Court Opinion

ID: 9599796
Source: CourtListenerOpinion
Date Created: 2023-08-22 01:21:33.022382+00
Date Added: 2024-06-11T09:02:25.462254
License: Public Domain

BIRD, C. J.
I respectfully dissent. The Public Utilities Commission (PUC) erred by granting Pacific Telephone and Telegraph Company (Pacific) a rate increase that took into account the most recent data on Pacific’s costs from “station connection” or installation services but which failed to take into account the most recent data on Pacific’s revenues from those services.
This is not to say that the PUC acted improperly in granting Pacific a rate increase to offset the effect of the change in accounting of its installation costs. This change was strictly a matter of how an item of cost as estimated in the general rate proceeding was to be listed on Pacific’s books. It did not in and of itself require a revision in the estimated amount.
As a matter of uniform accounting, two major conforming changes were necessary: a reduction in Pacific’s rate base as a direct result of the reduction in the capital expense account, which is a component of the rate base, and an increase in Pacific’s revenue requirement to reflect the combined effect of the increase in current expenses and the decrease in rate base.1 In common sense terms, these changes accorded with the purpose of expensing rather than capitalizing the installation costs. That purpose was to permit Pacific to charge its customers in the year of expenditure for costs which previously had been capitalized and recovered over several years.
*536However, the PUC also revised its estimate of actual installation costs at the same time that it was shifting them from a capital to a current expense account. No corresponding revision in the estimate of Pacific’s installation revenues was made. The practical result was a larger rate increase than would have been granted if the latest data on both costs and revenues from installations had been used. The rate increase was also larger than it would have been if only the accounting change had been made. In that event, the installation cost estimate adopted in the general rate proceeding would have been retained, subject only to the $70 million reduction ordered by the PUC pursuant to the settlement of the cities’ earlier suit. By rejecting both of these alternatives and choosing instead to retain the old installation revenue estimate while adopting a revised cost estimate—no matter how accurate— the PUC failed regularly to pursue its authority. (Pub. Util. Code, § 1757; see City of Los Angeles v. Public Utilities Com. (1975) 15 Cal.3d 680, 691-692 [125 Cal.Rptr. 779, 542 P.2d 1371].)
In deciding otherwise, the majority adopt a general rule which is ill-suited to the circumstances that justified a rate adjustment in this case and which does not even correspond to the action taken by the PUC. The majority hold that in an offset proceeding “the commission need only determine the relevant extraordinary change and then take account of it by adjusting the utility’s rates to offset the effect of such change, with all other items of expense and revenue held constant as estimated in the utility’s most recent general rate proceeding.” (Maj. opn., ante, at p. 531.)
The majority’s formulation is inapplicable to this case because it assumes an isolated increase in the actual cost of an item, unaccompanied by a corresponding increase in revenue from that item.2 In this case, by contrast, the adjustment was made necessary not by a change in actual costs but by a change in accounting practices. The PUC could not, and did not, make the necessary rate adjustment by changing a single item of expense while holding “all other items of expense and revenue . . . constant as estimated in the utility’s most recent general rate proceeding.” (Maj. opn., ante, at p. 531.) Rather, when the cost of installation was shifted from a capital to a current or operating expense account, changes in both accounts were necessary.
*537More important, higher installation costs are unavoidably accompanied by higher installation revenues, since customers are billed separately for installation. Thus, actual changes in installation costs do not qualify as the sort of changes which, because they tend “to vary abnormally in comparison to the utility’s other financial criteria” (California Manufacturers Assn. v. Public Utilities Com., supra, 24 Cal.3d at p. 257), may be taken into account in revising rates without first revising revenue figures as well {ibid.). If the cost figure is revised, the revenue figure must also be revised or the resulting rate change will not “accurately] represent] the utility’s actual experience during the relevant period” (maj. opn., ante, at p. 534).3
The cases on which the majority rely are readily distinguished. Rate adjustments were required in those cases as the result of extraordinary changes in the actual cost of a single item, such as fuel (see, e.g., California Manufacturers Assn. v. Public Utilities Com., supra, 24 Cal.3d at p. 257) or in the actual amount accumulating in a single, unchanged accounting category, such as deferred tax reserves (see City of Los Angeles v. Public Utilities Com., supra, 15 Cal.3d at p. 691). Such changes are extraordinary in that they are not accompanied by simultaneous, offsetting changes on the other side of the utility’s balance sheet. It is reasonable to adjust a utility’s rates to cover exceptional costs for which there is no corresponding increase in revenues, and to do so without recalculating the estimate of revenues made in the most recent general rate setting proceeding.
The “extraordinary change” in this case was a change in the method of accounting for one of the utility’s costs. Had there been no change in accounting and only a change in the data on actual installation costs, there would have been no independent legal basis for an offset proceeding to modify the estimate. The reason is simple: an increase in these costs is accompanied by a roughly equivalent increase in revenues.4 Hence, in the absence of the accounting change, the PUC would have rejected any application for an interim rate increase. The installation cost estimate employed *538in the general rate setting proceeding, as modified in the settlément of the cities’ earlier suit, would have been left unaltered.
A change in the accounting of installation costs did occur, and a rate adjustment was necessary as a result. It would be senseless to require the PUC, in calculating the resulting rate increase, to ignore reliable data based on actual operating experience, which indicates a need for revision of the estimate of those costs. If more recent, reliable data is available, the fairest and most accurate measure of the impact of an accounting change on a utility’s revenue requirement can be obtained by revising the estimates of both costs and related revenues from the item for which the accounting change is being made, leaving all other items of cost and revenue constant.5 This procedure would comport with the recognized purpose of an offset proceeding and would not constitute impermissible, retroactive ratemaking.
I would remand the matter to the PUC with instructions to revise its estimate of Pacific’s installation revenues, based on the same data that was used to revise the estimate of installation costs, and to adjust the rate increase granted to Pacific accordingly.

