Opinion ID: 2284798
Heading Depth: 1
Heading Rank: 5

Heading: treatment of expenses incurred for advertising, trade association membership, community affairs programs, and business and civic organization support

Text: The Commission, over the dissent of Commissioner Stratton, found that certain expenses, including $95,000 for general advertising, $56,000 for trade association dues, $130,000 incurred in providing information to schools and community groups, and $35,000 for membership dues and support payments to civic and business organizations, did not inure to the benefit of WGL's customers. The Commission therefore concluded that these expenses should be borne by the Company's shareholders, rather than its ratepayers. Order 6051, at 68-74. The Commission concurrently announced its intention to initiate rulemaking hearings on the treatment of advertising expenses in the near future. Id. at 69. On appeal the Company argues that the Commission's change of policy was arbitrary and unreasonable. The Commission and People's Counsel respond that the Commission acted within the scope of its allowed discretion and that, as the Company failed to prove that these expenditures directly benefited the ratepayers, the Commission's action must be sustained. Finding no error, we affirm the Commission's treatment of these expenses.
In the proceedings before the Commission, People's Counsel proposed that WGL's general and administrative expenses be reduced by $95,000, the amount expended by WGL on general advertising during the test year. First, People's Counsel contended that WGL had for accounting purposes treated the advertising expenses as being of a good will or institutional nature which is ... designed to improve the image of the utility or the industry, rather than as informational. [48] Second, Daniel Sack, the witness for People's Counsel, stated in prepared testimony that, in light of restrictions on the Company's authorization to expand service to new customers, [49] he considered it inappropriate to charge advertising expenses to the ratepayers. [50] WGL's witness, Unkle, responded that, despite the technical wording of the Uniform System of Accounts, over half the expenses in the account represented the Company's contribution to the American Gas Association's media advertising program, which informs customers about gas safety, gas supply, fuel characteristics, and the rising cost of gas. Unkle acknowledged that the Company had in the test year kept another, separate account, which covered informational advertising to customers. The Commission accepted People's Counsel's proposed adjustment to the Company accounts, stating: Whenever WGL wants to charge its advertising to the ratepayers, it must carry the burden of proof. In this instance, People's Counsel alleged that WGL's advertising program was strictly for image building. Faced with this challenge, WGL should have come forward with a detailed presentation. Instead, although WGL presented a rebuttal witness, he contented himself with a three-sentence response. The witness' statement that the advertising was informational is phrased in generalized and conclusory language. It defies analysis or verification. In these circumstances, the Commission will not require the ratepayers to underwrite these advertising costs. [Order 6051, at 69 (emphasis added).] On appeal, the Company contends that the Commission erred in its allocation of the burden of proof. The Commission charged the Company with the burden of responding to the challenge by People's Counsel to WGL's accounting practice. The Company argues instead that the Commission bears the burden of explaining the reasonableness of any departure from a long-standing practice, and any facts underlying its explanation must be supported by substantial evidence. Columbia Gas Transmission Corp. v. Federal Energy Regulatory Commission, 202 U.S.App.D.C. 219, 299 n. 31, 628 F.2d 578, 586 n. 31 (1979). See also Atchison, Topeka & Santa Fe Railway Co. v. Wichita Board of Trade, 412 U.S. 800, 808, 93 S.Ct. 2367, 2375, 37 L.Ed.2d 350 (1973). The case before us differs materially from Columbia Gas Transmission Corp. v. Federal Energy Regulatory Commission, supra , upon which petitioner relies. In Columbia Gas, the Commission itself, and its predecessor, the Federal Power Commission, for nearly twenty-five years had used one method of accounting (the Seaboard formula) for purposes of both cost allocation and rate design. 