Case Name: People's Organization for Washington Energy Resources, et al, Petitioners, v. The Utilities and Transportation Commission, et al, Respondents
Court: Washington Supreme Court
Jurisdiction: Washington
Decision Date: 1985-12-12
Citations: 104 Wash. 2d 798
Docket Number: No. 50264-1
Parties: People's Organization for Washington Energy Resources, et al, Petitioners, v. The Utilities and Transportation Commission, et al, Respondents.
Judges: Dolliver, C.J., and Utter, Callow, and Durham, JJ., concur.
Reporter: Washington Reports
Volume: 104
Pages: 798–844

Head Matter:
[No. 50264-1.
En Banc.
December 12, 1985.]
People's Organization for Washington Energy Resources, et al, Petitioners, v. The Utilities and Transportation Commission, et al, Respondents.
Elizabeth Thomas of Evergreen Legal Services, for petitioners POWER, et al.
Kenneth O. Eikenberry, Attorney General, John R. Ellis, Deputy, and Charles F. Adams and Robert F. Manifold, Assistants, as petitioner Public Counsel.
Kenneth O. Eikenberry, Attorney General, and Donald T. Trotter, Assistant, for respondent Utilities and Transportation Commission.
Perkins Coie, William S. Weaver, Priscilla W. Derick, and Jeffrey D. Hutchings, for respondent Puget Sound Power and Light.
Robert L. Simpson and David J. Meyer on behalf of Washington Water Power, amici curiae for respondents.

Opinion:
Andersen, J.
Facts of Case
Petitioners are the People's Organization for Washington Energy Resources (POWER) and the Public Counsel Section of the Attorney General's Office. They challenge orders of the Washington Utilities and Transportation Commission (WUTC) approving a rate increase for Puget Sound Power and Light Company. The rate increase was not stayed and is currently in effect. The basis of petitioners' challenge to the rate increase is the authority of the WUTC to include in rates, as an operating expense, costs prudently incurred by Puget Power for the planning and designing of the subsequently canceled nuclear electrical generating project at Pebble Springs, Oregon. We affirm the WUTC.
This case cannot be properly considered apart from the historical context in which it arose.
In the 1970 National Power Survey, produced by the then Federal Power Commission, this urgent warning was sounded:
"Mounting demand, sharply rising costs, and changing social values have combined to place unusual stress on the U.S. electric power industry. . . . We foresee recurrent and spreading power shortage unless positive steps are taken, and taken soon, to remedy conditions which are slowing the orderly development of essential power supplies.''[ ]
At about this same time, our Legislature enacted thermal power plant siting legislation declaring that " [i]t is the policy of the state of Washington to recognize the pressing need for increased energy facilities . . ."
The same perceived energy shortages which were recognized by federal and state governments also influenced individual electric utilities. Puget Power's situation was that it served a territory which had historically experienced higher than average load growth and this growth was projected to continue. Puget Power's agreement to acquire an interest in the Pebble Springs nuclear generating plant, which is the project involved in this case, was signed not long before President Carter gave his now famous speech to a joint session of Congress and to the American people referring to the energy crisis and its solution as "the moral equivalent of war."
By 1981, however, the situation had changed drastically. The nation had experienced the Arab oil embargo, double digit inflation, recurring economic recessions, the Three Mile Island nuclear accident (March 1979) and accelerated government control over plant siting and expansion. In addition, a substantial and broadly based effort to cut energy consumption through conservation, load management and other measures designed to reduce the projected need for new electric plant capacity was initiated.
By 1982, it was reported that in the previous decade 91 nuclear power plants had been canceled and a Nuclear Regulatory Commission report estimated that electric utilities were likely to cancel another 19 nuclear power reactors in various phases of construction. These project abandon-ments occurred after staggering amounts of capital had been invested in planning, siting and acquiring equipment. The financial, economic and social effects of the turnaround in the demand for energy and nuclear facilities in but a single decade were calamitous. Included in the fallout from all of this is the question of who should pay for the costs associated with the abandonment of generating plants before they became operable and of any use to the electric utilities and their customers. This is a problem of national consequence which in this state we address for the first time in this case.
In 1976 Puget Power exchanged a portion of its share of the Skagit Nuclear Project in this state for a 23.5 percent share of the Pebble Springs Nuclear Project in Oregon which was sponsored by the Portland General Electric Company. Puget Power's objectives in this exchange were achieving maximum flexibility in scheduling generation to meet future load, attempting to optimize capital construction cash flows, spreading the risks of licensing, construction, and operation of large generating units, minimizing overall construction costs and optimizing fuel purchases and use.
Although prior approval of the investment, as such, by the WUTC is not required under the statutes and regulations of this state, the WUTC did review Puget Power's involvement in the Pebble Springs project in a variety of contexts — rate cases, approval of budgets, approval of securities issues, and in at least one proceeding which focused on Puget Power's forecasted load-resource imbalance.
The Pebble Springs project was ultimately canceled as a result of a number of factors, including large drops in fore-casted load growth, rapidly escalating construction costs and the passage of Ballot Measure 7 in Oregon (an Oregon initiative passed in November 1980) which prohibited siting nuclear plants in that state until approval of a nuclear waste storage site. Actual construction on the project was never begun. Ultimately, on October 8, 1982, a termination agreement was entered into by the project participants.
Puget Power's investment in the Pebble Springs project as of June 30, 1982, the end of the "test year" in the rate case being appealed, was $76.9 million. The termination produced a loss for income tax purposes, leaving a net investment of $53.5 million. Puget Power asked the WUTC for permission to recover back its net investment in rates over a 5-year period. It also asked permission to earn its authorized rate of return on the declining unamortized balance during this period as compensation for its costs of capital associated with carrying the investment over the write-off period.
The WUTC denied Puget Power's request and, instead, authorized a lesser recovery over a 10-year period but with no recovery to Puget Power of the costs of capital connected with the unamortized balance. Thus the WUTC allowed Puget Power to ultimately recover, through rates, $47.5 million rather than Puget Power's full $53.5 million net investment. The part of the rate increase attributable to Pebble Springs increased the average residential customer's monthly billing by $1.12.
