Boise Water Corp. v. Idaho Public Utilities Commission, 12028

• Decision Date: 07 October 1976
• Docket Number: No. 12028,12028
• Citation: 555 P.2d 163,97 Idaho 832
• Parties: BOISE WATER CORPORATION, Appellant, v. IDAHO PUBLIC UTILITIES COMMISSION, Respondent.
• Court: Idaho Supreme Court

Page 163

555 P.2d 163

97 Idaho 832

BOISE WATER CORPORATION, Appellant, v. IDAHO PUBLIC UTILITIES COMMISSION, Respondent.

No. 12028.

Supreme Court of Idaho.

Oct. 7, 1976.

Kenneth G. Bergquist, Boise, D. Rives, of Rives, Bonyhadi & Drummond, Portland, Ore., for appellant.

Robert Jones, Asst. Atty. Gen., Boise, for appellee.

SHEPARD, Justice.

This is an appeal from an order of the Public Utilities Commission denying in part of petition by Boise Water Corporation for a rate increase.

Appellant-company assigns error to the following portions of the Order:

(1) The disallowance of a portion of the alleged cash working capital from the rate base;

(2) The disallowance of a portion of the Company's operating expenses used in calculation of the present rate of return on capital invested for rate-making purposes (3) The determination of the costs of each capital component within the capital structure adopted; and

(4) The overall rate of return on invested capital allowed, which Company asserts falls below the zone of reasonableness.

We set aside the Order.

Boise Water Corporation is an Idaho public utility subject to the jurisdiction of the Idaho Public Utilities Commission and serves some 26,000 water customers in and adjacent to Boise, Idaho. Its common stock is wholly owned by General Waterworks works Corporation (GWC), a Delaware corporation owning 70 water, sewer and heating utility companies in the United States and Canada. GWC is in turn wholly owned by I.U. International Corporation, a multi-faceted holding company. Certain of Boise Water Corporation's administrative and billling services wer provided by Management and Services Corporation, Inc. (M & S), under a contractual arrangement between the two entities. M & S is also a wholly owned subsidiary of GWC and is thus an affiliate of Boise Water. The amounts paid to M & S comprised 26% of all of the expenses of Boise Water in the administrative and billing aspects of its operation.

On February 1, 1974, Boise Water filed a petition with the Commission seeking a 37% increase in rates. Following hearings thereon the Commission granted a 4% increase in rates. Boise Water appeals from that Order asserting that the result confiscates its property without benefit of due process of law.

I. CASH WORKING CAPITAL

Cash flow problems often confront a utility which must pay expenditures prior to the time revenues therefor have been collected. To the extent that such amount exceeds the revenue collected, it is supplied by the owners of the utility as a portion of their investment and thus becomes a part of the rate base. Thus, cash working capital is a recognition of the sum which the utility needs to supply from its own funds (rather than the rate-payer's) to meet current obligations as they arise due to the time lag between payment of expenses and collection of revenues. Alabama-Tennessee Natural Gas Co. v. Federal Power Commission, 3 Cir., 203 F.2d 494 (1953). Such allowances by the Commission are not guaranteed as a matter of course; the utility carries the burden of showing by competent evidence that the need therefor exists. Application of Wilmington Suburban Water Corp., 203 A.2d 817, 829 (Del.1964). Traditionally, such a showing was made by producing data from the utility's actual experience showing the need resulting from the time lag in collection of revenue, i. e., from a lag study. Such procedure became overly cumbersome once the Commission satisfied itself that a formunla of allowing 1/8th of annual operating expenses was a reasonably accurate estimate for the needs of a utility billing its customers on a monthly basis. That formula-premised on monthly billings-assigns a 45-day time lag ¹ and thus allocates as cash working capital 1/8th of annual operating expenses.

The Company argues that since it bills bi-monthly, the average lag between service and meter reading increases from 15 days (the average lag in one month) to 30 days (the average over two months), and thus it should be allowed sufficient cash working capital to last 60 days, i. e., 1/6th of annual operating expenditures. The Commission was unconvinced that the need for a greater allowance had been proved and it disallowed the portion which exceeded the usual 1/8 formula. We affirm that decision.

The record does not support the contention for a need for a greater allowance. No authority is cited indicating the necessity, let alone the proriety, of granting the higher rate base figure. The Company in fact has billed bi-monthly sicne 1971, the date of the last rate increase granted by the Commission. Since that time only the traditional 1/8th formula has been used, and the Company failed to present evidence manifesting any inadequacy of that allowance over these years despite the Commission's specific request for any such data.

