Opinion ID: 2332011
Heading Depth: 2
Heading Rank: 4

Heading: Interest Income and Interest Expense

Text: During 1974 Casco received $6,061 in interest on investments and other debts which it was owed by others (interest income). During the same year Casco paid $6,960 in interest on debts it owed others (interest expense). Casco proposed to offset the interest expense against the interest income so as to produce a net interest income of negative $899. However, the Commission refused to offset interest income and interest expense for ratemaking purposes. It found that the ratepayers were entitled to the interest income which Casco received on the funds they had supplied. Accordingly, it allocated 75% of the interest income to Casco's operating revenues, thereby reducing its revenue requirements. Casco was allowed to retain the remaining 25% as a reward and incentive for good investments. On the other hand, the Commission excluded interest expense from Casco's operating expense for ratemaking purposes. Casco argues that the Commission's refusal to offset interest expense against interest income for ratemaking purposes is confiscatory and inequitable. We sustain the Commission on this issue. Before proceeding to the Commission's treatment of interest income and interest expense, a brief discussion of the ratemaking technique used in this case is in order. Unlike cases in which the return to the utility is determined by applying a percentage rate of return to its ratebase, [3] the return to Casco and other transit utilities is determined by means of an  operating ratio . An operating ratio is a ratio of operating expenses to operating revenues. If expenses equal revenues, the ratio is 100. As expenses exceed revenues the number increases to over 100, and in cases in which revenues exceed expenses, the number is less than 100. Maine Motor Rate Bureau, Me., 357 A.2d 518, 521, n. 2 (1976). [4] The Commission has established a 93% operating ratio for Casco, which Casco does not challenge in this case. Accordingly, 93% of Casco's operating revenues cover its operating expenses, with the remaining 7% going to its investors. The Commission's inclusion of interest income in Casco's operating revenues decreases its net return. Similarly, its refusal to include interest expense in operating income produces a lower return to Casco. We will consider the Commission's treatment of each of these items separately. (1) Casco's interest income is derived from various sources including bank certificates of deposit, a U.S. Treasury Note, interest paid by the I.R.S. on tax refunds, and interest on debts owed by other businesses. The Commission's Decree treats the interest income as follows: We think it is entirely reasonable that the ratepayers should share in the benefit from the investment of money supplied by them. One of the reasons that CBL is able to earn the interest income is that CBL receives the bulk of its revenues during summer months and spreads its expenses over the entire year. Since it is the ratepayers who supply the cash for these interest-bearing investments, they should share the benefits. On the other hand, part of the money supplied by the ratepayers flows to the owners as profits. Also, it is the owner's business sense and profit incentive which is partially responsible for this income. Therefore, we find it reasonable for the purposes of this case that interest income should be divided 25 per cent to the owners and 75 per cent to the ratepayers. In accordance with the above discussion, we shall add $4,148 to the company's income projections which takes into account that $530.66 of the $6,061.49 which is income from non-recurring loans. Re Casco Bay Lines, supra at 178. The Commission properly decided that, as a matter of ratemaking policy, the ratemakers are entitled to share in the interest collected by Casco on funds provided through their fares and charges. We also find no error in the Commission's refusal to include $156.70 interest paid by the I.R.S. on a tax refund as income from a nonrecurring loan, because Casco waived that issue in its reply brief before the Commission. We sustain the Commission's inclusion of $4,148 of interest income in Casco's operating revenues for ratemaking purposes. (2) The Commission excluded interest expense from operating expenses for the following reason: In Re Casco Bay Lines (1962) F.C. No. 1669, this commission found that the operating ratio of 93 per cent will produce sufficient revenue to cover operating expenses and make ample provision for interest payments, federal income taxes and provide reasonable earnings to the petitioner. [Emphasis ours.] Thus, it is apparent that the 93 per cent operating ratio makes allowance for the interest expense of CBL and that there is no need for interest expense to be paid from interest income. Re Casco Bay Lines, supra at 178. Essentially the question is whether interest expense should be included in Casco's operating ratio (ratio of operating expenses to operating revenue) as an operating expense or as an offset to the interest income portion of operating revenues. The Commission found that interest expense was not to be considered as a part of Casco's operating ratio. Rather, Casco's interest expense must be satisfied from the 7% of operating revenues remaining after operating expenses are met. In this we find no error. It appears to be a basic principle of ratemaking that interest expense is neither a proper charge to operating expense nor a proper deduction from revenues, but must be satisfied from the return to investors. City of Covington v. Public Service Commission, 313 S.W.2d 391, 393-94 (Ky.1958); Oklahoma Natural Gas Co. v. Corporation Commission of Oklahoma, 90 Okl. 84, 216 P. 917, 922 (1923); Re Crystal Water Co., 31 P.U.R.3d 214, 217-18 (Conn.Pub.Util. Comm'n 1959); Ex Parte Breaux Bridge Telephone Co., 26 P.U.R.3d 184, 185-86 (La. Pub.Serv. Comm'n 1958); Re West Jersey Water Service, Inc., 78 P.U.R.3d 61, 63 (N.J.Bd. of Pub.Util. Comm'rs 1969); Re Northern Gas Co., 70 P.U.R.3d 260, 268-69 (Wyo.Pub.Serv. Comm'n 1967); 64 Am. Jur.2d Public Utilities § 185 (1972); and cases located at P.U.R. Digest Expenses §§ 54, 57. The Maine Public Utilities Commission has applied this principle in the past. Re New England Telephone & Telegraph Co., 23 P.U.R.3d 510, 519 (Me.Pub. Util. Comm'n 1958); Re Milo Water Co., 1930 B P.U.R. 269, 275 (Me.Pub.Util. Comm'n 1930); Re Lincoln Water Co., 1919 B P.U.R. 752, 757 (Me.Pub.Util. Comm'n 1919). Interest was treated as a factor in determining rate of return in New England Telephone & Telegraph Co. v. Public Utilities Commission, supra , and Mechanic Falls Water Co. v. Public Utilities Commission, supra . The same rule applies when return is determined by means of an operating ratio. The operating ratio method permits a carrier to earn an amount representing annual operating costs, plus an additional amount from which to pay interest to the creditors and dividends to the owners. D. C. Transit System, Inc. v. Washington Metropolitan Area Transit Commission, 121 U.S.App.D.C. 375, 382, 350 F.2d 753, 760 (1965) cert. denied, 389 U.S. 847, 88 S.Ct. 52, 19 L.Ed.2d 115 (1967), 393 U.S. 1081, 89 S.Ct. 860, 21 L.Ed.2d 773 (1969) (emphasis supplied). As the Commission points out, allowing Casco to recover interest expense as a cost of operation would constitute double payment by the ratepayers who already provide for its interest expense through Casco's operating ratio. We find no error in the Commission's exclusion of interest expense from the operating expenses or operating revenues portion of Casco's operating ratio and sustain its actions with respect thereto.