Appeal of Public Service Co. of New Hampshire

Decision Date12 June 1984
Docket NumberNo. 84-140,84-140
Parties, 60 P.U.R.4th 16, 14 Envtl. L. Rep. 20,848 Appeal of PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE (New Hampshire Public Utilities Commission).
CourtNew Hampshire Supreme Court

Sulloway, Hollis & Soden, Concord (Martin L. Gross (orally) and Margaret H. Nelson, Concord, on the brief), for Public Service Company of New Hampshire.

Gerald M. Eaton, Concord, by brief and orally, for The Community Action Program Belknap-Merrimack Counties, Inc.

Michael W. Holmes, Concord, by brief and orally, as Consumer Advocate.

Backus, Shea & Meyer, Manchester (Robert A. Backus, Manchester, on the brief and orally), for Seacoast Anti-Pollution League.

Douglas I. Foy (orally) and Armond M. Cohen (on brief), Boston, Mass., for Conservation Law Foundation of New England, Inc.

Larry S. Eckhaus, Derry, by brief and orally, for Campaign for Ratepayers' Rights, as amicus curiae.

Shaines, Madrigan & McEachern, Portsmouth, and Sharon A. Spickler (on brief), Dover (Paul McEachern, Portsmouth, on the brief), for Paul McEachern, as amicus curiae.

SOUTER, Justice.

At the request of Public Service Company of New Hampshire, the Public Utilities Commission has transferred the following question of law to this court under RSA 365:20:

"Does RSA 378:30-a, as a matter of law, prohibit the Public Utilities Commission from allowing public utilities to recover, through rates, amounts such utilities have invested in plant construction projects that have been abandoned?"

When we accepted the transfer, we said that we would limit our answer to the interpretation of the statute without regard to the constitutionality of its application, since the factual record was insufficient for an informed consideration of constitutional issues. After the company objected to this limitation, we asked the commission if it still desired an answer subject to our limitation. The commission replied that it did. We answer yes to the question transferred.

The question arises on these undisputed facts. In 1972 the company acquired an interest of 3.47 percent in a project to build a nuclear electric power generating plant known as Pilgrim 2, in Plymouth, Massachusetts. The company had invested $15,926,729 in Pilgrim 2 when the owners cancelled the uncompleted construction in 1981. In 1983, the company petitioned the commission to provide "an appropriate ratemaking methodology" to allow it to recover its investment in the abandoned plant. Apparently, the company would prefer to do this by treating the investment as an expense to be recovered over the course of one year. Interlocutory Transfer at 1, 3.

To understand the question and the statute to which it refers, we must consider how the commission deals with the variables that determine the amount of revenue that the company may receive through rates. We stress that in the following discussion we will deal only with the process of setting rates to produce revenue. Some of the terms to be used occur in other regulatory contexts, where their functions differ from what we will be describing. We also stress that our discussion is not intended to describe the process of ratemaking in all of its complexity. Our concern here is only with the basic analysis necessary for an understanding of how the statute operates.

In simplest terms, revenue is allowed to equal the total of approved operating expenses plus a reasonable return on the value of certain property. The return is calculated by applying a rate of return to the cost less depreciation of the company's property that is "used and useful in the public service." RSA 378:27, :28; Interlocutory Transfer at 3. Operating expenses include salaries and wages, maintenance costs and taxes. Interlocutory Transfer at 3. The "used and useful" property is commonly spoken of as the rate base and includes the depreciated cost of plant in service and working capital. Id. Thus, the commission controls three variables in regulating rates to provide revenue to the company: operating expenses, rate base and rate or percentage of return allowed on the rate base.

For the company to recover its investment in Pilgrim 2, it must be allowed to generate revenue determined by these variables. The commission's control of these variables is limited by statutes, including RSA 378:30-a (Supp.1981). To understand how those statutes affect the answer to the question before us, it is essential to consider the commission's authority to deal with a problem that arises whenever a utility builds a new plant: how should the utility raise the cost of money to be invested in the construction of the plant? That cost may take the form either of interest on funds borrowed by the company or of dividends to holders of the company's stock.

