Case Name: Monongahela Power Co. v. The Public Service Comm. Of W. Va.
Court: Supreme Court of Appeals of West Virginia
Jurisdiction: West Virginia
Decision Date: 1981-02-10
Citations: 166 W. Va. 423
Docket Number: No. 14852
Parties: Monongahela Power Co. v. The Public Service Comm. Of W. Va.
Judges: 
Reporter: West Virginia Supreme Court
Volume: 166
Pages: 423–456

Head Matter:
Monongahela Power Co. v. The Public Service Comm. Of W. Va.
(No. 14852)
Decided February 10, 1981.
Richard S. Weygandt and Thomas C. Sheppard, Jr., Squire, Sanders & Dempsey, Alan P. Buchmann and Arthur E. Korkosz, for petitioner
Angela D. Williams, Public Service Commission, for respondent.

Opinion:
Miller, Justice:
Monongahela Power Company (Company) appeals from a final order allowing the Company an approximate $5 million rate increase entered on December 21, 1979, by the Public Service Commission of West Virginia (Commission). The Company asserts that this rate increase is too low, particularly when viewed in light of past rate allowances, and therefore it amounts to a confiscation of the property of its investors. They also claim that this new rate makes it impossible for the Company to secure needed investment capital, which will jeopardize its ability to supply electric service to its customers in this State.
The Company is a wholly-owned subsidiary of the Allegheny Power System, Inc., a regulated public utility holding company. The primary service area of the Company is thirty-two counties in northern West Virginia. On December 18, 1978, the Company filed revised tariffs before the Commission requesting an approximate $18 million rate increase for furnishing electric service to its various customers in West Virginia.
By an order dated January 31, 1979, the Commission set five interim issues for hearing on April 10, 1979. The five interim issues were: (1) rate of return on invested capital; (2) consolidated tax savings; (3) construction work in progress; (4) normalization of federal income tax; and (5) rate designs for interim rates, including fuel allowance.
The interim hearing was subsequently advanced to April 5, 1979, and concluded on April 10, 1979. Briefs were submitted by the parties on May 4, 1979, and on May 31, 1979, the Commission entered its interim order granting what it concluded to be an increase in annual rates or revenues of $12.6 million which included a 9.6% rate of return on invested capital.
Final hearings were conducted by the Commission on September 5, 6 and 7, 1979. Briefs were received from the various parties up until November 14, 1979. On December 21, 1979, the Commission issued its final order, which in effect reduced the rates established in the interim order by $7.6 million and granted a $5 million increase in the Company's rates and required it to refund the excess amount collected under the interim order with interest payable on the refund of 11-3/4%.
I. STANDARD OF REVIEW
We have in the past held that an order of the Commission based upon findings of facts will not be disturbed unless such findings are: (1) contrary to the evidence; or (2) without evidence to support them; or (3) arbitrary and capricious; or (4) a result of a misapplication of legal principles. E.g., Virginia Electric & Power Co. v. Public Service Commission, 161 W. Va. 423, 242 S.E.2d 698 (1978); Boggs v. Public Service Commission, 154 W. Va. 146, 174 S.E.2d 331 (1970); United Fuel Gas Co. v. Public Service Commission, 73 W. Va. 571, 80 S.E. 931 (1914).
We have also stated that because the Commission is experienced with the intricacies of the rate-making process we will ordinarily not substitute our judgment for that of the Commission on controverted evidence. Charleston v. Public Service Commission, 110 W. Va. 245, 159 S.E. 38 (1931). Additionally, we have recognized that the statute requires the utility to carry the "burden of proof to show that the proposed increased rate . is just and reasonable. ." W. Va. Code, 24-2-4; Natural Gas Co. v. Public Service Commission, 95 W. Va. 557, 121 S.E. 716 (1924).
In several cases we have stressed the importance of the Commission making an adequate order or an opinion "which, upon appellate review, would make known to the Court the motivating circumstances which influenced the decision." Mountain Trucking Company v. Daniel, 156 W. Va. 855, 860, 197 S.E.2d 819, 822 (1973); see also, Mountain Trucking Company v. Public Service Commission, 158 W. Va. 958, 216 S.E.2d 566 (1975). In Syllabus Point 3 of Citizens Bank v. West Virginia Board of Banking and Financial Institutions, 160 W. Va. 220, 233 S.E. 2d 719 (1977), we said with regard to complex administrative findings in general:
"In administrative appeals where there is a record involving complex economic or scientific data which a court cannot evaluate properly without expert knowledge in areas beyond the peculiar competence of courts, neither this Court nor the trial courts will attempt to determine whether the agency decision was contrary to the law and the evidence until such time as the agency presents a proper order making appropriate findings of fact and conclusions of law."
