Utah Power & Light Co. v. Idaho Public Utilities Commission , 105 Idaho 822 ( 1983 )

SHEPARD, Justice.

This is an appeal by Utah Power & Light Company from orders of the Public Utilities Commission (Nos. 14348 and 14430) which denied in part Utah Power’s request for a rate increase. Utah Power had requested a 52.49% rate hike, which was granted by the commission only to the extent of a rate increase of 13.3%. The issues raised here were previously treated in Utah Power & Light Company v. Idaho Public Utilities Commission, 102 Idaho 282, 629 P.2d 678 (1981) {UP & LI). Utah Power and the commission stipulated that the basis of the instant appeal was substantially identical to that of UP & L I, and hence the parties’ request for extension of the briefing in the instant case pending the outcome of UP & L I was granted.

Here, Utah Power challenges a formula used by the commission in calculating the rate base of Utah Power, which formula in turn, in essence, determines the allowable rate increase. Specifically, Utah Power asserts that the commission erred in adopting an “average year rate base” rather than using a “year end rate base;” that the commission erred in refusing to include in the rate base construction work in progress, property held for future use, and certain coal inventories; that the commission erred in its adjustment of a requested allowance for Utah Power’s maintenance and operation; that the commission erred in rejecting the use of an attrition factor in its rate base formula; and that the commission wrongly reduced the proposed allowance for interest return on the company’s equity. We hold that the commission erred in its calculation of the rate base, and since all asserted errors pertain to the commission’s method of figuring the rate base, we briefly analyze that term.

In Intermountain Gas v. Idaho Public Utilities Commission, 97 Idaho 113, 116, 540 P.2d 775, 778 (1975), the Court defined “rate base” as follows:

“The rate base consists of the capital invested in the utility upon which the company is entitled to a fair and just return. Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333 (1944). There are two components to Intermountain’s rate base: the net utility plant and the working capital. The net utility plant is the capital which the company has invested in the utility plant, consisting of the gas plant in service and construction work in progress, less the depreciation reserve and the amount the customers have contributed to the company in aid of construction. The working capital is the capital which the company has invested in the cash needs of the utility, consisting of an ‘ “allowance for the sum which the Company needs to supply from its own funds for the purpose of enabling it to meet its current obligations as they arise and to operate economically and efficiently”.’ Alabama-Tennessee Natural Gas Co. v. Federal Power Commission, 203 F.2d 494, at 498 (3rd Cir.1953) (emphasis in original).”

Also, and more simply put, in Citizens Util. Co. v. Idaho Public Util. Comm., 99 Idaho 164, 169, 579 P.2d 110, 115 (1978), the Court stated:

“A utility’s ‘rate base’ represents the original cost minus depreciation of all property justifiably used by the utility in providing services to its customers. Utilities are allowed to charge customers rates which will yield a certain percentage return on the utility’s total investment. Thus, the larger the utility’s rate base the higher the rates utilities can charge to customers.”

In the instant case, Utah Power proposed a historical test year of 1977 and proposed the use of a year end rate base for that test year. The commission adopted 1977 as a historical test year, but refused to use a year end rate base, opting instead for an average year rate base formula.

In Citizens Util. Co. v. Idaho Public Util. Comm., supra, 99 Idaho at 171—172, 579 P.2d at 117-118, we reviewed and approved the use of the average year rate base:

“The Commission adopted an average year rate base. An average year rate base is calculated by adding the test year opening rate base to the test year closing rate base and by dividing by two. Citizens claims that the Commission erred by adopting an average year rate base in that such a rate base will not allow Citizens to earn a reasonable return in the future. Citizens argues that the Commission should have adopted a year end rate base, current value rate base, or even a future year rate base ...

“The purpose of appellate review by this Court of decisions by the Idaho Public Utilities Commission is ‘to look at the' overall effect of the rate fixed to determine whether the return to the utility is reasonable and just.’ Intermountain Gas Co. v. Idaho Public Utilities Commission, 97 Idaho 113, 120, 540 P.2d 775, 782 (1975). After reviewing the record in this case we cannot say that the adoption by the Commission of the average year rate base ... resulted in an unreasonable or unjust overall return for Citizens. Consequently, we hold that the Commission’s use of the average year rate base was not error.”