The reduction in the capital expense account also caused offsetting reductions in the accounts for depreciation, income taxes, and property taxes.

An example would be a sudden rise in the cost of the fuel required by a power company to generate electricity. Such a change would not be accompanied by an increase in the utility’s revenues from sale of electricity, since the rates at which it could sell the electricity were fixed. (See California Manufacturers Assn. v. Public Utilities Com. (1979) 24 Cal.3d 251, 257 [155 Cal.Rptr. 664, 595 P.2d 98]; City of Los Angeles v. Public Utilities Com., supra, 15 Cal.3d at p. 695 & fn. 32.)

The majority properly reject the cities’ contention that a new estimate of installation revenues should be applied retroactively in the general rate proceeding. (Maj. opn., ante, at p. 534; see City of Los Angeles v. Public Utilities Commission (1972) 7 Cal.3d 331, 338 [102 Cal.Rptr. 313, 497 P.2d 785]; Pacific Tel. & Tel. Co. v. Public Util. Com. (1965) 62 Cal.2d 634, 649-656 [44 Cal.Rptr. 1, 401 P.2d 353].) However, the rule against retroactive general ratemaking does not preclude a revision of estimates, restricted to two integrally related items of revenue and cost, in the present offset proceeding. Such a revision would not constitute the impermissible reopening of the general rate proceeding against which the majority warn.

The record indicates that the amount Pacific charged for installation varied over the course of 1981 from approximately 50 percent to approximately 110 percent of the full cost of installation.

An additional factor supports use of revised cost and revenue estimates rather than the original estimates. Pursuant to the parties’ earlier settlement, the PUC ordered a $70 million reduction in the rate base adopted in the general rate proceeding. This adjustment was made to reflect the increased use of PhoneCenter stores by residential customers and the resulting decrease in Pacific’s installation costs. However, the PUC’s order does not state that the reduction is attributable specifically to the “station connection” or installation account, as opposed to other accounts which comprise Pacific’s total station equipment costs. Moreover, the cost estimates adopted in the general rate proceeding did not include a breakdown for installation costs. Thus, it would be difficult to determine the appropriate cost figure.