Other courts have also stressed the need for adequate findings by Public Service Commissions. Greyhound Lines, Inc. v. Maryo, 207 So.2d 1 (Fla. 1968); Georgia Power Co. v. Georgia Public Service Commission, 231 Ga. 339, 201 S.E.2d 423 (1973); Cities Service Gas Co. v. State Corporation Commission, 201 Kan. 223, 440 P.2d 660 (1968); Mississippi Power Co. v. Mississippi Public Service Commission, 291 So.2d 541 (Miss. 1974); Gage v. Railroad Commission, 582 S.W.2d 410 (Tex. 1979).
We have not articulated any precise formula as to an ultimate test, for the reasonableness and adequacy of a given rate, probably because much depends on the peculiarities of the individual case. In Charleston v. Public Service Commission, 110 W. Va. 245, 159 S.E. 38 (1931), we said that what is a fair net return for a public utility depends upon present day conditions. In the same case we found that an adequate net return would have to provide a sufficient amount to pay reasonable dividends and pass something to the surplus account. This latter statement is also contained in Wheeling v. Natural Gas Company, 115 W. Va. 149, 175 S.E. 339 (1934). In United Fuel Gas Co. v. Public Service Commission, 143 W. Va. 33, 99 S.E.2d 1 (1957), we stated that a utility is entitled to earn a reasonable return upon the whole of its property devoted to public service in this State and to the extent that it is deprived from such a return there is a confiscation of its property.
In this regard, one of the leading cases on what is a fair overall rate of return is Bluefield Water Works & Improvement Co. v. Public Service Commission, 262 U.S. 679, 43 S.Ct. 675, 67 L.Ed. 1176 (1923), where this Court was reversed when it approved too low a rate of return. In Bluefield, the rate of return was formulated by the Supreme Court so that it would correspond to returns made by comparable businesses. Generally stated, the amount of return should be reasonably sufficient to assure confidence in the financial soundness of the utility and should be adequate, under economically efficient operation, to enable it to raise adequate funds to discharge its public duties. 262 U.S. at 693, 67 L.E. at 1183, 43 S.Ct. at _.
Recently in Virginia Electric & Power Co. v. Public Service Commission, 161 W. Va. 423, 242 S.E.2d 698, 704 (1978), we concluded that we could "find no evidence that the utility is not making money, is not able to attract investors, or is not providing the service it should— elements which, if proved, might require us to reach a different result. Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333 (1944)." Until 1968, the Hope case was preeminent in setting the federal standard for a just and reasonable rate. It emphasized the total impact of the rate order and indicated that "[t]he fact that the method employed [by the Commission] to reach that result [just and reasonable rates] may contain infirmities is not then important." 320 U.S. at 602, 88 L.Ed. at 345, 64 S.Ct. at 288. This test has been adopted by a number of states. In the Permian Basin Area Rate Cases, 390 U.S. 747, 20 L.Ed.2d 312, 88 S.Ct. 1344 (1968), the Supreme Court adopted a more comprehensive standard of review for courts, which we believe integrates much of what has been scattered through our case law:
"First, it must determine whether the Commission's order, viewed in light of the relevant facts and of the Commission's broad regulatory duties, abused or exceeded its authority. Second, the court must examine the manner in which the Commission has employed the methods of regulation which it has itself selected, and must decide whether each of the order's essential elements is supported by substantial evidence. Third, the court must determine whether the order may reasonably be expected to maintain financial integrity, attract necessary capital, and fairly compensate investors for the risks they have assumed, and yet provide appropriate protection to the relevant public interests, both existing and foreseeable. The court's responsibility is not to supplant the Commission's balance of these interests with one more nearly to its liking, but instead to assure itself that the Commission has given reasoned consideration to each of the pertinent factors. Judicial review of the Commission's orders will therefore function accurately and efficaciously only if the Commission indicates fully and carefully the methods by which, and the purposes for which, it has chosen to act, as well as its assessment of the consequences of its orders for the character and future development of the industry." 390 U.S. at 791-92, 20 L.Ed.2d at 350, 88 S.Ct. at 1373.
