Opinion ID: 2284798
Heading Depth: 1
Heading Rank: 9

Heading: treatment of gains realized on wgl's sale of propane reserves

Text: WGL uses propane to provide gas when demand exceeds the available pipeline supply. Several years prior to the commencement of this rate proceeding, the Company purchased a sizeable quantity of propane, which is stored in Conway, Kansas. Subsequently, pipeline supplies became more plentiful and it was no longer necessary to maintain such large reserves of propane. Accordingly, during the period ending June 30, 1977, WGL sold the final eleven million gallons of propane that had been stockpiled in Kansas. The Company realized a net aftertax gain of $855,200 on these sales, $192,000 of which was allocable to the District of Columbia. Order 6051, Appendix A, Sch. 2. WGL recorded the entire gain in a below-the-line account, and proposed that the Commission likewise allow the Company's shareholders to have the profits from the sales. The Staff and People's Counsel objected, urging that the ratepayers were entitled to the entire gain. The Commission ultimately adopted the Staff's proposal to amortize the gain over three years for the ratepayers' benefit; WGL's test-year operating revenues accordingly were increased by one-third of the total net after-tax gain ($64,000). Id. The Company contends that the Commission's action in this regard was unlawfully confiscatory. The appropriate allocation of gains and losses realized upon the transfer of utility property is an issue that has received surprisingly little attention in reviewing courts. Those few courts that have addressed the subject have provided only general guiding principles by which to judge the propriety of a commission's action in such matters. It is evident, however, that each case must rest upon its own factual situation; the validity of each allocation of profits or losses depends upon the nature of the property transferred and a balancing of the equities involved. See generally Democratic Central Committee v. Washington Metropolitan Area Transit Commission, 158 U.S.App.D.C. 7, 26-32, 485 F.2d 786, 805-11 (1973), cert. denied, 415 U.S. 935, 94 S.Ct. 1451, 39 L.Ed.2d 493 (1974). The propane that WGL sold during the test period had been recorded by the Company in Account 151.109 of the Uniform System of Accounts, see 18 C.F.R. Pt. 201 (1980). PC Exh. C, at 13. That account is labelled Propane Stock and is a subcategory of Account 151, Fuel Stock. The Uniform System of Accounts prescribes methods for allocating gains and losses on the transfer of certain categories of utility property. [63] However, such guidelines do not materially aid our review function in this case for two reasons. First, the Uniform System's allocation scheme relies largely upon certain classifications of the property transferred, e.g., whether the property is depreciable or non-depreciable, whether it is operating or non-operating, and whether the property is in current use or held for future use. See Washington Public Interest Organization v. Public Service Commission, supra at 82-84. The record in this case does not disclose the nature of the propane stock in question with precision from an accounting standpoint. [64] Moreover, even if the proper treatment under the Uniform System were plain, it would not be dispositive for ratemaking purposes. See note 41 supra. The more important inquiry in determining who should receive the gains from the propane sales is the question of who has borne the risks and burdens associated with its maintenance. See Democratic Central Committee v. Washington Metropolitan Area Transit Commission, supra 158 U.S.App.D.C. at 27-32, 40-43, 485 F.2d at 806-11, 819-22. See also Washington Public Interest Organization v. Public Service Commission, supra at 87-88; City of Lexington v. Lexington Water Co., 458 S.W.2d 778 (Ky.1970); New York Water Service Corp. v. Public Service Commission, 12 A.D.2d 122, 129, 208 N.Y. S.2d 857, 863-64 (1960), appeal denied, 10 N.Y.2d 705, 219 N.Y.S.2d 1025 (1961). The Commission found that the equities favored a complete allocation of gains to the ratepayers. [65] It stated: To begin, WGL procured this propane for the benefit of ratepayers and to provide more system reliability during peaking periods. As a result, this propane inventory was included in WGL's rate base. And ratepayers paid all WGL's costs for storing the propane in Kansas. In addition, if WGL lost the propane, as through some catastrophe, it would be likely to ask that ratepayers help bear the loss. Since the ratepayers face the risk of loss, they should likewise realize the gain when this propane is sold off-system. [Order 6051, at 48.] The Company does not dispute that the propane stock was included in WGL's rate base or that the ratepayers paid all costs associated with maintaining the reserves in Kansas. It argues, however, that because WGL's investors furnished the capital to purchase the propane, any profits realized on its disposal must go to the investors. This result is mandated, the Company argues, by the Supreme Court's opinion in Board of Public Utility Commissioners v. New York Telephone Co., supra 271 U.S. at 32, 46 S.Ct. at 366, wherein the Court stated: Customers pay for service, not for the property used to render it. Their payments are not contributions to depreciation or other operating expenses, or to capital of the company. By paying bills for service they do not acquire any interest, legal or equitable, in the property used for their convenience or in the funds of the company. Property paid for out of moneys received for service belongs to the company, just as does that purchased out of proceeds of its bonds and stock. While the above language is appealing on its face, the Commission and People's Counsel correctly note that the case from which it was quoted is distinguishable from the one at hand. The issue in New York Telephone was whether past excess depreciation accruals could be used to reduce present depreciation accruals. The Court found that such a policy constituted unlawful retroactive ratemaking. Not only is that issue factually distinct from the one before us, but its applicability to the type of question presented here was implicitly rejected by the circuit court for the District of Columbia in Democratic Central Committee v. Washington Metropolitan Area Transit Commission, supra . See note 65 supra. As we have noted with respect to this case, the ratepayers paid all costs associated with maintaining the propane in Kansas, including storage and transportation costs (and personal property taxes, if any). They also paid WGL a return on the original cost of the propane, since the fuel was included in the rate base. See PC Exh. C, at 14. We further note that the propane stock was maintained pursuant to WGL's obligation to hedge against fuel shortages during peak usage periods: propane is unique as the property of a gas distribution company, since in periods of need it becomes gas to be supplied to consumers. Therefore, the Company's assertion that it is not in the business of selling propane is essentially unrealistic. We hold that the treatment of gains realized on the sale of propane reserves was not so unreasonable as to constitute an unlawful confiscation of the Company's property. We therefore affirm the Commission's ruling on this point.