Court Opinion

ID: 9640778
Source: CourtListenerOpinion
Date Created: 2023-08-22 17:15:09.951864+00
Date Added: 2024-06-11T09:08:01.404301
License: Public Domain

HARRIS, Associate Judge,
with whom NEBEKER, Associate Judge, concurs, dissenting:
This is the first major public utility rate case to be handled by this court (as a consequence of the Court Reform and Criminal Procedure Act of 1970, see D.C.Code 1973, § 43 — 705). Because of that fact, in writing the original majority opinion for the division, particular care was taken to describe the applicable legal principles and to spell out in detail the errors in the Commission’s disposition of the case. Potomac Electric Power Co. v. PSC, D.C.App., 380 A.2d 126 (1977) (hereinafter cited as Pepco I). With all due respect for my esteemed colleague, Judge YEAGLEY’s then-dissenting opinion did not reflect a recognition of certain basic characteristics of ratemaking proceedings. See Pepco I, at 150-62. The. deficiencies in Judge YEAGLEY’s dissent were cogently addressed by Judge NEBEKER in his concurring opinion. See Pepco I, at 164-69.
It would be difficult for me to conceive of a rate case in which the agency’s action could more readily be seen to be erroneous than this case. See D.C.Code 1973, § 43-706. One result of the majority’s resolution of this appeal seems regrettably inescapable: The Commission will conclude that virtually any treatment of a utility which purports to be “pro-consumer” in nature is likely to escape perceptive judicial review.1
The temptation is strong to challenge item-by-item the many flaws in the majority opinion. Such an exercise is not necessary, however, since there are three existing well-documented opinions which address the issues at length. The first is the opinion of Commissioner Stratton written in dissent to the Commission’s decision. In re Potomac Electric Power Co., 11 P.U.R.4th 215, 237-51 (PSC D.C.1975). The second and third, as noted above, are the majority and concurring opinions in Pepco I which the majority has chosen to overturn. I would, however, now make a few comments, supplemented by a number of references to portions of Commissioner Strat-ton’s dissent which were not referred to in my earlier opinion for the division majority.
The Commission decided upon an overall 9.1 percent rate of return for Pepeo. That *28conclusion prompted the following statement by Commissioner Stratton:
It cannot be demonstrated that the rate of return found reasonable by the commission fails the statutory test [of establishing “just and reasonable” rates], and I support it even though it is in the low range . . . . [11 P.U.R.4th at 251.]
Establishing a rate of return, however, is but a starting step in determining a utility’s revenue needs. Commissioner Stratton aptly inquired: “Thus did the right hand give but what of the left hand?” Id., at 240. What the left hand did, to complete the metaphor, was take away. To reduce the case to its essence, the Commission imper-missibly (1) tore tens of millions of dollars out of Pepco’s rate base, and (2) overstated revenue expectations from projected sales of excess generating capacity by Pepeo to the PJM interchange.2 The obvious explanation for such action, as expressed by Commissioner Stratton (with particular reference to the grossly unwarranted reduction of the rate base item of construction work in progress), is that it constituted “an expediency perpetrated in the interest of holding down rates [which] must be seen as arbitrary and is, on that basis, probably reversible error.” Id., at 244.
I quote Commissioner Stratton’s evaluation of what basically was at stake before the Commission:
The real issue in this case is whether this commission can so demonstrate its understanding of this utility and the world in which it must exist as to issue a rate order under which the utility can operate for a reasonable period of time without returning to us in quest of higher rates. This we have failed to do. Our failure is rooted in our denial of known and inexorable upward pressures on operating and capital costs, with which revenues must keep pace if a utility is to fulfill its service obligation. [11 P.U. R.4th at 238.]
The en banc court’s majority opinion reflects an inadequate understanding of how rate cases routinely are tried. When a rate increase application is filed, typically a test year is adopted which includes a majority of past months with actual operating results (here, eight months) and a smaller number of months (here, four months) for which data are predicted. Then, as the hearing proceeds, actual data are substituted for the prior estimates. This is done quite simply, but the majority seems to see problems in such a routine substitution of numbers.3 I agree with Commissioner Stratton’s axiomatic comments on the use of a test year:
[O]ne must recognize that the test-year approach to rate making is a forecasting methodology, as it must be, since rates are made for the future. The test-year approach [is] implemented as follows: a recent 12-month period (calendar 1974 in this case) is selected as the test year; financial results of that year’s operations are used as the base data in the analytical process; [and] known changes are reflected as pro forma adjustments to the test-year operating results . . .. [11 P.U.R.4th at 238.]
******
[T]he test-year device is imperfect, but, like democracy, it is probably better than the alternatives. This imperfection is compensated for in some measure by adjusting test-year data in order that it better mirror the future, typically by tak*29ing into account known changes that are not fully reflected in test-year data . [Id., at 239.]
It must be borne in mind that the administrative process in this case was protracted, in part because of the delay occasioned by the establishment of the office of People’s Counsel. Pepco’s application was filed on December 20, 1974. The hearing began on June 4, 1975; it did not end until July 25, 1975. By that time, complete operating figures through June 30, 1975, had been introduced into evidence. Data for July and August of 1975 later were provided by the company, and oral argument was conducted on September 30, 1975.
Often in rate cases, a commission is required to exercise its discretion in determining which of the competing parties’ projections are more valid. That was not true here; to return to Commissioner Stratton’s analysis:
But the commission was not compelled to select between the conjecture of the company and the conjecture of the staff. We have accepted into the record monthly operating statements and balance sheets for the first eight months of 1975, and these were available to us as we deliberated upon this case. I had thought our purpose in accepting current financial reports was to permit us to make a better informed decision. Are we free to decline the opportunity to do so? I think not. [Id., at 241.]
There is an interesting passage in the en banc court’s majority opinion. The majority recognizes that:
