Opinion ID: 2279962
Heading Depth: 1
Heading Rank: 5

Heading: The $542,468 Exclusion

Text: In Re: Central Maine Power Company, 26 PUR 4th 388, 398 (Me., P.U.C. 1978), the Commission defined rate base as follows: The rate base consists of the investment made by various capital owners of Central Maine in utility plant that is used or required to be used in rendering utility service. The suppliers of capital are legally entitled to a reasonable opportunity to earn a fair return on their investment. Thus, the rate base multiplied by the fair rate of return equals the fair [or required] return ... in dollars. (emphasis added) Apparently, when submitting rate revisions, the Company included in its proposed rate base the original cost of the defective muffler less depreciation, but it did not isolate that cost from the general, plant-wide costs of Wyman 4. The Company also included an additional $542,468, representing the expenditure made by the Company for the replacement muffler during the thirteen month 1979 test-year period. The total capitalized cost to the Company of the replacement muffler is $1,832,470. Concluding that the defective muffler was useless and finding insufficient record evidence of its cost, the Commission valued the defective muffler at its replacement cost, $1,832,470, and, accordingly, removed $542,468 from rate base. Both the Company and the PUC apparently concede that, had the original cost of the defective muffler, less depreciation, been isolated as an identifiable figure from the general plant-wide costs of Wyman 4, the Commission could properly have removed that figure from rate base. Clearly, the Commission acted within its discretion in concluding that the Company is not entitled to rate base treatment of both the defective muffler and its replacement. In effect, however, the Commission's adjustment has left in rate base the unknown original cost, less depreciation, of the useless muffler and removed from rate base the test-year portion of the known cost of the used and useful muffler. For at least three reasons, that adjustment was erroneous. First, the as yet undepreciated cost of the defective muffler and the $542,468 that happened to be invested during the test-year in manufacturing and installing a new muffler are logically incommensurable values. Second, there is no concrete evidentiary support for the conclusion that the total cost to the Company of purchasing and retrofitting a working muffler into an existing smoke stack, $1,832,470, is substantially equivalent to the original cost of the defective muffler. Third, in a footnote to its decision, the Commission stated: Since the new muffler is used and useful, the Company is entitled to earn a return on the full value of the new muffler. [4] This statement cannot be reconciled with the Commission's adjustment. In particular situations involving failed equipment it might be appropriate to depart from test-year expenditures in order to include in rate base the full value of replacement equipment, see, e. g., Pennsylvania Public Utility Commission v. Philadelphia Electric Company, 17 P.U.R. 4th 203, 208 (Pa. P.U.C. 1976). Conceivably, this would be such a case. But, not yet, at least, has it been shown that the full value of the new muffler, $1,832,470, did, ultimately, find its way into rate base. We remand for the Commission to receive evidence on, then to remove, the defective muffler's original cost less depreciation. Additionally, at a minimum, the $542,468 erroneously taken out of rate base should be restored. If the Commission has in fact already determined that the Company is entitled to earn a return on $1,832,470, the rates should be adjusted accordingly.