Opinion ID: 2551426
Heading Depth: 1
Heading Rank: 8

Heading: The Commission May Authorize A Rate Increase To Recover A Single Item Expense Without Conducting A General Ratemaking Proceeding.

Text: Appellants assert that the Commission may not, under these circumstances, authorize a rate increase without taking into account the Company's total revenues, expenses and other costs of doing business. Additionally, appellants assert that allowing accelerated recovery of its DSM expenditures would increase the Company's authorized rate of return. The thrust of appellants' argument, therefore, is that the Commission may not authorize a rate increase in this case without conducting a general rate proceeding. Idaho law permits the Commission to authorize a rate change in some instances without conducting a general ratemaking proceeding. In J.R. Simplot Co. v. Intermountain Gas Co., 102 Idaho 341, 630 P.2d 133 (1981), this Court held that where a gas utility sought to maintain its authorized rate of return by passing through to its customers the increased cost of natural gas, the Commission was not required to conduct the type of hearing used in a general rate proceeding in order to raise rates. See 102 Idaho at 342, 630 P.2d at 134. The Court in Simplot stated that in the regulatory context, due process is a flexible concept permitting expert administrative agencies broad latitude to adapt procedures to the specific regulatory needs of their jurisdictions. See id. Appellants argue that the circumstances of the present case differ from that of Simplot in three aspects: 1) control over the expenditure; 2) timing since last general rate case; and 3) impact on authorized rate of return. Therefore, appellants argue, this case should not have been treated as a tracker or pass through case. This situation does not differ from Simplot as much as the appellants contend. This Court's decision in Simplot addressed the constitutional implications and limited application of the narrow facts and circumstances of that case to a general policy and practice in the area of administrative regulation and ratemaking. As previously stated, ratemaking is a legislative function and not judicial. So long as the Commission pursues its authority and remains within constitutional limitations, this Court has no jurisdiction to interfere with its determinations. See Application of Utah Power & Light Co., 107 Idaho at 448-49, 690 P.2d at 903-04. In this sense, [t]he Constitution does not bind rate-making bodies to the service of any single formula or combination of formulas. Agencies to whom this legislative power has been delegated are free, within the ambit of their statutory authority, to make the pragmatic adjustments which may be called for by particular circumstances. Once a fair hearing has been given, proper findings made and other statutory requirements satisfied, the courts cannot intervene in the absence of a clear showing that the limits of due process have been overstepped. If the Commission's order, as applied to the facts before it and viewed in its entirety, produces no arbitrary result, our inquiry is at an end. City of Los Angeles v. Public Utilities Commission, 15 Cal.3d 680, 125 Cal.Rptr. 779, 542 P.2d 1371, 1383 (1975) (quoting Federal Power Comm'n v. Pipeline Co., 315 U.S. 575, 586, 62 S.Ct. 736, 743, 86 L.Ed. 1037, 1049-50 (1941)). It appears necessary to clarify the basis upon which this Court acknowledged the use of abbreviated proceedings by a public utilities commission in single item expense cases. [1] In Simplot, this Court analyzed decisions of other courts for insight into the requirements of due process when a public utilities commission is faced with a requested rate increase due to a single item expense. The Supreme Court of California, in City & County of San Francisco v. P. U.C., 39 Cal.3d 523, 217 Cal.Rptr. 43, 703 P.2d 381 (1985), articulated the sound reasoning behind allowing abbreviated proceedings in certain circumstances. The court stated: In a general rate setting proceeding, the commission determines for a test period the utility expense, the utility rate base, and the rate of return to be allowed. Using those figures, the commission determines the revenue requirement and then fixes the rates for the customers to produce sufficient income to meet the revenue requirement. . . . [¶] The rates are fixed in the general proceedings on the basis of historical data. Adjustments may be made in that proceeding for anticipated future extraordinary changes. [citation.] It is obvious revenue, expense and rate base arrived at on historical data will not remain constant in future years when the rates take effect. The assumption underlying fixing of future rates on historical data is that for future years changes in the revenue, expense, and rate base will vary proportionately so that the utility will receive a fair rate of return. . . . In an offset proceeding, by contrast, both the purpose and the scope of the commission's inquiry is limited. In such a proceeding, the commission, without waiting until the utility's next general rate proceeding, determines whether there has occurred a significant and not reasonably foreseeable change in an item of expense or revenue that, unless taken into account of, would seriously affect the utility or its ratepayers. [citation.] As a consequence, the commission is not required to conduct an inquiry equivalent to that in a general rate proceeding, recalculating all expenses, revenues, rate base, and rate of return . . . . [citation.] Rather the commission need only determine the relevant extraordinary change and then take account of it by adjusting the utility's rates to offset