Colorado Municipal League v. Public Utilities Com'n of State of Colo., 81SA551

• Decision Date: 20 August 1984
• Docket Number: No. 81SA551,81SA551
• Parties: COLORADO MUNICIPAL LEAGUE, Plaintiff-Appellant, v. PUBLIC UTILITIES COMMISSION OF the STATE OF COLORADO; Commissioners Edythe S. Miller, Daniel E. Muse and L. Duane Woodard; and Mountain States Telephone and Telegraph Company, Defendants-Appellees.
• Court: Colorado Supreme Court

Page 416

687 P.2d 416

COLORADO MUNICIPAL LEAGUE, Plaintiff-Appellant, v. PUBLIC UTILITIES COMMISSION OF the STATE OF COLORADO Commissioners Edythe S. Miller, Daniel E. Muse and L. Duane Woodard; and Mountain States Telephone and Telegraph Company, Defendants-Appellees.

No. 81SA551.

Supreme Court of Colorado.

Aug. 20, 1984.

Rehearing Denied Sept. 24, 1984.

Gorsuch, Kirgis, Campbell, Walker & Grover, Leonard M. Campbell, Simon J. Freedman, Denver, for plaintiff-appellant.

J.D. MacFarlane, Atty. Gen., Richard F. Hennessey, Deputy Atty. Gen., Eugene C. Cavaliere, Asst. Atty. Gen., Denver, for defendants-appellees Public Utilities Commission of the State of Colorado, Edythe S. Miller, Daniel E. Muse and L. Duane Woodard.

Coleman M. Connolly, Denver, for defendant-appellee The Mountain States Telephone and Telegraph Company.

LOHR, Justice.

On January 21, 1980, Mountain States Telephone and Telegraph Company (Mountain Bell) filed an advice letter and tariff revisions with the Colorado Public Utilities Commission (PUC) seeking to implement a $78,628,044 revenue increase for its Colorado intrastate operations. The PUC suspended the effective date of the tariffs for 210 days, and scheduled hearings on Mountain Bell's revenue requirements. The hearing record comprises over 3000 pages of written submissions, and almost 3000 pages of transcripts spanning twelve days of testimony. On September 16, 1980, the PUC issued a 53-page order denying the requested rate increase in its entirety. Re Mountain States Tel. & Tel. Co., 39 Pub.Util.Rep. 4th (PUR) [hereinafter cited as PUR] 222 (Colo. PUC 1980).

The Colorado Municipal League (League), which had intervened in the proceedings before the PUC, petitioned in Denver District Court for judicial review of the PUC's order. The League contended that the PUC should have entered an order reducing Mountain Bell's revenues. On November 12, 1981, the district court summarily affirmed the PUC's order. The League then appealed, asserting that the PUC had erred on three issues: (1) The PUC allegedly found that Mountain Bell had $9,159,000 in negative working capital, but did not subtract this from the rate base; (2) the PUC allowed a $5,703,000 adjustment to expenses, representing annualization of wage increases going into effect during the test period, without making an offsetting adjustment for annualization of productivity increases; and (3) the PUC found that Mountain Bell's test period earnings exceeded its revenue requirements by $506,000, but failed to order a rate reduction. The numerous other elements of the PUC's decision are no longer in dispute.

The PUC selected the twelve-month period ending on October 31, 1979, as the test period for the purpose of determining Mountain Bell's revenue requirement. It valued the rate base, the property dedicated to providing service to the utility's customers, at $946,269,000. It determined that a fair rate of return on Mountain Bell's common equity was 13.3%. In combination with the fixed return to the preferred stock and debt, this yielded an overall rate of return of 10.07%. Applying this rate of return to the rate base produced a revenue requirement of $95,289,000. The PUC found that Mountain Bell's net operating earnings for the test year were $95,795,000, exceeding Mountain Bell's revenue requirement. It concluded that Mountain Bell was not entitled to any revenue increase, and permanently suspended the proposed new tariffs.

Statutory authority for appellate review of the PUC's order is found in section 40-6-115(5), 17 C.R.S. (1973). The purposes of judicial review are to determine whether the PUC has regularly pursued its authority, whether it has adhered to the federal and state constitutions, whether its decision is just and reasonable, and whether its conclusions are in accordance with the evidence. § 40-6-115(3), 17 C.R.S. (1973). In determining whether the PUC has regularly pursued its authority, we must consider whether its order is based upon evidence introduced before it, whether the order is supported by findings of fact, whether the PUC applied the relevant legislative standards, and whether it acted within the authority conferred upon it by law. PUC v. Northwest Water Corp., 168 Colo. 154, 451 P.2d 266 (1969). Orders that are arbitrary and capricious or a clear abuse of discretion must be set aside. Colo. Mun. League v. PUC, 198 Colo. 217, 597 P.2d 586 (1979); City of Montrose v. PUC, 197 Colo. 119, 590 P.2d 502 (1979).

