Opinion ID: 329424
Heading Depth: 3
Heading Rank: 2

Heading: The 25%-75% Formula

Text: 42 In reviewing orders concerning cost allocation the courts have been particularly reluctant to devise technical requirements that would impose unrealistic standards of precision on the administrative process. In Colorado Interstate Gas Co. v. FPC, 324 U.S. 581, 65 S.Ct. 829, 89 L.Ed. 1206 (1945), for example, the Supreme Court refused to require the segregation of physical property that functioned as an integrated whole but provided both jurisdictional and nonjurisdictional service. Admitting that (a)llocation of costs is not a matter for the slide-rule, but (a) judgment on a myriad of facts, 50 the Court held that the appropriateness of the formula employed by the Commission in a given case raises questions of fact not of law. 51 43 When Congress . . . fails to provide a formula for the Commission to follow courts are not warranted in rejecting the one which the Commission employs unless it plainly contravenes the statutory scheme of regulation. . . . Mr. Justice Brandeis, speaking for the Court in Groesbeck v. Duluth, S.S. & A.R. Co., 250 U.S. 607, 614-15, 40 S.Ct. 38, 41, 63 L.Ed. 1167, noted that it is much easier to reject formulas presented as being misleading than to find one apparently adequate. 52 44 In setting rates the Commission is free, within the ambit of (its) statutory authority to make the pragmatic adjustments which may be called for by particular circumstances. 53 45 The percentage distribution of fixed costs within the framework of a two-part allocation and rate structure has never been considered inviolate. In Atlantic Seaboard, the Commission, recalling the words of the Court in Colorado Interstate, stressed that it was making a judgment determination in deciding to divide the fixed costs equally between demand and commodity. 54 The Seventh Circuit, rebuffing a challenge to a substantial deviation from the 50%-50% formula, noted that the Commission's orders have deviated markedly from Seaboard since that case was decided and found that the Commission is to be extended this discretion and . . . we are not to substitute our judgment except in cases of clear abuse. 55 46 We cannot say that the result reached by the Commission in allocating one quarter of fixed costs to demand and three quarters to commodity is unreasonable. The Commission realistically acknowledged the conclusion in Seaboard that the assignment of costs could not be done by mathematical computation but involves judgment. 56 The courts cannot fairly demand the perfect at the expense of the achievable. 57 47 The development of extreme gas shortages 58 and the resulting existence of large unused pipeline capacity provides a reasonable basis for reducing the demand component of the tariff charge and moving away from a marked peak differential. 48 To the extent that fixed costs are attributed to demand, rather than to commodity, additional gas purchases are encouraged, for a customer paying a demand charge incurs, on an incremental basis, only the commodity charge as to any additional purchases. High load-factor buying is also encouraged, for high load-factor customers bear a relatively smaller share of the demand charges. In the past, all customers benefitted from these effects, for they led to a more efficient use of the pipeline facilities and a consequent reduction in unit costs for all. As gas prices increased relative to the costs of other fuels, the Commission found it necessary to depart from Seaboard and to increase the relative attribution of fixed costs to the demand side, 59 in order to maintain high efficiency and retain industrial customers. Due to the increasing costs of coal and oil and the growing scarcity of natural gas, it is no longer necessary to lure industrial customers with relatively low commodity charges. 49 Also, since some pipeline capacity now goes unused even on peak days, the demand charge no longer has the same vitality as a premium for reserving priority use of a scarce resource. A given customer may have a right to a greater share of the gas available on peak days, but that is subject, not only to the limitations of supply, but to the strictures of the curtailment programs. 60 A customer does not pay a premium for the guarantee of a place when he knows that the train, or theatre, or whatever, will be partly empty in any event. 50 Under these circumstances, we cannot say that the Commission's increased allocation of fixed costs to the commodity component represents an abuse of discretion. 61 Our ruling in this case affirming the 25%-75% classification of fixed costs decreed by the Commission does not require that we embrace or approve the Commission's view that a 100% classification of fixed costs to the commodity component would be proper.