Opinion ID: 2443825
Heading Depth: 1
Heading Rank: 2

Heading: Utility Rate Base Valuation

Text: In September 1976 the Telephone Company filed with the Public Utility Commission an application and notice of intent to increase its rates for telephone services. After an extended hearing the Commission entered its order fixing rates to be charged by the telephone utility. The rate permitted by the Commission provided for an increase of $57.8 million, somewhat less than that requested by the Telephone Company. The Telephone Company then appealed from this order to the District Court of Travis County seeking judicial review of the Commission's order. Simultaneously, Southwestern Bell sought an order temporarily staying the Commission's order pursuant to section 85, PURA, and requested a full evidentiary hearing before the trial court. The district court, after hearing, rendered its order denying the Telephone Company's application for stay, suspension, or temporary injunction of the Commission's final order. The court further ruled that its review was confined to the record made before the Commission and refused to admit the Telephone Company's additional proffered evidence. The stated legislative policy and purpose of PURA was to protect the public interest inherent in the rates and service of public utilities.... The purpose of this Act is to establish a comprehensive regulatory system which is adequate to the task of regulating public utilities as defined by this Act, to assure rates, operations, and services which are just and reasonable to the consumer and to the utilities. [5] Southwestern Bell contends that the Public Utility Commission used an incorrect rate base in determining the proper return to be allowed on its investment. Bell argues that the Commission erroneously used only original cost less depreciation as a rate base, rather than the adjusted value of invested capital, defined in section 41 of the PURA as a reasonable balance between original cost less depreciation and current cost less an adjustment for present age and condition. The Commission contends that it properly used original cost less depreciation under the dual rate base interpretation which it gives to the PURA. The correct determination of a rate base is obviously of prime importance to Bell and its customers since Bell's return on its investment is the product of the rate base multiplied by a reasonable or fair rate of return. See Railroad Commission v. Houston Natural Gas Corp., 155 Tex. 502, 289 S.W.2d 559 (1956) (the Alvin case); Hopper, A Legislative History of the Texas Utility Regulatory Act of 1975, 28 Baylor L.Rev. 777, 799 (1976); Webb, Utility Rate Base Valuation in an Inflationary Economy, 28 Baylor L.Rev. 823, 838 (1976). It is undisputed by the parties and courts below that sections 39, 40, and 41 of the PURA govern the proper rate base and rate of return thereon. What is disputed is the correct interpretation to be placed upon these provisions. This is a question of first impression and is of great importance in setting utility rates in this case as well as in future cases. The applicable sections provide: Sec. 39. In fixing the rates of a public utility the regulatory authority shall fix its overall revenues at a level which will permit such utility to recover its operating expenses together with a reasonable return on its invested capital. Sec. 40. (a) The regulatory authority shall not prescribe any rate which will yield more than a fair return upon the adjusted value of the invested capital used and useful in rendering service to the public.       Sec. 41. The components of adjusted value of invested capital and net income shall be determined according to the following rules: (a) Adjusted Value of Invested Capital. Utility rates shall be based upon the adjusted value of property used by and useful to the public utility in providing service including where necessary to the financial integrity of the utility construction work in progress at cost as recorded on the books of the utility. The adjusted value of such property shall be a reasonable balance between original cost less depreciation and current cost less an adjustment for both present age and condition. The regulatory authority shall have the discretion to determine a reasonable balance that reflects not less than 60% nor more than 75% original cost, that is, the actual money cost, or the actual money value of any consideration paid other than money, of the property at the time it shall have been dedicated to public use, whether by the utility which is the present owner or by a predecessor, less depreciation, and not less than 25% nor more than 40% current cost less an adjustment for both present age and condition. The regulatory authority may consider inflation, deflation, quality of service being provided, the growth rate of the service area, and the need for the public utility to attract new capital in determining a reasonable balance. The Commission and lower courts interpreted these provisions as establishing a dual rate base. The courts below held that section 39 set a minimum rate base permitting a reasonable return on invested capital or original cost less depreciation, and sections 40(a) and 41(a) set a maximum rate base permitting a fair return on the adjusted value of invested capital. Southwestern Bell argues that only section 41(a) sets a rate base, and that sections 39 and 40 merely speak in general terms as to the allowable rate of return. In determining the monetary return to which Southwestern Bell is entitled, the Commission made findings using the two differing methods described in sections 39 and 40. Under section 39, the Commission interpreted invested capital as the equivalent of original cost less depreciation. The Commission found this figure to be $3,030,707,000. Applying a 9.5% rate of return to this rate base of invested capital, the Commission fixed a return to Bell of $287,917,000. A similar monetary return was found by the Commission using the adjusted value of invested capital, found as $3,441,075,000, and applying an 8.37% rate of return. The Commission argues that either method is permitted by the dual rate base provisions of the PURA, since the first method takes inflation into consideration in the rate of return on invested capital while the second method compensates for inflation in the higher rate base. The Commission points out that the actual monetary return under either method is the same, and that the courts are concerned only with the end resultthe rate. See Railroad Commission v. Houston Natural Gas Corp., supra . Southwestern Bell argues, on the other hand, that under section 41(a) only the adjusted value of invested capital can be considered as a rate base, and that since the Commission used invested capital as a rate base, it has failed to give Bell any return on the difference in value between the adjusted value of invested capital and invested capital or original cost. Bell also argues that taking the dollar return obtained by using an original cost rate base and dividing it into an adjusted value of invested capital rate base to obtain a rate of return on that second rate base is merely arithmetic sleight of hand by the Commission. Bell contends that figuring the dollar return and rate of return by such a backing in process plugged into original cost is not a permissible way to set the percentage rate of return and monetary return on the only proper rate base, the adjusted value of invested capital. We agree with Southwestern Bell that only section 41(a) defines a rate base. In