Opinion ID: 2366694
Heading Depth: 1
Heading Rank: 5

Heading: rate of return and attrition

Text: In its appeal to this court, the company argued that the commission's original report and order had not adequately considered the erosion or attrition of the return that it was experiencing, and that unless that attrition were recognized it would be impossible to earn the 8.38 percent which the commission found to be a fair rate of return. In our previous opinion, we stated that upon remand of the case and the taking of further evidence, the commission would    be in a position to make suitable adjustments which can reflect whatever erosive trends may be disclosed. Rhode Island Consumers' Council v. Smith, supra . On remand, the commission received additional evidence through the company's witness which demonstrated that,    the Company's earnings under the rates allowed by our Order of May 4, 1972 have been substantially below the level anticipated by that Order, and that on the basis of present facts an adjustment for attrition is warranted. Among other things, the company's evidence showed that its actual 1972 earnings, based on the commission's original order and report, would produce a rate of return of 6.79 percent, mainly as a result of the spiraling rate of inflation. The company attempted by its supplementary evidence to show the effect of what it considers to be adjustments required by this court's remand and further adjustments to place its 1972 results on an updated basis. On this basis, it arrived at adjusted 1972 earnings of $11,895,000, an average 1972 rate base of $170,175,000 and a rate of return of 6.99 percent. While the commission agreed that the 1972 figures must be looked at to see the effect in practice of the rates it allowed in May of 1972, it felt that the company had overstated the so-called [c]ourt remand adjustments by including an upward adjustment to its working capital. The commission felt that the supplemental record supported the result produced by its method. Therefore, it concluded that an average 1972 rate base for the company reflecting its conclusions pursuant to this court's decision was $167,155,000. Its 1972 earnings, based upon the commission's findings and conclusions in the supplementary report and order, and adjusted to give full annual effect to the increased rates previously allowed by the commission and the company's 1972 wage increases, were $11,895,000. Relating these earnings to the 1972 average rate base produced a rate of return for the year 1972 of 7.12 percent. This shows that in 1972 the company's revenues were at an annual level approximately $4,465,000 under the amount necessary for it to achieve the 8.38 percent rate of return the commission and this court found to be fair and reasonable. It was also clear to the commission that this erosive trend was likely to continue. To offset such erosion so that it will at least for the immediate future have an opportunity to earn the allowed rate, the company contends that an earnings trend adjustment of $2,792,000 in revenues above and beyond the $4,465,000 referred to above is required. This conclusion was based upon a comparison of the year 1972's results with those for the test period used on a comparable basis in the commission's original report and order, as a means of measuring the rate of erosion. That rate was then applied to the 1972 average rate base to determine the revenue effect. After considering that evidence and the prior evidence as to the company's experience following the increase that took effect in February 1970, the commission was of the view that the company's approach to this question had produced a reasonable result. The commission was also mindful that the company's construction program was expected to continue at a high level, and that it was already committed by its 1971 collective bargaining agreement to further wage increases. The adjustment, together with the $4,465,000 deficiency during the adjusted year 1972, indicated that on a current basis the company would be entitled to additional annual revenues of approximately $7,250,000 or substantially more than the full effect of the tariffs if allowed in their entirety. Under those tariffs, after deduction of the increases already allowed by the commission's original order and report, a maximum additional revenue increase of $6,777,000 could be produced based upon 1972 volumes of business. That is a difference of nearly $500,000. However, the commission decided to allow the company no more than it originally asked for. Its supplemental order allowed the company to place in effect its tariffs filed April 16, 1971. The council argues that the commission went far beyond this court's mandate: It went far beyond restoring the Company's 1972 earnings to the 8.38 percent allowable rate of return. First, it entertained and used data provided by the Company reflecting not its actual 1972 rate of return but rather its pro forma rate of return (after annualization of wage increases) for the year 1972 to determine an additional revenue requirement of $4.5 million. Second, it added an additional $2.8 million to offset an adverse earnings trend, i.e., assuming further erosion beyond pro forma 1972. This amount was developed in supplemental Company testimony and reflects for a second time the deficiency in the 1972 pro forma rate of return. Another way of looking at it is that this earnings trend adjustment represents the erosion occurring between the test year ended August 31, 1971, and calendar 1972 or approximately 1 ½ years experienced erosion. In the view of the Consumers' Council, this portion of the attrition adjustment clearly double counts the experienced erosion is [sic] an obvious violation of the prohibition against inflationary expectations. The council's argument disregards the purpose of a test period in rate making and does not recognize that rates are made for the future. The use of 1972 or any other period as a test year in determining rates is only meaningful if the test year results are adjusted so as to make them as reasonably indicative as possible of the results anticipated, at least for a reasonable period of time after the effective date of the revised rates. Rates cannot be made retroactive to the year 1972. The council's argument further ignores this court's direction that the commission recognize erosive trends in determining the relief to be allowed the company, and the commission had before it substantial evidence that an erosive trend in the company's rate of return had continued since its original report and order. Furthermore, the council submitted no evidence to the commission, and no evidence exists in the record, contradicting this evidence of erosion. The company by testimony and exhibits at both the original and supplementary hearings presented alternative methods of compensating for such erosion. We have recognized that the commission has discretion in the selection of a method for compensating for erosion. The evidence in this proceeding supports the method adopted by the commission as a reasonable method for achieving a just and reasonable result and will not be disturbed. In each case, the records certified to this court are ordered returned to the Public Utilities Commission. The decision of the commission as modified by the supplementary report and amended order is affirmed. The commission is directed to issue the orders necessary to carry out its order in conformity with this opinion. ROBERTS, C. J., did not participate.