Intermountain Gas Co. v. Idaho Public Utilities Commission

• Decision Date: 05 September 1975
• Docket Number: No. 11726,11726
• Citation: 97 Idaho 113,540 P.2d 775
• Parties: INTERMOUNTAIN GAS COMPANY, Appellant, v. IDAHO PUBLIC UTILITIES COMMISSION, Respondent.
• Court: Idaho Supreme Court

Page 775

540 P.2d 775

97 Idaho 113

INTERMOUNTAIN GAS COMPANY, Appellant, v. IDAHO PUBLIC UTILITIES COMMISSION, Respondent.

No. 11726.

Supreme Court of Idaho.

Sept. 5, 1975.

Barry Marcus of Marcus & Marcus, Boise, for appellant.

Wayne L. Kidwell, Atty. Gen., Boise, Gary L. Montgomery, of the Idaho Public Utilities Commission, Boise, for respondent.

BAKES, Justice.

On October 3, 1973, the applicant-appellant Intermountain Gas Company filed with the respondent Idaho Public Utilities Commission a proposed tariff designed to increase its rates and charges for natural gas service in Idaho. The rates in the proposed tariff would have increased the $37 million annual revenue generated by the existing rates by approximately $4.8 million. Pursuant to its authority under I.C. § 61-623, the Commission suspended the effectiveness of these rates during the proceedings before it and pending its final order.

On December 11, 1973, the Commission received prepared direct testimony from Intermountain's witnesses, then recessed the hearing until further notice. On January 8, 1974, the Commission issued its notice of a continued hearing scheduled for February 12, 1974. On February 12 and 13, 1974, Intermountain's witnesses were cross-examined, and redirect and re-cross examination testimony was also received. The Commission heard oral argument on May 1, 1974, and issued its order on June 26, 1974. The order granted Intermountain authority to increase its rates so that Intermountain would receive increased annual revenue of approximately $3.4 million, directed Intermountain to file proposed tariffs producing such increased revenue, and further directed Intermountain to discontinue the sale of natural gas appliances within a period of one year from the date of the order.

Intermountain petitioned the Commission for a rehearing, contending (1) that the Commission had no authority to order it to discontinue its gas appliance sales business and that there was no evidence in the record upon which the Commission could base the order to discontinue the business; (2) that the rate of return it had been allowed was inadequate; (3) that the Commission This case separates into two distinct substantive areas: those issues pertaining to the rate-setting process, and those issues pertaining to the order that Intermountain divest itself of its gas appliance sales business. We shall discuss these issues in turn, beginning with those pertaining to the rate-setting process.

[97 Idaho 116] had improperly calculated Intermountain's working capital requirements; and (4) that the Commission had not properly considered all of the evidence before it in determining Intermountain's revenue deficiency. On August 14, 1974, the Commission by order denied Intermountain's petition for rehearing. From these two orders of the Commission, Intermountain appealed. For the reasons hereinafter given, we set aside the orders of the Commission.

I RATE INCREASE ISSUES

The Idaho Public Utilities Commission adopted the following method of setting the rates Intermountain may charge its customers. First, the rate base was determined. The rate base consists of the capital invested in the utility ¹ upon which the company is entitled to a fair and just return. Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333 (1944). There are two components to Intermountain's rate base: the net utility plant and the working capital. The net utility plant is the capital which the company has invested in the utility plant, consisting of the gas plant in service and construction work in progress, less the depreciation reserve and the amount the customers have contributed to the company in aid of construction. The working capital is the capital which the company has invested in the cash needs of the utility, consisting of an "allowance for the sum which the Company needs to supply from its own funds for the purpose of enabling it to meet its current obligations as they arise and to operate economically and efficiently'.' Alabama-Tennessee Natural Gas Co. v. Federal Power Commission, 203 F.2d 494, at 498, (3d Cir. 1953) (emphasis in original).

Next the Commission made its determination of a fair overall rate of return, i. e., the Commission determined the percentage of the rate base the company was entitled to recover as annual net operation income from its utility business. The Commission calculated the net operating income that it would allow the company to receive from its utility operations by multiplying the dollar amount of the rate base by the percentage the Commission had determined to be the fair rate of return. This figure was then compared with the net operating income of the company from its utility business ² during the one year test period.