202 U.S.App.D.C. at 295 & n. 12, 628 F.2d at 582 & n. 12. In rate proceedings one party had suggested substitution of another accounting method (the United formula) for purposes of rate design. Several parties presented substantial evidence in opposition to such a substitution, while its proponent simply contended without evidentiary support that the substitution would distribute certain costs more equitably. The Commission staff also supported the United proposal. An administrative law judge found the United proposal inapplicable, but was overruled by the Commission which in conclusory fashion adopted the United proposal. Id. 202 U.S.App.D.C. at 296-98, 628 F.2d at 583-85. The court reviewed the record and found no evidence that adoption of the United proposal would serve any purpose. Under these circumstances, the court stated that, although the Commission was empowered to reconsider its policy and change its approach, in case of such a change the Commission was at least required fully to articulate the basis for its decision. Id. 202 U.S.App.D.C. at 305-06, 628 F.2d at 592-93. See also West Ohio Gas Co. v. Public Utilities Commission (No. 1), 294 U.S. 63, 72, 55 S.Ct. 316, 321, 79 L.Ed. 761 (1935) (commission's disallowance of certain advertising expenses as business expenses chargeable to ratepayers was wrong where the commission's action had no basis in evidence, either direct or circumstantial ). In this case, unlike Columbia Gas, the Commission had never before ruled on the accounting treatment of advertising expenses. [51] We are thus not confronted with a departure from a long-standing Commission practice. Under these circumstances, the Commission did not bear the burden of explaining the reasonableness of its ruling. The Commission's ruling on the burden of proof issue, that it was incumbent upon the Company to demonstrate that the advertising benefited its ratepayers in order to charge its ratepayers for these expenses, was consistent with modern utility practice. See, e.g., In re General Telephone Co., 37 P.U.R.4th 127, 155 (Cal.P.U.C.1980); In re Mountain States Telephone and Telegraph Co., 22 P.U.R.4th 516, 541 (Colo.P.U.C.1977); In re Hawaiian Telephone Co., 23 P.U.R.4th 385, 404 (Hawaii P.U.C.1978); In re Central Illinois Public Service Co., 34 P.U.R.4th 267, 280-81 (Ill. Commerce Comm'n 1979); In re South Carolina Electric and Gas Co., 37 P.U.R.4th 441, 480 (S.C.P.S.C.1980). Courts too have ruled that institutional advertising expenses should not be charged to ratepayers unless the utility establishes [that] such expenditures benefit all ratepayers. State v. Oklahoma Gas and Electric Co., 536 P.2d 887, 894 (Okl.1975); accord, e.g., State ex rel. Laclede Gas Co. v. Public Service Commission, 600 S.W.2d 222, 228-29 (Mo.App. 1980), appeal dismissed, 449 U.S. 1072, 101 S.Ct. 848, 66 L.Ed.2d 795 (1981); City of Cleveland v. Public Utilities Commission, 63 Ohio St.2d 62, 70-73, 406 N.E.2d 1370, 1377-79 (1980); cf. Washington Public Interest Organization v. Public Service Commission, supra at 85 (the question before us in determining the propriety of a Commission ruling on an accounting issue was whether the Company had made a convincing showing that the Commission's ruling was unreasonable, unjust, or discriminatory.) But see note 55 infra. The Commission fairly described the Company's evidence as a generalized and conclusory refutation of People's Counsel's proposal. Order 6051, at 69. [52] The evidence presented by People's Counsel, although weak, was at least as substantial as the Company's. Circumstantial evidence was presentedthe recording of the disputed expenses in Account 930.1, and the existence of a second separate account for informational advertising, as testified to by the Company's witness Unkle on cross-examinationindicative that the Company had made an internal judgment that the expenses were image-building in nature. [53] Also, Sacks's argument, that since WGL would in the near future be permitted to expand only minimally promotional advertising was unnecessary, buttressed the position of People's Counsel. [54] Under these circumstances, we cannot conclude