Narragansett Elec. Co. v. Burke

• Decision Date: 03 May 1984
• Docket Number: Nos. 82-155-M,s. 82-155-M
• Citation: 475 A.2d 1379
• Parties: NARRAGANSETT ELECTRIC COMPANY v. Edward F. BURKE et al. Dennis J. ROBERTS II v. NARRAGANSETT ELECTRIC COMPANY. P., 82-157-M.P.
• Court: Rhode Island Supreme Court

Page 1379

475 A.2d 1379

NARRAGANSETT ELECTRIC COMPANY v. Edward F. BURKE et al.

Dennis J. ROBERTS II v. NARRAGANSETT ELECTRIC COMPANY.

Nos. 82-155-M.P., 82-157-M.P.

Supreme Court of Rhode Island.

May 3, 1984.

Thomas G. Robinson, Providence, Samuel Huntington, Westborough, Mass., for petitioner.

Dennis J. Roberts II, Atty. Gen., Daniel J. Schatz, John R. McDermott, Sp. Asst. Attys. Gen., for respondent.

OPINION

MURRAY, Justice.

This is a consolidated appeal from a decision of the Public Utilities Commission (commission) concerning a request for a rate increase filed by Narragansett Electric Company (Narragansett) on July 1, 1981.

On that date Narragansett Electric Company filed with the commission new rates designed to increase its revenues by roughly $14.4 million, or 5.2 percent. On March 30, 1982 the commission issued its initial order awarding Narragansett a rate increase of $9,506,000.

On April 7, 1982, Narragansett submitted to the commission its proposed schedule of rates. In that filing, Narragansett also directed the commission's attention to four "clerical discrepancies" in its initial order which, if revised, would reduce Narragansett's need for additional revenues by $120,000. On April 9, 1982, the commission corrected what it apparently felt were simple clerical errors in its initial order and authorized a compliance rate increase of $9,386,000.

Both Narragansett and the Attorney General of the State of Rhode Island have filed appeals from the commission's final order in docket No. 1591. Narragansett initially appealed upon three grounds, including two commission findings concerning Narragansett's calculation of its federal income tax expense.

Narragansett's grounds of appeal were originally that (1) the commission improperly computed Narragansett's interest expense deduction for federal income tax purposes, (2) the commission improperly disallowed Narragansett the recovery of certain tax expenses attributed to Narragansett's production facilities, and (3) the commission failed to authorize a legally sufficient return on equity for Narragansett's shareholders.

On January 20, 1983, Narragansett notified this court that it was dropping its third reason of appeal upon the ground that it was moot. ¹

The Attorney General, in his capacity as legal representative of the Division of Public Utilities (the division), has also raised three issues on appeal. One of these is identical to the question posed in Narragansett's second ground of appeal--what is the amount of tax expense attributed to Narragansett's production facilities that is properly recoverable from Rhode Island customers? The other two involve the commission's calculation of Narragansett's working capital needs and its inclusion of the Providence supplemental property tax in Narragansett's rate base. ²

Consequently, there are presently four issues pending before this court. Two were first raised by Narragansett concerning the commission's calculation of its federal income tax liability. The final two were raised by the Attorney General and involve the commission's calculation of Narragansett's working capital needs and its treatment of the Providence supplemental property tax. For purposes of convenience, our discussion will address these remaining justiciable questions in the reverse order in which they were presented on appeal.

The commission's final order of April 9, 1982 permitted Narragansett the right to recover an additional $261,000 in property taxes it incurred as a result of the city of Providence's supplemental tax. The division argues that such commission action was illegal since it violated the general regulatory rule prohibiting retroactive ratemaking by a public utilities commission. See New England Telephone and Telegraph Co. v. Public Utilities Commission, 116 R.I. 356, 391, 358 A.2d 1, 21 (1976).

We have recently considered and rejected this same issue and argument in Providence Gas Co. v. Burke, No. 82-340-M.P., 475 A.2d 193 (R.I., filed February 21, 1984). The mandate of that opinion is equally applicable to this appeal and requires our affirmance of the commission's treatment of the supplemental tax.

