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

Heading: Flaws in the Commission's Treatment

Text: As recognized in the per curiam opinion, the Commission departed from the traditional, inherently promotional declining block rate structure in WGL's most recent prior rate proceeding in 1976. See In re Washington Gas Light Co., 16 P.U.R. 4th 261, 278-84 (Formal Case No. 647, D.C. PSC 1976). In its place, the Commission instituted a two-part rate structure consisting of (1) a system charge, i.e., a fixed charge (unrelated to volume of consumption) which was designed to recover a significant portion of customer-related costs, [5] and (2) a commodity charge, i.e., a single per-therm rate for usage which was uniform for all customers regardless of customer class or volume of consumption. See id., at 279. The Commission felt that a uniform commodity charge would encourage conservation of gas. At the same time, the system charge was presumed to allocate the recovery of customer costs equitably among customer classes. [6] Although the Commission established separate system charges for each class of firm customers in the 1976 proceeding, it felt constrained to temper the effect of the sudden transition into a revolutionary new rate design. Id., at 280. Thus, despite evidence showing that customer costs were approximately the same for all residential customers, the PSC prescribed substantially unequal annual system charges of $72 for residential heating customers and $45 for residential non-heating customers. [7] Id., at 280 & n. 13. The Commission justified this discrepancy upon pragmatic as well as theoretical considerations. When a commission ushers in a drastically new rate structure, the PSC stated, it has the responsibility or at least the discretionto temper radical changes in the historical rate patterns. Id., at 280; accord, Apartment House Council of Metropolitan Washington, Inc. v. PSC, D.C.App., 332 A.2d 53, 57-58 (1975). Because the residential non-heating class had enjoyed low bills under the old declining block rates, the PSC saw a need to ameliorate the impact of the new rate structure on that class. It therefore felt justified in setting for residential non-heating customers an initial system charge which recovered only about two-thirds of the class' customer costs, even though that decision meant that other customer classes would have to make up for these unrecovered costs through higher commodity charges. The Commission was careful to note, however, that the transition period would not last forever and that in the future, such a cross-subsidization of one class by another would cease to be appropriate. It thus stated in the earlier case: Moreover, in a future general rate case, the commission will consider rate structure again. This case is only the first step in a periodic review of system charge levels. Once customers have had a fair opportunity to adjust to the new rate structure, the company can consider system charges which include more cost ingredients. [16 P.U.R. 4th at 280.] The clear import of this passage was that in future ratemaking cases, the system charge for the residential nonheating class gradually would be raised to reflect customer costs more accurately. It is clear, however, that the new customer (formerly system) charges which were established in the instant case achieve precisely the opposite result. What the Commission has done is to raise the uniform commodity charge from 21.0¢ per therm to 32.59¢ per therm. [Order No. 6051, at 106.] At the same time, the Commission lowered the customer charge component for residential heating customers from $72 per year to $45 per year. It lowered the customer charge for residential non-heating customers from $45 per year to $30 per year. It lowered the customer charge for small (less than 3,000 Ccf) commercial and industrial heating customers from $148.50 per year to $58.50 per year. For large commercial and industrial heating customers, the PSC left the customer charge at $148.50 per year. Finally, it left the customer charge for all non-heating commercial and industrial customers at $84 per year. The Commission thus declined to increase any class' customer charge, despite undisputed evidence that customer costs had increased for all classes. [Order No. 6051, at 106; Order No. 6060, at 28-29 (Stratton, C., dissenting).] Commissioner Stratton lodged a vigorous and well-reasoned dissent from the Commission majority's rate design determination. His dissenting opinion, from which the petitioners on this issue understandably draw much of their support, took the position that the new customer chargescoupled with the higher commodity charge would increase the disparities in rates of return among customer classes. Basing his calculations on test-year consumption patterns and on customer class cost-of-service studies conducted by WGL, he computed class rates of returnboth existing (based on the old rates) and projected (based on the new rates)for firm ( i.e., non-interruptible) service, as follows: Class of Service Rate of Return ---------------- -------------- Old Rates New Rates --------- --------- Residential Heating [] 6.37% 4.91% Residential Non-heating [] (3.91%) (8.42%) Commercial Heating [] 11.77% 15.13% Commercial Non-heating [] 19.44% 26.11% [ See Order No. 6060, Charts C & D accompanying Commissioner Stratton's dissent.] Commissioner Stratton contended (as have petitioners here) that this move toward even more unequal rates of return componentsprecisely the opposite direction from that in which the PSC had promised in the 1976 rate proceeding to moveis devoid of justification in the record. That being true, he asserted, the new rate design results in an impermissible cross-subsidization of the residential non-heating class (whose rate of return is projected to be a stunning negative 8.42%) by the other classes, particularly the commercial/industrial heating and non-heating classes (the rates of return for which are projected to be 15.13% and 26.11%, respectively). Those figures reveal that WGL's different customer classes will be making vastly unequal contributions toward the Company's overall authorized rate of return of 9.25%. Before addressing the legality of what I perceive to be manifest rate discrimination, however, I dispose of a concern relied upon by the majority and raised by the Commission and by People's Counsel in their appellate briefs. They challenge the validity of the projected rates of return by pointing to an admitted error in WGL's cost allocation studies. The Company apparently overstated the costs (both capital and operating costs) associated with gas delivery mains which were allocated to certain members of the residential heating and non-heating classes. WGL assigned those customers' costs evenly on a per-meter basis, not accounting for the fact that residential customers living in individually metered apartments are responsible for lesser main-related costs per customer than are other residential customers. The effect of a proper adjustment would have been to lower somewhat the total customer costs and the rate base for the residential non-heating class, with a concomitant increase in that class' projected rate of return. [8] None of the witnesses, however, was able to pinpoint the degree of adjustment that would be appropriate, or to estimate even roughly the degree to which the rate of return would rise. I carefully have reviewed the relevant cost allocation data and the related testimony of WGL's witnesses, bearing in mind that petitioners have the burden of establishing a convincing case of rate discrimination before this court may invalidate the rate design. I am well satisfied, however, that while Commissioner Stratton's rate of return figures may be distorted slightly due to the misallocation of main-related costs, those figuresviewed in conjunction with other record evidenceare reliable and indeed establish a prima facie case of rate discrimination. A number of factors makes this conclusion inevitable. First, the allocation of costs pertaining to mains is an inherently imprecise endeavor. As compared with other costs incurred in delivering gas to customers (such as costs of regulators, meters, meterreading, billing, etc.), it is much more difficult to determine accurately for what percentage of the costs of the total system of mains each customer is responsible. This is true simply because many customersand often customers in different classesshare the same mains. Hence, while WGL admittedly could have made further adjustments to its figures, it must be borne in mind that a good deal of educated quesswork naturally is involved in allocating costs associated with mains. Moreover, in computing the customer cost of mains for the residential classes, the Company took a very lenient approach. [9] For example, with respect to the residential heating and cooling class, less than one-third of the relevant mains were included. [Order No. 6060, at 11.] Second, the cost data in the record make it clear that whatever the appropriate adjustment might have been, the projected rate of return for the residential non-heating class still would remain negative. As the Commission majority noted in its Final Opinion and Order, even if all costs associated with distribution mains were eliminated from the customer costs computation, the resultant customer costs still would exceed the new customer charges for the residential classes. See PSC Order No. 6060 at 11; see also Ex. WGL 7, Sch. 2, Item B, for cost figures associated with mains. [10] Given the fact that residential non-heating customers use fewer therms per customer than any other class, the excess of customer costs over customer charges for this class obviously cannot be recovered through the commodity charge. When a customer class does not cover its costs through the customer and therm charges combined, a negative class rate of return necessarily results. When this happens, the utility cannot have the opportunity to earn its authorized overall rate of return unless higher-volume customers in other classes cover these excess costs through the therm charge. This is precisely the stuff of which rate discrimination is made. Finally, even if WGL's cost studies contain minor inaccuracies, they are the best and indeed the onlyevidence this court has to consider. They understandably were the only class-cost-of-service