Opinion ID: 1733065
Heading Depth: 1
Heading Rank: 3

Heading: Inclusion of Disallowed Imprudent, Unreasonable or Excessive Expenditures in Savings Tracker

Text: In its first assignment of error, the Commission contends the district court erred in ruling that costs disallowed because they are imprudent, excessive or unreasonable should be treated as savings in the savings tracker calculation. The Commission argues the tracker contains no provision for the inclusion of regulatory disallowances as savings and was never intended to permit the recovery of a disallowed imprudent or unreasonable expense as a legitimate and prudent expense. The Commission further reasons that because of the sixty percent sharing mechanism, treating disallowances as savings would allow the Company to recover sixty percent of disallowances and thus pervert the intention underlying the usage of the tracker. In opposition to the Commission's arguments on this issue, the Company contends that all adjustments that affect the revenue requirement should also be reflected in the savings tracker calculation since all such adjustments produce reductions in costs to ratepayers, which make savings available for recovery of the acquisition premium. The Company further argues that if the Commission removes an amount of expenses from the Company's revenue requirement, then that same amount must be removed from the normalized expenses used to calculate savings. It asserts that the plain language of the Joint Regulatory Proposal contemplates that the O & M expense included in the revenue requirement used in setting rates and the future year normalized O & M expense used in calculating savings under the tracker will be consistent. The Order states, The O & M Savings Tracker shall not be interpreted to include recovery of any portion of disallowed imprudent, unreasonable, or excessive expenditures. L.S.P.C. Order No. U-22092-B at 32. The Commission asserts this conclusion is supported by both the plain language of the Merger Order and the testimony of its witness, Mr. Kollen. Keeping in mind the principles that [t]he Commission is an expert within its own specialized field and courts should be reluctant to substitute their views for those of the expert body charged with the legislative function of ratemaking, Entergy Gulf States, Inc. v. Louisiana Pub. Serv. Comm'n, 98-1235 at p. 27, 730 So.2d at 911 (internal citations omitted), we find the Commission's conclusion is supported by the plain language of the Proposal and/or the testimony of its witness. The Proposal describes the way the savings tracker is to operate. Paragraph (4) of the Proposal states: To measure the savings achieved as a result of the merger, a benchmark will be established. The benchmark will be based on a normalized pre-merger test year's operation and maintenance expense, as set forth in Attachment A [Base Year Normalized Operating Expense]. For each year subsequent to the test year, the operation and maintenance expense level will be increased by an inflation factor reflecting the Consumer Price Index and by one-half the amount of the company's growth in sales to residential and commercial customers. To measure savings, future years will be normalized in a manner consistent with the base year, as set forth in Attachment A [Future Year Normalized Operating Expense]. Appendix 1 to L.P.S.C. Order No. U-19904, Joint Regulatory Proposal Term Sheet, at 1-2. To determine the Base Year Normalized O & M expense, Attachment A mandates that the Total Actual 1992 Non-Fuel O & M expense (excluding specific accounts) be quantified, certain expenses and costs be deducted from that amount, and other specific costs and charges be added. The final calculation yields the Total Base Year Normalized, to which the normalized future year expense levels will be compared to measure savings. The Proposal also contains the formula to be used to calculate the Future Year Normalized O & M expense. That formula states that the Total Actual Future Year Non-Fuel O & M Expense (excluding specific accounts) be quantified and, from that number, certain expenses, costs and charges or credits be subtracted. As we stated in Entergy Gulf States, Inc. v. Louisiana Pub. Serv. Comm'n, 98-1235 at p. 8, 730 So.2d at 898, When a Commission order adopts an agreement between a utility and the Commission, this Court cannot unjustifiably disregard the parties' intentions or the plain language of the agreement to uphold the Commission's interpretation of the order, even though the Commission's interpretation of its own orders generally deserves great weight. Likewise, when the agreement between the utility and the Commission is clear, we cannot disregard its plain language to effectuate a modification proposed by the Company when the Commission does not agree to the change. Nowhere does the formula provide for the subtraction of disallowed