Opinion ID: 1370217
Heading Depth: 1
Heading Rank: 4

Heading: allowance for cash working capital

Text: Consumer Advocate contends the circuit court erred in affirming PSC's treatment of cash working capital because that decision was arbitrary, capricious, and not supported by substantial evidence. We agree. Cash working capital is money a utility must have on hand to pay its own bills before it receives payments from customers. Consumer Advocate argued PSC should use a lead-lag study prepared by BellSouth to determine how much cash working capital to include in BellSouth's rate base. [4] Such a study shows whether a company is able to pay its own bills before receiving revenue from customers by comparing the revenue lag (days between company's provision of service and customers' payment) with the expense lag (days between the incurring of an expense by company and payment of the expense). [5] Consumer Advocate presented testimony showing PSC should set BellSouth's allowance for cash working capital at zero because the company bills most of its customers for services in advance. BellSouth has a negative cash working capital requirement, Consumer Advocate contended. Simply put, customer revenue flows into BellSouth's accounts before it must pay expenses. Therefore, BellSouth needs no allowance for cash working capital and it is inappropriate to allow shareholders to earn a return on that money by including it in the rate base, Consumer Advocate argued. [6] PSC rejected Consumer Advocate's position, instead adopting its staff's recommendation to include an allowance for cash working capital of $10.4 million in BellSouth's rate base. PSC's staff based its calculations on a method that uses a company's average daily cash balances to determine the requirement. In its orders, PSC stated it had long used such a method and believed it to be appropriate in this case. Companies must have cash on hand for daily operations and there is no such thing as a negative cash working capital requirement, PSC stated. PSC considers cash working capital to be an investment made by shareholders upon which they are entitled to earn a return. PSC also concluded the lead-lag method penalizes good cash management and rewards inefficient cash management. The circuit court affirmed PSC's decision. Consumer Advocate now contends PSC's decision was arbitrary, capricious, and not supported by substantial evidence. In some states, courts have approved a regulatory agency's decision either to establish a negative cash working capital requirement and deduct it from the rate base, or set the requirement at zero. [7] In others, courts have upheld a regulatory agency's decision to include an allowance for cash working capital in the rate base, although it usually is limited to investor-supplied capital. [8] It is within PSC's discretion to adopt the rate-setting method it believes is appropriate, provided that method complies with the statutes. See Heater of Seabrook, Inc., 324 S.C. at 64, 478 S.E.2d at 830 (PSC generally has wide latitude to determine an appropriate rate-setting methodology); Nucor Steel v. South Carolina Pub. Serv. Comm'n, 312 S.C. 79, 85, 439 S.E.2d 270, 273 (1994) (nothing in statute requires PSC to adopt any particular price-setting methodology in determining fair rate of return). As an Arkansas court stated, as long as a regulatory agency operates within the statutes, [i]t is apparent that no particular methodology is precise and ... a determination of working capital is in many respects an exercise of discretion as to what particular method yields the most fair and equitable result in each case. General Tel. Co. v. Arkansas Pub. Serv. Comm'n, 23 Ark.App. 73, 744 S.W.2d 392, 397 (Ark.Ct.App.), aff'd, 295 Ark. 595, 751 S.W.2d 1 (1988). We conclude the circuit court erred in affirming PSC's decision on this issue because the record does not contain any testimony or other substantial evidence supporting PSC's conclusion. PSC decided the issue arbitrarily, adhering to its past practice and simply announcing BellSouth is entitled to an allowance for cash working capital in its rate base without attempting to explain or support that decision. See Hamm, 309 S.C. at 289, 422 S.E.2d at 114 (a previously adopted policy may not furnish the sole basis for PSC's action). PSC made no effort to explain or support its conclusion that the lead-lag method penalizes good cash management and rewards inefficient cash management. In addition, PSC's statement that there is no such thing as a negative cash working capital requirement is simply incorrect. Other regulatory agencies and courts have discussed and applied the concept. E.g., Colorado Mun. League, 687 P.2d at 419 (explaining that positive working capital is provided by shareholders, while negative working capital is provided by advance customer payments or other funds received before a company's own bills are due); Barasch v. Pub. Util. Comm'n, 108 Pa.Cmwlth. 326, 530 A.2d 936 (Pa.Commw.Ct.1987) (same); cases cited in footnote 7. In short, PSC's arbitrary pronouncement stands in stark contrast to the debate engaged in by regulatory agencies and courts in other states on this issue. Accordingly, we reverse the judgment of the circuit court on this issue.