People's Counsel v. Public Service Commission

Decision Date27 February 1979
Docket NumberNo. 12023.,12023.
Citation399 A.2d 43
PartiesPEOPLE'S COUNSEL, Petitioner, v. PUBLIC SERVICE COMMISSION of the District of Columbia, Respondent, Potomac Electric Power Co. and the District of Columbia Department of Transportation, Intervenors.
CourtD.C. Court of Appeals

Elizabeth A. Noel, Washington, D. C., for People's Counsel.

James T. McManus, Asst. Corp. Counsel, Washington, D. C., with whom John R. Risher, Jr., Corp. Counsel at the time the case was briefed and argued, and Richard W. Barton, Deputy Corp. Counsel, Washington, D. C., were on the brief, for respondent. Louis P. Robbins, Acting Corp. Counsel, Washington, D. C., also entered an appearance for respondent.

William Dana Shapiro, of the bar of the State of Virginia, pro hac vice, by special leave of court, with whom Alan G. Kirk II, Lawrence A. Gollomp and Allen C. Barringer, Washington, D. C., were on the brief, for intervenor Potomac Elec. Power Co.

Ian D. Volner and Ruth S. Baker, Washington, D. C., entered appearances for intervenor Dept. of Transp.

Before GALLAGHER, NEBEKER and MACK, Associate Judges.

GALLAGHER, Associate Judge:

This is a petition for review of three orders of the Public Service Commission (Commission) granting Potomac Electric Power Company (Pepco) an increase in rates for retail electric service in the District of Columbia.1 It presents for our resolution a narrow issue: whether the Commission erred in refusing to deduct from Pepco's cash-working capital requirement amounts representing accrued taxes and interest on long-term bond indebtedness. We affirm the Commission.

The proceedings below were initiated on December 29, 1975, when Pepco filed an application for authority to increase rates in the District calculated to produce $57,578,000 in additional revenues. People's Counsel (petitioner) appeared on behalf of the electric consumers of the District of Columbia. D.C.Code 1977 Supp., § 43-205. Formal hearings lasting eleven days were held in June 1976. On October 20, 1976, the Commission issued its Proposed Opinion and Order (Order No. 5831) which granted Pepco an increase in rates calculated to produce $29,411,000 in additional revenues. On November 1, 1976, People's Counsel filed exceptions to the proposed order, citing as error, inter alia, the failure of the Commission to offset cash-working capital by accrued taxes and interest. On December 16, 1976, the Commission issued Order No. 5849, which rejected People's Counsel's exceptions. On February 14, 1977, the Commission denied People's Counsel's petition for reconsideration (Order No. 5856). This appeal followed.

I. Scope of Review

Before considering the specific arguments advanced by People's Counsel in this case, we reiterate what often has been stated by this court: the scope of our review of a utility commission's order is narrowly circumscribed. It is limited to questions of law and to findings of fact only if they appear "unreasonable, arbitrary, or capricious." D.C.Code 1973, § 43-706; Chesapeake & Potomac Telephone Co. v. Public Service Commission, D.C.App., 330 A.2d 236, 239 (1974); Goodman v. Public Service Commission, D.C.App., 309 A.2d 97, 100 (1973). The Commission, not this court, has been entrusted with the primary responsibility of arriving at a fair balance between competing consumer and investor interests. In the Permian Basin Area Rate Cases, 390 U.S. 747, 791-92, 88 S.Ct. 1344, 1373, 20 L.Ed.2d 312 (1968), the Supreme Court delineated the responsibilities of a reviewing court:

First, it must determine whether the Commission's order, viewed in light of the relevant facts and of the Commission's broad regulatory duties, abused or exceeded its authority. Second, the court must examine the manner in which the Commission has employed the methods of regulation which it has itself selected, and must decide whether each of the order's essential elements is supported by substantial evidence. Third, the court must determine whether the order may reasonably be expected to maintain financial integrity, attract necessary capital, and fairly compensate investors for the risks they have assumed, and yet provide appropriate protection to the relevant public interests, both existing and foreseeable. The court's responsibility is not to supplant the Commission's balance of these interests with one more nearly to its liking, but instead to assure itself that the Commission has given reasoned consideration to each of the pertinent factors.

