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Cities of Newark v. Federal Energy Regulatory Commission and

June 3, 1985


On Appeal from the Federal Energy Regulatory Commission Petition for Review (FERC Docket No. ER 78-414)

Seitz, Becker, and Rosenn, Circuit Judges.

Author: Becker


BECKER, Circuit Judge.

This opinion addresses a petition for review of an order of the Federal Energy Regulatory Commission ("FERC" for the "Commission") by four Delaware municipalities ("municipalities") that purchase electric power at wholesale from intervenor Delmarva Power and Light Company ("Delmarva"). The petition raises two important questions, one concerning our jurisdiction and the other concerning the substance of the Commission's order.

The threshold question is whether we have subject matter jurisdiction under § 313(b) of the Federal Power Act (the "Act"), 18 U.S.C. § 825 (b) (1974), to review the Commission's order. Under this provision, parties aggrieved by an order of the Commission must file a petition for review "within sixty days after the order of the Commission upon the application for rehearing" of the order. Id. In this case, the municipalities filed a petition for review more than 60 days after the Commission's order upon rehearing of the substantive issue raised here but within 60 days of a later Commission order disposing of a motion for further rehearing. That rehearing motion and the subsequent order address two issues discussed in the original rehearing order, but not raised in this court. We hold that the sixty-day period under § 313(b) was tolled by the municipalities' motion for rehearing of an issue addressed in an earlier order on rehearing and that their timely petition for review following the second order on rehearing permits the municipalities to raise all issues that might have been raised in a petition for review of the first order on rehearing. Accordingly, we conclude that we have jurisdiction to consider the Petition for Review.

The question on the merits is whether the Commission acted arbitrarily and capriciously or abused its discretion in concluding that the disparity between the rates charged by Delmarva to its wholesale cooperative customers and the rates changed to its municipal customers did not violate the antidiscrimination mandate of § 205(b) of the Federal Power Act, 18 U.S.C. § 824d(b) (1974). The disparity arose solely as a result of a partial settlement entered into by Delmarva and its wholesale cooperative customers. The settlement, according to the municipalities, incorporated a demand allocation methodology which had been proposed by Delmarva but was later rejected by the Commission on the ground that methodology allocated too large a portion of Delmarva's demand-related costs to the utility's municipal customers.

Despite its rejection of Delmarva's proposed methodology, the Commission nevertheless decided to tolerate the resulting disparity in rates, ruling that the rate discrimination in this case does not constitute an "undue preference or advantage" or "unreasonable differences in rates" within the meaning of § 205(b). In support of its decision, the Commission noted four principal considerations: (1) the disparity was temporary; (2) the disparity was not due to bad faith or improper conduct on the part of the utility; (3) Delmarva did not advantage itself by settling with the cooperatives; and (4) there was no evidence of actual competitive harm to the municipalities. We conclude that these findings of fact by the Commission are supported by substantial evidence, and that the Commission considered the appropriate factors in determining that the rate differential did not violate the antidiscrimination mandate of § 205(b). We will therefore deny the petition for review.


A. Delmarva's Filing and Interim Proceedings

Delmarva supplies electric power at wholesale to customers in Delaware, Maryland, and Virginia, including eight municipalities in the state of Delaware, four of which are petitioners in this case.*fn1 On May 31, 1978, Delmarva submitted to FERC proposed wholesale rate increases designed to general a revenue increase of $7,819,530 over Delmarva's prior rates for the 12-month period ending December 31, 1978. Upon receipt of objections by a number of Delmarva's customers, FERC suspended the proposed rates for the maximum period of five months, set the case for hearing, and granted intervention to a number of Delmarva's wholesale customers, including six Delaware municipally-owned utilities and the three rural electric cooperatives, see supra note 1, and others.*fn2

Wholesale rate filings before FERC must include some method by which the utility proposes to allocate its total cost of providing service among the utility's various classes of customers. One major category of costs is that of so-called "demand costs." As a general matter, demand costs encompass a utility's fixed or capacity-related costs, including the cost of providing generating the transmission facilities. Apportioning these costs among customers presents "theoretical and practical problems," Cities of Batavia, et al. v. F.E.R.C., 217 U.S. App. D.C. 211, 672 F.2d 64, 80 (D.C. Cir. 1982), for the customers typically use the system capacity on a join basis.*fn3

Delmarva's 1978 rate filing proposed to allocate demand costs among its wholesale customer classes on the basis of a four-day confident peak ("4-DCP") cost allocation method. This method allocates demand costs to customers based on each customer's average contribution to demand for electricity during Delmarva's four highest power sales days.*fn4 In support of its choice of the 4-DCP method, Delmarva argued essentially that its system peak consistently occurred during the summer, and that its annual system peak load was the most important factor affecting its decision regarding additions to its power supply capacity. See Delmarva Power § Light Company, 17 F.E.R.C. P63,044, at 46 (December 2, 1981) (initial decision of Administrative Law Judge).*fn5 The revenue increase sought by Delmarva on the basis of the 4-DCP allocation methodology amounted to $4,002,947 from its wholesale municipal customers and $3,888,636 from its wholesale cooperative customers.