[T]he most recent available material must be considered and weighed by the Commission in reaching decisions on ratemak-ing. This is consistent with effective ratemaking policy. If recent operating figures are completely ignored, the new rate will be based on old and perhaps no longer valid data. [Ante, at 18.]
How the majority could acknowledge those truths and still fail to see the errors in the Commission’s actions defies comprehension. The original opinion for the division majority sets forth in detail the Commission’s distorted treatment of the rate base items of both materials and supplies and construction work in progress (CWIP), and of the revenue item relating to PJM interchange sales. 380 A.2d at 145-47. I shall not restate those points here, but a brief description of what the Commission did with respect to one component of CWIP warrants inclusion in this dissent.
The funds expended by the utility for CWIP consistently have been included in its rate base. During all of 1974, a new generating plant — Chalk Point Unit No. 3 — was under construction. There was no question as to the dollar amounts expended on that project. In May of 1975, months before the record was closed, the new plant was placed in operation, and the roughly $160 million which it cost were transferred from the company’s CWIP account to the plant in service account. These facts were routine and unchallenged, and any objective observer would have deemed it inconceivable for the Commission to fail to include that $160 million in the company’s overall rate base (with the appropriate percentage thereof going into Pepco’s District of Columbia rate base). In what must surely have been one of the most arbitrary actions in the history of American ratemaking, however, the Commission refused to include the completed Chalk Point Unit No. 3 in the rate base. Moreover, although in the 1970 and 1973 decisions in' prior Pepeo rate cases the Commission properly sought to compensate for attrition by using a year-end computation of CWIP, here it further eroded the rate base by taking a 1974 average CWIP figure.
The overall effect of the several devices thus arbitrarily and unreasonably utilized by the Commission was to reduce the company’s District of Columbia rate base to $650,091,000 [see 11 P.U.R.4th at 228], and to understate the company’s revenue needs by exaggerating the net receipts supposedly anticipated from PJM sales. In the final paragraph of his dissent, Commissioner Stratton stated: “At a minimum, the rate base should have been established at $693 million . . ..” Id., at 251. I share that conclusion.
*30The majority seeks to justify its disposition of this case in two principal ways. The first is an artificial semantic exercise — performed by utilizing out of context a few selected phrases uttered during the hearing by Pepeo representatives — as to whether the test year should have ended December 31, 1974, or June 30, 1975.4 Not only is the majority’s treatment of that question illogical (there is no doubt on this record but that Pepeo — quite understandably in this period of severe inflation and rampant fuel cost increases — wanted to use its most current actual operating data); it also is largely irrelevant. As I have noted, the en banc majority recognizes the obligation of the Commission to use current data; as long as such figures are used it matters little whether we say that the test year should have ended June 30, 1975 (as did the original majority opinion for the division), or that the Commission was obliged to adjust the test year data to reflect known later facts of record. Considered properly, the record simply reflects Pepco’s related anxieties to avoid further delays and achieve prompt rate relief.
The second way in which the majority supports its result is by (1) making cursory references to Pepco’s contentions on appeal, followed by (2) stating with respect to each contention that the Commission considered the subject, hence effectively ending the matter.5 Such an approach, however, begs the issue. It is beyond question that the Commission considered what it was doing; its rulings were calculated, not accidental. It determined that Pepeo theoretically should have the opportunity to earn an overall 9.1 percent rate of return, but then by the devices discussed above — such as erroneously reducing the company’s District of Columbia rate base by some $43 million, to accept Commissioner Stratton’s figure— it made it a certainty that such a rate of return could not be achieved. (An erroneous diminution of rate base correspondingly erroneously reduces revenues, for revenues are mathematically linked to rate base.)
A third factor militating towards affirmance appears in the en banc majority opinion, although the extent of its effect is difficult to ascertain. The majority devotes several pages of its opinion to expressing concern as to the complications which would be presented if we were to reverse. Ante, at 21-22. Such an approach is grievously unfair to Pepeo as a party in this court; it is entitled to have its case determined exclusively “upon the record” on appeal (D.C.Code 1973, § 43-705), and a consideration of the potential consequences of a reversal is irrelevant to the requisite basic analysis as to whether the Commission’s decision is to be affirmed or reversed — exclusively on its merits.6
In turning to an overview of this case, one maxim must be recognized: A regulatory commission which is unduly pro-consumer inevitably must be recognized to be anti-consumer as well. To jeopardize a utility’s economic stability is simultaneously to jeopardize its ability to provide the service upon which its customers so vitally depend (as well, incidentally, as to increase its costs *31of obtaining capital, which costs in the long run must be borne by the ratepayers). The Commission does not have a partisan role; it has both a statutory and a constitutional obligation to set just and reasonable rates, i.e., rates which permit a utility the opportunity to earn a fair rate of return on its investment. See PepCo I, supra, 380 A.2d at 131-32 and cases there cited. If the Commission arbitrarily refuses to achieve the requisite delicate balance between consumer and investor interests, it is not only violating the utility’s constitutional rights, it is harming the true long-range interests of consumers as well. Ibid. That is precisely what occurred in this case.
Commissioner Stratton’s dissatisfaction with his agency’s disposition of this case was such that he was moved to express the following beliefs:
To sum up, the commission’s order posits an economic environment reminiscent of the early 1960’s. In failing to acknowledge and deal with the fact that operating and capital requirements per unit of sales have risen, and continue to rise, faster than revenues the commission has taken a step that can only bring regulation in the District of Columbia into disrepute among the fair-minded and knowledgeable. [11 P.U.R.4th at 251.]
I feel comparable consternation at my colleagues’ superficial approach to their review of the Commission’s actions. In my view, the majority’s failure to recognize the realities of this case is analytically indefensible. Accordingly, I respectfully dissent.

