Opinion ID: 2362262
Heading Depth: 3
Heading Rank: 3

Heading: Requirement of a Fully Allocated Cost Study

Text: Arguing in the alternative, NET contends that even if it has not complied with the requisite cost standards, the decision and order under review is nevertheless reversible because the requirement of a comprehensive fully allocated cost study exceeds the statutory authority conferred upon the commission and is wholly unreasonable. [4] The commission is charged with the duty and exclusive authority to supervise, regulate, and promulgate orders governing public utilities to ensure, inter alia, that rates and charges assessed the public for the provision of utility services are not improper, unreasonable, or unjustly discriminatory. See G.L. 1956 (1977 Reenactment) § 39-1-1. To this end, the Legislature has vested in the commission all additional, implied and incidental power which may be proper or necessary to effectuate their purposes. Section 39-1-38. Additionally, our statutory scheme expressly imposes the burden of proof upon a utility proposing a rate increase to demonstrate, with respect to every component of its tariff, that the increase sought is necessary to achieve a reasonable compensation for services rendered. See Valley Gas Co. v. Burke, 406 A.2d at 370; § 39-3-12. To satisfy this burden, a utility must prove that the overall revenue increase requested is necessary and that the schedule of rates it proposes is nondiscriminatory. Blackstone Valley Chamber of Commerce v. Public Utilities Commission, 396 A.2d at 104; United States v. Public Utilities Commission, 120 R.I. 959, 963, 393 A.2d 1092, 1094 (1978). Should the utility seek to spread the increase proportionately across the board among its several customer classes, it may rely upon a presumption that the new rates proposed are reasonable and nondiscriminatory since they are superimposed upon existing rates previously approved by the commission. Id. at 964, 393 A.2d at 1095. In the instant regulatory proceedings counsel for NET noted that the tariff filing proposed increases of 13 percent for residence-exchange service, 14 percent for business-exchange service, 35 to 50 percent for key-telephone service, 34 to 70 percent for semipublic coin-telephone service, 85 percent for private-line service, and 45 percent for auxiliary service. The commission correctly observed, therefore, that because NET sought increases of varying percentages for its several customer groups, or multiservices, the proposed tariff-rate schedules were not protected by the mantle of presumed nondiscrimination. In view of the statutory framework described, we have no doubt but that the commission is fully empowered to prescribe as a threshold requirement the precise cost information that a utility such as NET must submit with its rate-increase filings in order to meet its statutory burden to prove that the requested overall revenue is necessary and the proposed rate design nondiscriminatory. We also point out that this very principle can be discerned from the court's previous rulings in United States v. Public Utilities Commission and Michaelson v. New England Telephone & Telegraph Co., both supra. In the former case, the Navy objected to its being charged increased rates for the provision of electricity different from the rates charged the utility's other customer classes. The court commented that it is generally recognized that a cost-of-service study is of paramount importance and may indeed be a precondition to consideration of a proposed rate design. [Citations omitted.] United States v. Public Utilities Commission, 120 R.I. at 967, 393 A.2d at 1096. The case was remanded to the commission for its determination of whether, under the particular circumstances presented, a cost-of-service study was a prerequisite to approving the proposed rate design under review, and if so, whether the requisite study must fully allocate all costs of service among all customer classes or merely delineate the cost of serving the Navy. Id. at 966, 393 A.2d at 1096. In the latter case the commission declined to dismiss NET's tariff filing for failure to base its rate design upon cost-of-service considerations, reasoning that such action would represent `a major change in the governing regulatory standard for which there should ordinarily be warning sufficient to adjust both the practice and proof to the new situation.' Michaelson v. New England Telephone & Telegraph Co., 404 A.2d at 813. The court upheld the commission's limitation of its cost-information standards to all subsequent rate proceedings in the absence of any showing that the company had at that time failed to produce the type of evidence which the commission had accepted, albeit reluctantly, in the past. The court concluded, This controversy does not require us to decide specifically whether a cost-of-service study is a prerequisite to the commission's approval of a tariff filing. We reach that conclusion because, even assuming both that a cost-of-service study is necessary and that the company did not meet its burden to produce the cost data, we feel that the commission could legitimately delay requiring the data if it believed that without that delay the company could not compile the information. (Footnote omitted.) Id. 404 A.2d at 813. We turn now to the company's charge that the commission was unreasonable in its strict adherence to the cost-study standards outlined in docket No. 1475. NET takes the position that the interdependent cost-information materials accompanying its filing, consisting of the 1979 EDA, the FACS, the five specialized service-area studies, and the numerous incremental unit-cost analyses, afforded the commission all the data necessary to evaluate the reasonableness of the proposed individual rates. It claims, therefore, that it was arbitrary and capricious for the commission to reject the individual economic analyses submitted simply because of NET's failure to meet the threshold requirement of a sufficiently detailed fully allocated cost study. Again, we emphasize that it is entirely within the province and expertise of the commission to determine the nature and type of factual information that must be supplied in the first instance