might differ from that of Union Electric as a whole. Dr. Sherman did not make any adjustments to his return, derived from his study of Union Electric, to reflect the fact that the degree of risk in an investment in Missouri Utilities might be higher or lower than an investment in its parent company. Indeed, Dr. Sherman contended that each and every portion of Union Electric's business should earn the 16.09% rate of return indicated by his study, regardless of whether each part is faced with the same degree of risk. Because Missouri Utilities' other operations (gas, water and retail electric) do not earn returns even approaching this figure, Dr. Sherman would, in effect, have jurisdictional sales subsidize all others. Intervenor witness Bernstein examined some data of the performance of Missouri Utilities but did not attempt in any systematic way to make his recommendation a result of the characteristics of the jurisdictional business alone. Staff witness Hutt explicitly recognized that Missouri Utilities and Union Electric are both attendant with distinct financial performances and risks. However, his recommended return was based on his analysis of Missouri Utilities' stockholder (Union Electric) as much as it was of Missouri Utilities. It is the responsibility of the Commission to determine a fair and reasonable rate of return on the jurisdictional portion of an electric utility's business. This determination should reflect the risks of the jurisdictional business alone. In the case where the return of a wholly-owned subsidiary or a utility which sells part at wholesale and part at retail is at issue, attention must necessarily be given to the performance of common stock which reflects risks of non jurisdictional business. However, where there is a perceived difference in risk between the jurisdictional and nonjurisdictional portions of the business, adjustments to a return derived from a study of the entire business must be made. Arguably, a determination based solely upon the performance of Union Electric's stock is necessary to meet the capital attraction test. Since a prospective investor must purchase stock in the entire bundle of Union Electric's businesses, he is interested in a return commensurate with the risks of Union Electric as a total entity. Giving each portion of the business a return based on the risks of the whole will enable Union Electric to attract capital since the overall return will be based on the risk of the entire company. However, the capital attraction test is also satisfied by a return based on the jurisdictional portion of the business only. If each part of the business receives a return based on its own risks, then the overall return will be sufficient to compensate for the risk of the enterprise as a whole; capital will be attracted to the company. Additionally, a customer of the jurisdictional business will not pay a return based upon aspects of the company from which he receives no benefit. Customers should pay a rate based upon costs caused by those customers. It is, therefore, necessary that the cost of money be calculated on the risks of the portion of the business from which the customer receives service. The adjustment is particularly necessary in a case, as this one, where the nonjurisdictional portion of the utility is so very small that it has little bearing on the bundle of risks in the whole company perceived by the investor. In terms of revenues, Missouri Utilities comprises roughly 6% of Union Electric's business, and Missouri Utilities' jurisdictional portion is only two-tenths of one percent of Union Electric's total. Even if Missouri Utilities were to be an extremely safe or extremely risky enterprise, this fact would have little effect on the risk of Union Electric as a whole and on the performance of Union Electric stock. Thus, a rate of return proposal, based solely on Union Electric's need to attract capital and receive earnings similar to comparable companies does not necessarily indicate the appropriate return to be adopted in this case. Here, Missouri Utilities' investment for the jurisdictional customers is almost entirely devoted to providing transmission service. Almost all of the power the Cities purchase from the Company is generated by Union Electric and sold to Missouri Utilities. The Company assumes little risk for the generating portion of the business since its tariffs recover the cost of purchased power and the fuel adjustment and demand charge clauses operate to pass through almost all increases in that cost. Missouri Utilities' construction program is extremely small, and it appears that Missouri Utilities has sufficient capacity to meet the needs of its customers in the immediate future. This is due in some part to the fact that the Cities generate their own power at times of Missouri Utilities' system peaks. The result is that Missouri Utilities' load pattern is more even than it would be otherwise and greater efficiency thus results. Finally, the fact the Company is essentially providing a transmission service lowers the amount of competition which Missouri Utilities faces from other utilities. While the Cities might turn elsewhere for the generation of power, there is no alternative method of transmitting that power to them." Missouri Utilities is virtually assured that it will never lose to a competitor that portion of the business on which it earns almost all of its jurisdictional return. Missouri Utilities is essentially