that the Company has made a convincing showing that the Commission's determination, that the Company failed to prove that the advertising was other than image-building in nature, was factually unreasonable. Nor did the Commission err as a matter of law in concluding that such expenses must be charged to the Company's shareholders rather than its ratepayers. The principle underlying public utility accounting systems is that gains and losses on assets which are used and useful in serving the public are allocated to the ratepayers, while expenses for and profits from nonutility assets are allocated to the company's shareholders. Washington Public Interest Organization v. Public Service Commission, supra at 82. A regulated utility may not impose unnecessary costs upon its consumers. Cities Service Gas Co. v. Federal Power Commission, 424 F.2d 411, 417 (10th Cir. 1969), cert. dismissed, 400 U.S. 801, 91 S.Ct. 9, 27 L.Ed.2d 33 (1970). A large number of public utility commissions have in recent years concluded that institutional advertising, which is designed to enhance or preserve the corporate image of the utility, and to present it in a favorable light, City of Cleveland v. Public Utilities Commission, supra 63 Ohio St.2d at 70, 406 N.E.2d at 1377 (quoting In re Promotional Practices of Public Utilities and Cooperative Utility Associations, 97 P.U.R.3d 1, 4 (Okla.Corp.Comm'n 1972)), benefits company shareholders, rather than ratepayers, and should be disallowed as an operating expense upon which to base utility rates. See, e.g., In re Southwestern Bell Telephone Co., 27 P.U.R.4th 493, 509-11 (Ark.P.S.C. 1979); In re Mountain States Telephone and Telegraph Co., supra at 541 (Colo.); In re Southern Bell Telephone and Telegraph Co., 21 P.U.R.4th 451, 471-72 (Fla.P.S.C. 1977); In re Hawaiian Telephone Co., supra at 403-04; In re Idaho Power Co., 29 P.U. R.4th 183, 204 (Idaho P.U.C.1979); In re Interstate Power Co., 32 P.U.R.4th 494, 509 (Minn.P.S.C.1979); In re Empire District Electric Co., 30 P.U.R.4th 1, 3-4 (Mo.P.S.C. 1979); In re Gas Co., 35 P.U.R.4th 106, 127-28 (N.M.P.S.C.1980); In re South Carolina Electric and Gas Co., 34 P.U.R.4th 458, 489 (S.C.P.S.C.1979); In re Otter Tail Power Co., 30 P.U.R.4th 26, 34-36 (S.D.P.U.C. 1979); In re Monongahela Power Co., 25 P.U.R.4th 449, 455 (W.Va.P.S.C.1978); In re Madison Gas and Electric Co., 34 P.U.R.4th 569, 575 (Wis.P.S.C.1980). Courts have sustained such determinations as being reasonable and within the scope of the commissions' authority. E.g., State ex rel. Laclede Gas Co., supra at 226-29; City of Cleveland v. Public Utilities Commission, supra 63 Ohio St.2d at 72-73, 406 N.E.2d at 1378-79; State v. Oklahoma Gas and Electric Co., supra at 894; Pacific Northwest Bell Telephone Co. v. Davis, 43 Or.App. 999, 1015, 608 P.2d 547, 556 (1979); cf. Consolidated Edison Company of New York, Inc. v. Public Service Commission, 47 N.Y.2d 94, 417 N.Y.S.2d 30, 34, 103, 390 N.E.2d 749, 752-53 (1979), rev'd on other grounds, 447 U.S. 530, 544, 100 S.Ct. 2326, 2337, 65 L.Ed.2d 319 (1980) (sustaining the Commission's ruling disallowing the company's accounting method under which promotional advertising expenses were considered above-the-line expenses chargeable to ratepayers). [55] We conclude that the Commission's ruling, that the Company bears the burden of demonstrating why ratepayers should cover the cost of institutional advertising expenses, and that the Company had failed to meet this burden, was not unjust, unreasonable, or discriminatory. The ruling of the Commission must therefore be sustained. [56]
People's Counsel's witness Sack proposed that $56,000 expended by WGL for trade association dues be excluded from the company's operating expenses. Sack suggested that [t]he ratepayer gets no benefit from these dues, and that such expenses are not a necessary part of providing gas service to the consumer. PC Exh. C, at 23-24. On cross-examination, Sack conceded that he had made no attempt to discover what the Company's trade association membership entailed. In his rebuttal testimony, WGL's witness Unkle stated: Of the $56,000 of association dues included in the rate case, ... $55,400 represents annual dues paid by the Company for its membership in the American Gas Association [AGA]. As a member of the American