Opinion ID: 1496861
Heading Depth: 1
Heading Rank: 4

Heading: the test year

Text: Ratemaking for a particular utility is, in essence, the making of a forecast of its future financial condition upon the basis of its known performance during a span of time in the immediate past, viz., a test period. Telephone Users Association v. Public Service Commission, supra at 297; Michigan Wisconsin Pipe Line Co. v. Federal Power Commission, 263 F.2d 553, 555-56 (6th Cir. 1959). Pepco argues on appeal that since the PSC did not use an amended test year period ending June 30, 1975, in determining its new rates, Pepco will be prevented from realizing an equitable rate of return on its investment. In that regard we have admonished the Commission in Telephone Users Association v. Public Service Commission, supra , wherein the Commission failed to take into consideration the most recent data submitted by the utility, that the most recent available material must be considered and weighed by the Commission in reaching decisions on ratemaking. This is consistent with effective ratemaking policy. If recent operating figures are completely ignored, the new rate will be based on old and perhaps no longer valid data. The problem becomes more acute when there is a long regulatory lag, as in the instant case where considerable time elapsed between the original request and the final decision. Although this is an inevitable part of the regulatory process where the rights of the company to rate relief must be balanced against the interests of the consumer in a hearing involving a myriad of parties, it is nonetheless important, in fairness to all, that the latest available operating data not be ignored. However, a request to use more recent data submitted in a last minute filing does not present the same situation and is not necessarily a fair or reasonable request. It is to be resolved in the reasonable exercise of the Commission's discretion. [4] We will not reverse and remand the decision here for further hearings and consideration of the more recent data filed under these circumstances. First of all, as will be demonstrated by the record, Pepco did not make clear for any reasonable person to understand at the time it filed the new data that it was taking a position that the PSC must adopt a revised test year. Secondly, the Commission in using a 1974 test year did give weight and consideration to the 1975 data filed by Pepco. We would observe that filing the latest available operating data does not necessarily mandate a change in the test year by the Commission. Rather it should select a test year that appears likely to be representative of the future. See generally, Interstate Commerce Commission v. City of Jersey City, 322 U.S. 503, 515, 64 S.Ct. 1129, 88 L.Ed. 1420 (1944). In the application for a rate increase filed by the Company, it asked that it be based on a 1974 calendar test year and it supplied figures for the first eight months of 1974 augmented with detailed estimates for the remaining four months. As figures for the Company's actual operations for those four months became available they were supplied by the Company. After cross-examination of Company witnesses was completed and as the respondent and intervenors were completing their testimony in opposition, the Company, on Friday, July 18, 1975, filed proposed rebuttal testimony of its Sr. Vice-Pres.-Finance, with two detailed exhibits which included financial data reflecting for the first time operating results from January 1 through June 30, 1975. (Company Exhibits G and 14.) The witness appeared and testified orally on those figures in rebuttal on Wednesday, July 23. During cross-examination of that witness by counsel for the Commission, the following developed: Q. Mr. Davis, are you proposing a new test year for the Commission to use in this case? A. I have indicated in the testimony that we think it is important to place this information on a test year revenue requirement basis before the Commission. Now we are not  not suggesting a substitution of the June 30 year for the December 31 year, but I do ask, or do suggest in my rebuttal testimony, and I would ask, that the Commission take note of this information and apply it in reaching the conclusions in this case. . .. [Emphasis supplied.] The Company relies principally on the testimony of Pepco's President, J. Reid Thompson, who in testifying in rebuttal that same day said: I would urge the Commission to base its results on the June 30 figures. However, when Mr. Thompson was cross-examined by People's Counsel, he made an important modification to that position in the following exchange: Q. . . . You are not suggesting a new period, are you? You still want your end of period rate base considered in this case December, 1974. You are not requesting an amendment of that at this time? A. I don't want to get bogged down in semantics or play a game. Q. Well, let's not get bogged down. You are a lawyer. Let's understand A. What I am saying to this Commission is trying to arrive at the truth here as to what is a fair and reasonable rate of return. I am suggesting to this Commission that if it can be done in the light of their understanding and their responsibility without delaying this case, without any further opening the record, that