Michaelson v. New England Tel. & Tel. Co., s. 77-306-M

• Decision Date: 29 June 1979
• Docket Number: Nos. 77-306-M,s. 77-306-M
• Citation: 404 A.2d 799,121 R.I. 722
• Parties: Julius C. MICHAELSON, Attorney General et al. v. NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY. NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY v. PUBLIC UTILITIES COMMISSION. P., 77-307-M.P.
• Court: Rhode Island Supreme Court

Page 799

404 A.2d 799

121 R.I. 722

Julius C. MICHAELSON, Attorney General et al. v. NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY.

NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY v. PUBLIC UTILITIES COMMISSION.

Nos. 77-306-M.P., 77-307-M.P.

Supreme Court of Rhode Island.

June 29, 1979.

[121 R.I. 750] Dennis J. Roberts II, Atty. Gen., Gregory L. Benik, R. Daniel Prentiss, Sp. Asst. Attys. Gen., for Julius C. Michaelson and Division of Public Utilities and Carriers.

Tillinghast, Collins & Graham, Peter J. McGinn, Mark A. Pfeiffer, Providence, Richard W. Blackburn, Boston, Mass., for New England Tel. and Tel. Co.

OPINION

KELLEHER, Justice.

On November 5, 1976, the New England Telephone and Telegraph Company (the company or New England) filed with the Public Utilities Commission (the commission) a revised schedule of tariffs designed to increase the company's annual revenues from its intrastate operations by approximately $25 million. The commission, pursuant to its authority under G.L.1956 (1977 Reenactment) § 39-3-11, suspended the proposed effective date of the tariffs by separate orders dated November 11, 1976, and June 3, 1977, so that it might conduct investigations and public hearings with respect to the propriety of the proposed increase.

On June 1, 1977, the commission conducted the first of twenty-four hearing sessions, sessions that continued through August 15, 1977. During the course of those hearings, members of the general public were given an opportunity to be heard, ¹ as were, of course, the numerous expert witnesses of both the parties and the intervenors. The report and order reveals that the actual parties in the proceeding before the commission, namely, the company and the Division of Public Utilities and Carriers (the division) presented between them thirteen "technical witnesses"; eleven appeared on behalf of the company and two on behalf of the division. The commission also heard testimony from two additional expert witnesses, one each on behalf of the intervenors the Coalition for Consumer Justice and the State of Rhode Island, Department of Administration, Division of the Budget. ²

On September 4, 1977, the commission issued its report and order in this proceeding, rejecting the proposed filing and authorizing the company to file revised tariffs designed to produce approximately $3,422,000 in additional annual revenues. ³ After issuance of the commission's order, the company, as well as the division, together with the Attorney General (on behalf of the public and the State of Rhode Island as a consumer of the company's services) commenced in this court separate certiorari proceedings pursuant to the provisions of § 39-5-1; we consolidated the petitions in this proceeding and, pending argument, denied the Attorney General's motion to stay and suspend execution of the commission's order.

The consolidated petitions together raise several issues, involving three major areas of dispute: first, the propriety of certain accounting adjustments; second, both the sufficiency of the rate of return allowed the company on its intrastate investment and the appropriateness of an erosion adjustment granted to help ensure that inflationary trends in the economy do not undermine the company's ability to earn the rate of return actually allowed it; and finally, whether the commission has approved and has the authority to approve a tariff filing that is not based upon considerations of the cost of the service furnished to customers. We have chosen to deal with the various contentions of the parties by subject matter, as outlined above, rather than to separate the issues by dealing first with those raised in one of the two petitions and only then dealing with the issues presented in the other.

Accounting Adjustments

I. Cash Working Capital

The company's intrastate rate base, to which the commission applies a rate of return deemed by it sufficient to allow the company to attract investment capital as well as to maintain its credit, often includes an allowance for working capital. Cash working capital has long been accepted to represent the amount of cash required to operate a utility during the interim (the "lag") between the rendition of service and the receipt of payment therefor. Rhode Island Consumers' Council v. Smith, 111 R.I. 271, 288-89, 302 A.2d 757, 768 (1973). ⁴

