Opinion ID: 1330179
Heading Depth: 1
Heading Rank: 3

Heading: allowance of inflation adjustments on purchases from western electric

Text: The Commission adopted an inflation adjustment of 20.1 percent for all expenses for which a going-level adjustment was not specifically made. C & P does not challenge the factor selected by the Commission. C & P argues that the Commission's decision to not apply the inflation adjustment to Western Electric purchases was intended to punish C & P, not a legitimate reason for eliminating this figure from the rate base. It claims the Commission's actions were arbitrary. The Commission made the following findings of fact and conclusions of law with respect to Western Electric's purchases: [4] FINDINGS OF FACT 9. C & P presented no evidence or testimony in this case on the issue of the reasonableness of the prices paid to Western Electric by C & P for Western Electric products which was substantially different, or presented this Commission with any further information, than it presented in Case No. 80-182-T-42T. 10. The Supreme Court of Appeals of West Virginia has upheld the reasonableness of this Commission's adjustment to C & P's rate base and depreciation expenses by an amount representative of Western Electric's excess profits ( The Chesapeake and Potomac Telephone Company of West Virginia v. The Public Service Commission of West Virginia, Slip Opinion No. 15424, March 4, 1982). 11. C & P presented testimony which only compared Western Electric's prices on a weighted average total Bell System basis with the lowest price charged by the general trade suppliers for a given product, rather than presenting testimony comparing the price paid by C & P for Western Electric products with the lowest price charged by general trade suppliers for the same product (C & P Exh. 12). 12. Western Electric earned a rate of return on equity and investment for the year 1980 substantially in excess of the rate of return approved by this Commission for C & P (C & P Exh. 9, Exh. DJ, pg. 8). 13. In many instances, prices charged by Western Electric for its products are considerably higher than prices charged by general trade suppliers for similar products (Staff Exh. 9, pp. 16-18; Staff Exh. 9A). 14. C & P frequently uses Western Electric products even where an equivalent lower priced general trade product is available (Tr. Vol. 3, pp. 107, 109, 114-115, 127-129, 134, 137, 140, 142, 145, 147 and 149). 15. Until an order is issued by the Supreme Court of Appeals of West Virginia on the petition for reconsideration filed by this Commission in The Chesapeake and Potomac Telephone Company of West Virginia v. The Public Service Commission of West Virginia, supra, the decision of the Court, with regard to the Commission's authority to make a Western Electric excess profits adjustment for surviving Western Electric products purchased from 1959 onward, is stayed and of no force and effect ( Atlantic Greyhound Corporation v. The Public Service Commission of West Virginia, 132 W.Va. 650 [1949], at pages 664-665 [56 S.E.2d 169]; Appalachian Power Company v. The Public Service Commission of West Virginia, W.Va., 253 S.E.2d 377 [1979] at page 380). . . . . . 31. The Company obstructed the efforts of Commission Staff to obtain accurate information which would reflect the actual inflationary trend of Western Electric prices (Staff Exh. 6, p. 8; Staff Exh. 7, p. 13; Staff Exh. 7B, pp. 1-3; C & P Exh. 9, p. 26; Tr. Vol. 6, pp. 121, 139-140). . . . . . 57. The evidence indicates that C & P is frequently dilatory and at times obstructionistic with regard to providing Commission Staff with information needed to fully perform an acceptable Staff audit, which can lend assistance to the Commission during the trial of a rate case (see generally Staff Exhs. 6, 6A, 7, 7A and 10). CONCLUSIONS OF LAW 2. Since the Company provided this Commission with no new testimony or evidence on the issue of the reasonableness of Western Electric prices and did not provide this Commission with the type of information which we specified in Case No. 80-182-T-42T as being necessary for a Commission decision favorable to the Company on this issue, we are of the opinion that our decision in Case No. 80-182-T-42T is reasonable and should be adopted in this case. 3. Until the Supreme Court of Appeals of West Virginia issues its order on the Petition for Reconsideration filed by this Commission in The Chesapeake and Potomac Telephone Company of West Virginia v. Public Service Commission of West Virginia, Slip Opinion No. 15424, the decision of the Court with regard to the inpermissibility [sic] of a portion of our Western Electric adjustment in the previous C & P rate case is stayed and of no force and effect. . . . . . 31. The Company has been unreasonably dilatory and obstructionistic with regard to providing Commission Staff with information needed to fully perform the Staff audit in this case and, shall, in the next rate case, cooperate to the fullest extent with Commission Staff during performance of the audit, even beyond normally expected cooperation between a utility company regulated by this Commission and Commission Staff, considering the complexity and difficulty of an audit of C & P's books and records and the statutory time limit on the Commission for deciding rate cases. These conclusions are further explained in the text of the final order: Staff Adjustment No. 46 increases operating expenses by $7,500,000 to reflect the effects of inflation which will occur during the first full year in which these rates will be in effect. This adjustment parallels the Company's Adjustment No. 44, but excludes Western Electric purchase expenses, license contract