Opinion ID: 1752589
Heading Depth: 1
Heading Rank: 2

Heading: Refusal to Adjust Net Operating Income for Weather

Text: In determining the rate of return, the Commission outlined the operating revenues and expenses of United, and its net operating income as submitted during the two stated periods. It made certain adjustments in the operating expenses, eliminating (a) supplier's bonded gas rate increases; (b) contributions and expenses relating to employees' stock purchase plan; (c) donations to charitable organizations; and (d) wage and postage increases. After disallowing these expenses, the Commission reached an adjusted net operating income of appellant under the old rates of 5.36 percent for the year ending December 31, 1957, and 7.37 percent based on an annualized, specified ratio for the year 1958. It then tested the reasonableness of the rate of return by the use of certain factors in a cost-of-capital method. It held that the rates in effect prior to August 1, 1958, were just and reasonable. Therefore it cancelled the new filed schedule of rates and charges which were in effect under bond. The Commission recognized that the company's earnings are vitally affected by the weather. Based on 30-year statistics, the year 1957 was abnormally warmer than the statistical average, while the first six months of 1958 were abnormally colder. Appellant contends, and its witnesses testified, that the Commission, in determining the company's net operating income, should normalize the degree days in fixing just and reasonable rates. Many regulatory agencies do that. The phrase degree days is defined as the extent to which the mean daily temperature falls below an assumed base, usually 65 degrees Fahrenheit. Appellant says, and the Commission recognized, that rates which are based on normal weather conditions may actually produce inadequate earnings, depending upon the deviation in degree days from the level of normality. However, it concluded there are some infirmities in this method. It thought that, after considering all of the facts, the technique of normalizing weather was too unpredictable and uncertain to permit any reasonable accuracy. A second method was used, based on the theory that investors are cognizant of the impact of weather on the earnings of gas utilities, and the prices they pay for gas securities in the open market reflect this risk, among others. Hence the Commission concluded that the optimum protection could be given the equity owners by allowing them a rate commensurate with the peculiar risks of the gas industry. It had previously followed this method in the 1957 Willmut Gas and Oil Company rate case. Hence it declined to make a specific adjustment in United's net operating income for the purpose of normalizing weather conditions. But it sought to allow the equity owners a maximum return based upon certain earnings-price ratios offered by Hirsch and reflected in recognized groups of gas utilities. There was also a dispute between the company's witnesses, which selected a 5-year period for normalizing weather, and one of the Commission's witnesses, Van Scoyoc, who suggested a 30-year period. The Commission was warranted in concluding there was insufficient data to arrive at a reliable statewide norm. In view of the conflicting data, it adopted the version of Hirsch, a consultant on its staff, by seeking to provide the maximum earnings demanded by investors in related groups of utilities, in order to allow the company the maximum protection. Moreover, under Sec. 10 of the Public Utility Act, Laws 1956, Ch. 372, a public utility may obtain rate relief within thirty days, at least on a temporary basis. (Hn 10) We are unable to say that the Commission committed error in refusing a specific percentage adjustment for weather. Its action appears to be reasonable, with substantial evidence to support it. See Public Utility Company of Pa. v. Peoples Natural Gas Co., 6 PUR (3d) 341, 372-373 (Pa. PUC 1954); Pa. Public Utility Comm. v. Mfrs. Light and Heat Co., 5 PUR (3d) 346, 384 (Pa. PUC, 1954). However, since the case will be remanded to fix a rate of return, we do not consider the validity of the method used in allowing United a maximum return, or the end-result of that method. We find no error in the Commission's refusal to normalize the degree days for weather for the test periods.