our view, and based upon our interpretation of the available legislative history, sections 39 and 40(a) prescribe in general terms a floor and a ceiling for the monetary return allowed to a utility on its investment. Section 39 speaks in terms of fixing rates of a public utility such that it may have revenues sufficient to recover its operating expenses and a reasonable return on its invested capital. Section 40(a) says that the Commission shall not set any rate which will yield more than a fair return on the adjusted value of its invested capital. Section 41(a), however, provides that [u]tility rates shall be based upon the adjusted value of property used by and useful to the public utility in providing service.... In determining rates, the Commission is required by section 41(a) to use the adjusted value of invested capital, as defined in that section, as the rate base. Sections 39 and 40 are general guidelines for the Commission to follow to check its determination of total return to the utility to make sure that it is within the lower and upper limits prescribed by those sections. In this manner, the utility is assured of an adequate return on its investment and the utility customers are protected from excessively high rates. If the total monetary return does not fall within the limits prescribed by sections 39 and 40, the Commission has the discretion provided in section 41(a) to adjust the balance in the rate base between original cost less depreciation and current cost less an adjustment for present age and condition. In determining adjusted value of invested capital as a rate base, section 41(a) permits the Commission to use from 60% to 75% original cost less depreciation, and not less than 25% nor more than 40% current cost less an adjustment for both present age and condition. The exact percentages of each element in the rate base can be set by the Commission within the limits of section 41(a) on a case by case basis. We also agree with the interpretation given to the phrase invested capital by the Commission and courts below. Section 39 provides that a utility shall recover at least a reasonable return on its invested capital; however, the term invested capital is never defined. Section 40(a) then provides that a utility shall not receive rates which would yield more than a fair return on the adjusted value of invested capital. Section 41(a) also uses the phrase adjusted value of invested capital and then goes on to define it and provide that it is the correct rate base. In looking at the legislative history of section 39, conflicting conclusions can be drawn as to why invested capital was used rather than the adjusted value of invested capital. The latter phrase was used in an earlier version of the bill, but was subsequently deleted. The only reasonable interpretation which can be placed upon the phrase invested capital is that it means original cost less depreciation, as the trial court and court of civil appeals held. Since the Legislature could just as easily have said adjusted value of invested capital in section 39, we must take invested capital to have a different meaning. We can conceive of no reasonable interpretation of invested capital other than original cost with an adjustment for depreciation. We therefore hold that invested capital, as used in section 39 of the PURA, means original cost less depreciation. Since we have held that the proper rate base is defined in section 41(a) as the adjusted value of invested capital, we must determine whether the Commission has erroneously computed the monetary return to Bell by using an incorrect rate base. It is undisputed that the Commission computed the return to Bell under its dual rate base theory, which we have held is an incorrect interpretation of the PURA. The Commission fixed a total monetary return to Bell by applying a 9.5% rate of return to the original cost less depreciation rate base, and by applying an 8.37% rate of return on the adjusted value of invested capital rate base. The Commission used a balance of 69.4% original cost and 30.6% current cost in computing the adjusted value of Bell's invested capital. It seems obvious that the Commission figured the total revenues or monetary return to which Bell was entitled by one method or the other, and merely used that same figure to determine a rate of return on the other rate base. As stated above, we do not accept a dual rate base theory, but the Commission purported to determine the monetary return based upon what we have held to be the correct rate base, the adjusted value of invested capital. By using this method of fixing revenues for Bell in the alternative, the Commission has acted correctly. Since Bell does not dispute the Commission's finding as to the adjusted value of invested capital, the only element still in dispute is the rate of return. The rate of return is not specified in the PURA as any exact percentage. Rather, sections 39 and 40(a) provide that it shall be at least a reasonable return on invested capital, but not more than a fair return on the adjusted value of invested capital. We take these provisions to mean that the Commission has discretion in setting a reasonable or fair return on the value of Bell's property used or useful in rendering service. In giving the Commission such discretion, we believe that the Legislature has acquiesced in the standard for rate of return set out in the Alvin case, Railroad Commission v. Houston Natural Gas Corp., supra . Discussing fixing the rate of return this Court said: In the absence of legislation the courts have resorted to reason for a guide and have fairly well established the rule that to avoid confiscation the rate of return must be high enough to attract ample capital but need not be beyond that. This percentage figure the trial court can determine as a fact. Alvin, supra at 572. We are not to be understood as holding that the Legislature has codified the Alvin case, because the Commission rather than the trial court must set the rate of return. The PURA also establishes more specific standards in fixing a rate base than the general fair value language of Alvin. We do, however, regard the Commission as having the power to determine a percentage rate of return as a fact. It has done so in this case, setting an 8.37% rate of return on the adjusted value of invested capital rate base. The total revenues or monetary return to Bell lies within the limits prescribed by sections 39 and 40, and we regard the revenues as a fair return on the adjusted value of Bell's invested capital. We therefore uphold the Commission's determinations as to the rate of return and revenues or monetary return to which Bell is entitled. Although we reject the notion of a dual rate base, we hold that the Commission's alternative method of setting the rate of return and rate base was correct under the PURA. The trial court and court of civil appeals correctly affirmed the Commission's determination on this issue. The Commission excluded from the rate base all land held by the Company for future use. We agree with the courts below that the Commission erred in its blanket exclusion of this property from the rate base. However, we do not consider such action, under this record, confiscation. In the future, the Commission should consider the nature and present usefulness of the parcels of land and determine whether or not such property should be included in the rate base. The judgment of the court of civil appeals is reversed and the judgment of the trial court is affirmed. SAM D. JOHNSON and CHADICK, JJ., dissent.