In its rate order, the WUTC reviewed the history of the Pebble Springs project and Puget Power's role therein. The WUTC also reviewed the presentation of the WUTC staff, the only party to present direct evidence on the prudence of Puget Power's investment in Pebble Springs and the subsequent abandonment. The staff was of the opinion that costs for the plant should have ceased being accrued by Puget Power as soon as Oregon's Ballot Measure 7 became law. The WUTC, however, decided that the company had needed time to study its options after that event and, in disagreeing with both staff and Puget Power, reasoned that as of April 9, 1982, costs for the Pebble Springs project should have ceased being accrued.
On the issue of prudence, apart from the cutoff time for the accrual of costs, the WUTC noted that "witness after witness denied that they were questioning the prudence of any of the company's decisions." The WUTC nonetheless indicated that it did weigh the evidence in deciding the prudence issue.
The WUTC found that Puget Power's investment in Pebble Springs, as well as its subsequent abandonment of the project, were both prudent. We do not understand the petitioners to contest this.
In its rate order, the WUTC also reiterated in this case a statement it had made in a prior rate case, reasoning in part:
It is simply one of the realities facing both investors and consumers of electric utility service that in order to provide continuity of service and to provide for continuing generation needs, a utility must undertake massive investments yet must maintain its financial integrity. Where necessary, this may involve a sharing of responsibilities and risks by both shareholder and ratepayer groups. [ ]
Then, applying this reasoning to Puget Power's situation in this case, the WUTC added:
In order to preserve the ability of the company to render service to the public at reasonable rates, a shared responsibility of the loss in Pebble Springs is required.
The Commission is of the opinion that the most equitable allocation of the company's loss associated with the Pebble Springs project is to allow it to expense the loss over a period of ten years, and to reject its request to include the unamortized balances in rate base.[ ]
The WUTC also found the rates set by its order to be "just, reasonable and sufficient."
On July 25, 1983, the WUTC served its Order on the merits of the case, which was denominated its Third Supplemental Order. An addendum was issued on July 28, 1983. Then, following the filing by Puget Power of a petition for reconsideration on August 4, 1983, the WUTC on September 8, 1983, issued its Fifth Supplemental Order.
Petitions for review were filed in the Superior Court for Thurston County by POWER on September 9, 1983, and by Public Counsel on September 16, 1983. The Superior Court certified the appeal to the Court of Appeals, following which this court granted discretionary review.
One ultimate issue is presented.
Issue
Does the WUTC have authority to allow an electric utility to include in rates, as an operating expense, repayment of costs incurred by the utility for planning and designing a subsequently canceled nuclear generating facility?
Decision
Conclusion. The WUTC, as the regulatory agency charged by law with the setting of just, reasonable and sufficient public utility rates in this state, is empowered to allow a utility to amortize to expense costs incurred in an abandoned electrical generating project, if the project was prudently undertaken and terminated by the utility (as the WUTC found that it was) and if the WUTC fairly weighed both consumer and investor interests in arriving at its decision (as the record establishes that it did).
We reject, at the outset, the notion that this case involves no more than the simple issue of who bears the loss associated with a canceled nuclear power project. The ramifications are much broader than that and the case potentially affects the basis of all utility regulation in this state. In the most comprehensive opinion yet written on the subject, the Massachusetts Department of Public Utilities observes that "[t]he matter is complex in the extreme." In that case, the Massachusetts Commission allowed canceled plant costs to be amortized over a several year period, as did the WUTC in this case, and the Massachusetts Commission's decision was upheld by Massachusetts' highest court.
The Massachusetts decision is both pertinent and instructive in putting the issue into perspective:
In our view, the question presented by the demise of the Pilgrim II [nuclear] project is one of the most serious and the most controversial regulatory issues that the department has ever confronted. At a minimum, the dis position of this question will affect the company and the customers who rely upon its necessary energy services for years to come. Beyond that, this decision may impact the provision of all regulated public services in the commonwealth in both the short- and long-term. The matter is complex in the extreme.
This decision has required us to address the very foundations of public utility regulation. Accordingly, our analysis begins with a discussion of the nature of regulated utilities and the unique relationship that exists between those who provide and those who consume regulated public services.
Even before beginning this discussion, we confront a threshold question. Why is this a complex issue at all? Is not the answer to the question, who should pay for a failed utility project, obvious? Credible and sincere people argue that the answer is in fact obvious. The most cited "obvious" answer is that privately held companies, in a free economy, must absorb the loss of failed projects, as both the consequence and the price of the right to profits. There would be no meaning to success if there were no failures. With the right to succeed comes the right to fail, with its beneficial cleansing of inefficiencies from the market.
And, it is not market theories alone that motivate those supporting this apparently obvious result. When customers feel they have little or no control over a matter and when they receive no benefits, equity seems easily to reside on the side that concludes that these customers should have no obligation to pay. Finally, there are those who simply have adopted the adversarial, "us against them" perspective, which our system clearly entitles them to do. From this vantage point, the view is by design so narrowed that only the short-run conflict of economic interests stands out, while the long-term implications are ignored.
As we have already suggested, all of these perspectives are fundamentally at odds with our own. The threshold question must, in our view, be answered, "No." It is, we submit, not obvious who should pay for this failed project. The reason that it is not obvious is that all necessary considerations cannot even be identified without the broadest possible perspective and a clear understanding of the nature of regulated utilities.[ ]
(Footnote omitted.)
By way of aid to an understanding of this issue and our resolution of it, it is necessary to first review the basic principles of public utility ratemaking. For, as the late Justice Frankfurter wrote: "[t]he determination of utility rates — what may fairly be exacted from the public and what is adequate to enlist enterprise — does not present questions of an essentially legal nature in the sense that legal education and lawyers' learning afford peculiar competence for their adjustment. These are matters for the application of whatever knowledge economics and finance may bring to the practicalities of business enterprise."
