Dayton Power & Light Co. v. Public Utilities Commission

• Decision Date: 13 February 1980
• Docket Number: No. 79-881,79-881
• Citation: 61 Ohio St.2d 215,400 N.E.2d 396
• Parties: , 15 O.O.3d 230 The DAYTON POWER & LIGHT COMPANY, Appellant, v. PUBLIC UTILITIES COMMISSION of Ohio, Appellee.
• Court: Ohio Supreme Court

Page 215

61 Ohio St.2d 215

400 N.E.2d 396, 15 O.O.3d 230

The DAYTON POWER & LIGHT COMPANY, Appellant, v. PUBLIC UTILITIES COMMISSION of Ohio, Appellee.

No. 79-881.

Supreme Court of Ohio.

Feb. 13, 1980.

On May 15, 1978, appellant, Dayton Power & Light Company (hereafter referred to as DP&L) filed an application for a rate increase with appellee, Public Utilities Commission. The commission established, as the test period for analysis, the 12 months from November 1, 1977, through October 31, 1978. In its opinion and order, issued May 9, 1979, the commission allowed appellant a return on common equity of 13.33 percent, and further found an overall rate of return of 10.07 percent upon a rate base of $602,617,000 to be fair and reasonable. In order to achieve this rate of return, appellee authorized an increase in annual revenues of approximately $40,456,000. (This figure included amounts previously granted appellee as emergency relief.)

From that order, DP&L brings this appeal as of right.

J. R. Newlin, M. A. Gribler, Dayton, Squire, Sanders & Dempsey, John Lansdale, Alan P. Buchmann and William C. Donahue, Cleveland, for appellant.

William J. Brown, Atty. Gen., Marvin I. Resnik and Harris Leven, Asst. Attys. Gen., for appellee.

Allie B. Latimer, Gen. Counsel, Spence W. Perry, Asst. Gen. Counsel and Patsy L. Mullenix, Trial Atty., Washington, D.C., for intervening appellee General Services Administration.

PER CURIAM.

The crux of appellant's argument is that the commission's order is unreasonable and unlawful in that it "guarantees" that appellant will not be able to earn the allowed return on common equity of 13.33 percent. While DP&L alleges several mistakes in the commission's analysis, it does not specify any of these as individual errors requiring reversal, but rather it contends that these mistakes establish a context in which the end result reached is unreasonable.

Primarily, appellant assails the commission's application of the discounted cash flow (DCF) method of calculating the required return on equity capital and the failure of appellee to adopt an "attrition" adjustment. Under the DCF methodology, the cost of equity capital is equal to the sum of current dividend yield plus growth rate. In forecasting future growth rate, the commission staff relied on the average growth in DP&L's earnings over the past ten years. Appellant contends that since its past earnings have been inadequate, this use of historical data will guarantee inadequate earnings in the future. However, this argument disregards the fact that the yield component of the DCF formula incorporates the current market price of the utility's stock. As the market price decreases the yield will increase, and this in turn raises the required return on common equity.

DP&L proposes that the commission consider its "comparable earnings" method of calculating cost of equity capital instead of the DCF method. Since the businesses represented in appellant's comparison had higher returns on common equity than the DCF method allowed for, appellant maintains that the commission violated the mandate of Bluefield Water Works & Improvement Co. v. Pub. Serv. Comm. (1923), 262 U.S. 679, 692, 43 S.Ct. 675, 678, 67 L.Ed. 1176, 1182, that a utility be given an opportunity to earn a return commensurate with other enterprises having corresponding risks.

Appellee argues that the businesses selected by DP&L are not comparable, many being highly diversified, unregulated companies. The commission indicates that in recent years appellant's return on equity and its market-to-book ratio have been comparable to other electric and combined gas-electric utilities. While one method of calculating cost of equity capital may be favorable to another, we cannot say that appellee's use of the DCF methodology is clearly unreasonable; therefore, under our oft-stated standard of review, ^* this determination will not be disturbed.

Similarly, appellant contends that the commission erred by not adjusting the calculated cost of capital to compensate for attrition due to inflation. This is an adjustment this court has repeatedly refused to require of the commission. See, e. g., Masury Water Co. v. Pub. Util. Comm. (1979), 58 Ohio St.2d 147, 389 N.E.2d 478; C & SOE v. Pub. Util. Comm. (1979), 58 Ohio St.2d 120, 388 N.E.2d 1398; and Franklin Co. Welfare Rights Org. v. Pub. Util. Comm. (1978), 55 Ohio St.2d 1, 377 N.E.2d 990. As stated in Masury Water, supra, 58 Ohio St.2d at page 151, 389 N.E.2d at page 482, important policy considerations preclude us from compelling such an attrition allowance: " 'The magnitude of such an adjustment would, of course, be difficult to quantify * * *. (A) djustments of this nature may well serve to diminish the incentive for prudent management and for efficiency in operation.' " Additionally, we note that the equity market recognizes the lag and attrition inherent in utility rate regulation, and the use of market price in the DCF methodology incorporates investor expectations regarding inflationary trends. For these reasons, we again decline to compel such an adjustment.

Appellant alleges several other errors by the commission which it deems contributed to an unreasonable end result. First, a...