Gas Association, the Company has available to it resources for prompt, competent analysis of significant issues affecting the short and long term viability of the gas industry. The American Gas Association also acts as an industry clearinghouse for information on new techniques in coping with industry problems related to gas operations. [WGL Exh. L, at 6.] The Commission adopted People's Counsel's proposal and eliminated $56,000 from WGL's operating expenses. In so doing, the Commission remarked: [Trade associations] represent their members in matters affecting them, such as proposed legislation, activities of relevant regulatory agencies, litigation, information dissemination, and image-building advertising.       Although AGA's general activities are undoubtedly valuable to investors, the record does not demonstrate that they improve customer service. Accordingly, it is more appropriate for WGL's stockholders to fund the gas industry's legislation and public relations programs. To illustrate our rationale for excluding AGA dues from cost of service, we contrast these dues to WGL's payments to AGA regarding a coal gasification project. In Case No. 647 [16 P.U.R.4th at 267], we allowed WGL to recover those payments to AGA through rates. We viewed the coal gasification project as related to future customer service, in the sense that it enhanced gas supplies. On the other hand, the general activities of the AGA, as funded by the dues in question, are far less tied to improving service to the customer. [Order 6051, at 69-71 (emphasis added).] Review of the accounting treatment of expenditures such as trade association dues is typically and appropriately entrusted to the Public Service Commission. The purpose of Commission oversight is to protect the consuming public against monopolistic exploitation, see State ex rel. Laclede Gas Co. v. Public Service Commission, supra at 226, in part by assuring that utility customers are compelled to pay only for expenses that accrue to their benefit. The Commission's allocation of the burden to the Company to demonstrate that the payment of trade association dues benefits customers comports with modern utility commission regulatory practice. See Colorado Ute Electric Association, Inc. v. Public Utilities Commission, 198 Colo. 534, 541, 602 P.2d 861, 865-66 (1979) (en banc); In re Florida Gas Co., 13 P.U.R.4th 255, 259 (Fla.P.S.C. 1975); In re Idaho Power Co., 23 P.U.R. 299, 319-20 (Idaho P.U.C.1977); In re Rules and Regulations Covering Rate Case Treatment of Certain Expenses, 30 P.U.R.4th 338, 343 (N.M.P.S.C.1979). Likewise, the Commission's disallowance of trade association dues as operating expenses for ratemaking purposes, in the absence of evidence that the expenses directly benefit the ratepayer, parallels the practice of many other utility commissions. See, e.g., In re Idaho Power Co., supra at 319-20; In re Kansas City Power and Light Co., 28 P.U.R.4th 398, 437-38 (Mo.P.S.C.1979); In re Rules and Regulations Covering Rate Case Treatment of Certain Expenses, 30 P.U.R.4th at 343; In re Minnesota Gas Co., 32 P.U.R.4th 1, 27-28 (S.D.P.U.C.1979); Washington Utilities and Transportation Commission v. Washington Natural Gas Co., 32 P.U.R.4th 530, 542-43 (Wash.Utils. & Transp. Comm'n 1979); In re Pennzoil Co., 6 P.U.R.4th 189, 194 (W.Va.P.S.C.1974). Contra, In re Southwestern Bell Telephone Co., 28 P.U. R.4th 519, 537 (Kan.St.Corp.Comm'n 1979); In re Columbus and Southern Ohio Electric Co., 24 P.U.R.4th 261, 287 (Ohio P.U.C. 1978). We conclude that here, in the absence of evidence that AGA activities benefited customers, the Commission acted reasonably and within the scope of its allowed discretion in concluding that ratepayers should not be compelled, by inclusion of those expenditures in the Company's operating expenses, to pay the AGA dues. [57]
