45 N.Y.2d 661 | NY | 1978
OPINION OF THE COURT
We conclude that there was a rational basis for and substantial evidence in the record to support the determination of the Public Service Commission authorizing the introduction of time-of-day pricing as the basis for a new rate structure for the furnishing of electricity, and, as a first step to that end, approving the proposal of Long Island Lighting
On August 8, 1975 Long Island Lighting Company (LILCO) filed an application with the Public Service Commission for a general rate increase. In response the commission issued an order initiating case No. 26887, which order also directed the company to file "rate proposals to price electricity by time of day”. Pursuant to that directive LILCO filed proposed rate "Service Classification 2 — Multiple Rating Period” (hereafter "SC2-MRP”). That filing was served on all parties to case No. 26887 and as well on all parties to case No. 26806 (proceeding on motion of the commission as to rate design for electrical corporations).
On January 29, 1975 the commission had issued an order stating that the "rapidly increasing costs of new generating facilities and the rising cost of fuel both make it urgent, in the interest of energy conservation and the efficient use of resources, that the structure of energy prices reflect, to the greatest extent feasible, the variations in the incremental costs of service because of differences in the time of consumption, as well as in all other cost-influencing factors”. By the same order the commission instituted case No. 26806, the so-called "generic proceeding”, to consider, among other things, "whether marginal or incremental costs provide a reasonable basis for determining the rate structure of electric utilities”, and to resolve certain issues concerning the legality, theory and practicality of marginal cost pricing before approval of any specific rate proposals. On the basis of an extended record (which included the testimony of a host of economists, engineers and experts in rate design who had been subjected to cross-examination by the Council of Retail Merchants and also included the testimony of an economist who appeared on behalf of the council) the commission concluded in that proceeding on August 10, 1976 "that marginal costs do provide a reasonable basis for electric rate structures”. The commission added, however: "This finding does not mean that rate structures must in all cases embody marginal cost pricing, or that rate structures in any case should be based exclusively on such principles. But it does mean that marginal costs are an important tool for consideration in all rate cases, and that failures to take these principles into account should be justified”. After noting its cognizance of the problems of both the
Accompanying LILCO’s filed proposed rate SC2-MRP was the marginal cost study which formed the basis of the proposed rate. LILCO submitted expert testimony with respect both to the manner in which marginal costs were translated into rates and to the economic basis for the proposed SC2MRP rate. This testimony was subject to cross-examination by the Council of Retail Merchants which also introduced expert testimony of its own.
On December 16, 1976 the commission approved SC2-MRP. The council’s request for a rehearing before the commission was denied. The council then instituted the present proceeding under CPLR article 78 which was transferred to the Appellate Division. On May 31, 1978 that court annulled the commission’s determination. The commission and LILCO have appealed to our court. We now reverse the judgment of the Appellate Division and confirm the order of the commission.
As a matter of analysis it appears that our consideration should proceed on three levels. The first involves the validity of time-of-day rate structures in principle; the second, the validity of the particular time-of-day rate structure proposed by LILCO; and the third, the permissibility of the classification of consumers to which LILCO proposes initially to apply its proposed time-of-day rate structure.
As to the first level there is no dispute. Respondents do not challenge the validity in principle of a rate structure based on quantity and time of consumption. Indeed classification of service "based upon the quantity used [and], the time when used” is expressly authorized by statute (Public Service Law, § 66, subd 14; cf. id., § 65, subd 5).
Because the Appellate Division annulled the commission’s determination at the third level, concluding that the proposed
LILCO, having been directed by the commission to file a rate based on marginal costs, with the benefit of suggestions made by commission staff, calculated the company’s marginal costs and then placed those costs into three rating periods. The choice of the particular periods was a function of metering capability, homogeneity of costs within different hours, the probability of loss of load for each hour and the likelihood of consumer reaction. As a result of this weighing process the following periods were identified:
Period 1 (off-peak period, lowest demand): Midnight to 7 a.m.; all days, all year;
Period 2 (peak period, greatest demand): 10 a.m. to 10 p.m. weekdays and Saturdays, June 1 to September 30; and
Period 3 (intermediate or "shoulder” period): all remaining times.
