Opinion ID: 1918402
Heading Depth: 1
Heading Rank: 8

Heading: Base Rate Refund

Text: In the eighth assignment of error, the Company asserts that the Commission erred by requiring the Company to implement certain adjustments retroactively by refunding $9.635 million to its customers. This issue arises out of the terms of the Proposal appended to the Merger Order. According to the Proposal, the Company agreed to file with the Commission a Louisiana jurisdictional revenue requirement within five months following the end of each of the first seven post-merger calendar years. L.P.S.C. Order U-19904, Appendix 1, at 4-5. The Proposal further provided that, If the revenue requirement including the company's share of any savings, based on the most recently approved cost of equity, shows that reduction in rates is appropriate, the Company shall reflect that reduction in a Rider to be applied to bills rendered on and after the day following the filing. On the other hand, if the revenue requirement calls for an increase in rates, [23] the Commission is permitted 90 days to review the filing, unless the parties agree to or the Commission orders an extension of time. If the Commission fails to act within the 90 day period, however, the Company may increase the rates subject to a refund if the rates are later determined to be excessive. Id. According to the terms of the Proposal, this plan should capture ratepayers' share of savings through a prompt and thorough regulatory review process. Id. at 1. Moreover, the Proposal provides that [t]he Commission shall retain the right to review the accounting practices of the Company to ensure that they are consistent with GAAP and sound regulatory principles and practices. Id. at 6. On May 31, 1995, the Company filed its Louisiana jurisdictional revenue requirement claiming a revenue deficiency of $30.774 million. Thus, according to the Company, the Proposal did not require it to implement an immediate rate reduction. According to the Commission, however, adjustments ordered in the rate order following the first earnings review, Order No. U-19904-C, should have been included by the Company in its rate filing in the second earnings review. The Company had excluded from its revenue requirement filing $24.879 million of adjustments required explicitly or implicitly, according to the Commission, by Order No. U-19904-C. Additionally, the Commission determined that the Company's filing included three new proposals, previously unapproved by the Commission, to change ratemaking treatment of certain costs. These new proposals constituted $15.53 million of the Company's claimed revenue deficiency. [24] The Commission contends that, if the Company's filing had complied with the first rate order and not included proposed new ratemaking treatments, the Company would have been required to implement a rate reduction of $9.635 million between June 1, 1995, the day after the filing was due, and May 31, 1996, the day that the third annual filing was due. The Commission asserts that by excluding previously ordered adjustments from its filing and including previously unapproved costs in its filing, the Company deviated from GAAP and sound regulatory principles, and unilaterally inflated its cost of service, thereby permitting the Company to avoid a rate decrease the day after its annual filing. The Commission further contends that the Company's filing frustrated the intent of the Proposal, which was to promptly pass on savings to ratepayers. The Company argues that the refund violates the rule against retroactive ratemaking. Second, the Company argues that it did not agree in the Proposal to implement voluntarily rate reductions based upon adjustments that the Commission adopted in the rate order following the first earnings review, especially when that rate order was pending on appeal at the time of the Company's second filing. Rather, the Company contends that it is entitled to advocate different resolutions to ratemaking issues so long as an appeal is pending from the previous order, or the Company otherwise believes in good faith that new evidence or arguments may change the Commission's position. Third, the Company argues that it did not agree in the Proposal to forgo its right to reflect in its filing costs not previously approved by the Commission. Thus, according to the Company, the Proposal contemplated that where judgment is called for in the filing, it is the Company's