held harmless from increased demand charges to Union Electric by operation of the rate design approved in this decision, and, because the costs of those facilities used by and useful only to Jackson and Malden are directly attributed to those cities, Missouri Utilities does not face any potential under-recovery for them. Because Missouri Utilities' service to the wholesale customers is provided at a degree of risk approaching the negligible, the appropriate return should be lower than the amount recommended by witnesses Hutt and Bernstein and lower than gener B. Energy Charge C. Transmission Facility Charge D. Local Facility Charge - Shall be determined monthly as the sum of: (a) $3.429 per kilowatt All energy delivered dur- Shall be determined monthly as the higher of either: (a) a charge of 41 cents per kilowatt of Annual Kilowatt Demand, or (b) a charge of 0.142 cents per kilowatt-hour delivered; A charge of 1.25% per month of the total installed cost of local facilities required solely to serve the Purchaser as defined in Section 5 of the Electric Service Agreement for Wholesale Electric Service. (Exhibit 11, p. 3) The "Demand Charge" is designed to recover the demand charges incurred by Missouri Utilities in its purchase of power from Union Electric. It does not recover fixed costs attributable to Missouri Utilities' own facilities. The "Energy Charge" collects revenues to compensate the Company for the energy charges it must pay for the power it purchases from Union Electric. Together the "Demand Charge" and the "Energy Charge" recover the Missouri Utilities' total purchased power costs from Union Electric. The "Transmission Facility Charge” is designed to collect revenues for the demand-related costs attributable to that portion of the generation and transmission of electricity that Missouri Utilities provides. Because the Company purchases almost all the power it sells rather than generating its own power, the "Transmission Facility Charge" essentially collects for the demand-related costs of Missouri Utilities' transmission service. The "Local Facility Charge" collects from a particular city revenues to cover the costs of the local facilities now enumerated in the Electric Service Agreement between Missouri Utilities and that city. Missouri Utilities calculates the charge for each of the components of the rate in the following manner: The Annual Kilowatt Demand Charge and the Temporary Kilowatt Demand Charge parallel the Company's S-88 contract with Union Electric to pass through Missouri Utilities' purchased power demand costs. Because the Cities did not cause any such costs during the test period, none of the revenue requirement is attributed to the Demand Charge. The Transmission Facility Charge, which is the higher of .142 cents per kilowatt-hour delivered or 41 cents per kilowatt of Annual Kilowatt Demand, is taken from the Settlement Agreement between Missouri Utilities and Kennett in Docket No. E-9473. The amount of the revenue requirement to be collected by the Transmission Facility Charge is computed by multiplying .142 cents per kilowatt-hour by total Southeast SFR kWh sales. The Local Facility Charge is set at 1.25% per month, which Missouri Utilities contends is fair and reasonable in view of depreciation, taxes and an appropriate return. This rate is also taken from the E-9473 Settlement Agreement. Missouri Utilities computes the amount of the revenue requirement to be collected by the Local Facility Charge by multiplying the total installed cost of local facilities for each city by the yearly rate (15%). Finally, the Energy Charge is determined by dividing that portion of the revenue requirement remaining by total Southeast SFR kWh sales. It is clear that Missouri Utilities' method of calculating its rate is improper. It has arbitrarily selected rates for the Transmission Facility Charge and the Local Facility Charge based upon rates charged in the past rather than determining the appropriate figure from the costs attributable to the service for which that particular component of the rate is being established. The fact that Kennett and Missouri Utilities accepted the Transmission Facility Charge and the Local Facility Charge in Docket No. E-9473 does not mean that rate is cost justified, especially since Kennett has no local facilities to which the charge would apply. Nor has the Company made any showing in this proceeding that test period costs warrant the charges proposed. Furthermore, the Company has used an incorrect method of computing the Energy Charge. The revenue requirement to be collected by the Energy Charge should be the cost of purchased power (excluding Demand Charges) sold to the wholesale customers. Sound ratemaking practice requires that one begin by determining those costs attributable to each of the components of the rate, which, in turn, will establish, through appropriate allocations, the revenue requirement for each. The revenue requirements are then applied to the respective billing determinants to arrive at the necessary charges. This practice should be followed in this case. The total revenue requirement and the proper classification of the various elements of Missouri Utilities' cost of service are to be determined in accordance with this decision. Both Staff and the Intervenors have raised objections to the components of the rate proposed by Missouri Utilities. All parties agree that an Energy Charge should be included in the rate although there is