studies presented at the hearing. Even though one witness challenged their accuracy, neither he nor any other witness attempted to quantify the asserted misallocation. I therefore think it is not only reasonable but inescapable that the court should defer to the evidence of record, which petitioners have shown to be substantially correct. That evidence conclusively demonstrates that the PSC's new rate design is discriminatory. Had the majority addressed this issue correctly, the next step on reviewhaving established that the new rate design significantly discriminates in favor of the residential non-heating class at the expense of larger-volume commercial and industrial customerswould have been to determine whether the PSC advanced valid reasons for the rate disparities, and, if so, whether those justifications have adequate support in the record. It indeed may seem peculiar that the majority opinion largely avoids quoting the Commission's justifications for the new rate design. The reason the majority does not advert to the Commission's reasoning, however, is clear: The PSC's rationale simply does not square with that supplied by the majority in its desire to affirm the Commission's actions entirely. To read the majority opinion on rate design, and then to read the Commission's orders on the same subject, gives the impression that one is reading about two different rate proceedings. I think it is important to point out what the Commission's reasoning actually was, so that its decision may be judged on its own merits rather than on those supplied by the majority on this appeal. The Commission explained its decision to decrease so substantially the residential non-heating class' customer charge as follows: This sub-class of residential customers uses gas solely for cooking and/or heating water. Because of the very low volumes of gas which this sub-class takes relative to its customer costs, a two-part rate yields an anomoly; this sub-class pays the highest unit price for service at the same time as WGL earns the least return from this service. In designing rates for the residential non-heating/non-cooling sub-class, the Commission faces a direct conflict between the principle of cost causation, on the one hand, and historic rate patterns and social considerations on the other hand. Recognition of historic rate patterns for this group is required. We shall accordingly reduce the customer charge for this sub-class from $3.75 to $2.50 per month. This $1.25 reduction in the customer charge maintains approximately the same relationship as before with the new lower customer charge for the residential heating and cooling sub-class. We take this action essentially for equitable reasons. Because WGL incurs a comparatively large amount of fixed costs in order to deliver the very small volumes used by this sub-class, the Company's service for cooking and hot water is unprofitable for WGL. Nevertheless, through past advertising and rate structure, WGL promoted the growth of this form of gas usage. As a result, today there are 51,000 cooking and hot water customers in D.C. At least at this time, we feel compelled to provide some degree of relief for existing customers who are in no position to respond to more cost-based rates. Equally important is the Commission's desire to lessen the extent to which the low-volume gas user pays a higher per unit price for service. [Order No. 6051, at 96-97.] On this appeal, the PSC and People's Counsel contend that the Commission's order amply explains the rate disparities in terms of valid non-cost based factors, particularly equitable considerations and the desire to preserve historic rate patterns. [11] Petitioners, on the other hand, argue that the preference accorded to residential non-heating customers not only is explained inadequately by the PSC but also enjoys no independent support in the record. Petitioners draw upon Commissioner Stratton's dissenting opinion, in which the following manifestly valid observations were made: The purposes of rate design, once the revenue requirement is established, are, first, to establish rates that offer a reasonable prospect of generating revenues sufficient to cover the utility's cost of service as determined by the Commission, and, second, to distribute the burden of those rates fairly among the utility's customers. The rates established in this case most definitely fail the latter test. For what the Commission has not acknowledged is that in arbitrarily softening the impact of rates on small users it is increasing the impact of rates on medium and large users who pay back through the therm charge every cent and more of their customer charge reductions.       