The states have the right under their police power, and within constitutional limitations, to regulate public utilities operating within their borders and to prescribe reasonable rates at which charges may be made by public utilities for their services to the public.
The function of ratemaking is legislative in character and may be directly exercised by the Legislature itself or, as in the usual case, by administrative bodies endowed to that end. It follows that the judicial branch of government is not empowered to usurp this legislative authority by itself undertaking to fix rates.
In this state, the Legislature has conferred the ratemak-ing power on the WUTC, subject, of course, to appropriate judicial review. Most states delegate their ratemaking power to regulatory agencies in very broad terms, basically just directing them to set those rates which the agencies determine to be just and reasonable. Washington is such a state. As this court pointed out in Jewell v. State Utils. & Transp. Comm'n, 90 Wn.2d 775, 777, 585 P.2d 1167 (1978), "the statutory direction to the commission in rate setting is broadly stated." (Italics ours.) The statutory mandate to the WUTC is to set fair, reasonable and sufficient rates. RCW 80.28.010-.020. Indeed, as this court has also observed, the paramount objective of the Legislature in creating the commission, now the WUTC, "was to secure for the public safe, adequate, and sufficient utility services at just, fair, reasonable, and sufficient rates." State ex rel. PUD 1 v. Department of Pub. Serv., 21 Wn.2d 201, 209, 150 P.2d 709 (1944).
Following this broad standard, then, the WUTC must in each rate case endeavor to not only assure fair prices and service to customers, but also to assure that regulated utilities earn enough to remain in business — each of which functions is as important in the eyes of the law as the other.
In order to control aggregate revenue and set maximum rates, regulatory commissions such as the WUTC com monly use and apply the following equation:
R = 0 + B(r)
In this equation,
R is the utility's allowed revenue requirements;
O is its operating expenses;
B is its rate base; and
r is the rate of return allowed on its rate base.
Although regulatory agencies, courts and text writers may vary these symbols and notations somewhat, this basic equation is the one which has evolved over the past century of public utility regulation in this country and is the one commonly accepted and used. We here use this equation for illustrative purposes in order to make more clear what the WUTC did in this case.
Once the utility's aggregate allowed revenue requirements (R) are determined by using this equation, based thereon the regulatory agency then establishes the maximum rates the utility can charge for its products to each class of customers according to the agency's calculation of the rates that, when multiplied by the expected number of units of the product or service sold, will yield to the utility its aggregate allowed revenue requirements (R).
To then break this equation down into its component parts.
First, the B term is the "rate base" which represents the total investment in, or fair value of, the facilities of the utility employed in providing its service. Calculation of the rate base is of obvious importance since the product of the rate base (B) multiplied by the allowed rate of return (r) accrues to the utility's investors.
Next, the r term is the rate of return that the utility is allowed to earn on its investment, i.e., on its rate base (B). In theory, r is the utility's cost of capital, or the amount of money it must spend to obtain the capital it uses to provide regulated products. Rate of return is the weighted average cost of the utility's various sources of capital (the interest it pays on its debt and the rate of return on its equity) that is necessary to permit it to continue to attract the capital required to provide the regulated product or service — in this case, electricity.
The O term in the equation refers to the operating expenses the utility incurs to provide the regulated product or service. Customarily, O is determined based on actual operating expenses in a recent past period referred to as the "test period" or "test year". A utility cannot include every expense it wishes in this operating expense category since the regulatory, agency has the power to review operating expenses incurred by a utility and to disallow those which were not prudently incurred. To this end, detailed accounting systems are almost uniformly set up by the utilities, as in this state, where a "uniform system of accounts" has been adopted by the WUTC, and which accounts are regularly audited by the regulatory agency. The effect of disallowing an item of operating expense for ratemaking purposes does not relate to whether the utility had the right to incur it or not. Rather, the utility is not permitted to recover the expense in question in its rates to customers who purchase a regulated product or service. Thus, the shareholders of the utility must absorb the disallowed expenses, with a resulting reduction in the actual rate of return earned by them. This means that disallowance of an expense in a rate case has the very real effect, among others, of increasing the risks of investing in the utility.
Turning from the details of the equation used to determine a utility's revenue requirements (R), it is also helpful to consider rates in the broader perspective of the functional "end result" test announced by the United States Supreme Court in FPC v. Hope Natural Gas Co., 320 U.S. 591, 88 L. Ed. 333, 64 S. Ct. 281 (1944); that is, that rates, no matter how they are determined, need only "enable the company to operate successfully, to maintain its financial integrity, to attract capital, and to compensate its investors for the risks assumed ." Hope Natural Gas, 320 U.S. at 605. That test was given further content in the Permian Basin Area Rate Cases, 390 U.S. 747, 20 L. Ed. 2d 312, 88 S. Ct. 1344 (1968), which held that a regulatory agency's rate decision would be affirmed if it fell within the "zone of reasonableness". Permian Basin, 390 U.S. at 797. In Permian Basin, the United States Supreme Court also provided the classic articulation of a reviewing court's role:
It follows that the responsibilities of a reviewing court are essentially three. 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 appro priate 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.
(Italics ours.) Permian Basin, 390 U.S. at 791-92.
While modernly a reviewing court's role in this state is delineated by the administrative procedure act, RCW 34.04.130(6), these classic statements from Hope Natural Gas and Permian Basin continue to provide guidance in the judicial review of rate cases; and it remains the law that courts are not at liberty to substitute their judgment for that of the WUTC. Thus, within a fairly broad range, regulatory agencies exercise substantial discretion in selecting the appropriate ratemaking methodology.