It can be discerned that this standard of review contains three areas of analysis. The first is a rather broad inquiry centering on whether the Commission abused or exceeded its statutory jurisdiction and powers. The second step relates to an analysis of the Commission's methodology and a determination of whether there is adequate evidence to support the Commission's findings. The third analysis looks to the substantive result of the Commission's order to see if it has arrived at a proper determination. This last analysis essentially incorporates the just and reasonable rate requirement set by our statute, W. Va. Code, 24-2-4, and more fully developed in Hope Natural Gas Co., supra, which we have adopted. It is the Permian Base standard of review that we apply to the present case.
II. THE GENERAL RATE FORMULA
In this case we do not perceive that there is any real argument by the Company that the Commission has abused or exceeded its authority in the sense that its actions exceeded the broad regulatory duties entrusted to the Commission. Therefore, the first step analysis need not be discussed.
The controversy on this appeal centers on whether the second and third criteria have been met. With regard to the second criterion, the Company complains that the Commission's findings are contradictory and, thus, even while recognizing that it has broad authority to select particular methods for determining what is a reasonable and just rate, its interim and final orders do not reflect a reasoned result. The Company also complains that the new rates do not meet the third standard of permitting it to maintain financial integrity, attract the necessary capital and fairly compensate investors for the risks they have assumed. Because the new rates are a product of the separate components or the method of building the rate process, these two criteria are closely interrelated. In order to understand the detailed argument, some reference must be made to the general rate formula which governs the rate-making process.
The rate-making process essentially involves setting tariff rates or a schedule of charges that the utility's customers must pay. The total revenues derived from the tariff rates must be sufficient to cover the actual operating costs of the utility. In addition, the revenues must be sufficient to assure an adequate return on both the equity and debt capital of the business. This general rate-making process can be represented by the formula: R = C + Ir, where "R" is the total revenue earned by the Company through its tariff charges; "C" equals the utility's expected costs for goods and services, including taxes and depreciation during the period the prospective tariff rates are in effect; "I" represents the assets of the utility that are used but not consumed in the business ("I" is also known as the "rate base"); and the letter "r" is the reasonable rate of return allowed compositely on both debt and equity capital. See Morgan, Economic Regulation of Business 219 (1976); Wilcox & Shepherd, Public Policies Toward Business 360 (5th ed. 1975); Phillips, The Economics of Regulation 129 (rev. ed. 1969); Wise & Baer, Some Comments on Rate Making in West Virginia, 57 W. Va. L. Rev. 33 (1955).
III. REVIEW OF SPECIFIC CLAIMS
A. The Earnings Question
The Commission in its interim order stated that it was permitting the Company to increase its charges in order to generate $12.6 million in increased revenues, which would yield "$60 million in defined earnings." Much the same language is contained in the final order.
The difficulty is that in neither order is there any analysis nor explanation as to how this level of "defined earnings" can be achieved nor any explanation of what constitutes "defined earnings." Both the interim and final orders contain a Schedule A which is a summary of the ultimate calculations showing the end result of the rate-making process. We are at a loss to understand how the Commission's defined earnings statement can be understood. In the ordinary sense of the word, "earnings" are those amounts representing a return above the company's costs. Customarily, the "earnings" in the general rate formula is the rate of return on invested capital (r), which in both the interim and final orders is approximately $43.7 million and $43.9 million, respectively.
It may well be that the Commission is utilizing the term "defined earnings" in a broader sense, but if it is, there is no elaboration of its meaning in the Commission's orders. We do not suggest that the Company is entitled to $60 million in earnings but only that it is not possible to determine what the Commission conceived was an appropriate level of earnings. It has failed to give an explanation of its methodology or terminology in regard to the "defined earnings" question and in particular how it relates to the actual projected earnings of $43.9 million allowed in the final order. For this reason, we consider the Commission's order defective in this respect.