disagreement on the correct amount. As noted above, the Company incorrectly computed its rate components, and they do not necessarily reflect the costs attributable to those components. The Energy Charge should be calculated from purchased power energy charges and any other charges properly a part of this charge. Missouri Utilities' "Demand Charge" is designed to compensate the Company for those demand charges it incurs from its purchase of power from Union Electric. The Missouri Utilities Demand Charge tracks the Union Electric rate so that a customer which causes Missouri Utilities to incur a purchased power demand charge will pay for it. Cities argue that the proposed Demand Charge is inappropriate and unnecessary because they are interruptible customers who have not caused Missouri Utilities to incur demand charges from Union Electric in the past and will not in the future.1 These demand charges will not be imposed unless the Cities in fact impose a demand at a time of peak so that Missouri Utilities must pay increased purchased power demand charges to Union Electric. Because the Company offers firm service to the Cities if they want it, these charges are necessary to compensate Missouri Utilities for its actual costs of purchased power in the event that the Cities abandon their usual practice and do not generate at the time of heavy system loads. This aspect of the Company's rate design is approved. Missouri Utilities' Transmission Facility Charge is designed to collect the entire amount of demand-related costs allocated to the jurisdictional customers by the demand allocator. In the section on demand allocation, this decision finds that no credit should be given to the Cities for their generating capacity because, even though it is not Cities' practice to do so, they have the right to take energy from Missouri Utilities even at times when the Southeast system load reaches 80% or more of system peak. However, a determination must be made of those demand-related costs that Cities actually cause. This analysis will be done here and incorporated into the rate design. It is Missouri Utilities' position that because it stands ready to provide service to the wholesale customers even at times of system peak, it must maintain its transmission facilities as if the Cities were totally firm customers. Accordingly, it claims that total recovery of the entire demand component from the jurisdictional customers is proper. Cities contend that the entire Transmission Facility Charge must be eliminated because, as interruptible customers, the Cities impose no demand-related costs on the Company. Staff proposes, as an alternative to the Transmission Facility Charge, a demand charge of $1.37 per kW, calculated at the twelve coincident peaks. According to Staff, this charge will recover demand-related costs if the Cities cause them by choosing not to generate at the 12 CPs. However, if the Cities do generate at these times, they will be able to avoid entirely fixed charges related to transmission facilities. Staff contends that Missouri Utilities does not build any additional facilities to meet any of the Cities' loads because of the Cities' consistent practice of peak shaving. If this practice continues, it is the view of Staff that the Cities will not in fact cause the demand-related costs included in the jurisdictional cost of service and thus there should be no recovery. The peculiar nature of the service provided the wholesale customers by Missouri Utilities prevents the resolution of this issue by pigeon-holing the service into either the firm or interruptible category and determining the causation of demand-related costs from the category selected. Certainly, if the service were firm, Missouri Utilities would receive the entire demand component of the revenue requirement. Minnesota Power & Light Company, Opinion No. 12, supra, dictates that no demand costs be attributable to interruptible customers. However, in this case, the demands on capacity necessitated by Missouri Utilities' tariff obligation to provide firm service if the Cities want it, may be mitigated by the Cities' practice of utilizing their own generation to avoid demand charges. An analysis must be made of the effect on costs of the nature of the service, since only those costs actually caused by the customers are properly collectible from them. The parties have provided little evidence regarding the extent to which Missouri Utilities has installed capacity to carry loads in the event the wholesale customers take power at the time of system peak. Missouri Utilities' witness Ervin contended that the Company plans its system to meet the needs of the Cities as firm customers. Yet he did not support his assertions with any examples or data. Without a specific factual showing of its claim, the Company's position cannot be adopted. It runs counter to the typical practice of utilities to utilize actual demands in planning capacity requirements. For example, a utility whose customers have considerable load diversity may need to install less capacity than the sum of its firm contractual commitments. It is logical to assume that peak shaving by the wholesale customers is a factor considered by load planners just as is load diversity. Accordingly, a rate design that allows recovery of all the demand-related costs when the costs may not be incurred must be rejected. Cities' proposed elimination of the Transmission Facility Charge must also be dismissed. Because