Opinion ID: 1907714
Heading Depth: 2
Heading Rank: 4

Heading: Test Year Expenses and Revenues

Text: This step in a rate determination matches expenses against revenues in order to arrive at the amount of income available to pay the wages of capital, i. e. interest on debt securities, dividends on stock and additions to surplus. Rhode Island Consumers' Council v. Smith, 111 R.I. at 281, 302 A.2d at 764. The council and the company assert various objections to the commission's treatment of certain expense and revenue items. Additionally, the council questions the admissibility of certain evidence presented by the company during this phase of the rate proceeding. We shall consider the arguments seriatim.
The company contends that the commission erred in refusing to allow some $26,000 worth of charitable contributions and $11,000 of lobbying expenses to be included as an above-the-line operating expense of the company (cost of service). [14] The issue has led to disparate results in different jurisdictions, although many still allow the inclusion of such items subject to reasonable restraints. See, Annot., 59 A.L.R.3d 941 (1974); 1 Priest, supra at 83-87. However, in United Transit Co. v. Nunes, 99 R.I. 501, 209 A.2d 215 (1965), this court held that a gift by a public utility to a charitable organization in modest amount may be charged as an operating expense provided it is first established that it is productive of good community relations which will benefit the utility or its patrons. Id. at 513-14, 209 A.2d at 222. On its part, the commission states that such expenses must be treated below-the-line and consequently excluded as a cost of service. The commission based its ruling upon certain statements found in a publication called the Uniform System of Accounts where it deals with lobbying and charitable expenses in an account of Miscellaneous Income Deductions. [15] We do not agree with this position. The New York Public Service Commission has discussed the impact of the Uniform System of Accounts upon the ratemaking treatment of particular items within the Miscellaneous Income Deductions account. Re Accounting Treatment for Donations, Dues, and Lobbying Expenditures, 71 P.U.R.3d 440 (N.Y.P.S.C. 1968). The New York commission emphasized that while the publication was concerned with harmonizing accounting and ratemaking techniques, no accounting procedure, in and of itself, could bind the commission in fixing rates. As pointed out previously, if for any reason a company feels that such an expenditure should be allowed in considering rates, it should sustain the burden of proving the reasonableness of that claim in the context of the commission's ratemaking procedures. Re Accounting Treatment for Donations, Dues, and Lobbying Expenditures, supra at 445. Obviously, then, the existence of any particular accounting system does not automatically dictate the treatment of expense items for ratemaking purposes. Although for accounting purposes the commission can require such items to be put in the income deduction account, at the rate hearing the company should be given an opportunity to show such items benefit the ratepayer and, accordingly, should be treated as an operating expense. This position is clearly applicable to charitable contributions in our jurisdiction. United Transit Co. v. Nunes, supra . Furthermore, we see no reason to treat lobbying expenses differently if the company can show the expense is reasonable and the purpose directly beneficial to the ratepayer. We, therefore, remand this issue to the commission in order to allow the company an opportunity to make a showing that these various expenses should be included in cost of service.
In 1973 the company sold certain utility property to Algonquin Gas Transmission Company. The sale resulted in a $528,855 gain to the company. In a 1973 rate proceeding the company treated the gain as a below-the-line item. In the instant proceeding, the commission recognized the inequity of such treatment and ordered the company to amortize the gain above-the-line over a 24-year period. Such treatment would reduce the cost of service to the consumer by $22,000 annually. The company does not seriously contend that such a gain should be treated as below-the-line income. However, it does maintain that the transaction was part and parcel of an earlier rate case, is not part of the present test period, was tacitly approved by the previous case, and, accordingly, should not be considered by the commission in the instant case. In FPC v. Hope Natural Gas Co., 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333 (1944), the Supreme Court noted: The rate-making process under the Act, i. e., the fixing of `just and reasonable' rates, involves a balancing of the investor and the consumer interests   . Nor is it important to this case to determine the various permissible ways in which any rate base on which the return is computed might be arrived at. For we are of the view that the end result in this case cannot be condemned under the Act as unjust and unreasonable from the investor or company viewpoint. Id. at 603, 64 S.Ct. at 288, 88 L.Ed. at 345. With these guidelines in mind, we find the commission's treatment of this item eminently reasonable and conducive to a fair end result. To decide otherwise would elevate procedure over substance at the expense of the consumer interest. Moreover, the company presented no evidence that the propriety of including the gain below the line was even mentioned at the prior proceeding. All in all, we have no hesitancy in upholding the commission's present treatment of the gain.
