Opinion ID: 2332011
Heading Depth: 2
Heading Rank: 3

Heading: Gain from Sale of Depreciated Property

Text: In 1974, Casco sold certain depreciable property (three vessels) and realized a net gain of $28,396.47. This was treated as extraordinary income and applied against a $50,000 operating loss sustained in 1974. The Commission found that the ratepayers were entitled to benefit from the sale of the assets and allocated the gain over a three-year period so as to reduce Casco's depreciation expense for ratemaking purposes during those three years. In order to provide Casco's investors with an incentive to sell depreciable property for the best price, the Commission allowed Casco to retain 10% of the gain. Casco claims that the Commission's flow-through of 90% of the gain on the sale of the depreciable property deprived it of its property without reasonable compensation and without due process. We sustain the Commission on this issue. Depreciation expense is one of the operating costs utilities are allowed to recover from their ratepayers through their rates and charges. The purpose of such depreciation is to return to the utility its original cost for the property over its useful life. Upon retirement of the property, the total accrued depreciation plus its remaining value upon retirement (if any) is expected to equal its original cost. Thus, the utility recovers its original investment through its annual depreciation expense plus its proceeds upon disposition of the property. If the proceeds from the sale of a depreciated asset plus the accrued depreciation are greater than the original cost, the utility had realized a gain upon the sale of the asset. It is the disposition of such a gain upon the sale of depreciation property which is at issue here. The Commission's Decree treated the gains as follows: We reaffirm our position that the ratepayers should benefit from the sale of depreciable assets. The purpose of depreciation is to recover the original cost of the property over its useful life. This recovery is effected through depreciation charges or through salvage. If there is a gain from the sale of depreciable property, it indicates that depreciation has been miscalculated and that the ratepayers have been overcharged. Furthermore, we note that utilities are permitted to amortize losses from the retirements of utility property in certain circumstances. See, for example, PUC Uniform System of Accounts for Electric Utilities at p. 23, item 23(D). Accordingly, we shall use the gains from depreciable property to reduce depreciation expense for rate-making purposes. Since it is the past ratepayers who provided the excess depreciation expense, they are the ones who should primarily receive the benefits from sale of depreciable assets. Therefore, we shall spread the net gain over a period of three years. The commission is aware that if the stockholders receive no benefit from the sale of depreciable property, there may be no incentive to achieve the best possible purchase price. In order to avoid this problem, we will allow the company to retain 10 per cent of the gain. Re Casco Bay Lines, supra at 174-75. It is entirely reasonable to redistribute those excessive depreciation payments back to the ratepayers by means of future reductions in Casco's depreciation expense. See Democratic Central Committee of District of Columbia v. Washington Metropolitan Area Transit Commission, 158 U.S.App. D.C. 7, 485 F.2d 786 (1973), cert. denied 415 U.S. 935, 94 S.Ct. 1451, 39 L.Ed.2d 493 (1974); In re Revision of Rates Filed by Plainfield-Union Water Co., 57 N.J.Super. 158, 154 A.2d 201 (1959); Re D. C. Transit System, Inc., 85 P.U.R.3d 508 (Wash.Met. Area Trans. Comm'n 1970); Re The Detroit Edison Co., 20 P.U.R. 4th 1 (Mich.Pub.Serv. Comm'n 1977); Re Minneapolis Street Railway Co., 31 P.U.R.3d 141 (Minn. R.R. & Warehouse Comm'n 1959); Re Salt Lake City Lines, 30 P.U.R.3d 319 (Utah Pub.Serv. Comm'n 1959); Re Wyoming Gas Co., 40 P.U.R.3d 509 (Wyo.Pub.Serv.Comm'n 1961). Furthermore, we note that when a utility sells property at a loss it is generally allowed to amortize such loss as an expense to be recovered from its ratepayers. Democratic Central Committee of the District of Columbia v. Washington Metropolitan Area Transit Commission, supra 158 U.S.App. D.C. at 29-32, 485 F.2d at 808-11; Re Casco Bay Lines, supra at 175. It is only equitable that the ratepayers who bear the cost of depreciation and maintenance on the property and the burden of a sale at a loss, should be entitled to benefit from the sale of such property at a gain. Democratic Central Committee of the District of Columbia v. Washington Metropolitan Area Transit Commission, supra 158 U.S.App. D.C. at 42-43, 485 F.2d at 821-22. In the alternative Casco argues that if its investors are to be denied the gain on the sale of its assets, such gains should, at least, be applied against its 1974 operating loss or offset against those years in the past when it failed to attain the rate of return allowed by the Commission. Ratemaking techniques lie primarily within the discretion and expertise of the Commission and may not be disturbed by this Court if they are reasonable and supported by substantial evidence. New England Telephone & Telegraph Co. v. Public Utilities Commission, supra (1978). We find that the Commission's decision to allocate the gain to the ratepayers by reducing Casco's depreciation expense over a period of three years is a reasonable method to account for the excessive depreciation paid by such ratepayers in the past. The record contains substantial evidence to support the Commission's actions. We sustain the Commission with respect to its treatment of gain from the sale of depreciable assets.