Opinion ID: 1833875
Heading Depth: 1
Heading Rank: 1

Heading: regarding point a:

Text: In both cases Petitioner contends that while it has no quarrel with the test period adopted by the Commission, it does most vigorously take exception to the computations of rate base at the end of the test year selected by the Commission which extended from October 1, 1963 to September 30, 1964, rather than on the average investments during the twelve-month period. Petitioner argues that the soundest and most reliable method of computing a utility's earned rate of return is to relate the average rate base during the test year to the actual earnings produced by that rate base. In the briefs Petitioner asserts that most regulatory bodies, both State and Federal employ this average investment method, and further argues that the radical departure below from such a well established method    was a clear departure from the essential requirements of law. In both orders reviewed the Florida Public Service Commission sets forth some of the policy reasons and factors supporting utilization of the year-end rate base as follows: Since 1953 this Commission has used year-end investments as the starting point in calculating the rate base. In 1953 Florida had already begun its surge forward in population growth and economic development. New industries were moving in and the State found itself bounding ahead on all fronts. At that time Florida public utilities were striving to keep pace with the pyramiding demands for service. They were confronted with the task of securing hundreds of millions of dollars in order to finance the necessary expansions so that they could keep pace with Florida's mounting economic boom. It was at that time that this Commission determined that it was in the public interest to depart from its traditional use of average year investment in calculating the rate base when fixing rates for public utilities engaged in extraordinary expansion programs.    In Florida the year-end rate base is permissible under the statutes and controlling court decisions. Its use should be determined by the necessities and circumstances existing when the determination is made. The growth problems that existed in 1953, when its use was first adopted by this Commission, have not abated, but on the contrary, have increased and are even more pronounced at this time.    We are firmly convinced that terminal or year-end investment, under all the circumstances of this case, should constitute the starting point in calculating the rate base on which the respondent, Southern Bell Telephone and Telegraph Company [and Florida Power & Light Company], will be allowed to earn a fair and reasonable return. Continued growth, and the accompanying demands for more and more telephone [and electric] service by the increasing population, businesses and industries    are real facts in this case and demand a better answer than anyone has advanced who would have this Commission revert to a philosophy that is incapable of meeting the demands of a booming economy. Sections 364.14 and 366.06, Florida Statutes, F.S.A., deal with the procedures for fixing and changing rates, charges, tolls, etc., of telephone and telegraph companies and public utilities, respectively. F.S. Section 364.14, F.S.A., reads in part: Whenever the commissioners shall find, after a hearing had upon their own motion or upon complaint, that the rates, charges, tolls or rentals demanded, exacted, charged or collected by any telegraph company or telephone company    are unjust, unreasonable, unjustly discriminatory or unduly preferential    or that such rates    are insufficient to yield reasonable compensation for the service rendered, the commissioners shall determine the just and reasonable rates    to be thereafter observed and in force, and fix the same by order as hereinafter provided. Section 366.06(2), Florida Statutes, F.S.A., states that in determining rate base for public utilities the Commission    shall investigate and determine the actual legitimate costs of the property of each utility company, actually used and useful in the public service, and shall keep a current record of the net investment of each public utility company in such property which value, as determined by the commission, shall be used for rate-making purposes and shall be the money honestly and prudently invested by the public utility company in such property used and useful in serving the public, less accrued depreciation    (Emphasis added.) It is quite apparent these statutes repose considerable discretion in the Commission in the rate-making process. In 1953 a basic policy pronouncement was made by the Commission in Re Florida Power Corp., 99 P.U.R. 129, from which we quote as follows: In normal times and under stable conditions the amount of revenue required to produce a fair rate of return can generally be calculated accurately and equitably upon the average and not the year-end balances of the test year. On the other hand, where a utility is in the throes of unusual growth and confronted at the same time with constantly increasing investment and operating costs, conventional notions of rate making must be adjusted to the circumstances and this is especially true where net earnings fail to keep pace with heavy additions made and to be made in plant investment. Where there is little fluctuation in a utility's investment accounts from the beginning of the year to the end of the year, we believe that the rate base should be predicated upon the net average investment for the test period. We have followed that method consistently for many years and will continue to do so whenever and wherever the investment accounts disclose nothing more than a normal growth.    