Opinion ID: 1918402
Heading Depth: 1
Heading Rank: 1

Heading: 1994 Operations & Maintenance Expenses

Text: In its first assignment of error, the Company contends that the Commission erred by disallowing $6.116 million in 1994 O & M expenses incurred to produce future O & M savings, more particularly, expenses attributed to employee severance costs, employee benefit costs, and costs associated with consolidating business offices. The Company proposed that some expenses be deferred and amortized over three years and others over five years, so that the Company would recover these expenses through base rates over the period of time during which the savings would be realized. Initially, the Commission's expert witness, Mr. Lane Kollen, opposed the Company's request to amortize some of the expenses over three years and others over five years. Rather, he argued that they should all be amortized over five years. Nonetheless, Mr. Kollen acknowledged that the ratepayers should share in bearing these expenses because the ratepayers stand to benefit from the resultant savings. Even in the Commission Staff's Post-hearing Brief to the Commission, the Staff argued that deferral of the expenses with a five year amortization was the more reasonable treatment. The Staff stated: The five year amortization is reasonable, because it more fairly matches the amortization period with the savings created by the nonrecurring costs. The company seeks recovery of these merger related costs because they will produce savings.... A matching of the amortization period with the savings period would be reasonable. Thus, Mr. Kollen's five-year amortization is reasonable. Post-Hearing Brief on Behalf of the La. Pub. Serv. Comm'n of 2/23/96, at 20 (citations omitted). Because the Staff, its expert, and the Company all advocated recovery of these expenses, neither the Company nor the Staff presented evidence on the propriety of totally disallowing the expenses. Nonetheless, the issue went before the ALJ, who declined to recommend any amortization. Instead, she recommended disallowing entirely the relevant 1994 O & M expenses. The Commission adopted the recommendation and reasoning of the ALJ. In the rate order, the Commission essentially provided four reasons for disallowing the 1994 O & M expenses. [5] The Commission first points to the following provision of the Proposal: The Company will not be allowed to defer O & M expense for the purpose of computing savings under the mechanism set forth in Attachment A [the O & M savings tracker]. L.P.S.C. Order No. U-19904, Appendix 1. The Commission contends that an expense must be deferred on the Company's books for later collection in order to be amortized over a number of years. Because O & M expenses cannot be deferred for the purpose of computing savings according to the Proposal, the Commission concludes that deferral of O & M expenses in order to facilitate recovery of these costs is equally impermissible. On the other hand, the Company contends that this provision addresses only the effect of deferring O & M expenses on the computation of savings pursuant to the merger savings tracker. In other words, according to the Company, the provision says only that the Company cannot defer O & M expenses for the purpose of determining the amount of savings in a given test year; the provision does not address whether O & M expenses themselves may be amortized and recovered in rates over forthcoming years, and it says nothing to justify a disallowance of costs in calculating the Company's revenue requirement. We agree with the Company on this point. When a Commission order adopts an agreement between a utility and the Commission, this Court cannot unjustifiably disregard the parties' intentions or the plain language of the agreement to uphold the Commission's interpretation of the order, even though the Commission's interpretation of its own orders generally deserves great weight. The Commission cites no evidence in the record [6] or other authority supporting its contention that the Proposal precludes recovery of O & M expenses incurred to produce savings. Instead, the language in the Proposal expressly precludes deferral of O & M expenses for the purpose of computing savings, not for the purpose of determining whether O & M expenses incurred to produce future savings are recoverable. In fact, the experts on both sides recommended recovery of the 1994 O & M expenses. The Commission Staff's expert, Mr. Kollen, acknowledged that this provision of the Proposal was intended to prevent the Company from deferring O & M expenses for the purpose of artificially creating or increasing purported savings by understating test year expenses in the tracker calculation. Dir. Test Mr. Kollen at 10, L.P.S.C. (10/95). For example, the amount of savings under the tracker would be increased if the Company deferred the incurrence of O & M costs, or the ratemaking recognition of these costs, until after the end of the seven-year period during which savings will be measured. Because O & M expense would be reduced in the year in which such costs are deferred, measured savings would be increased for that year. Mr. Kollen explicitly recognized that the Company did not have this impermissible purpose in mind and that its filing did not attain this impermissible result. Id. After reviewing the record, we find no reason not to apply the express language of the provision as written. Accordingly, we find that the Commission's