[97 Idaho 117] The deficiency in the net operating income was calculated by subtracting the test period net operating income from the utility business from the Commission's allowable net operating income as calculated by multiplying the rate based by the Commission's determined fair rate of return.

Finally, the Commission calculated the additional net taxable income the company must earn to generate this additional net operating income from the utility business after payment of state and federal income taxes. This final calculation represented Intermountain's revenue deficiency, i. e., the additional revenue the Commission in its order allowed Intermountain to obtain by raising its rates. ³

Intermountain does not argue that the Commission has used an improper method to calculate the amount by which Intermountain will be allowed to increase its rates. However, Intermountain argues that (1) the working capital allowance was inadequate, (2) the Commission's determination of Intermountain's net operating income during the test year was inaccurate, and (3) the overall rate of return allowed upon the rate base was inadequate. Intermountain further argues that the rate of return allowed to its common stock shareholders,

[97 Idaho 118] i. e., the rate of return upon equity capital, was inadequate; so, even if the overall rate of return was reasonable when considered only as an overall rate of return, nevertheless it was inadequate because it did not produce a reasonable rate of return upon equity capital. Thus, Intermountain concludes that its calculation of the revenue deficiency, rather than the Commission's calculation, is correct and that it should be allowed to submit a proposed rate increase based on the higher figure. See footnote 3, supra. The Commission's allowance for working capital, its determination of the company's net operating income, its determination of a fair overall rate of return, and its determination of a fair rate of return upon equity capital have all been assigned as error. We shall consider these issues in turn.

A. WORKING CAPITAL ISSUES:

1. Purchased gas costs: The Third Circuit said in Alabama-Tennessee Natural Gas Company, supra, that working capital is an allowance for the sum which the company needs to supply from its own funds to meet current obligations as they arise. That court went on to say that:

'Since . . . expenses will eventually be paid for out of revenues received by the Company, the need for working capital arises largely from the time lag between payment by the Company of its expenses and receipt by the Company of payments for service in respect of which the expenses were incurred.' 203 F.2d at 498.

Our examination of the authorities shows that regulatory bodies have almost uniformly estimated that if a utility bills its customers monthly the time lag between the utility's payment for goods and services in connection with operation and maintenance and the utility's receipt of payments from its customers is approximately 45 days. E. g., see the cases listed in footnote 4, infra, which use this estimate whenever the regulated utility bills its customers monthly. Accordingly, regulatory agencies have allowed utilities to include one eighth of their annual operating expenses for such goods and services, i. e., approximately their average expenditures for such items for a 45 day period, in the allowance for working capital. In Intermountain's last general rate increase proceeding, reported as Intermountain Gas Co., 86 P.U.R.3d 438 (Idaho PUC 1970), in addition to one eighth of Intermountain's annual expenses for goods and services purchased in connection with operations and maintenance, the Commission allowed Intermountain to include as part of its working capital allowance one eighth of its annual cost of purchased gas from its wholesale supplier. In the proceeding from which this appeal was taken, however, the Commission excluded all purchased gas costs from the allowance for working capital. The Commission thereby reduced Intermountain's requested allowance for working capital by $2,703.101, one eighth of Intermountain's annual cost of purchased gas. (See footnote 3, supra, for the effect of this exclusion upon the requested rate increase.) The Commission gave the following reasons for this decision:

'A majority of regulatory commissions do not allow (purchased gas costs) to be included in working capital and in nearly every case where purchased gas costs are allowed, in whole or in part, the inclusion of this item in working capital has been supported by a time lag study. We recognize that the Commission did not treat specifically this subject in its order in the last general rate proceeding for the Applicant. However, this Commission has not and does not now permit the inclusion of purchased power costs by electric utilities subject to its jurisdiction nor has it allowed the inclusion of purchased gas costs as a part of working capital by the other natural gas utility under this Commission's jurisdiction. Therefore, to achieve consistency in this matter, the Commission will not permit the inclusion of purchased gas costs in Applicant's working...