Opinion ID: 2215827
Heading Depth: 2
Heading Rank: 1

Heading: Calculation of the Rate Base in 18515.

Text: A public utility's rate base is its total investment (less depreciation) in property that is used and useful to the public in providing utility service during the test year. E.g., New England Tel. & Tel. Co. v. Department of Pub. Utils., 360 Mass. 443, 450 (1971). The rate base ultimately adopted by the Department in 18515 was $986,692,000, which is about $40,000,000 lower than the $1,027,006,000 rate base figure proposed by the Company. Boston Edison contends that, in computing the rate base, the Department committed the following errors: (1) it based its computation on the Company's average investment during the test year rather than on its total investment at year end; (2) it excluded from the rate base certain funds  known as compensating balances  kept on deposit in various banks to ensure the availability of short-term credit; (3) it excluded the unamortized portion of the Company's investment in certain pollution control equipment which can no longer be used economically and which was not used during the test year; (4) it excluded the Company's investment in land held for possible future use; and (5) it reduced the cash working capital allowance includable in the rate base by rejecting the use of a standard accounting convention and instead estimating the Company's future working capital needs from evidence of the Company's actual experience. 1. Year average vs. Year end. In its proposed calculation of rate base, Boston Edison used year-end 1975 figures, which it urged the Department to adopt in order to offset the effects of attrition and regulatory delay. The interveners, on the other hand, urged the Department to use the year average calculation  that is, the average of the year-end figures for 1974 and 1975. It has become the Department's established practice to use the year-average method, but in 18515 the Department departed from this method to include the full year-end value of the Mystic 7 station (Mystic 7), less depreciation, in the rate base. This adjustment gave Boston Edison approximately seven-eighths of the differential resulting from the two methods of calculation. The Company's protest on appeal is that the Department did not abandon its established practice altogether for the test-year 1975. There was no error. The Department is not compelled to use any particular method for calculating the rate base, provided that the end result is not confiscatory  a matter in which the utility bears the burden of proof. Fitchburg Gas & Elec. Light Co. v. Department of Pub. Utils., 371 Mass. 881, 884 n. 5 (1977). New England Tel. & Tel. Co. v. Department of Pub. Utils., 371 Mass. 67, 71 (1976). New England Tel. & Tel. Co. v. Department of Pub. Utils., 360 Mass. 443, 453 (1971). In this instance, the Department tailored the application of the year-average and year-end methods to yield a fair and principled result. [9] 2. Compensating balances. The Company's calculation of rate base included $22,592,000 in compensating balances kept on deposit in various banks to ensure the availability of short-term credit. The Department excluded this sum from the rate base in 18515. Boston Edison concedes that its loan agreements with these banks do not limit the Company's ability to withdraw these funds, but it stresses that, as a practical matter, it must maintain compensating balances if it hopes to continue short-term borrowing. The Department's objection is that the Company has not attempted to trace and measure what portion, if any, of the compensating balances are used and useful to the ratepayers. The record does not show the purposes for which the short-term credit is used; the Company has not broken down the $22,592,000 sum to apportion short-term credit between operating costs and capital costs, which are not includable in rate base. In such undifferentiated form, compensating balances do not reflect any measure of usefulness to customers asked to pay a rate of return on them. For this reason, the Department excluded the entire amount from the rate base, relying on our decision in New England Tel. & Tel. Co. v. Department of Pub. Utils., 360 Mass. 443, 460 (1971). There was no error. The same failure of proof has occurred here as occurred in that case. Moreover, the Company was put on notice by the Department's decision in 18200/18200-A that the need for compensating balances and the necessary amount thereof should be clearly established as part of a working capital lag study. In the absence of such evidence, it was not improper for the Department to exclude the Company's proposed rate base adjustment. 