The company then selected the group of its consumers to which new rates based on quantity and time-of-day consump
The commission’s interest in the development of a more sophisticated rate structure was predicated on its view that the present condition of the State’s economy made such development imperative. "Repeatedly in recent rate decisions we have stated our intention to hold rates down to the lowest reasonable level, precisely because we realize that energy costs have become oppressive to large numbers of consumers and have a magnification effect throughout the economy. Over two years ago we embarked on a program of utility management and efficiency audits and, additionally, we are demanding commitments to increased productivity. We are confident that these efforts will help to hold rates down; but they alone cannot reach the two principal cost factors that have pushed utility rates to unprecedented levels: the escalating costs of new construction and of fuel, particularly oil.” Prior to the present proceedings, time-of-day and marginal cost pricing principles had never been used in New York State as a basis for pricing electricity. In its consideration of this new approach to rate fixing the commission recognized that peak usage by every customer imposes the same costs on the system and did not seriously contend that a time-of-day rate structure would not affect all of LILCO’s customers approximately evenly, conferring similar benefits and imposing comparable burdens.
In the implementation of the new rate structure by LILCO, however, the commission made two critical determinations. First, it determined that there should be "selective implementation as a part of a programmed plan”, that the "interest of all ratepayers is best served by a step-by-step application of time-of-day metering because of the enormous cost that a widescale mandatory metering program would entail”. Thus, it rejected contentions that time-of-day metering should initially be applied across the board. Second, acknowledging that "[a]ny cut off point for the first step inevitably involves some element of arbitrariness, as does any reasonable classification”, it approved the particular classification of consumers proposed by LILCO for its first phase implementation.
It appears that there had been no consumer or utility experience with the new rate structure in theory or in practice, that its implementation will be possible only with the installation of relatively expensive metering devices and that the regulatory body has found that effective utilization will "require detailed and individual consumer education on an individual basis” which "can be done most efficiently with a relatively small group of consumers at the outset”. On such a record we cannot say that the courts are entitled to substitute their judgment for the evaluation of the commission, giving fair consideration to the expertise possessed by the commis
By similar analysis we find that the record compels the conclusion that there was a rational basis for approval of the group of consumers selected by LILCO for first stage application of the new rate structure. Several considerations entered into the choice of the class of consumers to which the new rates would be applied in the first instance. Prior to having been required to propose a marginal cost-based rate, LILCO had at its own expense placed the type of sophisticated meters required by such a rate with its largest use commercial and industrial class of customers for the purpose of collecting load data. Not only could it be found that it was appropriate to use the large use consumers because their high kilowatt hour usage would result in a much lower metering cost per kilowatt hour, thus producing a minimal customer burden relative to what it would be for other customers on LILCO’s system; additionally, meters were already in place for these consumers, thereby postponing "the enormous cost that a widescale mandatory metering program would entail”. Necessary consumer education can most efficiently be undertaken with a relatively small group of informed, sophisticated consumers. The group selected was making substantial payments to LILCO and thus had a real potential for usage responsiveness; its large consumption of energy offered both opportunity and inducement to take effective action, perhaps even at some initial cost to the consumers, to shift more load to off-peak periods. There was warrant for the hope that some significant decrease in the use of inefficient generating facilities might be realized, even without proof as to the precise degree of elasticity in energy consumption among the included consumers. Here again the identification of relevant factors, the weighing of the relative significance of each and of all taken in combi
In passing we note, that the commission considered and rejected the suggestion that the new rate structure should first be put into effect on a voluntary rather than a mandatory basis. The fact that such a plan of implementation has been adopted in other States and surely could be said to have a rational basis, does not establish that it is the only rational plan or that the mandatory plan approved by the commission in this instance did not have a rational basis. Indeed, other considerations of public acceptance and of the effect of consumer self-selection might raise questions as to the efficacy and desirability of introduction of time-of-day rate fixing in any voluntary manner. At the very least there were matters lying well within the scope of the commission’s authority, out of reach of judicial intrusion. Then, too, we observe that in the design of the particular first phase implementation, efforts were made to assure that the selected consumers as a class will not pay total revenues to LILCO greater than they would have had to pay had their rates not been redesigned.
