Opinion ID: 1865373
Heading Depth: 1
Heading Rank: 1

Heading: Year-End Rate Base

Text: Public counsel's basic contention in this proceeding is that the allowance of a year-end rate base has been routinely permitted by the Commission since 1968, in contravention of our directive that this rate-making tool should be used only in extraordinary situations. City of Miami v. Florida Public Service Commission, 208 So.2d 249 (Fla. 1968). Public counsel has selected the allowance of a year-end rate base for General Telephone as typical of the Commission's consistent pattern in responding to utilities' requests for this extraordinary accounting procedure, [2] and has attempted to show that the allowance in this case is unsubstantiated by any factual findings of extraordinary growth or circumstances. Both the Commission and General Telephone defend the allowance on a record that they contend supports findings of both attrition and plant expansion, two features they suggest justify use of a year-end rate base. They also challenge public counsel's basis for showing in this proceeding that the Commission has been guilty of approving rote year-end rate base awards. Our analysis of the respective arguments of the parties persuades us that public counsel's contentions are well-taken. The test year or period is an analytical device used in rate-making proceedings to compute current levels of investment and income in order to determine the amount of revenue that will be required to assure the company a fair rate of return on its investment. Gulf Power Company v. Bevis, 289 So.2d 401 (Fla. 1974). In Gulf Power, we recognized that because [r]ates are fixed for the future rather than for the past, test year data may be adjusted in order properly to reflect typical conditions in the future period for which the rates [are] being fixed. [3] Use of a year-end rate base, rather than the more traditional average rate base, is one method by which the Commission adjusts any imbalance between the test-year data and the known future needs of the utility. Rate base is the total amount which a utility has invested in capital items to provide its service. The ratio of the company's net income to its rate base provides its rate of return. Since the level of investment reflected on the company's books may vary during its test year period, the rate of return is susceptible of variations attributable to the choice of an average or a year-end rate base  the rate of return appearing to be lower when rate base at year end exceeds the yearly average. [4] To offset the effects of intra-year rate base fluctuations, and to ensure that the figures employed in computing the rate of return accurately reflect a company's capital position, regulatory authorities have traditionally calculated the rate base as the average investment during the test year. [5] Since it rests on the assumption that, with minor adjustments for known changes, the relationship between investment and income during the test period will remain unchanged, [6] this method of computation provides a relatively dependable measure of predictability as to future conditions in times of market stability and orderly economic growth. [7] It is apparent, however, that the average rate base approach can produce a distorted picture of future conditions when the company is experiencing extraordinary growth due to rapidly increasing demands for its services, as in periods of great population influx, or when other factors are forcing investment costs upward without a concomitant increment in revenues. [8] This latter phenomenon, commonly referred to as attrition, is principally a by-product of inflation. To compensate for the problems of extraordinary growth and attrition, regulatory bodies have developed several methods of adjusting rate computations, one of which is to measure investment at the end of the year, including property under construction, rather than taking the test period average. [9] The year-end rate base was first utilized by the Commission in Florida in 1953. Re: Florida Power Corp., 99 P.U.R. 129 (1953). This Court approved its use in the City of Miami case. We carefully stressed, however, that the year-end rate base is to be regarded as a deviation from the norm, and that it should properly be employed only in the most exceptional of cases: We wish to make it clear that in not disturbing the use of the year-end method ... in fixing rates in these cases rather than average investment during the test year, we do so because of the strong unrebutted evidentiary showing that ... utilities are endeavoring to cope with extraordinary needs for their services due to abnormal population and economic growth conditions within their service areas. ... [I]t is our belief that in the absence of the most extraordinary or emergency conditions or situations, average investment during the test year should be the method employed by the Commission in determining rate base. Our study of the subject discloses that average investment during the year is the better choice of methods and we commend it to the Commission in future cases  and suggest it should not be departed from except in the most unusual and extraordinary situations where not to do so would result in rates so low as to be confiscatory to the utility. [10] Notwithstanding our admonition, a review of the Commission's decisions indicates that, with one exception, a year-end rate base has been applied in every major electric and telephone utility case to come before it since 1968. [11] General Telephone and the Commission argue that the combined effects of company growth (requiring plant expansion to meet increasing consumer demands) and attrition (due to increased operating costs brought on by inflation) necessitate the application of a year-end rate base for this, as well as other Florida utilities. As evidence of this need, they point to the fact that General Telephone has not earned its authorized rate of return at any time since 1973 and that, notwithstanding the consistent use of a year-end rate base, major utilities have been repeatedly forced to return to the Commission for rate relief during the past nine years. Distilled to its essence, respondents' position is that so long as Florida continues to experience high levels of population growth and inflation, the year-end rate base should properly be the rule rather than the exception in rate-making determinations. [12] We perceive in respondents' rationale for the year-end rate base a concern more for the effects of attrition than for evidence of extraordinary or unusual growth. For example, the Commission states, after concluding with little discussion that comparative statistics reflect extraordinary company growth: We also observe the basic proposition that the use of a year-end rate base may be necessary and appropriate notwithstanding the fact that growth in certain categories may not be unusual or extraordinary... . The three types of attrition affect public utilities and occur whenever inflation is present irrespective of the growth rate that may be experienced... . There are, then, clear and compelling circumstances when a mismatch between investment and revenues is required even though extraordinary growth rates may not exist... . [T]he record discloses that ... attrition [has] had a pervasive effect on the Company and the use of a year-end rate base is clearly required ... and our decision shall rest upon the application of the same. In holding that the use of a year-end rate base may be justified in the absence of extraordinary growth, the Commission clearly departed from the rationale of our decision in the City of Miami case. Our review of the record indicates that the Commission's concern for the erosive effect of attrition on the company's ability to earn its fair rate of return is indeed well-founded. We do not, however, conclude from that fact alone, as the Commission did, that a year-end rate base is the most practical way by which to alleviate the problem. Rather, we hold that a separate attrition allowance is the appropriate tool. For one thing, attrition is more easily quantifiable than growth. An example is this case, where the Commission awarded General Telephone a separate attrition allowance for increased plant expansion, in the form of a rate base increase of approximately $20,600,000. [13] For another, we ensure a more workable basis on which to review a rate award if we require independent determinations of growth and of attrition. By this means we avoid the dual difficulties encountered here of guessing what record evidence of attrition supports the year-end rate base and whether the Commission would have used that base if attrition had been isolated from growth. In future rate cases, and on remand here, these uncertainties will be eliminated by having the Commission predicate its decision regarding the use of a year-end rate base solely on considerations of extraordinary growth, and by requiring all adjustments for attrition to be encompassed within a separate allowance.