New England Tel. & Tel. Co. v. Public Utilities Com'n

• Decision Date: 09 January 1984
• Citation: 470 A.2d 772
• Parties: NEW ENGLAND TELEPHONE & TELEGRAPH COMPANY v. PUBLIC UTILITIES COMMISSION.
• Court: Maine Supreme Court

Page 772

470 A.2d 772

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

Supreme Judicial Court of Maine.

Argued Nov. 7, 1983.

Decided Jan. 9, 1984.

Pierce, Atwood, Scribner, Allen, Smith & Lancaster, Ralph I. Lancaster (orally), Everett P. Ingalls, III, Portland, for plaintiff.

Charles F. Dingman (orally), Joseph G. Donahue, William E. Furber, Public Utilities Com'n, Augusta, for defendant.

Before NICHOLS, ROBERTS, WATHEN, GLASSMAN and SCOLNIK, JJ., and DUFRESNE, A.R.J.

NICHOLS, Justice.

The Plaintiff, New England Telephone and Telegraph Company (NET), seeks review of a decision and order of the Public Utilities Commission (Commission), the Defendant, which denied NET's proposed rate increase and instead authorized NET to file a revised schedule of rates designed to increase revenues by a lesser amount. NET challenges the Commission's rulings on (1) the adjustment of test year expenses; (2) the amortization of deferred tax reserve; (3) the imputation of interest on certain plant; and (4) the capitalization of research and engineering expenses.

We affirm the Commission's decision and order.

Pursuant to 35 M.R.S.A. § 64 (Supp.1982-83), NET on July 27, 1982, filed with the Commission revised tariffs to become effective August 26, 1982, seeking a $49.8 million increase in its annual gross revenues. This would augment revenues by approximately 30% over the previous year and would mean that the average telephone-related costs to a Maine family of four would rise, according to the Commission's estimate, by $200 per year. The effective date of the tariffs was suspended twice by orders of the Commission dated August 4, 1982 and November 2, 1982.

Beginning on October 18, 1982, approximately thirty days of hearings were conducted. Over 160 exhibits were introduced, and more than 4,200 pages of testimony were recorded.

The Commission afterward concluded in its decision and order dated April 26, 1983, that NET was entitled to a rate increase of $11.4 million, which represented a 7% increase over 1981 rates. This computation was premised on a finding that a fair rate of return on NET's investment was 11.31%. In order to establish what rate structure would yield the requisite return on investment, it was necessary to compute three items: NET's expected gross utility revenues, its expected operating expenses, and its property providing service for which rates are charged and comprising the "rate base" on which a return should be earned. ¹

In the course of calculating these variables, the Commission made, inter alia, the following determinations: First, in projecting NET's wage costs (a major component of total expenses), the Commission took into account employee reductions occurring beyond the test year. Second, the Commission decided to amortize excess accruals in NET's deferred tax reserve, thereby increasing NET's operating income. In addition, the Commission reduced the rate base to reflect the smaller reserve. Third, in calculating NET's federal income tax expense, the Commission imputed an interest expense on the amount of investment financed by the Job Development Investment Tax Credit (often referred to as JDITC), thus reducing its income for tax purposes. Finally, rather than treating research and systems engineering costs as a current expense, the Commission capitalized and amortized them over a ten-year period.

On May 25, 1983, NET filed a complaint seeking judicial review of that decision and order. The complaint alleges that the rates and charges authorized by the decision and order are too low for NET to obtain what the Commission had determined to be the fair rate of return and are therefore confiscatory. NET contends that the Commission acted arbitrarily and abused its discretion in its treatment of (I) work force reductions, (II) excess of deferred taxes, (III) JDITC-financed plant, and (IV) research and engineering costs, and consequently understated its revenue requirement by about $6.5 million in all. ² Furthermore, NET contends that the Commission's handling of the excess deferred taxes could jeopardize NET's qualification for taking the federal income tax benefit of accelerated depreciation.

We shall consider each of the challenged actions seriatim.

I.

