Opinion ID: 1720472
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Heading: Working Capital and Tax Accruals

Text: The company contends that the cities erred in the treatment of the company's tax accruals and working capital needs. Working capital has been defined as the sum which a utility needs to supply from its own funds in order to meet its current obligations as they arise. The need for working capital arises from the time lag between the date a utility pays its expenses and the date it recovers payments for services rendered to its customers. Alabama-Tennessee Natural Gas Co. v. Federal Power Com'n, 3 Cir., 203 F.2d 494; City of Pittsburgh v. Pennsylvania Public Utility Com'n, 370 Pa. 305, 88 A.2d 59; Rhode Island Consumers' Council v. Smith, 111 R.I. 271, 302 A.2d 757. As the Iowa Supreme Court stated, For utility rate purposes `working capital' is commonly defined as the amount of capital investors are required to put into a business, over and above investment in plant and intangibles, so as to cover any gap between cash expenditures in production and delivery of the services and collections of revenues from service sales. Davenport Water Co. v. Iowa State Commerce Com'n, Iowa, 190 N.W.2d 583, 607. The cities made an allowance of $1,693,261 for working capital requirements, consisting of $621,357 for cash working capital, $870,914 for materials and supplies, and $200,990 for fuel stock allowances. The cities determined that accruals for taxes collected from ratepayers were available in the amount of $1,911,707 and deducted that amount from the rate base. The company contends that it was error for the cities to do so because the resulting negative cash working capital allowance understated the rate base and reduced the revenue requirements of the company. It has been held proper for a ratemaking body to offset tax accruals furnished by ratepayers against the working capital requirements of a utility on the theory that investors are not entitled to earn a return on funds that have been supplied by the ratepayers rather than by the investors. In upholding such an offset, the Iowa Supreme Court held in the Davenport Water Co. case, supra: Had Commission held other than it did, Utility's customers would be unreasonably required to pay a return on funds already supplied by them in the form of prepaid taxes. 190 N.W.2d at 607. See also Pacific Telephone & Tel. Co. v. Public Utilities Com'n, 62 Cal.2d 634, 44 Cal.Rptr. 1, 401 P.2d 353; City of Cincinnati v. Public Utilities Com'n, 161 Ohio St. 395, 119 N.E.2d 619; Northwestern Bell Telephone Co. v. State, 299 Minn. 1, 216 N.W.2d 841. In determining the amount of tax accruals available to offset working capital requirements, the cities took the average of the thirteen monthly closing balances over the period from June 1972 through June 1973 for each appropriate category of accrued ad valorem, unemployment and social security, city and state use, and federal income taxes. These amounts were allocated to the electric department using factors appropriate for each of the various categories, and the allocated amounts were then added together. The same method was applied to obtain the average amount of tax collections payable, and the sum of the two, or $1,911,707, was deducted from the rate base. The cities determined the company's working capital by adding an amount for cash working capital to the company's figures for materials and supplies and fuel stock. In estimating the company's cash working capital needs, the cities used a standard rule of thumb that assumes a forty-five day lag between the date of providing service and the date of receipt of payment therefore. This so-called 1/8 rule has been frequently applied as a reasonable method of estimating cash working capital needs. See, e. g., Intermountain Gas Co. v. Idaho Public Utilities Com'n, 97 Idaho 113, 540 P.2d 775; Boise Water Corp. v. Idaho Public Utilities Com'n, 97 Idaho 832, 555 P.2d 163; Public Service Co. of New Mexico, 7 PUR 4th 166 (N.M.1974); Florida Power & Light Co., 9 PUR 4th 146 (Fla. 1975). The determination of a cash working capital allowance is a question of fact and rests in the sound discretion of the regulatory agency, Providence Gas Co. v. Burman, R.I., 376 A.2d 687, and we conclude that the cities did not err in applying the 1/8 rule in the instant case. The company contends that the cities erred in failing to make an allowance for the compensating balances that the company is required to maintain in certain banks with which it maintains lines of credit. The cities have responded by pointing to the fact that the company made no claim for the inclusion of an allowance for this item in its case in chief and that the only support for the claim was by way of a brief reference during rebuttal testimony to the effect that the average cash balance in the three banks in question during the test year period totaled $898,121. The cities contend that this casual reference, unsupported by any testimony by company officials or bank officers concerning the amount of compensating balances required and the commercial necessity for such balances, was an insufficient basis upon which to justify the inclusion of the amount claimed within the rate base. There is authority for the cities' treatment of the company's claim. For example, in Niagara Mohawk Power Corp., 87 PUR 3d 189 (N.Y.1970), the New York Public Service Commission said: If shown clear and convincing proof of the need to maintain these balances and the amount required in these accounts, this commission will give careful consideration to the allowance . . .. We would want, for example, testimony of bank officers that such balances are required to be maintained . . .. Evidence also should be submitted concerning the use which is made of the funds borrowed which result in these balances. 87 PUR 3d at 193. In Kansas Power & Light Co., 8 PUR 4th 337 (Kan.1975), the Kansas State Corporation Commission refused to add a compensating bank balance to the rate base in the absence of evidence that the balance was not subject to withdrawal. Although the company has cited authority for the proposition that compensating bank balances are properly includable as part of working capital, see, e. g., Public Service Co. of Colorado, 13 PUR 4th 40 (Colo.1975), and although we do not necessarily agree with the cities that proof of the necessity for the compensating balances need rise to the level of being clear and convincing, we cannot say that the cities' refusal to accept the attenuated rebuttal testimony on this issue as satisfying the company's burden of proof was arbitrary, capricious or unreasonable. See New England Telephone & Tel. Co. v. Dept. of Public Utilities, 360 Mass. 443, 275 N.E.2d 493.