Although it has not often had to be resorted to in modern ratemaking cases, it is also to be kept in mind that there is a constitutionally based floor below which a rate ceiling set by a regulatory agency will be reversed by the courts as confiscatory. This is based on the prohibitions in the fifth and fourteenth amendments to the United States Constitution against taking private property for a public use without just compensation. Put succinctly, the "power to regulate is not a power to destroy ." Stone v. Farmers' Loan & Trust Co., 116 U.S. 307, 331, 29 L. Ed. 636, 6 S. Ct. 334, 388, 1191 (1886). In State ex rel. Pac. Tel. & Tel. Co. v. Department of Pub. Serv., 19 Wn.2d 200, 266, 142 P.2d 498 (1943), this court quoted with approval from Bluefield Water Works & Imp. Co. v. Public Serv. Comm'n, 262 U.S. 679, 692, 67 L. Ed. 1176, 43 S. Ct. 675 (1923):
"A public utility is entitled to such rates as will permit it to earn a return on the value of the property which it employs for the convenience of the public equal to that generally being made at the same time and in the same general part of the country on investments in other business undertakings which are attended by corresponding risks and uncertainties; but it has no constitutional right to profits such as are realized or anticipated in highly profitable enterprises or speculative ventures. The return should be reasonably sufficient to assure confidence in the financial soundness of the utility and should be adequate, under efficient and economical management, to maintain and support its credit and enable it to raise the money necessary for the proper discharge of its public duties. ."
(Italics ours.)
We then apply the foregoing principles to the case before us.
This rate case was conducted before the WUTC. It was an extensive one. There were 7 parties (including 4 interve-nors), 27 witnesses, 182 exhibits and 3,453 pages of transcript. Extensive prefiled testimony and briefs were submitted by each of the parties. Some 19 days of hearings were conducted in population centers in Puget Power's service area in order to provide a full opportunity for input from ratepayers and interested persons as well as from all of the parties. There is no suggestion that the proceedings were not fair to all parties in every respect. Following the hearings, the WUTC set rates which in its judgment were fair, reasonable and sufficient, as required by statute.
The WUTC did this by substantially applying the generally accepted equation (set out above) determining the aggregate revenue (R in the equation) required by Puget Power and then setting consumer rates accordingly.
In applying the formula, the WUTC determined the rate base (B) by evaluating Puget Power's investment in its property and facilities and then multiplied that by what it considered to be a fair rate of return (r).
The WUTC then computed Puget Power's operating expenses (O) and added them into the equation, as was proper. In this connection, the WUTC also included within the operating expense factor (O) repayment of part of Puget Power's net costs incurred in planning and designing the abandoned Pebble Springs generating facility; and to this the petitioners object on several grounds.
As discussed, the WUTC did not allow any part of the abandoned nuclear facility costs to be placed in the rate base (B), as some commissions have done under like circumstances. To have done so would have resulted in Puget Power's investors profiting from the costs of the abandoned project when the allowed rate of return (r) was applied to a rate base (B) incorporating those costs. Instead, the WUTC permitted only those costs, which in the WUTC's judgment had been prudently incurred on the abandoned project, to be recovered by Puget Power over a 10-year period during which the unamortized costs would earn nothing for Puget Power or its investors.
Puget Power's request to include the unamortized costs of the Pebble Springs project in the rate base (B) was denied in light of RCW 80.04.250, which reads in relevant part:
Valuation of public service property. The commission shall have power upon complaint or upon its own motion to ascertain and determine the fair value for rate making purposes of the property of any public service company used, and useful for service in this state and shall exercise such power whenever it shall deem such valuation or determination necessary or proper under any of the provisions of this title.
(Italics ours.) As recently held by this court in People's Org. for Wash. Energy Resources v. Utilities & Transp. Comm'n, 101 Wn.2d 425, 679 P.2d 922 (1984) (hereinafter Power), construction work in progress (CWIP) on two Col-strip, Montana, coal-fired generating plants (Units 3 and 4) and Washington Public Power Supply System (WPPSS) plant No. 3 in this state could not be included in rate base. Based on this statute, it was there held that " [o]bviously, an uncompleted utility plant is neither employed for service nor capable of being put to use for service; therefore, such a plant is not 'used and useful' for service as required by RCW 80.04.250, and the Commission exceeded its statutory authority by including CWIP in [the utility's] rate base." Power, 101 Wn.2d at 430.
Petitioners further argue herein, however, that based on this same statute (RCW 80.04.250), we should now apply the "used and useful" standard to operating expenses (O in the above equation) as the Power case applied it to rate base (B in the above equation). They further argue that so applied, the foregoing statute precludes the placing of any of the costs of an abandoned project like Pebble Springs into operating expenses (O) since the Pebble Springs expenditures will never be "used and useful".
The property on which a public utility is entitled to earn a fair return is that which is used and useful for public service at the time the inquiry as to rates is made. Since the WUTC only allowed Puget Power to amortize abandoned plant costs, and did not include those costs within rate base or otherwise enable it to earn a return thereon, the "used and useful" concept is not involved. Those few cases from other jurisdictions which suggest otherwise, therefore, are not in point in this regard; however, they will be further discussed shortly.
Our statute, RCW 80.04.250, is purely a rate base statute and does not apply to operating expenses. The cases in this jurisdiction have so treated it and so do we.
Petitioners claim, however, that the absence of the term "rate base" from the statute suggests otherwise. We disagree. While the statute does not use the term "rate base" it does use the word "valuation", and historically "valuation" in a ratemaking context is a function of "rate base". This statute is an older statute first enacted in its original form when the WUTC's predecessor, the Public Service Commission, was created in 1911. As one scholarly treatise explains:
The rate base, or "valuation" as it was called in former years, represents the total quantum of invested capital or of property "values" on which the company is entitled to a reasonable rate of compensation.
(Italics ours.) J. Bonbright, Public Utility Rates 149-50 (1961). Other texts on the subject amply support this view. Rate base (B) is "valued"; whereas operating expenses (0) are not "valued" as such, but are determined according to modern utility bookkeeping methods.
Petitioners also challenge the inclusion of costs of the abandoned project as "operating expenses" (0) on the basis that they are not within any reasonable definition of that term. The difficulty with that argument in this state, however, is that in dealing with "operating expenses" (O), we are not seeking to apply a statutory definition of the term nor are we dealing with precise words of legal art. As previously discussed, Washington is one of the majority of states wherein the legislatures have delegated the ratemak-ing authority to the regulatory agency in very broad terms. As a consequence, there is no statutory definition of "operating expenses" in this state.