There seems to be only one sound objection to the use of the year-end rate base and that is that some additional revenues must be ascribed to plant additions; however, this would be largely offset by the factors of additional depreciation, taxes, and expenses, so that there is little, if any, danger of excessive compensation. Under present conditions, as disclosed by the record herein, we conclude that the year-end rate base is more realistic than the average investment rate base. Inasmuch as we are here fixing rates for the present and for a reasonable time in the future, we should not use an investment figure that is already more than a year old. (at 134-135) Upon thorough study of the authorities cited by all parties, we conclude that, to borrow the above quoted words of the Commission, under present conditions, as disclosed by the record herein    the year-end rate base is more realistic than the average investment rate base. (Emphasis supplied.) The voluminous testimony and exhibits of the transcript of record and the detailed discussion by the Commission on the totality of the evidence and circumstances leading to the determinations in Orders 4076 and 4078 bear out and support our decision to uphold both orders as to the rate base concept. We will not unduly burden this opinion with verbatim recitations of the total scope of determinative factors leading to the choice of rate-making method in the instant cases. We will, however, set forth some of the basic factors involved in each case which were influential in the determination of both orders. In Order 4076 the Commission made the following observations in regard to Southern Bell Telephone and Telegraph Company: In Florida, Southern Bell operates in 26 counties, serving almost 2,000,000 telephones through 95 local exchanges. Its largest local exchange is in the City of Miami where it has 325,298 stations in service. Southern Bell serves the entire east coast section of Florida from Jacksonville to Key West. Its service area includes several exchanges in central, north, and west Florida; and it provides telephone service in such population centers as Pensacola, Jacksonville, Daytona, Orlando, Fort Lauderdale, and Miami. The company also serves several large and important air and naval bases in the State and the tremendous space complex in the Cape Kennedy section.          In 1951, Southern Bell's telephone plant in service in Florida was $149,927,240 and at the end of the test period, September 30, 1964, it was $736,530,921, or an increase of approximately 400%. The Company had a large backlog of held orders, more than 32,000 people were clamoring for telephone service they could not get, mostly in the Miami area, which then as now was enjoying phenomenal growth. At the end of the test period in the present case, the Company was installing telephones through its service area on a current basis. In 1951 Southern Bell still had many exchanges which had not been converted to dial operation, and direct-distance dialing by subscribers was still a long way off. Today all the company's exchanges are dial operated, and a substantial majority of its subscribers have Extended Area Service and can dial their own long distance calls. These records of growth and expansion reflect the service demands that had to be met if the public was to have the service it needed and was entitled to receive. Such progress on the part of a state's public utilities also reflects a regulatory philosophy that is responsive to the economic demands of a growing section. The philosophy of this Commission has been, and will continue to be, to support and encourage the growth and prosperity of all sections of Florida so long as that can be done without imposing unreasonable and exorbitant rates upon the public. The past several years, and the rate reductions imposed on public utilities when their earnings have become excessive, furnish adequate support of this Commission's constant awareness of the earnings requirements of utilities under its jurisdiction, as well as the Commission's dedication to the principle of keeping all public utility rates within the zone of reasonableness. Regarding Florida Power & Light Company, the Commission related the following in Order No. 4078: Florida Power and Light Company, with its principal business offices located    in Miami, Florida, is the public utility involved in this investigation. It is a Florida corporation operating as an integrated public utility engaged exclusively in the intrastate business of generating, purchasing, transmitting, distributing, and selling electric energy to the public for compensation; and for that purpose owns and operates generating plants substations, transmission lines, and distribution systems in various parts of the State of Florida. The utility operates in Dade, Broward, Palm Beach, Hendry, Lee, Charlotte, Glades, Highlands, Sarasota, Manatee, Hardee, DeSoto, Hillsborough, Collier, Martin, Okeechobee, St. Lucie, Indian River, Brevard, Seminole, Volusia, Flagler, Alachua, Bradford, Putnam, St. Johns, Clay, Union, Columbia, Suwannee, Baker, Nassau, and Duval Counties. Its service area includes such population centers as Miami, Miami Beach, Fort Lauderdale, West Palm Beach, Daytona Beach, Sarasota, Fort Myers, Bradenton, Palatka, and Lake City. It also serves several large defense areas including Homestead Air Force Base, Patrick Air Force Base, and the tremendous space complex in the Cape Kennedy section. Florida Power and Light serves probably the fastest growing territory in the United States. This public utility has been a major contributing factor in the unprecedented growth of Florida's east coast section. It has done an outstanding job in