The Company's witness, Unkle, testified that, at the invitation of schools and community groups, WGL sends out speakers to talk about matters relating to gas service, including fuel conservation, safety considerations, the two-part billing system, estimated billing, the gas supply situation, and the rising cost of gas. WGL Exh. L, at 6. During the test year, WGL incurred expenses of $130,000 on this speakers program. People's Counsel's witness, Sack, recommended that the entire amount be disallowed as an operating expense. He testified: The amount of $130,000 described as community activities is clearly to enhance the public image of the Company and, as such, should be borne by the stockholder. The Company is free to make these expenditures and may even consider that it is under a certain amount of community pressure to do so. These activities are probably not equally available to all ratepayers and may, in fact, not even be desired by many of the ratepayers. I believe that this expense, being one of enhancing the public image of the Company, should be borne by the stockholders. [PC Exh. C, at 24.] On cross-examination, Sack admitted that his characterization of the Company's speakers program as one enhancing the public image of the Company was based on speculation concerning the implications of the descriptive title of the program. In rebuttal, Unkle denied that WGL's community activities were undertaken to enhance the Company image. Rather, he stated, Talking about such subjects to community groups is one important way our Company can provide information about subjects of vital concern both to us and our customers. ... The purpose is to communicate with customers on those subjects about which they want more information. In fact, the Company is under a certain amount of community pressure to engage in such activities. Such expenses are not only proper, but they are vital. [WGL Exh. L. at 6-7.] The Commission adopted People's Counsel's proposal, explaining its reasoning as follows: [T]he Commission believes that WGL's shareholders should pay these community affairs expenses. We take this action for two reasons. In the first place, notwithstanding WGL's protestations to the contrary, many of these community affairs activities are image-building in effect. These presentations enhance WGL's appearance in the community without any direct link to providing utility service. Secondly, we analogize these community affairs expenses to the charitable discounts for telephone service which we discontinued in a prior C&P rate proceeding, Case No. 631. There, we viewed those telephone discounts as a forced contribution by telephone users to `individuals and organizations to which [the ratepayers] might not otherwise contribute.' (Order No. 5790, p. 78). In the same way, if ratepayers must underwrite WGL's community affairs expenses, they will be forced to make a contribution to the beneficiaries of WGL's program. That would be unfair, particularly since only a limited number of community organizations are receiving speakers from WGL. In taking this action, we do not find that WGL has acted imprudently. Nevertheless, the nature of the community affairs program is more akin to the interest of WGL's stockholders than to [that of] the ratepayers. We shall, however, reserve the right to reevaluate in the future this issue and the question of support to civic organizations. [Order 6051, at 73-74.] On appeal, the Company likens the expenditures in issue to informational advertising. Utility commissions generally find informational advertising, relating, for example, to safety and conservation, to be chargeable as an above-the-line expense to ratepayers. See, e.g., In re Peoples Gas Light and Coke Co., 34 P.U.R.4th 292, 317-18 (Ill. Commerce Comm'n 1979) (75% of informational advertising expenses allowed above-the-line); In re Gas Co., supra at 128 (N.M.); In re South Carolina Electric and Gas Co., 37 P.U.R.4th 441, 480 (S.C.P.S.C. 1980); In re Madison Gas and Electric Co., 34 P.U.R.4th 569, 575 (Wis.P.S.C.1980). The Company contends that the Commission's ruling, that these expenditures must be charged below the line to WGL's shareholders, rather than above the line to the ratepayers, was arbitrary and unreasonable. The Commission responds that, as in the case of the challenged advertising expenses and trade association dues discussed above, the Company failed to meet its burden of demonstrating that the expenses in question directly benefited the utility's ratepayers. As in the case of the other challenged expenses, we also accept the Commission's allocation of the burden of proof with respect to community affairs expenses. As the Company has primary control of its own records, there is no injustice in allotting to the Company