Opinion ID: 1508978
Heading Depth: 1
Heading Rank: 1

Heading: Disallowance of Interest and Depreciation Expenses Attributable to the Nelseco II Because of Revenue Offsets

Text: The company contends that the Nelseco's expenses warranted rate relief because there was no nexus between the ship's being placed into service and the increase in revenue that the company realized during 1981. According to Interstate, delays caused by long passenger lines had plagued the Block Island run in the past. The company used the Nelseco between Block Island and existing terminals that had suffered from these delays. The company asserts, therefore, that the Nelseco did not generate any new revenue, as it might have done had the company used the vessel between Block Island and newly established terminals. We find this contention perplexing in light of Mr. Linda's admission that the Nelseco had generated new revenue for the company. In its brief, the company explains this inconsistency by claiming that the Nelseco, along with the company's other vessels, was used to transport an unexpected increase in the company's passenger pool as well as passengers in what the company characterizes as the basic pool. The company suggests to this court, therefore, that Mr. Linda meant that all of the vessels generated new revenue. We are of the opinion that our acceptance of this line of reasoning would have no effect upon the disposition of the company's petition. Even if all of the vessels in Interstate's fleet, rather than only the Nelseco, generated new revenue during 1981, our review would still focus on the commission's finding that those revenues attributable to the Nelseco offset the ship's interest and depreciation expenses. Our determination of the validity of this finding, in turn, is affected by the legitimacy of two contentions that the company has set forth: (1) the nexus argument, to which we have already referred, and (2) the contention that Mr. Goldman's formula for allocating increased revenue among the company's ships was hypothetical and, as such, constituted illegal, incompetent evidence that the commission should have disregarded. If we accept the company's challenge to the evidence adduced through Mr. Goldman's testimony, we must reverse the report and order of May 28, 1982, because the commission's disallowance of rate relief for the Nelseco's expenses was based solely upon this evidence. Prior to considering this issue, however, we must make clear that we find the company's nexus argument unpersuasive. Interstate seems to suggest that a capital investment, such as a new vessel, must service customers to whom a company had never previously offered service for that investment to generate new revenue. In this case, the general manager of Interstate attributed the growth in revenue during 1981, in part, to an upsurge in the popularity of Block Island with summer tourists. If the company had not placed the Nelseco in service during the summer of 1981, it is quite likely that the company's fleet would have been incapable of adequately handling the increased demand for passenger space. Other palliatives, such as additional trips to the island, would probably have failed to meet the need. Consequently, the company would have lost revenue that it would have realized had the Nelseco been placed in service. It is therefore illogical to contend that no connection exists between the Nelseco and increased passenger revenue. In any event, it should be noted that an application for rate relief must be based upon the total revenues and expenses of the company. In arriving at a determination of revenue offsets to expenses, the experience of a particular vessel is of interest and may well be a significant factor in the determination. It is not, however, the only factor or indeed even a sine qua non in the determination of entitlement to the privilege of charging higher fares to customers. Such a determination should be made, as it was made in this case, on the basis of the total income and expense statement for the relevant period. [3] Accordingly, the sole issue before us is whether the commission's decision in respect to the denial of rate relief was based upon legally competent evidence relating to income and expenses of the company. Mr. Goldman was retained by the division to conduct a financial review of Interstate based upon income statements and other information that the company supplied. This review was intended to result in a determination of whether increases in passenger revenue attributable to the Nelseco offset the ship's depreciation and interest expenses. He visited the company's office in New London, Connecticut, and met with officers of the company. During the course of his analysis, Mr. Goldman learned from Mr. John Kanabis, the company's general manager, that passenger revenue was not segregated by vessel, except for the Yankee. [4] According to Mr. Goldman's report and his prefiled testimony he therefore developed a formula for allocating passenger revenue among the various ships, after discussing the reasonableness of the formula with Mr. Kanabis. Mr. Goldman allocated total passenger revenue for the period January 1, 1981, to September 7, 1981, among the