Opinion ID: 2355085
Heading Depth: 2
Heading Rank: 2

Heading: Expenses and Rate Base

Text: The Town of Wiscasset cross-appeals from the Commission's treatment of the management and supervision expenses incurred by the Company, including those charged it by its parent, Consumers Water Company. Maine Water presented evidence of the management and supervision expenses for each of its five divisions, ranging from $43.38 per customer in Wiscasset to $17.03 per customer in Oakland, for an average of $25.76 per customer Company-wide. The Company had the burden to prove the reasonableness of its expenses, see 35 M.R.S.A. § 64 (Supp.1983-1984), and the Commission found that the Company had failed to satisfy that burden. The Company has not appealed that finding. In place of the Company's requested per customer expense allowance of an average of $25.76, the Commission determined a per customer management and supervision expense by examining the expenses of 43 other water utilities having between 300 and 800 customers, the range in size of the five divisions of Maine Water Company. [7] The Commission had developed this method in Re Mechanic Falls Water Co., 13 P.U. R.4th 347 (Me.Pub.Util.Comm'n 1976), and on appeal this court had approved the method as a permissible one. See Mechanic Falls Water Co. v. Public Utilities Commission, 381 A.2d 1080, 1099 (Me. 1977). Since the Mechanic Falls method here yielded an average management and supervision expense of $19.80 per customer in those 43 water utility comparable, the Commission allowed Maine Water 76.9% of each division's expense, representing the ratio of $19.80/$25.76. As a consequence, the Commission allowed a reduced management and supervision expense for each division, ranging from $33.34 per customer in Wiscasset to $13.09 per customer in Oakland, for an average of $19.80 per customer Company-wide. On our review of this expense allowance, as on the other expense and rate base issues raised on the cross-appeals, the Commission's decision is entitled to considerable deference. Absent a demonstrable error of statutory or constitutional law, we will review the Commission's orders only for an abuse of discretion. See New England Telephone & Telegraph Co. v. Public Utilities Commission, 448 A.2d 272, 278-79 (Me.1982). In that review, as we have recently explained, [t]he Commission has broad discretion in selecting among various rate-making methodologies, provided that they are reasonably accurate. [Citation omitted] The Commission is not required to manipulate its methodologies to eliminate every shred of suggested inaccuracy. New England Telephone & Telegraph Co. v. Public Utilities Commission, 470 A.2d 772, 776 (Me.1984). We will uphold the action of the Commission so long as it is reasonable and supported by substantial evidence. See Mars Hill & Blaine Water Co. v. Public Utilities Commission, 397 A.2d 570, 575-76 (Me.1979). Wiscasset first argues that since the burden of proof rests on the Company, the Commission cannot go outside the Company's proof and select data from other utilities to substitute for deficiencies in the Company's evidence. It is true that when a utility files a request for a rate change, the burden of proof to show that such change is reasonable shall be upon the public utility. 35 M.R.S.A. § 69 (Pamph. 1983-1984). The statute places on the utility the burden of original production, as well as of ultimate persuasion. Where, however, the Commission finds the Company's proof of the reasonableness of a particular expense inadequate, the Commission is not required to treat the matter as if the Company had no such expense at all. Much of the Commission's expertise would be wasted if it were not allowed to use information available to it, regardless of the source of that information. Utility commissions may make reasonable assumptions or use relevant outside data to fill in the holes in either party's proof in a rate proceeding. See, e.g., Boise Water, 99 Idaho at 160, 578 P.2d at 1091 (use of consumer price index to measure change in affiliate costs where more reliable data is lacking). In pursuit of its ultimate goal of setting just and reasonable rates, the Commission may set intracorporate expenses by reference to facts other than those brought forth by the public utility. See Washington Water Power Co. v. Public Utilities Commission, 105 Idaho 276, 281, 668 P.2d 1007, 1012 (1983) (court looks to facts shown in commission order, not facts proven by utility, in upholding order substituting parent's rate of return for subsidiary's reasonable expenses); Montana-Dakota Utilities Co. v. Bollinger, 632 P.2d 1086 (Mont.1981) (where commission invalidates parent-subsidiary expenses, commission must make its own factual findings). As with the initial proof burden on the public utility, the substitute facts used by the Commission must have a rational connection to the element of expense at issue. See Boise Water, 99 Idaho at 160, 578 P.2d at 1091. Wiscasset's second argument on the management and supervision expense issue is that the data from the other utilities chosen for comparison are not rationally connected to Maine Water's expenses. Wiscasset argues that the choice of utilities having 300 to 800 customers is improper because the five divisions of Maine Water in the aggregate serve upwards of 3,000 customers. We cannot agree. The Commission made that comparison in light of the 300 to 800 customer size of Maine Water's divisions. A comparison of Maine Water to other single-system utilities with 3,000 customers would ignore the distinctive separation of Maine Water into geographically isolated divisions. The Commission could reasonably believe that the five divisions, as separate water systems in various parts of the state substantially removed from one another, create managerial and supervisory problems not likely to be encountered by a unitary water system serving customers in a single compact area. As a third point Wiscasset argues that the Commission erred in not allocating certain Company-level management and supervision expenses on a per-customer basis. The Commission found the per-division allocation system used by the Company reasonable in light of the unique problems associated with the management and supervision of a multi-divison operation. As the Commission found, Many functions must be performed no matter how many customers a company has and are therefore dependent on the very fact that there is a company or division rather than upon the number of customers. We find no error in the Commission's reduced allowance of management and supervision expenses in each of the Company's divisions.
