Chesapeake and Potomac Tel. v. Pub. Serv. Com'n

• Decision Date: 10 September 1986
• Docket Number: No. 85-1662.,85-1662.
• Citation: 514 A.2d 1159
• Parties: CHESAPEAKE AND POTOMAC TELEPHONE COMPANY, Petitioner, v. PUBLIC SERVICE COMMISSION OF the DISTRICT OF COLUMBIA, Respondent, Office of People's Counsel, Intervenor.
• Court: D.C. Court of Appeals

514 A.2d 1159

CHESAPEAKE AND POTOMAC TELEPHONE COMPANY, Petitioner, v. PUBLIC SERVICE COMMISSION OF the DISTRICT OF COLUMBIA, Respondent, Office of People's Counsel, Intervenor.

No. 85-1662.

District of Columbia Court of Appeals.

Argued June 10, 1986.

Decided September 10, 1986.

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Petition of Appeal from an Order of the Public Service Commission of the District of Columbia.

Edward D. Young, III, with whom Lee A. Satterfield, D. Michael Stroud, Gregg C. Sayre, and Mark J. Mathis, Washington, D.C., were on brief, for petitioner.

Howard C. Davenport, with whom Mary J. Sisak and Gilbert E. Hardy, Washington, D.C., were on brief, for respondent. Roberta Willis Sims and Charles L. Reischel, Washington, D.C., also entered appearances for respondent.

Frederick D. Dorsey, People's Counsel, Elizabeth A. Noel, Deputy People's Counsel, Joanne Doddy Fort, and Ronald C. Jessamy, Washington, D.C., were on brief for intervenor.

Before FERREN, TERRY and ROGERS, Associate Judges.

TERRY, Associate Judge:

This is the first telephone rate case to reach this court since the breakup of the Bell System on January 1, 1984. On that date the Chesapeake and Potomac Telephone Company (C & P), which had formerly been a subsidiary of American Telephone and Telegraph Company (AT & T), became a subsidiary of Bell Atlantic Corporation (Bell Atlantic). This case requires us to examine some of the effects of that change on the rates paid by District of Columbia subscribers for their telephone service.

On August 24, 1984, C & P filed an application with the Public Service Commission requesting authority to increase and restructure its schedule of rates and tariffs for telephone service in the District of Columbia. The proceedings on this application became Formal Case No. 827 before the Commission. After extensive hearings, the Commission issued Order No. 8300 authorizing C & P to earn some, but not all, of the additional revenues it had requested. C & P, the Office of People's Counsel (OPC), and the General Services Administration all applied for reconsideration of that order, and in Order No. 8329 the Commission granted C & P's application in part and denied it in part. C & P then appealed to this court.

C & P contends that the Commission acted arbitrarily and capriciously when it (1) disallowed recovery of certain expenses for services performed by Bell Atlantic Corporate Services, Inc.; (2) imposed a limitation of one percent of intrastate operating revenues on Bell Communications Research, Inc., research expenses; (3) rejected C & P's proposed surcharge to recoup the estimated loss of Billing Inquiry Service revenues; (4) ordered C & P to refund to its ratepayers certain license contract fees, previously paid by C & P to AT & T, for which C & P had been reimbursed; and (5) refused to correct three alleged mathematical errors. We reverse as to items (1) and (2) and affirm as to items (3) and (4). As to item (5), we reverse as to two of the mathematical errors, but in light of our reversal on item (2), we do not reach the third.

I. THE STANDARD OF REVIEW

The scope of this court's review of a Commission order is defined by D.C.Code § 43-906 (1981), which states:

In the determination of any appeal from an order or decision of the Commission the review by the Court shall be limited to questions of law, including constitutional questions; and the findings of fact by the Commission shall be conclusive unless it shall appear that such findings of the Commission are unreasonable, arbitrary, or capricious.

See also Washington Public Interest Organization v. Public Service Commission, 393 A.2d 71, 75 (D.C. 1978), cert. denied, 444 U.S. 926, 100 S.Ct. 265, 62 L.Ed.2d 182 (1979). The Commission, not this court, must balance the competing interests of utility consumers and investors in the ratemaking process. People's Counsel v. Public Service Commission, 455 A.2d 391, 393 (D.C. 1982). In our review of rate orders, "[i]t is especially important to accord great respect to the Commission in a complex esoteric area such as rate making in which the Commission has been entrusted with the difficult task of deciding among many competing arguments and policies." Goodman v. Public Service Commission, 162 U.S.App.D.C. 74, 78-79, 497 F.2d 661, 665-666 (1974), quoted in People's Counsel v. Public Service Commission, supra, 455 A.2d at 333. Indeed, we have repeatedly said that our review of a ratemaking order by the Commission "is the narrowest judicial review in the field of administrative law." Potomac Power Co. v. Public Service Commission, 402 A.2d 14, 17 (D.C.) (en banc), cert. denied, 444 U.S. 926, 100 S.Ct. 265, 62 L.Ed.2d 182 (1979); accord, e.g., Washington Gas Light Co. v. Public Service Commission, 483 A.2d 1104, 1168 (D.C. 1984). Thus a party seeking to overturn a Commission order "carries the heavy burden of demonstrating clearly and convincingly a fatal flaw in the action taken." Washington Gas Light Co. v. Public Service Commission, 450 A.2d 1187, 1194 (D.C. 1982) (citations omitted). That burden is not met by merely proposing an acceptable alternative to the Commission's actions. People's Counsel v. Public Service Commission, supra, 455 A.2d at 384.