A. The Rate Base (I)
As earlier discussed, the general rate-making formula envisions that, above the Company's costs, it is entitled to an earning increment, "Ir", which is a return on capital. In both the interim and final orders the Commission established the rate of return (r) at 9.6%. This rate of return is then multiplied by the Company's fixed assets or rate base (I). Obviously, the higher the value of the rate base the greater dollar value will be yielded when the rate of return is multiplied against it.
In this case, we are offered no explanation in the Commission's order as to how the rate base was calculated. The Commission did allow a $57 million increase in the Company's rate base in its interim order and we can only conclude that this was included in the rate base of $455,142,000 set in Schedule A. Yet, in its final order, the Commission stated that it was including an additional $10 million in the rate base. However, examining the rate base in Schedule A of the final order, we find it appears as $456,954,000 or only an approximate $800,000 increase in the rate base, not the announced $10 million increase. At the established rate of return of9.6%,a$10 million increase in the rate base would generate an additional $960,000.
The order cannot be reconciled in this area and we are unable to determine upon what basis the Commission settled on the rate base in its final order. The rate base figure is a key component in the overall rate-making process, and because of this $10 million descrepancy, we are compelled to conclude that the Commission's final order does not meet our review standard since it does not contain any explanation of this apparent discrepancy.
C. Revenues at Going Level
Both in the interim and final orders on Schedule A, the Commission has set the existing revenues of the Company based on revenues derived from a preceding rate case No. 8809, which are called the Tier III rates. The Company claims at least as to the non-fuel costs, these existing revenues or rates are based on 1976 costs and do not reflect the increased costs arising from inflation since the 1976 test year utilized in case No. 8809.
We do not concur in the Company's position since the Tier III revenues are only being used as estimates of the present going level revenues of the Company. The cost figures on Schedule A of the current rate case represent cost estimates based on the 1977 test year and they have been adjusted for current cost estimates. The purpose that the Tier III revenues or rates serve in the present case is to establish a revenue level against which the current costs of the Company are measured, including the rate of return on capital. It is the difference between the Company's total costs and its current revenues that establish the amount of increase in revenues that are to be set in the revised tariff rates.
We do not, however, understand the Commission's use of Tier III revenues of $197,149,000 in Schedule A of the final order as the going level revenues. In footnote 1 of both the interim and final orders the Commission states that "its final order in Case No. 8809 . provided total annual Tier III revenues of $186,302,013." This $10 million discrepancy in going level revenue would have the effect of overstating the estimate revenue level in Schedule A which would result in a failure to cover a similar amount of the Company's anticipated costs. Again, the problem lies in the adequacy of the Commission's order which does not attempt any explanation of how the difference in the Tier III revenue was obtained.
IV. APPLICATION OF THE REVIEW STANDARD TO THE COMMISSION'S ORDERS
We have earlier stated that an administrative decision requires that there be some reasoned explanation of the various rulings. The Commission should make a fuller explanation not only of the methodology it has adopted but some more detailed analysis of both the factual and legal issues. We sense that part of the problem in this case lies in the fact that the Commission dealt with a series of prior rate cases filed by the Company and, at least as to case No. 8809, it did not terminate until after the Company's new tariff was filed in the present case. As a consequence, the Commission had a great deal of familiarity with the Company's financial records and consequently handled its reporting of the present case in a somewhat abbreviated fashion.
The problem this Court has on review is that we have no such familiarity with the previous proceedings and consequently it is difficult to understand the Commission's orders. A more comprehensive opinion is the ultimate goal that we seek. We are aware that the Commission can produce a comprehensive order fully compatible with our review standard. E.g., Re Chesapeake and Potomac Telephone Company of West Virginia, 26 Pur.4th 29 (Docket Nos. 8890, 8969, W. Va. 1978); Re Columbia Gas of West Virginia, Inc., 20 Pur.4th 204 (Case No. 8807, W. Va. 1977). Certainly, there are other models that Commission could follow which give a careful explanation of how the differences between the Company and Commission's staff are resolved and how the figures for the overall rate formula are determined. E.g., Re: Connecticut Light and Power Co., 30 Pur.4th 67 (Docket Nos. 781206, 781207, Conn. 1979); Re: Intermountain Gas Co., 30 Pur.4th 231 (Order No. 14859, Idaho 1979); Re: Missouri Public Service Company, 30 Pur.4th 145 (Case Nos. ER-79-60, GR-79-60, Mo. 1979); Re: Southern Bell Telephone and Telegraph Co., 30 Pur.4th 263 (Order No. 79-90, S.C. 1979); Re Appalachian Power Co., 30 Pur. 4th 54 (Case No. 19984, Va. 1979).