the initial responsibility for demonstrating the reasonableness of above-the-line charges to its ratepayers. The sparse record with respect to the challenged community affairs expenses consists merely of cross-allegations as to the nature and purpose of the speakers programs, unsubstantiated by documentary evidence on either side. The Commission did not act arbitrarily in refusing to accept WGL's conclusory assertions here; the burden of proof imposed in this case is consistent with the Commission's usual practice. See, e.g., In re Potomac Electric Power Co., 36 P.U.R.4th 139, 186-87 (D.C.P.S.C.1980): While we readily appreciate that an applicant for a rate increase cannot be expected in its initial filing to offer detailed support for each and every aspect of its cost of service, we do expect substantially more than this conclusory and bare bones effort to deal with a concrete, specified issue such as this one. Without more, Pepco's skeletal affirmative case falls far short of showing, even at a prima facie level, the appropriateness of its advertising expenditures.... [ Id. at 186.] Nor is the Commission's disallowance of these community affairs expenses inconsistent with the treatment accorded such items by utility commissions in other jurisdictions. See, e.g., In re Northwestern Bell Telephone Co., 37 P.U.R.4th 1, 23 (Minn.P.S.C. 1980) (expenditures for open house community events, multisubject films, town talkers, displays and exhibits on multisubjects excluded from above-the-line operating expenses). On this record the Commission could reasonably conclude, as it did, that the Company failed to demonstrate a direct link between the speakers program and the provision of utility service, and thus that the Company did not justify above-the-line treatment for the community affairs expenses. [58]
The Commission further disallowed as operating expenses for ratemaking purposes WGL's contributions to various business and civic organizations. [59] Although it recognized that all of these organizations appeared to be meritorious and deserving of the business community's support, the Commission concluded: WGL's management decision to contribute to these organizations is not the ratepayers' concern. However worthwhile these organizations may be, the ratepayers may not be required to make forced contributions to them. Since the ratepayers do not directly benefit from WGL's payments in terms of gas service, they should not bear this cost. [Order 6051, at 72.] We cannot conclude that the Commission's decision on this point was arbitrary or unreasonable. The Company's contributions to these organizations are tantamount to charitable donations. Reviewing courts have generally held that it is a proper exercise of agency discretion for a regulatory commission to exclude such donations from a utility's cost of service. See, e.g., Alabama Power Co. v. Alabama Public Service Commission, supra at 779-80; New England Telephone and Telegraph Co. v. Public Utilities Commission, supra at 55-56 (Me.); State ex rel. Utilities Commission v. Southern Bell Telephone and Telegraph Co., 24 N.C.App. 327, 335, 210 S.E.2d 543, 549 (1975), vacated on other grounds, 289 N.C. 286, 221 S.E.2d 322 (1976). Indeed, a growing number of courts have held that charitable contributions may not be recovered from the ratepayers, and have reversed utility commission orders that allowed such contributions as operating expenses. See, e.g., Alabama Power Co. v. Alabama Public Service Commission, 390 So.2d 1017, 1027 (Ala.1980); City of Cleveland v. Public Utilities Commission, supra 63 Ohio St.2d at 73-74, 406 N.E.2d at 1379-80 (and cases cited therein). Contra, New England Telephone and Telegraph Co. v. Department of Public Utilities, 360 Mass. 443, 480-84, 275 N.E.2d 493, 518-21 (1971). We note too that the Uniform System of Accounts treats charitable contributions as a below-the-line deduction from income, chargeable to the shareholders rather than the ratepayers. 18 C.F.R. Pt. 201, Account 426.1 (1980). But see note 53 supra. We accordingly find no error in the Commission's conclusion that the ratepayers may not be required to make forced contributions to business and civic organizations, Order 6051, at 72, and we therefore affirm the Commission's below-the-line treatment of these expenses.