Opinion ID: 566757
Heading Depth: 2
Heading Rank: 1

Heading: The Cities' Petitions

Text: 41 The Cities first complain of the Commission's decision to strike their composite rate-of-return study in the earlier proceeding. They claim this decision denied them due process. We disagree. 42 To obtain a Phase II hearing, the Cities had the initial burden of establishing the existence of competition and a disparity between the R-2 rate and relevant retail rate(s). In Opinion 62, the Commission found that the Cities competed with Edison in three ways. They competed directly for industrial customers located in, or thinking of locating in, their service areas; they faced yardstick competition, which refers to pressure brought by retail customers on municipal power systems to keep their rates competitive with Edison's; and they competed for exclusive service areas, called franchises, granted by the CPUC. See 8 F.E.R.C. at 61,684-85, 61,687, 61,693. We accept the Cities' contention that the yardstick and franchise concepts potentially involve all classes of retail customers, not just large industrial firms eligible for the A-8 rate. 43 The Commission, however, further found that the Cities had established only an R-2/A-8 rate disparity. See id. at 61,687. The Cities clearly stated ... that the retail rate that is the focus of our inquiry herein is the A-8 industrial rate. Id. [291 U.S.App.D.C. 327] And [v]irtually all of the cities' testimony ... centered on their allegation that they are comparable to those customers receiving the A-8 rate and that this is the rate the cities should be receiving. Id. The alleged R-2/A-8 disparity was therefore the sole focus of Edison's rebuttal evidence. In remanding to the ALJ, the Commission instructed that the Phase II hearing would not provide an opportunity to relitigate the cities' prima facie showing [and] Edison's rebuttal. Id. at 61,694. Thus, the ALJ could reasonably conclude that evidence purporting to show price discrimination for all retail rates was inadmissible as beyond the scope of the proceedings. See 23 F.E.R.C. at 65,282-83. 44 The Cities cry foul because their prima facie case was based on a bill comparison study, a flat comparison of billed rates that is meaningful only if the two rate classes have comparable costs of service. They assert that when the Commission subsequently changed its view and preferred the more flexible rate-of-return approach, which in theory can identify price discrimination with respect to any retail class, due process required an opportunity to present such evidence. Cf. Hatch v. FERC, 654 F.2d 825, 835 (D.C.Cir.1981). 45 The Cities received that opportunity. On rehearing of Opinion 62, the Commission recognize[d] that price squeeze proceedings must still be regarded as a developing area of the law, and that as important new rulings are made, [e]quity may require that the parties be given a further opportunity to make their case. Opinion 62-A, 10 F.E.R.C. at 61,510. Accordingly, in Phase II both Edison and the Cities were ultimately allowed to introduce competing rate-of-return analyses comparing the R-2 and the A-8 rates. 46 The Commission was not obligated to entertain an entirely new prima facie case, however, because the Cities were aware at the outset of their burden to establish the rate disparity that would become the focus of the price squeeze inquiry. Cf. Cities of Batavia v. FERC, 672 F.2d 64, 87 (D.C.Cir.1982) (inconsistent with due process to find in favor of one party simply because an adversary has failed to make a showing it was not aware would be required of it ) (quoting Commonwealth Edison Co., 9 F.E.R.C. p 61,184, 61,345 (1979) (emphasis added)). 47 The Cities cannot maintain that the Commission rigidly refused to consider any methodology but bill comparison. The Cities themselves had also introduced a transfer price analysis, comparing the average costs of transmission and generation for all wholesale and retail customers, which the Commission termed an acceptable approach to employ in establishing a price squeeze claim. 8 F.E.R.C. at 61,694. The Commission rejected this particular transfer price analysis because it was flawed and because the Cities' own choice to zero in on the A-8 class rendered the study not particularly helpful. See id. at 61,695, 61,698 n. 97. 48 Thus, the Commission was open to new methodologies. (In fact, the Commission embraced the rate-of-return test no later than a month after Opinion 62 and well before Opinion 62-A. See Commonwealth Edison Co., 8 F.E.R.C. p 61,277, reh'g denied, 9 F.E.R.C. p 61,184 (1979), aff'd in relevant part, Cities of Batavia, 672 F.2d at 90.) Any loss of opportunity to expand the case to cover all retail rates was caused not by a lapse of adequate process, but by the Cities' failure to anticipate or initiate a new way to demonstrate price discrimination. 49 We also reject the Cities' contention that the ALJ's exclusion of the study was arbitrary, capricious, and an abuse of discretion. We have previously held that the Commission may designate a particular target of competition, such as industrial customers, and that it may limit its inquiry to a rate-of-return comparison between the wholesale rate and the large industrial rate. See Boroughs of Ellwood City, 731 F.2d at 973-74. Contrary to the Cities' assertion, such a limited comparison is not nonsensical or illogical[ ] simply because it fails to quantify all of the price discrimination that may affect competition between the utility and the wholesale customer. Brief for Petitioning Cities, No. 90[291 U.S.App.D.C. 328] 1236, at 18, 30. The Cities rely on Commonwealth Edison, in which the Commission stated that the relevant question for the rate-of-return test is which retail customers comprise the group for which there is competition ..., not which group of retail customers is of like size to the wholesale customers. 8 F.E.R.C. at 61,850. But there the Commission was simply ruling that a utility may not disprove price discrimination by using a rate-of-return analysis that focuses on an irrelevant subset of the target group. See id. at 61,849-50. As the ALJ pointed out in granting Edison's motion to strike, the Commission in Commonwealth, as here, accepted a relevant target group that comprised only industrial customers despite evidence of broader competition. See 23 F.E.R.C. at 65,283.
