New England Tel. & Tel. Co. v. Public Utilities Commission

• Decision Date: 12 July 1977
• Docket Number: No. 75-195,75-195
• Citation: 118 R.I. 570,376 A.2d 1041
• Parties: NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY v. PUBLIC UTILITIES COMMISSION et al. M.P.
• Court: Rhode Island Supreme Court

Page 1041

376 A.2d 1041

118 R.I. 570

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

No. 75-195 M.P.

Supreme Court of Rhode Island.

July 12, 1977.

[118 R.I. 595] Tillinghast, Collins & Graham, Peter J. McGinn, Mark A. Pfeiffer, Providence, for petitioner; Richard W. Blackburn, Boston, Mass., of counsel.

Julius Michaelson, Atty. Gen., Gregory L. Benik and R. Daniel Prentiss, Sp. Asst. Attys. Gen., for respondents.

OPINION

DORIS, Justice.

This is a public utility rate case. It is before us on a motion by the New England Telephone and Telegraph Company (hereinafter "the company") for further consideration of a supplementary report and order of the Public Utilities Commission (hereinafter "the commission"), pursuant to our opinion in New England Tel. & Tel. Co. v. Public Util. Comm'n, 116 R.I. 356, 358 A.2d 1 (1976).

The early history of this case may be found in the above opinion. Briefly, in August 1974, the company filed a tariff with the commission seeking to increase its revenues by approximately $19,500,000. The commission eventually allowed an increase of only $7,245,000. Thereafter the company filed a petition for a writ of certiorari in this court to review the commission's order pursuant to G.L. 1956 (1969 Reenactment) § 39-5-1, as amended by P.L. 1969, ch. 240, § 8 and P.L. 1973, ch. 199, § 4. We determined that the commission's order was erroneous in three respects and remanded the case to the commission with the following instruction:

"(R)eview the evidence and testimony in the present record as supplemented by such further testimony as may be offered by the parties or by the commission's own direction. On the basis of this record so supplemented, the commission is directed to make further findings and orders in harmony with this opinion. The commission's hearing on remand is to be limited to those portions of the original report and order specifically found by this court to be lacking in evidentiary support, that is, the rate of return, the purchases from Western Electric and the working capital allowance. Any party dissatisfied with said decision may, by motion filed in this court within 20 days following the commission's action, bring the matter before us for further consideration." Id. at 394-95, 358 A.2d at 23.

The commission subsequently held seven days of hearings. On December 10, 1976, it issued a supplementary order and report which permitted the company to collect $742,000 of additional revenue. On December 17, 1976, the company moved for further consideration of that supplementary order on the following grounds: first, that the commission failed to consider the company's post test year experience in certain instances, and as a result did not make a suitable erosion adjustment or rate of return; second, that the commission misconceived the nature of the gross receipts tax and consequently failed to make an adequate working capital allowance; third, that the commission adopted a return on equity that was based on faulty and discredited testimony.

It is important to keep in mind the principles of appellate review in a public utility rate case. However, there is no need at this point to discuss them at great length because they are well known and have been summarized in several recent opinions of this court. New England Tel. & Tel. Co. v. Public Util. Comm'n, 116 R.I. at 362-63, 358 A.2d at 7; Rhode Island Consumers' Council v. Smith, 111 R.I. 271, 277, 302 A.2d 757, 762-63 (1973). It is enough here to note that we do not sit as factfinders; our role is simply to determine if the commission's decision was lawful and reasonable and substantially supported by legal evidence. Bearing this limited role in mind, we now consider individually each of the company's claims.

I. Use of Post Test Year Experience.

The company claims that the commission erroneously used stale information to reach its decision at the remand proceeding, in that it used data from the original hearing (hereinafter referred to as "the 1974 data") instead of the company's most recent experience (hereinafter "the 1976 data"). ¹ The argument is aimed in particular at the commission's use of the 1974 rate base to determine the erosion adjustment and the allowed rate of return.

Our discussion of the company's claim will be structured as follows: first, we will set out the commission's actions with respect to erosion and the rate of return, and the company's objections thereto; second, we will discuss the general principles involved in the use of post test year data in a remand proceeding; and third, we will consider the commission's decision in light of these principles.