fees, and utilizes a slightly different factor (C & P uses 21.1%, while Staff uses 20.1%). ... While Staff stated that it had no objection to a reasonable provision for inflation for Western Electric purchases and license contract fees, Staff did take the position that, for intercompany transactions, a specific measurement should be required before applying an inflation adjustment to those expenses. Staff took the position that better data is available within the accounting system for affiliated transactions, which is preferable to a broad based index such as the GNP implicit price deflator. Further, Staff was of the opinion that a company might attempt to simply roll all expenses into the Staff inflation adjustment, without making an effort to specify the actual effects upon inflation of specific adjustments.... The Company also advocated that the Commission include Western Electric purchases by C & P in the inflation adjustment.... Commission Staff attempted on several occasions, as detailed in the record, to obtain price information with regard to Western Electric purchases which would give an indication as to the actual Western Electric price increases. Such information was never provided to Commission Staff; however, during the hearings in this case, Company witness Jones testified that prices for Western Electric products were rising at a rate of approximately 16% as of November of 1981 (Tr. Vol. 6, pp. 121 and 139-140). Given that the Company obviously had this information and utilized it in preparing its testimony on Western Electric, this Commission is of the opinion that at least in this instance, the Company deliberately withheld available information from Commission Staff. Therefore, while we would normally have approved an inflation factor adjustment for Western Electric purchases, we will totally exclude Western Electric products from any inflation adjustment in this case as a result of the Company's lack of cooperation with Commission Staff with regard to obtaining information on price trends of Western Electric products. (Citations omitted.) Again, we start from the premise that the utility has the burden of proving the reasonableness of any increase it requests. Accord, Utah Department of Business Regulation, Division of Public Utilities v. Public Service Corporation, Utah, 614 P.2d 1242, 1245 (1980); Public Service Coordinated Transport v. State, 5 N.J. 196, 74 A.2d 580, 593-594 (1950); Bell Telephone Co. of Pennsylvania v. Pennsylvania Public Utility Commission, 47 Pa.Commw. 614, 408 A.2d 917, 925-926 (1979); Texas Alarm and Signal Association v. Public Utility Commission, Tex., 603 S.W.2d 766 (1980); Re Southern California Gas Company, 35 PUR.3d 300, 309 (1960); Re Gas Company of New Mexico, 28 PUR.4th 20, 23 (1978). The Commission has a duty to go beyond the Company's schedules and submissions. Public Service Coordinated Transport v. State, supra 74 A.2d, at 591-592; Utah Department of Business Regulation, supra 614 P.2d, at 1247. The Commission Staff requested additional submissions from C & P on Western Electric purchases. Utilities must supply information requested by the Commission, W.Va.Code, 24-2-7 and 24-2-9, and it need not be in the form of the company's account books. Accord, Washington Public Interest Organization v. Public Service Commission, 393 A.2d 71, 80-82 (D.C.App. 1978), U.S. cert. denied; New England Telephone and Telegraph Co. v. Public Utilities Commission, Me., 390 A.2d 8, 23 (1978); Trustees of Clark University v. Department of Public Utilities, 372 Mass. 331, 361 N.E.2d 1285 (1977); American Can Co. v. Davis, 28 Or.App. 207, 559 P.2d 898 (1977); New England Telephone and Telegraph Co. v. Public Utilities Commission, R.I., 446 A.2d 1376, 1385 (1982). The Staff needed that data to determine the appropriate inflation adjustment, rather than to apply an across-the-board inflation factor. These requests for data were made in ample time for C & P to respond. The Commission had requested this data in three previous orders. Re Chesapeake and Potomac Telephone Company of West Virginia, 26 PUR.4th 29, 38 (1978), 40 PUR.4th 279 (1980), and 42 PUR.4th 312 (1981). The large quantity of business done with Western Electric, which resulted in $10,745,560 in C & P's operating expenses, recommends that it be treated differently than minor purchases. Although there was some evidence that purchases of manufactured goods from Western were not increasing at a rate commensurate with the general inflation rate, the Staff could not obtain sufficient data from C & P to quantify the exact level of past and prospective changes in prices for Western Electric products. Other courts and public service commissions have addressed the problem of a utility company's failure to submit required data. The Texas Supreme Court, in Texas Alarm and Signal Association v. Public Utility Commission, supra 603 S.W.2d, at 773, wrote: We have previously recognized Bell's size and how it creates an aura of self-evaluation in Commission proceedings. State v. Southwestern Bell Telephone Co., 526 S.W.2d 526, 532 (Tex.1975). We also recognize that Bell has the data and expertise required to design rate structures. Therefore, to justify their [sic] rate structure, Bell must present its data and produce additional information that is reasonably requested by the Commission or intervenors. In summary, the Commission has discretion to determine relevant factors in a rate design problem; those factors must address whether the resulting rate structure is just, reasonable, and not unreasonably discriminatory; the utility must be consistent in proceedings; and the burden of proof of the utility includes the obligation to produce relevant