reliance on this provision is not based on the record, and it is arbitrary and capricious. Second, the Commission reasons that the Company can recoup the O & M expenses incurred to produce savings through the merger savings tracker, which allows the Company to keep sixty percent of savings resulting from the mergersavings which will recur annually. The Company contends that it is unfair to disallow recovery of these expenses simply because the Company recoups sixty percent of merger-related O & M savings. These savings, the Company asserts, were solely intended to recompense the Company for the premium Entergy paid to acquire the stock of Gulf States. Again, we agree with the Company. Entergy agreed to pay $20 per share for Gulf States, an amount in excess of the market price and book value of the stock when the offer was made. L.P.S.C. Order No. U-19904 at 82. According to the Merger Order, the Commission understood that Entergy seeks to recover ... the premium it will pay for the stock through a mechanism for sharing the savings it expects to realize from the merger. Id. The Commission further recognized that the merger savings would be the shareholders' sole compensation for the premium paid by Entergy to acquire Gulf States' stock. In the Merger Order, the Commission cited the testimony of Mr. Richard D. Treich, who noted: The regulatory treatment proposed in connection with this Joint Application would allow the investors to be compensated for assuming that risk and would encourage them to assume that risk, as a means of creating the significant savings that will be made available to Gulf States' customers. The compensation to which the investors would be entitled would not be guaranteed to those investors, but would only be available out of savings for which management would be at risk and for which base rates would not be increased. L.P.S.C. Order U-19904 at 82-83 (emphasis added). The Merger Order also states that [t]he plan to allow shareholders to keep 60 percent of O & M cost savings allows them a reasonable opportunity to recover the premium included in their investment, without which their would be no merger savings. Id. at 85. The Commission reasoned that the savings tracker mechanism permitting Entergy to share only in the savings actually achieved provides a substantial incentive to Entergy to fulfill its [savings] predictions. Id. at 73. We find that the Commission's proposal that the merger savings be used to pay for O & M expenses ascribable to merger savings controverts the intentions of the parties in the Proposal. The parties agreed that the merger savings would be used solely to compensate Entergy's shareholders for the acquisition premium. Accordingly, we find no merit to the Commission's second reason. Third, the Commission reasoned that the expenses were functionally equivalent to the 1993 merger-related O & M expenses that were disallowed in the first year's earnings review rate order, Order No. U-19904-C, and should accordingly be disallowed in this second year's earnings review as well. In the first earnings review based upon the pre-merger 1993 test year, the Company included 1993 directors and shareholders expenses in its filings. The Commission, however, disallowed the expenses, and the Company did not appeal. The Company asserts that the disallowed 1994 O & M expenses are dissimilar to the 1993 O & M expenses, which included payments made to officers of Gulf States prior to the merger. The 1993 O & M expenses had been disallowed, the Company argues, because they were perceived as increasing the premium paid by Entergy for which it had agreed not to seek base rate recovery. Because the 1994 O & M expenses at issue were incurred after closing of the merger, the Company argues they could not have contributed to the premium paid by Entergy. The Commission does not assert in its brief to this Court that the previous order addressing 1993 O & M expenses has the effect of res judicata. Moreover, the 1994 O & M expenses at issue were disallowed for totally distinct reasons. In the Merger Order following the first earnings review, the Commission disallowed 1993 O & M expenses based upon the testimony of Mr. Kollen, who, incidentally, recommended recovery of the 1994 O & M expenses. L.P.S.C. Order No. U-19904-C at 28. In disallowing recovery and deferral of the expenses, the Commission stated: Since these personnel costs were expenses by Gulf States prior to the merger, the costs effectively increased the acquisition adjustment paid by Entergy for the Gulf States stock. Accordingly, Mr. Kollen found that these costs were part of the acquisition adjustment and were not recoverable from the Louisiana retail cost of service and not be deferred..... The Commission adopts Mr. Kollen's recommendation. Id. at 64. The Commission's exclusion of pre-merger 1993 O & M expenses does not support the Commission's disallowance of the post-merger 1994 O & M expenses, which did not affect the premium Entergy paid for Gulf States' stock. Accordingly, we find the Commission's reliance on this argument is arbitrary and capricious. Fourth, the Commission contends that the 1994 O & M expenses were properly disallowed because they were abnormal and nonrecurring. The Commission asserts that disallowance of abnormal and nonrecurring expenses is consistent with the general rule against retroactive ratemaking, which occurs when a utility is permitted to recover an additional charge for past