Opinion ID: 1305149
Heading Depth: 2
Heading Rank: 1

Heading: working capital issues:

Text: 1. Purchased gas costs: The Third Circuit said in Alabama-Tennessee Natural Gas Company, supra, that working capital is an allowance for the sum which the company needs to supply from its own funds to meet current obligations as they arise. That court went on to say that: Since ... expenses will eventually be paid for out of revenues received by the Company, the need for working capital arises largely from the time lag between payment by the Company of its expenses and receipt by the Company of payments for service in respect of which the expenses were incurred. 203 F.2d at 498. Our examination of the authorities shows that regulatory bodies have almost uniformly estimated that if a utility bills its customers monthly the time lag between the utility's payment for goods and services in connection with operation and maintenance and the utility's receipt of payments from its customers is approximately 45 days. E.g., see the cases listed in footnote 4, infra, which use this estimate whenever the regulated utility bills its customers monthly. Accordingly, regulatory agencies have allowed utilities to include one eighth of their annual operating expenses for such goods and services, i.e., approximately their average expenditures for such items for a 45 day period, in the allowance for working capital. In Intermountain's last general rate increase proceeding, reported as Intermountain Gas Co., 86 P.U.R.3d 438 (Idaho PUC 1970), in addition to one eighth of Intermountain's annual expenses for goods and services purchased in connection with operations and maintenance, the Commission allowed Intermountain to include as part of its working capital allowance one eighth of its annual cost of purchased gas from its wholesale supplier. In the proceeding from which this appeal was taken, however, the Commission excluded all purchased gas costs from the allowance for working capital. The Commission thereby reduced Intermountain's requested allowance for working capital by $2,703,101, one eighth of Intermountain's annual cost of purchased gas. (See footnote 3, supra, for the effect of this exclusion upon the requested rate increase.) The Commission gave the following reasons for this decision: A majority of regulatory commissions do not allow [purchased gas costs] to be included in working capital and in nearly every case where purchased gas costs are allowed, in whole or in part, the inclusion of this item in working capital has been supported by a time lag study. We recognize that the Commission did not treat specifically this subject in its order in the last general rate proceeding for the Applicant. However, this Commission has not and does not now permit the inclusion of purchased power costs by electric utilities subject to its jurisdiction nor has it allowed the inclusion of purchased gas costs as a part of working capital by the other natural gas utility under this Commission's jurisdiction. Therefore, to achieve consistency in this matter, the Commission will not permit the inclusion of purchased gas costs in Applicant's working capital portion of the rate base at this time. The Commission in subsequent rate proceedings involving natural gas utilities will give further consideration to the inclusion of a portion of purchased gas costs in working capital if it is supported by competent time lag studies. Order No. 11507, June 26, 1974, p. 5. Sec. Tr., Vol. II, p. 385. Intermountain argues that since it relied upon the previously established policy of the Commission in preparing its case, that the Commission should be bound to use the same method of determining the working capital allowance as it had used in the previous proceedings to which Intermountain was a party, at least so long as the Commission has not shown a change of circumstances warranting a modification of previously established policy. However, because regulatory bodies perform both legislative as well as judicial functions in these proceedings, they are not so rigorously bound by the doctrine of stare decisis that they must decide all future cases in the same way as they have decided similar cases in the past. So long as regulatory bodies adequately explain their departure from prior rulings so that a reviewing court can determine that their decisions are not arbitrary or capricious, orders based upon positions substantially different than those taken in previous proceedings can be upheld. See Federal Communications Commission v. WOKO, Inc., 329 U.S. 223, 67 S.Ct. 213, 91 L.Ed. 204 (1946); Federal Trade Commission v. Crowther, 139 U.S.App.D.C. 137, 430 F.2d 510 (1970). There is considerable authority that one eighth of a gas or electric company's annual costs for purchase of gas or electricity will not necessarily be included in the allowance for working capital. [4] Furthermore, Burton L. Moore, Intermountain's vice president and treasurer for the management of the Budgets and Reports Department agreed with the statement of the Commission's counsel that if Intermountain's customers paid their bills as they came due, it is a fair statement that it doesn't take 45 days to get reimbursed for gas that [Intermountain] ha[s] purchased from [its