Opinion ID: 2279962
Heading Depth: 1
Heading Rank: 9

Heading: Amortization of Pre-Certification Sears Island AFUDC Capital Costs

Text: On January 25, 1977, the Company cancelled its plan to build a nuclear power plant on Sears Island. The primary reason for the cancellation was the discovery of an earthquake fault within 2000 feet of the proposed site. Prior to the discovery of the fault the Company had spent over $2,000,000 in preliminary engineering studies needed for future licensing and, in addition, several million dollars in prepayments under a uranium contract with the federal government. While the instant PUC decision was pending, the Company sold the uranium contract for a net payment of $3,534,180. The PUC found that these expenditures were not imprudent. Citing, inter alia, Re Virginia Electric and Power Company, 29 PUR 4th 65 (Va.S.C.C.1979), the Commission concluded that since the plant had never become used and useful, the most equitable method of allocating the expenditures was to allow Company shareholders a return of their investment (through amortization and depreciation) but not on their investment (through inclusion of the unamortized balance in rate base). Accordingly, the PUC authorized the Company to amortize over a five year period the expenses of the preliminary engineering studies. The Company was not allowed, however, to amortize over $300,000 of associated AFUDC. So far as prepayments on the uranium contract were concerned, the PUC advised the Company that it could request an appropriate allowance at its next rate filing should any portion of the prepayments remain unrecovered following that contract's sale. The PUC added, however, that it would not permit amortization of the approximately $500,000 of AFUDC connected to those prepayments. In thus distributing between ratepayers and shareholders the costs of the risk that an anticipated project will not be completed, the PUC explained in its decree: When a plant becomes used and useful, the shareholder is ordinarily rewarded for his risk by being allowed both a return of AFUDC, through depreciation, and on AFUDC, when it is capitalized and included in rate base. The AFUDC amounts in the present case, however, represent the carrying costs borne by the investor of a project which will never become used and useful. While we recognize that the shareholders have, in the present case, been shouldering all carrying costs so far, a reasonable balancing of the burden of this abandoned project requires that the shareholders continue to do so. In this appeal, the Company charges that the PUC did not engage in reasonable balancing. According to the Company, any distinction between pre-certification capital costs, or AFUDC, and all other pre-certification costs is illogical and, when effectuated, confiscatory. The PUC relied in its decree upon Re San Diego Gas and Electric Co., 31 PUR 4th 435 (Cal.P.U.C.1979), where the same distinction was identically reasoned and similarly effectuated. See id. at 447, 449. In San Diego the utility had accumulated nearly $90,000,000 in site-related and non site-related pre-certification costs prior to abandoning its plan to build a nuclear plant. Before permitting investor recovery of any of these costs, the California Commission first separated out and discarded all AFUDC. The Company attempts to distinguish San Diego by suggesting that only where costs are of such magnitude is non-recovery of AFUDC justifiable. We discern no plausible basis for the suggested distinction, and we reject it. The Company also avers that the PUC's position is inconsistent with past practice. To establish this inconsistency, the Company points only to Bangor Hydro-Electric Company Re: Proposed Increase In Rates, Docket No. 80-38. The utility in that case requested and obtained amortization of all pre-certification expenses, including AFUDC. The decision was based, however, not on a hearing and adjudication but on a stipulation agreement among the parties. As the PUC points out, accepting a stipulation as a fair and complete resolution of all issues is not tantamount to a holding that the resolution is the only fair and complete one possible. In the approval of stipulation agreements, fairness is not the Commission's only concern. It must also be mindful of the delay and expense involved in the full hearing process that all parties are seeking to avoid by stipulating to a resolution. The one case cited by the Company that involved reversible inconsistencies by a public utilities commission, Boston Gas Co. v. Department of Public Utilities, 367 Mass. 92, 324 N.E.2d 372 (1975), was premised upon unjustified inconsistent prior decisions, not upon a single inconsistent stipulation.