meeting the ever increasing demands from the public for more and more electric energy for residential, commercial and industrial use. While the territory served by Florida P & L has grown by leaps and bounds, the utility itself has also experienced a strikingly similar and remarkable growth. At the end of 1951, when it first came under the jurisdiction of this Commission, this utility served 328,000 customers and had a gross total plant investment of $180,000,000. By the end of 1965, under State regulation, it had increased its gross plant investment to $900,000,000 and presently serves approximately 1,000,000 customers. Gross electric revenues for 1951 were $53,000,000, but for 1965 they were $250,000,000. For 1951 total Kwh sales amounted to one billion six hundred million, whereas by 1965 they had climbed to twelve billion one hundred million. During this period of rapid growth and expansion this Commission, under its policy and practice of continuing surveillance, required Florida P & L to reduce its rates by $4,725,000 in 1957; $2,864,000 in 1959; by $260,000 in 1960; $6,256,000 in 1961; $10,000,000 in 1964; $3,741,743 in 1965; and $9,467,900 effective January 1, 1966. Thus, since coming under the jurisdiction of this Commission, the rates of this particular electric utility have been reduced $37,314,643 on an annual basis. Thus, in view of the particular circumstances and facts involved, we can not agree with Petitioner's assertion that the method employed by the Commission to compute the rate of return of the two companies involved was so plainly irrational, incongruous, arbitrary and capricious as to constitute a flagrant abuse of discretion.    Another factor to be considered and one lending further support to the method selected by the Commission for determining rate base, is the concept or principle known as the end result rule. This concept was originated in the case of Federal Power Commission v. Hope Natural Gas Co. (1944), 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333. There the Supreme Court of the United States, reviewing a rate reduction order of the Federal Power Commission, said We held in Federal Power Commission v. Natural Gas Pipeline Co., supra, 315 U.S. 575, 62 S.Ct. 736, 86 L.Ed. 1037, that the Commission was not bound to the use of any single formula or combination of formulae in determining rates. Its rate-making function, moreover, involves the making of `pragmatic adjustments.'    And when the Commission's order is challenged in the courts, the question is whether that order `viewed in its entirety' meets the requirements of the Act.    Under the statutory standard of `just and reasonable' it is the result reached not the method employed which is controlling.    It is not theory but the impact of the rate order which counts. If the total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry under the Act is at an end. The fact that the method employed to reach that result may contain infirmities is not then important. Moreover, the Commission's order does not become suspect by reason of the fact that it is challenged. It is the product of expert judgment which carries a presumption of validity. And he who would upset the rate order under the Act carries the heavy burden of making a convincing showing that it is invalid because it is unjust and unreasonable in its consequences.    (at 602, 64 S.Ct. at 287) This end result doctrine was adopted in Florida in the case of Jacksonville Gas. Corp. v. Railroad & Public Utilities Comm. (1951), Fla., 50 So.2d 887, in which this Court, speaking through Mr. Justice Thomas, said: It was the commission's view that it should be `free to follow such method    as (it) may choose so long as the end results are rates which are just and reasonable.'    At first we were disposed to criticize such reasoning because we thought one could not evaluate a conclusion without examining the course followed in reaching it; in other words, the product of .07X could not be judged properly without isolating and defining `X'. But upon further study we became convinced that the `end result' is to be weighed in terms of justness and reasonableness, having consideration for all circumstances that in the sphere of finances affect and influence investments of this sort. This so-called `end result' is made fluctuant by the variant in percentage and the flexibility of justness and reasonableness. From an intense study of this litigation in the light of applicable statutes and decisions dealing with the subject, it is patent that the criterion, as indistinct and inexact as it may be, is the justness and reasonableness of the earnings to be computed. The qualifications are ever present, and it is rates of this character that the utility board is charged with finding. (at 892) (All italicized in original.) Later, in 1959, we reaffirmed the end result concept in the case of General Telephone Co. v. Carter, et al., Fla., 115 So.2d 554, wherein we said, speaking through the late Mr. Justice Hobson:    Our disposition of these issues is controlled by this Court's position originally adopted in the case of Jacksonville Gas Corporation v. Florida Railroad & Public Utilities Commission, [(1951) Fla., 50 So.2d 887] wherein we pointed out that the Commission in rate cases is free to follow such methods as it may choose so long as the `end result' of such methods is the establishment of just and reasonable rates and so long as such methods do not go so far astray that they violate our statutes or run afoul of constitutional guarantees. Thus, we hereby reaffirm our adoption of the `end result' test   . (at 559) Thus, it is our considered judgment that Petitioner has failed to make a showing that the rate base