Rhode Island Consumers' Council v. Smith

• Decision Date: 01 July 1974
• Docket Number: Nos. 73-257-M,s. 73-257-M
• Parties: , 6 P.U.R.4th 27 RHODE ISLAND CONSUMERS' COUNCIL v. Archie SMITH, in his capacity as Chairman of the Public Utilities Commission of the State of Rhode Island, et al. The NARRAGANSETT ELECTRIC COMPANY v. Archie SMITH, in his capacity as Chairman of the Public Utilities Commission of the State of Rhode Island, et al. P. and 73-271-M.P.
• Court: Rhode Island Supreme Court

Page 17

322 A.2d 17

113 R.I. 384, 6 P.U.R.4th 27

RHODE ISLAND CONSUMERS' COUNCIL v. Archie SMITH, in his capacity as Chairman of the Public Utilities Commission of the State of Rhode Island, et al.

The NARRAGANSETT ELECTRIC COMPANY v. Archie SMITH, in his capacity as Chairman of the Public Utilities Commission of the State of Rhode Island, et al.

Nos. 73-257-M.P. and 73-271-M.P.

Supreme Court of Rhode Island.

July 1, 1974.

Roberts & Willey Incorporated, Bruce G. Tucker, Dennis J. Roberts, II, Providence, for Rhode Island Consumers' Council

Edwards & Angell, Edward F. Hindle, Knight Edwards, Deming E. Sherman, Providence, for The Narragansett Elec. Co.

Archie Smith, pro se.

OPINION

KELLEHER, Justice.

On November 30, 1972, the Narragansett Electric Company (Narragansett) filed with the Public Utilities Commission (the Commission) a proposed revision in its tariffs which would increase Narragansett's annual income attributable to its intrastate Rhode Island business by some $4,822,000. The increased plaintiff was to become effective on January 1, 1973. However, acting pursuant to G.L.1956 (1969 Reenactment) § 39-3-11, as amended by P.L. 1969, ch. 240, sec. 5, the Commission entered orders suspending the proposal pending its consideration of the new tariff. Thereafter, there followed an extended public hearing at which the Rhode Island Consumers' Council (the Council) appeared in opposition to Narragansett's proposal.

On October 1, 1973, the Commission announced its decision. It rejected the proposed tariff but permitted Narragansett to file a new tariff which would increase its Rhode Island revenue by about $3,013,000 annually. Thereafter, relying on § 39-5-1 the Council filed its statutory petition for certiorari. Later, at Narragansett's request, we issued the common-law writ of certiorari in order to review the Commission's findings, which the utility averred were erroneous. We have consolidated both proceedings.

Within recent times, we have pointed out that in any public utility rate case, there are three general determinations to be made. The first is the selection of an appropriate test period during which the utility's revenues, expenses, rate base and rate of return may be measured. The test period is usually a 12-month period. Second, there must be established the utility's rate base, which is its total investment in, or fair value of, the used and useful property necessarily devoted to the rendering of the regulated service. Once the rate base has been computed, with proper adjustments being made for the utility's operating expenses and revenues, all that remains is the last element, the setting of an allowable rate of return, that is, the percentage by which a utility's rate base is multiplied in order to determine the revenue needed to pay expenses and to acquire investment capital. The definitions of test period, rate base, and rate of return to which we have just alluded can be found in Rhode Island Consumers' Council v. Smith, 111 R.I. 271, 302 A.2d 757 (1973).

Narragansett's proposed tariff sought a rate of return figured at 7.94 per cent. The Council took a position that a 7.25 per cent was just and reasonable. The tariff authorized by the Commission gives Narragansett a 7.60 per cent rate of return.

Here, the Council faults the Commission in many areas but lays great stress on the Commission's failure to reduce Narragansett's rate base by some $747,000 in unamortized tax credits and its failure to offset any increase in wage and salary expenses by an alleged increase in employee productivity. Conversely, Narragansett contends that the Commission erred by refusing to base the wage and salary adjustment for 1972 on a full 12-month period, by excluding from the rate base about $104,000 in prepaid insurance premiums and by miscalculating the amount Narragansett needs for its cash working capital. We will first consider the Council's contentions and then go on to those being pressed by Narragansett.

As we turn to our task, we are not acting as factfinders. Factfinding is the Commission's job. Our objective is to determine whether the Commission's decision and order are lawful and reasonable and whether the findings are fairly and substantially supported by legal evidence and sufficiently specific to enable us to ascertain whether the facts upon which they are premised afford a reasonable basis for the result reached. Necessary factual determinations need not be set out in precise languate but they may be fairly and reasonably implied from the Commission's language and actions. Rhode Island Consumers' Council v. Smith, supra.