Manitou, the Manisee, the Quonset and the Nelseco by comparing each vessel's prorata share of passenger capacity with the total passenger capacity of all of the vessels and applying that ratio to total passenger revenues. He applied the same formula to the entire year 1981. [5] This procedure resulted in a determination that the company's total passenger revenue increased by $194,228 from 1980 to 1981. According to the allocation formula, the company realized $226,942 in passenger revenue during 1981 from the operation of the Nelseco. [6] This entire amount represented an increase in revenue because the Nelseco was not in service during 1980. Of the total amount of passenger revenue that the Nelseco generated during 1981, Mr. Goldman calculated that the ship generated $220,599 between January 1, 1981, and September 7, 1981. Mr. Goldman suggested that the commission apply this entire amount to offset the Nelseco's expenses. The division adopted this theory but, in the alternative, proposed that the commission apply a revenue offset of $207,619. The reason for this strategy was as follows. The company's income statement for the years 1979 through 1981, which the company filed prior to the end of 1981, projected an increase in expenses for the company from 1980 to 1981 in the amount of $334,307. [7] Mr. Goldman's financial review, however, indicated that the expense increase was $311,519. [8] This discrepancy resulted from adjustments that Mr. Goldman made to the company's overall interest and depreciation expense for 1981. In a memorandum filed with the commission, the division suggested that the company's 1981 expense figure was too high but addressed the commission's possible acceptance of the figure and the effect of that acceptance on the revenue offset attributable to the Nelseco. First, the division calculated, relying on the product of the number of vessels and the number of months they were in service during 1981, a total of fifty-four vessel/months during 1981. [9] Next, since the period in question (July 1 to September 7) was only 2.5 months, or 4.1 percent of fifty-four, the division determined that 4.1 percent of the company's 1981 expense increase was attributable to the Nelseco during the relevant period. The division therefore purported to apply the percentage to the expense-increase figure that the company had set forth and to reduce the division's revenue offset by this amount. A reapplication of this formula reveals that the division made some minor mistakes when calculating the adjusted revenue offset. We believe however that these miscalculations are not prejudicial to the company. Even though the commission ultimately adopted the division's version of the adjusted revenue offset, an application of more accurate calculations regarding the revenue offset would have led the commission to the same result; the revised figure would still far exceed the company's request for rate relief in the amount of $73,441. After reviewing all of the evidence presented to the commission, we are of the opinion that the commission's finding of a revenue offset in this case was lawful, reasonable, and substantially supported by legally competent evidence. Mr. Goldman's formula for allocating the increased revenue among the ships was reasonable and fair to the company. Interstate, after all, made absolutely no attempt to comply with the commission's request for data concerning expense savings and revenue increases specifically attributable to the Nelseco. As the party seeking rate relief, the company had the burden of establishing its entitlement to such relief. General Laws § 39-3-12; see Providence Gas Co. v. Burke, R.I., 419 A.2d 263, 266 (1980); Valley Gas Co. v. Burke, R.I., 406 A.2d 366, 370 (1979); Michaelson v. New England Telephone & Telegraph Co., 121 R.I. at 734, 404 A.2d at 806; see also United States v. Public Utilities Commission, 120 R.I. 959, 963, 393 A.2d 1092, 1094 (1978) (by enacting § 39-3-12 the Legislature has recognized the general principle that a moving party must prove its case). Moreover, there is no merit to the company's implicit comparison of Mr. Goldman's revenue allocation formula to the deduction of a theoretical deficiency from the rate base, resulting from a retroactive application of a new rate of depreciation, which practice we most recently invalidated in Blackstone Valley Electric Co. v. Public Utilities Commission, R.I., 447 A.2d 1152 (1982). Mr. Goldman developed his formula after consulting with Interstate's general manager and based it upon ascertainable facts, namely, the passenger capacity of each vessel in the company's fleet during the relevant periods, the total passenger capacity of the entire fleet, the number of months that each ship was in service, and the total amount of passenger revenue that the company realized. The formula was by no means theoretical in the sense that we used that word in Blackstone Valley. Rather, it was a well-reasoned, rational method of completing a task that the company should have undertaken  that is, calculating the amount of passenger revenue attributable to the Nelseco during the summer of 1981. Accordingly, we find no error in the commission's reliance upon Mr. Goldman's testimony.