. The majority’s “hear no evil, see no evil” approach to this case is wholly inconsistent with the 2-1 decision of another division of this court in Washington Public Interest Organization v. PSC, D.C.App., 393 A.2d 71 (1978). There the majority reached the following conclusion:
Given the presumptive validity of the Commission’s expert judgment in balancing investor and consumer interests, taken against petitioners’ own incomplete analysis, we must conclude that petitioners have not made the “convincing showing” required to overturn a rate order. They cannot prevail at this time. [Id., at 89.]
That, of course, should have been the end of the matter; the Commission’s action should have been affirmed and the appeal dismissed. See D.C.Code 1973, § 43-705. However, based upon a dissatisfaction with the Commission’s reliance on its established Uniform System of Accounts, the court remanded the case for further exposition by the Commission. (Judge NEBEKER and I voted to grant the petitions for rehearing en banc which were filed in that case.)

. In its treatment of the PJM interchange issue, the majority recites some of the facts which reflect significant decreases in Pepco’s revenues therefrom, but ultimately simply retreats into the “we will not substitute our judgment for that of the Commission” refuge. Ante, at 27. I readily recognize that we are not to substitute our judgment for that of the agency, but the Commission’s actions here far transcend the rather broad area of mere judgmental differences.

. Regulated utilities follow the Commission’s Uniform System of Accounts, and Commission personnel regularly monitor the company’s books. Thus, for example, if Pepeo predicts that its fuel expense for the forthcoming month of June will be x dollars, it is exceptionally easy later to substitute the amount of money actually spent.

. The en banc court’s majority opinion — like Judge YEAGLEY’s earlier dissent — is unduly selective in its excerpting of the relevant remarks from the record. To complete the picture of what was said on the subject, see Pepco I, 380 A.2d at 140-41 (majority opinion) and 166-67 (NEBEKER, J., concurring).

. In the Washington Public Interest Organization case which I cited in footnote 1, supra, the majority of that division recognized the risk that a “non-expert” court “could simply be fooled into accepting arbitrary agency action by the mesmerizing influence of the confidently expressed language of experts.” 393 A.2d at 78. Regrettably, that concern has become a reality in this case.

.In his prior dissent to the majority opinion of the division, Judge YEAGLEY took the position that his view of the case was demonstrably correct since the market price of Pepco’s stock had risen subsequent to the Commission’s decision. Pepco I, 380 A.2d at 159-60. Such an analysis was both faulty and unwarranted, as noted by Judge NEBEKER in his concurring opinion. Id., at 168-69. I note with some relief that the notion that stock prices are indicative of whether an agency’s ruling is proper or erroneous has had at least no visible effect upon the en banc majority’s disposition of the case.