Citizens of Florida v. Hawkins, No. 51399

• Court: United States State Supreme Court of Florida
• Writing for the Court: ENGLAND; ADKINS
• Citation: 356 So.2d 254
• Parties: The CITIZENS OF the State of FLORIDA, Petitioner, v. Paula F. HAWKINS, Chairman, William T. Mayo, Commissioner, and William H. Bevis, Commissioner, as and constituting the Florida Public Service Commission, et al., Respondents.
• Docket Number: No. 51399
• Decision Date: 16 February 1978

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356 So.2d 254 24 P.U.R.4th 374 The CITIZENS OF the State of FLORIDA, Petitioner,
v.
Paula F. HAWKINS, Chairman, William T. Mayo, Commissioner, and William H. Bevis, Commissioner, as and constituting the Florida Public Service Commission, et al., Respondents. No. 51399. Supreme Court of Florida. Feb. 16, 1978.

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Larry Levy, Public Counsel, and Peter A. Knocke, Associate Public Counsel, Tallahassee, for petitioner.

Prentice P. Pruitt, Legal Director, Donald R. Alexander, Staff Counsel, and Joseph A. McGlothlin, Staff Counsel, Tallahassee, for Florida Public Service Commission, respondent.

John Robert Jones, Columbus, Ohio, Hugh C. Macfarlane, Tampa, Wilton R. Miller, Tallahassee, James V. Carideo, Jr., and James F. Bell, Tampa, for General Telephone Co. of Florida, respondent.

ENGLAND, Justice.

Public counsel for the State of Florida asks us to review a rate increase awarded to General Telephone Company by the Florida Public Service Commission. ¹ The only aspects of the Commission's decision which are challenged in this proceeding are the Commission's use of a year-end rate base, rather than an average year rate base, and the Commission's application of a so-called "subsidiary approach" to the computation of General Telephone's income tax expense for the test year, rather than a "consolidated approach".

In mid-1976, General Telephone sought a rate increase from the Commission of approximately $71,000,000, pursuant to Section 364.05, Florida Statutes (1975). Public counsel and several other interested parties intervened in the proceeding, and extensive public hearings were conducted in the area serviced by General Telephone. In due course the Commission's staff recommended approval of a rate increase aggregating approximately $46,000,000, after which the Commission, with the chairman dissenting, approved a rate increase of approximately $41,000,000.

Among other matters, the dissent criticized the use of a year-end rate base and the application of a subsidiary approach in calculating the company's income tax expense, estimating that a $5.8 million and.$3.2 million saving, respectively, would accrue to ratepayers by use of an average rate base and a consolidated approach. In challenging the same rulings here, public counsel contends that the company's revenue increase should be reduced by nearly $13 million. General Telephone and the Commission, appearing in defense of the rate award, argue that the Commission's rulings on these two issues are consistent with established principles of law and accounting, and that they are properly supported by competent substantial evidence.

Year-End Rate Base

Public counsel's basic contention in this proceeding is that the allowance of a year-end rate base has been routinely permitted by the Commission since 1968, in contravention of our directive that this rate-making tool should be used only in "extraordinary" situations. City of Miami v. Florida Public Service Commission, 208 So.2d 249 (Fla.1968). Public counsel has selected the allowance of a year-end rate base for General Telephone as typical of the Commission's consistent pattern in responding to utilities' requests for this "extraordinary" accounting procedure, ² and has attempted to show

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that the allowance in this case is unsubstantiated by any factual findings of extraordinary growth or circumstances. Both the Commission and General Telephone defend the allowance on a record that they contend supports findings of both attrition and plant expansion, two features they suggest justify use of a year-end rate base. They also challenge public counsel's basis for showing in this proceeding that the Commission has been guilty of approving rote year-end rate base awards. Our analysis of the respective arguments of the parties persuades us that public counsel's contentions are well-taken.

The test year or period is an analytical device used in rate-making proceedings to compute current levels of investment and income in order to determine the amount of revenue that will be required to assure the company a fair rate of return on its investment. Gulf Power Company v. Bevis, 289 So.2d 401 (Fla.1974). In Gulf Power, we recognized that because "(r)ates are fixed for the future rather than for the past," test year data may be adjusted "in order properly to reflect typical conditions in the future period for which the rates (are) being fixed." ³ Use of a year-end rate base, rather than the more traditional average rate base, is one method by which the Commission adjusts any imbalance between the test-year data and the known future needs of the utility.

Rate base is the total amount which a utility has invested in capital items to provide its service. The ratio of the company's net income to its rate base provides its rate of return. Since the level of investment reflected on the company's books may vary during its test year period, the rate of return is susceptible of variations attributable to the choice of an average or a year-end rate base the rate of return appearing to be lower when rate base at year end exceeds the yearly average. ⁴

To offset the effects of intra-year rate base fluctuations, and to ensure that the figures employed in computing the rate of return accurately reflect a company's capital position, regulatory authorities have traditionally calculated the rate base as the average investment during the test year. ⁵ Since it rests on the assumption that, with minor adjustments for known changes, the relationship between investment and income during the test period will remain unchanged, ⁶ this method of computation provides a relatively dependable measure of predictability as to future conditions in times of market stability and orderly economic growth. ⁷

It is apparent, however, that the average rate base approach can produce a distorted picture of future conditions when the company is experiencing extraordinary growth due to rapidly increasing demands for its services, as in periods of great population influx, or when other factors are forcing investment costs upward without a concomitant increment in revenues. ⁸ This latter phenomenon, commonly referred to as "attrition", is principally a by-product of inflation. To compensate for the problems of extraordinary growth and attrition, regulatory bodies have developed several methods of adjusting rate computations, one of which is to measure investment at the end

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of the year, including property under construction, rather than taking the test period average. ⁹

The year-end rate base was first utilized by the Commission in Florida in 1953. Re: Florida Power Corp., 99 P.U.R. 129 (1953). This Court approved its use in the City of Miami case. We carefully stressed, however, that the year-end rate base is to be regarded as a deviation from the norm, and that it should properly be employed only in the most exceptional of cases:

"We wish to make it clear that in not disturbing the use of the year-end method . . . in fixing rates in these cases rather than average investment during the test year, we do so because of the strong unrebutted evidentiary showing that . . . utilities are endeavoring to cope with extraordinary needs for their services due to abnormal population and economic growth conditions within their service areas.

. . . (I)t is our belief that in the absence of the most extraordinary or emergency conditions or situations, average investment during the test year should be the method employed by the Commission in determining rate base. Our study of the subject discloses that average investment during...