supplier.] It is something considerably less than that... . Rptr. Tr., Vol. II, p. 135. This authority, Moore's testimony, and the Commission's decision to treat with uniformity purchased power costs of all electric utilities and purchased gas costs of all natural gas utilities that it regulates are sufficiently persuasive reasons to allow the Commission to alter its previously established policy regarding the applicant. It has not acted arbitrarily or capriciously in doing so. Intermountain further argues that since it had not been given notice that the Commission staff would oppose its request that purchased gas expenses be included in the allowance for working capital that it was denied a fair hearing upon this issue because it had not been able to make the type of lead-lag studies which the Commission in its order indicated might persuade it to allow a portion of these purchased gas costs in the allowance for working capital. However, this argument misconstrues the purpose of appellate review of the Commission's rate-making proceedings. Our purpose is not to analyze each step of the rate-setting process to determine whether the regulatory agency was correct in its decision, but to look at the overall effect of the rate fixed to determine whether the return to the utility is reasonable and just. As the Supreme Court of the United States stated in Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333 (1944): It is not theory but the impact of the rate order which counts. If the total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry under the Act is at an end. The fact that the method employed to reach that result may contain infirmities is not then important. Moreover, the Commission's order does not become suspect by reason of the fact that it is challenged. It is the product of expert judgment which carries a presumption of validity. And he who would upset the rate order under the Act carries the heavy burden of making a convincing showing that it is invalid because it is unjust and unreasonable in its consequences. 320 U.S. at 602, 64 S.Ct. at 288. Thus, so long as the Commission has adequately explained why it disallowed purchased gas costs from the working capital allowance, and this exclusion does not result in an unjust and unreasonable return to the utility, the Commission was not required to allow Intermountain to include purchased gas costs in the working capital allowance in the absence of a lead-lag study. However, under the authority of I.C. §§ 61-624, 61-629, Intermountain may move that further proceedings be held to alter or amend the order, and we hold that it may initiate new proceedings to introduce into evidence the results of a lead-lag study and that the Commission must take such a study into consideration in determining the working capital allowance. Finally, we note that in the case of Idaho Underground Water Users Ass'n v. Idaho Power Co., 89 Idaho 147, at 164, 404 P.2d 859 (1965), we said that the sum necessary for working capital of a utility is addressed to the sound discretion of the Commission, and in the absence of an abuse of discretion will not be set aside. See also Petition of Mountain States Telephone and Tel. Co., 76 Idaho 474, 284 P.2d 681 (1955). For this reason, and because the Commission has adequately explained its departure from its prior practice, based upon this record we uphold the decision by the Commission totally excluding all purchased gas costs from the working capital allowance. However, we recognize that Intermountain operated under a larger working capital allowance during the test year upon which this rate proceeding was based than it would pursuant to the Commission's order. In the event that further proceedings are conducted upon the rate-setting question, if Intermountain can show that this reduced allowance for working capital will result in increased operating expenses, e.g., if because the working capital allowance has been reduced, thereby reducing the rate base and return on the rate base, it must engage in additional short term borrowing because its revenues do not exceed expenditures to the extent they did in the test year, then Intermountain must be given an opportunity to present evidence of the adjustments to the data collected during its test year that would have resulted had Intermountain then been using the smaller allowance for working capital. 2. Franchise taxes. Intermountain also objects to another adjustment to the working capital allowance which differed from the Commission's formulation of the allowance in the 1970 rate-making proceeding: reduction of the working capital allowance by one half of the amount of the franchise taxes annually collected by Intermountain from its customers. The franchise tax is a sum Intermountain collects from those customers residing within municipalities which impose a fee upon Intermountain for the privilege of doing business within the municipality. A portion of this tax is collected from the customers in each of Intermountain's twelve monthly billings, but Intermountain remits the franchise tax collected to the municipalities only once annually, on April 1. The Commission staff recommended that the working capital allowance be reduced by an amount equal to one half of the franchise