Before WRIGHT,* WALD and MIKVA, Circuit Judges.
Supplemental Opinion on Rehearing October 30, 1981. Opinion as Modified on Rehearing October 30, 1981.
Petition for Review of an Order of the Federal Energy Regulatory commission.
DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE WALD
Upon consideration of the petitions for rehearing filed by Respondent, Federal Energy Regulatory Commission, and Intervenor, Central Illinois Public Service Co., and responses thereto, it is
ORDERED, by the Court, that petitions for rehearing are granted and Section III A of our opinion is amended to reflect the views set out in the supplemental opinion.
Opinion for the Court filed by Circuit Judge WALD.
Our original opinion in this case was issued on August 17, 1981. *fn1 Pursuant to the Federal Rules of Appellate Procedure 35 and 40 and local rule 14, Respondent, the Federal Energy Regulatory Commission ("FERC" or "Commission"), and Intervenor, Central Illinois Public Service Company ("CIPSCO" or "Company"), with the support of the United States, *fn2 have petitioned for rehearing, requesting that Section III A of our opinion be vacated. We hereby grant the request for rehearing and vacate those parts of Section III A which are inconsistent with this supplemental opinion. *fn3
Section III A examined Illinois Cities of Bethany's ("Cities") allegation that a wholesale electric power tariff, filed by CIPSCO under section 205 of the Federal Power Act, 16 U.S.C. § 824d, and approved by FERC, was too high in comparison with CIPSCO's retail rates. Cities, a group of CIPSCO wholesale customers, claimed that they were being price squeezed. *fn4 Relying upon a Staff study that indicated that CIPSCO's profit margin was higher for its retail services than its wholesale services, see Joint Appendix at 16, 412, an Administrative Law Judge rejected Cities' claim. Id. at 345, 406-17. FERC affirmed that decision. Id. at 425. Because we read the Supreme Court's decision in Conway v. United States (510 F.2d 1264) to permit the Commission, in the interests of competition, to adjust even cost-justified differentials, we remanded "to allow the Commission, if it (found) that CIPSCO and petitioners (were) competitors, ... to reduce (CIPSCO's wholesale) rate to the higher of the "lower end of the range of reasonableness' or that needed to eliminate the price squeeze, or to justify a higher rate by reference to other factors." Illinois Cities (supra) slip op. at 24. On rehearing, however, we have determined that no price squeeze exists so as to justify invocation of the Conway doctrine. We now vacate that decision and affirm the decision of the Commission.
Our decision to remand was based upon our finding that the ALJ had erred initially in rejecting a prima facie price squeeze case *fn5 presented by Cities and subsequently in failing to determine whether CIPSCO's wholesale rate, although within the range of reasonableness, lay at the "lower end of the range of reasonableness," i.e., at a point within the range of reasonableness that would permit elimination of the price squeeze. Id. at 19, 21. Upon further reflection inspired in part by the additional information and reformulated arguments in the petitions for rehearing and the responses thereto, we now conclude that we were mistaken in ordering the remand.
The price squeeze case presented by Cities was based upon the Alcoa transfer price test. United States v. Aluminum Co. of America, 148 F.2d 416, 436-38 (2d Cir. 1945) (hereinafter Alcoa ). That test maintains that "(i)f a vertically integrated entity cannot purchase at its own wholesale rates and still realize a profit at its own retail rates, then it can be concluded that the supplier has overcharged its wholesale customers." Illinois Cities (supra) slip op. at 14.
The ALJ appears, however, to have misunderstood the appropriate transfer price test proffered. He concluded that "it would place in the hands of the party alleging discrimination the ability to create the discriminatory premises either willfully or simply through an inefficient municipal operation." J.A. 416. Thus he viewed it as requiring an inquiry into whether a vertically integrated company could realize a profit by purchasing at its own wholesale rates and selling at the retail rates of the party alleging discrimination rather than at its own retail rates. Language in our original opinion *fn6 may inadvertently have contributed further to the confusion. Thus, both respondent *fn7 and intervenor, *fn8 in their petitions for rehearing, misconstrued our initial decision as "requiring the Commission to lower wholesale electric utility rates whenever a municipal customer, competing with the utility for retail business, cannot pay the rate, and (while incurring its own costs) resell at a profit." *fn9 Properly understood, however, the transfer price test probes only whether the utility itself could buy or sell at its own prices. *fn10 As such, it is similar to the method of analysis employed in the Staff study relied upon by the ALJ *fn11 which compares the company's rate of return on sales at both the wholesale and retail level to see whether the company is subsidizing lower retail prices through higher wholesale prices in order to compete against its wholesale customers. *fn12 Both tests depend upon a proper allocation of wholesale and retail costs, and both seek to test whether there is a price discrimination *fn13 a non-cost justified differential-between wholesale and retail customers. *fn14 Thus, Cities' attempted use of the transfer price squeeze test to attack the findings of the Staff cost-of-service study is in fact not materially different from a direct attack upon the accuracy of the Staff study itself. Having acknowledged the discretion of the Commission to utilize its choice of an appropriate methodology *fn15 to prove or disprove a price discrimination, and having rejected Cities' frontal assault upon that methodology, *fn16 we should have found that Cities had failed to make out a price squeeze case. In sum, since the Staff study found that after fully allocating wholesale and retail costs the company's rate of return on wholesale sales was reasonable and indeed less than its rate of return on retail sales, there was no reason to believe that Cities was being price squeezed at all. See n.14 supra. And where no price squeeze case exists, there is no need to decide whether Conway *fn17 requires the ALJ to determine whether CIPSCO's wholesale rate, although within the range of reasonableness, lay at a point within that range where it could or should be lowered to eliminate the price squeeze. Because we erred in remanding for the Commission to consider applying Conway to this case, we vacate our earlier decision on this aspect of the case.
The Supreme Court in Conway held that although the Commission lacked jurisdiction to fix retail rates, its jurisdiction to set wholesale rates allowed it to take retail rates into consideration where wholesale customers were price squeezed by dint either of the utility company's desire to drive out retail competitors or of the interplay between federally and locally regulated rates.
The Commission must arrive at a rate level deemed by it to be just and reasonable, but in doing so it must consider the tendered allegations that the proposed rates are discriminatory and anticompetitive. *fn18
The Supreme Court upheld a decision of this court, per Leventhal, J., and observed that this court was "quite correct" in concluding:
When costs are fully allocated, both the retail rate and the proposed wholesale rate may fall within a zone of reasonableness, yet create a price squeeze between themselves. There would, at the very least, be latitude in the FPC to put wholesale rates in the lower range of the zone of reasonableness, without concern that overall results would be impaired, in view of the utility's own decision to depress certain retail revenues in order to curb the retail competition of its wholesale customers. *fn19
We read that language as permitting the Commission to adjust wholesale rates within a range of reasonableness to respond either to utility efforts to depress retail rates to meet competition, or to situations where the imperfections of regulation result in an unintended price squeeze. Since ratemaking is an inexact science, even bona fide allocations of costs between wholesale and retail operations may be imperfect or rates of return set by different regulators at the wholesale and retail levels may make it impossible for purchasing wholesalers, no matter how efficient, to compete at the retail level. In such cases, Conway acknowledges the Commission's discretion to press wholesale rates to the lower end of the zone of reasonableness. The Conway doctrine is not, however, we emphasize, designed to subsidize particular retail competitors. Rather, the ...