8 Discrimination: When Is Favoritism 'Undue'?

• Author: Scott Hempling
• Pages: 287-302

8.A. Undue discrimination

8.A.1. Rate differences not justied by cost differences

8.A.2. Rate differences with anti-competitive effect

8.B. Due discrimination

8.B.1. Different customer proles

8.B.2. Different settlement strategies and contract histories

8.B.3. Price discounting to retain customers

8.B.4. Product differences

8.C. Cost allocation within holding company systems

8.C.1. Systems that plan and operate utility assets centrally

8.C.2. Systems that mix utility and non-utility businesses

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Discrimination

When Is Favoritism “Undue”?

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Self-interest of the carrier may not override the requirement of equality in rates.1

Chapters 6 and 7 addressed the statutory requirement of justness and reasonableness, as

applied to cost-based rates and market-based rates, respectively. Justness and reasonable-

ness is necessary for lawfulness, but it is not sufcient. Regulatory statutes typically add

that rates may not grant an undue preference:

Every gas corporation, every electric corporation and every municipality shall furnish and

provide such service, instrumentalities and facilities as shall be safe and adequate and in all

respects just and reasonable. . . . No gas corporation, electric corporation or municipality

shall make or grant any undue or unreasonable preference or advantage to any person.2

In the pricing context, discrimination can be lawful or unlawful, depending on whether

it is “due” or “undue.” This chapter illustrates the distinction with examples. Undue dis-

crimination includes rate differences not justied by cost differences and rate differences

with anti-competitive effect. Due discrimination includes rate differences based on cus-

tomer proles and load characteristics, rate differences arising from settlement strategies

and contract histories, price discounting to retain customers, and rate differences arising

from product differences. It then turns to a modern problem of discrimination: cost allo-

cation on multi-utility systems.

8.A. Undue discrimination

8.A.1. Rate differences not justied by cost differences

The prohibition against undue discrimination distills to this golden rule: Treat similar

customers similarly; dissimilar customers dissimilarly. Customers who cause similar costs

should face similar cost-based rates.3 Cost-causation underlies the common method for

1. United States v. Ill. Cent. R.R., 263 U.S. 515 (1924).

2. N.Y. P. S. § 65. See also D.C. C § 34-1101 (“The charge made by any public utility for a

facility or service furnished, rendered, or to be furnished or rendered, shall be reasonable, just, and non-

discriminatory.”); K. S. A. § 66-101b (“Every unjust or unreasonably discriminatory or unduly

preferential rule, regulation, classication, rate, charge or exaction is prohibited and is unlawful and

void.”). See also Section 205(b) of the Federal Power Act (FPA), 16 U.S.C. § 824d(b):

No public utility shall, with respect to any transmission or sale subject to the jurisdiction of

the Commission, (1) make or grant any undue preference or advantage to any person or subject

any person to any undue prejudice or disadvantage, or (2) maintain any unreasonable differ-

ence in rates, charges, service, facilities, or in any other respect, either as between localities or as

between classes of service.

3. See Portland General Exchange, Inc., 51 FERC ¶ 61,108, at p. 61,245 n.62 (1990) (“[D]ifferences in

rates must be based upon factual differences, for instance, in a utility’s cost of service . . . .”).

Chapter Eight288

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