Opinion ID: 2284798
Heading Depth: 1
Heading Rank: 4

Heading: proposed adjustments to account for post-test-period changes in operating expenses and rate base

Text: The Company challenges the Commission's denial of its request for an additional 0.5% authorized return on rate base above and beyond the return indicated by the cost-of-capital computation in order to offset the effects of attrition. [42] The Company's request for an incremental attrition allowance was in addition to its plea for more conventional attrition remedies such as a year-end rate base and pro forma adjustments to its test-period operating expenses. The 0.5% figure represented approximately one-half of the projected effect upon the Company's earnings of two specific factors that WGL anticipated would cause attrition: expanding rate base and increased direct labor costs. See WGL Exh. C, at 29-31. The Company's witness, Maher, estimated that WGL's year-end rate base for the District would be $87 million for 1977 and $92.4 million for 1978, representing an annual growth rate of 6.21%. He further projected that when the Company's then-current labor agreement expired on May 31, 1978, a new settlement would be reached at a five or six percent increase. Id. at 29-30. The Commission Staff also recommended that a specific attrition allowance be granted. Its witness, Glassman, estimated WGL's 1978 rate base growth at about three percent, to $89.6 million by year-end. He suggested that the attrition allowance should be based solely on expected rate base expansion, and not on anticipated increases in operating costs (such as wages and pensions). Accordingly, he proposed an incremental allowance of 0.27% on the year-end 1977 rate base. Staff Exh. 14, at 46-58; see id., Schs. 14-15. People's Counsel opposed any lump-sum attrition allowance. Its witness, Daniel Sack, testified that attrition would be mitigated adequately by the use of a year-end rate base and by allowing the Company to make pro forma adjustments to reflect known increases during 1977 and 1978 in the costs of labor, pensions, insurance, taxes, peak-shaving gas, and other expense items. PC Exh. C. at 30-31. See also WGL Exh. D, at 6-9; WGL Exh. 4, at 4-21, 23, 25-26 (testimony and exhibits prepared by Lewis G. Unkle). People's Counsel suggested also that the effects of attrition would be offset further by increased operational efficiencies, which a WGL witness had predicted would be forthcoming. See WGL Exh. A, at 5-7 (testimony of Paul E. Reichardt). Finally, People's Counsel referred to testimony by Staff witness Glassman to the effect that customer contributions to capital in the form of deferred income tax accumulations would continue to rise each year and would not be reflected in the Company's cost of service until the next rate proceeding is instituted. The Commission essentially adopted the position urged by People's Counsel. It stated in part: The Commission is sympathetic to the attrition problem which the Company has been experiencing throughout the 1970's. It is a matter of great financial importance to the Company as well as to District customers. Nevertheless, on the basis of this record we are hesitant to adopt the proposed solution of a lump-sum adjustment; we are not convinced that a lump-sum adjustment to the revenue requirement is a reasonable approach to the attrition problem in this case. For purposes of this case, we will continue to rely on the corrective measures adopted in past cases. The year-end rate base which this Commission uses has long been recognized as a device to compensate for attrition resulting from a growth in investment which outstrips growth in revenues. Although this device does not alleviate attrition stemming from expenses growing faster than sales, the Commission does adjust test-year expenses for known changes which occur during, or within a reasonable period subsequent to, the test year. In an effort to formulate policy for future cases, the Commission has decided to undertake a thorough reevaluation of the problem. We recognize that year-end rate base and pro forma adjustments may not be adequate in the years to come. Much depends on the future trends in the underlying factors which affect the Company's attrition rate. [Order 6051, at 27-28.] The Commission suggested that alternative remedies, such as a projected test year, might be preferable to a lump-sum attrition allowance, and stated its intention to institute a separate proceeding in the near future to reevaluate the problem. [43] Id. at 28-29. In its Application for Reconsideration of the Commission's final order (submitted April 16, 1979), the Company renewed its request for attrition relief. It proffered new data tending to demonstrate that the newly-approved rates were already insufficient to allow WGL its authorized return. [44] It asked that the Commission recompute WGL's revenue requirement using a pro forma test year ending December 31, 1978. On April 26, 1979, the Commission issued its First Order on Reconsideration (Order No. 6069), in which it denied the Company's plea that updated figures be substituted for the stale test-year data. The Commission found