unreasonable, arbitrary, nor capricious, and is supported by substantial evidence, the rate must be sustained.
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.