Opinion ID: 450364
Heading Depth: 2
Heading Rank: 1

Heading: Rate Structure

Text: 3 This case plunges us into the intricacies of rate structure. Under the Federal Power Act, FERC is charged with finding that rates are just and reasonable. 16 U.S.C. Secs. 824d, 824e (1982). This determination requires careful scrutiny of the complexities of the proposed rate structure. Public utility rates are designed to do more than recover the cost of service; they are intended to allocate cost of service among customers in a reasonable manner. Cities of Batavia v. FERC, 672 F.2d 64, 80 (D.C.Cir.1982). 4 Two features of rate structure must be considered at the outset: demand allocation and demand billing. Although both features figure in a utility's overall rate structure, they have different missions. While methods of demand allocation distribute the demand charge among classes of customers,    a method of demand billing [ ] distributes a class' allocated demand among members of that class. Id. at 83 (emphasis in original). 5 The relationship of these features to KG & E's dispute with FERC will be discussed in the context of that dispute. Before reviewing the KG & E dispute, however, it is helpful to briefly review the nature of demand allocation method and demand billing. 6 1. Demand allocation. Demand allocation determines the charge allocated to a class of customers. A 12-month coincident peak method, commonly known as the 12-CP method, is one form of demand allocation. Under this method, demand costs are allocated by taking the hour of highest total usage (the coincident peak) during each of the preceding twelve months, determining the percentage of peak usage drawn by each customer class during each of the twelve months, and averaging the resulting percentages for each customer class. Second Taxing District of City of Norwalk v. FERC, 683 F.2d 477, 480 (D.C.Cir.1982). In contrast, other demand allocation methods are based on peak usage during a different number of months. A 3-CP method, for instance, is based on peak usage during three specified months. Under a typical 3-CP method, the utility might seek to allocate fixed costs among customers based on each customer's demand for electricity during [the utility's] peak sales months of June, July and August. Cities of Bethany v. FERC, 727 F.2d 1131, 1135 (D.C.Cir.), cert. denied, --- U.S. ----, 105 S.Ct. 293, 83 L.Ed.2d 229 (1984). Thus the demand allocation method governs the allocation to classes of customers. 7 2. Billing demand. Billing demand, in turn, determines the billing total for each member of the class. One billing demand method, commonly known as a ratchet, is a billing device that sets the minimum demand cost for a utility customer at some fixed percentage of the customer's maximum demand during a particular period. Cities of Batavia, supra, 672 F.2d at 83. In contrast, in the absence of a demand billing ratchet, the twelve    monthly (metered) demands of all customers in a given class are simply summed. Central Illinois Light Co., 10 FERC p 61,248, 61,473 (March 20, 1980), reversed and remanded on other grounds sub nom. Villages of Chatham and Riverton, Illinois v. FERC, 662 F.2d 23 (D.C.Cir.1981). Thus a ratchet substitutes a formula based on a customer's peak for actual demand. 8 3. The combination of a 12-CP method and a ratchet. As this court has explained, There is no necessary relationship between a particular method of demand allocation and a particular method of demand billing. Cities of Batavia, supra, 672 F.2d at 83. Since at least 1978, however, FERC has expressed concern about the use of a ratchet in combination with a 12-CP method. In Carolina Power & Light Co., 4 FERC p 61,107 (August 2, 1978), the Commission disallowed the use of a 95 percent ratchet with a 12-CP method. FERC emphasized, Although neither the Federal Power Act nor our Regulations prohibit the combined use of a 12-CP method of demand cost allocation and a rate design based in part on demand during only a portion of the year, such ratchet is generally undesirable for the reason that it generates differences in customer billings which are not entirely cost justified. Id. at 61,232 (footnote omitted). 9 Two years later FERC elaborated its concern about this combination. In Central Illinois Light Co., supra, the Commission disallowed the use of a 60 percent demand ratchet with a 12-CP method of allocation. It found the combination likely to be unjust and inequitable. 10 FERC at 61,473. The Commission explained: We note that one important working assumption of the 12-month average coincident peak method of allocation is that actual demands of the respective customers in each of the months contribute to system coincident demand or, in other words, result in actual cost causation, and to a roughly uniform degree. Id. at 61,474-61,475 (emphasis in original). Thus a given individual customer's monthly 12-CP demand allocating factor is generally in itself, without imposition of the added ratchet, also the most appropriate basis for deriving its demand charge billing determinant. Id. at 61,475. In short, FERC found a ratchet generally unnecessary and incompatible with the 12-CP method. 1 The Commission announced that, in view of this effect, [w]here    the 12-CP method of demand allocation has been well-chosen--for example, because of a relatively 'level' or 'flat' monthly system-wide demand pattern--the applicant utility must bear the burden of demonstrating that the ensuing disadvantages to consumers of an additionally imposed demand ratchet are outweighed by any benefits to be derived by the utility itself, or by the consuming public. Id. at 61,475 (emphasis in original). See also Minnesota Power & Light Co., 11 FERC p 61,311, 61,649-61,650 (June 24, 1980) (reiterating Central Illinois standard). 10 FERC has made clear, however, that, although the utility must show that its combination has outweighing benefits, the Commission has not adopted a per se rule against the combination. Indeed, when it has determined that the utility has made the required showing, the Commission has permitted a demand ratchet in combination with a 12-CP demand allocator. See Connecticut Light & Power Co., 14 FERC p 61,139 (February 19, 1981), affirmed sub nom. Second Taxing District of City of Norwalk v. FERC, supra; Union Electric Co., 12 FERC paragraphs 61,239, 61,586 (September 2, 1980). Similarly, this court has noted that FERC's determination on the permissibility of the ratchet/12-CP combination rest[s] with the facts of the particular case. Second Taxing District of City of Norwalk, supra, 683 F.2d at 488. 11 In short, FERC has identified ways in which the combination of a 12-CP method and a ratchet may produce unjust and unreasonable results, and it has put the burden on the utility to prove that its combination has outweighing benefits that justify its use.