that WGL's request to supplement the record came much too late. It noted that if it decided to incorporate the Company's post-1977 test-year evidence into the case at that time, it would be compelled to reopen the record in order to allow other parties to confront WGL's witnesses and test their 1978 and 1979 calculations. Such an endeavor, it found, would be tantamount to initiating a new rate proceeding. Order 6069, at 2-3. We agree with the Commission that it was under no obligation to consider extra-record evidence that was offered for the first time after the Commission's final order had been issued. While it may be an abuse of discretion for an agency to ignore the most recent data on the record of a proceeding, see West Ohio Gas Co. v. Public Utilities Commission (No. 2), 294 U.S. 79, 81-82, 55 S.Ct. 324, 325, 79 L.Ed. 773 (1935); Potomac Electric Power Co. v. Public Service Commission, supra at 18-19; Telephone Users Association v. Public Service Commission, D.C.App., 304 A.2d 293, 298 (1973), cert. denied, 415 U.S. 933-34, 94 S.Ct. 1448, 1449, 39 L.Ed.2d 492 (1974), the same cannot be said as easily for evidence submitted after the record has been closed and a final opinion issued. See Bowman Transportation, Inc. v. Arkansas-Best Freight System, Inc., 419 U.S. 281, 294-96, 95 S.Ct. 438, 446-47, 42 L.Ed.2d 447 (1974) (we have always been loath to require that factfinding begin anew merely because of delay in proceedings of such magnitude and complexity); Illinois Commerce Commission v. United States, 292 U.S. 474, 480-81, 54 S.Ct. 783, 785, 78 L.Ed. 1371 (1934); cf. Potomac Electric Power Co. v. Public Service Commission, supra at 19 ([A] request to use more recent data submitted in a last minute filing ... is not necessarily a fair or reasonable request. It is to be resolved in the reasonable exercise of the Commission's discretion.) (footnote omitted). Only in exceptional circumstances is it appropriate for a reviewing court to remand a final ratemaking decision in order to update a stale record. See Atchison, Topeka & Santa Fe Railway Co. v. United States, 284 U.S. 248, 52 S.Ct. 146, 76 L.Ed. 273 (1932) (Commission's refusal to reopen record in light of the economic metamorphosis brought on by the Great Depression was an abuse of discretion). Although the PSC consumed a considerable amount of time before rendering a decision after the record in this case was closedperhaps due to the number of novel and complex issues raisedwe do not find any exceptional circumstances justifying a reopening of the record. On appeal, WGL contends that the Commission failed to state adequate findings of fact in support of its decision, and argues, in effect, that, in light of the continuing erosion to its rate of return caused by inflation, the failure to provide an attrition allowance was per se unreasonable. No party disputes the fact that WGL's earnings have suffered from attrition in recent years, or that inflation is likely to remain an economic reality in the near future. The Commission recognized the Company's earnings erosion and took several steps that it considered sufficient to combat attrition in this case. Besides routinely allowing WGL to amend its original application (based on a calendar 1976 test year) to incorporate a test year ending June 30, 1977, the Commission also (1) adjusted the mid-1977 test period to reflect known changes in operating costs occurring shortly thereafter, and (2) used a year-end rate base (as of December 31, 1977) in establishing WGL's revenue requirements. WGL's argument, that the Commission was required to grant further relief in the form of an attrition allowance to compensate for expected growth in the rate base and anticipated increases in labor costs, is, we find, without merit. Although other jurisdictions have accepted separate attrition allowances as a valid means of hedging against inflation, see, e.g., Legislative Utility Consumers' Council v. Granite State Electric Co., 119 N.H. 359, 362-63, 402 A.2d 644, 646-47 (1979) (attrition allowance of 0.5% of rate base upheld); In re Georgia Power Co., 30 P.U.R. 4th 409, 420-21 (Ga.P.S.C.1979) (authorized return on equity increased by 0.7% to account for attrition), a majority of state regulatory commissions adhere to the view that, absent extraordinary conditions, using a year-end rate base and making adjustments for known and measurable changes occurring within a reasonable time after the test period are sufficient steps to offset attrition. See, e.g., In re General Telephone Co., 19 P.U.R. 4th 227, 232-35 (Fla.P.S.C.1977); In re Kansas Power and Light Co., 13 P.U. R.4th 213, 223 (Kan.St.Corp.Comm'n 1975); In re East Ohio Gas Co., 16 P.U.R.4th 137, 153-54 (Ohio P.U.C. 1976); In re Chesapeake and Potomac Telephone Co., 19 P.U. R.4th 349, 363-64 (Va.St.Corp.Comm'n 1977). General allegations of as-yet-unquantified future cost increases and rate base expansion do not provide an automatic entitlement to incremental attrition relief. Effective ratemaking requires an honest and intelligent forecast as to probable price and wage levels in the near future. McCardle v. Indianapolis Water Co., 272 U.S. 400, 408, 