Home Builders Ass'n of Metropolitan Denver v. Public Utilities Com'n of State of Colo.

• Decision Date: 02 June 1986
• Docket Number: No. 84SA244,84SA244
• Citation: 720 P.2d 552
• Parties: HOME BUILDERS ASSOCIATION OF METROPOLITAN DENVER, Petitioner-Appellee, v. PUBLIC UTILITIES COMMISSION OF the STATE OF COLORADO and Public Service Company of Colorado, Respondents-Appellants.
• Court: Colorado Supreme Court

Page 552

720 P.2d 552

HOME BUILDERS ASSOCIATION OF METROPOLITAN DENVER, Petitioner-Appellee, v. PUBLIC UTILITIES COMMISSION OF the STATE OF COLORADO and Public Service Company of Colorado, Respondents-Appellants.

No. 84SA244.

Supreme Court of Colorado En Banc.

June 2, 1986.

Rehearings Denied June 23, 1986.

Rothgerber, Appel & Powers, James M. Lyons, Denver, for petitioner-appellee.

Duane Woodard, Atty. Gen., Charles B. Howe, Chief Deputy Atty. Gen., Richard H. Forman, Sol. Gen., John E. Archibold, Asst. Atty. Gen., Denver, for respondent-appellant, Public Utilities Com'n of Colo.

Kelly, Stansfield & O'Donnell, James K. Tarpey, Denver, for respondent-appellant, Public Service Co. of Colo.

QUINN, Chief Justice.

The Public Utilities Commission (PUC) and Public Service Company of Colorado (Public Service) appeal from a judgment of the Denver District Court, which set aside and decreed null and void a decision of the PUC establishing an embedded investment method for calculating a free construction allowance in connection with the construction of electrical distribution facilities, service laterals, and street lights. ¹ The district court held that the PUC acted in a rule-making, as opposed to adjudicatory, capacity without complying with the procedural requirements applicable to a rule-making proceeding as mandated by the State Administrative Procedure Act, §§ 24-4-101 to -108, 10 C.R.S. (1982 & 1985 Supp.), and the Colorado Public Utilities Law, §§ 40-6-101 to -121, 17 C.R.S. (1984 & 1985 Supp.). We conclude that the PUC failed to follow the legislative requirements for rule-making in adopting the embedded investment formula for calculating free construction allowances and that it adopted a formula which was not supported by substantial evidence. We affirm, therefore, the judgment of the district court.

I.

On February 28, 1980, Public Service filed Application No. 32602 ² with the PUC, in which it sought to change Public Service's electric distribution extension policy, particularly with respect to the amount of money customers would be required to deposit with Public Service in connection with the construction of electric distribution facilities, service laterals, and street lights. The purpose of an extension policy is to allocate the cost of extending existing facilities to new customers by setting forth the amount to be paid by the customer, which is denominated "customer advance" by the PUC, and the amount to be paid or invested by the utility, which is denominated "free construction allowance."

The PUC has adopted rules regulating the service of electric utilities. Rule 31, § II(c), 4 C.C.R. 723-3 (1977), contains the requirements for extending permanent service, lines, and facilities and provides as follows:

Each [public utilities'] extension policy [for permanent service] shall specifically set forth the relation that the investment the utility is justified in making for an extension bears to the said assured monthly or annual revenue. This relation shall be expressed as the extension percentage of said revenue to said investment, or as the extension ratio of said investment to said revenue; in urban territory this relation may be limited by a fixed minimum amount of construction to be provided by the utility. A utility may adopt separate ratios of investment to revenue for different territories and conditions of service. ³

Prior to submitting its application, Public Service's free construction allowance for a new customer was 5.5 times the estimated annual gross revenue. For example, if it was estimated that the customer would generate $100 total revenue per year, then the free construction allowance would equal 5.5 times $100, or $550. Public Service, therefore, would install at its expense electric distribution facilities equal to 5.5 times the average revenue to be received from the new customer, or $550, and the customer would pay all estimated costs in excess of $550. Public Service sought in its application to revise the free construction allowance downward to one times the annual base rate revenue. ⁴ In effect, Public Service proposed to install the necessary electric distribution facilities equivalent in cost to one times the estimated average annual base rate revenue to be received from a new customer, with the customer being required to pay all estimated costs in excess of this construction allowance. The effect of reducing the extension policy ratio to 1.0 would be that new customers would be required to pay higher customer advances than previously had been required. According to Public Service's calculations, the new extension ratio would raise an additional $7 million to $9 million per year. Public Service contended that this increase in charges to new customers was necessary due to the rising costs of providing electrical service. The application also sought to require a new customer to pay on a nonrefundable basis the full cost of providing a service lateral, which is a piece of conductor that connects the utility's distribution line to the customer's building to which electrical service is furnished.

