Opinion ID: 2284798
Heading Depth: 1
Heading Rank: 13

Heading: treatment of expenses incurred for advertising, trade association membership, and community affairs programs

Text: At the suggestion of People's Counsel, the Commissionover Commissioner Stratton's dissentdisallowed as above-the-line operating costs $95,000 in general advertising expenses, $56,000 in trade association dues, $130,000 expended in providing information to schools and community groups, and $35,000 in civic and business support payments. The Commission's rationale in so doing, which is echoed by the majority here on appeal, is that the Company failed to prove that these expenditures directly benefited the ratepayers, and thus they should be borne by the Company's shareholders. Ante, at 78, 87. While I recognize that a number of factors recently has led a number of state commissions to adopt restrictive policies on the allowance of advertising and public affairs expenses, I do not believe that a failure to prove that each item of expense directly benefits the customers properly may be invoked as the sole basis for shifting the entire onus of those expenses to the utility's stockholders. It is particularly unreasonable to adopt such a policy in this proceeding, in light of the Commission's heretofore unvarying practice of recognizing all such expenses for ratemaking purposes. Commissioner Stratton aptly summed up the arbitrariness of the Commission majority's action in this respect: The total elimination from the cost of service of expenses for advertising, trade association dues, dues to civic and business associations, and community affairs programs is misguided overkill. Every organization, business or governmental, must communicate with its clients and customers, and the cost of doing so is a legitimate expense. The irony that those who object most strongly to the recognition of communication and outreach expenses in rates are often those whose activities make increased communication necessary only emphasizes the point. Like every expense, these must be reasonable in amount. If this Commission's past practice of allowing all such expenses which are recorded in above the line accounts be thought too uncritical, the remedy is to correct it either through rule-making (as has been done in New York) or through a more careful analysis of these expenses in the context of the rate proceeding, but not an abrupt reversal of long-standing Commission policy. [Order No. 6060, at 54-55 (Stratton, C., dissenting).]
The Commission's decision to change its prior policy so as to disallow WGL's advertising expenses for rate-making purposes was precipitated by the testimony of People's Counsel's witness Sack. He stated: In light of the Company's restrictions concerning connecting of new customers, I did not consider it appropriate to have the ratepayer provide funds for advertising when such advertising may be in vain.[ [16] ] In its brief before the Commission, People's Counsel further alleged that WGL's advertising was image building in nature, intended solely to improve the utility's stature in the community. As such, People's Counsel argued, the Company's advertising expenses should be borne entirely by the stockholders. On cross-examination by WGL's counsel, Sack admitted that he had made no effort to ascertain the actual nature of the advertising in question. He acknowledged that his characterization of the advertising as image building was based merely upon speculation ... of what the descriptive titles would imply. In his prepared rebuttal testimony, WGL's witness Unkle responded to Sack's assertions as follows: Q. Will you please discuss the nature of the advertising expenses which Mr. Sack eliminated from the cost of service. A. The $95,000 of general advertising costs included in the Administrative and General Expense relates to advertising which, in common terminology, would be described as informational in character. The advertising addresses two specific issues of great concern to our customers the gas supply situation and the rising cost of gas. It is entirely proper and right that our company address these issues in communicating with customers.[ [17] ] Despite the paucity of support in the record for People's Counsel's allegations, the Commission for the first time imposed upon the Company the burden to come forward with a detailed presentation of how its advertising directly benefited its customers. Order No. 6051, at 69. I believe it was arbitrary for the Commission ex post facto to impose such a burden upon WGL, and I do not believe it was reasonable to conclude that absent such a detailed showing the advertising in question must be presumed to benefit only the Company's stockholders. In 1935, the Supreme Court held that a state utilities commission's disallowance of a gas distributor's promotional advertising expenses was an unconstitutional usurpation of management prerogative. West Ohio Gas Co. v. PUC, 294 U.S. 63, 55 S.Ct. 316, 79 L.Ed. 761 (1935). Justice Cardozo, writing for the Court, stated: Good faith is to be presumed on the part of the managers of a business. In the absence of a showing of inefficiency or improvidence, a court will not substitute its judgment for theirs as to the measure of a prudent outlay. The