losses.... South Central Bell Tele. Co. v. Louisiana Pub. Serv. Comm'n, 594 So.2d 357, 359 (La. 1992). Under this rule, test year data should be representative of conditions prevailing in the immediate future when the rate will be effective. Central La. Elec. Co., 508 So.2d at 1369. In Central Louisiana Electric Co., this Court observed that: [t]he test year is merely a tool. Thus, test year data should not be looked at in isolation or arbitrarily applied. Instead, [e]very aspect of the utility's operations during the test year must be examined in order to determine the extent to which the figures it has received from the utility are representative of the figures that will, or should prevail in the future. When it is apparent the test year data provides an inaccurate forecast of the future, adjustments should be made so as to provide a reasonably accurate estimate of future operating conditions. Id. (citations omitted). The Commission relies upon this Court's opinion in the first earnings review for the 1993 test year, in which we disallowed litigation expenses in part because they were unusual and not likely to recur. Gulf States Utils. Co., 676 So.2d at 579-80. The Commission also cites Southern Bell v. Louisiana Pub. Serv. Comm'n, 239 La. 175, 118 So.2d 372, 384 (La.1960), where we upheld a Commission order disallowing advertising expenses because they were abnormal and nonrecurring, and because their inclusion in the operating expense accounts would distort test year earnings. Moreover, the Commission argues that the parties acknowledged that the expenses were abnormal and nonrecurring. In fact, the record reflects that the Company's expert, Mr. David Wright, did indeed testify that the expenses were unusual and nonrecurring: Q. Okay. So merger-related early retirement and termination expenses are unusual and nonrecurring; right? A. Yes. They are also a cost incurred and necessary for the company to achieve the savings that the company has predicted down the line. Cross Exam. Mr. Wright at 849-50, L.P.S.C. (1/16/96). We find the cases cited by the Commission supporting the disallowance of abnormal and nonrecurring expenses distinguishable under the unusual circumstances of the Proposal. Under this agreement, the Commission rewards the Company for reducing O & M expenses by allowing it keep sixty percent of the savings as its sole reimbursement for the premium paid by Entergy for Gulf States' stock. Significantly, the Commission reasoned that [t]he rate plan also benefits ratepayers... by providing for annual review that will flow through their share of the savings ... Ratepayers can only benefit from this process.  L.P.S.C. Order No. U-19904 at 85 (emphasis added). Thus, the Merger Order induces the Company to incur abnormal and nonrecurring expenses to create savings that benefit ratepayers, as well as the Company. This Court most recently addressed unusual and nonrecurring expenses in Gulf States Utils. Co., 676 So.2d at 579-80, which involved the first earnings review following the Merger Order. In that case, Gulf States asserted that the Commission erred by disallowing $1.73 million in litigation expenses incurred in its defense of a fraud suit brought by Cajun Electric Power Cooperative. The expenses were not incurred to produce savings pursuant to a plan similar to the Proposal. We upheld the Commission's order for two reasons. First, we reasoned that any judgment in the case against Gulf States would have affected its shareholders, not the ratepayers, due to the underlying allegations of fraud. Therefore, the defense of the suit benefitted [Gulf States'] shareholders, not the ratepayers.  Id. at 579 (emphasis added). Second, we noted that it appears that these litigation expenses were unusual and not likely to recur. Id. In Southern Bell Telephone & Telegraph Co., 118 So.2d at 384, also cited by the Commission, the facts further suggest that the expenses did not benefit ratepayers. Moreover, the expenses were not incurred to produce future savings pursuant to a plan similar to the Proposal. In that case, the Commission disallowed $225,000 during the test year for advertising expenses incurred to inform the public of the utility's position pending its application for a rate increase. Id. We stated that other jurisdictions condemn the practice of utilities in using the ratepayer's money to conduct an advertising campaign to increase the rates. Id. Accordingly, we affirmed the Commission's order disallowing the expenses because they were abnormal and nonrecurring in character. Id. The case sub judice is quite distinguishable from these cited cases. The ratepayers benefit substantially from O & M expenses incurred to produce savings pursuant to an agreement between the Commission and the Company. It is this benefit that convinced the Commission, in part, to adopt the Merger Order and Proposal. It is unreasonable to disallow totally the expenses prudently incurred to produce savings for the benefit of the Company and the ratepayers, which is the object of the Merger Order and Proposal. Thus we also find the Commission's position in this regard untenable. Because we find all of the Commission's reasons for disallowing the 1994 O & M expenses incurred to produce savings to be either arbitrary or capricious or unsupported by the record, we remand this portion of the case to the Commission for further proceedings to determine the appropriate amortization period for recovery of these expenses.