Opinion ID: 1935843
Heading Depth: 1
Heading Rank: 1

Heading: The 1974 Proposal

Text: This is the second time the company has come before us and taken issue with the commission's disposition of its 1974 effort to increase its rates. Earlier, in Bristol County Water Co. v. Public Utilities Commission, 117 Rd. 89, 363 A.2d 444 (1976), we remanded the case to the commission and ordered the commission to point out the evidentiary basis which would support the commission's rejection of various operating revenues and expenses which the company had included in its rate hike application. The company's proposal, which was based upon a 1973 test year, was geared to generating an additional annual increase in revenue of close to $266,000. The commission, in rejecting the company's proposal, classified the proposed increase in revenue as excessive, unjust, and unreasonable. However, the commission did authorize the company to submit a new proposal which would produce an annual increase in revenue of almost $135,000. In our remand the commission was directed to point out to us the evidence upon which it relied to (1) increase by 2 percent the company's estimate of its annual increase in sales; (2) reject the company's proposed 7-year period for amortizing the maintenance expense of its standpipes and substitute therefor a 10-year amortization period; (3) disallow a $19,000 item which was the anticipated cost of assistance to be given by the American Water Works Service Company, Inc. in preparing the 1974 rate case and replace the $19,000 item with an allowance of $8,500; and (4) classify as unreasonable $72,691 in management fees paid by the company during the test year to the service company, and reduce the allowable amount of fees by $13,404. In remanding the case to the commission, we made two additional comments. We first observed that the commission might have to recalculate its original allowance for cash-working capital once it had completed its reconsideration of the questioned income and expense items. Our final comment was addressed to Bristol Water's argument that the commission, in establishing the approved rate of return, could not take into consideration the quality of the product being sold to the consumer. We disagreed with the company's position and said that quality of service was a proper consideration in determining the amount the consumer will have to pay for those services in the immediate future. 117 R.I. at 106, 363 A.2d at 453. When the commission conducted its October 1974 hearing, it had listened to complaints about a product whose quality was so poor that health authorities considered issuing an order requiring the boiling of all drinking water. Since a remand was a necessity, we told the commission to check out the company's plant improvement program which, according to the record, was scheduled to be completed in May 1975. If the company had, in fact, improved its product, we suggested that a reconsideration of the approved rate of return might well be in order. Our remand was incorporated in an opinion which was filed on August 23, 1976. At that time there was pending before the commission an application for an upward revision in rates which had been filed on February 13, 1976. That application, which was based upon a 1975 test year, contemplated an increase in the company's annual revenues of about $460,000 above the almost $135,000 increase granted by the commission in April 1975. Upon receipt of our opinion, the commission held a series of concurrent public hearings in early November and December 1976 at which it considered evidence and testimony relating to the remanded issues and the merits of the company's 1976 proposal. The commission issued its decision and order in mid-December. In addressing itself to our remand, the commission made several comments, but it did not make any changes in its original computations of the company's operating income and expenses. The failure of the commission to amend its calculations is the basis of the company's appeal regarding the 1974 remand. While the company does not fault the commission's handling of the rate-case-expense allowance, it does contend that the commission's reconsideration of 1974's operating revenues, standpipe amortization period, management fees, and the rate of return was totally inadequate. It asks us to permit an increase in the 1976 rates which would compensate it for the alleged loss incurred because of the supposedly improper adjustments made by the commission in those four specific areas of its 1974 proposal. This we will not do. In disposing of Bristol Water's claim that the commission did nothing to reassess its original findings, we think it appropriate to describe the positive actions taken by the commission following its receipt of our remand order. In its 1976 decision the commission adhered to the $8,500 rate-case-expense allowance originally granted when the company's 1974 proposal was first considered because, in the commission's view, proceedings on remand showed that this allowance in fact accurately reflected rate case expenses incurred by the Company. The commission characterized the company's challenge of the allowance as a frivolous waste of Commission and court time. The commission also defended its original choice of a 10-year amortization period for standpipe maintenance by pointing to the company's adoption in 1976 of a similar period. There are four standpipes. [1] The commission pointed to evidence adduced at the November 1976 hearing which indicated that one standpipe had not been painted in 12 years, a second had not been painted in 10, and a third had a history of hiatuses between paintings of 8 and 9 years. The fourth structure was comparatively new and was painted oncein 1970. The commission left the 1974 rate of return undisturbed and with good reason. The commission's final public hearing was held in Bristol on the evening of December 9, 1976. When the commission chairman inquired about the quality of the company's 1976 product, a witness testified: There are very, very few people that dare to drink the water from Bristol County Water Works and I vouch for that. It has [sic] a lot to be desired.    