Green Mountain Power Corp., In re

• Decision Date: 22 April 1994
• Docket Number: No. 92-353,92-353
• Citation: 648 A.2d 374,162 Vt. 378
• Court: Vermont Supreme Court
• Parties: , Util. L. Rep. P 26,397 In re GREEN MOUNTAIN POWER CORP.

Page 374

648 A.2d 374

162 Vt. 378, Util. L. Rep. P 26,397

In re GREEN MOUNTAIN POWER CORP.

No. 92-353.

Supreme Court of Vermont.

April 22, 1994.

Motion for Reargument Denied

July 18, 1994.

Robert V. Simpson, Jr., Montpelier, for appellant Dept. of Public Service.

Christopher L. Dutton, Karen Krug O'Neill, Michael H. Lipson, and Michael A. Murphy, Burlington, for appellee and cross-appellant Green Mountain Power Corp.

Harriet Ann King of King and King, Waitsfield, for amicus curiae Vermont Yankee Nuclear Power Corp.

Before ALLEN, C.J., GIBSON, DOOLEY and MORSE, JJ., and PECK, J. (Ret.), Specially Assigned.

MORSE, Justice.

The Department of Public Service (DPS) and Green Mountain Power Corporation (GMP) appeal the Public Service Board's approval of a 5.6% rate increase for GMP. GMP had sought a 9.96% increase, while DPS asserted that only a 2.65% increase was justified. DPS claims that the Board erred by declining to reduce GMP's rate base to account for: (1) interim year accumulated depreciation on GMP's test year plant, and (2) certain projected operating expenses of Vermont Yankee Nuclear Power Corporation that would be passed on to GMP ratepayers. On cross-appeal, GMP contends that the Board: (1) erred by rejecting GMP's proposed 5.5% salary increase for officers and other employees exempt from the company's collective bargaining agreement, and (2) engaged in unlawful retroactive ratemaking by reducing GMP's rate base to credit ratepayers for excess amortization expenses paid under a previous rate. We affirm in part, and reverse in part.

I. Standard of Review

At the outset, we acknowledge this Court's deferential standard of review in appeals from the Public Service Board. Orders issued by the Board enjoy a strong presumption of validity. In re East Georgia Cogeneration Ltd. Partnership, 158 Vt. 525, 531, 614 A.2d 799, 803 (1992). The Board's decisions regarding ratemaking "are subject to great deference in this Court so long as it can be shown they are directed at proper regulatory objectives." In re Green Mountain Power Corp., 142 Vt. 373, 380, 455 A.2d 823, 825 (1983). We accept findings and conclusions adopted by the Board unless the appealing party demonstrates that they are clearly erroneous. See East Georgia, 158 Vt. at 531-32, 614 A.2d at 803. In reviewing such findings and conclusions, we defer to the Board's expertise. Id. at 531, 614 A.2d at 803. With this standard in mind, we consider each of the parties' claims of error.

II. DPS Claims

A. Interim-Year Depreciation

DPS first contends that the Board was required to reduce GMP's rate base to account for interim year accumulated depreciation on the test year plant. We agree.

A basic explanation of ratemaking procedure will be helpful to our discussion of this issue. The Board seeks to establish utility rates for the immediate future that will allow investors a reasonable return without overcharging the ratepayers. As the first step in arriving at a fair rate of return, the Board determines the operating expenses and the "rate base"--the utility's net plant investment--for the "test year," usually the most recent full calendar year, in this case 1990. The Board then adjusts the rate base by modifying the test year rate base to reflect "known and measurable" changes in plant investment. These are changes that are measurable with a reasonable degree of accuracy and have a high probability of being in effect in the adjusted test year, in this case 1992. Finally, the Board calculates an appropriate return on the adjusted rate base and devises adjusted rates that will produce a fair rate of return on the company's property in the immediate future. See Letourneau v. Citizens Utilities Co., 128 Vt. 129, 134, 259 A.2d 21, 24 (1969) (rates should be set based on latest available relevant test year data to accomplish objective of determining fair rate of return).

DPS argues, as it did before the Board, that the Board was required, as a matter of law, to reduce the test year rate base by the average amount of depreciation ratepayers would pay in 1991, the interim year, on the test year plant. As stated in prefiled testimony by a DPS witness:

Interim accumulated depreciation is "known and measurable" with absolute certainty. The Company has a certain level of plant in service at the end of 1990. The Company's rates currently include depreciation expense on this plant which will be recovered in 1991.... [T]his is known with certainty and this fact must be reflected in the proforma rate base to prevent over recovery on plant which is already paid for.