The Unamortized Investment Tax Credit

As the result of federal legislation granting a so-called 'investment credit,' the federal income taxes for which Narragansett became actually liable were reduced on and after January 1, 1962 by a sum equal to three per cent of the amount it invested in certain newly acquired depreciable equipment that formed part of its plant. Revenue Act of 1962, 26 U.S.C. § 38, 76 Stat. 962. Narragansett took advantage of this congressional action and has recorded the tax credit in a separate account which it has amortized over the depreciable life of the property to which the credit applies. At the time of the hearing, the test-year balance in this account totaled $747,000. In computing its cost of serices, Narragansett included an assessment for federal income tax expense that exceeded $3,500,000. Narrangansett's computations did not include any reduction for $747,000. The Commission approved Narragansett's income tax calculations. The Council argues here, as it did before the Commission, that the tax credit should be treated as a 'flow through' item and thereby reduce its tax expense by the $747,000. Narragansett contends that the Commission's 'normalization' treatment of the credit was warranted.

'Flow through' and 'normalization' are part of the ratefixer's everyday jargon. Under 'normalization' the utility used the allowable liberalized depreciation to its advantage by taking the difference between taxes actually paid and the higher taxes reflected for ratemaking purposes as a cost of service and setting up the difference in its records as a deferred tax account. This account is then used as a source to supply a specific amount of depreciation over a specified period of time. It is obvious that the establishment of such an account obligates the utility to acquire funds to maintain that account. A principal source of these funds is the rates charged the consumer. However, when the flow-through technique is employed, the full benefit of the tax credit is immediately bestowed upon the customer. Farris & Sampson, Public Utilities-Regulation, Management & Ownership, 113-14 (1973).

In embracing the normalization approach, the Commission referred to findings it had made in an earlier proceeding entitled In Re: Tariff Filing Made by the New England Telephone & Telegraph Company on April 16, 1971, Docket No. 1092 (1973), where in pertinent part it ruled:

'We are convinced that the method we have used which results in a sharing of the benefits of the Investment Tax Credit by giving the consumer the benefit of the annual amortization and the Company the benefit of the use of the funds derived from the credit is a fair and reasonable approach to the treatment of this item.'

The Commission also made reference to the intent of Congress in enacting a 1964 amendment ¹ of the 1962 Revenue Act. By this amendment, federal regulatory bodies were prohibited from deducting the unamortized revenue from a utility's rate base. The prohibition, however, did not specifically bar deduction by a state regulatory body. See, City of Pittsburgh v. Pennsylvania Public Utility Comm'n, 208 Pa.Super. 260, 222 A.2d 395 (1966). The Commission further noted that similar tax credits, such as the 'Job Development Credit,' i.e., the Work Incentive Program, 26 U.S.C. § 46, as amended by Pub.L.No. 92-178, § 107(a)(1), 85 Stat. 507 (1971), are available to a public utility only if the federal or state regulatory body does not reduce the rate base by the amount of unamortized tax credit.

The Commission appears to have been striving for consistency in the treatment of the rate base for the purposes of both federal and state computations. With the tax investment credit being included in the rate base on the state level, the rate base figure will be one and the same for both federal and state purposes. ²

In rejecting the approach advocated by the Council, the Commission has put a public utility operating in Rhode Island in conformity with those operating under federal regulations and at the same time permits the Rhode Island utility to take advantage of other available tax credits. The Commission balanced the obvious benefit to the consumer by a one-shot advantage of decreasing the rate base by some $747,000 for one year, against giving the consumer a long-term benefit that will extend over a number of years while at the same time giving the utility the use of the unamortized funds which will hopefully be used to generate further income and thereby reduce the cost of service. Flow through increases the revenue only for the test period but creates a revenue gap for the years that follow. It is a short-range approach to the problem, while the long-term normalization affords greater hope for stabilization of rates in the future.

We acknowledge that in January 1963, the Commission's predecessor had specifically directed Narragansett to reduce its rate base by the entire amount of its then unamortized tax credit. We need only say that today's administrators are not bound by any prior administrative orders as to what shall be included in the rate base. See, Narragansett Electric Co. v. Kennelly, 88 R.I. 56, 143 A.2d 709 (1958). The treatment to be given a tax credit is a matter within the discretion of the Commission. New England Tel. & Tel. Co. v. Department of Public...