Opinion ID: 1541219
Heading Depth: 2
Heading Rank: 2

Heading: Details of the Uniform System of Accounts: Implications for Ratemaking

Text: A regulated company's balance sheet segregates the utility plant assets (including land), which are used and useful in serving the public, from the company's other assetscalled nonutility property which are carried on the books, most commonly, as investments. Suelflow, supra at 25-31. [9] Similarly, the company's income statement carefully separates utility operating income and related expenses from its other income arising out of activities beyond the Commission's jurisdiction. Id. at 20-25. Gains and losses on utility operations generally are allocated above the line to the ratepayers, whereas nonutility gains and losses are allocated below the line to the investors. Id. at 23-24. In a sense, therefore, each public utility is at least two companies: one serving and accountable to the public (through the good offices of the Commission) and the other accountable solely to its investors. These allocations either to ratepayers or to investors are implemented on the company's books through use of accounts established under the Uniform System to reflect transactions with specified consequences above or below the line. Fundamentally, therefore, a utility's accounting system is designed to channel entries into accounting categories intended to have a prescribed impact on periodic ratemaking. Id. at 24. When the Uniform System of Accounts is carefully examined, three characteristics having a bearing on this case became apparent. First, when property owned by a utility company is sold, the System does not generally favor either the shareholders or the ratepayers; the System allocates gains (or losses) to one group or the other, depending on specified circumstances. Second, there are a number of significant exceptions to the allocation principles themselves, making generalizations even more difficult. Third, the System calls for the exercise of substantial discretion by the regulatory commission in determining whether a particular transaction is better characterized one way or another under the System, often with significant consequences above or below the line. Given respondents' substantial reliance on this accounting System as a basis for ratemaking, it is crucial to understand the extent to which the System's fixed principles, subject to various exceptions, applied with the Commission's discretionary hand, can be said to provide a coherent defense to petitioners' assertions. There is a threshold distinction in the System between utility property that is operating and nonoperating. When a utility's operating unit or system is sold, the gain or loss [10] on both plant and land is allocated below the line to the shareholders[u]nless otherwise ordered by the Commission. [11] Usually, therefore, the only benefit to the ratepayers is removal of the residual book value of the facility from the rate base. Whenever utility property becomes non-operating, however ( i. e., it is retired from active service rather than sold as an operating facility), the accounting becomes more complexsometimes to the ratepayers' benefit. If the property is merely transferred out of the rate base but retained by the company as nonutility property, the ratepayers receive the benefit of removal from the rate basethe same benefit they would have received if the property instead had been sold as an operating unit. Account 121. Thereafter, if this nonutility property is sold, all gains or losses on both land and depreciable plant facilities accrue to the shareholders. Accounts 421.1 and 421.2; Plant Instr. 7.E., 10.1. If, on the other hand, nonoperating utility property is sold immediately upon its retirement, without prior transfer out of the rate base to a nonutility account, all proceeds allocable to the sale of land will accruegain or lossto the shareholders; but, contrary to the results when operating or nonutility property is sold, all proceeds of the depreciable plant facility upon retirement will be allocated to the ratepayers. Account 108, Plant Instr. 10.B., 10.F. Thus, if the net salvage value of the electric or gas plant facility exceeds depreciated book costs, ratepayers will gain from the transaction. But see Re D.C. Transit System, Inc., supra (discussed in Part III.A., supra ). Otherwise, of course, ratepayers will break even or lose. [12] In summary, under the general accounting rules applicable to dispositions of land (in contrast with depreciable plant facilities), gains or losses are not credited or charged to the ratepayers under any circumstance. Whether land is sold as part of an operating unit, or sold immediately upon retirement from service, or sold after transfer to the status of nonutility property, the Uniform System of Accounts generally provides that the shareholders alone shall benefit from any gainand bear any loss. These general rules, however, are subject to a number of significant exceptions. For example, as an incentive for utility companies to acquireindeed to stockpileland (or to retain retired land) for future use as the need may arise, the Uniform System permits a utility company to add such land to the rate base, even though it may never be used in service. Account 105. There is, nevertheless, a quid pro quo for the ratepayers. Upon disposition of land held in this account, all gains (or losses) are allocated above the line. Accounts 105, 411.6, 411.7. This approach reflects a policy that the ratepayers should underwrite the costs of long-range planning but, as a matter of equity, should receive all gains from dispositions of land held for use but never used. See Accounting Treatment for Land Held for Future Utility Use and for Profits or Losses Realized Through Sales of Those Lands, 45 F.P.C. 106 (1971). Another exception pertains to unforeseeable extraordinary losses on property abandoned or otherwise retired from service, Account 182, i. e., losses (usually exceeding five percent of income) which could not reasonably have been foreseen and provided for. Id. See Gen. Instr. 7. Normally, such losses would be borne by the shareholders in the sense that the normal depreciation chargeable to the ratepayers would not cover the loss as rapidly as the extraordinary loss provisions permit. In the Commission's discretion, however, they can be shifted to the ratepayerswhich is likely to happen unless the utility is earning a sufficient return and the company has ample time to recover fully the cost of plant through depreciation. Suelflow, supra at 73. See Account 182, Gen. Instr. 7. [13] In simplified form, therefore, the accounting treatment which the Uniform System generally accords gains and losses on dispositions of utility property can be depicted as follows: I. OPERATING UNIT OR SYSTEM II. NONOPERATING FACILITY [Gains or losses on plant A. Depreciable B. Nondepreciable facilities and land allocable (Plant) (Land) to shareholders] 1. Sold upon retirement 1. Sold upon retirement [Gains or losses allocable [Gains or lossed allocable to ratepayers] to shareholders] 2. Transferred to 2. Transferred to nonutility property nonutility property account; sold account; sold thereafter thereafter [Elimination from [Elimination from rate base; gains or rate base; gains or losses allocable to losses allocable to shareholders] shareholders] 3. Sold after placement 3. Sold after placement in held for in held for future use account future use account [After elimination [After elimination from rate base, gains from rate base, gains or losses allocable or losses allocable to shareholders] [14] to ratepayers] From this discussion it should be clear that respondents' defense on the basis of adherence to the Uniform System of Accounts may be question-begging, given the considerable room for Commission discretion in characterizing and approving particular accounting entries. For example, the determination as to whether a particular sale involves an operating or retired facilitywhich often is far from clear may determine, as an accounting matter, whether the transaction shall be treated below or above the line. [15] Similarly, the Commission has discretion over inclusion and removal of land, especially retired land, in the held for future use accounta critical determination as to allocation of potential gains and losses to ratepayers or shareholders. The Commission, moreover, has discretion to determine whether retired property shouldor should notbe transferred to a nonutility property account, with the consequent impact on rate base and eventual allocation of the proceeds upon sale. Finally, the allocation of an extraordinary loss to ratepayers or shareholders is discretionary. This is not to say that reliance on the Uniform System as a basis for ratemaking is unjustified in the present case. Obviously, the System, which is designed to assist in ratemaking, reflects years of fine tuning premised on expert views about balancing investor and consumer interests. Moreover, many of the prescribed accounting treatments discussed above, subject to the Commission's discretionary gloss, are not relevant to this case. Despite these considerations, however, we must conclude that because of the substantial discretion of the Commission under the System, a defense of particular ratemaking based on per se application of that System says little more than ratemaking based on expert Commission discretion. Thus, before we can draw a conclusion as to whether reliance on the Uniform System in this case provides a rational connection between the companies' land transactions and the Commission's decision to place them for ratemaking purposes below the line, we have to examine the System very carefully as applied here.