Opinion ID: 1224268
Heading Depth: 1
Heading Rank: 5

Heading: The Alleged Errors of Accounting

Text: After finding the fair value of the properties of Vepco used and useful in rendering retail electric service in North Carolina, the Commission fixed the rate base by adding to such fair value an allowance of $1,930,466 for working capital. It arrived at this figure in the following manner stated in its Finding of Fact No. 6: That the working capital allowance found to be reasonable for VEPCO's North Carolina retail operations was determined by taking the cash working capital of $1,269,215 and adding to it materials and supplies, $1,619,088. Average tax accruals in the amount of $664,348, average customer deposits of $90,235, and a fuel payment lag of $203,254, were offsets to the working capital allowance, resulting in a net working capital allowance in the amount of $1,930,466 and that the amount of working capital is $1,930,466. Like any other business, a public utility must at all times have on hand a reasonable amount of materials and supplies and a reasonable amount of funds for the payment of its expenses of operation. While Chapter 62 of the General Statutes makes no reference to working capital, as such, the utility's own funds reasonably invested in such materials and supplies and its cash funds reasonably so held for payment of operating expenses, as they become payable, fall within the meaning of the term property used and useful in providing the service, as used in G.S. § 62-133(b)(1), and are a proper addition to the rate base on which the utility must be permitted to earn a fair rate of return. Conversely, the utility is not entitled to include in its rate base funds which it has not provided but which it has been permitted to collect from its customers for the purpose of paying expenses at some future time and which it actually uses as working capital in the meantime. Such funds, so supplied by the customers, are used and useful in providing the service and the utility, having lawfully collected them, is the owner thereof. Nevertheless, such funds, so collected from the customers and used by the utility as working capital, are not the public utility's property within the meaning of G.S. § 62-133(b) (1). In Utilities Commission v. State and Utilities Commission v. Telegraph Co., supra, 239 N.C. at page 348, 80 S.E.2d at page 143, this Court, speaking through Justice Barnhill, later Chief Justice, said: When, in fixing rates, which will produce a fair return on the investment of a utility, it is made to appear it has on hand continuously a large sum of money it is using as working capital and to pay current bills for materials and supplies, that is a fact which must be taken into consideration. And if the fund on hand is sufficient, no additional sum should be allowed at the expense of the public. Chapter 62 of the General Statutes does not state a formula by which the Commission is to determine what is a reasonable amount to be added to the rate base for working capital. Vepco's witness Reilly testified that the weighting to be given the respective indicators of fair value is a matter for subjective judgment. Vepco's witness Phillips testified that the determination of what constitutes a fair rate of return must also be determined by subjective judgment. Likewise, the total amount reasonably necessary for working capital is a matter requiring the exercise of subjective judgment. When the record, considered as a whole, contains substantial evidence supporting the subjective judgment of the Commission on any of these factors in the fixing of reasonable rates, the conclusion reached by the Commission may not be disturbed by a reviewing court merely because the court's subjective judgment is different from that of the Commission, nor is the Commission required to accept as conclusive the subjective judgment of a witness, even though the record contains no expression of a contrary opinion by another witness. Vepco does not take exception to the Commission's finding as to the total working capital required by it. Its contention is that the deductions therefrom by the Commission on account of funds collected in advance from the customers and actually used as working capital, while being held for ultimate disbursement for taxes, fuel bills and other expenses, were improperly computed. Vepco contends that the deduction of $90,235 on account of customer deposits was error because this amount was also included in the computation of the deduction for average tax accruals. In its brief in the Court of Appeals, the Commission concedes that it thus inadvertently deducted the average customer deposits twice. The effect of this is to understate the rate base by $90,235 and so to deprive the company of approximately $6,200 in allowable return. While it would hardly be practicable to spread such a relatively small amount among Vepco's ratepayers in the form of a further increase in their rates, the Commission may take it into account, along with its error in computing the fair rate of return, in the further proceedings which must be had. Vepco also contends that the Commission made too large a deduction from the working capital allowance on account of tax accruals. The rates for service paid by the customers are fixed so as to produce, in addition to other amounts, the sums necessary to pay Vepco's taxes, including its income taxes. Of necessity, the ratepayers pay into Vepco for this purpose, as they use electricity, money which Vepco does not have to pay over to the tax collector until a substantially later period. Meanwhile, Vepco has the use of these funds and does use them as working capital. Vepco contends that the testimony and exhibit of Mr. Thomas, the accounting witness for the Commission staff, shows that, during the test period, Vepco actually had a negative figure for its Federal income tax liability attributable to its North Carolina retail operations. Consequently, says Vepco, the Commission was in error in including in its deductions from cash working capital $60,783 for accrued Federal income taxes. The absence of an actual tax liability during the test period does not alter the fact that Vepco's North Carolina customers have paid to it rates which included enough to cover anticipated Federal income taxes. The question here is not how much, if anything, Vepco must pay to the United States. The questions are how large a fund Vepco has collected from its customers with which to pay taxes and how long it has had the use of such fund. Having had the use of funds so collected, it is not entitled to ignore its use thereof when computing its working capital requirement. We see no error in the order of the Commission in this respect. Vepco further contends that the Commission's deduction from working capital on account of tax accruals is overstated for the reason that the Commission's computation of the time lag between Vepco's collections from its customers and its payments to the tax collector overlooks an offsetting lag between the date Vepco bills its customers and the date the customers pay Vepco. The proper computation of the time lag between Vepco's receipt of such money and Vepco's payment over to the tax collector is a matter of accounting as to which the Commission's accountant and Vepco's accountant are in disagreement. We are unable to find from the record any error of law in the Commission's computation of this portion of the deduction to be made from Vepco's full working capital requirements. Vepco also complains of the failure of the Commission to make a pro forma adjustment in its actual operating expenses during the test period by reason of a salary and wage increase and an increase in Federal Social Security taxes, both known in the test period to be forthcoming but neither taking effect until after the end of the test period. In this we find no error of law. In Utilities Commission v. City of Durham, 282 N.C. 308, 320, 193 S. E.2d 95, 104, we said: The actual experience of the company during the test period, both as to revenues produced by the previously established rates and as to operating expenses, is the basis for a reasonably accurate estimate of what may be anticipated in the near future if, but only if, appropriate pro forma adjustments are made for abnormalities which existed in the test period and for changes in conditions occurring during the test period and, therefore, not in operation throughout its entirety. (Emphasis added.) Adjustments for post test period increases in certain categories of expense may well give a distorted picture of the need for revenue since post test period experience in other categories of expense is not known and the possibility of offsetting adjustments is not precluded. As a practical matter, there must be a cut-off date for the making of adjustments. Chapter 1041 of the Session Laws of 1973, Second Session, 1974, has no application to this matter. We have considered and find no merit in Vepco's remaining assignments of error. By reason of the Commission's error in its computation of the fair rate of return upon the fair value of the properties of Vepco, used and useful in rendering retail electric service in North Carolina, the judgment of the Court of Appeals is reversed and this matter is remanded to that court with direction that it enter its judgment further remanding the matter to the Utilities Commission for further proceedings by the Commission not inconsistent with this opinion. Reversed and remanded.