Our review of the cases on the subject reveals an extraordinarily broad array of costs which have been allowed as operating expenses, all having in common only that in the considered judgment of the agency charged with regulating utilities, the costs were appropriately utility related. In the final analysis, as Professor Priest's authoritative text instructs:
The fundamental question is one of fact. As the Court of Appeals for the District of Columbia Circuit observed:
Expenses (using that term in its broad sense to include not only operating expenses but depreciation and taxes) are facts. They are to be ascertained, not created, by the regulatory authorities. If properly incurred, they must be allowed as part of the composition of the rates. Otherwise, the so-called allowance of a return upon the investment, being an amount over and above expenses, would be a farce.
1 A. Priest, Public Utility Regulation 49 (1969), quoting from Mississippi River Fuel Corp. v. FPC, 163 F.2d 433, 437 (D.C. Cir. 1947). We consider this to be the sounder view. This is not to say, however, that a WUTC order allowing or disallowing a particular item as an operating expense may not be reversed by the courts if the record establishes that the order was arbitrary or capricious — or is improper on some other ground within the permissible scope of judicial review as prescribed by the administrative procedure act. We must, therefore, go further and address the substance of the WUTC decision in this regard.
The decision of the WUTC reads:
Decision
The Commission is faced with a company which has a bond rating of bbb, a rating which must be retained for reasonable access to capital markets. The company is in a weakened financial condition and is still encumbered with a construction program which, while reduced significantly, is still massive and will require a high degree of investor confidence in the company in order to raise these funds. To restore Puget to financial viability the Commission has ordered:
(5) The Pebble Springs project is to be amortized over a ten-year period with the unamortized portion not receiving a return. This treatment results in a 70/30 split of the loss between ratepayers and stockholders and places some of the costs on future ratepayers who would have benefited from the project.
Further in this regard, the WUTC found as a fact:
The shareholders of the company and the ratepayers will jointly derive benefits if the company is authorized to amortize its investment associated in the Pebble Springs project over a period of ten years and the unam-ortized balance is not included in the rate base. Among the benefits the stockholders will experience is a stabilization of the company's earnings and favorable reaction from investors. The ratepayer will, in the long run, receive the benefit of the company's ability to obtain finances at lower rates than otherwise. The benefits are jointly shared by the stockholders and ratepayers and the loss associated with Pebble Springs should be shared by both parties in order for the company to serve its customers at the most economical level and the shareholders to receive a reasonable return on their investment.
It is thus clear that the WUTC carefully balanced investor and consumer interests, as it was obligated to do, and set a rate which it determined would assure fair prices and service to the ratepayers on the one hand yet allow sufficient earnings to keep the financially hard pressed Puget Power in business on the other.
Approximately 100 state regulatory agencies in some 33 jurisdictions have faced the question of how to allocate the burden of costs associated with abandonment of power plant projects. As the Supreme Judicial Court of Massachusetts summarized in Attorney Gen. v. Department of Pub. Utils., 390 Mass. 208, 455 N.E.2d 414, 422 (1983):
A substantial majority of the public utility regulatory agencies that have considered the question have permitted a utility to recover all or some portion of the prudently incurred costs of a nuclear power plant reasonably abandoned before completion.
(Footnote omitted. Italics ours.)
In Attorney General, the court affirmed a decision of the Massachusetts Department of Public Utilities and held that the Department had the authority to permit an electric utility to recover by amortization a portion of its investment in the Pilgrim II nuclear power plant reasonably abandoned before completion. The finding of the Department in that case, which is quoted in part in the court's decision, well expresses from the ratepayers' point of view what is really involved in such a decision:
If the company now absorbs the Pilgrim II [nuclear power plant] loss, regulatory policies, and the returns they dictate, appear to us to be inadequate to compen sate investors for the new level of risk. Investors who are inadequately compensated do not remain investors for long. The adverse financial consequences which flow from such circumstances are, in our opinion, inevitable and devastating. The company goes to great lengths in describing how earnings will indefinitely be depressed, stock prices will tumble, bond ratings will collapse, and future capital, if available at all, will be prohibitively priced. Stripped of hyperbole, this assessment remains accurate enough to cause us great pause. The disdain of the financial markets for this company will be formidable, and that disdain can only mean that eventually the customers of the company will pay a high price in terms of both extravagant compensation for new capital and an unavoidable service deterioration reflecting the scarcity of reasonably priced capital. In a very real sense, what we face today is not the question, who should bear the costs of Pilgrim II. It is, rather, when should those costs be faced.[ ]
(Footnote omitted. Italics ours.)
As with regulatory agencies, the substantial majority of courts that have considered the matter have also allowed utilities to recover abandoned plant costs, prudently incurred, as operating expenses or as expenses which could otherwise be amortized.
A minority of courts have ruled otherwise. The Wyoming and Indiana courts, previously cited in our discussion of the "used and useful" issue, denied recovery on the basis that under their utility statutes and practice the "used and useful" principle was applicable to abandonment costs and/or that abandoned plant costs were not "operating expenses". For the reasons detailed above, we disagree with that viewpoint. The Ohio and New Hampshire courts also denied recovery, but did so on the basis of specific regulatory statutes in those states. Those statutes have no counterpart in this state and for that reason are not in point. The New Hampshire statute, for example, specifically directs that " [a]t no time shall any rates or charges be based upon any costs associated with construction work if said construction work is not completed."
The latter two of these courts with a contrary view are worthy of further note. Although the Ohio court reversed its commission, in doing so it specifically acknowledged that "the overwhelming weight of authority from other jurisdictions supports the position of the commission." Similarly, the New Hampshire court in its ruling referred to the contrary Massachusetts view (above discussed with approval) as being in accord with "the overwhelming majority of other jurisdictions."
Returning to the case before us, the WUTC concluded:
The authority granted herein to [Puget Power] to expense its costs associated with its loss on the Pebble Springs Project is not contrary to RCW 80.04.250 and is consistent with the Commission's obligation to set rates that are fair, just and reasonable as provided in RCW 80.28.020.