method employed by the Commission in the instant two cases resulted in unjust and unreasonable effects. We do not, however, intend by this opinion to give blanket-type approval to, or adopt as a standard procedure or method, the year-end rate base. Rather, we would borrow language used by the Tennessee Public Service Commission in the case of Re Inter Mountain Teleph. Co. (1965), 59 P.U.R.3d 337, which reads: The adoption of the above items in these proceedings does not preclude their exclusion and use of the average rate base in future proceedings in which the company is not faced with extraordinary demands for expansion of its service facilities. (at 344) The end result doctrine was never intended to justify improper or erroneous methods or factors in the rate-making process. It operates to neutralize such irregularities where they do not appear to be serious enough to produce harmful effects in the final determination of a fair and reasonable return. Applied to the instant cases the doctrine operates to help neutralize the dispute over whether the year-end test or the average investment during the year should have been used. For example, even if the rate bases ascertained by use of the year-end test are inflated, the percentages fixed by the Commission to be applied to such rate bases to produce fair returns may be low enough to offset the inflated rate bases. At this point, we reiterate careful inspection of the record in these cases does not disclose competent and substantial evidence contrary to the findings of the Commission that the percentages of return allowed are neither confiscatory to the utilities nor excessive or exorbitant to their subscribers and consumers. Nevertheless, we are not happy that resort to the end result doctrine is necessary in order to conclusively determine this disputed issue. We fear end result can tend to discourage use of proper yardsticks in determining rate base and encourage unsystematic rate making. See 73 C.J.S. Public Utilities § 17, pp. 1013 et seq., both text and annotation. Year-end test if used without regard to the reality of an exceptional or abnormal condition can produce an exaggerated rate base. Under controlling rules of law we cannot substitute our judgment for that of the Commission in regard to its administrative determination to use the year-end test for ascertaining rate base  nor can we disregard precedent that the rule of end result may render harmless the year-end method. In future rate cases before the Commission the advisability of using particular test methods and criteria over others for rate base determinations may be more scientifically ascertained due to the evolution of the rate fixing process and the trend of rate decisions. It may not be necessary in such cases to fall back on end result to wash out erroneous administrative methods, mistakes and judgments in the rate-making process. An example of a rather egregious mistake in this case is pointed out by the Petitioner and confirmed by the record. The Commission made a mathematical error of $108,356 in computing excess net earnings of Florida Power & Light Company, but since the factors making up its rate base were found to total $637,826,667, upon which a fair return of 6.95% was allowed, the error in these large calculations is de minimus under the end result rule on the theory it may have helped offset possible mistakes unfavorable to the Company. An excessive allowance by a rate-fixing body for a particular rate factor does not necessarily invalidate the rate fixed. Such an allowance as to one factor may, when the rate is judicially reviewed, compensate for error in others. 43 Am.Jur., Public Utilities and Services, § 160, p. 677. We note the 1967 Legislature has given the Commission some financial relief by providing it additional regulatory trust funds (Ch. 67-300, Item 928), as well as some additional utility regulatory authority (Ch. 67-326). This augurs well for the Commission in the discharge of its rate-fixing function and hopefully indicates a continuing legislative disposition to make it possible in approaching decades for the Commission to be adequately staffed and equipped so that it can regularly and systematically, through the aid of competent experts and data collecting equipment, evaluate the rate bases of public utilities, their operating expenses, their capital outlay needs, including financing and other features incident to determining fair and reasonable rates, as well as permit the Commission to keep abreast of rate practices in other jurisdictions in order that the public utilities in our state will be accorded fair and reasonable returns on their investments and consumers and patrons fair and reasonable rates. [1] We wish to make it clear that in not disturbing the use of the year-end method which was utilized by the Commission 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 the two utilities are endeavoring to cope with extraordinary needs for their services due to abnormal population and economic growth conditions within their service areas. The Commission did not find the proliferation of subscribers and consumers due to increased population and economic growth had the effect of increasing the earnings of the two utilities to the point where a year-end rate base was unnecessary. Concluding our discussion on this point, it 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. See Re Montana-Dakota Utilities Co. (N.D. 1960), 102 N.W.2d 329; Narragansett Electric Co. v. Kennelly (R.I. 1958), 88 R.I. 56, 143 A.2d 709; Re North Carolina Gas Service Div. (North Carolina Utilities Comm. 1961), 41 P.U.R.3d 91, 101-102; and Re Niagara Mohawk Power Corp. (New York Public Service Comm. 1960), 35 P.U.R.3d 149.