Citizens Utilities Co., Application of
| Decision Date | 04 June 1987 |
| Docket Number | No. 16457,16457 |
| Citation | 739 P.2d 360,112 Idaho 1061 |
| Parties | In the Matter of the Application of CITIZENS UTILITIES COMPANY for an Order Approving Revised Rates and Charges for Electric Service in the State of Idaho. CITIZENS UTILITIES COMPANY, Appellant, v. IDAHO PUBLIC UTILITIES COMMISSION, Respondent. |
| Court | Idaho Supreme Court |
Kenneth Bergquist, Boise, and John H. Engel (argued), Stamford, Conn., for appellant.
Jim Jones, Atty. Gen., and Donald L. Howell, II (argued), Deputy Atty. Gen., Boise, for respondent.
Citizens Utilities Company (Citizens), a corporation headquartered in Connecticut, provides electricity to the Wallace, Idaho area through its Idaho Electrical Division. The Idaho division of Citizens is not a separate utility--rather it is a division of a Connecticut corporation which operates both utility and non-utility property in other states. On June 20, 1985, Citizens filed an application for an increase in its rates and charges. Following a suspension of the effective date of the proposed rate increase, the Commission, on January 31, 1986, issued an order granting a rate increase of approximately 40 percent of the amount requested. A petition for reconsideration was filed by Citizens on February 20, 1986.
Citizens protests the Commission's use of a hypothetical capital structure to calculate the revenue requirement for Citizens. Citizens proposed the use of the actual capital structure of 73 percent equity and 27 percent debt. The Commission staff recommended a hypothetical capital structure of 45 percent equity and 55 percent debt, asserting a debt/equity ratio of 27/73 is not an appropriate capital structure for an electric utility. The Commission actually adopted a hypothetical capital structure of 50 percent debt and 50 percent equity. The capital structure and weighted costs are utilized to calculate a required rate of return of eleven percent as per the following computation:
Weighted
% of Capital Cost
Component Total Cost (1) X (2)
--------- ----- ------- ---------
Long-Term Debt 50.0% 9.55% 4.78%
Common Equity
Series A 42.0% 12.30% 5.16%
Series B 8.0% 13.30% 1.06%
------ ------ -----
Total 100.0% 11.00% Rate of return
------ ------
The adoption of a 50-50 hypothetical capital structure results in a hypothetical interest expense, which, due to the larger debt ratio, is greater than the actual interest expense. This in turn results in an adjustment of Citizens' income tax and net income figures, which in turn results in a revenue requirement of $23,563 less than would be required were a hypothetical capital structure not utilized. 1 Citizens argues this reduction in revenue requirement is arbitrary and unsupported by the evidence in the record. This appeal followed the denial of Citizens' petition for reconsideration.
The issue on appeal is whether the Commission erred in adopting a hypothetical capital structure rather than utilizing an actual capital structure where the utility is a division of a parent company which also owns and operates non-utility properties and utility properties in other states.
As with other cases reviewing the orders of the Commission, the scope of review is limited to a determination of "whether the Commission has regularly pursued its authority" and whether the constitutional rights of the appellant have been violated by the actions of the Commission. I.C. § 61-629; Utah Power & Light Co. v. Idaho Public Utilities Commission, 102 Idaho 282, 629 P.2d 678 (1981).
To determine whether the Commission has regularly pursued its authority, the Court must decide if the Commission acted arbitrarily when it adopted a hypothetical interest expense. The Commission's order and findings must be supported by competent and substantial evidence. Intermountain Gas Co. v. Idaho Public Utilities Commission, 97 Idaho 113, 540 P.2d 775 (1975); Boise Water Corp. v. Idaho Public Utilities Commission, 97 Idaho 832, 555 P.2d 163 (1976).
Citizens alleges that the Commission's adoption of the fictitious interest was arbitrary, first, as a departure from past rulings of the Commission. In previous cases, the Commission utilized hypothetical capital structures in calculating the rate of return, but utilized the actual interest expense and not a hypothetical interest expense. This departure, in and of itself, is not an arbitrary act on the part of the Commission.