Conclusion of law 3. See also RCW 80.28.010. Based on our review of the entire record presented, we agree.
The WUTC is accorded considerable discretion in determining which items should be included within utility operating expenses (O) and which items should be excluded therefrom. Utilities such as Puget Power which operate under RCW Title 80 have statutory responsibilities in connection with assuring that an adequate supply of electric power will be available to their customers. Necessarily encompassed within a utility's obligation to serve is an attendant obligation to plan and make reasonable provision for the continuing availability of its products or services in order to meet reasonably expected future demand, given the information which the utility possesses and the options open to it. Under the law as set forth above, we conclude that the WUTC did not abuse the discretion reposed in it by law when it authorized inclusion of prudent costs connected with the abandoned Pebble Springs nuclear generating plant within operating expenses for rate setting purposes.
By entering its rate order in this case, the WUTC did not exceed its statutory authority and was not arbitrary or capricious. The proceeding before the WUTC fairly complied with its rules, and the essential elements of the order are supported by substantial evidence. The order was carefully drawn so that in the considered judgment of the WUTC it balanced and protected both the public interest and that of Puget Power, its shareholders and investors. We conclude that the WUTC did not err.
Upholding the legality of the rate orders as we do, it is not necessary to further address Puget Power's unconstitutional confiscation argument.
Petitioners also make reference in their arguments to the effect of the WUTC budget statutes, RCW 80.04.300-.330. Those statutes are not pertinent to the issue. They contain no requirement that the WUTC give express prior approval for any particular expenditure. RCW 80.04.330 sets forth the consequences if an item which has been rejected from the utility's budget is contracted for by the utility, but since none of the costs involved in this case were ever rejected or excepted to by the WUTC that statute is not relevant. Furthermore, the WUTC acted in this rate case to determine the prudence of such costs, and this was an appropriate forum for such determination. RCW 80.04.310.
We also conclude that Chemical Bank v. WPPSS, 99 Wn.2d 772, 666 P.2d 329 (1983), relied on by petitioners, is not in point. That case held that public utility districts did not have the statutory authority to enter into certain contracts. There is no issue in the case before us as to the authority of Puget Power to enter into the contracts that it did.
Nor is the WUTC's Fifth Supplemental Order invalid because it was entered over 10 days after Puget Power's motion for reconsideration was denied, as argued by petitioners. Although under RCW 80.04.165 Puget Power's motion for reconsideration would formerly have been automatically deemed denied after 10 days, that statutory time limit was superseded by the later enactment of a section of the administrative procedure act, RCW 34.04.130(1), which provides that the agency decision shall not be final until the agency shall have acted thereon. Entry of the Fifth Supplemental Order complied with the time limits of the later statute and that was sufficient.
In petitioners' broad ranging arguments against the orders entered by the WUTC, they also appear to argue that: (1) the term "for service rendered" used in the rate setting statutes (RCW 80.28.010-.020) is equivalent to the term "used and useful for service" in the rate base statute (RCW 80.04.250) which is set out and discussed above; and (2) that the "used and useful" concept in the rate base statute is thereby statutorily mandated for inclusion in the rate setting statutes. This is a novel and incorrect reading of the rate setting statutes.
In construing statutes we are required to give words their usual and ordinary meaning. In reading the rate setting statutes (footnote 66), it is clear that they are simply referring to "service rendered" in the context of utilities charging customers "for services rendered" or "services to be rendered" to their customers, and that these terms are used in much the same sense that lawyers charge their clients "for services rendered" and doctors charge their patients "for services rendered".
When the language of a statute is clear, we will respect it. For us to read the "used and useful" concept of the rate base statute (RCW 80.04.250) into the rate setting statutes (RCW 80.28.010-.020), as petitioners suggest, would require that we read into the rate setting statutes matters which are not there and thus modify those statutes by construction. This we cannot do.
One additional matter bears note. In arguing against petitioners' "used and useful applies to expenses" theory, the WUTC makes the point in its brief that " [a]doption of that theory could well be the death knell of 'flow through' tax accounting, depriving the ratepayers of billions [of dollars], while depriving the Commission of a valuable rate-making tool that can be used to keep rates as low as possible while still maintaining a company's financial viability." This concern is not answered in petitioners' briefs. Since we have declined to adopt petitioners' theory, we need not deal with the merits of this contention. We believe, however, that even the possibility of such untoward ramifications underscores the wisdom of the salutary principle declared by this court in Farm Supply Distribs., Inc. v. State Utils. & Transp. Comm'n, 83 Wn.2d 446, 448, 518 P.2d 1237 (1974), that
courts should not interfere with or substitute their judgment for a decision of the Commission when the Commission has acted properly within the sphere of its purpose, expertise and competence.
(Italics ours.) We adhere to this view.
All remaining issues have been answered by our decision herein or are rendered moot thereby.
Affirmed.
Dolliver, C.J., and Utter, Callow, and Durham, JJ., concur.
Federal Power Commission, The 1970 National Power Survey, Pt. 1 1-1-1 (1971).
RCW 80.50.010; Laws of 1970, 1st Ex. Sess., ch. 45, § 1, p. 313.
123 Cong. Rec. 11,482 (1977).
See Sommers, Recovery of Electric Utility Losses From. Abandoned Construction Projects, 8 Wm. Mitchell L. Rev. 363, 364 (1982); Avery, The Costs of Nuclear Accidents and Abandonments in Rate Making, Pub. Util. Fort., Nov. 8, 1979, at 17-18.
10 Energy Users Rep. (BNA) 900 (Sept. 2, 1982).
10 Energy Users Rep. (BNA) 271-72 (Mar. 18, 1982).
Cause U-82-38, Third Supplemental Order (Order), at 19.
Order, at 20.
Order, at 20.
Order, at 35.
See RCW 34.04.133.
Re Boston Edison Co., 46 Pub. Util. Rep. 4th 431, 453 (Mass. Dep't of Pub. Utils. 1982).