I believe the Company, its customers, and a reviewing court are entitled at a minimum to a finding that fixed monthly charges based on fixed costs do have an adverse impact on small users, and, if so, how and why. Then the Commission should explain in the requisite detail why the adverse impact consideration should overcome all the other reasons advanced for not moving toward a one-part rate. Next the Commission should state how and why the adverse impact on only small users was taken into consideration when every other class of ratepayers is also impacted by fixed monthly charges. Finally, the Commission should justify its decision to visit additional impact on most ratepayers in order to alleviate the impact on the small user. There is a reason that this order lacks those fundamental requisites. It is that the record in this case not only does not support this decision, but requires that the customer charges of those classes who are not now covering their customer costs through those charges be raised. [Order No. 6060, at 35-37 (Stratton, C., dissenting) (footnote omitted).] Commissioner Stratton thus concluded that the new rates were not only discriminatory but unsupported as well. I think it is obvious, as Commissioner Stratton pointed out, that the increasedly unequal rates of return result from the PSC's decision to lower the customer charge for most of its firm customers while raising the commodity charge. As more and more of the utility's fixed costs (including customer costs) are recovered through the commodity charge, rather than through the customer charge, the burden of cost recovery falls disproportionately upon large-volume customers. See Order No. 6060, at 26 (Stratton, C., dissenting). All that remains to be determined is whether, contrary to Commissioner Stratton's assertions, the rate disparities enjoy adequate record support in terms of valid cost or non-cost considerations. As the Commission's final order reveals, the customer charge reductions were effected essentially for equitable reasons. Order No. 6051, at 97. The Commission asserted that it faced a direct conflict between the principle of cost causation, on the one hand, and historic rate patterns and social considerations on the other hand. Ibid. It also alleged that through past advertising and rate structure, WGL promoted the growth of this form of gas usage, even though those customers are responsible for a comparatively large amount of fixed costs and have been unprofitable. Ibid. The Commission concluded that it was compelled to provide some degree of relief for existing customers who are in no position to respond to more cost-based rates. Ibid. I turn to the social and equitable considerations cited by the PSC. Assuming, arguendo, that these factors could provide an appropriate justification for such a discriminatory rate structure, there is no evidentiary support for them in the record. While the Commission's order suggests that the unprofitable residential non-heating customers were seduced into subscribing to gas service at low prices by WGL's past promotional campaigns, the only record evidence of the Company's promotional efforts is the following statement by WGL witness Smallwood: Yes, we did have a large tonnage air conditioning promotional campaign in the mid and late '60's, as I guess everybody did until the crunch came in '72. That advertising campaign, of course, was directed to large scale users of gas in the heating and cooling sub-classes. [12] As to the assertion that low-volume users are, as a class, less able to respond to more cost-based rates than are other classes, there is a similar dearth of support for such a concept in the record. To the contrary, the Company's witness Smallwood testified that although nearly 30,000 of WGL's customers used less than 1,000 therms in the test year, no study had been made of the income distribution of that group: We have not attempted to study whether customers using a thousand or less [therms] are low-income or fixed-income customers or whether they are well-to-do customers. No other witness offered any testimony on the subject of income distribution by customer classes. In assuming that small users of gas tend to have lower incomes, then, the Commission acted not on the basis of reliable evidence in the record, but rather on the basis of pure, rank speculation. It just as easily might be fathomed that the typical residential non-heating customer is a relatively well-off family which uses gas for cooking and hot water, but which heats its house or apartment with now more costly oil or electricity. [13] The Commission also mentioned its desire to preserve historic rate patterns. While preservation of historic rate patterns is a valid ratemaking objective when needed to temper a radical change in rate structure, the only relevant historic rate pattern in this case is a $3.75 customer charge for the residential non-heating class which was established in the 1976 rate proceeding. At that time, the customer charge recovered only about two-thirds of the class' costs of service, but it was accompanied by the PSC's promise to include more cost ingredients in future cases. See In re Washington Gas Light Co., supra, 16 P.U.R.4th at 280. What was then the future is now, but instead the residential non-heating class has been extended a $2.50 customer chargea one-third reduction despite overwhelming evidence of rising customer costs. Certainly, then, the recent history of WGL's rate structure does not supportand indeed contradictsthis action by the Commission. [14] The Commission and People's Counsel nevertheless argue that the new rate design can be supported under this Court's decision in Apartment House Council of Metropolitan Washington, Inc. v. PSC, supra . In that case, the PSC had established electric rates which resulted in somewhat unequal projected rates of return by customer class. We noted that in judging the reasonableness of the return differentials, we first examine the cost-related factors and then the non-cost-related factors. 