by a utility, unless shown to be impossible or unduly burdensome, in order to obtain approval of a tariff-increase request. See American Can Co. v. Davis, 28 Or. App. 207, 559 P.2d 898 (1977) (determination of nature and type of facts likely to assist regulatory agency in discharging its duties is for public utility commissioner to make, and commissioner may order such studies as he deems relevant although he is not required to have any particular study or investigation made); see also Trustees of Clark University v. Department of Public Utilities, 372 Mass. 331, 361 N.E.2d 1285 (1977) (utility's rates need not be structured on a cost-related basis unless, after fair warning, the department of public utilities requires that approach). Furthermore, the commission did not, as NET suggests, reject wholesale the individual service studies presented; it merely held that such analyses were not acceptable substitutes for the comprehensive fully allocated cost study dictated by its prior decisions. The commission found that these unit-cost analyses fell short of its cost standards because they were partial. In this regard the studies suffered from the same deficiency that had tainted similar individual cost studies accompanying the filing in docket No. 1475. Quoting from its earlier decision in that docket, the commission explained: `The Company cannot meet this burden [to establish that proposed rates are nondiscriminatory] simply by submitting the costs associated with individual tariffs, but must also provide comprehensive cost information for all tariffs; to require less would be to improperly shift to unhappy ratepayers the burden of proving that the proposed tariffs were discriminatory. Under a piecemeal approach a utility could select which rates to study, ignore studies once completed, eventually attain certain revenue goals bit by bit, and delay indefinitely the submittal of a fully allocated cost study.' (Emphasis added.) Nor do we share the company's opinion that the commission is unreasonably relying upon a cost-of-service criterion as the determinative basis for setting specific rates for the multifaceted offerings contained in the tariff. On the contrary, a review of the decision reveals that the commission was fully cognizant that various factors have a bearing on the final pricing decision, only one of which is the actual cost of rendering a particular service or product. It simply concluded that to consider all such relevant factors properly, it must have before it the complete picture. Reiterating its position as expressed in an earlier decision and reaffirmed in its decision in docket No. 1475, it stated: `[W]hile the Commission does not bind itself to either accept or reject a cost-based tariff structure, it will insist on the availability of a fully allocated cost study upon which rate design decisions may be made on a more adequate evidentiary record than has been available in the past.' In the eyes of the commission, then, the lack of a comprehensive fully allocated cost study in docket No. 1560 rendered the picture unacceptably incomplete. It is interesting to note, as the commission points out, two of its regional counterparts, the Maine Public Utilities Commission and the Massachusetts Department of Public Utilities, have rejected NET's cost studies submitted in recent rate proceedings. Both agencies characterized the company's 1979 EDA as seriously deficient and unacceptable as a basis by which its tariff proposals could be supported. See Me. P.U.C. Decision and Order in Docket No. 80-142 at 75, (March 30, 1981), and Mass. D.P.U. Decision and Order in Docket No. 411 at 59-61 (April 3, 1981). Finally, we remain unpersuaded by NET's citation to the ruling in Mountain States Telephone & Telegraph Co. v. New Mexico State Corp. Commission, 90 N.M. 325, 563 P.2d 588 (1977), in which the New Mexico Supreme Court reversed the order of the state regulatory agency denying the utility's rate-increase request for lack of sufficient cost data to support each and every proposed rate. The order in that case significantly differs from the order before us in two vital respects. First, relying on the cost information accompanying the filing, the New Mexico commission was able to determine the exact additional yearly revenue needs of the utility and did in fact do so. According to the court, this was the most critical part of the decision-making process; from there it simply became a question of how the increased revenue load was to be apportioned among the customers of Mountain Bell. Id. at 332, 563 P.2d at 595. Second, the commission had not previously indicated that it desired additional proof to support the rate schedules. Having rejected the proposed allocation of the additional revenues found to be necessary, the court concluded that under the mandates of the New Mexico Constitution the commission was obligated to promulgate alternative rate schedules since, in the court's opinion, substantial cost information had been presented from which fair and reasonable rates could have been calculated. Id. at 333, 563 P.2d at 596. In the case at bar, no finding was made concerning the additional aggregate revenue needs of NET. Indeed, the very heart of the controversy revolves around the commission's position that a threshold requirement for any determination of NET's increased revenue needs is the presentation of a comprehensive fully allocated cost study identifying all costs associated with each and every particular service listed in the company's tariff. Nor can it be seriously maintained that the record before us is devoid of any complaints by the commission regarding NET's failure to provide it with more adequate and detailed cost information to support both the filing in question and previous filings. Whatever may be the burden imposed upon a New Mexico utility seeking to increase its rates, we again stress that our statutory scheme places upon a Rhode Island utility the burden of proving both its overall revenue needs and the reasonableness of its rates. Moreover, no affirmative duty is imposed upon the commission to fix such rates when the utility has not demonstrated that its new rate schedule is reasonable and not unjustly discriminatory.