Attorney Gen. v. Department of Pub. Utils., 390 Mass. 208, 455 N.E.2d 414 (1983).
Boston Edison, at 453.
Driscoll v. Edison Light & Power Co., 307 U.S. 104, 122, 83 L. Ed. 1134, 59 S. Ct. 715 (1939) (Frankfurter, J., concurring).
64 Am. Jur. 2d Public Utilities § 88 (1972); 73B C.J.S. Public Utilities § 12-15 (1983).
Pacific Coast Elevator Co. v. Department of Pub. Works, 130 Wash. 620, 641, 228 P. 1022 (1924); 64 Am. Jur. 2d Public Utilities § 89; 73B C.J.S. Public Utilities § 12(a).
Port Orchard v. Kitsap Cy., 19 Wn.2d 59, 61, 141 P.2d 150 (1943); 64 Am. Jur. 2d Public Utilities § 89; Interstate Commerce Comm'n v. Cincinnati, N.O. & T.P. Ry., 167 U.S. 479, 499, 42 L. Ed. 243, 17 S. Ct. 896 (1890).
See Raymond Lumber Co. v. Raymond Light & Water Co., 92 Wash. 330, 335, 159 P. 133 (1916); RCW 80.01.040.
See Note, Consumers' Counsel v. Public Utilities Commission: Who Shall Bear the Cost of Abandonment, 11 Cap. U. L. Rev. 91, 96 (1981).
State ex rel. Puget Sound Power & Light Co. v. Department of Pub. Works, 179 Wash. 461, 466, 38 P.2d 350 (1934).
E. Gellhorn & R. Pierce, Jr., Regulated Industries 97 (1982); R. Pierce, G. Allison & P. Martin, Economic Regulation: Energy, Transportation and Utilities 130 (1980); W. Jones, Regulated Industries 128-29 (2d ed. 1976); D. Boies & P. Verkuil, Public Control of Business 112-13 (1977); 1 A. Priest, Public Utility Regulation 45 (1969). See Third Supplemental Order (cause U-82-38), at 6, 7.
E. Gellhorn & R. Pierce, Jr., at 97-98.
People's Org. for Wash. Energy Resources v. Utilities & Transp. Comm'n, 101 Wn.2d 425, 427, 679 P.2d 922 (1984); A. Priest, at 139.
People's Org. for Wash. Energy Resources v. Utilities & Transp. Comm'n, supra; A. Priest, at 45.
E. Gellhorn & R. Pierce, Jr., at 99; A. Priest, at 191-93.
64 Am. Jur. 2d Public Utilities § 173; 73B C.J.S. Public Utilities § 36(a); A. Priest, at 45.
State ex rel. Pac. Tel. & Tel. Co. v. Department of Pub. Serv., 19 Wn.2d 200, 252-60, 142 P.2d 498 (1943); West Ohio Gas Co. v. Public Utils. Comm'n, 294 U.S. 63, 79 L. Ed. 761, 55 S. Ct. 316 (1935). See also Chicago & Grand Trunk Ry. v. Wellman, 143 U.S. 339, 345-46, 36 L. Ed. 176, 12 S. Ct. 400 (1892).
WAC 480-100-031.
E. Gellhorn & R. Pierce, Jr., at 145; A. Priest, at 47.
Northern Pac. Transp. Co. v. State Utils. & Transp. Comm'n, 69 Wn.2d 472, 477-78, 418 P.2d 735 (1966).
Jewell v. State Utils. & Transp. Comm'n, 90 Wn.2d 775, 776, 585 P.2d 1167 (1978).
E. Gellhorn & R. Pierce, Jr., at 167.
Pacific Telephone, at 217-26.
See Georgia R.R. & Banking Co. v. Smith, 128 U.S. 174, 179, 32 L. Ed. 377, 9 S. Ct. 47 (1888). See also RCW 34.04.130(6)(a).
64 Am. Jur. 2d Public Utilities § 139 (1972); 73B C.J.S. Public Utilities § 24 (1983).
See Pacific Power & Light Co. v. Public Serv. Comm'n, 677 P.2d 799 (Wyo. 1984); Citizens Action Coalition of Ind., Inc. v. Northern Ind. Pub. Serv. Co., 472 N.E.2d 938 (Ind. Ct. App. 1984) cited by petitioners.
See, e.g., State ex rel. Pac. Power & Light Co. v. Department of Pub. Works, 143 Wash. 67, 82, 254 P. 839 (1927); State ex rel. Spokane v. Kuykendall, 119 Wash. 107, 116, 205 P. 3 (1922); State ex rel. Pac. Tel. & Tel. Co. v. Department of Pub. Serv., 19 Wn.2d 200, 232, 142 P.2d 498 (1943). See also Attorney Gen. v. Department of Pub. Utils., 390 Mass. 208, 455 N.E.2d 414, 424-25 (1983); Cohen v. Pennsylvania Pub. Util. Comm'n, 90 Pa. Commw. 98, 494 A.2d 58, 62-63 (1985).
See 64 Am. Jur. 2d Public Utilities § 138 (1972); 73B C.J.S. Public Utilities § 23 (1983).
Laws of 1911, ch. 117, § 92, p. 601; Pacific Telephone, at 233.
See J. Garfield & W. Lovejoy, Public Utility Economics 56 (1964); 1 A. Priest, Public Utility Regulation 139 (1969).
See F. Welch, Public Utility Regulation 317 (2d ed. 1968); A. Priest, at 46.
See F. Welch, at 268; WAC 480-100-031.
See 64 Am. Jur. 2d Public Utilities § 173-88 (1972); 73B C.J.S. Public Utilities § 36, 37 (1983).
RCW 34.04.130; Pacific Telephone.
Cause U-82-38, Third Supplemental Order, at 3, 4.
Order, at 35.
FPC V. Hope Natural Gas Co., 320 U.S. 591, 603, 88 L. Ed. 333, 64 S. Ct. 281 (1944).
