Opinion ID: 1720100
Heading Depth: 1
Heading Rank: 2

Heading: Unbilled Revenues

Text: GSU argues the commission improperly ordered that the $16.662 million of unbilled revenues resulting from an accounting change be divided equally between the ratepayers and the shareholders. GSU contends that these unbilled revenues were really payment for electric service it had previously rendered in December, 1992, and the effect of the commission's decision was to give its customers some of their December, 1992 electricity for free. In order to properly resolve this issue, it is necessary to understand the background of utility billing practices. Historically, utilities used the meters read method of accounting. Under this method, the utility did not record on its books the revenues to which it was entitled as a result of providing electric service until after it read the customer's meter and rendered bills based on those meter readings. Since the December meter reading would usually take place near the middle of the month, any electricity delivered after this reading would not be placed on the company's books until the following year, when the January meter reading took place. [2] The revenue for this period (consisting of approximately ten days) is termed unbilled revenue. The federal Tax Reform Act of 1986 required utilities to include within taxable income unbilled revenues for the tax year in which the underlying services were rendered to the customer. See National Fuel Gas Distribution Corp. v. Public Service Commission, 154 A.D.2d 31, 551 N.Y.S.2d 636 (1990). Thereafter, GSU switched to the unbilled revenues method of accounting for tax purposes, but continued to use the meters read method for its financial accounting. In 1991, in a rate increase proceeding before the commission, GSU indicated that it may switch to the unbilled revenues method for financial accounting. The commission's consultant testified that such a switch would not, on an ongoing basis, affect the revenue requirement. The commission adopted the recommendation of its consultant and ordered that GSU defer for future review and consideration by the Commission any initial gain from a change in accounting, if the company should make such a change. GSU elected to initiate unbilled revenue accounting on its financial books effective January 1, 1993. This resulted in an accrual of an initial balance of $16.662 million, consisting of eleven days of revenue from December 20-31, 1992. In the present proceeding, the commission's consultant, Lane Kollen, recommended that the entire $16.662 million be amortized over approximately three years as a cost of service reduction. [3] By contrast, GSU's expert, Kenneth Gallagher, argued that the entire balance should be immediately amortized to GSU, contending that the balance represented revenues for services rendered. The commission's special counsel took a middle course, recommending that the $16.622 million be allocated equally between ratepayers and GSU, observing that the income accrual is the type of one-time windfall that often is shared between investors and consumers. The commission adopted this recommendation and ordered GSU to amortize one-half of the total accrual ($8.33 million) effective January 1, 1995. GSU contends that the effect of the commission's order is to add $8.33 million of 1992 revenue (resulting from approximately five days of December, 1992) to the 1993 test year, resulting in a mismatch of approximately 370 days of revenue (i.e., 365 days of 1993 revenue plus five days of 1992 revenue) to 365 days of 1993 expenses. GSU argues that through a prospective reduction in rates, it is being required to give back to customers the extra five days of revenue, even though no extra payments were actually made by its customers. It concludes that this money is simply payment that is owed to it by its customers for electricity delivered to them during December, 1992. We see merit to GSU's argument. While on its face, the commission's decision purports to match 365 days of 1993 revenue with 365 days of 1993 expenses, it is clear that the effect of the commission's action is to place five extra days of 1992 revenue into the 1993 test year, thus creating a mismatch between revenue and expenses. Contrary to the commission's reasoning, the $16.622 million does not represent a windfall to GSU, but simply represents money owed to GSU for services rendered during the last days of December, 1992. Other courts addressing this issue have reached similar conclusions. In National Fuel Gas Distribution Corp. v. Public Service Commission, 154 A.D.2d 31, 551 N.Y.S.2d 636, 638 (1990), the court annulled the determination of the New York Public Service Commission, which had added unbilled revenues into the test year, noting that the commission's decision represented a matching of more than a year of revenues against 12 months of expenses and does not reflect any enhancement of actual revenues [the utility] will receive from ratepayers. Likewise, in Petition of Interstate Power Co., 419 N.W.2d 803, 805 (Minn.App.1988), the court affirmed the Minnesota Public Utilities Commission's determination that since unbilled revenues were not included in the test year, the tax expense associated with the unbilled revenues should not be included. The court cited the commission's reasoning that unbilled revenues should not be included in the test year rate calculation, since this would result in an inappropriate mismatch because the test year would contain 365 days of cost but more than 365 days of revenue. In support of its order, the commission attempts to analogize the unbilled revenues to the income gain from the sale of generating assets at issue in Gulf States Utilities Co. v. Louisiana Public Service Commission, 92-1185 (La. 3/17/94), 633 So.2d 1258. In Gulf States, the utility sold generating assets which had been paid for by the ratepayers through depreciation reflected in base rates. The utility then attempted to pass along an asset fee to its ratepayers as part of a fuel adjustment clause. The thrust of our holding was simply that the utility could not make ratepayers pay twice for an asset they had already paid for. Gulf States is clearly distinguishable from the instant case, since there is no suggestion that GSU is seeking a double recovery. The commission also analogizes its treatment of the unbilled revenues to its prior action allowing GSU to defer expenses. For example, it argues that in 1986, GSU was allowed to defer eighteen months of expenses resulting from the River Bend nuclear plant until the commission issued its rate order in 1987. As a result, GSU was allowed to collect, through higher rates over a ten year period, the eighteen months of expenses previously deferred. The commission argues that this created a mismatch between expenses and revenue, yet GSU did not object to this treatment. While at first blush this argument appears to have some merit, we believe it is distinguishable from the present situation. The problem of dealing with extraordinary expenses arises from the prohibition against retroactive rate making, since future rates may not be designed to recoup past losses. See Louisiana Power & Light Co. v. Louisiana Public Service Commission, 523 So.2d 850 (La.1988). Therefore, the only way the commission may allow a utility to recoup past losses is to order the establishment of a deferral as of the date of its order and the right to collect the deferred amount in the future. Id. at 857, n. 4. By contrast, there are no similar policy considerations supporting the deferral of revenues properly earned in one year into the next year. Stated another way, the allowance of deferred expenses is a limited exception to the general rule that expenses and revenues must be matched, and that exception is not applicable in this case. Lastly, the commission relies on the opinion of the District of Columbia Public Service Commission in Re Potomac Electric Power Co., 150 PUR4th 528, 1994 WL 109204 (D.C.P.S.C.1994), which amortized the full amount of unbilled revenues to ratepayers over five years, requiring the base rate to be reduced by the unamortized amount of the accounting change. A review of this decision shows it is not supported by persuasive reasoning. [4] We conclude that the authorities we have cited set forth the proper resolution of this issue. In sum, we hold that the commission's order fails to state an adequate basis as to why the $16.622 million accrual should be allocated between the ratepayers and GSU. Accordingly, we must find that the commission's determination of this issue is arbitrary and capricious.