Opinion ID: 1102627
Heading Depth: 2
Heading Rank: 2

Heading: The Commission's Answer to the Appeal: An Attrition Adjustment

Text: A regulatory lag occurs between the time a utility applies for a rate increase and the time the rate application is finally determined. This lag may cause an attrition in the actual rate of return, after the test year. This may be caused by a growth in the utility's rate base or in its operating expenses (such as increases in expenses due to inflation), or both, by reason of which insufficient revenues are produced to accord the utility the fair rate of return to which the regulatory agency's order entitles it. An attrition adjustment is sometimes made, when the evidence so justifies, to allow rates imposed to take this attrition factor into consideration. On its initial hearing, the district court in which judicial review was sought remanded the proceeding to the Commission to determine an attrition adjustment predicated on the rate of inflation on operation and maintenance expenses. Applying the 11.1% inflation that had occurred in 1976 and 1977 (i.e., following the 1975 test year), the Commission determined that, under the district court's ruling, the attrition adjustment should be $1,253,000. [6] However, the Commission pointed out several reasons why an attrition adjustment was inappropriate under the facts of this case. Nevertheless, the district court ordered a rate increase in the amount of $1,253,000, in order to effectuate this attrition adjustment. By answer to the appeal, the Commission prays that this court disallow the rate increase for an attrition adjustment which had been allowed by the district court. In so praying, the Commission points out that by its original order it had allowed for known changes in expenses after 1975 as proposed by Gulf States at the original hearings, that it had to some extent allowed for attrition by using a year-end rate base without at the same time adjusting revenues to the year-end level, and that Gulf States had not requested any attrition allowance until the Commission order was appealed to the district court. Perhaps more central to the Commission's complaint is that the allowance of the attrition adjustment of $1,253,000 (with increase in net income, after allowing for taxes, of $623,000) would be a court-mandated windfall rate increase beyond what is needed to assure the utility a fair rate of return and a fair and reasonable return on equity. As previously indicated by the Commission and approved by the court, during the test year the utility enjoyed a rate of return of 9.15% on the rate base, which would provide a return on equity of 13.84%. The Commission further indicated that a rate of return of 8.7% and a return on equity of 10.5%-11.5% would be fair and reasonable. The Commission points out that, even if the attrition allowance of the district court were permitted to increase the expense factor of the rate base, nevertheless Gulf States would receive a rate of return on its rate base of 9.05% and a return on equity of 13.55%, or well in excess of the rates the Commission had found to be necessary to be fair and reasonable. Since a rate increase is justified only if the rate of return of the utility is less than a fair rate of return, the Commission did not, in our view, abuse its discretion by failing to allow the attrition adjustment ordered by the district court. Accordingly, we disallow the attrition adjustment and rate increase ordered by the district court.