Before a Commission order may be affirmed, however, "the Commission must indicate `fully and carefully the methods by which, and the purposes for which, it has chosen to act. . . ." Washington Gas Light Co., supra, 450 A.2d at 1193, quoting from In re Permian Basin Area Rate Cases, 390 U.S. 747, 792, 88 S.Ct. 1344, 1373, 20 L.Ed.2d 312 (1968).

[This] court . . . has a responsibility to hold the Commission accountable— through as many remands as necessary—for satisfying a burden all its own: to explain its actions fully and clearly. A utility rate cannot be deemed "reasonable" simply because an expert agency says it is. Independent of a petitioner's burden to show convincingly that a Commission-prescribed rate is unreasonable, the Commission . . . has the burden of showing fully and clearly why it has taken the particular ratemaking action. Absent such comprehensive explanation, judicial review of the Commission's substantive decisions cannot be completed and the rate order finally approved—or set aside.

Washington Public Interest Organization, supra, 393 A.2d at 75. To satisfy this requirement, the Commission must state on the record "the criteria governing the rate determination" and must explain "how the particular rate order reflects application of these criteria to the facts of the case." Id. at 75.¹ Only when the Commission has given the required full and careful explanation is its ruling entitled to deference. Washington Gas Light Co. v. Public Service Commission, 452 A.2d 375, 379 (D.C. 1982), cert. denied, 462 U.S. 1107, 103 S.Ct. 2454, 77 L.Ed.2d 1334 (1983).

II. THE CSI EXPENSES

C & P contends that the Commission acted arbitrarily when it disallowed recovery from the ratepayers of the expenses C & P had incurred for services performed by Bell Atlantic Corporate Services, Inc. (CSI). We reverse this part of the further proceedings.

CSI, a subsidiary of Bell Atlantic, provides centralized corporate services such as treasury operations, investor relations, financial and tax planning, corporate communications, legal advice, and administration of employee benefits to both the regulated and unregulated subsidiaries of Bell Atlantic, including C & P. CSI bills the costs associated with the regulated subsidiaries to Bell Atlantic Management Services, Inc. (MSI), which then bills C & P and the other regulated companies according to established cost allocation factors. Work performed by CSI for unregulated entities is billed directly to them. Order No. 8300 at 109.

Traditionally, the Commission has taken the position that C & P has a "special burden" to justify the reasonableness of expenses incurred by one of its affiliates. Chesapeake & Potomac Telephone Co., 43 Pub.Util.Rep. 4th 169, 207 (D.C.PSC 1981). Recently the Commission expressed its concern over the growth in centralized service expenses and the lack of control by C & P over those expenses charged to ratepayers. See Chesapeake & Potomac Telephone Co., 56 Pub.Util.Rep. 4th 53, 87 (D.C.PSC 1983). The Commission announced that in the future none of the centralized service expenses could be charged to the ratepayers unless they were "properly identified, justified, and supported in the record, on an activity-by-activity basis." Id. at 89. In addition, the Commission required C & P to prove that the expenses were reasonable and that they benefited the ratepayers of the District of Columbia. See Order No. 8300 at 114 n. 54.

In the present case, the Commission found that although C & P had "basically provided the necessary information regarding the activity-by-activity costs and the methods of allocation" of CSI's services and expenses, "it ha[d] not fully met its burden of proof as to a justification for all of those costs." Order No. 8300 at 114.² The Commission concluded that "sufficient justification for all of the CSI expenses simply does not exist," mainly because "the allocation method employed is based upon a measure of capital" and because "this may well work to the detriment of capital-intensive companies." Id. In the Commission's view, no attempt had been made "to segregate costs according to the actual extent of usage of CSI services by the various [operating companies]," and the C & P witnesses had failed to provide "sufficient assurance that . . . C & P has not been allocated the expenses of services used by other entities." Id. The Commission therefore disallowed all CSI expenses.

C & P challenged this decision in a mation for reconsideration, principally asserting that the Commission was mistaken in its belief that CSI expenses were allocated on the basis of the operating companies' capital. The Commission, however, reaffirmed its earlier decision on the...