Gulf States Utilities Co. v. Louisiana Public Service Commission

• Decision Date: 13 November 1978
• Docket Number: No. 61900,61900
• Citation: 364 So.2d 1266
• Parties: GULF STATES UTILITIES COMPANY, Plaintiff-Appellant, v. LOUISIANA PUBLIC SERVICE COMMISSION, Defendant-Appellee (Stauffer Chemical Co. et al.), Intervenors-Appellees.
• Court: Louisiana Supreme Court

Page 1266

364 So.2d 1266

GULF STATES UTILITIES COMPANY, Plaintiff-Appellant, v. LOUISIANA PUBLIC SERVICE COMMISSION, Defendant-Appellee

(Stauffer Chemical Co. et al.), Intervenors-Appellees.

No. 61900.

Supreme Court of Louisiana.

Nov. 13, 1978.

Tom F. Phillips, A. Michael Dufilho and James L. Ellis, Taylor, Porter, Brooks & Phillips, Baton Rouge, for plaintiff-appellant.

Marshall B. Brinkley, Gen. Counsel, La.Pub. Service Com.; Saul Stone, Michael R. Fontham, Stone, Pigman, Walther, Wittmann & Hutchinson, New Orleans, for defendant-appellee.

R. Gordon Kean, Jr., G. William Jarman, Sanders, Downing, Kean & Cazedessus, Baton Rouge, on behalf of: Stauffer Chemical Co., Vulcan Materials Co., Ciba-Geigy Corp., Georgia-Pacific Corp., Olin Corp., Firestone Synthetic Rubber & Latex Co., and Monochem, Inc., intervenors-appellees.

TATE, Justice.

Gulf State Utilities Corporation applied to the Louisiana Public Service Commission for an increase in its electric rates. By these proceedings, Gulf States seeks judicial review of the regulatory agency's denial of its application. The district court essentially affirmed the Commission's ruling, although (after a remand to fix the amount) it ordered the Commission to allow an additional $1,253,000 increase in rates to allow for the increase in expenses due to inflation subsequent to the 1975 test year.

Gulf States appeals, urging three principal errors. The Commission answers the appeal, praying that this court disallow the "attrition adjustment" ordered by the district court. Certain industrial firms ("Stauffer" et al.), which had intervened both before the Commission and the district court in support of the denial of a rate increase, likewise answered the appeal to request certain ancillary relief in the event that any rate increase is authorized.

We will discuss below the respective contentions of (I) Gulf States, (II) the Commission, and (III) the intervenors.

Preliminarily, however, we deem it appropriate to reiterate once again the standard of judicial review of determinations of the regulatory commission with regard to rate applications by utilities. As recently summarized by us in South Central Bell Telephone Company v. Louisiana Public Service Comm'n., 352 So.2d 964 (La.1977), the principles of judicial review applicable are, 352 So.2d 968-69 (omitting the extensive citation of authority):

In reviewing the rate-making process the inquiry of the judiciary is generally confined to a determination of whether the regulatory agency acted unreasonably or arbitrarily in establishing rates for the utility. * * * The United States Supreme Court, in assessing the Federal Power Commission's performance of its statutory duty to fix "just and reasonable" rates, elaborated on this principle:

" * * * If the total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry under the Act is at an end. The fact that the method employed to reach that result may contain infirmities is not then important. Moreover, the Commission's order does not become suspect by reason of the fact that it is challenged. It is the product of expert judgment which carries a presumption of validity. And he who would upset the rate order under the Act carries the heavy burden of making a convincing showing that it is invalid because it is unjust and unreasonable in its consequences. * * * " Id. (Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333 (1944)) 320 U.S. at 602, 64 S.Ct. at 288.

The Louisiana Public Service Commission is authorized to fix "just and reasonable" rates to be charged by public utilities. La.R.S. 45:1176. In Louisiana rate cases this Court has articulated various descriptions of its role in reviewing the regulatory determinations of the public service commission. We have said the orders of the Commission are entitled to great weight and are not to be overturned unless shown to be arbitrary, capricious or abusive of its authority; * * * ; that courts should act slowly in substituting their views for those of the expert body charged with the legislative function of rate making, and should not disturb the Commission's decision in the absence of a clear showing of an abuse of power; * * * ; that Commission decisions will not be disturbed unless found to be clearly erroneous or unsupported by evidence. * * *.