the effect of such change, with all other items of expense and revenue held constant as estimated in the utility's most recent general rate proceeding. Id. 217 Cal.Rptr. 43, 703 P.2d at 385 (citing California Manufacturers Assn. v. Public Utilities Comm'n, 24 Cal.3d 251, 155 Cal. Rptr. 664, 595 P.2d 98 (1979)). See also Southern Cal. Edison Co. v. Public Utilities Comm'n., 20 Cal.3d 813, 144 Cal.Rptr. 905, 576 P.2d 945 (Cal.1978). Here, it appears that the Commission's decision to allow a rate increase to reflect directly, the single cost associated with an accelerated recovery of deferred DSM expenditures represents precisely the situation for which the Commission has adopted abbreviated proceedings. The Commission, after petition and full hearing on the matter, determined that a reduced amortization period for all of the Company's DSM expenditures was appropriate. Faced with an accelerated period of recovery, the Commission found that the Company's current authorized rate was insufficient. The Commission therefore increased the Company's rate to directly reflect the revenue necessary to offset accelerated recovery of the Company's authorized DSM expenditures. It is argued by appellants that authorizing and accelerating recovery of deferred DSM expenditures will increase the Company's authorized rate of return and therefore cannot be done without conducting, in essence, a general rate proceeding. It is important to note that the Company is not seeking an increased rate of return or increased net annual earnings. The application submitted by the Company seeks to pass through to its customers at an increased rate, the cost of the DSM expenditures from which they have benefited. Compare Montana Consumer Counsel v. Public Service Comm'n, 168 Mont. 180, 541 P.2d 770, 773-74 (Mont.1975). The Commission concluded that acceleration of DSM recovery would not affect the Company's rate of return. Questions of rate of return are matters which raise extremely complicated issues. These issues are within the area of expertise, and their resolution a function of the Commission. See Washington Water Power Co. v. Idaho Pub. Utils. Comm'n, 101 Idaho 567, 575, 617 P.2d 1242, 1250 (1980). We agree that an accelerated rate of recovery for the Company's DSM expenditures will not affect the Company's authorized rate of return. Rate of return is the term used in public utility regulation to describe the compensation, which the owners receive over and above gross revenue and allowable deductions. It is the annual income from an investment, expressed as a percentage of the investment. See BLACK'S LAW DICTIONARY, 7th ed.1999. The general procedure for fixing a rate of return is to calculate the utility's capital investment amount or rate base by assessing the utility's property value, its costs and investment in property, and then determine what percentage of that rate base should be allowed as a fair return. DSM expenditures differ, however, from traditional capital investments. When a DSM expenditure is authorized for recovery by the Commission, two things occur. First, a directly proportional regulatory asset is placed on the utility's books to offset the expenditure and therefore, though technically included as part of a utility's rate base, the net effect of an authorized DSM expenditure on a utility's rate base is zero. Second, a period of amortization is established over which the expenditure may be recovered. For each year of the amortization period, a portion of the principal is reclaimed, interest is collected, and the regulatory asset is decreased proportionally. Therefore, although a utility may have an extremely large investment represented by DSM expenditure, that investment has no effect on the calculation of the utility's rate base, and in turn does not affect calculation of the utility's rate of return. Here, the Company's last general rate case was conducted in 1995. At that time, authorization was given for amortization of the Company's outstanding DSM expenditures over a twenty-four year period. The amount of the outstanding balance was offset, for accounting purposes, by an equal figure representing a regulatory asset. Calculation of the Company's rate base was therefore unaffected by the DSM expenditures and the rate of return was based solely upon the Company's remaining costs of doing business. Likewise, accelerated recovery of its DSM expenditures will not affect the Company's base rate or rate of return because the increased rate of recovery will be offset proportionately by a decrease in the regulatory asset. To permit the Company to receive interest on its DSM investment, the Commission initially considered the nature of the expenditure and the various risks involved in recovery, and authorized a carrying charge on the regulatory asset equal to the Company's authorized rate of return. Upon recognizing that the Company would experience decreased risk of recovery with an accelerated amortization period, the Commission decreased the carrying charge allowed on the regulatory asset from the 9.199% which had been authorized during the last general rate case, to 7.25%. In short, while the Company will be recovering its DSM capital more rapidly, the rate of return on that capital has actually decreased. Additionally, the Company will receive less total return on its investment due to the shorter amortization period. Therefore, we hold that an accelerated rate of recovery of the Company's DSM expenditures will not increase the Company's authorized rate of return and that the Commission regularly pursued its statutory authority when it adopted abbreviated proceedings to account for the Company's single item expense.