3. Exclusion of the scrubber from rate base. In 1970, Boston Edison invested $5,283,000 in a scrubber, a pollution control device designed to permit the use of inexpensive high sulphur fuel oil without increasing air pollution. The Company built the scrubber as an experiment which, if successful, might have saved ratepayers a substantial amount in fuel clause charges. Tests showed that the scrubbing process did indeed work, but the scrubber has been permanently retired because changes in Federal air quality regulations have made operating the device economically unfeasible. The Department has permitted the Company to recover the entire amount of its investment from the ratepayers. For this reason the Department has allowed the Company to amortize the investment over a ten-year period; one-tenth of the investment will be reflected in the rates, as part of the cost of providing electrical service, each year for ten years. But the Department will not permit the Company to earn a return on the unamortized portion of the investment in the meantime. For this reason, the Department excluded the unamortized portion from the rate base in 18515. There was no error. The record shows that the scrubber was not used or useful to the ratepayers during the test year and would not be put back in operation in the future. This court has sanctioned the Department's general policy of excluding retired plant from the rate base provided that the Department applies its policy consistently to the affected utility and provided that the exclusion does not have a confiscatory effect. See Fitchburg Gas & Elec. Light Co. v. Department of Pub. Utils., 371 Mass. 881, 886 (1977). Special circumstances may necessitate an exception to the Department's policy on occasion, see Boston Gas Co. v. Department of Pub. Utils., 367 Mass. 92, 101-102 (1975), but no special circumstances appear in this case. 4. Plant held for future use. The Company included $1,895,691 in its proposed year-end rate base as plant held for future use. Of this amount, $1,663,000 was allocated for land, and $232,691 for plant that had been retired in 1972. The Company introduced no plan for the use of either. There was no error in excluding the two items from the rate base. When the Company anticipates a need for constructing a new plant, it buys land in the area under consideration, often well before the time when the land will actually be used in construction. The Company contends that, in the long run, a program of this sort might reduce the Company's total land acquisition costs. This may be true, but in the meantime the land is not used and useful in providing service to the ratepayers. Moreover, the Company remains free to sell the land at a profit, which goes to the stockholders, not to the ratepayers. One such sale occurred during the test year. The Department's general policy is to exclude from the rate base items that are not currently used and useful to the ratepayers. E.g., New England Tel. & Tel. Co., 11 P.U.R. 4th 297 (Mass. Dep't of Pub. Utils. 1975). This policy is in accord with that of many jurisdictions, see 1 A.J.G. Priest, Principles of Public Utility Regulation 180 & n. 138 (1969), and there was no reason to depart from it in this case. 5. Cash working capital. The cash working capital allowance in the rate base represents the amount of money the utility must supply from its own funds to meet operating expenses as they arise during the period between the rendition of service and the receipt of payment therefor. Ordinarily, the allowance equals 12.5% of those total annual operating expenses that require working capital. That is, the company should have enough cash on hand to cover forty-five days of operating expenses (12.5% of the year), on the assumption that there will be a lag of forty-five days between rendition of service and payment by the customer. The forty-five day figure is a widely used convention, but it is axiomatic that the regulatory agency may quite reasonably and properly take into account factors which reduce the need as well as those which increase it. Alabama-Tenn. Natural Gas Co. v. Federal Power Comm'n, 203 F.2d 494, 498 (3d Cir.1953). Using the forty-five day standard, the Company included $30,457,000 in its proposed rate base as cash working capital. It included another $28,917,000 to cover an additional sixty-day lag in the collection of revenues associated with fuel expenses. The interveners objected that if the Department allowed both items in the rate base, it would in effect be allowing the Company a return on 105 days of working capital purportedly needed to cover fuel expenses. [10] The Company's witness had admitted on cross-examination, however, that there was a ninety-day lag for fuel costs, not a 105-day lag. The Department, therefore, rejected Boston Edison's proposals and recalculated the Company's working capital needs according to the evidence. It allowed ninety days of working capital to cover fuel costs; sixty days of working capital to cover purchased power costs; and the usual forty-five days of working capital to cover all other operating expenses. The recalculation lowered the Company's proposed working capital allowance by $4.6 million. The Department's decision was supported by substantial evidence.