The Facts

Based upon a 1975 test year, the utility applied for an increase in its electric rates to produce additional revenues of $23,750,000. After extensive hearings, the Commission denied any electric rate increase.

In so doing, the Commission found: The rates were to be determined on the basis of (a) a rate base (the total amount of investment in a utility employed in providing its service) of $697,296,000; and (b) a net operating income of Gulf States for the test year calculated at $55,651,000.

Based upon these figures, the Commission found that the utility enjoyed a "rate of return" (the ratio of return to rate base) of 9.15 per cent, which resulted in a return on the investor's equity of 13.84 per cent.

For reasons that are supported by the record, in rejecting higher figures contended for by the utility, ¹ the Commission found that a range of return on equity of 10.5 to 11.5 per cent would be within a reasonable range sufficient to maintain the utility's financial integrity, to attract capital, and to compensate its investors for the risks assumed, as required under accepted rate-regulation principles. Hope Natural Gas, cited above, at 320 U.S. 605, 64 S.Ct. 289; South Central Bell (1977), cited above, at 352 So.2d 967. The Commission indicated that, with the "cost" of (fair and reasonable return on) equity determined at 10.5-11.5%, a rate of return of 8.7% Of the rate base would be a fair and reasonable rate of return, i.e., one sufficient to cover expenses, service debt, and provide the 10.5-11.5% Return on the investor's equity.

Therefore since under existing rates the revenues produced by the rate of return resulted in return of 13.84 per cent on equity, or in excess of that deemed necessary to maintain the utility's financial integrity the Commission denied Gulf State's application for a rate increase.

I. Gulf States' Contentions

As we apprehend Gulf States' position, it principally argues that the "net operating income" computed by the Commission for the test year should have been lower. (A lower income figure for the test year would necessitate additional revenues to be generated by a rate increase in order to produce the 8.7% Rate of return on the rate base deemed to be the fair rate required.)

In this regard, Gulf States principally contends:

(A) The allowance as capitalized "income" of amount for funds devoted to construction work in progress (AFUDC) had the effect of adding the sum of $13,519,000 as "phantom" income, thus fictitiously decreasing the need for additional revenues to produce the 8.7% Fair rate of return required. Gulf States suggests that, instead, the AFUDC "income" entry should be capitalized at $7.7 million, and that actual revenues should be provided by a rate increase so as to assure the utility a fair rate of return.

(B) The "expense" items for state and federal income taxes should have been increased by $2,242,000 by permitting the utility to show its tax liability for the year in question by the accepted accounting method of the "normalization" of income. This would necessitate a rate increase to provide revenues to balance this additional expense item.

Gulf States further argues, more comprehensively:

(C) That the net effect or end result of the Commission's various rulings on these and other issues is that, in cumulation, insufficient present revenues are allowed to the utility for it to maintain its financial integrity and to attract the immense capital funds (estimated at $650,000,000 during 1977-78 alone) necessary for it to convert to fuel oil, coal, and nuclear generating facilities, due to the energy crisis presented by the unavailability in the future of natural gas. The utility further suggests that the fictitious "income" figure of $13,519,000 AFUDC (or at least that in excess of $7.7 million suggested as appropriate by the utility) has resulted in a cash flow crisis, by which the utility is forced to borrow money to pay dividends to its stockholders.

These contentions will be discussed under subheadings A, B, and C of this part (I) of this opinion.

A. Issues Related to the Allowance in "Income" of a Return for Funds Devoted to Work in Progress ("AFUDC", see below).

A general rule of utility regulation is that ratepayer-consumers should only pay the utility company a fair return on facilities and capital actually used and useable for production of service to these ratepayers. Under this principle, the utility has not usually been permitted in the past to include in its rate base, or to expense, the cost of construction work in progress ("CWIP"). (However, when the new construction Is placed in service, the utility is entitled to earn a fair rate of return on and recover through depreciation (from Then current ratepayers) all of its capital expenditures so incurred, including the cost of capital.)

Arguably, however, the cost of such construction represents an expenditure for the ultimate benefit of present consumers, so that charging them in current rates for such costs is not unreasonable, especially insofar as the expenditures are for pollution-control or other social reasons not directly resulting from the intention to increase revenues. A minority of regulatory commissions do adopt this approach urged upon us by Gulf States. Gulf States strongly contends that, with the huge capital demands occasioned by the enormously expensive cost of converting generation facilities to nuclear and other sources of energy, this previously minority approach is the only fair one under the present energy-crisis conditions.

The issue is not, however,...