they should adopt a June 30 test year. I am suggesting precisely that, but I am suggesting that, however, if it requires a reopening of the record to lay in a case, that they don't do that. Rather, grant an additional attrition allowance to take into account June 30 figures. [Emphasis supplied.] [5] His final position then seems to be clear that the Company was not insisting on a change in the test year, but was urging the Commission in using a 1974 test year to consider that data in light of the more recent June 30 figures. Since the case was filed and tried by all parties on a 1974 test year, it is apparent from the foregoing that President Thompson was necessarily leaving to the discretion of the Commission the decision as to how much weight to give the new data. Mr. Thompson concluded his testimony by saying: I would urge upon this Commission the urgent necessity for prompt action on the case after it is completed, with the same alacrity with which you have conducted the hearings, Madam Chairperson. When the hearing was terminated there was no question on the record that 1974 was still the test year. Although the Company believed the Commission should give thorough consideration to the updated figures, any further delay to explore the new data was not acceptable. Accordingly, respondent and intervenors, not having had time to obtain in depth familiarity with the new data, did not cross-examine Mr. Davis in detail on the new information nor did they recall their witnesses to testify regarding their analysis of the updated 1975 figures as would have been their right had the Commission announced that it was adopting a new test year. The testimony of all witnesses of the respondent and of all witnesses for the intervenors had dealt only with the 1974 calendar year data. That is what the first 2,600 pages out of a total of 2,900 pages of testimony were all about. When wholly new data are furnished at the end of a case, procedural due process as well as basic considerations of fairness require an opportunity for all parties to examine the new data, to cross-examine the utility's witnesses regarding it and to offer such evidence in surrebuttal as necessary. In view of the testimony of the Company's own officers, it is surprising it would claim subsequently on petition to the Commission for reconsideration and on appeal here that the use of June 30, 1975 as a test year was an issue in the case. Although the Company is expected to base its application on a specified test year, when a dispute arises later as did here, it is up to the Commission in the reasonable exercise of its discretion to determine to what extent the new data can and should be used. In this case the Commission and intervenors had good reason to conclude from the express words of Company witnesses and the apparent acquiescence of Company counsel in the position they articulated, that the Company was not insisting that a new test year be established. Counsel asserted no new position and made no motions for the adoption of a new test year. Later in oral argument to the Commission Pepco did not raise any question about a June 30, 1975 test year. Instead its lawyers appeared to assume that a 1974 test year was to be used. Company counsel, Carl D. Hobelman, said, for example: Now what solutions to the attrition problem exist? The one that's traditionally been used by this Commission and most others is year-end rate base, and we think that if this Commission is going to stick with the 1974 test period that that's a minimum. Edward A. Caine, the other Pepco counsel who argued, flatly stated, while discussing the possible effect of Company land transactions, [t]he test period in this case is 1974. The case having been filed and tried on a 1974 test year up to almost the last day, the Commission had ample basis to support the exercise of its discretion to use a 1974 test year, utilizing the 1975 updated figures as it deemed appropriate. The Supreme Court of Arkansas has had occasion to address a strikingly similar situation. In Arkansas Power & Light Co. v. Arkansas Public Service Commission, 226 Ark. 225, 233-234, 289 S.W.2d 668, 673 (1956), where the Commission refused to consider information submitted as to post-test year data, the court held: As to the testing period, it clearly appears to us from the record that the appellant, itself, in its rate application chose the testing period, and the Commission accepted appellant's choice. Appellant's application was tried throughout on the theory that the test period should be the 12 months ending March 31, 1954. In other words, March 31 was to be the cut-off period of this pattern year. We find this reasoning to be persuasive and hold there was no error in the Commission's decision not to make a last minute change in the test year. See also New England Power Co. v. Federal Power Commission, No. 75-1379 (unpublished) (1st Cir., Nov. 13, 1975). We would also observe, however, that the Company's request that we reverse the Commission's decision on this issue and remand for a revision of rates upward based on 1975 data is complicated somewhat by the fact that after the Commission released its order in the instant case, Pepco promptly filed a new application with the PSC on December 29, 1975, seeking a further rate