suggestion is made that there is no evidence of competition. We take judicial notice of the fact that gas is in competition with other forms of fuel, such as oil and electricity. A business never stands still. It either grows or decays. Within the limits of reason, advertising or development expenses to foster normal growth are legitimate charges upon income for rate purposes as for others. When a business disintegrates, there is damage to the stockholders, but damage also to the customers in the cost or quality of service. [ Id., 294 U.S. at 72, 55 S.Ct. at 321 (citations omitted).] West Ohio Gas has been interpreted as establishing that, once the company has made out a prima facie case that an advertising expense was incurred, the burden rests with the Commission's staff (or any other interested party) to prove that the expense was unreasonable because of wastefulness, inefficiency, or bad faith. Boise Water Corp. v. PUC, 97 Idaho 832, ___, 555 P.2d 163, 169 (1976), citing West Ohio Gas, supra, 294 U.S. at 72, 55 S.Ct. at 321; see Note, Advertising by Public Utilities as an Allowable Expense for Ratemaking: Assault on Management Prerogative, 13 Val.U.L.Rev. 87, 119-20 (1978). In this case WGL, relying upon the Commission's long-established practice of approving all advertising expenses listed in the firm's General and Administrative Expenses account, produced evidence that it had spent $95,000 on informational advertising which dealt with the gas supply situation and the rising cost of gas. This should have been sufficient to establish a prima facie showing of reasonable informational advertising expenditures, subject to proof by the Staff or People's Counsel to the contrary. People's Counsel's witness made an allegation that the advertising was strictly for image building and that it was inappropriate as an operating expense in light of WGL's restrictions concerning the connecting of new customers. [18] He admitted, however, that he had no idea what the subject matter of the ads had been. The PSC nevertheless concluded that [f]aced with this challenge, WGL should have come forward with a detailed presentation. Order No. 6051, at 69. In so ruling, the Commission erroneously shifted the burden of proof back to the Company upon nothing more than a bald allegation by People's Counsel's witness. I also do not think that the allowance of advertising costs as an operating expense should hinge on whether the advertising is classified as informational, promotional, or institutional. The utility's management must have the discretion to make decisions on advertising, and the costs of advertising should be treated as valid operating expenses so long as they are reasonable in amount and the advertising is designed to serve some legitimate utility purpose. While West Ohio Gas involved promotional advertising, its holding logically has been extended to cover institutional ( i.e., goodwill or image-building) advertising as well. In New England Telephone and Telegraph Co. v. Department of Public Utilities, 360 Mass. 443, 275 N.E.2d 493 (1971), the Supreme Judicial Court of Massachusetts quoted approvingly from a New York PSC decision: What is of concern here are advertisements which are obviously designed to project a favorable image of the company to its customers, its existing stockholders or potential investors. To the extent that such advertising fosters sound consumer relations or encourages people to invest in the company, it seems clear that the consumers, as well as the stockholders, are ultimately benefitted through the lessening of the expense of doing business.   In conclusion, it is determined that in view of the fact management should control advertising expenditures as long as they are within the limits of reason, and so long as these expenses do not exceed what is reasonably necessary and proper in the particular case ... there is no ground to distinguish such costs from other necessary and proper expenses. [ Id., 360 Mass. at 485, 275 N.E.2d at 518, quoting In re Consolidated Edison Co. of N. Y., 41 P.U.R.3d 305 (N.Y. PSC 1962).] More recently, the Supreme Court of Alabama wrote pointedly in addressing the same issue: Although subject to regulation by the government, a utility, like any corporation, should be allowed to operate consistent with the free enterprise system to the extent possible. Advertising is of vital importance to corporations in establishing and maintaining their public image, as well as in educating the consuming public. As such, it is a responsibility of the duly authorized manager of a utility to decide the type, quantity, or form of advertising which would most benefit the corporation in its continued growth. The utility has the initial right to decide the amount and type of advertisement which comports with good management practices. The function of the Alabama Public Service Commission is that of regulation, and not of management. Petition of New England Tel. & Tel. Co., 115 Vt. 494, 66 A.2d 135 (1949). The Commission should not be allowed to interfere with the proper operation of the utility as a business concern by usurping managerial prerogatives. [ Alabama Power Co. v. PUC, 359 So.2d 776, 780 (Ala.1978).] After quoting with approval from West Ohio Gas, the court concluded: Advertising, under honest, efficient, and economical management, can be an operating expense and reasonable advertising costs expended by a public utility should be allowed. [ Ibid. ] See Central Maine Power Co. v. PUC, 153 Me. 228, 243-46, 136 A.2d 726, 736-37 (1957); In re New England Telephone & Telegraph Co., 115 Vt. 494, 509-12, 66 A.2d 135, 145-46 (1949); see also El Dorado v. PSC, 235 Ark. 812, 825, 362 S.W.2d 680, 688 (1962); Southern Bell Telephone & Telegraph Co. v. PSC, 203 Ga. 832, 49 S.E.2d 38, 65 (1948); State ex rel. North Carolina Utilities Commission v. Piedmont Natural Gas Co., 254 N.C. 536, 550-52, 119 S.E.2d 469, 479-80 (1961); Commonwealth v. Virginia Electric and Power Co., 211 Va. 758, 772, 180 S.E.2d 675, 685 (1971), aff'd In re Virginia Electric Power Co., 84 P.U.R.3d 1 (Va. SCC 1970); General Telephone Co. of Wisconsin v. PSC, 46 P.U.R.3d 1, 5 (Wis.Cir.Ct. 1962). As the majority notes, a number of state commissions recently have begun to disallow promotional and/or institutional advertising expenses as operating costs. Some of the decisions were the result of concerns that promotional advertising was unwise in the face of then-critical energy shortages. Others simply concluded that institutional or goodwill advertising categorically is of no benefit to the consumer. I am unaware of any such opinion which even attempts to explain its departure from the principles laid out in West Ohio Gas and its progeny. [19] Nevertheless, however excusable the silent abandonment of West Ohio Gas might be in other individual cases, this case presents no special circumstances which would justify such a departure. [20] At the very least, the Company deserves some advance notice that the Commission is changing its longstanding policy so that it may be prepared to defend its advertising decisions in more detail. In summary, I believe the Commission and the majority of this court have erred both with respect to the allocation of the burden of proof and by drawing unsupported conclusions as to the value of the advertising involved to WGL's consumers. I would remand this issue to the Commission with instructions to make an appropriate adjustment.
For essentially the same reasons that pertain to the issue of advertising expenses, it was arbitrary and unreasonable for the Commission to have excluded from operating costs the entire $56,000 expended by WGL for trade association dues. In affirming the disallowance, the majority states that the PSC's action was reasonable in the absence of evidence that AGA activities benefited customers. Ante, at 1229. I am at a loss to see how the Company can be expected to demonstrate a corresponding consumer benefit for each dollar spent on AGA dues. Such a requirement places an almost unsurmountable burden of proof upon the Company. The Company's management deserves considerable discretion in determining whether such membership is in the best interest of the utility. Where it appears that association membership may improve the overall efficiency of the utility's operation, its cost should be allowed, at least in substantial part, as a legitimate cost of doing business. The uncontradicted evidence of record reflects that the AGA serves as a valuable pool of resources for its member distributors. It provides informational as well as research and development services to its members at a much lower per-member cost than would be possible if each member company were to conduct those activities itself. To the extent that the AGA engages in political or other activities which reasonably could not be expected to benefit consumers even indirectly, perhaps the Commission could apportion an appropriate part of the membership dues to the stockholders. A total exclusion of the entire membership fee from the Company's operating expenses, however, assuredly is not justified. The purpose of the Commission's oversight of a utility's operating costs is to prevent monopolistic exploitation in the form of exorbitant returns or wasteful expenditures. Insofar as a utility's operating expenses are consistent in nature and amount with those incurred by competitive businesses, they should be allowed. It goes without saying that the concept of trade association membership is hardly unique to monopolistic enterprises. Competitive industries, businesses, and professions almost invariably are served by trade associations, and the individual members may be expected to pass the costs (and the benefits) of association membership on to their customers. In the past, the PSC has allowed such dues as an operating expense. A number of other state commissions similarly include these costs above-the-line. See, e.g., In re Peoples Gas System, Inc., 11 P.U.R.4th 505 (Fla. PSC 1975) (abstract); In re Southwestern Bell Telephone Co., 28 P.U.R.4th 519, 537 (Kan. SCC 1979); In re Rules and Regulations Covering Rate Case Treatment of Certain Expenses, 30 P.U.R.4th 338, 343 (N.M. PSC 1979); In re Columbus and Southern Ohio Electric Co., 24 P.U.R.4th 261, 287 (Ohio PUC 1978). In my view, the Commission's action on this expense item was arbitrary, unreasonable, and unsupported by evidence in the record. I therefore disagree with the majority on this point, too, and would remand for an appropriate adjustment.