judgment that is reflected. We first address the Company's assertion that the refund violates the rule against retroactive ratemaking. In South Central Bell Telephone Company v. Louisiana Public Service Commission, 594 So.2d 357, 359-60 (La.1992), this Court provided a thorough description of the Commission's authority to order a refund. In that case, we stated: [I]t is well established that the exercise by the Public Service Commission of its ratemaking authority is primarily a legislative function, which, in the absence of constitutional or statutory authority to the contrary, is limited to fixing rates to be applied prospectively. South Central Bell v. Louisiana Pub. Serv. Comm'n, 555 So.2d 1370 (La.1990); Louisiana Power & Light Co. v. Louisiana Pub. Serv. Comm'n, 523 So.2d 850 (La.1988); Public Utilities Comm'n of Ohio v. United Fuel Gas Co., 317 U.S. 456, 63 S.Ct. 369, 87 L.Ed. 396 (1943); In re Petition of Minnesota Power & Light Co., 435 N.W.2d 550 (Minn.App. 1989); In re Petition of Elizabethtown Water Co., 107 N.J. 440, 527 A.2d 354 (1987). This concept is inherent in our constitutional provisions which establish in general terms the powers of the Commission to regulate all common carriers and public utilities and have such other regulatory authority as provided by law, but authorize the agency to require a utility to make refunds only when a provisional rate increase is disallowed or reduced before it becomes final. La. Const. Art. IV, Sec. 21(B). Similarly, the legislature has authorized the Commission to exercise regulatory power for the purpose of fixing and regulating the rates charged or to be charged by public utilities, La.R.S. 45:1163, but has recognized its power to order a refund in only one special situation, viz., when a temporary or provisional rate increase is disallowed, in whole or part, before its finality. La.R.S. 45:1163.1. Generally, retroactive rate making occurs when a utility is permitted to recover an additional charge for past losses, or when a utility is required to refund revenues collected pursuant to its lawfully established rates. Louisiana Power & Light Co. v. Louisiana Pub. Serv. Comm'n, 523 So.2d 850 (La.1988); In re Petition of Elizabethtown Water Co., 107 N.J. 440, 527 A.2d 354 (1987); In re Central Vermont Pub. Serv. Corp., 144 Vt. 46, 473 A.2d 1155 (1984); Cheltenham & Abington Sewerage Co. v. Pennsylvania Pub. Util. Comm'n, 344 Pa. 366, 25 A.2d 334 (1942); Chesapeake and Potomac Tel. Co. of West Virginia v. Public Serv. Comm'n of West Virginia, 171 W.Va. 494, 300 S.E.2d 607 (1982); State ex rel. Utilities Comm'n v. Edmisten, 291 N.C. 451, 232 S.E.2d 184 (1977). A commission-made rate furnishes the applicable law for the utility and its customers until a change is made by the Commission. Michigan Bell Tel. Co. v. Michigan Pub. Serv. Comm'n, 315 Mich. 533, 24 N.W.2d 200 (1946). Therefore, the utility is entitled to rely on a final rate order until a new rate in lieu thereof is fixed by the Commission. Arizona Grocery Co. v. Atchison, T. & S. F. Ry. Co., 284 U.S. 370, 52 S.Ct. 183, 76 L.Ed. 348 (1932); Michigan Bell Tel. Co. v. Michigan Pub. Serv. Comm'n, 315 Mich. 533, 24 N.W.2d 200 (1946). Consequently, the revenues collected under the lawfully imposed rates become the property of the utility and cannot rightfully be made the subject of a refund. Michigan Bell Tel. Co. v. Michigan Pub. Serv. Comm'n, 315 Mich. 533, 24 N.W.2d 200 (1946). A utility is entitled only to the opportunity to earn a reasonable return on its investment; the law does not insure that it will in fact earn the particular rate of return authorized by the Commission or indeed that it will earn any net revenues. Southern California Edison Co. v. Public Utilities Comm'n, 20 Cal.3d 813, 144 Cal. Rptr. 905, n. 8, 576 P.2d 945, n. 8 (1978) citing Federal Power Comm'n v. Natural Gas Pipeline Co., 315 U.S. 575, 590, 62 S.Ct. 736, 745, 86 L.Ed. 1037 (1942); Bluefield Water Works & Improvement Co. v. Public Serv. Comm'n, 262 U.S. 679, 692-693, 43 S.Ct. 675, 678-679, 67 L.Ed. 1176; Re General Tel. Co. of Cal., 69 Cal.P.U.C. 601, 610 (1969); Oakland v. Key System Transit Lines, 52 Cal.P.U.C. 779, 786 (1953). By the same token, if the utility's profits turn out to be higher than had been forecast by the Commission in setting the rates, the law does not penalize the Company for its efficiency by requiring a divestiture of unanticipated earnings. In re Petition of Elizabethtown Water Co., 107 N.J. 440, 527 A.2d 354 (1987); Connecticut Light & Power Co. v. Department of Pub. Util. Control, 40 Conn.Supp. 520, 516 A.2d 888, 897 (1986); B & O R. Co. v. Pennsylvania Public Utility Commission, 136 Pa.Super. 