the wholesale customers have the right to take power at the times of system peaks, the rate must be designed to compensate Missouri Utilities for demand-related costs in the event the Cities do take power at these times. At the very least, the demand component must be collectible to the extent that the Cities do not generate at the monthly peaks, causing demand costs on the system. Staff's proposal remains. It too must be rejected. Staff's contention that the Cities cause no demand-related costs if they supply their own power at the 12 CP is no more correct than Missouri Utilities' position. Because of the tariff, Missouri Utilities cannot be assured that the wholesale customers will not on occasion or even continuously demand power at times of system peak. Some capacity is properly attributable to the Cities as installed for this contingency. Thus, the proper rate design must collect demand component revenues in an amount between those requested by Missouri Utilities and those that will result from Staff's proposal if the Cities generate at the 12 CPs. The charge for transmission service will reflect the hybrid nature of service. To do so, 25% of the demand component, as computed in accordance with this decision, will be classified with the energy component and collected on the basis of kilowatt-hour sales. This tilt toward energy will assure that Missouri Utilities collects some revenues for its transmission service. The remaining portion of the demand component will be billed, as in Staff's proposal, on the basis of demand at the 12 CPs. The Company will collect the latter portion to the extent that the Cities impose demand on the Southeast system at the monthly peaks. The present contracts between Missouri Utilities and Jackson and Malden include charges to recover the costs of all local facilities for these cities. Because the City of Kennett has no local facilities, the contracts will collect all the necessary revenue for this component of the Company's rate until these contracts are terminated. Because the contracts will recover the costs of local facilities, these costs should not be included in the revenue requirement to be collected by the other components of the rate. Upon expiration of the contracts with Jackson and Malden, a cost-justified Local Facility Charge should be collected. As stated above, the manner in which Missouri Utilities has computed this charge in its proposed rate design is not based upon actual costs incurred for these facilities. Without any showing that the present contractually determined one percent per month (12% per annum) charge does not recover full costs, it is ordered retained. Cities also object to (1) the minimum monthly charge, (2) the requirement that Purchaser coordinate its generation to avoid demand charges, (3) the requirement that each Purchaser enter into a 20year contract to take service under this rate schedule, and (4) the loss modification factor. Missouri Utilities' minimum monthly charge includes the Demand Charge, the Transmission Facility Charge and the Local Facility Charge. This provision makes clear that a customer will have to pay any annual demand charges it has caused the Company to incur and will have to pay for any local facilities attributable to it even if the customer takes no power in a given month. This charge is reasonable since it reflects costs actually incurred by Missouri Utilities. The components of the Minimum Monthly Charge will, of course, be those that conform to this decision. Cities also propose elimination of language requiring Purchaser to coordinate its generation. The provisions in question read as follows: It shall be the sole responsibility of Purchaser to coordinate the daily, monthly and annual power and energy flow into Purchaser's system from Company's system to avoid liability for either or both of the Annual and/or Temporary Kilowatt Demand charges. It shall be the responsibility of the Company to notify Purchaser by telephone when Company's system is approaching the level at which additional demand cost liabilities will be incurred on Company's purchased power requirements. Cities contend that the first paragraph should be eliminated because it is contradicted by the second. The two paragraphs, however, should be interpreted to give effect to both. A wholesale customer's responsibility to coordinate the power and energy flow into its own system does not include the responsibility of determining when the Company is reaching loads which will trigger either the Annual or Temporary Kilowatt Demand charges. Missouri Utilities must inform the Cities as the system is approaching this level of demand. Cities' objection to the requirement that Purchasers sign a 20-year contract to take service under the SFR-1 rate is not well founded. The 20-year term is necessary to the Company's planning and is reasonable. Finally, Missouri Utilities has included a loss modification factor of .943 in the rate schedule. It is designed to allow for the fact that line losses to the wholesale customers are on the average not as great as the losses accounted for in the basic energy rate. Cities apparently misunderstand the Company's loss modification factor which is actually more beneficial to the wholesale customers than their own .975 proposal. The Company's figure is found to be reasonable and is adopted. VIII DISCRIMINATION CLAIM OF THE CITY OF KENNETT The service agreement between Missouri Utilities and the City of