The fundamental legislative standard in ratemaking cases is that all public utility charges must be just and reasonable. § 40-3-101(1), 17 C.R.S. (1973). This requires balancing the investor's interest in avoiding confiscation and the consumer's interest in prevention of exorbitant rates. Pub. Serv. Co. of Colo. v. PUC, 644 P.2d 933 (Colo.1982); Mountain States Tel. & Tel. Co. v. PUC, 186 Colo. 260, 527 P.2d 524 (1974). The PUC has the primary responsibility for doing this. PUC v. Northwest Water Corp., 168 Colo. 154, 451 P.2d 266 (1969).

The findings of the PUC concerning disputed questions of fact are generally not subject to judicial review. § 40-6-115(2), 17 C.R.S. (1973). Findings will not be set aside because the evidence is conflicting, or because conflicting inferences can be drawn from the evidence, but only if the record lacks competent evidence to support them. Morey v. PUC, 629 P.2d 1061 (Colo.1981); Ephraim Freightways, Inc. v. PUC, 151 Colo. 596, 380 P.2d 228 (1963). Nor will this court interfere with the PUC's exercise of its discretion. Atchison, T. & S. F. Ry. Co. v. PUC, 194 Colo. 263, 572 P.2d 138 (1977).

With these principles in mind, we affirm on the negative working capital issue. We reverse on the annualization issue, because the PUC has abused its discretion and failed to pursue its authority regularly, in that it has selectively annualized in-period wage increases, failed to make adequate explanatory findings of fact, and as a result failed to establish a basis upon which it can be determined whether the rates are just and reasonable. We affirm on the de minimus issue, subject to modification on remand.

I.

The League claims that the PUC should have subtracted $9,159,000, the amount attributable to negative working capital, from Mountain Bell's rate base, on which Mountain Bell was allowed a 10.07% rate of return. Positive working capital

consists of the additional funds, provided by the investors, which may be required by the utility to meet its day-to-day operating expenses, such as maintaining an inventory of materials and supplies, meeting certain operating expenses which must be paid before the revenues associated with those expenses are received, and keeping a certain amount of cash on hand for daily operations.

New England Tel. & Tel. Co. v. PUC, 390 A.2d 8, 51 (Me.1978). Positive working capital is investor-supplied. In contrast, negative working capital reduces the need for investor-supplied capital. It arises when the utility receives customer payments before service is rendered, or when it receives other funds before it must satisfy a corresponding liability. See Valley Gas Co. v. Burke, 122 R.I. 374, 406 A.2d 366 (1979).

Mountain Bell bills most local service in advance, although it does not necessarily collect on all those bills before the corresponding service is rendered. It collects funds each month which are later used for payment of property taxes and federal income taxes. It remits property taxes semi-annually, and federal income taxes on a schedule less frequent than monthly. As a result, Mountain Bell has the use of funds collected from ratepayers for various periods before these moneys must be disbursed to pay taxes. In its newly filed tariffs, Mountain Bell included $21,112,000 in its rate base for positive working capital. This amount was derived by calculating one-twelfth of its annual operating expenses less depreciation. In other words Mountain Bell postulated a one-month lag between payment of all expenses and receipt of the corresponding revenues. It stated that positive working capital allowances had been attributed to Bell telephone companies by regulatory authorities in thirty-one states, and zero or negative working capital had been attributed in eleven states. A positive working capital allowance using the same formula utilized in deriving the newly-filed Colorado tariffs had been granted to Mountain Bell in Texas and Wyoming, and denied in Montana.

Evidence of Mountain Bell's working capital requirement was also offered by a management consultant testifying on behalf of Colorado Ski Country USA and the Colorado-Wyoming Hotel and Motel Association, Inc., who reported on the results of his balance sheet analysis. Working from Mountain Bell's monthly balance sheets, he subtracted assets not recognized in the rate base from liabilities not assigned a specific cost in rate-of-return calculations. This resulted in a negative working capital figure of $6,216,000. In his opinion this was the proper way to calculate the working capital requirement because it included every use and source of working capital. See, e.g., Wash. Util. & Transp. Comm'n v. Puget Sound Power & Light Co., 45 PUR4th 605, 612 (Wash. Util. & Transp. Comm'n 1982); Re Determination of Rate Base and Working Capital Allowance, 43 PUR4th 402 (Fla.Pub.Serv.Comm'n [hereinafter cited as PSC] 1981). The witness noted that Bell telephone companies in six areas used the balance sheet approach in calculating their own working capital requirements. He concluded that Mountain Bell's request for positive working capital should be denied. He characterized this recommendation as conservative, and said that the PUC could reduce the rate base by $6,126,000 for negative working capital if it were so inclined.

The PUC staff recommended to the PUC that Mountain Bell's request for an allowance for positive working capital be rejected. Utilizing data concerning Mountain Bell's average...