Opinion ID: 1720100
Heading Depth: 1
Heading Rank: 6

Heading: Revenue Annualization

Text: GSU argues the commission erred in adjusting revenues to reflect an annualization of the effect of an increase in the number of customers at the end of the test year. As a procedural matter, GSU contends that the commission's consultant, Lane Kollen, did not propose this adjustment until November 7, 1994, one week before hearings were scheduled to begin. It argues that this late proposal denied it an opportunity to meaningfully respond to the adjustment. On the merits, GSU argues that the commission erred in adopting the annualization as to revenues only, without making corresponding adjustments to the rate base and expenses. The commission concluded that GSU had an adequate opportunity to respond, finding GSU conducted extensive cross examination of Mr. Kollen regarding the annualizations. The commission also found GSU introduced testimony of Mr. David Wright that specifically addressed the computations and components of the rate base and expense annualizations. Based on these findings, the commission concluded that the evidence of the annualizations was properly admitted. On the merits, the commission's consultant, Mr. Kollen, proposed the revenue annualization to deal with the fact that GSU experienced growth in its billing determinants and in the number of customers over the year. Instead of the revenues stated in GSU's filing, Mr. Kollen proposed that revenues for residential customers be recomputed at year end customer levels. Under this proposal, test year revenues were increased to the level of revenues that would have been produced if, in each month of the test year, GSU had been serving as many residential customers as it served in the last month of the test year. [8] Mr. Kollen also proposed that GSU's rate base be adjusted and expenses be annualized. However, the special counsel recommended against adoption of the adjustments for the rate base and the expense annualizations because of the lack of clarity regarding the quantification of the adjustment. The commission adopted the special counsel's recommendation: The record is left with no clear, single quantification of the rate base and operating expense annualizations. The result of the adjustments still appears to be a likely reduction in the revenue requirement. Under the circumstances, the Commission accepts the recommendation of Special Counsel that no adjustment be made on the basis of the rate base and operating expense annualizations. However, the Commission directs that Gulf States and the Commission's consultants evaluate the appropriateness and benefits of annualizationing adjustments in future review proceedings. GSU argues that the commission erred in adopting the revenue annualization without corresponding adjustments to the rate base and operating expenses, something which the commission's own consultant testified was improper. GSU contends the effect of the commission's action is to create a mismatch among revenues, expenses and the rate base. We see merit to GSU's argument. The commission has advanced no logical reason why the revenue annualization should be adopted without corresponding adjustments to the rate base and expenses. The commission implies that its failure to adopt the rate base and expense annualization adjustments was actually beneficial to GSU, since the adjustments, if correctly calculated, would have resulted in a larger rate decrease for GSU than that reflected in the commission's order. However, this is contrary to the testimony of GSU's witness, who calculated that the adjustments would have resulted in a slight revenue increase of approximately $2 million. It appears that many of the difficulties in connection with the annualization adjustments can be traced to the short time frame in which the commission sought to introduce this issue. The commission's conclusion that GSU had adequate time to respond on this issue is belied by its finding that the commission's own consultant was unable to properly calculate the rate base and expense adjustments at the hearing. While we do not mean to imply that the commission could not adopt annualization adjustments, we think the procedural deficiencies in the way the issue was raised in the instant proceeding, combined with the internal inconsistencies of adopting a revenue annualization without corresponding rate base and expense adjustments, mandate a finding that the commission's action was arbitrary and capricious. Accordingly, we will vacate this portion of the commission's order and remand the case to the commission to hold a new hearing.