50 Next, the Cities challenge in both cases the Commission's acceptance of Edison's ECAC adjustments. They argue that because the fuel costs affected by the ECAC and ECAC balancing accounts were not actually billed to retail customers during the months at issue, they should not be considered part of the retail rates in the comparative rate-of-return analysis. The Cities maintain that these adjustments are impossible to reconcile with the Commission's treatment of tax normalization and the FCBA credit. We uphold the adjustments as within the Commission's discretion and not arbitrary or capricious. 51 In refining the comparative rate-of-return analysis, the Commission has decided to focus on the effective retail rate against which the wholesale customers are actually competing--that is, the rate authorized by the state and in effect during the relevant period. See Opinion 62, 8 F.E.R.C. at 61,690. The Commission could reasonably conclude that the fuel cost increases subject to recovery under the ECAC were part of the effective rate from the point of view of the retail customers. The ALJ found that the ECAC and ECAC balancing accounts were integral parts of the rate tariffs authorized by the CPUC; therefore, rational purchasers, especially the A-8 customers, would presumably have known that their rates were highly sensitive to fluctuations in Edison's costs. See 34 F.E.R.C. at 65,272. We refuse to impose on the Commission a rigid definition of effective that would include only the amounts of electricity bills actually mailed to retail customers in a particular period. 52 Furthermore, the Commission acted within its discretion in treating the retail and wholesale rates alike with respect to the fuel cost/revenue relationship. Both rates included similar adjustment clauses that allowed the utility to recoup fuel and purchased power cost increases in the short term. In determining the just and reasonable wholesale rate of return in Phase I, the Commission included the FCA amounts as revenue; in Phase II, the parties similarly synchronized R-2 fuel costs and revenues in their various rate-of-return studies. See id. at 65,271. Because both the FCA and the ECAC operated to make Edison whole for actual costs incurred and both were designed to insulate Edison's profit margins from uncontrollable changes in fuel costs, the ALJ concluded that the methods for deriving the wholesale and retail rates of return should be consistent, even though the lag in recovery of fuel expenses on the wholesale side was shorter. Id. at 65,271-72. 53 We recognize that the price squeeze doctrine is meant to remedy discrimination caused by the imperfections of regulation, Cities of Batavia, 672 F.2d at 91, and the paradox of dual ratesetting, Boroughs of Ellwood City, 731 F.2d at 974. We also recognize that matching fuel costs with revenues eliminated any short-term wholesale/retail disparity caused by the different cost recovery schedules for the FCA and ECAC. But the rate-of-return analysis also suffers from imperfections and discrepancies, and it is largely within the Commission's discretion to refine that analysis from case to case. Thus, the Commission could conclude that erasing the disparity by disregarding both the FCA and the ECAC lags was preferable to aggravating it by eliminating the FCA lag alone, as [291 U.S.App.D.C. 329] the Cities proposed in their study. See 53 F.E.R.C. at 61,318. 54 The ECAC adjustment is also consistent with the Commission's handling of the FCBA credit. In Opinion 128, the Commission found that the overcollections associated with the later FCBA credit should be included in calculating the retail revenues in the earlier period. The overcollections were part of the effective rates because the charges were not interim or subject to refund when collected; the CPUC had authorized them as final and lawful. 16 F.E.R.C. at 61,422. Because there was no ECAC balancing account in the authorized rates, the excess billings could only be credited prospectively, following an investigation by the CPUC. See id. at 61,420, 61,423; Opinion 347, 51 F.E.R.C. at 61,883. Thus, taking account of the credits later ordered by the CPUC would produce retail rates against which the Cities had never actually competed. 16 F.E.R.C. at 61,422. In contrast, the ECAC mechanism was part of the final rate actually in effect at the relevant times; retail charges were continually subject to automatic fine tuning without separate action by the CPUC. 55 Nor is the ECAC decision at odds with rejection of the tax normalization adjustment. Under the required flow-through accounting, the effective retail rate(s) did not include charges for tax costs until Edison actually paid them. Edison elected to take advantage of the tax normalization option permitted by FERC to raise R-2 revenues. This decision caused a rate disparity that could have affected the purchasing decisions of retail customers during the locked-in period because the tax costs might not have passed to the retail customers for another ten to twenty years, if at all. See 34 F.E.R.C. at 65,274-75. Moreover, we have said that price discrimination generally exists where a rate disparity results from the utility's manipulation of its administrative options, as opposed to a difference in cost of service. See Boroughs of Ellwood City, 731 F.2d at 977-79. It was thus appropriate for the Commission to consider the tax normalization issue in step three of the price squeeze analysis, in determining whether the discrimination was undue, rather than in step one. See 40 F.E.R.C. at 62,174-75.
