Opinion ID: 2303572
Heading Depth: 1
Heading Rank: 8

Heading: Cash Working Capital for Purchased Power

Text: Before discussing this area, it is appropriate that we briefly set forth a relationship which could be called, for want of a better term, Narragansett's family tree. All Narragansett's common stock is owned by a holding company, the New England Electric System (New England Electric). New England Electric also owns the New England Power Service Company (New England Power). The interrelationship of Narragansett, New England Electric, and New England Power is such that the real profits, because of federal laws governing utility holding companies, are reflected on the books of the holding company, New England Electric, rather than on the books of the operating company, Narragansett, which of course is subject to the regulations of the Commission. Having in mind the arboreal theme of this paragraph, we may call New England Electric the trunk of the tree, two branches of which are Narragansett and New England Power. On August 25, 1967, Narragansett entered into a contract with New England Power for the purchase of virtually all of its primary electricity, which Narragansett in turn sells to its customers. The rates under the contract for the purchase of this power are regulated by the Federal Power Commission. Under the agreement, Narragansett is credited by New England Power for the full cost of whatever electricity which may be generated by the Rhode Island utility. New England Power bills Narragansett on a monthly basis in arrears for electricity it delivers to Rhode Island. The payment terms are that New England Power's bills shall be due when rendered. However, Narragansett has a 60-day grace period for payment before it incurs an interest charge at the rate of seven per cent per annum on the unpaid balance. Narragansett has included within its computation a cash working capital allowance for the purchase of power in the amount of $1,397,000. This amount represents the money needed to maintain Narragansett's operation during a lag period of 28.22 days which the utility claims is the time that elapses between the date it pays its bill to New England Power and the date it is reimbursed by its customers. Despite Narragansett's assertion of a contractual obligation to pay New England Power's bills when rendered, the Commission refused to allow cash working capital for this expense. Narragansett maintains that in so rejecting the expenditure, the Commission acted arbitrarily and clearly abused its discretion. It is evident that the Commission based its decision upon the fact that while the power bills are due when rendered, they do not incur any interest charge until after 60 days. Evidence adduced at the hearing revealed that other subsidiaries of New England Electric do not pay their power bills to New England Power when they are rendered. The Commission had before it evidence establishing that power charges to Narragansett consequently contain a factor for working capital requirements which result from delays in payments to New England Power by the holding company's other subsidiaries. It appears from the Commission's Report and Order that, although Narragansett and New England Power are separate corporate entities, the Commission believed that their relationship to New England Electric wholly as subsidiaries is such that they operate in fact as two divisions of the holding company. The allowance for cash working capital as an item in the rate base is primarily to take care of the needs of current expenses over the period of lag. Such allowance in the rate base, however, is not something to which a public utility is ipso facto entitled. City of Pittsburg v. Pennsylvania Public Util. Comm'n, 169 Pa.Super. 400, 82 A.2d 515 (1951). The sum necessary for working capital is addressed to the sound discretion of the utilities commission. Petrolane Gas Serv., Inc. v. Public Util. Comm'n, supra . The determination of the amount to be allowed as cash working capital is a question of fact, varying with the circumstances of each case. Central Maine Power Co. v. Public Util. Comm'n, 156 Me. 295, 163 A.2d 762 (1960). In reviewing the testimony before it, the Commission, in disallowing the purchased power element, has merely determined the factual question against Narragansett. Since there was the 60-day grace period, the Commission felt the sum requested was not one    which the company needs to supply from its own funds for the purpose of enabling it to meet its current obligations as they arise. Alabama-Tennessee Nat. Gas Co. v. F.P.C., 203 F.2d 494 (3d Cir.1953). It appears to us that the ultimate consumer should not be penalized in the form of higher rates if Narragansett chooses to pay its charges before they start to incur interest, especially when the other members of the family tree do not pay their power bills when due. Narragansett maintains that the Commission's ruling is requiring Narragansett's management to be less than prudent. We do not join in that conclusion. The Commission is merely requiring the utility to exercise the kind of prudent money management the ratepayer has a right to expect from a regulated monoply. We see no abuse of the Commission's discretion.