332 A.2d at 56. We made it clear that [i]t is not necessary that differences in rate of return be specifically and quantitatively supported by customer class-cost considerations. Id., at 57. Valid non-cost-related factorssuch as energy conservation and preservation of historic rate and usage patternsmay be used to help justify class return differentials. Id., at 57-58. We also subscribed to the general rule of thumb that a rate structure must achieve the lowest price for the largest number of users. Id., at 57, citing Philadelphia Suburban Transportation Co. v. Pennsylvania Public Utility Commission, 3 Pa.Commw.Ct. 184, 195-98, 281 A.2d 179, 186-87 (1971). Finding evidence of both cost and non-cost-related justifications in the record, we upheld the electric rate structure in Apartment House Council. While Apartment House Council is precedent, the facts of that case are fundamentally different from the facts before us in at least two major respects. First, the disputed electric rates in Apartment House Council involved relatively minor discrepancies in rates of return. The following class returns were projected: Residential 5.63% General Service 7.78% High Tension 8.27% [332 A.2d at 55.] In stark contrast, the projected class rates of returns in issue here (for firm service) range from 26.11% to a shockingly negative 8.42%while WGL's overall authorized rate of return is 9.25%. Second, and more importantly, the court in Apartment House Council found substantial evidence in the record to support both the cost-related and the non-cost-related justifications put forth by the Commission. Here, the PSC essentially concedes that its rate design is not cost-justified, and there is no support in the record for the non-cost factors the Commission has advanced. From a more fundamental standpoint, however, the non-cost factors relied upon by the Commission legally could not support the enormously disparate rates at issue here, even if there were evidence in the record to support them. The PSC's enabling act provides in relevant part that: The charge made by any such public utility for any facility or services furnished or rendered, or to be furnished or rendered, shall be reasonable, just, and non-discriminatory. Every unjust or unreasonable or discriminatory charge for such facility or service is prohibited and is hereby declared unlawful. [D.C.Code 1981, § 43-501.] The Commission has a statutory mandate to set rates which are reasonable and non-discriminatory; nowhere in the Act is the Commission authorized to function in a contrary fashion. The Colorado Supreme Court (sitting en banc) recently construed a virtually identical statutory provision as prohibiting that state's public utilities commission from setting preferential rates based on social considerations. See Mountain States Legal Foundation v. Public Utilities Commission, 197 Colo. 56, 590 P.2d 495 (1979). In that case the PUC had established reduced gas rates (often called lifeline rates) for low-income elderly and disabled persons. The court determined that the preferential rates were invalid under the Commission's enabling act, which forbids unjust discriminatory rates. The court stated: [T]he PUC has limited authority to implement a rate structure which is designed to provide financial assistance as a social policy to a narrow group of utility customers, especially where that low rate is financed by its remaining customers.       Establishing a discount gas rate plan which differentiates between economically needy individuals who receive the same service is unjustly discriminatory. To conclude, although the PUC has been granted broad rate making powers by Article XXV of the Colorado Constitution, the PUC's power to effect social policy through preferential rate making is restricted by statute no matter how deserving the group benefiting from the preferential rate may be. [ Id., at 60, 590 P.2d at 497-98.] Of course, the Colorado Supreme Court's reasoning is equally applicable here, particularly given the pertinent similarity in the two jurisdictions' utility codes. See also Public Service Co. of New Hampshire v. State, 113 N.H. 497, 509, 311 A.2d 513, 521 (1973); Note, Conservation, Lifeline Rates and Public Utility Regulatory Commissions, 19 Nat.Res.J. 411 (1979) (Public Utilities Public Service Commissions' Jurisdiction and Powers Applied to Rate Structures: Public Service Commissions are limited to cost of service analysis in prescribing appropriate rate structures for public utilities. Environmental considerations and income redistribution may only be considered within the confines of this analysis.) The Commission in past years has recognized its proper mission, and it has acknowledged the primary role of cost-related factors in structuring rates. For example, in In re Potomac Electric Power Co., 84 P.U. R.3d 250 (D.C. PSC 1970), the PSC rejected