increase based on a 1975 test year. That application resulted in Order No. 5849 of December 16, 1976, granting Pepco an increase in revenues of $29.4 million based on the 1975 data. That order has superseded the order under review here (Order No. 5739) and the Company is presently operating under the December 1976 order. [6] The increase provided therein was awarded on the basis of the Company's operating experience for the calendar year 1975 and its financial condition as reflected by its books as of December 31, 1975. A remand now for the granting of a substantial increase to the Company's net earnings based on the first six months of 1975, as ordered by the division, [7] would cause a material change in the Company's balance sheet as of December 31, 1975. That is to say that the financial data would no longer be valid that were used to support the 1976 rate increase. The figure for 1975 net earnings might have been as much as $20 million less than the corrected figure. Should such a windfall go to the shareholders or be rebated to the 1976 ratepayers who paid an increased rate that turned out to provide the Company with greater revenues than were intended by the 1976 order? Surely the PSC would not have granted the full $29 million increase in December 1976 had it known this court was later to award the Company a substantial increase in 1975 earnings possibly up to $20 million. A reversal and remand of the December 1975 order to the PSC at this juncture would confront the Commission and the parties with the problem of how to increase that rate in light of data for the first half of 1975 when the Commission has already put into effect a new rate based on figures for the full 1975 test year. Such a reconsideration on remand of a revised test period that overlaps a subsequent rate order cannot be compared to the Commission using the last part of the previous test period in making a new rate that will operate prospectively. For example, the PSC might want to consider a rate increase after only six months had passed since the last order but desire to base its determination on the full previous year. In that case the PSC of course would take into consideration the previous treatment of the overlapping period and no change would have occurred in those figures. The PSC would have the full picture before it in the subsequent proceeding. Here, however, the latter order which set rates in 1976 has already been finalized and there is no opportunity to take into consideration the revised financial data for 1975. Using overlapping periods for prospective ratemaking poses no problem. But in this case the division would have the PSC enlarge an old test period thereby changing the financial picture for the Company affecting a test period upon which an intervening rate increase has long since been finalized. In respect to the effect on a remand by the intervening filing of a new application for another rate increase, the circuit has said: These matters having been disposed of by this opinion insofar as it is possible now to do so, very little will be left which could be remanded to the Commission, especially as any possible remaining issues are also restricted by a new application of the Company to the Commission for a rate increase, filed since argument of these appeals, and of which we take judicial notice. Remand to the Commission, in the circumstances of this case, could not be to enable a rate order to be superimposed upon the old application, filed July 14, 1949. [ Washington Gas Light Co. v. Baker, 90 U.S.App.D.C. 98, 104, 195 F.2d 29, 35 (1951) (emphasis added).] In Baker the company had filed an overlapping application whereas here the PSC has already issued an order on a subsequent application. We are not saying that the 1976 rate order based on a calendar-1975 test year necessarily precludes equitable relief with respect to the previous rate order based on a somewhat earlier, though overlapping, test year ( i. e., one extending several months into 1975). We are saying, rather, that the second rate order inevitably updated, and thus to some extent corrected, the Company's rate structure, thereby reducing any claim to equitable relief. The Company's position on appeal does not take account of this 1976 adjustment; however, in view of our disposition affirming the Commission's order, we need not further consider how the second rate order might bear on the one at issue. The question, however, of mootness is not so clear. Pepco seeks an opportunity to be made whole for the revenues it claims it lost during the period this order was effective, from December 13, 1975, to the effective date of the order of December 16, 1976, by reason of the asserted arbitrary decision of the Commission. Pepco, as well as the majority opinion of the division, suggested that this could be accomplished, if need be, by imposing a surcharge on present customers. Fortunately, as already indicated, we need not reach the complicated problem of equitable relief in light of our disposition of the case. In any event, the Company's sole remedy to seek relief was by appealing the questioned order, which issue we now have before us. Since we view that part of the case as being a contested issue, we deny the motion of the PSC to dismiss this proceeding as moot.