Opinion ID: 2363714
Heading Depth: 3
Heading Rank: 1

Heading: Directory Advertising Rate Increases

Text: The company charges that the commission erroneously accepted Hartikka's recommendation that test-year earnings should be adjusted upward to recognize the effect of post-test-year changes in directory advertising revenues and expenses. Specifically, Hartikka proposed to recognize additional revenues of $502,000, which produced an overall increase in test-year earnings of $177,000. The company's response was essentially that the expenses associated with those revenues were so speculative that the commission should have disregarded this new revenue. The task of the commission is to base future rates upon known past and present conditions through the use of data generated during a specific test period. Narragansett Electric Co. v. Harsch, 117 R.I. 395, 416, 368 A.2d 1194, 1206 (1977); Rhode Island Consumers' Council v. Smith, 111 R.I. 271, 278, 302 A.2d 757, 763 (1973). However, in order to ensure that the test year is representative of the conditions that will prevail when the new rates take effect, Rhode Island Consumers' Council v. Smith, 113 R.I. 384, 397, 322 A.2d 17, 24 (1974), the commission has both the authority and responsibility to undertake a reasoned exercise of its discretion in altering test-year data to reflect changes of known magnitude occurring subsequent to the test year. Northwestern Bell Telephone Co. v. State, Minn., 253 N.W.2d 815, 822 (1977). Yet, despite the broad discretion it possesses in this area, the commission generally considers only post-test-year revenue and expense changes that affect test-year results with certainty. Rhode Island Consumers' Council v. Smith, 113 R.I. 384, 393, 322 A.2d 17, 22 (1974). See also Narragansett Electric Co. v. Harsch, 117 R.I. at 416-17, 368 A.2d at 1206-07. To factor in changes of unknown magnitude would in most cases increase what speculation already exists in the ratemaking process and thereby tend to undermine the effectiveness of the test-year concept. Central Maine Power Co. v. Public Utilities Commission, 153 Me. 228, 242-43, 136 A.2d 726, 735-36 (1957); Public Service Co. v. State, 102 N.H. 150, 162-63, 153 A.2d 801, 810 (1959). On the other hand, we have never determined that the commission is entirely without discretion to adjust test-year data unless all relevant figures are ascertainable with complete exactitude. To do so would be, in our opinion, to bind the commission's hands in cases where flexibility is necessary to `do justice,' to decide what is just and reasonable based on the evidence before it. Rhode Island Consumers' Council v. Smith, 111 R.I. at 289, 302 A.2d at 769, quoting Narragansett Electric Co. v. Kennelly, 88 R.I. 56, 73, 143 A.2d 709, 719 (1958). When the commission for articulated reasons determines that its figures are reliable and finds that an adjustment of the type made here is necessary to ensure that test-year data remain representative, we see no reason to deny the commission the discretion to act solely because it cannot do so with complete precision. Cf. General Telephone Co. v. Public Service Commission, 78 Mich.App. 528, 539-40, 260 N.W.2d 874, 879 (1977) (once anticipated increases in directory advertising revenues were recognized, commission should have considered as well somewhat speculative wage increases). With respect to the present controversy, there apparently exists little dispute that the $502,000 in increased revenues associated with the directory advertising rate increases constitute just the sort of known and measurable future economic condition of which the authorities overwhelmingly approve. Narragansett Electric Co. v. Harsch, 117 R.I. at 418, 368 A.2d at 1207. Both the commission and the division agree, however, that the adjustment urged by Hartikka and accepted by the commission incorporates an expense figure that is not so thoroughly based on fact. The company contends that the expense figure is speculative and may therefore not be considered, with the result that it is equally inappropriate to consider the effect of the increased revenues; in so arguing it appears to rely upon the simple proposition that an adjustment for changes in revenues occurring after the test year should require a commensurate change in expenses in the same period. City of Pittsburgh v. Public Utility Commission, 187 Pa.Super. 341, 363, 144 A.2d 648, 660 (1958). See also City of Los Angeles v. Public Utilities Commission, 7 Cal.3d 331, 346-47, 102 Cal.Rptr. 313, 325, 497 P.2d 785, 797 (1972). Although we have already stated that the general rule can accommodate less than mathematical precision, and have thereby affirmed that the treatment of post-test-year occurrences is, to a large extent, within the discretion of the commission, Narragansett Electric Co. v. Harsch, 117 R.I. at 417, 368 A.2d at 1207, the commission has in this case failed to demonstrate that its findings are based upon legally probative evidence; consequently, we must remand with directions that the commission provide us with that information or, if necessary, alter its decision. Rhode Island Consumers' Council v. Smith, 111 R.I. 271, 283, 302 A.2d 757, 765 (1973). In its report and order the commission stated that rejection of Hartikka's recommended adjustment would unfairly penalize the ratepayers. It may well be that to ignore altogether known revenues of such magnitude would detract from the representative nature of the test year, at the consumer's expense. This is especially so because, despite the protests of the company's accounting witness, John F. O'Neill (O'Neill), that an analysis of the relevant expenses would be quite long and complex because it involves a great number of departments and a great number of different items   , the company itself had already adjusted test-year data to reflect increased wage expense, which company figures in turn suggest accounted for about half of the total directory advertising expense. On the other hand, the report and order reveals that Hartikka based part of his calculations on the assumption that directory advertising expense would increase by the same percentage that directory advertising revenues would be increased   a theory that standing alone is too speculative to be relied upon. Cf. General Telephone Co. v. Public Service Commission, 78 Mich.App. 528, 540, 260 N.W.2d 874, 879 (1977) (conclusion that directory advertising revenues will increase at same rate as in past was probably too speculative for adoption). If and to the extent that the commission adopted that formula as a measure of directory advertising expense, we direct that on remand it exclude the arrived-at sum as an adjustment to test-year data. In conclusion, we must remand so that the commission can detail its reasons for having adopted Hartikka's methodology, [7] both in general and specifically with regard to the expense that was not wage related, and so that it can as well reconsider and perhaps modify its decision in light of what we have said here.