517, 7 A.2d 488, 491 (1939). The Commission's recourse is to fix a new rate prospectively and not to change the rates retroactively. In re Petition of Elizabethtown Water Co., 107 N.J. 440, 527 A.2d 354 (1987). Id. Applying the foregoing rules, we concluded in South Central Bell that a Commission-ordered refund violated the rule against retroactive ratemaking by depriving the utility after the fact of funds earned under rates valid at the time. In that case, the Commission issued an order placing the utility on notice that the Commission was beginning an investigation to determine whether the utility's earnings were excessive. According to the order, the utility could maintain its current rate schedule, but would be required to refund any excessive rates collected after the date of the order. Following an investigation, the Commission ordered a prospective rate decrease, and ordered the utility to refund approximately $35 million, the amount collected during the pendency of the investigation in excess of the new rates. Id. at 358-59. In overruling the refund, we determined that the basis for the Commission's refund order was the Commission's finding that the utility's revenues were excessive during the investigative period. Significantly, we found that the utility never collected improper rates. We further noted that the interim order authorizing the investigation stated clearly and unambiguously that the order did not change the present status of the utility's rates or revenues. Thus, we reasoned that the refund order was clearly an act of retroactive rate making because it divested the company of earnings it had properly derived from then lawful rates fixed by a final order of the Commission. The case sub judice is quite dissimilar from South Central Bell. To begin, it arises out of the peculiar circumstances surrounding the merger of Entergy and Gulf States. Only after the parties, including the Commission Staff, stipulated to the Proposal did the Commission approve the merger, determining that it was in the public interest. The Proposal outlines an annual earnings review procedure to ensure that merger savings are promptly passed on to ratepayers. Part of that procedure requires the Company to implement rate changes based upon its filing of a Louisiana jurisdictional revenue requirement that complies with sound regulatory principles and practices. The Company bargained for this outcome. In South Central Bell, on the other hand, the utility never agreed to implement rate reductions absent a final rate order. Collection by the Company of rates greater than those authorized by the Merger Order and Proposal amounts to collection of improper rates. In South Central Bell, however, the utility was ordered to refund lawful, unchanged rates that were supposed to prevail until a successive rate order. The Commission initiated an investigation, determined that those rates were excessive, and consequently ordered a refund of the excessive rates collected following the commencement of the investigation. As this Court unanimously found, that was unquestionably retroactive ratemaking. Reading the Commission's instant refund order, however, it is evident that the instant refund is not premised on the Commission's finding that the Company's revenues were excessive between June 1, 1994 and May 31, 1995. Rather, the Commission ordered the refund because the Company collected not rates to which it was entitled, but amounts in excess of those rates, i.e. improper rates. Specifically, the Commission stated: Such a refund does not constitute retroactive ratemaking. As of June 1, 1995 the only rate that Gulf States Utilities Company, Inc. was authorized to charge its customers was a rate that had been adjusted to reflect savings realized under the merger plan. L.P.S.C. Order No. U-21485 at 18. We agree. The refund order does not violate the rule against retroactive ratemaking when the retroactive adjustments simply correct the Company's filing by bringing it into compliance with GAAP, sound regulatory principles and practices, and the Proposal and Merger Order's command to promptly pass on savings to ratepayers. [25] By this standard, we address below each of the retroactive adjustments.