By not making this adjustment, DPS argues, GMP is receiving a larger return on investment than that to which it is entitled.

The Board disagreed. Citing its decision in GMP's previous rate case, 119 P.U.R.4th 62, 1991 WL 501686 (Vt.Pub.Serv.Bd.1991), the Board acknowledged that deducting interim year accumulated depreciation had some appeal in a strict accounting sense, but that the deduction would not give GMP a fair rate of return because the utility's plant investment was increasing at a faster rate than it was depreciating. It declined to reduce GMP's 1992 adjusted test year rate base on grounds that the $3.076 million reduction, though known and measurable, would be "offset" by potential 1992 adjusted test year plant investment by GMP. The Board pointed out that GMP's net plant investment had increased every year between 1978 and 1989. While acknowledging that it could not be sure, on the basis of the record, that the trend would continue into the adjusted test year, the Board declined to consider the interim year accumulated depreciation as a "known and measurable" change absent a showing that the trend had reversed itself.

On appeal, GMP concedes that DPS is correct from an accounting perspective, but argues that ratemaking policy should prevail over conventional accounting practices and that " 'slavish' adherence to generalized ratemaking principles" will not succeed in balancing the interests of GMP's customers and investors. Specifically, GMP argues that the Board was not legally bound to conclude that interim year depreciation was a "known and measurable" change. Finally, GMP contends that the Board is obligated to use "realistic" methods and adjustments that produce results which are "consistent from one case to the next."

The crux of this dispute is whether the Board acted within its discretion in declining to reduce the test year rate base for what the Board and the parties agree are known and measurable changes, on the basis that to do so would be to deny GMP a fair rate of return. We hold that the Board's decision was erroneous, since the evidence of a known and measurable change in net plant as a result of interim year accumulated depreciation was unquestioned, and the Board's reasons for failing to follow that mandate were vague and not sustained by the record. Though the Board's expertise is at the heart of the deference given its decisions, In re Telesystems, Corp., 143 Vt. 504, 509, 469 A.2d 1169, 1172 (1983), that expertise is not a license to shroud its reasoning in an all-encompassing explanation that a particular decision is simply necessary to yield what the Board perceives is the correct result.

Central to the Board's rationale was its assumption that reduction for interim year 1991 accumulated depreciation would be offset by adjusted test year plant investment. Yet in a lengthy and thorough record, there is no evidence from GMP identifying these future investments or suggesting their cost. And the Board itself cast doubt on the existence and scope of such offsets:

During the evidentiary hearings in this case, the DPS argued that, by not making this adjustment [in prior docket], we allowed the Company a larger rate base, and therefore return on rate base, than the Company actually had in service. The evidence, however, was not unequivocal on this point. GMP points out that depreciation expense and additions to plant accumulate annually; and historically, the two have been largely offsetting. However, on the basis of this record in this docket, we cannot determine whether the relationship between the two will remain relatively constant or will vary significantly in the adjusted test year. We will need more detailed evidence on the historic relationship of accumulated depreciation and plant additions before we can conclude that the adjustment recommended by the DPS is indeed "known and measurable." (Emphasis supplied.)

Even more critically, no justification is advanced by the Board for failing to recognize interim year accumulated depreciation as a "known and measurable change," even if GMP had presented evidence of adjusted test year investments.

In sum, the Board failed to identify a nexus between its denial of an undisputed "known and measurable" change in the interim year and offsets--proven or chimerical--in the adjusted test year. As we stated in In re Green Mountain Power Corp., 131 Vt. 284, 303-04, 305 A.2d 571, 583 (1973), findings of fact must be "based exclusively on the evidence and on matters officially noticed by the Board." On review, "we will sustain [the Board's] weighing of the evidence if there is evidence to support it." Id. at 305, 305 A.2d at 584. (Emphasis added.) When the Board itself declines to make the requisite findings, we cannot affirm its conclusions. See also In re New England Tel. & Tel. Co., 120 Vt. 181, 192, 136 A.2d 357, 365 (1957) ("Without supporting evidence, the Commission was not at liberty to resort to the 1953 rate proceedings in determining a just and reasonable return in 1956. The justness of the return allowed must be based on present requirements.").

The essential reason to apply the "known and measurable change" principle to the test year rate base is that once customers have, in effect, returned a portion of a utility's investment, they should not be required to pay for that portion a second time, once as...