Opinion ID: 2217179
Heading Depth: 1
Heading Rank: 4

Heading: power supply costs

Text: In the category of operation and maintenance expenses, company's most spirited attack is launched against the PUC's decrease in power supply costs which deleted more than $3,200,000 from company's claim for those costs. Again, PUC adopted cities' computation entirely without regard for the showing of their own staff. Company argues that the decision is not supported by substantial evidence and is arbitrary and capricious. We agree. Much of the disparity in this instance arises from the going on line of the Big Stone Plant as previously mentioned and the conversion of company from a purchasing company to a generating company at the end of the test year. As 32.5% owner of the plant, company need no longer purchase power from other sources for resale since the plant provides all the power that company requires plus additional off-peak power which can be sold to other electrical utilities. All parties agree that the plant should be included in the test year rate base because of its obvious impact on company's rates. Inclusion of the plant in rate base, however, requires a corresponding pro forma adjustment in the form of a credit to power supply costs for the test year to reflect the additional income company will receive from the sale of off-peak energy. The controversy relates to the magnitude of the adjustment which depends on a determination of how much electric power the plant can generate and how much of the surplus generated power can be sold. Cities calculated the credit to company's power supply costs using data contained in a letter written by the plant's superintendent, Mr. Johnson, to an official of one of the other co-owners of the plant. This letter (hereinafter sometimes called the Johnson letter) was written on March 26, 1975, before the plant was operational. The letter is concerned with, as appears under Subject at the top of it, operating and maintenance costs. The letter contains Mr. Johnson's prediction of the plant's operating and maintenance costs assuming the plant operated for the full year in 1975 at an unrestricted load. The unrestricted load assumed by Mr. Johnson was 337 days at 396 MW with a heat rate of 10,500 BTU/KWH. Using these figures, Mr. Johnson concluded that the plant could produce 3,202,800 MWHs of generation. Not only did cities adopt the data in the Johnson letter to calculate the plant's generating capacity, it used the same figures to compute company's power pool sales, that is, the amount of excess power available for sale to other electric companies in the MAPP pool. Cities' power pool sales estimate further assumed that 100% of the plant's surplus output could be sold. Staff disagreed with cities' approach. As pointed out by the staff witness, cities' calculations did not take into consideration the peaks and valleys of electric usage. Demand for power is greater during some seasons than others; in fact, during certain hours of the day. Common sense dictates that a plant the size of Big Stone would not be built merely to meet the present power needs, but rather to handle expanded future needs. Staff and company urged a less simplistic approach based on existing contracts and historical sales data. Company points out that power sales are a matter of supply and demand, but while the Johnson letter may give an indication of the available supply, it does not address the factor of demand. Another point of attack by company on the computation of credit for wholesale sales is described as a mismatch in the use of two different costs of fuel. Computation based on the Johnson letter resulted in the figure of 5.41 mills per KWH. A November 1975 actual figure of fuel costs of 6.89 mills per KWH was established in the record. The deductive process of computation was first to determine the fuel costs per KWH of electricity generated; second to determine the fuel costs per KWH of the power that is wholesaled and then to deduct the latter from the former which results in the costs to be passed on to the retail customers as an add-on in the operation and expense category. Cities' witness used the lower figure of 5.41 mills in his calculation of the total cost of power generated, but used the higher actual cost figure in his calculation of costs of wholesale power to be deducted. Company urges that this results in a mismatch, and we agree. On appeal, counsel for the PUC urges that the November cost figure is not accurate, that it is too short a period to reflect the true cost. In this he may be correct, but he fails to explain why it is so inaccurate that it cannot be used in one step but accurate enough to be used in the second. Whichever figure is used it should be used in both steps, otherwise they are comparing apples with oranges. By the time the rate increase hearing began in April of 1976, the plant had been in operation for nearly a year. Company presented evidence of its actual experience with the plant during that year which showed that the power production prediction contained in the Johnson letter was highly overestimated. Company's evidence also showed that sales of 100% of excess power to other electric companies was not being realized as forecast by cities, but that only 65% of the excess output was being sold. The assumptions on which the Johnson prediction was based were neither verified nor proven to exist. The PUC adopted all of cities' calculations and rejected all of the evidence presented by company, ignoring company's actual experience with the plant for nearly a year which had elapsed between the test year and the hearings. We conclude that the PUC's decision in this regard was arbitrary, since the result was a drastic underestimation of company's power supply costs and a concomitant overestimation of the wholesale revenues which would stem from the operation of the plant. The purpose of using a test year is to establish with a reasonable degree of accuracy the revenue and expenses that a utility will experience during the period when the new rates will be in effect. N. W. Pub. Serv. v. Cities of Chamberlain, Etc., supra, at 879. It is well-settled, however, that when reliable evidence of actual experience is available, it should supplant evidence of a purely theoretical and predictive nature. This principle was recognized and applied by this court in N. W. Pub. Serv. v. Cities of Chamberlain, Etc., supra, at 878 and 879. This principle was enunciated in West Ohio Gas Co. v. Public Utilities Com., 294 U.S. 79, 55 S.Ct. 324, 79 L.Ed. 773 (1935), wherein the United States Supreme Court held that the public utilities commission acted arbitrarily by using predictions of income and expenses based on test-year data and ignoring available evidence of actual post test-year earnings. We think the adoption of a single year as an exclusive test or standard imposed upon the company an arbitrary restriction in contravention of the Fourteenth Amendment and of the rudiments of fair play made necessary thereby. The earnings of the later years were exhibited in the record and told their own tale as to the possibilities of profit. To shut one's eyes to them altogether, to exclude them from the reckoning, is as much arbitrary action as to build a schedule upon guesswork with evidence available. 294 U.S. at 81-82, 55 S.Ct. at 325, 79 L.Ed. at 776 (citations omitted). We find the Court's reasoning in that case equally applicable to the instant case when cities and the PUC relied almost entirely on the data contained in the Johnson letter. That letter was nothing more than a prediction based upon certain assumptions which were never verified or proven to exist. Company, on the other hand, presented concrete evidence of actual post test-year experience with the plant, which was in sharp contrast to the Johnson letter data. We conclude that the PUC's reliance in this case on the speculative data presented by cities and its refusal to consider company's evidence of actual results and the recommendation of its own staff was arbitrary and that the decision on this issue was not supported by the evidence.