A hearing on Public Service's application was conducted on September 11, 12 and 22, 1980. In addition to representatives of Public Service, a number of parties requested and were granted leave to intervene and participated in the proceedings before the PUC. The intervening parties were the Home Builders Association of Metropolitan Denver, the City of Lakewood, the City of Arvada, the Colorado Energy Advocacy Office, the Colorado Office of Consumer Services, and CF&I Steel Corporation. The staff of the Public Utilities Commission also appeared.

Public Service presented evidence that a lower construction allowance was necessary to reflect the current economics of rendering utility service and was essential to prevent further burdening the company's existing customers with new extension costs. A great deal of testimony was presented on the method by which the company arrived at 1.0 as the appropriate extension ratio to replace the previous multiplier of 5.5. ⁵ In the course of the testimony it incidentally came out that approaches other than the revenue ratio method could be used for calculating free construction allowances. For example, Ronald Binz, appearing on behalf of the Colorado Energy Advocacy Office, testified that free construction allowances could be tied to some factor other than revenue--possibly the embedded cost of the distribution system averaged on a per customer basis. The focus of the hearing, however, was not on the availability of alternative methods for calculating free construction allowances but was on the validity of using a 1.0 multiplier to determine the new extension policy. Home Builders Association and the cities of Lakewood and Arvada presented testimony that the numbers and methodology used by Public Service to arrive at the multiplier of 1.0 were flawed. ⁶ In addition they presented evidence that the proposal would result in the inequitable treatment of new customers and that the present policy should be retained.

On December 22, 1980, the hearing examiner issued a recommended decision in which he concluded that the evidence did not support the proposed reduction in the free construction allowance. The findings of the hearing examiner centered on the validity of the proposed change from an extension ratio of 5.5 to 1.0. Although the hearing officer did find that the average embedded investment for an existing residential customer in 1978 was $233, whereas the average annual revenue per residential customer was $228, no findings were made concerning the validity of adopting some method other than the revenue ratio method for calculating free construction allowances, such as the embedded cost method. The hearing examiner viewed the extension ratio of .71 (rounded up to 1.0) as merely a fraction that resulted from dividing the component of "new plant supportable at new money costs" by the "total base rate revenues for distribution customers." He found that although Public Service had described its present 5.5 free construction allowance as "overly generous," such a policy was the norm rather than an exception in the state. In addition, the hearing examiner found that the average customer required a distribution investment, including service lateral, of $704, and generated annual base rate revenues of $374; that the average new customer required "an extension ratio or free construction allowance of only 1.9X;" and that Public Service was not really contending that an extension ratio of 5.5 was too high but that an extension ratio of 1.9 was too high.

The hearing examiner concluded as follows from these findings: that granting the application for a reduced free construction allowance, rather than preventing undue subsidization of new customers by old customers, which was the purported objective of the application, would actually result in undue subsidization of old customers by new customers; that the proposed change would cause an increase in income taxes because the customer contributions would constitute taxable income and there would be no offsetting expenses until the new facilities were constructed; that since the facilities attributable to customer contributions could not be included in the rate base, they would not be subject to depreciation, thus resulting in a shortfall in capital for eventual replacement of such facilities and in a likely request for increased rates to offset this condition; that there were no extraordinary facts or circumstances concerning Public Service's financial situation, or the environment in which Public Service provided service, which would recommend an extension ratio of 1.0; and that, although Public Service's present extension policies had not been shown to be unjust, unreasonable or unduly discriminatory, ⁷ the proposed revisions in the free construction allowance would be "unjust, unreasonable, and...