Opinion ID: 1973623
Heading Depth: 1
Heading Rank: 4

Heading: Inflation Adjustments

Text: The PUC refused to accept OTP's proposed adjustment to its operating costs for inflation. The method used by OTP to allow for inflation was to take the Consumer Price Index and the Wholesale Price Index at the beginning and again at the end of the test year to determine the increase. It then took one-half of the increase and applied it to operating costs other than fuel, labor and postage. Appellant argues that the method used by OTP did not support the raising of its operating costs for rate purposes across the board, because of general trends in the economy and because it would be sheer coincidence if OTP's expenses coincide with its formula. PUC further argues that OTP's employees, in preparing their forecast for the budget that constitutes the basis for the rate increase, likely took into account the effects of inflation in making estimates, and that, therefore, this would constitute double-counting and additional inflation. OTP counters that since the PUC rejected its proposed test year and adopted as test year figures the actual figures for 1975, there could be no double-counting. The PUC found that OTP's proposed inflation adjustment was not based upon measurable change and, therefore, it was disallowed. The circuit court found that the disallowance of the proposed adjustments for the purpose of inflation, in regard to OTP's operating costs, was an arbitrary, capricious and wholly unwarranted exercise of discretion. While it is not clear that OTP would experience an inflation rate comparable to fluctuations in the Wholesale Price Index, or the Consumer Price Index, we agree with the trial court that to disallow any inflation adjustment is unrealistic and unwarranted. Proving an adjustment for inflation as to operating costs is at best elusive, complicated and fraught with uncertainty. The PUC acknowledges that OTP will sustain increased operating costs due to inflation. We agree with the trial court that in the absence of any guidelines set forth by the PUC for the development of an inflation adjustment by investor-owned utilities, or to adopt an inflation adjustment on its own, it appears that a failure to recognize these increased costs, as presented by OTP, was an arbitrary decision. There are likely more accurate methods of proof; the trial court was correct in vacating the disallowance and remanding the issue to the PUC to determine a reasonable inflation adjustment procedure and allowance.