Opinion ID: 1720472
Heading Depth: 1
Heading Rank: 5

Heading: Cost of Purchased Power

Text: The company contends that the cities understated the company's cost of electric power purchased wholesale for sale to its customers. We agree. The company made adjustments in the test year expenses to reflect the substantial increases in purchased power costs that the company had experienced under the new contracts it had entered into with its suppliers effective November 1, 1973. To reflect these additional costs, the company proposed an adjustment of $2,163,424, based upon estimates of a twelve month period ending in October of 1974. At the time of the rate hearing in March of 1974, four months of this period had already elapsed. The company selected the November 1973-October 1974 period in order to demonstrate the true future purchased power costs, as the company had experienced a one hundred percent increase in the cost of purchased power in the period between September of 1973 and November of 1973. More specifically, the average cost in mills per kilowatt hour of purchased power during the period from July through November of 1973 was as follows: July, 3.4619; August, 4.3886; September, 3.3561; October, 7.1164; November, 8.0222. The cities selected a twelve month period ending in June of 1974 upon which to base adjustments to purchased power costs. The cities' adjustments totaled $1,426,763. The difference of $736,661 between the cities' and company's adjusted purchased power costs resulted in a dollar-for-dollar decrease in that amount in the company's revenue requirements for its electric department. In reaching their adjusted cost figures, the cities utilized the July, August, and September, 1973 costs in arriving at the average cost of purchased power in mills per kilowatt hour, even though the cities' witness on this issue acknowledged that costs as low as those of the July-September 1973 period would not be experienced again in the foreseeable future. The cities argue that they were more than generous in basing post test year adjustments upon six months of post test year known costs in 1973 and six months of estimated costs during the January-June 1974 period and that to permit the company to base adjustment upon projections extending some sixteen or seventeen months beyond the end of the test year period would be contrary to all accepted regulatory practices. In Application of Northwestern Bell Telephone Co., 78 S.D. 15, 98 N.W.2d 170, we stated that in determining prospective rates the regulatory agency could make adjustments in test year figures. The court held in that case that the Public Utilities Commission had exceeded its authority in not including within the rate base the cost of property whose use was imminent at the close of the test year. The Minnesota Supreme Court recently discussed adjustments in test year data in the following language: The test-year concept is designed to produce a measure of a regulated utility's earnings for a known period of time, to enable the regulatory body to make an accurate prediction of revenues and expenses in the reasonably near future. Based upon the evidence presented, the regulatory body undertakes a reasoned exercise of its discretion in altering test-year data to reflect changes of known magnitude occurring subsequent to the test year. Northwestern Bell Telephone Co. v. State, Minn., 253 N.W.2d 815, 822. In a case in which the regulatory agency had failed to consider all of the increased wage and salary expense during the test year, the Rhode Island Supreme Court held that: The object of test-year figures is to reflect typical conditions. Since a test period is employed to show what the probable operating and financial condition of Narragansett will be in the immediate future, in order that rates may be fixed which will compensate the company for all operating expenses and provide it with a fair return, the test year must be representative of the conditions which will prevail in the immediate future when those rates will be effective. . . . We do not doubt that in order to arrive at an accurate calculation of expenses, the necessity of a test year is evident. On the record before us, we have only the Public Utilities Commission rejecting the annualization put forth by Narragansett and basing its decision as to the estimated operation expense, i. e., the wage and salary adjustments on the actual payments made for the last nine months of 1972. We see such as error. A failure to consider the first quarter of 1972 presents a false picture with reference to the future expenses that Narragansett may incur. Therefore, we remand this matter to the Commission with a direction to allow a full amount of the wage and salary adjustment. Rhode Island Consumers' Council v. Smith, 113 R.I. 384, 397, 322 A.2d 17, 24. (citation and footnote omitted). The purpose of using a test year is to establish with a reasonable degree of accuracy the revenue and expenses that a utility will experience during the period when the new rates will be in effect. Although the cities' witness attempted to justify the use of the July-September 1973 cost of purchased power figures in determining the company's future costs for such power, we conclude that in view of his admission that those low costs would not be experienced again within the foreseeable future it was arbitrary, capricious and unreasonable for the cities to utilize those figures in making adjustments to the company's future cost of purchased power.