A. The commission's decision. In its original order, the commission added an erosion adjustment ² of 0.3 percent to the company's otherwise allowable rate of return. On appeal, we found that adjustment to be without evidentiary support and directed the commission to make a suitable erosion adjustment based on the evidence before it. New England Tel. & Tel. Co. v. Public Util. Comm'n, 116 R.I. at 371, 358 A.2d at 12. On remand, the commission found the most suitable means of establishing an erosion adjustment to be that originally proposed by the company in the first proceeding; namely, to add to the otherwise allowable rate base an amount equal to the company's average annual increase in investment. Accordingly, the commission calculated the increase in investment which occurred subsequent to the 1974 test year, from June 30, 1974 to March 31, 1976. It then took the average 12 month increase over this period and added that amount to the 1974 rate base. ³

It is this use of the 1974 rate base to which the company objects. The company argues that to achieve a meaningful erosion adjustment, the average increase in investment must be added to the actual rate base at the time of the remand. The company thus wants the rate base "updated".

Next, we turn to the commission's use of post test year data with respect to the rate of return. In both the original decision and the decision on remand, the commission followed the traditional path of determining the company's capital structure, then determining the cost of debt and equity, and finally combining these figures to obtain the allowed rate of return. This rate of return was then multiplied by the rate base to determine the allowed earnings.

In its original decision the commission disallowed certain proposed construction costs and concluded that since the company's need to attract capital was thereby diminished, its required rate of return on equity could also be reduced. On appeal we found this portion of the decision to be without evidentiary support and directed the commission on remand to reconsider the rate of return. On remand the commission heard additional evidence on the issue, including post test year data, and made a completely new determination of the allowed return. In so doing, it used the company's 1975 capital structure, which differed from the 1974 capital structure. It then multiplied the new rate of return by the 1974 rate base, to determine the allowed earnings.

The company again objects to the use of a 1974 rate base. It claims that when it is used in conjunction with a post test year capital structure, two undesirable consequences occur; one, a distorted view of the company's financial situation is created, and two, the company's right to use accelerated depreciation for purposes of federal income taxes is jeopardized. ⁴

B. General principles regarding use of post test year data. It is our task to decide whether the commission's failure to consider the company's 1976 rate base in the instances described above was unreasonable or otherwise not in accord with the law of this state. The rules of law are not in dispute. The commission must make rates for the future. Rhode Island Consumers' Council v. Smith, 113 R.I. 232, 319 A.2d 643 (1974). In so doing, it cannot shut its eyes to the company's actual operating results, nor can it rely on prophecy when the company's real experience is available. "(E)laborate calculations which are at war with realities are of no avail." West Ohio Gas Co. v. Public Util. Comm'n, 294 U.S. 79, 82, 55 S.Ct. 324, 325, 79 L.Ed. 773, 776 (1935). The question before us in this case is to what extent the above principles obligate the commission to take into account post test year data in a remand proceeding.

Perhaps because this issue has only recently grown to be a significant problem, there are few relevant cases, and none that we regard as controlling. For example, the company relies on Letourneau v. Citizens Util. Co., 128 Vt. 129, 259 A.2d 21 (1969), for the proposition that the commission must consider updated information on remand. However, in that case it was only decided that where a remand hearing would be held five years after the initial tariff filing, the commission did not abuse its discretion in considering updated information on remand. The case of Chenango & Unadilla Tel. Corp. v. Public Serv. Comm'n, 45 A.D.2d 409, 357 N.Y.S.2d 937 (1974) presents a factual situation which is widely divergent from the one before us. The thrust of the holding in that case is that if a commission takes into consideration post test year revenues to set rates, it must also take into account other post test year changes in a utility's position. A recent Massachusetts decision directed a regulatory agency to consider the most recent available data on remand of a rate case, but that direction was explicitly linked to a finding of confiscation. New England Tel. & Tel. Co. v. Department of Pub. Util., Mass., 354 N.E.2d 860, 866 (1976). No finding of confiscation was made by us prior to the remand in this case. The company also refers to many cases holding that rates are made for the future and cannot be based on stale information. But the extent to which those cases impose an obligation to hear post test year information is...