See Attorney Gen. v. Department of Pub. Utils., 390 Mass. 208, 455 N.E.2d 414, 422-24 (1983); Note, Consumers' Counsel v. Public Utilities Commission: Who Shall Bear the Cost of Abandonment, 11 Cap. U. L. Rev. 91, 94, 108 (1981); Sommers, Recovery of Electric Utility Losses From Abandoned Construction Projects, 8 Wm. Mitchell L. Rev. 363, 371 (1982) and citations to regulatory decisions therein footnoted.
Re Boston Edison Co., 46 Pub. Util. Rep. 4th 431, 459 (Mass. Dep't of Pub. Utils. 1982). See Attorney Gen. v. Department of Pub. Utils., 390 Mass. 208, 455 N.E.2d 414, 420 (1983).
Gulf Power Co. v. Cresse, 410 So. 2d 492, 493 (Fla. 1982); Central Me. Power Co. v. Public Utils. Comm'n, 433 A.2d 331, 344—45 (Me. 1981); Attorney Gen. v. Department of Pub. Utils., 390 Mass. 208, 455 N.E.2d 414, 425-27 (1983); Consumer Protec. Bd. v. Public Serv. Comm'n, 97 A.D.2d 320, 471 N.Y.S.2d 332, 335-36 (1983); Wisconsin Pub. Serv. Corp. v. Public Serv. Comm'n, 109 Wis. 2d 256, 325 N.W.2d 867, 870-71 (1982); South Dakota Pub. Utils. Comm'n v. Federal Energy Regulatory Comm'n, 690 F.2d 674, 676-78 (8th Cir. 1982); NEPCO Mun. Rate Comm. v. Federal Energy Regulatory Comm'n, 668 F.2d 1327, 1332 (D.C. Cir. 1981); Union Elec. Co. v. Federal Energy Regulatory Comm'n, 668 F.2d 389, 397-98 (8th Cir. 1981); Washington Metro Area Transit Auth. v. Public Serv. Comm'n, 486 A.2d 682, 687-88 (D.C. 1984); State ex rel. Union Elec. Co. v. Public Serv. Comm'n, 687 S.W.2d 162, 165-68 (Mo. 1985); Abrams v. Public Serv. Comm'n, 104 A.D.2d 135, 483 N.Y.S.2d 785 (1984); Cohen v. Pennsylvania Pub. Util. Comm'n, 90 Pa. Commw. 98, 494 A.2d 58, 62 (1985).
Pacific Power & Light Co. v. Public Serv. Comm'n, 677 P.2d 799 (Wyo. 1984).
Citizens Action Coalition of Ind., Inc. v. Northern Ind. Pub. Serv. Co., 472 N.E.2d 938 (Ind. Ct. App. 1984).
See footnote 37.
Office of Consumers' Counsel v. Public Utils. Comm'n, 67 Ohio St. 2d 153, 423 N.E.2d 820 (1981), appeal dismissed sub nom. Cleveland Elec. Illuminating Co. v. Office of Consumers' Counsel, 455 U.S. 914, 71 L. Ed. 2d 455, 102 S. Ct. 1267 (1982).
In re Pub. Serv. Co., 125 N.H. 46, 480 A.2d 20 (1984).
N.H. Rev. Stat. Ann. § 378:30-a (Supp. 1981) (part).
Office of Consumers' Counsel, 67 Ohio St. 2d at 162.
In re Pub. Serv. Co., at 56.
Order, at 35.
State ex rel. Hotel Continental v. Burton, 334 S.W.2d 75, 80 (Mo. 1960).
RCW 80.28.010; RCW 80.28.110. See State ex rel. PUD 1 v. Schwab, 40 Wn.2d 814, 823, 246 P.2d 1081 (1952).
See Port Orchard v. Kitsap Cy., 19 Wn.2d 59, 61, 141 P.2d 150 (1943); Northern Pac. Transp. Co. v. State Utils. & Transp. Comm'n, 69 Wn.2d 472, 477-79, 418 P.2d 735 (1966).
See Permian Basin Area Rate Cases, 390 U.S. 747, 791-92, 20 L. Ed. 2d 312, 88 S. Ct. 1344 (1968); RCW 34.04.130(6).
See Herrett Trucking Co. v. State Pub. Serv. Comm'n, 58 Wn.2d 542, 543-45, 364 P.2d 505 (1961).
At all pertinent times herein, RCW 80.28.010 read as follows:
"Duties as to rates, services, and facilities. All charges made, demanded or received by any gas company, electrical company or water company for gas, electricity or water, or for any service rendered or to be rendered in connection therewith, shall be just, fair, reasonable and sufficient.
"Every gas company, electrical company and water company shall furnish and supply such service, instrumentalities and facilities as shall be safe, adequate and efficient, and in all respects just and reasonable.
"All rules and regulations issued by any gas company, electrical company or water company, affecting or pertaining to the sale or distribution of its product, shall be just and reasonable.
"Every gas company, electrical company and water company shall construct and maintain such facilities in connection with the manufacture and distribution of its product as will be efficient and safe to its employees and the public." (Italics ours.)
"Commission to fix just, reasonable, and compensatory rates. Whenever the commission shall find, after a hearing had upon its own motion, or upon complaint, that the rates or charges demanded, exacted, charged or collected by any gas company, electrical company or water company, for gas, electricity or water, or in connection therewith, or that the rules, regulations, practices or contracts affecting such rates or charges are unjust, unreasonable, unjustly discriminatory or unduly preferential, or in any wise in violation of the provisions of the law, or that such rates or charges are insufficient to yield a reasonable compensation for the service rendered, the commission shall determine the just, reasonable, or sufficient rates, charges, regulations, practices or contracts to be thereafter observed and in force, and shall fix the same by order." (Italics ours.) RCW 80.28.020.
State ex rel. Longview Fire Fighters Local 828 v. Longview, 65 Wn.2d 568, 570-71, 399 P.2d 1 (1965).
Griffin v. Department of Social & Health Servs., 91 Wn.2d 616, 624, 590 P.2d 816 (1979).
See King Cy. v. Seattle, 70 Wn.2d 988, 991, 425 P.2d 887 (1967).