The mechanics behind the operation of the two PGA clauses have been discussed earlier under the heading of Cash Working Capital and do not merit repetition here. The sole issue at this juncture is whether the commission properly treated the $1.9 million undercollection associated with the SNG portion of the PGA. Normally, undercollections of a given test year will be treated as revenues to the company in computing its cost of service. The council recommended that the entire sum of undercollections be reflected as such in the computation. The commission, however, adopted the company's argument that at least part of the undercollections attributable to SNG were recurring costs (i. e. a continual undercollection) rather than a deferred cost that would be recouped. On that basis the commission determined the average undercollection over a 3-year period (the period since the company began using SNG) to be $1.1 million. Accordingly, it only included the excess undercollection, $798,539, as test year revenues. The council vehemently objects to this position as sheer speculation. The commission, while recognizing the potential inaccuracy of the estimate and the consequences thereof, [19] allowed the adjustment because the commission will have ample opportunity to investigate and analyze the operation of the clause in the future. To the extent that the company suffers a recurring underrecovery for SNG, we concur with the commission's treatment of it. However, given the commission's own hesitancy regarding the reliability of its prediction, this appears an appropriate situation to remand the cause and let the commission measure the accuracy of its estimate against the reality of the company's subsequent operating history. Narragansett Elec. Co. v. Harsch, R.I., 368 A.2d 1194 (1977); Rhode Island Consumers' Council v. Smith, 111 R.I. at 298, 302 A.2d at 773.
The council contends that the company failed to meet its burden of proof under § 39-3-12 to establish the necessity of a rate increase. Specifically, the council charges that the company failed to adduce competent evidence to support its proposal figures relating to rate base and cost of service. The pertinent facts in this regard may be briefly summarized. The company introduced the testimony of Herbert W. Steere, Assistant Treasurer of the Providence Gas Company. Steere presented exhibits before the commission concerning the financial adjustments resulting from the use of various ratemaking principles. During the course of his testimony, it was disclosed that Steere was almost totally unfamiliar with the various principles to which he applied his figures. Later in the hearings, a rate analyst for the company supported certain adjustments to test year results included in Steere's exhibits. Finally, the company produced an expert in ratemaking principles, who concurred in what the exhibits purported to represent and supported the utilization of the ratemaking principles upon which Steere's figures were based. The council moved to strike Steere's testimony on the grounds that he did not possess the requisite expertise and accordingly his exhibits were meaningless. Furthermore, on appeal it argues that Steere's testimony cannot be retroactively validated by the experts who subsequently testified. Lastly, the council argues that even if the testimony given by the expert in ratemaking did support Steere's, the exhibit was filed in violation of § 39-1-12. [20] The council argues that the commission abused its discretion by allowing the testimony of the company's expert because it left the Consumers' Council uncertain as to precisely what testimony the company ultimately relied upon to justify its rate base and cost of service. The commission in its report and order allowed Steere's testimony to remain part of the record. In so doing, the commission noted the following: We have allowed Mr. Steere's exhibits and testimony to remain in the record because we have been able to analyze the data sufficiently to go beyond his numbers, and discern the justifiability of those of his adjustments that have been allowed. To have stricken the evidence from the record would have caused untenable delays in the progress of this rate proceeding. Such delays may be punitive to Providence Gas, as well as to other utility companies awaiting availability of Commission time for action on other matters. The Commission's function is not to punish, but to efficiently and expeditiously regulate the rates of the jurisdictional utilities. It should be noted, however, that our determination not to strike Mr. Steere's exhibits is one forced from practical considerations which are before us today; we are not impressed with this method of case presentation, and don't expect to see it again. The practical considerations may not be so overwhelming the next time around. The basic problem here is that the foundation for Steere's testimony was laid after his exhibits were received. However, § 39-1-11 provides that at a hearing the commission shall not be bound by technical rules of evidence. The testimony offered by the other experts provided a sufficient basis for the commission to analyze the data and adjustment figures proposed by Steere. Moreover, we do not find that the commission abused its discretion by allowing the late-filed testimony to lend support for Steere's testimony. Lastly, the commission found, as a matter of fact, that there was sufficient evidence before it to determine the justifiability of Steere's recitation. We see no reason to disturb its findings.