A basic principle of ratemaking is that a utility's revenues, expenses and plant in the near future may be estimated by matching these items within a recent twelve-month operating period, called the "test year." The parties to this proceeding agreed that the test year would be the calendar year 1981. It is well established that adjustments in test year results should be made to reflect subsequent known changes that would be certain to alter significantly the assumed balance among revenues, expenses and plant. Camden and Rockland Water Co. v. Public Utilities Commission, 432 A.2d 1284, 1287 (Me.1981); Central Maine Power Co. v. Public Utilities Commission, 153 Me. 228, 234-38, 136 A.2d 726, 731-33 (1957).

NET made three adjustments relating to wage and benefit costs: annualization of a wage and benefit increase that went into effect for the latter part of 1981, which reduced net income by $1.6 million; annualization of 1982 wage increases, which reduced net income by $2 million; and an adjustment for the transfer of employees to American Bell, Inc., occurring on January 1, 1983, which increased income by $619,000. These were accepted by the staff and the Commission.

The staff proposed, and the Commission accepted, a fourth adjustment, however, to reflect employee reductions occurring in 1982. This adjustment was calculated as decreasing payroll costs significantly and thereby resulting in an increase in net income of $1.7 million. NET objects to this calculation as an arbitrary departure from test year "matching" methodology, but it fails to distinguish in any persuasive manner this adjustment from the other three adjustments. NET cannot consistently maintain that adjustments for wage hikes are reasonable, in that they provide for a known change from which it may be predicted with certainty that wage costs will rise, and at the same time argue that employee reductions are not a known change from which it can be predicted with certainty that wage costs will fall.

NET asserts that it conclusively refuted the assumption that employee reductions would tend to diminish wage costs by introducing evidence of its expenses for July, 1982, and showing that these expenses, when annualized, exceeded the staff's projected calculations for 1982. It also presented evidence of its expenses for a twelve-month period ending September, 1982. Such evidence is far from conclusive. It would be impossible to prove the precise extent of NET's expenses for 1982 before the year had ended. The months examined may have been atypical of the calendar year as a whole.

Even if it should be assumed that the financial data for the months examined were representative of the entire year, it does not follow that the data prove the fallacy of the Commission's common-sense assumption that wage costs would decline as the number of wage earners declined. Under the test year methodology, the Commission must be guided by certain facts occurring outside the test year in preparing its estimates, see Central Maine Power Co. v. Public Utilities Commission, supra, 153 Me. at 236-42, 136 A.2d 726; but its estimates need not be consistent with all facts outside the test year in order to be reasonable. By necessity, the Commission deals with estimates and hypothetical constructs. Such estimates must be based on reasonable formulations. The Commission has broad discretion in selecting among various rate-making methodologies, provided that they are reasonably accurate. See New England Telephone & Telegraph Co. v. Public Utilities Commission, 390 A.2d 8, 49 (Me.1978). ³ The Commission is not required to manipulate its methodologies to eliminate every shred of suggested inaccuracy.

The Commission found, quite reasonably, that NET was really trying to obtain an attrition allowance through the backdoor without having presented a proper attrition analysis. ⁴ If NET's figures were indeed representative of the 1982 year, the most that can be said is that for unexplained reasons NET's 1982 expenses were greater than the pattern for the preceding year, taken together with relevant known variables, had foretold. NET would overlook the circumstance that there was a known change from the test year and would not make the downward adjustment in wage expenses that recognition of the change would logically compel--on the theory that this change is offset by an unproven and inconclusive increase in overall expenses caused by unpredicted variables. Such an approach would be inconsistent with the test year methodology which we have long favored. See Central Maine Power Co. v. Public Utilities Commission, 153 Me. 228, 136 A.2d 726 (1957).

Typically, this Court applies a limited and deferential standard of review to the Commission's fact-finding and choice of rate-making techniques. Central Maine Power Co. v. Public Utilities Commission, 405 A.2d 153, 182 (Me.1979). We have no reason to do less in the appeal now before us. The Commission made a reasonable and technically proper decision, which was supported by substantial evidence.

II.

Section 167 of the Internal Revenue Code provides two basic methods of calculating the annual depreciation deduction allowed with respect to a taxpayer's business property. Under the straight-line method, the taxpayer deducts an equal amount during each year of the asset's useful life. Under the accelerated method, he may deduct greater amounts during the early years of the asset's useful life. The taxes saved during these early years constitute "deferred taxes," which will eventually be collected in the form of reduced annual deductions, but the taxpayer derives a benefit by receiving what amounts to a governmental interest-free loan. The...