Utah Power asserts that the valuation of its assets and liabilities should have been set as of the last day of the chosen test year, since that year end rate base most accurately reflected the value of those physical assets available to and used for the benefit of the customers of the company during the period in which the new rates would be in effect. On the other hand, the commission argues that the average year rate base formula better matched the company’s revenues to expenses, since the commission determined that Utah Power’s data submitted on the basis of a year end rate base contained certain mismatches between costs and revenues. While the company contends that such a “mismatch” is insignificant and that no “windfall” to the company results from the use of that formula, nevertheless, the evidence was conflicting on this'point, and we note further that Utah Power did not conform to the commission’s requirement that the data be clarified and corrected. We find no error in the commission’s use of an average year rate base formula. We hold that the use of the average year rate base was and is permissible and within the discretion of the commission. That discretion of the commission will not be disturbed.

Utah Power next assigns error to the refusal of the commission to include in the rate base construction work in progress (CWIP) and property held for future use (PHFU). We agree.

In disallowing the CWIP factor in its calculations of the rate base, the commission made the following finding:

“The Company requests the Commission to allow inclusion of $10,714,000 in rate base so as to allow the Company to earn a return on its investment in construction work in progress. Company witnesses repeated the familiar arguments. The granting of CWIP reduces the cost of the electric plant when it comes on line, lessens the need for future rate increases, generates badly needed internal cash for additional construction, and creates better quality earnings. Staff witness Holbert and Irrigators’ witness Springer repeated the equally familiar counter-arguments, namely, that allowing a company to earn a return on construction work in progress destroys the incentive to finish that work speedily, puts on the ratepayers a risk which is properly born by stockholders, and creates a mismatch between those who presently pay and those who, in the future, will benefit from the electric plant when it becomes used and useful.

“The Commission has made clear its position on this issue in recent orders. See, Application of Utah Power & Light Co., Case No. U-1009-83, IPUC Order No. 13448 [UP & L I]; Application of Idaho Power Company, Case No. U-1006-17, IPUC Order No. 13714. We are steadfastly opposed to the inclusion of CWIP in rate base. We find that the alternative method of providing an allowance for funds used during construction (AFUDC) is just and reasonable and does not deprive the Company of anything to which it is entitled. Nothing would be served by further discussion of this matter.”

In UP & L I, we held that the value of the Huntington plant under construction was required to be included in the rate base, since it was not a conjectural or speculative adjustment. Id., 102 Idaho at 284, 629 P.2d at 680. We see no reason that the same rule should not apply in the instant case. As we stated in Citizens Util. Co. v. Idaho Public Util., supra, 99 Idaho at 170, 579 P.2d at 116, test year data should be adjusted for anticipated and known changes where the changes are shown to be reliable and certain. The commission’s finding pertaining to CWIP is set aside, as is that part of the commission’s orders.

In UP & L I, supra, we dealt with the question of plant held for future use (PHFU), and there ruled that PHFU, when known and measurable, must be reflected in the rate base. Similarly, in Citizens Util. Co. v. Idaho Public Util., supra, 99 Idaho at 171, 579 P.2d at 117, the Court reiterated the company’s right to collect a return on necessary and prudent investments. No reason is pointed out why the same rule should not obtain in the instant case. We deem that the company’s expenditures for PHFU are necessary and desirable from an economic standpoint, since they allow the company to take advantage of land opportunities that might otherwise be unavailable, allow the company to escape purchasing property at inflationary prices, and are conducive to lower customer rates in the long run. Hence, that portion of the commission’s decision refusing to incorporate PHFU into the rate base is erroneous and is set aside.

Utah Power next asserts that the commission erred in disallowing its coal stockpiles in the rate base formula. Utah Power proposed that the commission include in the calculation of working capital approximately 1,500,000 tons of coal which the company had on hand on December 31, 1977, including some 180,000 tons of coal stockpiled at year end for use in the Emery plant, which was to go on line in mid-1978. The commission made two adjustments to the company’s proposal. First, the commission eliminated any portion of the coal stockpile which was available in 1977 in anticipation of the startup of the Emery plant. Second, it adjusted the coal inventory, which it found to be excessive, to a level which would allow Utah Power to operate its plants for 45 days at normal load, rather than for 45 days at 100 per cent capacity.