The Commission noted, as shown by the proof, that the bi-monthly biling procedure saved Company substantial (though not quantified) operating costs over the previous monthly billing procedure. The Company's own evidence suggests that a 1/6th allowance would be overly generous in view of the savings made by the bimonthly billing procedure. Accordingly, the Commission had discretion to refuse the request to increase the tranditional allowance of cash working capital. Idaho Underground Water Users Assoc. v. Idaho Power Co., 89 Idaho 147, 164, 404 P.2d 859 (1965); Application of Wilmington Suburban Water Corp., supra.

II. OPERATING EXPENSES

To set rates allowing the utility the capability to earn a fair return upon its investment it is necessary for the Commission to ascertain first the return which is presently being received by the utility upon Company's present rate base. To accomplish that, the utility's annual revenues and net earnings must first be determined. '* * * (I)f improper items have been included in operating expenses or if operating expenses have been overstated, the current net earnings would be really * * * greater and the rate of return thus proportionately enlarged.' City of Norfolk v. Chesapeake and Potomac Tel. Co., 192 Va. 292, 62 S.E.2d 772, 783 (1951).

The Commission found that the Company's operating expenses in two accounts-(1) general and administrative expenses (administrative) and (2) customer accounting and billing (billing)-had increased at a rate significantly more rapidly than could be explained by the general rate of inflation during the years of the test period. That fact led the Commission to find that Company had failed to satisfy its burden of production of evidence on the issue of whether this total increase in operating expenses was reasonable. Consequently, it disallowed that amount of the increase in the operating expenses higher than the general inflationary rate.

The Company recognizes that the initial burden of producing evidence on the issue of reasonableness of present operating expenses rested with it. It urges, however, that it met that burden and established a prima facie case of reasonableness by producing evidence that these expenses were actually incurred. The Commission staff (Staff) did not dispute the existence of those actual expenses. Accordingly, so goes the Company's argument, the Commission would be required on due process grounds to accept its figures in order to avoid an arbitrary and thus confiscatory result. Secondly, Company asserts that Staff failed to produce substantial evidence of such unreasonableness. Therefore, as a matter of law, it contends its expenses were established as reasonable.

We turn first to the Company's contention regarding establishment of its own prima facie case. Our analysis is complicated by the fact that 26% of all these expenditures in these two accounts were paid to Management and Services Corporation (M & S), which is similarly a wholly owned subsidiary of GWC and thus one of the Company's affiliates. Although the Company may have established actual incurrence of these operating expenses, that fact alone does not establish a prima facie case of reasonableness with respect to payments to affiliates. Pacific Northwest Bell Tel. Co. v. Sabin, 534 P.2d 984 (Or.App.1975); State ex rel. Utilities Comm'n v. General Tel. of the Southeast, 281 N.C. 318, 189 S.E.2d 705 (1972); Re Forest Hills Utility Co., 91 P.U.R.3d 285 (Ohio 1971); Re Oregon Water Corp., 83 P.U.R.3d 288, 293-295 (Or.1970); Re Utah Tel. Co., 81 P.U.R.3d 156 (Utah 1969).

'Charges arising out of intercompany relationships between affilliated companies should be scrutinized with care (citations omitted), and if there is an absence of data and information from which the reasonableness and propriety of the services rendered and the reasonable cost of rendering such services can be ascertained by the commission, allowance is properly refused. * * *

'Moreover, the record in this case is an illustration of the fact that effective and satisfactory State regulation of utilities is made increasingly difficult by the progressive integration of utility services under holding company domination.

'The desire of public utility management, evidenced by various methods, to secure the highest possible return to the ultimate owners is incompatible with the semi-public nature of the utility business, which the management directs. It therefore follows that the commission should scrutinize carefully charges by affiliates, as inflated charges to operating company may be a means to improperly increase the allowable revenue and raise the cost to consumers of utility service as well as the unwarranted source of profit to the ultimate holding company.' Solar Electric Co. v. Pennsylvania PUC, 137 Pa.Super. 325, 9 A.2d 447, 473 (1939).

The Company argues that these authorities are inapposite, since they involve affiliates charging for profit, noting that here M & S charged 'at cost' for the services. No authority holding that such a distinction is relevant has been cited. Here we are dealing with charges for services provided by...