56 We uphold the Commission's handling of the new evidence submitted by the Cities on rehearing of Opinion 347. In response to the Commission's decision affirming Edison's ECAC adjustment, the Cities included with their petition for rehearing an affidavit from an expert witness, Timothy R. Corrigan, that reformulated the Cities' rate-of-return analysis to include the adjustment. The affidavit indicated the existence of price discrimination in subperiods not previously alleged by the Cities. See 53 F.E.R.C. at 61,318-19. The Commission rejected the new study as proof of additional discrimination; it reasoned that 57 acceptance of Edison's adjustment to the [ECAC] balancing account does not permit Cities to expand the scope of this already lengthy proceeding at this late date. Cities have long been aware of this adjustment to the balancing account since Edison proposed this adjustment not only in this proceeding but also in the proceeding which is the subject of Opinion No. 284. If Cities were of the opinion that the Commission's acceptance of Edison's adjustment would result in price discrimination during additional subperiods, they could have raised that contention long before this stage of the proceeding. 58 Id. at 61,319. 59 Nevertheless, the Commission found the submission relevant to the issue of remedy and denied Edison's motion to strike. Because the Corrigan affidavit indicated, contrary to the Cities' earlier contentions, that no price squeeze had occurred in the second subperiod, the Commission accepted the affidavit as a concession on this point. Id. 60 The Cities claim that the Commission's refusal to recognize additional periods of price squeeze and its selective use of the evidence violated their due process rights and was arbitrary, capricious, and an abuse of discretion. We disagree, largely for the [291 U.S.App.D.C. 330] reasons we discussed above in rejecting their challenge to the exclusion of the composite rate-of-return study in the companion case. The Cities knew early on of Edison's ECAC arguments and easily could have submitted the modified analysis of price discrimination at the outset of Phase II. There was no fundamental unfairness and nothing arbitrary in refusing to recognize such expansive new evidence long after the close of the hearing. 61 The Cities further argue that the Commission should have treated their submission as a motion to reopen the record. We have held that [t]he Commission should address even improperly styled motions to supplement the record under relevant criteria. Cooley v. FERC, 843 F.2d 1464, 1473 (D.C.Cir.), cert. denied, 488 U.S. 933, 109 S.Ct. 327, 102 L.Ed.2d 344 (1988). But in Cooley we also stated that at some point an agency must be able to say, 'Enough is enough,'  and thus [w]e normally reverse an agency's decision not to reopen the record only for an abuse of discretion. Id. (internal quotes omitted). Under its own rules of procedure, the Commission has discretion to reopen a hearing for good cause. 18 C.F.R. § 385.716(a). The Commission acted within this broad discretion here because it addressed criteria relevant to reopening the record--the timing of the request and the opportunity afforded the Cities to explore the issue at any point before or during the Phase II hearing. 62 We also uphold the Commission's deeming the affidavit a concession that no price squeeze had occurred in the second subperiod. See 53 F.E.R.C. at 61,319. The submission was a representation by the complaining parties that they no longer contested a portion of their original case. In the absence of any controversy over the second subperiod, the agency would have wasted time and resources by requiring Edison to prepare a compliance filing for the entire five-and-a-half months.