Clearly, a coal stockpile for the Emery plant is includable in the rate base, under the same theory that allows CWIP and PHFU in the rate base. To the extent that the commission’s order refused to include such a stockpile in the rate base, it is set aside. The company further argues that the commission exceeded its discretionary powers when it refused to include the total amount of coal inventory sought by Utah Power in its rate base. We disagree. Utah Power is entitled to recoup in its rates its overhead costs, but the actual amount necessary to compensate the company is addressed to the sound discretion of the commission, and absent an abuse of that discretion, the commission’s ruling will not be set aside. Boise Water Corp. v. Idaho Public Util. Comm’n, 97 Idaho 832, 555 P.2d 163 (1976); Intermountain Gas v. Idaho Public Util. Comm’n, 97 Idaho 113, 540 P.2d 775 (1975). On the record here, we cannot say that there is an absence of evidence to support the commission’s ruling in this regard, and it is therefore affirmed.

It is next asserted that the commission erred in rejecting Utah Power’s application for an “attrition allowance” of 3.85%. We agree and set aside that portion of the commission’s ruling denying an attrition factor in the rate base formula.

In UP & L I, this Court defined regulatory lag or attrition:

“Regulatory lag or attrition has been defined as a ‘decline in the rate of return earned * * * [occurring] when the rate base expands faster than the revenue and is caused both by inflation and by expansionists construction programs which do not generate additional comparable revenue.’ [Citations.]” Id., 102 Idaho at 284, 629 P.2d at 680.

Here, the commission did not rule that the company was not experiencing attrition or regulatory lag. In UP & L I, we reversed the commission’s refusal to award an attrition allowance, stating:

“Utah Power argues that their past actual rates of return on common equity have never risen to the level of the rates permitted by the Commission. A rate of return authorized by a Commission is not a guarantee of any level of revenues. [Citation.] Conflicting views exist as to whether a utility’s failure to earn an authorized rate is, in and of itself, the final test of attrition. [Citations.] Nevertheless, it is clear that continuing high rates of inflation are especially damaging to electric power utilities. The impact of inflation is great on all public utilities because their endeavors are normally capital intensive and involve assets with relatively long useful lives. [Citation.] Inflation is particularly painful to electric-power utilities since they are the most capital-intensive industry in the United States. [Citation.]

* * * * * *

“The Commission has the power and the duty to set rates of return within a ‘broad zone of reasonableness.’ [Citation.] Here, however, the Commission eliminated from Utah Power’s allowable return on equity a 1% attrition allowance. It is undisputed that a rate of return incorporating such attrition or regulatory lag was within the zone of ‘reasonableness’ in the prior year and was so ordered by the Commission. It also appears undisputed that the factors of inflation and an expansionists construction program continue to exist and apparently were not considered by the Commission. Hence, that portion of the Commission’s ruling eliminating the 1% previously allowed regulatory lag or attrition is without foundation in the evidence and is set aside.” 102 Idaho at 284-285, 629 P.2d at 680-691. (Emphasis in original.)

Albeit the commission stated certain conclusions regarding the attrition problem, we discern that the commission likely was unwilling to consider such an allowance for attrition or regulatory lag in any event. We do not state that an attrition allowance will now be mandatory in every public utility rate order, but we hold that the order at issue here is unclear as to the reason for the denial. Further, the commission at the time of this order did not have the benefit of our opinion in UP & L I. Hence the commission’s order respecting attrition or regulatory lag is set aside, and on remand the commission is directed to reconsider the matter of attrition or regulatory lag, in accordance with UP & L I.

Utah Power also asserts that the commission erred in allowing it only a 13.5% return on equity in calculating Utah Power’s rate base. It is argued, and we agree, that a public utility is entitled to such rates as will permit it to earn a return on the value of the property which it employs for the convenience of the public, equal to the return generally being made at the same time and in the same general part of the country on investments and other business undertakings which are attended by corresponding risks and uncertainties. Blue Field Water Works & Improvement Co. v. Public Service Comm., 262 U.S. 679, 43 S.Ct. 675, 67 L.Ed. 1176 (1923).

We do not agree, however, with the assertion of Utah Power that a 13.5% return on common equity in the instant case is totally arbitrary and confiscatory. In UP & L I, we reviewed and approved an order of the commission allowing a 13.5% return to common equity based on an average rate base test year 1976. We are not persuaded of the unreasonableness of the commission’s action here in using the same 13.5% figure for an average rate base 1977 test year.

We have examined the remainder of Utah Power’s assertions of error and find them to be without merit. The orders and rulings of the Public Utilities Commission are affirmed in part, set aside in part, and remanded for further proceedings in accordance herewith. Costs to appellant Utah Power. No attorneys’ fees allowed.

BAKES, J., and McFADDEN, J. Pro Tern., concur.