It is conceivable that the Commission could issue orders like it has in this case and await the Company's petition for rehearing which would serve to identify the critical points that the Company claims were adversely decided. Upon ruling on the petition for rehearing, the Commission could then go into greater detail as to the reasons for its challenged rulings by way of a written order or memorandum. This approach might serve to avoid any extensive discussion of minor issues and confine the fuller memorandum to those substantial issues which the Company may wish to appeal.
V. THE COMPANY'S RESPONSIBILITIES
We do not overlook the Company's responsibilities in seeking an appeal from the Commission's rulings. It should be prepared to identify with particularity where the Commission's ruling precludes a fair overall rate of return. Part of the problem in the present case is that we are confronted with a generalized claim by the Company that the overall rate of return is confiscatory without any detailed showing in the briefs that supports this position. If the problem is partially the failure to adjust base year costs, these adjustments should be identified by amount so that a determination can be made as to the dollar value effect on the overall rate of return. The same is true of omissions from the rate base or claims of error on calculations of costs or return on capital. There is also need to pinpoint these errors by reference to the administrative record and more importantly to demonstrate that these errors were specifically assigned on the petition for rehearing.
An illustration of the problem is the construction work in progress (CWIP) issue. The Company obtained as a result of the Commission orders some $67 million in CWIP included in its rate base. Apparently, this was a marked departure from the Commission's past practice which was to create an allowance for funds used during construction (AFUDC) account into which are accrued the amount of the costs of funds used in the construction work in progress. Normally these earnings, which are supposedly equivalent to the cost of funds raised for the construction (not the principal sum), are permitted to accumulate in the AFUDC account. In this sense, it is an income account but such earnings are "paper" only and do not enhance the cash flow. Ultimately, under the AFUDC method, when the facility is constructed it will be placed in the rate base along with the AFUDC account.
Despite what appears to be a favorable ruling for the Company by the Commission's placing $67 million of CWIP in the rate base, the Company in its brief argues that this has damaged its financial condition. We are presented with no explanation by the Company on this point. Consequently, not only are we unable to analyze the issue but such a presentation seriously undermines the credibility of the Company's overall position on appeal.
A similar difficulty occurs when the Court examines the Company's argument that its historic return on equity capital, as actually earned, is less that the amount permitted or set by the Commission in previous rate cases. We are aware that the Massachusetts court has on several occasions dealt with this question. E.g., New England Telephone & Telegraph v. Department of Public Utilities, 371 Mass. 67, 354 N.E.2d 860 (1976); Boston Gas Company v. Department of Public Utilities, 359 Mass. 292, 269 N.E.2d 248 (1971). However, in those cases, the Company made a specific record, through expert testimony, detailing the exact nature of the causes creating the historic deficiencies between the actual rate of return and the rate of return set by the Commission. In New England Telephone, the court found the Company's position was uncontradicted and that the decline in actual rate of return was a result of "attrition," defined as,
"the tendency of rate of return to diminish in a period of comparatively high construction costs. In times of inflation, as old plant is retired, the new plant built to replace it costs more. If investment increases more rapidly than revenues, the rate of return is diminished." (citations omitted) 371 Mass. at 72, 354 N.E.2d at 864.
In this case, we are not presented with a specifically developed expert record which demonstrates "attrition." Nor did the Company assert the "attrition" issue in its petition for rehearing before the Commission. Therefore, we decline to address this issue.
VI. CONCLUSION
We conclude that because of the inadequacy of the Commission's explanation surrounding the company's "defined earnings," the apparent discrepancy of approximately $9.2 million in the Company's rate base in West Virginia and the problem involving the amount of the Tier III revenues from Case No. 8809, this case will be remanded for further clarification of these points. This is the procedure that other courts have adopted when the Commission's order contains inadequate findings. Cerro Copper Products v. Illinois Commerce Commission, 76 Ill.App.3d 230, 394 N.E.2d 1084 (Ill. App. 1979); United Telephone Co. of Indiana, Inc. v. Public Service Commission, 402 N.E.2d 1013 (Ind. App. 1980); Gas Service Co. v. State Corporation Commission, 4 Kan. App.2d 623, 609 P.2d 1157 (1980); General Telephone Co. v. Public Utilities Commission, 30 Ohio St.2d 271, 285 N.E.2d 34 (1972).