information. This same concept was articulated by the Utah Supreme Court: A state regulatory commission, whose powers have been invoked to fix a reasonable rate, is entitled to know and before it can act advisedly must be informed of all relevant facts. Otherwise, the hands of the regulatory body could be tied in such fashion it could not effectively determine whether a proposed rate was justified. Utah Department of Business Regulation v. Public Service Commission, supra 614 P.2d, at 1245-1246 (footnotes omitted). The Maine Supreme Court supported its Public Utilities Commission's decision to deny New England Telephone and Telegraph Co. (NET) a short-term CWIP (construction work in progress) expense in its rate base with an appropriate AFUDC (allowance for funds used during construction) adjustment. The court stated: NET contends alternatively that the Commission should have included NET's short-term CWIP in rate base with an appropriate AFUDC adjustment instead of merely excluding all short-term CWIP. The Commission does not deny that an AFUDC adjustment would have been acceptable but claims that NET failed to present any evidence to support a computation of the adjustment. ... It does not appear why the necessary information could not have been extracted and compiled with a reasonable amount of effort and within a reasonable period of time. ... Accordingly we hold that the Commission's exclusion of $4,877,000 of short-term CWIP from rate base without an AFUDC adjustment in NET's income statement was reasonable as long as NET did not supply the data necessary for computing the compensating AFUDC offset. New England Telephone & Telegraph Co. v. Public Utilities Commission, Me., 448 A.2d 272, 294-295 (1982). Rhode Island's Public Utilities Commission refused to excuse NET's failure to provide requested cost studies and rejected the cost evidence submitted by the company. The Rhode Island Supreme Court upheld the Commission on this point: In the case at bar, no finding was made concerning the additional aggregate revenue needs of NET. Indeed, the very heart of the controversy revolves around the commission's position that a threshold requirement for any determination of NET's increased revenue needs is the presentation of a comprehensive fully allocated cost study identifying all costs associated with each and every particular service listed in the company's tariff. Nor can it be seriously maintained that the record before us is devoid of any complaints by the commission regarding NET's failure to provide it with more adequate and detailed cost information to support both the filing in question and previous filings. ... [W]e again stress that our statutory scheme places upon a Rhode Island utility the burden of proving both its overall revenue needs and the reasonableness of its rates. Moreover, no affirmative duty is imposed upon the commission to fix such rates when the utility has not demonstrated that its new rate schedule is reasonable and not unjustly discriminatory. New England Telephone & Telegraph Company v. Public Utilities Commission, R.I., 446 A.2d 1376, 1386 (1982). The New Mexico Public Service Commission stated in Re: Gas Company of New Mexico, supra 28 PUR.4th, at 23: [A] utility has the burden of proof to demonstrate that its proposed increase in rates or charges is just and reasonable. The mere filing of schedules and testimony in support of the rate increase is insufficient to meet this burden. The company must support its application by way of substantial evidence. Two other public service commissions have denied increases where access to necessary information has been denied the commission staff. In Re: Southwestern Bell Telephone Company, supra 36 PUR. 4th, at 290, the Missouri Commission denied the telephone company a portion of the license contract payment relating to antitrust litigation, stating: [T]he portion of the contract payment relating to antitrust litigation should be disallowed since no expense should be included when the commission staff has been denied access to the supporting records to determine the proper level or the reasonableness of the claimed expense. The Ohio Commission rejected an allowance for Ohio Edison's stockpile management program, an exercise mandated by EPA requirements, because the company's testimony was not backed by any evidence. Applicant's witness Wilson estimates the handling costs associated with these efforts at $1,503,000 and proposes a two-year amortization of this amount. Although it is apparent that the Company has been aware of these requirements for sometime, certainly since before the six-and-six case was submitted, no mention was made of the proposed adjustment in any of the applicant's previous filings. The staff had no opportunity to review the adjustment during its investigation, and we still have only vague clues as to the basis on which it is calculated. Under these circumstances, there is simply no way the Commission will approve such an adjustment. Re: Ohio Edison Company, supra, 33 PUR.4th, at 466-467. The Commission cannot punish C & P for its recalcitrance in providing requested and necessary information by denying an item. It should revise that portion of its final order that indicates its decision not to apply the inflation factor to Western Electric purchases was punitive. The Commission is provided other means of countermanding noncooperation. W.Va.Code, 24-2-2, 24-4-3. [5] Nonetheless, this portion of the Commission's decision is affirmed, based on C & P's total failure to prove by competent evidence that a 20.1 percent inflation factor was appropriately applied to its substantial purchases from Western Electric. Affirmed in part; reversed in part.