a proposal that low-income customers be exempted from a general increase in electric rates. It then stated: From the legal point of view, we are required by the statute to establish rates which are not unjustly discriminatory. The net result of the Consumer Council proposal is that persons with incomes higher than $5,500 per year would be paying higher rates for the same service in order to avoid an increase for those in the lower income category. The premise on which the discrimination would be based is that persons with incomes lower than $5,500 per year cannot afford any further increase. However, it could well be that persons with incomes in excess of $5,500 per year would also feel, in some cases with great justification, that they cannot afford to pay more for electricity either. We think that the standards suggested, i.e., the ability of a customer to pay the increase, is too subjective and too indefinite to provide a sound basis on which to base an obvious rate discrimination. [ Id., at 255-56.] More recently, the Commission recognized that [b]ecause cost recovery is the ultimate test of equity among ratepayers, the development of rate structures which conform as closely as possible to the cost standard provides the ideal goal toward which rate-making processes should tend. [ In re Chesapeake & Potomac Telephone Co., 9 P.U.R.4th 550, 571 (D.C. PSC 1975), quoting SHARFMAN, THE INTERSTATE COMMERCE COMMISSION, Vol. III, at 325.][ [15] ] See also Payne v. Washington Metropolitan Area Transit Commission, 134 U.S.App.D.C. 321, 335, 415 F.2d 901, 915 (1968). The preferability of cost-based rate structuring has been accepted widely by courts and regulatory agencies in other jurisdictions. See, e.g., Jager v. State, 537 P.2d 1100, 1109-10 (Alaska 1975); In re Utah Power Co. & Light Co., 22 P.U.R.4th 351, 373 (Idaho PUC 1977); Public Service Co. of Oklahoma, Opin. No. 788 (Feb. 17, 1977); In re Central Vermont Public Service Corp., 28 P.U.R.4th 469, 486 (Vt. PSB 1978); In re Virginia Electric and Power Co., 29 P.U. R.4th 65, 89 (Va. SCC 1979). We recently upheld an electric rate structure prescribed by the Commission which was alleged to discriminate unreasonably against large scale commercial customers. In Metropolitan Washington Board of Trade v. PSC, D.C.App., 432 A.2d 343 (1981), we found no reversible error in the Commission's decision to institute a time-of-day (TOD) peak load pricing scheme for commercial electric customers who consume an average of at least 1,000 kilowatt-hours monthly. Id., at 360-61. The petitioners in that case argued that it was unreasonable for the Commission to limit the new TOD pricing to large commercial customers, and that if it were to be instituted at all, it should be applied across the board. They contend that the net impact of the TOD rates would favor residential customers at the expense of the commercial class. We found the apparent rate discrimination to be justified by several legitimate mitigating factors, the likes of which are nowhere to be seen in the gas rate proceeding now before us. First, the TOD rates are in an experimental stage, at least in this jurisdiction. As mentioned earlier, the Commission has the discretion when ushering in a radically different rate structure to temper its impact on those customers which it would affect most adversely. In addition, the Commission in Metropolitan Washington Board of Trade had noted that the costs of installing the new meters needed for TOD pricing could be borne much more feasibly by large customers than by smaller customers during the initial stages of the new pricing system. The Commission also indicated that other customer classes would be included in the future if the TOD experiment proves successful with the large electricity users. The PSC's electric rate decision in Metropolitan Washington Board of Trade, much like its gas rate decision in 1976, represented a commendable first step toward a new, more cost- and resource-efficient rate structure. In each case the disruption in the historic rate patterns was tempered appropriately during the transition period, but with strong indications that future rates would be structured on a more cost-realistic basis. The trouble is, now that what was then the future has arrived for WGL's customers, the Commission has regressed toward an even less cost-based rate design. Therefore, with due recognition of the Commission's wide discretion in setting and structuring rates and of our limited review role, I nevertheless conclude that the PSC stepped well past the bounds of reasonableness in this proceeding. Petitioners have met their burden of showing that the new rate design is not reasonable, just, and non-discriminatory. D.C.Code 1981, § 43-301. The Commission failed to provide adequate explanation or evidentiary support for the obvious class cross-subsidization. The case should be remanded to the Commission with directions to restructure the rates so as to make them non-discriminatory in nature. The majority's unpersuasive affirmance of the new rate structure is, in my view, an ominous disservice to the citizens, businesses, and governmental entities that use natural gas in the District of Columbia.