The division next argues that the commission improperly computed Narragansett's working capital needs, resulting in an overstatement in its rate base of $10,043,000. Specifically, the division contends that Narragansett's method of computing its cash working-capital needs failed to account for its unbilled revenues earned during its lag period, the interval between the utility's rendition of service and its receipt of payment therefor. Valley Gas Co. v. Burke, R.I., 406 A.2d 366, 371-72 (1979).

The Division's argument is essentially the following. Expenses incurred by Narragansett in making December sales of electricity during the test year are included in Narragansett's total cost of service for the test year. Revenues earned from those December sales, however, are not included in test-year revenues at all. Narragansett defers revenue recognition for these sales until the January following the close of the test year. The result of this inclusion of December expenses and exclusion of "December" revenues increases Narragansett's cash working-capital needs above an amount properly recoverable.

In the hearings before the commission, the division proposed the adoption of a different method of accounting for Narragansett's working-capital needs which, it claims, would more accurately match Narragansett's test-year expenses and revenues. Mr. James Rothschild, a division witness, suggested that Narragansett base its working capital computation upon a different reference point than that employed by Narragansett. Specifically, he recommended that Narragansett employ the date it books its revenues and expenses, instead of the date it renders service, to calculate working capital needs.

Mr. Rothschild's suggestion was rejected by the commission on the ground that it did not accurrately reflect Narragansett's working-capital needs.

Upon reviewing commission findings concerning the proper amount of cash working-capital required by a utility to meet its expenses during its "lag" period, our task is limited. Since determinations of cash working-capital allowances are questions of fact to be decided by the commission, see Michaelson v. New England Telephone & Telegraph Co., 121 R.I. 722, 728, 404 A.2d 799, 803 (1979), "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.' " Id. Where the commission's findings are supported by substantial evidence, they are generally unassailable on review. Valley Gas Co. v. Burke, R.I., 446 A.2d 1024, 1030 (1982); Providence Gas Co. v. Burke, R.I., 419 A.2d 263, 268 (1980).

In this case, the commission explicitly reviewed the two alternate methods presented to it by Narragansett and the division for calculating Narragansett's working-capital needs. In its report and order dated March 30, 1982, the commission stated that it was "not convinced that the results of the company's lead-lag study are inaccurate." The commission also found that "the Company's analysis correctly synchronizes revenue and expense lags while the Division's adjustment distorts the Company's working capital needs by failing to measure revenue and expense lags, from the same starting point."

These findings are supported by substantial evidence and provide a specified and reasonable basis for the commission's result. See Rhode Island Consumers' Council v. Smith, 111 R.I. 271, 277, 302 A.2d 757, 762 (1973). The company presented two well-documented exhibits, Nos. N-21 and N-27, which plainly supported the commission's finding that Narragansett must pay for its purchased power three days before its customers pay Narragansett for the same power. This three-day lag period created a negative balance of $193,000 in Narragansett's working-capital account, which balance the commission properly accepted. Consistent with our prior holdings, the commission's findings as thus supported will not be disturbed by this court upon review.

Additionally, Narragansett's method of calculating its cash working-capital needs has been previously accepted by this court in Narragansett Electric Co. v. Harsch, 117 R.I. 395, 406-10, 368 A.2d 1194, 1202-03 (1977). We see no reason to depart from our holding in Harsch when the commission's action is totally reasonable.

Both Narragansett and the division challenge the commission's allowance of $190,000 for additional tax expense in calculating Narragansett's federal income tax liability. Such expense has arisen since Narragansett previously had taken accelerated depreciation on particular assets in calculating its federal income tax expense. The present effect of this prior acceleration has been to create an excess of book depreciation over tax depreciation upon the same assets. Consequently, Narragansett has a lower depreciation deduction for tax purposes than it does for book purposes and an additional tax expense. ³

Narragansett contends that the correct allowance for this expense amounts to $898,000 and that consequently the commission's ruling understated its federal income tax liability by $603,000. The division, however, contends that Narragansett was not entitled to any allowance for additional tax expense in 1981, and that the commission's order therefore effectively resulted in higher electric rates to the Rhode Island consumer by creating an intrastate expense that Narragansett never in fact incurred. Alternatively, both Narragansett and the division argue respectively as respondents in each other's appeal that the commission's calculation of the additional tax expense was a reasonable determination that should be sustained.

This court is all too familiar with the...