Opinion ID: 1926458
Heading Depth: 1
Heading Rank: 8

Heading: attritional allowance

Text: Both South Central Bell and the Commission have appealed the district court's judgment ordering an increase in intrastate rates to produce an additional $26,320,000 in revenues to offset the effects of attrition and inflation experienced by South Central Bell since the 1975 historical test year. The Commission contends that the district court erred in granting any attritional allowance and alternatively that if the court determines an attritional allowance should be granted, the district court erred in fixing the allowance at $26,320,000, based on evidence filed by South Central Bell with the Commission on remand, rather than at $6,714,000 which was determined by the Commission to be a sufficient allowance. On the other hand, South Central Bell asserts that the court erred in granting an attritional allowance of only $26,320,000 rather than the allowance of approximately $53,000,000 requested by the company. After remand by the district court to the Commission to make whatever adjustments necessary to offset the effects of attrition and inflation on South Central Bell's overall rate of return since the 1975 test year, South Central Bell filed with the district court and the Commission additional evidence on the impact of attrition and inflation experienced by the company in 1976 and anticipated in 1977. This evidence included the company's actual investment, revenues and expenses based on the average year 1976, year-end 1976 and forecasted data for the average year 1977. Although briefly reviewed by the Commission, this evidence was not relied on by it in determining the attritional allowance. The Commission specifically rejected the use of the year-end rate base and an adjustment to the rate of return as methods of computing the allowance but instead adopted a detailed study approach in which the relationship between revenues, expenses and plant investment (rate base) were examined during the past ten years as a means of ascertaining an appropriate allowance for attrition to offset its effect on the company's future realized rate of return. On the basis of this analysis, the Commission projected an annual rate of attrition of .4% which, when applied to the 1975 average rate base adopted by the Commission and after adjustment for taxes, translated into a needed increase in revenues of $6,714,000. After reviewing the Commission's decision, the district court rejected the attritional allowance as fixed by the Commission concluding that the Commission's action was arbitrary and unreasonable in that it would not produce revenues necessary to insure the healthy operation of the utility. Rather, the court adopted the findings of Mr. D. M. Ballard, assistant chief accountant for South Central Bell, relative to his determination of additional revenues needed to offset attrition and inflation since the 1975 test year, which findings had been filed with the Commission on remand. The additional revenues were computed by multiplying the company's average rate base for 1976 by the 8.7% rate of return authorized by the Commission to derive the 1976 required net operating income. From this figure, the company's achieved net operating income for 1976 was deducted. This produced an income deficiency after taxes. After an adjustment for taxes, the company's revenue deficiency attributable to attrition and inflation was revealed as $26,320,910. Based on the foregoing computation, the district court ordered the Commission to increase rates to produce an additional $26,320,000 in revenues to offset attrition and inflation so that South Central Bell might realize an overall rate of return of 8.7%. In the instant case, the Commission elected to use an historical test year (1975) and the average rate base for that year in fixing rates under which South Central Bell would operate for some time in the future. The use of an historical test year assumes that the actual results for the same period of operations will be sufficiently representative of the future to provide a reliable testing vehicle for the proposed rates. New England Telephone & Telegraph Co. v. State, 113 N.H. 92, 302 A.2d 814 (1973); Note, The Use of the Future Test Year in Utility Rate-Making, 52 B.U.L.Rev. 791 (1972). However, we know that a utility's operations in the future will be at a different level from the test year. We can normally expect a utility's service requirements to grow and generally its investment, revenues and expenses can be expected to increase as the service grows. As long as investments, revenues and expenses remain in generally the same relative position as the test year, the future realized rate of return will not fall below that level which rates were fixed to produce. However, in an inflationary period where unprecedented demands for goods and services at increasing costs upset the balance among investments, revenues and expenses, the assumption that future results will approximate those of the past is not realized in fact. The result is attrition, an erosion in earning power of revenue-producing investment caused by operating expenses or plant investment, or both, increasing more rapidly than revenues. If attrition occurs, the rate of return realized in the future will be below that which the rates are designed to produce. This effect is particularly apt to occur during a period in which high cost plant investments replace obsolete assets as this tends to increase the applicable rate base at a more rapid pace than the resulting earnings. When it is shown that, because of attrition, a utility will not earn the overall rate of return determined by the Commission to be fair, the Commission must evaluate the impact of attrition on earnings of the utility and make an appropriate allowance for it. Only if this is done can an historical test period properly be used as a basis for determining a company's future revenue requirements. Re New York Telephone Co., 12 PUR 4th 1 (N.Y.Pub.Serv.Comm.1975). Accordingly, I conclude that the district court's decision to grant an allowance to South Central Bell to offset the impact of attrition experienced since the 1975 test year was proper. In view of this conclusion, it is now proper to consider whether the district court erred in fixing the attritional allowance at $26,320,000. In deciding this issue, it should be recognized that any determination must necessarily be based upon the projection of future conditions. Accordingly, such a determination must be subjected to close scrutiny. At the outset, I find that, since evidence of the effects of attrition actually experienced by South Central Bell since the test year was made available to the court after having also been filed with the Commission and subject to its review, this evidence was properly considered by the district court. The authority of a reviewing court in fixing an attritional allowance extends to new evidence necessary to bring the proof as nearly as reasonably possible down to the final decision. New England Telephone & Telegraph Co. v. Dept. of Public Utilities, 354 N.E.2d 860 (Mass.1976). After reviewing the method used by the Commission in fixing the allowance for attrition, I do not agree with the Commission's conclusion that a revenue increase of only $6,714,000 was needed to offset attrition. The ten-year period used by the Commission in its analysis failed to properly consider South Central Bell's actual investment, revenues and expenses for 1976 as well as the increased rate of inflation in recent years. The Commission may not rely on predictions when actual experience is available and establishes that the predictions are substantially incorrect. Moreover, the Commission is bound to take into account drastic changes in economic circumstances. New York Telephone Co. v. Public Service Commission, 29 N.Y.2d 164, 324 N.Y.S.2d 53, 272 N.E.2d 554 (1971). For the aforesaid reasons, I find that the attritional allowance fixed by the Commission was insufficient. On the other hand, although I approve the method used by the district court in determining the attritional allowance since it is based on the company's actual investment, revenues and expenses for 1976, I believe that the district court failed to accord sufficient weight in its computation to certain factors which tend to offset the effects of attrition, such as lower bond prices since the hearings before the Commission, the company's increased productivity, the recent upturn in the economy, and the benefits to the company of deferred income taxes and tax credits. Thus, I consider that the district court's award of $26,320,000 to offset attrition so that South Central Bell could realize 8.7% overall rate of return authorized by the Commission is too high. However, in view of my belief that South Central Bell is entitled to earn an overall rate of return of 9.20% and taking into consideration the factors which tend to offset attrition, I conclude that the attritional allowance of $26,320,000 is appropriate under the circumstances to assure that the company will realize this increased rate of return during the present inflationary period. For this reason, I would affirm the district court's attritional allowance of $26,320,000.