47 S.Ct. 144, 147, 71 L.Ed. 316 (1926). See also Telephone Users Association v. Public Service Commission, supra at 300-03. To be sure, WGL made a bona fide attempt to quantify the expected growth in its rate base during the year 1978 and the estimated increase in labor costs that would be engendered by the new labor agreement (to be negotiated following the expiration of the then-existing contract on May 31, 1978). However, there were a number of countervailing factors in the record that support the Commission's refusal to grant a supplemental allowance based on those estimated increases. First, there was a significant lack of unanimity as to the expected growth in WGL's rate base. The Company's prediction was more than 100% greater than that of the Staff, and People's Counsel challenged the methodology used by both. Second, the Company's projection with respect to future wage levels not only was speculative, but also related to a labor settlement that was yet to be negotiated and, in any event, would not take effect until June 1, 1978. The Commission did not act unreasonably in refusing to grant rate relief on the basis of conjectural costs so far removed from the test period. Third, there was evidence that the size of WGL's labor force had declined steadily in recent years, due in part to productivity efficiencies. There also was evidence that the Company expected to cut costs in some areas through improved technologies in the near future. In addition, a Company witness pointed out that customer contributions in the form of deferred income taxes should continue to rise each year. Evidence was adduced that the gas supply picture for the near future had improved since WGL's last rate proceeding. The Company recently had been authorized to expand its service obligation by up to 5,000,000 therms per year to a maximum of 3,000 new customers. See note 49 infra. And finally, we observe that the Commission computed WGL's operating expenses using a 48% federal corporate income tax rate, whereas Congress had recently lowered the actual rate to 46%, effective January 1, 1979. Since we today affirm the Commission's use of the 48% tax rate ( see Part IV (B) infra ), the savings that the Company realizes on the difference between the two rates will serve also to mitigate attrition. [45] In sum, although it is generally desirable for the Commission to account for changes in costs or in the rate base occurring within a reasonable period after the test year even when this entails making educated forecaststhere were sufficient offsetting factors in this case to justify the Commission's refusal to grant the Company separate relief based on projected post-test-year rate base expansion and labor expense increases. On the basis of the record before us, we cannot conclude that the Commission committed reversible error in finding that the Company had failed to justify its request for a separate attrition allowance.
The Commission computed WGL's revenue requirements using the 48% federal corporate income tax rate, which was in effect until December 31, 1978. [46] Order 6060, at 9-10. People's Counsel and the GSA contend here, as they did before the Commission, that since the rates in issue here went into effect on March 16, 1979, upon the issuance of Order 6060, the Commission should have used instead the newly-enacted 46% tax rate, which became effective on January 1, 1979. The Commission and the Company respond that the 46% rate was properly rejected because of its remoteness from the test year. [47] If it were to be utilized, they argue, equity then would require that a number of post-test-period cost increases (which were not reflected in WGL's pro forma test-period expenses) also be incorporated. WGL additionally contends that People's Counsel's espousal of the 46% tax rate is inconsistent with its position opposing an attrition allowance. The Commission stated: Were we to consider the new 46 percent corporate income tax rate, fairness and consistency would dictate that we likewise consider other offsetting changes in the tax laws, together with changes in other expenses, such as higher wage rates for labor. And in fact, the reduction in the income tax rate effective in 1979 is not the only change in the tax laws. Both the taxable wage base and the percentage rate for the social security tax (FICA) have been increased for 1979. There could well be other changes which, in the aggregate, might more than offset any rate reduction occasioned by using the 46 percent tax rate. But People's Counsel has failed to address this question of offsetting post-test year increases in expenses. For the reasons stated, we cannot grant People's Counsel's exception on this point. [Order 6060, at 10 (footnote omitted).] The Commission's interest in using income and expense data from a discrete time period, the test year, and its reluctance continually to extend that period until the issuance of its Final Order, are, we conclude, not unreasonable limitations on the ratemaking process. See Potomac Electric Power Co. v. Public Service Commission, supra at 18-19. The Commission's use of the 48% tax rate must therefore be affirmed.