Opinion ID: 2284798
Heading Depth: 1
Heading Rank: 8

Heading: treatment of map computerization expenses

Text: During the test year, WGL entered into a contract for the computerization of its distribution maps and records system. Under this program, aerial photographs will be used to produce digitized maps of the Company's service area, showing the location of mains, services, and other aspects of its distribution plant. The contract is to be completed within four years at a total price of $2,075,000. WGL spent $132,000 for the first phases of this project during the final three months of the test year. The Company, which books the conversion program as an expense item rather than a capital asset, proposed that the project's total cost be amortized evenly over the four-year contract term (at $519,000 annually), beginning with the test year. Instead, the Commission ruled that only the $132,000 actually incurred during the test year should be included in the Company's cost of service; remaining amounts expended on the contract after the test year were to be placed in a deferred expense account, and to be amortized (over an as-yet-undetermined period) once the project is completed. Order 6051, at 66-68. The Commission explained: In adopting this hybrid treatment, the Commission first rejects WGL's proposal for an immediate four-year amortization. WGL's computerized data base will benefit customers well beyond the term of the four-year contract. Accordingly, recovery of the full contract price in four years is unreasonable. Of course, present ratepayers have received some improvement in service from the partial performance to date. Nonetheless, WGL has made no attempt to match those benefits to its $519,000 expense proposal. Nor has WGL taken account of any offsets, such as improved labor efficiency and reduced costs attributable to the program. In sum, to adopt WGL's proposal would distort the test period match-up of costs and cost reductions. On the other hand, the Commission cannot totally ignore the program's costs, as People's Counsel's witness originally recommended. The computerization program is currently being used in the daily operations of the Company with resulting benefits. All of the District of Columbia has been photographed, and many of the aerial photographs have been digitized. Although additional benefits will result as the work progresses, parts of the program are in use now. No reason exists, therefore, for deferring the entire expense until the complete program is in operation. Indeed, even People's Counsel appears to accept that test-year expenses can properly include the $132,000 paid during that period. Under its decision, the Commission anticipates that a substantial portion of the total contract price will remain in the deferred expense account upon completion. It is clear to the Commission that the fully computerized data base will be useful to WGL in providing gas service after contract completion. The deferred expense accounting we have chosen recognizes that fact. Yet we are constrained by the state of the record not to establish how or over what period of time the deferred expenses will be recovered after contract completion. In a future rate filing, we anticipate that WGL will address how the computerized data base affects existing operations. It should also present evidence showing how the deferred expenditures should be treated for ratemaking purposes. [ Id. at 67-68.] The Company contends that the Commission's treatment of these expenses is unlawfully confiscatory. However, WGL's unhappiness seems to stem not so much from the allowance of only $132,000 during the test year, but rather from the Commission's suggestion that future expenditures on this project should be deferred for rate purposes until the conversion is completed. In its brief, WGL argues: [O]ver the remaining life of the contract, WGL is precluded from recovering anything at all for the heavy investments made. The Company is not even permitted a return on the expended amounts placed in the deferred expense account. For example, in WGL's current application for a permanent rate increase [Formal Case No. 722], pursuant to the Commission's mandate, map computerization expenses expended during the applicable test period are wholly excluded.       The Commission's treatment of map computerization expense is novel. A superficial analogy might be drawn to the treatment of expenditures for construction work in progress. A minority of the regulatory commissions, including the Commission for the District of Columbia, do not permit construction expenditures to be included in the rate base until after the plant is completed and in service (see Potomac Electric Power Co., Application for Rate Increase Formal Case No. 685, Order No. 7000, July 18, 1979). In that instance, however, the assumed return on the funds expended in construction is accumulated. Upon placing of the plant in service, the utility begins to recover the accumulated return during construction, plus the return on the plant added to the rate base; also, depreciation on the plant is an allowable expense item in connection with this capital asset. The Commission made no provision for accumulating returns on amounts placed in the deferred expense account for map computerization for eventual recovery after the project is completed. But this is only the start of the injustice. In the instance of a capital asset, such as a constructed plant, to spread out recovery of investment in the form of depreciation allowances over the entire estimated period during which ratepayers will benefit from such asset is not unreasonable, inasmuch as throughout that period the Company is permitted to earn a reasonable return on that capital expenditure. On the other hand, to tie the recovery period of an expense item, such as for map computerization, to the period during which ratepayers may reap the full benefit of that expenditure is grossly unreasonable. [Brief for WGL at 26-27 (emphasis in original).] The Commission and People's Counsel urge, on the other hand, that the PSC's action is consistent with the general ratemaking precept that the recovery of costs should be synchronized with the realization of affiliated benefits. Furthermore, they argue, the company's complaint about how post-test year expenses will be recovered is premature; this issue will be ripe for review only when, in a subsequent rate proceeding, the Commission issues a more definitive ruling on what treatment should be accorded these expenditures. We agree with the Commission and People's Counsel that only the $132,000 test year allowance is ripe for review. Because the opinion leaves open the question of precisely what rate treatment should be accorded post-test-year map computerization expenditures, we address only the reasonableness of the amount actually allowed in the case before us. As the Company acknowledges, it is not uncommon for regulatory commissions to defer the inclusion of construction costs in a utility's rate base until after the plant is completed and in service. See, e.g., Providence Gas Co. v. Burman, supra at 692-93; South Dakota Public Utilities Commission v. Otter Tail Power Co., 291 N.W.2d 291, 295 (S.D.1980); Re Southwestern Electric Power Co., 26 P.U.R.4th 381, 382-83 (F.E.R. C.1978); In re Southwestern Bell Telephone Co., 36 P.U.R.4th 283, 294 (Mo.P.S.C.1980); Pennsylvania Public Utilities Commission v. Pennsylvania Electric Co., 1 P.U.R.4th 272, 278 (Pa.P.U.C.1973). Analogously, when particular test year operating expenditures are deemed to be extraordinary ( i.e., infrequently recurring), commissions often amortize the recovery of these expenses over an appropriate number of years. See, e.g., In re Central Illinois Public Service Co., 34 P.U.R.4th 267, 280 (Ill. Commerce Comm'n 1979) (cost of study to improve efficiency and performance amortized over five years); In re Monmouth Consolidated Water Co., 24 P.U.R.4th 464, 470 (N.J.Bd. of Pub.Util.Comm'rs 1978) (expenses relating to extraordinarily cold winter amortized over ten years); In re Columbus and Southern Ohio Electric Co., supra at 285-86 (expenses of installing sulfur dioxide scrubber amortized over twenty years). These types of rate treatment are corollaries of the more basic principle of economics and regulation [that] costs which benefit future ratepayers should be capitalized and expensed in the future. South Central Bell Telephone Co. v. Louisiana Public Service Commission, 352 So.2d 964, 980 (La.1977), cert. denied, 437 U.S. 911, 98 S.Ct. 3103, 57 L.Ed.2d 1142 (1978). Along these lines, we cannot conclude that the Commission erred in rejecting WGL's four-year amortization schedule for map computerization costs. So far as the record reveals, the map conversion project is essentially a non-recurring item which should benefit future ratepayers in terms of cost efficiencies well beyond the term of the four-year contract. Order 6051, at 67. In response to testimony by WGL's witness, Smallwood, indicating that a number of interim benefits were being experienced as a result of work already completed, the Commission allowed WGL to recover the $132,000 already expended on the program. In the absence of a more detailed presentation by WGL matching future expenditures with resultant interim benefits, we do not think that the allowance of only $132,000 was unreasonable. Accordingly, we affirm on this issue.