Valid in terms of analysis of who is retained, but I'm not sure I agree that an officer's decision to pursue a due course path should not enter into the calculus when distributing a ranking.
Regardless of any individual's career decisions, the institution strives to provide enough qualified candidates to control grade milestones to provide the desired selectivity. Reporting based solely on current performance, which ignores the individual's potential or willingness to perform at the next milestone, does not equitably distribute that limited opportunity. It carries the risk of leaving otherwise qualified officers on the cutting room floor, while those with the EPs separate or pursue non-command career paths. Does the current system leave otherwise EP performers on that cutting room floor? Sure, but they weren't interested in DH or command anyway, right?
I think it's helpful for people to stop thinking of their FITREPs as a report card or performance evaluation, because that's not what it is. Its only purpose is for a RS to communicate to selection boards on an individual's fitness and suitability to perform at the next milestone. Nothing more, nothing less.
I would agree that, ceteris paribis, an officer desiring a career should be ranked higher than one who does not. However, the scenario you are describing isn't with all else equal. The notion that career desire can make up a performance deficit (i.e. I lesser performer should be ranked above a greater performer simply because he wants to stay in longer) doesn't create qualified candidates for grade milestones. It makes UNQUALIFIED candidates look as if they ARE qualified. That is a large distinction.
Because we decide how many people "make the cut" based on percentages, we implicitly say that the Navy wants the top X% of officers to become DHs, top Y% to screen for command, etc. By valuing career desire more than performance to a certain degree, we erroneously assign individuals to that top percentile. To be put more clearly - how many of the individuals screening during these boards would not have if the entire population of officers stayed in the Navy?
The notion that, if we don't do this, we won't have enough candidates for grade milestones is a fallacy. I don't say this to be disrespectful, but that notion is predicated on the belief that the individuals currently receiving rankings they don't "deserve" would depart the naval service instead of stay, while at the same time the rock stars currently leaving would continue to leave. You definitely have better information than I do, but I'm unaware, empirically or anecdotally, of anyone who decided to leave because he felt like he wasn't getting good enough rankings during FITREPs. Many people on this site talk about the individuals "who have no other option" being the ones that take the bonus, screen for command, etc. I don't prescribe to that train of thought, but if you did, you'd have to realize that those individuals won't have an option regardless of whether or not they get a #1 EP. They desire a Navy career no matter how you rank them, for whatever the reason. Likewise, many of the people who choose to depart at their MSR wouldn't change their mind for more money, homesteading, etc.
What would change is the Navy's understanding of its personnel management. It would see where their top performers desire to go for shore tours/disassociated, instead of what jobs end up determining who gets ranked as a top performer. Shouldn't the fact that all your #1 EP's would rather be a SFTI/GTI/SMTI than go to the boat mean something to the people at PERS? Likewise it would illustrate how many top performers leave the service at the first available opportunity and how many middle performers manage to serve a full and productive career. Wouldn't it be good for that #4 EP JO to know that he isn't, in fact, already disqualified from screening for command?
To your point about leaving good officers on the cutting room floor - that would only occur if BETTER officers decided to take their jobs. If the true #1 rock star decides to stay instead of leave, and that means the true #2 doesn't screen for DH, is that really a bad thing? If the true #1 leaves anyways, wouldn't that mean the #2 still gets selected? If the Navy's real goal is to groom the best candidates for each grade, they should want to know where they are falling short so they can fix the issue; not make the ice cream cone self-licking so they can't identify if/when a problem exists.
WRT FITREPs not being indicative of past performance but instead of future suitability - I'd have to disagree solely based on the content. The vast majority of the FITREP discusses what you have done since the last report; in only one block does it make a recommendation on what you should do next. And I think we all have seen enough individuals in the Navy prove the Peter Principle to realize that even if that IS the intent of a FITREP, it's clearly not doing its job. I have a lot of thoughts on how that could change, but that's beyond the scope of the thread we have already jacked...