Working capital determinations made in the course of rate proceedings have frequently been the subject of review by this court. We have said that an allowance in rate base for working capital is not something to which a utility is entitled as a matter of right. Narragansett Electric Co. v. Harsch, 117 R.I. 395, 408, 368 A.2d 1194, 1202-03 (1977); Rhode Island Consumers' Council v. Smith, 113 R.I. 384, 401, 322 A.2d 17, 26 (1974). Rather, determination of an allowance is a question of fact to be decided by the commission on the basis of the specific facts of the case before it. New England Telephone & Telegraph Co. v. Public Utilities Commission,116 R.I. 356, 385, 358 A.2d 1, 18-19 (1976); Rhode Island Consumers' Council v. Smith, 113 R.I. at 401, 322 A.2d at 26. Because the role of factfinder is that of the commission alone, See § 39-5-3, we review only to determine whether the commission's decision is "fairly and substantially supported by legal evidence and sufficiently specific to enable us to ascertain if the facts upon which (it is) premised afford a reasonable basis for the result reached." Rhode Island Consumers' Council v. Smith, 111 R.I. 271, 277, 302 A.2d 757, 762 (1973). In this case our concern with working capital lies in three areas: gross receipts tax expense, accrued interest expense, and average cash allowance.

A. Gross Receipts Tax

A recurrent area of dispute between the company and the division in recent years has involved the treatment of the Rhode Island gross receipts tax for purposes of working capital analysis. Specifically, the commission has examined the question whether the tax is and ought to be treated as a current one for ratemaking purposes or whether, as the company has argued, it is in fact a prepaid tax. The effect of what the company sees as a prepayment is to create a very substantial lag a prolonged period during which the company claims that investors are entitled to a return on money "temporarily len(t) to the company" by them in order to meet the tax expense. See Providence Gas Co. v. Burman, R.I., 376 A.2d 687, 693 n. 4 (1977).

In the company's two most recent general tariff filings, including that presently under consideration, the commission has quite clearly opted to treat what it believes is a tax "paid currently" as a current tax. We approved the logic of this position in New England Telephone & Telegraph Co. v. Public Utilities Commission, R.I., 376 A.2d 1041, 1051-52 (1977), where we upheld the commission's factual determination that the effect of a gross receipts tax paid both currently and on the basis of current revenue levels is such as to require no working capital allowance. We consequently upheld as well the commission's decision to account for any actual discrepancy between the level of test-year revenues and the level of corresponding gross receipts tax expense solely by means of an expense adjustment the ultimate cost of state tax adjustment used for this purpose by the company itself. Id. at 1052.

In this proceeding the company apparently does not dispute the testimony of division witness Aarne Hartikka (Hartikka) testimony incorporated by the commission into its report and order that "(t)he effect of (the ultimate cost of state tax) adjustment is to build into the Company's revenue requirement the actual tax relating to current year's revenues * * * ." Rather, it contends that the expense adjustment is alone insufficient to account for the claimed lag and that a working capital allowance is, therefore, necessary. Despite protests to the contrary by the company, we feel that its argument in this proceeding is precisely the same as that urged unsuccessfully by it in New England Telephone & Telegraph Co. v. Public Utilities Commission, R.I., 376 A.2d 1041 (1977). For the following reasons we uphold the commission's finding that "the only adjustment which can be properly made is the ultimate cost of state tax adjustment * * * ."

In New England Telephone & Telegraph Co. v. Public Utilities Commission, 376 A.2d at 1051, we explained as follows (and in somewhat simplified form) the operation of the gross receipts tax:

"Initially, the tax was payable in full on March 1 of each year, based on the gross receipts of the utility company for the prior year. In 1968 the payments were accelerated by chapter 26 of title 44. After 1968, the tax formerly due on the first day of March in year two was thereafter to be paid during year one; i. e., the tax was paid in the same year as the receipts upon which it was based were received."

Certainly, the company could not claim a return on amounts expended to pay a current tax. Id. at 1052. The actions of the commission, both in this general filing and in the last such filing, reveal its position that the tax operates essentially as a current tax. That being the case, the company's accounting procedures alone cannot bind the commission in its treatment of expense items for ratemaking purposes. Providence Gas Co. v. Burman, R.I., 376 A.2d 687, 699 (1977); New England Telephone & Telegraph Co. v. Public Utilities Commission, 116 R.I. 356, 386, 358 A.2d 1, 19 (1976).

An examination of the theory urged by the company reveals ample justification for the commission's having rejected it. The company's reasoning on this issue has been that the gross receipts tax as it was originally promulgated was an expense of year two, the year in which it was paid in full, rather than of year one, the year in which the receipts upon which it was based were collected. Consequently, when the tax was accelerated in 1968, it became a prepayment a payment in...