imprudent, unreasonable, or excessive expenditures. Thus, although the Proposal clearly contemplates a prudence review, stating that the Commission shall retain the right to review the prudence of capital expenditures consistent with traditional regulatory principles, it does not provide for the removal of disallowed imprudent, unreasonable, or excessive expenditures from the savings tracker. Therefore, we can only conclude that the parties did not agree to the removal of such disallowed expenditures from the savings tracker calculation, and the Commission's determination in this regard is supported by the plain language of the Merger Order. The Company's argument that the plain language of the Proposal precludes the Commission from making one set of adjustments to the O & M expense in the rate review and another set of adjustments in the savings tracker is without merit. Although the Company correctly points out that Principle (c) of the Proposal requires that the amounts reflected in the annual savings and rate reviews be consistent with GAAP and sound regulatory principles and practices, it misinterprets this requirement. The quoted principle does require that the accounting practices employed in the annual savings and rate review be consistent with GAAP and sound regulatory principles and practices, but the language clearly does not require that adjustments made to the rate review also be made to the savings tracker calculation. Similarly, although the Proposal does state that to measure savings, future years will be normalized in a manner consistent with the base year, as set forth in Attachment A, there is no requirement that the calculations for the base year normalized and the future year normalized be identical. In fact, the expenses and costs listed in Attachment A as reductions to the total actual 1992 non-fuel O & M expenses are not identical to those listed as reductions to the total actual future year non-fuel O & M expenses. The Commission's conclusion that the O & M Savings Tracker shall not be interpreted to include recovery of any portion of disallowed imprudent, unreasonable, or excessive expenditures, is also supported by the testimony of its witness, Mr. Kollen. In his direct testimony before the ALJ, Mr. Kollen testified as follows: Q: Okay. Now you did indicate that there's a category of expense that you would not recommend removing from the future year calculation in the tracker even if it's taken out of the cost of service; is that right? A: Yes, that's correct. Q: And what type of expense is that? A: To the extent that the Commission finds that there is an imprudent, excessive and/or unreasonable level of O & M expense included in revenue requirement and then disallows that from recovery, it's our recommendation that that not be reflected in the future year component of the O & M savings tracker mechanism. And the reason for that is that the company should have the full disallowance. They shouldn't be entitled to an offset to that of 60 percent. If they're found to be imprudent or if it's found that there is an excessive or unreasonable level of costs, then there shouldn't be an ability to undo that through the tracker by 60 percent. Q: Do you think it would be appropriate for the company to be able to recover, through this tracker mechanism, say 60 percent of an imprudent expenditure? A: No, I don't. Q: So, youI take it then that you wouldyou are proposing that that adjustment not be make to the tracker? A: That's correct. Dir. Test. Mr. Kollen at 39-40, L.P.S.C. (1/28/97). Upon the Company's cross-examination, Mr. Kollen again explained, to exclude the expenses, the unreasonable expenses, from the future year under the tracker mechanism would, essentially, give the company a partial recovery of the disallowed cost, and I think that's inappropriate. Cross-Examination Mr. Kollen at 26, L.P.S.C. (1/29/97). [4] Additionally, the Company's witness, Mr. Wright, acknowledged that a regulatory disallowance is not a savings produced by the merger. Cross-Examination Mr. Wright at 84, L.P.S.C. (2/17/97). Although the Company did present witnesses whose testimony conflicted with that of Mr. Kollen, the Commission clearly acted within its discretion in accepting the testimony of Mr. Kollen over that of the Company's witnesses. Thus, the Commission's determination that the savings tracker shall not be interpreted to include recovery of any portion of disallowed imprudent, unreasonable or excessive expenses is adequately supported by the testimony contained in the record. As explained above, the Commission's order that the savings tracker is not to be interpreted to include recovery of any portion of disallowed imprudent, unreasonable or excessive expenditures is supported by either the plain language of the Merger Order or the testimony of Mr. Kollen. Therefore, the district court's judgment to the contrary is reversed.