The Commission allowed the Company to recover from its customers in its five divisions rate case expenses incurred by the Company before the Commission in this current case in a total amount of $96,871, to be amortized in part over two years and in part over five years. [8] Thus, the Company's total annual revenue entitlement as found by the Commission included about $20,000 for rate case expense. The Commission based its allowance upon the findings that the Company did not act unreasonably in filing its rate increase request and that the rate case expense, although large, was reasonable in amount in view of the substantial number of parties involved and the myriad of issues, many complex, that were put in litigation. Contrary to the cross-appellants' contentions on appeal, we find no error in those findings. [9] Of course, a public utility may not force rate increases upon its customers solely as a result of expenses incurred in abortive or frivolous rate cases. Stratton Water Co. v. Maine Public Utilities Commission, 397 A.2d 188, 192 (Me.1979) (quoting Re Carolina Water Company, 32 P.U.R.3d 462, 470 (N.C.U.C.1960)). But the Commission rightly did not classify this rate case as abortive or frivolous. The allowance for ratemaking purposes of rate case expenses depends, as does the allowability of any other operating expense, upon whether those expenses were prudently incurred. The prudence of any utility expenditure is tested in regard to both its purpose and its amount. See generally Pennsylvania Public Utilities Commission v. Philadelphia Electric Co., 501 Pa. 153, 460 A.2d 734, 738 (1983) (commission should disallow only expenditures that are imprudently made or are abuses of managerial discretion). [I]t would be proper for a public utility company to be allowed rate case expenses when `the public service company has reasonably and fairly employed outside help in connection with ... (the) case'. Lone Star Gas Co. v. Corporation Commission, 648 P.2d 36, 41 (Okla.1982) (quoting Carey v. Corporation Commission, 168 Okla. 487, 491-92, 33 P.2d 788, 794 (1934) (ellipsis in original)); cf. Washington Gas Light Co. v. Public Service Commission, 450 A.2d 1187, 1240-41 (D.C.App.1982) (costs of defending breach of contract suit should be borne by ratepayers). The Commission acted well within its discretion in finding that the Company's rate filing was not imprudent. But for the Newport/Wilton issue, the Company would have been granted a rate increase. Given the novelty and difficulty of that issue, the Company acted prudently in seeking a rate increase notwithstanding the gain it had received from the Newport and Wilton sales. We also will not interfere with the Commission's conclusion that the sum expended by the Company in prosecuting the rate case was reasonable and prudent in amount; the Commission was in a much better position than we to pass judgment on that question.
The Commission allowed the Company to recover from its Wiscasset customers over a five-year period the $125,000 cost of a well search effort in that division. The Town of Wiscasset argues that a memorandum of agreement signed by the Company and the Town required the Company to bear those costs. The agreement, however, is far from clear. It can be fairly read simply to require the Company to provide the funds for the search in the first instance, without resolving whether the Company's customers or its shareholders, as against the Town, would ultimately bear the well search expense. In any event, the agreement does not operate to divest the Commission of its normal regulatory power to consider for ratemaking purposes costs actually incurred by a utility. By its express terms the agreement was subject to the approval of the Commission, the Maine Department of Human Services, and Wiscasset's legislative body, none of which agencies has acted to approve. The Town of Wiscasset also argues that the Commission committed an abuse of discretion in allowing the Company to recover the costs of this well search before the water quality problem in Wiscasset has been solved. We reject the Town's argument because, as the Commission found, the well search was a completed and distinct phase of the broader water improvement efforts in Wiscasset.
Using a 1982 test year, the Commission adjusted the rate base of the Wiscasset division to include some additions made in 1983 to the Wiscasset treatment plant. [10] The Town argues that this inclusion in rate base was improper because, according to the testimony of a substantial number of Wiscasset residents, no observable improvement in Wiscasset water resulted from those additions. On the other hand, the Commission chose to credit objective scientific testing indicating some improvement in the water as a product of those additions. Although the 1983 additions were but a part of a larger improvement planned for the treatment facility, the Commission acted within the proper scope of its discretion in finding that those additions, by themselves, were sufficiently useful and separable to warrant their recovery prior to the completion of the whole project. The Commission also was justified in finding that despite the use of those additions only during the summertime, they were nonetheless property of the public utility used or required to be used in its service to the public. 35 M.R.S.A. § 52 (1978). Finally, there was no error in the Commission's inclusion of those additions in the 1982 test year rate base even though they were not put into service until 1983. The general rule that the test year rate base should only include property providing service during that year, see New England Telephone & Telegraph Co., 448 A.2d at 294, may be relaxed to reflect subsequent known changes that [are] certain to alter significantly the assumed balance among revenues, expenses and plant. New England Telephone & Telegraph Co., 470 A.2d at 775. In the case at bar, the treatment plant additions did not produce additional revenue; the cost savings resulting from the 1983 additions were quantified and the test year expenses adjusted downward accordingly; and the additions, constituting about 25% of the Wiscasset division's rate base, were not a part of any routine, regularly recurring maintenance program. Thus, the Commission had sound basis for concluding that the treatment plant additions were too significant to ignore and that they could be included in the test year figures without impermissibly distorting the relationship among revenues, expenses, and rate base.