Kennett provides that the rates for service shall be those found in Missouri Utilities "effective Rate Schedule for Wholesale Electric Service within Southeast Missouri, FPC Electric Tariff on file with the Federal Power Commission." The Commission found in its order of June 1, 1977, and the parties agree, that this contract allows Missouri Utilities to file unilaterally for a rate increase. Kennett contends that the fact that it is unable to avail itself of the benefits of a fixed rate contract is discriminatory to the extent it must pay for rate increases to which Malden and Jackson are not subject because of the protection of their fixedrate contracts. Missouri Utilities replies that it has long attempted to make the SFR-1 rate applicable to the Cities of Jackson and Malden as well. This, of course, is what Missouri Utilities is attempting in this case. Missouri Utilities claims that the difference in rates is the result of the actions of Malden and Jackson to prevent rate redetermination, not the result of any action or intent of the Company. Missouri Utilities also states that Kennett requested service from Missouri Utilities and voluntarily signed its agreement in the original SFR-1 proceeding. According to the Company, because the agreement was initiated by Kennett, it cannot complain of the resulting disadvantages. Commission Staff correctly notes that the several case authorities, establishing tests for determining the existence of discrimination because not all parties have fixed-rate contracts, are not immediately reconcilable. The Court of Appeals for the District of Columbia Circuit found in Boroughs of Chambersburg and Monto Alto, Pa. v. F. E.R.C., 580 F.2d 573 (D.C.Cir. 1978), that if a difference in rates is due to the fact that some customers have fixedrate contracts while others do not, and no other factors that might establish undue preference or discrimination are demonstrated, the differential in rates does not constitute discrimination under Section 205(b) of the Federal Power Act. In another case before the District of Columbia Circuit, Town of Norwood v. F.E.R.C., 587 F.2d 1306 (D.C.Cir.1978), Norwood alleged collusion between Boston Edison and New England Power Company in the execution of a wheeling agreement setting a fixed rate 30% below the rate offered to the Town. The court remanded the question of whether collusion existed at the contract formation stage, reasoning that such a finding might constitute sufficient reason to set aside the rate differential as an undue preference. The court also addressed the question of the appropriate remedy where a difference in rates arising from the execution of fixed-rate contracts with some members of a class of customers is found to be discriminatory. It found that while the normal remedy would be to lower the rate of those customers not having the benefit of a fixed rate, circumstances at the contract formation stage, like collusion, may warrant the finding that a customer is not entitled to the benefits of its fixedrate contract and that an upward revision of the rate it pays is appropriate. In Public Service Company of Indiana v. F.E.R.C., 575 F.2d 1204 (7th Cir. 1978), the Seventh Circuit held that, where there is a substantial disparity in rates between customers of the same class and where a customer not receiving the benefits of a fixed-rate contract will be significantly injured thereby, the burden is on the public utility to justify the disparity in its rates on the basis of factual differences between the customers. The court distinguished Chambersburg on two grounds. First, it found that Chambersburg involved no finding of substantial injury to the customer. The court also noted that only one of five customers did not have a fixed-rate contract in PSCI, while all but one did not have fixed-rate contracts in Chambersburg. Presumably this difference in the posture of the parties affects the extent to which a non-fixed rate customer could be placed at a competitive disadvantage vis-a-vis the contract customer. Based on this latter distinction and noting that there had been no allegation of competitive disadvantage, the Commission found PSCI to be inapplicable as precedent to the circumstances in Southwestern Electric Power, Opinion No. 28, Docket No. ER76–177, et al., issued September 28, 1978, 4 FERC ¶ 61,330. The Commission followed the Chambersburg rationale and held that there was no undue discrimination because the sole reason for the rate disparity was the existence of a fixed-rate contract with one of the customers. In its initial brief, page 23, Staff cites Southwestern Electric Power Company to distinguish PSCI from the facts of the present case. It argues that because there was only one party without a fixed-rate contract and because there has been no showing of competitive disadvantage, this case should follow Chambersburg and find no discrimination. Staff contends that, based on the rationale of Southwestern Electric Power Company, Chambersburg is relevant authority but PSCI is not. In its reply brief, page 14, filed subsequent to the Norwood decision, Staff takes a different approach. Apparently, it believes that Norwood invalidates the basis for distinguishing PSCI and Chambersburg as developed by the Commission in Southwestern Electric Power Company. This view is arguably correct since the court in Norwood discussed the importance of having many or few cities without the benefit of fixed-rate contracts in the |