taxes annually collected because it concluded that this amount of money, on the average, is available to Intermountain for the payment of its operating and maintenance expenses, and thus the amount of money which the investors must supply as working capital is correspondingly reduced. The Commission adopted the staff's position and reduced the working capital allowance by one half of the amount of franchise taxes annually collected, or $329,964. (See footnote 3, supra, for the effect of this adjustment upon the requested rate increase.) Intermountain argues that it is improper to deduct one half the franchise taxes received from the working capital allowance when the 45 day allowance method is used to estimate the company's working capital requirements. We disagree. As the Court said in Alabama-Tennessee Natural Gas Co., supra : [T]he need for working capital arises largely from the time lag between payment by the Company of its expenses and receipt by the Company of payments for service in respect of which the expenses were incurred. (Citation omitted). But there are time lags which work in favor of the Company as well as those which work against it. The Company no more pays immediately every liability accrued than do its customers. In determining the need for working capital, the Commission may quite reasonably and properly take into account factors which reduce the need as well as those which increase it. 203 F.2d at 498. Thus, the Commission could properly take into account the cash generated by the franchise tax receipts in determining the company's need for working capital and reduce the working capital allowance by an amount corresponding to the average franchise tax receipts which the company has available to meet its normal operating and maintenance expenses. The company argues, however, that even if its working capital allowance may be reduced by an amount representing the average franchise tax receipts available to the company, there was no evidence introduced in the hearing below that showed that one half of the amount collected was on the average available to the company. Although no evidence was introduced showing the amount of franchise taxes collected in each month of the year, the testimony of Burton L. Moore, Intermountain's manager of budgets and receipts, tended to indicate that the franchise taxes were geared primarily to consumer use and that the bulk of them were collected in the winter months preceding the April 1 payment to the municipalities. If this be the case, Intermountain may introduce evidence in subsequent proceedings held before the Commission showing that less than one half of the franchise taxes annually collected by it are, on the average, available to meet its normal operating and maintenance expenses. Otherwise, the Commission is entitled to use this estimate of the amounts available, much as the Commission is entitled to estimate the utility's average expenses for operation and maintenance for a 45 day period as the working capital requirement of the utility. We will not set aside such estimates. As this Court said earlier, [T]he sum necessary for working capital of a utility is addressed to the sound discretion of the Commission, and in the absence of an abuse of discretion will not be set aside. Idaho Underground Water Users Ass'n v. Idaho Power Co., supra, 89 Idaho at 164, 404 P.2d at 868. Finally, Intermountain makes the same arguments in connection with the franchise tax adjustments as it made in connection with purchased gas costs with respect to lack of notice about the adjustment to the working capital allowance and the lack of a compelling justification for the change from prior Commission policy. The Commission did not need to give notice concerning this adjustment because Intermountain supplied the relevant data needed to make the adjustment without notice, and thus Intermountain was not prejudiced in this regard by lack of notice. Furthermore, we believe that the Commission has adequately explained why it modified its past policy by reducing the working capital allowance by a sum representing average franchise taxes collected and available to Intermountain to meet its normal expenses. The Commission said: We will accept the staff's adjustments [reducing the working capital allowance by one half of the franchise taxes collected] but are of the opinion that a proper method would be to use the average of the monthly tax collections for the determination of the amounts of such deduction. Order No. 11507, June 26, 1974, p. 6. Sec. Tr., Vol. II, p. 386. As we said with respect to purchased gas costs, our function on review is not to analyze each step of the rate-setting process to determine whether the agency was correct in that decision, but to determine the overall impact of the rate order. We cannot say that using the one half estimate is unreasonable and unjust in its consequences, and we will not substitute our judgment upon the matter for that of the Commission. However, the Commission itself has expressed a desire to base its order on more accurate data. If further rate-making proceedings are held, the Commission, following its enunciated policy, must allow Intermountain to introduce evidence upon average monthly franchise tax receipts.