So long as the Commission enters sufficient findings to show that its action is not arbitrary and capricious, the Commission can alter its decisions. Washington Water Power Co. v. Idaho Public Utilities Commission, 101 Idaho 567, 579, 617 P.2d 1242, 1254 (1980) (quoting 2 Davis Administrative Law Treatise § 18.09 at 610 (1958)).
This Court has affirmed the Commission's previous orders adopting a hypothetical capital structure. General Telephone Co. v. Idaho Public Utilities Commission, 109 Idaho 942, 712 P.2d 643 (1986); Citizens Utilities Co. v. Idaho Public Utilities Commission, 99 Idaho 164, 579 P.2d 110 (1978); Petition of Mountain States Telephone & Telegraph Co., 76 Idaho 474, 284 P.2d 681 (1955).
The rationale for adopting a hypothetical capital structure is either the need to impute a parent's capital structure onto a subsidiary as in General Telephone or an attempt by the Commission to counter the effect of an equity-thick utility as in Citizens, 99 Idaho at 173-74, 579 P.2d at 119-20. Both of these rationales have as the Commission's purpose the achievement of a proper balance between the interests of the utility investor and the utility ratepayer.
General Telephone, supra, 109 Idaho at 948, 712 P.2d at 649, citing accord General Tel. Co. v. Public Utility Commission, 628 S.W.2d 832, 837 (Tex.App.1982). As described in Communications Satellite Corp. v. Federal Communications Commission, 611 F.2d 883 (D.C.Cir.1977):
Ratepayers are subjected to an excessive burden when the revenues to be derived from the rates they pay have to be high enough to compensate the cost of a capital structure consisting entirely of equity financing; leveraging a capital structure with lower-costing debt relieves some of that burden. 611 F.2d at 902-03.
Citizens had a capital structure of approximately 73 percent equity compared to 27 percent debt. The Commission's response entailed adopting a 50-50 equity to debt capital structure noting:
The hypothetical interest expense was, in the words of staff witness Terry Carlock, the result when she "followed through to use a higher debt cost related to that hypothetical capital structure and it's appropriate to continue following through and using the interest related to that in figuring the interest cost to the Commission." While the exact calculations utilize derived numbers representing the weighted cost of debt and the rate of return, the end number used for the interest expense is based on the amount of debt in the capital structure.
If supported by sufficient evidence, the Commission adoption of a hypothetical interest expense based upon a hypothetical capital structure is within its power. We are in agreement with the Commonwealth Court of Pennsylvania which faced a similar issue in T.W. Phillips v. Pennsylvania Public Utilities Commission, 81 Pa.Cmwlth. 205, 474 A.2d 355 (1984); and Carnegie Natural Gas v. Pennsylvania Public Utilities Commission, 61 Pa.Cmwlth. 436, 433 A.2d 938 (1981). In both cases it upheld the commission's adoption of the hypothetical interest expense. 2 The commission in T.W. Phillips adopted a hypothetical capital structure due to the "atypical" nature of Phillips' capital structure. Based upon this hypothetical capital structure, the commission imputed an income tax expense which was substantially lower than Phillips' actual tax expense. The court stated:
[T]he Commission may, for ratemaking purposes disallow a utility's actual income tax expense and impute an income tax expense based upon a hypothetical capital structure when a utility's atypical capital structure causes it to incur substantially higher income taxes than it would were its capital structure arranged in a more typical fashion. Id. 433 A.2d at 362 citing Carnegie, supra.
The Commission here was faced with a similar suspect capital structure and adopted the hypothetical capital structure. As in Phillips, Citizens' capital structure would incur a lower interest expense and higher income tax than the Commission's more appropriately balanced structure.
Citizens argues a distinction should be made between the use of the hypothetical capital structure in calculating the rate of return and calculating the interest expense. Citizens' position is that the...
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