In ordering the remand, we wish to make it clear that the remand is for the purpose of clarification of the three specific areas that we have discussed in this opinion. We do not believe that additional testimony will be necessary nor that the Company is entitled to reopen the case or argue new points. We do not foreclose, however, authority to the Commission to modify its original order if upon further consideration it deems that such action is appropriate.
Remanded
Justice Caplan participated and concurred in this decision but departed from the Court prior to the preparation of the opinion. Justice McHugh did not participate in the consideration of this case.
In addition to Monongahela Power Company, the Allegheny Power System, Inc., owns the Potomac Edison Company and West Penn Power Company.
Monongahela Power Company services a small portion of the state of Ohio adjacent to northern West Virginia but this area accounts for only 6% of its total revenue.
The Commission had permitted various industrial companies to intervene in the rate case, as well as Mountain Community Union, which represented residential electrical users.
While Citizens Bank, supra, dealt with a review under the administrative procedure act, W. Va. Code, 29A-1-1, et seq., which excludes the Public Service Commission from its ambit, W. Va. Code, 29A-1-2, the case principles are clearly applicable to any administrative review.
The full text of the standard in Hope is:
"The rate-making process under the Act, i.e., the fixing of 'just and reasonable' rates, involves a balancing of the investor and the consumer interests. Thus we stated in the Natural Gas Pipeline Co. Case that 'regulation does not insure that the business shall produce net revenues.' 315 US p 590,86 L Ed 1052,62 S Ct 736. But such considerations aside, the investor interest has a legitimate concern with the financial integrity of the company whose rates are being regulated. From the investor or company point of view it is important that there be enough revenue not only for operating expenses but also for the capital costs of the business. These include service on the debt and dividends on the stock. Cf. Chicago & G. T. R. Co. v. Wellman, 143 US 339, 345, 346, 36 L Ed 176, 179, 180, 12 S Ct 400. By that standard the return to the equity owner should be commensurate with returns on investments in other enterprises having corresponding risks. That return, moreover, should be sufficient to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and to attract capital." 320 U.S. at 603, 88 L.Ed. at 345, 64 S.Ct. at 288.
See, e.g., Colorado Ute Elec. Ass'n v. Public Utilities Comm., 609 P.2d 861 (Colo. 1979); People's Council v. Public Service Comm., 399 A.2d 43 (D.C. App. 1979); Kansas-Nebraska Nat. Gas Co. v. State Corporation Comm., 4 Kan. App.2d 674, 610 P.2d 121 (1980); Legislative Utility Consumers' Council v. Public Service Co., 119 N.H. 332, 402 A.2d 626 (1979); Central Telephone Co. v. State Corporation Comm., 219 Va. 863, 252 S.E.2d 575 (1979).
We have accorded the Commission considerable flexibility in its rate-making methodology. See the Syllabus of Virginia Electric Power Co. v. Public Service Commission, 161 W. Va. 423, 242 S.E.2d 698 (1978).
The rate of return on invested capital is generally determined by calculating the cost of both debt and equity capital. As to equity capital, i.e. common stock, an alternative to the cost approach is to ascertain a reasonable return based on capital earnings from comparable businesses. The amount or rate of return on both debt and equity capital is expressed as a percent. These rates are then multiplied by the percent ratio that equity and debt capital bear to total capital. The resulting figures are then added together to obtain the composite cost of capital — which is often called rate of return. This composite rate of return is then multiplied by the rate base to arrive at a dollar figure, which is the amount of return on invested capital. In the Commission's interim order, the allowed rates of return on debt and equity were:
Percent to Total Cost Rate Weighted Cost
Long Term Debt 56.7 8.07 4.59
Preferred Stock 10.9 7.18-.78
Common Equity 32.4 13.05 4.23
Overall cost of Capital 100% 9.6%
This law review article uses a similar formula where "R" is termed the total cost of service incurred by the utility and is defined as:
"This cost of service customarily is made up of four major factors: (1) operating expenses, (2) depreciation and depletion allowances for property consumed in providing service, (3) taxes, and (4) return to the investor for the use of his money computed by the rate base — rate of return formula." 57 W. Va. L. Rev. at 44.