Several of Delmarva's customers including the petitioners here, raised objections to Delmarva's filing. Of relevance to this case, the petitioners argued before the Commission that Delmarva's use of the 4-DCP method was unsupportable and unreasonable. They noted that Delmarva had submitted no studies or support for its use of 4-DCP peaks or for the method by which it projected those peaks. The petitioners asserted that Commission precedent as applied to Delmarva's system and demand characteristics dictated that demand costs be allocated under the 12-CP method. Under this method, "demand costs are based upon the average of each month's peak demand during the year; the allocation among customer classes is based upon their average contribution to the average monthly peak. "Cities of Batavia, 672 F.2d at 81. The municipalities assert that, based upon the 12-CP methodology, Delamarva [sic] would have sought a revenue increase of $3,873,953 from its wholesale municipal customers and $5,768,869 from its wholesale cooperative customers. Thus, compared with the 4-DCP method, the 12-CP method results in a substantially greater proportion of total demand costs being allocated to Delmarva's cooperative customers.

In September 1978, prior to the commencement of proceedings before the Commission, Delmarva and its wholesale cooperative customers entered into a settlement, which the parties filed with the Commission for its approval. The settlement provided for a 36 percent reduction in Delmarva's filed rates to the cooperatives.*fn6 Delmarva made the same offer to the municipalities, but they rejected it. Delmarva and its cooperative customers stipulated that the agreement "represents a compromise for the purpose of settlement and is not to be regarded as a precedent with respect to any ratemaking principle" Joint Appendix at 370 (motion for approval of settlement agreement). The Commission, however, appears to have assumed that the settlement was based on the 4-DCP method, see 24 F.E.R.C. P61,199 at 61,645 (1983) (Opinion No. 185) (reprinted in Joint Appendix at 85) ("the discrimination found by the ALJ to violate § 205(b) arose at the settlement stage solely from Delmarva's use of a 4-day CP demand cost allocation method"), and the municipalities take the same position before this Court.

The municipalities subsequently withdrew their objections to the settlement on the understanding that it had no precedential effect on the question of what constituted the fair and reasonable rate which the Commission was obliged to fix under § 205(a) of the Federal Power Act, 16 U.S.C. § 824d(a) (1974), and that the municipalities did not thereby forfeit their right to contest at a later date the issues of demand cost allocation methodology and any resulting discrimination. The staff of the Commission supported the agreement, and the Commission approved it, as amended, see supra note 6, on Feb. 19, 1981. Joint Appendix at 48. In due course the matter of Delmarva's filing with respect to its non-settling customers came on before an Administrative Law Judge ("ALJ").

B. The ALJ's Decision

The administrative hearing went forward on numerous issues, including the appropriate demand allocation method and the municipalities" discrimination claim.*fn7 The ALJ then issue an initial decision, 17 F.E.R.C. P63,044 (1981). In ruling on the allocation issue, the ALJ first stated that the "Commission has not adopted any one method of demand cost allocation to the exclusion of others." Id. at 47. He then rejected Delmarva's proposed 4-DCP method, noting that the Commission had never approved this "unique" method and concluding that Delmarva had failed to justify its reasonableness.*fn8 Id. at 56. After an extensive analysis of Delmarva's system load characteristics, in which he applied a number of tests set forth in Commission opinions, the ALJ concluded that a 12-CP method of demand allocation would be more appropriate.*fn9

Turning to the discrimination issue, the ALJ concluded that the disparity in rates between the cooperative customers and municipalities violated the antidiscrimination mandate of § 205(b) of the Federal Power Act. He also concluded that the disparity in rates resulted from Delmarva's use of an unacceptable (4-DCP) method of demand allocation in its settlement agreement with the cooperatives, inasmuch as the 4-DCP method improperly allocated demand costs in favor of the cooperatives. The ALJ specifically rejected the argument that the resulting rate difference was rendered lawful by virtue of the facts that the cooperatives had accepted the settlement offer and the municipalities had not. The ALJ concluded that the municipalities were justified in rejecting a settlement offer based upon an allocation method later found to be unreasonable, and further noted that the municipalities' decision to litigate the allocation issue had resulted in vindication of their position. To remedy the ...

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