Everybody complains, they always complain about the water, but what can you do about it? They have to accept it, they have no choice. We believe that the commission's failure to modify its position with regard to the amortization of standpipe expenses and the rate of return is fairly and substantially supported by legal evidence. Providence Gas Co. v. Burke, R.I., 380 A.2d 1334 (1977); Narragansett Electric Co. v. Harsch, 117 R.I. 395, 368 A.2d 1194 (1977). In actuality the only two remanded questions upon which the commission made no further definitive findings were its prognostication of the 2 percent increase in sales and its refusal to give the company full credit for the management fees paid to the service company. The 2 percent figure actually amounts to $23,700. The disputed management fees add up to $13,404. If the commission erred in its disposition of these two matters, its calculations in regard to the company's 1974 application would have to be revised. The approved sales figure would be reduced by $23,700, and the operating expense account would be increased by $13,404. Everyone agrees that the commission was faced with a dilemma as a result of the overlapping of the 1974 remand and the 1976 filing. Final resolution of the 1976 rate filing had to be made by December 15, 1976. Otherwise, the company's 1976 proposal would automatically go into effect. General Laws 1956 (1977 Reenactment) § 39-3-11 empowers the commission to stay the effective date of a change in rates for a total period of 9 months beyond the proposed effective date of the new tariff. [2] The proposed effective date of the 1976 rate increase request was March 15. Thus, when our remand order was published on August 23, 1976, 5 months of the 9-month period had expired. At the time of the remand the commission had not begun the public-hearing facet of its investigation into the 1976 rate filing. However, there is evidence that during June 1976 staff members of the Division of Public Utilities (the division) were inspecting a portion of the company's records. The consolidated approach taken by the commission once it received our remand order was agreed to by the company. The final consolidated hearing took place on December 9, 1976, just a week before the 1976 rates would take effect ipso facto. The commission's decision and order concerning its consideration of the remand and the 1976 rate proposal was published on the final day of the suspension period, to wit, December 15, 1976. Whatever the ultimate effect these calculations would have had on the approved 1974 rates, its duration would have been extremely limited because, unless the commission had decided the 1976 rate hike case before December 15, 1976, the pending 1976 proposed rates would have become effective as of December 16. Assuming an upward revision of the approved 1974 rate was in order, the most the company could have expected was a 1-week slice (from December 9, when the public hearings were concluded, to December 16, when the 1976 rates became effective) of the income that would have been produced but for the commission's supposed miscalculation of the company's operating revenue and management fees. Furthermore, if the test-year figures for the 1974 rate filing were recast to compensate for the supposedly improper adjustments, the commission would also have had to go back over the entire revenue and expense figures involved in the 1976 proposal. Since adjustments in the 1974 rate proposal would have been reflected in the testyear figures of the 1976 case, any increase in test-year revenues brought about by adjustments in the 1974 proceeding would have called for a reduction in the 1976 revenue deficiency determination. Such a re-examination of the 1976 proposal would have been virtually impossible if the commission was to meet its December 15 deadline for passing upon the 1976 rate hike application. When the necessary mathematics is done, the actual loss to the company could be described in classical Latin as de minimus or in the language of the everyday business world as nickels and dimes. Whatever the amount, it would hardly pay the cost of the service company's cranking up its computers to include this pittance within all its bills. There is also a question of whether this 1-week prospective increase could properly find its way into the existing billing structure since most company customers are billed in arrears on a quarterly basis. One group's first payment is due in January, another's first bill is received in February, and the third group receives its bill in March. Given the fact that the chain of events prevented the issuance of a supplemental order in the 1974 filing, we must now decide whether the commission should have taken some other action which would constitute an adequate response to our remand. The commission recognized the problem which confronted it and made a concession to the company in the form of accepting without modification, or apparent questioning, the company's estimate of its revenues and management fees for the test year in the 1976 case. The company insists that the commission should have recalculated the revenue requirements in the 1974 case, making proper, adjustments in the categories to which we have previously referred, and then added any deficiency to the amount deemed collectible under the 1976 application. In this facet of their argument, Bristol Water is calling for the setting of rates based partially upon past losses. This falls clearly within the general proscription against retroactive ratemaking. We have stated on numerous occasions that a fundamental principle in ratemaking is that rates are exclusively prospective in nature. Further, rates may not be designed to recoup past losses. New England Telephone & Telegraph Co. v. Public Utilities Commission, 116 R.I. 356, 358 A.2d 1 (1976); Rhode Island Consumers' Council v. Smith, 111 R.I. 271, 302 A.2d 757 (1973). The rule prohibiting the imposition of retroactive rates holds true despite the fact that the company's loss might be attributable to the inevitable result of a regulatory lag. We are mindful that there is an exception to the proscription against retroactive ratemaking because in New England Telephone & Telegraph Co. we stated: [A] rate schedule which represents a deprivation of due process either in its inability to provide a fair return or in the grossly excessive time it took to correct good faith errors of the commission in arriving at the new rates would certainly entitle the company to some sort of extraordinary relief. 116 R.I. at 392, 358 A.2d at 22. Nevertheless, we do not believe the exception can be made applicable to the facts surrounding the 1974 remand. We cannot fault the commission for the manner in which it responded to our remand. We are acutely conscious of the prodigious increase in rate-case litigation and its impact on the commission as it strives to discharge its statutory duty within a limited period of time. Given the timing of the remand, the pendency of the 1976 proposal, the acquiescence of the company to the consolidated approach taken in the fall of 1976, and the time bind in which the commission found itself, [3] the approach it took in dealing with an almost impossible situation was fair and reasonable.