Opinion ID: 2375412
Heading Depth: 1
Heading Rank: 1

Heading: Depreciation Deficiency

Text: In 1975, the company commissioned Ebasco Services, Incorporated, to perform a depreciation study. The study included an examination of the company's present depreciation accounting practice and the adequacy of its depreciation reserves. Additionally, the study was to contain proposals for the treatment of any discrepancy between the newly calculated reserve and the actual reserve carried on the company's books. The company submitted the Ebasco study as an exhibit in the proceedings before the commission. [3] The Ebasco employee who supervised the study, Julius Breitling, testified for the company. According to Breitling, the study showed that the company had been applying an insufficient depreciation rate to its plant in service. Breitling testified that the company's depreciation rate should be raised from 1.9 percent to 2.6 percent to alleviate this problem and that the new rate should be applied over the remaining life of the property currently in service. [4] Mr. Breitling further observed that even adopting the higher depreciation rate would not serve to allow the company to recover the full investment made in its property. According to Breitling, the company's low depreciation rate had resulted in the inadequacy of the company's reserve for depreciation. Specifically, Breitling found that the company's book reserve of $6,103,807 was $1,013,757 less than the newly computed reserve requirement of $7,117,654. In order for investors to recover this deficiency, Breitling proposed an annual amortization expense of $31,324. While accepting the company's position that the higher depreciation rate itself was justified, the commission reduced the company's rate base by the approximately $1 million depreciation deficiency. The commission reasoned that because this property was no longer being used to provide service, it should not be a component of the rate base upon which customers must provide revenues to support a rate of return. The commission also rejected the company's request to amortize the deficiency. The commission based its ruling upon testimony by the division's witness, Mr. Galligan, that the company had received excessive earnings in the past because the rate base has been artificially inflated with assets that should have been depreciated. According to the commission, the company had failed to produce evidence to show that these revenues not only provided a fair rate of return but also the amount that would have been charged to operating expense had the assets been properly depreciated. The company contends that the commission's decision represents an unconstitutional confiscation of that property making up the calculated depreciation reserve deficiency. Specifically, the company asserts that the removal of this property from the rate base prevents investors from earning a fair rate of return from their investment. Additionally, the company maintains that the failure to amortize the deficiency denies investors their right to recover their investment. None of the parties to these proceedings questions the company's right to employ amortization to allow recovery of capital investments during their estimated service lives. Clearly, the cost of furnishing public utility services includes the value of the physical plant and equipment consumed in rendering that service. This computation is the true measure of depreciation, and customers receiving the service that caused this wearing-out should pay for the cost of the property used in their behalf. See Bonbright, Principles of Public Utility Regulation, 198 (1969); Kolb & Lipstreu, New Concepts and Current Issues in Public Utility Regulation, 10-11 (1963). As the proponent of the proposed rate increase, the company has the statutory burden of proof with respect to the component elements of its request, including depreciation expense. Section 39-3-12. See United States v. Public Utilities Commission, R.I., 393 A.2d 1092, 1094 (1978). With respect to the depreciation charges, however, the company presented no evidence whether earnings during the life of the property involved sufficiently exceeded the fair rate of return to compensate investom for the inadequate depreciation charges. The commission did, on the other hand, make the reasonable inference from the division's testimony that the inflated rate base provided investors with remuneration for the depreciation undercharges from actual earnings over and above the fair rate of return. In support of its contention that investors have not been adequately compensated, the company points to the fact that during the past several years, the company has failed to earn the rate of return established by the commission. We cannot say, however, that the fact that the returns over a 5-year period were below administratively fixed levels conclusively demonstrates that there were no periods during the life of the property in which excesses of earnings over fair returns either wholly or partially provided reimbursement for the depreciation deficiency. While we appreciate the company's difficulty in tracing its historical depreciation practices, the fact remains that the commission's acceptance of the company's request would be based upon speculation. We find no evidence in the record upon which the propriety of its proposal could be sustained. The commission's decision to disallow any amortization of the deficiency was, therefore, reasonable. [5] Accord, Williams v. Washington Metropolitan Area Transit Commission, 134 U.S.App.D.C. 342, 415 F.2d 922, 955 (D.C. Cir. 1968); Washington Gas Light Co. v. Baker, 88 U.S.App.D.C. 115, 125, 188 F.2d 11, 21, cert. denied, 340 U.S. 952, 71 S.Ct. 571, 95 L.Ed. 686 (1951); United States Steel Corp. v. Pennsylvania Public Utility Commission, 37 Pa.Cmwlth. 195, 217-219, 390 A.2d 849, 860-61 (1978); Pennsylvania Power & Light Co. v. Pennsylvania Public Utility Comm'n, 10 Pa.Cmwlth. 328, 341-43, 311 A.2d 151, 158-59 (1973). Our decision regarding the amortization issue mandates that the depreciation deficiency be removed from the rate base. Depreciation reflects the reduction in service value of an asset committed to rendering service. The removal of depreciated property from rate-base valuation does not result in confiscation because the utility has no right to expect consumers to pay for property no longer used for rendering services. Wilson, Herring & Eutsler, Public Utility Regulation, 201-02 (1935). The deduction makes the rate base portray the company's net investment in used and useful property upon which investors should expect a rate of return. See Narragansett Electric Co. v. Kennelly, 88 R.I. 56, 78, 143 A.2d 709, 722 (1958); Bonbright, supra at 198. Having determined that the cost of the depreciation deficiency had been recovered, the commission properly removed it from the rate base.