In sum we conclude that the record compels the conclusion that there was a rational basis for the determination of the commission to approve both the introduction of time-of-day rate fixing on a gradual progression basis and the first stage application proposed in this instance by LILCO. Thus, we disagree with the conclusion reached at the Appellate Division.
It remains then to consider whether the commission’s adoption and calculation of the SC2-MRP rate is supported by the evidence in the record — the issue which was not reached
LILCO’s SC2-MRP classification was derived from a marginal cost study which focused on three principal areas of cost: (a) marginal energy or running costs; Ob) marginal capacity costs; and (c) marginal customer costs.
Respondents specifically attack the component of marginal capacity cost — costs associated with the construction of new plant. LILCO used long-run marginal capacity costs in conjunction with the short-run marginal running costs. There is expert testimony in the record that this combination, as a practical matter, yielded the most economically efficient price at the time, and that in this instance inasmuch as curtailment costs (the value of the output which would not be produced if electricity demand exceeded supply, causing blackout or brownout) could not be computed; long-run incremental capacity costs were a reasonable surrogate for short-run curtailment costs. These were matters to be judged by the commission.
Finally, say respondents, a primary goal of marginal cost-based pricing is to conserve resources and to improve utility efficiency (in theory by sending consumers price "signals” which are designed to influence their consumption patterns), but, respondents continue, the record does not support the conclusion that this will be the result in this instance inasmuch as the initial group of consumers was selected without regard to their ability to respond to price signals. The determinative fact, however, is that the record does not establish that conservation of resources and improved utility efficiency will not be the result of the new rate structure. It suffices if there is evidence that they may be. Even in the
Recognizing the novel character of time-of-day pricing for electricity we conclude that the determination of the commission in approving LILCO’s SC2-MRP rate proposal represents a rational and reasonable step in the direction pointed by the commission toward time-of-day pricing for electricity and that it finds substantial support in this record.
For the reasons stated the judgment of the Appellate Division should be reversed, with costs, and the determination of the commission confirmed.
Chief Judge Breitel and Judges Jasen, Gabrielli, Wachtler, Fuchsberg and Cooke concur.
Judgment reversed, etc.
. That classification approval in the past has been based on pertinent cost-justification data is not surprising. As the commission noted:
"Historically in this State, and elsewhere, each customer within a defined service classification has paid for his electricity at a rate calculated through an averaging process: the rate he paid was related not to his individual consumption habits and the costs they imposed on society, but to the consumption characteristics of the entire group. This was essentially true even under the most enlightened regulatory practice, which involved trying to tie the rates charged the various groups of customers to the cost of serving them. The costs were the costs of serving the group, not the individual: through the use of one or more cost of service allocation methodologies, aggregate revenue responsibility would be assigned to a service classification in relation to that class contribution to total system costs. Thereafter rates for that class would be established so as, in the aggregate, to achieve the class revenue target.
"In thus designing rates, efforts have been made to allocate greater responsibility to those members of the class more responsible for the costs imposed by the class on the system — for example by the inclusion of seasonal differentials or separate demand charges and rachets — but one principal factor which influences cost has largely been ignored; the time of the day at which service is demanded.”
. It is reported that the charges to some 109 customers in the included class would be less under the new rate schedule than they would have been under the former schedule, with decreases going to 17.7%.
. Under the "two-thirds rule”, the rates charged were to be increased by not more than two thirds of the difference between the old and new rates.
. No particular attention is invited to this third area of cost in our court.