After a plant has begun to operate, the commission allows the company to recover the cost of money invested in it by including the depreciated cost of the plant in the rate base, on which it allows the rate of return. During the period of a plant's construction, however, recovery of the cost of money invested in it is not dealt with so easily. In practice, this cost has not been treated as an item of current expense for ratemaking purposes. Nor has it been met simply by raising the rate of return to produce more revenue on the existing rate base. Such treatment would be more complicated than it might seem, and could be unpopular "among utilities and regulating bodies from the political or public relations standpoint." L. Pomerantz and J. Suelflow, Allowance for Funds Used During Construction 150 (1975). For ratemaking purposes, that leaves regulation of the rate base as a means to recover the cost of money incurred during construction. Regulators have tried one or the other of two alternatives.

One method is to add the capitalized cost of money incurred during construction to the investment and hence to the rate base when the plant begins to operate. This capitalized value is commonly spoken of as an allowance for funds used during construction, or AFUDC. See Appeal of Public Serv. Co. of N.H., 122 N.H. 919, 451 A.2d 1321 (1982). During the period of a plant's construction, AFUDC treatment produces no cash flow from operations, and interest and dividends on money attributable to investment in that plant must be paid from other earnings or from borrowed or invested funds.

Traditionally in this State, as in most others, AFUDC has been the chosen alternative. Re Pub. Serv. Co. of N.H., 63 N.H.P.U.C. 127 (1978). As generating plants grew in complexity and cost, the AFUDC method required a greater investment to pay for the cost of money during construction and produced a greater capitalized amount to be added to the rate base later. Hence, utilities sought an alternative to AFUDC by including the value of the uncompleted plant in the rate base. This treatment would produce an immediate cash flow to be used to pay the cost of the money invested in the plant.

This method is described as including construction work in progress, or CWIP, in the rate base. The term CWIP must be used with care, however, for it can have any one of three related meanings. It can of course refer to the partially complete physical construction. It can also be used in technical senses to refer to the cost of that construction, or finally to that cost after it has been added to the rate base. See Pomerantz et a., supra at 150; Howe, A Survey of Regulatory Treatment of Plant Cancellation Costs, Pub.Util.Fort., March 31, 1983, at 52, 55. The commission defines a CWIP account as including "the total of the balances of work orders for electric plant in process of construction," provided that work orders "shall be cleared from this account as soon as practicable after completion of the job." N.H.P.U.C. Rule 307.04, adopting 18 C.F.R. Part 101 § 107A and B.

When the company acquired its share in Pilgrim 2, and when it began construction of the Seabrook nuclear power plant, the commission applied the AFUDC method to provide for recovery of the cost of investment. Re Pub. Serv. Co. of N.H., 63 N.H.P.U.C. 127 (1978). In 1978, however, on the company's petition, the commission authorized CWIP treatment of the amounts spent by the company in constructing these plants. Id. On appeal, this court upheld the commission's authority to authorize inclusion of CWIP in the rate base, reasoning that the commission had discretion under RSA 378:27 and :28 to find as a matter of policy that the plant was used and useful during construction. LUCC v. Public Serv. Co. of N.H., 119 N.H. 332, 402 A.2d 626 (1979).

Nevertheless, in 1979 the legislature enacted RSA 378:30-a (Supp.1981), thus culminating opposition to the allowance of CWIP in the rate base that had begun in the 1977 legislative session. See 1977 H.B. 986; 1978 H.B. 5; 1979 H.B. 134, H.B. 155, H.B. 197. By its terms, the new statute eliminated the commission's delegated discretion to allow rates based on CWIP. See Appeal of Legislative Utility Consumers' Council, 120 N.H. 173, 412 A.2d 738 (1980). Thereafter, the commission reverted to the AFUDC treatment of the company's cost of money for plant under construction. See Appeal of Public Serv. Co. of N.H., 122 N.H. 919, 451 A.2d 1321 (1982); Interlocutory Transfer at 2.

While the parties do not dispute that the terms of the new statute precluded the addition of investment to the rate base during the construction period, the question now before us is whether the terms of the statute are broad enough to preclude recovery of otherwise lost investment in a plant abandoned before completion of construction. The interlocutory transfer does not specifically describe how the value of the investment was computed, but we assume it includes both the cost of the actual construction and the cost of money used to pay for it.

The question is a broad one, which raises the following issues: whether the statute forbids the addition of the investment to the rate base subject...

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