Opinion ID: 444344
Heading Depth: 3
Heading Rank: 2

Heading: The Rate Tilt

Text: 20 There is a similar absence of evidence and explanation for the approval of a rate tilt that results from the application of WEPCO's rate design. Under the Act, a rate design must be non-discriminatory and non-preferential as well as being just and reasonable. 16 U.S.C. Sec. 824d(b); see also Alabama Elec. Co-op., Inc. v. FERC, 684 F.2d 20, 27 (D.C.Cir.1982) (quoting United States v. Illinois Central R.R. Co., 263 U.S. 515, 524, 44 S.Ct. 189, 193, 68 L.Ed. 417 (1924)). 8 If a rate design has different effects on charges for similar services to similar customers, the utility bears the burden of justifying these different effects. It can satisfy this burden by offering a valid reason for the disparity or by demonstrating that the gap is as small as practicable under the circumstances. Id. at 29. Not all discrimination is necessarily unlawful. Section 205(b) proscribes any unreasonable difference in rates and any undue preference or advantage. Id. at 28 (emphasis added); see also Second Taxing Dist. v. FERC, 683 F.2d 477, 486-88 (D.C.Cir.1982); Pub. Serv. Co. v. FERC, 575 F.2d 1204, 1211 (7th Cir.1978); Southwestern Pub. Serv. Co., 22 F.E.R.C. (CCH) p 61,341 (1983). 21 Petitioners have shown, and the record makes clear, that the proposed rate design results in a cross-subsidization, charging high-load factor customers part of the costs of service to low-load customers. Brief of ELCON, 36; J.A. 297-99. 9 The utility has put forth no legally sufficient reason for charging high-load factor customers a rate that does not accurately reflect the cost of serving them. Indeed, at oral argument before this court neither FERC's counsel nor WEPCO's counsel even attempted to explain or justify the rate tilt. 22 In light of the record before us, it is plain that WEPCO has not met its burden of showing that such a rate tilt is reasonable. In addition, FERC has made absolutely no attempt to outline the factors justifying the rate tilt. Instead, the Commission's decision offers only frivolous and circular reasoning in an effort to deny the existence of a tilt, and the brief from FERC fails to address the issue. In its opinion, FERC stated: 23 Admittedly, these results are not likely to be beneficial from the perspective of certain customer classes. This explains the source of the opposition of the high load factor municipal and industrial intervenors. Other customer groups, however, are likely to benefit from WEPCO's proposal. This trade-off of customer gains and losses is a fact of life .... The important question is whether there is a cost justification for the rate structure adopted. We find that there is. WEPCO's proposal comports with the well-reasoned theory of marginal cost pricing .... [O]nce marginal costs are chosen as the standard to be applied, it cannot be complained that the result lacks a rational basis. 24 Nor can it be complained that the result promotes an unlawful rate tilt. In point of fact, no tilt exists as that term is commonly understood because the result obtained here comports entirely with the pricing and reconciliation methodologies which underly [sic] it. There has been no deviation from marginal cost pricing theory. If a tilt can be said to exist, it is a tilt from average cost pricing. But that is no tilt at all because WEPCO never intended to use average cost pricing. 25 J.A. 46-48 (emphasis added). FERC's reasoning is totally circular and utterly without meaning. It is uncontested that, under the proposed rate design, part of the demand cost is being collected through the energy charge. Yet, the Commission accepts the reconciliation methodology as consistent with marginal price theory. Therefore, the tilt logically arises from marginal pricing, not from average pricing as the Commission asserts. Even assuming, arguendo, that the tilt does arise from average cost pricing (as claimed by FERC), it still must be shown that the proposed rate design is non-discriminatory and non-preferential. See note 8 supra. In this case, neither WEPCO nor FERC has produced any evidence showing factual differences to justify the tilt or to show that it is de minimis. Such a rate tilt, without legal justification, is unlawful. Columbia Gas Transmission Corp. v. FERC, 628 F.2d 578, 592-93 (D.C.Cir.1979). 26 C. The Alleged Application of Marginal Price Theory 27 Petitioners complain that WEPCO's record evidence is limited to recitations and quotations of marginal cost pricing theory ... and a few broad, unsubstantiated assertions that the same design employed at retail has had beneficial results. Brief of the Cities, 23; see also Brief of ELCON, 20-21. The ALJ was struck by the lack of a record justification for the new model: 28 The adoption of any particular mode of pricing can hardly be an end in itself, no matter what the mode may be. The results of a particular mode, its effects upon the adopting utility and upon the consuming public, those are the ends that give the mode value, that justify its adoption. Those results may be seen only through analysis of the actual facts and through comparisons with the probable results of the adoptions of different modes. It is only by comparisons with other modes that the value of a particular mode may be identified. 29 The record now before the Commission shows that WEP [sic] has made no analysis of the type just described, has made no such comparison. 30 J.A. 9. The Commission's reversal of the ALJ's order, by stark contrast, merely states that once marginal costs are chosen as the standard to be applied, it cannot be complained that the result lacks a rational basis. J.A. 48. 31 We conclude that, according to the applicable law in this circuit, mere invocation of theory is an insufficient substitute for substantial evidence and reasoned explanations. This is especially true in the context of this case where the theory has been severely compromised by the revenue constraint and the resulting modification in marginal pricing methodology. 32 Apart from the problems discussed above, petitioners have pointed out that pure marginal pricing theory in this case is limited in at least two additional ways. First, the theory assumes a state of pure competition which even FERC concedes does not exist in the wholesale electric utility industry in Wisconsin. 10 Second, there is evidence in the record suggesting that some effects of the new design might be economically inefficient. 11 The Commission's order did not address this latter point. 33 The principal point to be made here is not any opposition to marginal price theory (in its pure or a modified version), but rather that mere economic theory may not take the place of record evidence and reasoned decision-making. This point was made clear by this court in City of Charlottesville v. FERC, 661 F.2d 945 (D.C.Cir.1981), where FERC approved an increase in rates for two interstate pipeline companies purely on the basis of an incentive theory. We found that the record lacked any meaningful evidence of a causal relationship between the rate and the theoretical design, vacated FERC's decision and remanded, quoting Judge Leventhal's opinion in Greater Boston Television Corp. v. FCC, 444 F.2d 841, 852 (D.C.Cir.1970), cert. denied, 403 U.S. 923, 91 S.Ct. 2229, 29 L.Ed.2d 701 (1971): 34 An agency's view of what is in the public interest may change, either with or without a change in circumstances. But an agency changing its course must supply a reasoned analysis ... and if an agency glosses over or swerves from prior precedents without discussion it may cross the line from the tolerably terse to the intolerably mute. 35