The burden of petitioner to demonstrate reversible error is considerable. More than a difference of opinion with the Commission must be asserted. Petitioner must establish "clearly and convincingly a fatal flaw in the action taken. . . ." Goodman v. Public Service Commission, supra at 101. If the overall impact of the rate order is just and reasonable and produces no arbitrary result, judicial inquiry is at an end. Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 602, 64 S.Ct. 281, 88 L.Ed. 333 (1944). We approach petitioner's arguments with these principles in mind.

II. Cash-Working Capital

In every ratemaking proceeding, the Commission must determine four fundamentals: (1) what are the utility's gross revenues; (2) what are its operating expenses; (3) what utility property is used to provide the service for which rates are charged (rate base); and (4) what is the appropriate rate of return to be applied to the rate base in order to compute the return to which investors are entitled. I Priest, Principles of Public Utility Regulation 45 (1969). We are concerned on this appeal with only one of the above factors, the rate base, and, of that, a relatively small portion. The Commission authorized, in a rate base of $764,884,000, an allowance for cash-working capital in the amount of $13,401,000 — a figure comprising less than 2% of the total rate base. It is petitioner's contention that this amount should have been offset by accrued taxes and interest totalling approximately $12 million, thereby reducing the cash-working capital allowance to slightly over $1 million2

There is no disagreement among the parties that an allowance for cash-working capital may be properly included in the rate base.3 Utilities often experience cash flow problems because they bill for service after it is rendered. It is recognized that customer payments for services generally are not made to the utility until a portion of the cost incurred in furnishing those services is actually paid by the utility. Included, therefore, in the rate base is an allowance for working capital so that the company can keep itself current in paying costs. Cash-Working capital represents an amount which the company (investors) must supply from its own funds for the purpose of enabling it to meet current obligations as they arise due to the time lag between payment of expenses and collection of revenues. Alabama-Tennessee Natural Gas Co. v. Federal Power Commission, 203 F.2d 494, 498 (3d Cir. 1953). If investors supply the funds for working capital, they are entitled to a return on these advances and this is accomplished by including the working capital requirement in the rate base.

To the extent customers provide the revenues to the utility before it pays its costs, however, the investors are not supplying the funds to carry on. If customer-supplied funds are available, they relieve the investor of the necessity for providing them and there is no reason to include in the rate base a cash-working capital allowance. Alabama-Tennessee Natural Gas Co. v. Federal Power Commission, supra; City of Pittsburgh v. Pennsylvania Public Utility Commission, 370 Pa. 305, 88 A.2d 59 (1952). If the Commission does not make an adjustment in the cash-working capital requirement to reflect the availability of customer-supplied funds, ratepayers would be forced to pay a return on funds which they themselves have advanced. Chesapeake & Potomac Telephone Co. v. Public Service Commission, 201 Md. 170, 93 A.2d 249, 256 (1952).

An allowance by the Commission for cash-working capital is not guaranteed as a matter of course. The utility carries the burden of establishing the need for cashworking capital. Application of Wilmington Suburban Water Corp., 203 A.2d 817 (Del.Super.Ct. 1964). Absent an abuse of discretion, we may not set aside the amount authorized by the Commission once the utility has borne its burden. Narragansett Electric Co. v. Harsch, 368 A.2d 1194 (R.I. 1977); Idaho Underground Water Users Ass'n v. Idaho Power Co., 89 Idaho 147, 404 P.2d 859 (1965).

As noted previously, at issue are two sources of accrued funds available to Pepco for its own use until the funds are due and payable: accrued taxes and interest. People's Counsel contends that accrued interest on long-term debt is a customer, not investor, source of funds. Because Pepco pays interest on the debt semiannually, it accrues funds, available for its own use, before the date interest must be paid to the bondholders. People's Counsel asserts that since "customer-supplied" interest accruals are available to cover the "gap" between expenses paid and revenue collected, the $13 million cash-working capital allowance should have been offset by an approximately $8 million interest accrual. Both the Commission and Pepco consider accrued bond interest to be funds owned by investors which Pepco cannot be required to advance for day-to-day operations without compensation.

On the other hand, all parties on appeal agree that the cash-working capital requirement must be offset by taxes which have accrued in advance of payment. Rates are specifically calculated to include the tax component. To the extent accruals of taxes are available before their payment, they represent customer-supplied funds on which the investors should not be permitted to earn a return. Cleveland Electric Illuminating Co. v. Public Utilities Commission, 42 Ohio St.2d 403, 330 N.E.2d 1, 16 (1975...

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