Again, I cannot concur in the Commission's and the majority's treatment of community affairs expenses for essentially the same reasons that apply to the two expense items just discussed. Despite the vague allegation by People's Counsel's witness Sack that WGL's community affairs activities are clearly to enhance the public image of the Company, the record unquestionably reflects that the program is primarily informational in nature. WGL sends out speakers, at the invitation of schools and community groups, to talk about matters relating to gas service such as fuel conservation, safety considerations, the two-part billing system, estimated billing, the gas supply situation, and the rising cost of gas. On cross-examination by WGL's counsel, Sack admitted that his characterization of the Company's speakers program as one of enhancing the public image of the Company was based solely on speculation. In prepared rebuttal testimony, WGL's witness Unkle told the Commission: Talking about such subjects to community groups is one important way our Company can provide information about subjects of vital concern both to us and our customers. Mr. Sack is wrong when he says these activities are undertaken to enhance our image. That is not the purpose of our community activities. The purpose is to communicate with customers on those subjects about which they want more information. In fact, the Company is under a certain amount of community pressure to engage in such activities. Such expenses are not only proper, but they are vital. The PSC's action here again constitutes an unreasonable usurpation of management prerogative. Managers of a utility have the discretion, and indeed the duty, to inform their customers about such service-related concerns as safety, conservation, billing, cost-of-service, and so forth. Expenses incurred by virtue of conducting such informational activities, to the extent that they are not excessive or the result of an abuse of managerial discretion, are valid costs of doing business and should be treated as such in the ratemaking process. The Company's community affairs program is closely akin to the concept of informational advertising, which all parties before us and an overwhelming majority of state commissions agree is a proper above-the-line expense. See, e.g., In re Consumers Power Co., 14 P.U.R.4th 1, 29-30 (Mich. PSC 1976); In re Northern States Power Co., 6 P.U.R.4th 38, 42 (N.D. PSC 1974); In re Gas Co. of New Mexico, 21 P.U.R.4th 159, 175 (N.M. PSC 1977); In re Columbia Gas of Ohio, Inc., 25 P.U.R.4th 399 (Ohio PUC 1978); Re Utility Advertising Expenditures, 14 P.U.R.4th 578 (Ore. PUC 1976) (abstract); Pennsylvania PUC v. Peoples Natural Gas Co., 28 P.U.R.4th 180 (Pa. PUC 1978); In re Northwestern Bell Telephone Co., 15 P.U.R.4th 289 (S.D. PUC 1976); In re Wisconsin Power & Light Co., 4 P.U. R.4th 305 (Wis. PSC 1974). The Florida PSC has promulgated rules specifically providing that community activities of the type in question here are legitimate costs of service. See In re Promotional Practices of Electric Utilities, 8 P.U.R.4th 268, 276 (Fla. PSC 1975). Even the majority acknowledges informational advertising as a legitimate above-the-line expense item. See ante, at 1230. However, the majority then retreats to its familiar and transparent posture with respect to the Company's burden of proof: As the Company has primary control of its own records, there is no injustice in allotting to the Company the initial responsibility for demonstrating the reasonableness of above-the-line charges to its ratepayers. The sparse record with respect to the challenged community affairs expenses consists merely of cross-allegations as to the nature and purpose of the speakers programs, unsubstantiated by documentary evidence on either side.    [ Ante, at 1230.] It is difficult to conceive of what further proof could reasonably be expected of the Company on an item such as this. The Company's witness explained the nature of its speakers program, the subjects covered, and the community demand for the program. Perhaps the Commission would wish to see a verbatim transcript of each public appearance by a WGL speaker, but such a monitoring requirement hardly could improve the cost efficiency of the program for either the ratepayers or the stockholders. The Commission also is misguided in its attempt to equate the speakers program with forced contributions to charity. As the record reveals, the Company's community activities are not limited to certain charitable organizations, but rather are available to any group, regardless of its nature, that expresses an interest therein. The ratepayers are not being forced to contribute to selected organizations which they otherwise might not choose to support. The only selectivity involved lies in the fact that groups, rather than individuals, are the immediate beneficiaries. However, other more conventional forms of informational communication (which indisputably are proper operating expenses) probably are not equally available to all ratepayers, either. Therefore, the PSC's finding that only a limited number of community organizations are receiving speakers from WGL begs the issue. On the other hand, I do concur with the majority in affirming the disallowance of WGL's contributions to various business and civic organizations. The Company's direct monetary contributions to those organizationsunlike its informational speakers programare tantamount to contributions to charitable concerns. Although even regulated companies are under a great deal of community pressure to make such donations, the question of whether ratepayers should finance this largesse is a sensitive one. While state commissions and reviewing courts are divided on the appropriateness of including civic support payments in the cost of service, see Annot., Charitable Contributions by Public Utility as Part of Operating Expenses, 59 A.L.R.3d 941 (1974), I agree that it was within the PSC's discretion to find that WGL's customers should not be compelled through rate payments to make contributions to organizations which they independently might not wish to support.