The pertinent portion of the interim order at p. 5 states:
"Today's order is designed to provide, when fully effective, approximately $24.5 million of internal cash for construction after dividends (including the new depreciation rates approved in Case No. 9450), so that with an average 1979-1980 construction program net of AFUDC of approximately $59 million, the cash generated by the rates approved herein is approximately 42% of such construction program on a West Virginia basis.
"In addition, on a West Virginia basis, our decision today is designed to generate approximately $60 million in defined earnings, so that with a West Virginia long-term debt responsibility at the current level of about $20.5 million, pretax long-term debt coverage is in the order of 2.9 times."
The final order provides at p. 19:
"In addition, on a West Virginia basis, our decision today is designed to generate approximately 59.6 million in defined earnings so that with a West Virginia first mortgage bond interest responsibility at the current level of about $20.5 million, pretax long-term coverage is 2.9 times."
SCHEDULE A
Interim Final
Order Order
Amount Amount
(000 Omitted) (000 Omitted)
$ $
Rate Base 455,142_456,954
Return at 9.6% 43,694 43,867
Federal Income Tax 10,847 10,294
Operation and Maintenance Expenses 119,851 115,747
Depreciation and Amortization 16,127 16,181
Other Taxes 18,611 16,083
Total Cost of Service 209,130 202,172
Revenues Case 8809, Tier III Rates 196,497_197,149
Deficiency 12,633_5,023
The "deficiency" is the difference between the estimated costs of operations plus the cost of capital (figured at 9.6% of the rate base) less the revenues generated from the Tier III rates existing from a prior rate case No. 8809.
See Note 12 as to the Schedule A figures.
The applicable portion of the final order at p. 21 is:
"In recognition of Monongahela's financial situation, we will allow an additional $10 Million of CWIP in rate base, the total amount of CWIP allowed in rate base for this case is $67 million."
See Note 12, supra , where the Tier III rates are stated as $196,497,000 in the interim order and as $197,149,000 in the final order.
To attempt to summarize in one paragraph the complex accounting concepts of CWIP and AFUDC as they relate to rate making is virtually impossible and serves to illustrate perhaps why there is a need for some elaboration of these matters by both the Commission in its orders and by the Company on its appeal. Most commentators seem to agree that the Company benefits by allowing CWIP to be accrued into the rate base. E. Mattutat in A Pragmatic Approach to Construction Work In Progress, 99 Pub. Utility Fort. 31, 37, March 3, 1977, lists these advantages:
"In conclusion, when considering CWIP in rate base, there is a number of factors to be weighed, some of which are advantageous to the company and others which are in the overall best interests of the ratepayers. Among these factors are the following:
"1) Improved cash flow
"2) Improved quality of earnings by elimination of all or part of AFUDC
"3) Improved coverages
"4) Reduced financing requirements
"5) Gradual rate increases
"6) Prospect of reduced property taxes
"7) Improved bond ratings or the maintenance of existing ratings"
E.g., Hyde, A Compromise on Construction Work In Progress Would Benefit Consumers and Investors, 100 Pub. Utility Fort. 15, August 18, 1977; Fitzpatrick and Stitzel, Capitalizing on Allowance for Funds Used During Construction: The Impact on Earnings Quality, 101 Public Utility Fort. 18, January 19, 1978; Nash, Rate Relief and the Construction Funds Allowance—A Big Dollar Question, 102 Public Utility Fort. 15, July 6, 1978; Bunch, The Tax Effects of AFUDC: Financial Accounting Aspects, 106 Public Utility Port. 26, August 14, 1980.
The Company's brief of 6/23/80, p. 7, Note 1, contains this statement in commenting on the inclusion of CWIP into the rate base:
"On the surface, it seems as if the Commission has done something extra 'in order to improve the company's financial statute' and that such an effect should be commended. We do commend what the Commission says. In fact, however, the result of this apparently beneficient step, is eventually to reduce the Company's reported earnings and hence even further impair its financial status. By now (since the subject has been discussed at length in the Company's presently-pending rate case), the Commission may understand this. We will not burden the Court with the matter further at this point." (Emphasis in original)