Southern Cal. Edison Co. v. Public Utilities Com.

• Decision Date: 23 March 1978
• Docket Number: S.F. 23500
• Citation: 576 P.2d 945,144 Cal.Rptr. 905,20 Cal.3d 813
• Court: California Supreme Court
• Parties: , 576 P.2d 945, 24 P.U.R.4th 588 SOUTHERN CALIFORNIA EDISON COMPANY, Petitioner, v. PUBLIC UTILITIES COMMISSION et al., Respondents.

Page 905

144 Cal.Rptr. 905

20 Cal.3d 813, 576 P.2d 945, 24 P.U.R.4th 588

SOUTHERN CALIFORNIA EDISON COMPANY, Petitioner, v. PUBLIC UTILITIES COMMISSION et al., Respondents.

S.F. 23500.

Supreme Court of California, In Bank.

March 23, 1978.

As Modified March 30, 1978.

Rehearing Denied May 25, 1978.

Rollin E. Woodbury, William E. Marx, Rosemead, O'Melveny & Myers, Allyn O. Kreps and Keith H. Beyler, Los Angeles, for petitioner.

Richard D. Gravelle, J. Calvin Simpson, Hector Anninos, John S. Fick and Timothy E. Treacy, San Francisco, for respondents.

MOSK, Acting Chief Justice.

By this petition for writ of review Southern California Edison Company (Edison) challenges the lawfulness of portions of Decision No. 85731 of respondent Public Utilities Commission which require it to amortize, by 36 months of billing credit to its customers, substantial overcollections generated by operation of its "fuel cost adjustment clause." Edison's principal contention is that because the funds in issue were lawfully collected pursuant to a rate structure found by the commission to be just and reasonable at the time, the order to return them constitutes illegal "retroactive ratemaking." We conclude that the contention is without merit and the decision should be affirmed.

If the prohibition against retroactive ratemaking is to remain a useful principle of regulatory law and not become a device to fetter the commission in the exercise of its lawful discretion, the rule must be properly understood. In Pacific Tel. & Tel. Co. v. Public Util. Com. (1965) 62 Cal.2d 634, 44 Cal.Rptr. 1, 401 P.2d 353 (hereinafter Pacific Tel. & Tel.), the first decision of this court on the question, ¹ we construed Public Utilities Code section 728 to vest the commission with power to fix rates prospectively only. ² But we did not require that each and every act of the commission operate solely in futuro; our decision was limited to the act of promulgating "general rates." Thus we held (at p. 650 of 62 Cal.2d, at p. 10 of 44 Cal.Rptr., at p. 362 of 401 P.2d) that "the Legislature has not undertaken to bestow on the commission the power to roll back general rates already approved by it under an order which has become final, or to order refunds of amounts collected by a public utility pursuant to such approved rates and prior to the effective date of a commission decision ordering a general rate reduction." (Italics added.) And we concluded by reaffirming (at p. 655 at p. 14 of 44 Cal.Rptr., at p. 366 of 401 P.2d) "the rule that general rate making is legislative in character and looks to the future." (Italics added.)

Pacific Tel. & Tel. was precisely such a general ratemaking case. There the commission conducted an extensive investigation of the rates charged by the utility in question, found them to be unreasonably high, and fixed new lower rates. In addition, however, the commission ordered the utility to refund to its customers all charges collected in excess of the new rate level since the beginning of the investigation. The order, of course, resulted in the new general rate structure taking effect retroactively, a disposition which we ruled beyond the statutory power of the commission. ³

The second decision of this court applying the rule against retroactive ratemaking was City of Los Angeles v. Public Utilities Commission (1972) 7 Cal.3d 331, 102 Cal.Rptr. 313, 497 P.2d 785 (hereinafter City of Los Angeles I ). There the commission, after full hearings, found a utility's rates to be unreasonably low and fixed new higher rates. We issued a stay permitting the increased rates to be collected subject to refund pending our ruling on the petition for writ of review. In due course we annulled the decision, while recognizing that some rate increase was justified. The utility requested that we remand the case to the commission for the fixing of new rates and that the refunds be limited to the difference between such rates and those prescribed in the annulled decision. Again such an order would evidently have had the effect of permitting a new general rate structure to operate retroactively. We therefore reiterated the rule of Pacific Tel. & Tel. that "general rate making is legislative and looks to the future" (7 Cal.3d at p. 338, 102 Cal.Rptr. at p. 319, 497 P.2d at p. 791), and directed refund of the entire rate increase. (Id. at pp. 356-357, 102 Cal.Rptr. 313, 497 P.2d 785.)

We question neither the rule stated in the foregoing decisions nor its application to the facts there presented. But this is not such a case. At the risk of belaboring the obvious, we observe that before there can be retroactive ratemaking there must at least be ratemaking. There undoubtedly was ratemaking in both Pacific Tel. & Tel. and City of Los Angeles I; as we shall explain, however, ratemaking within the meaning of the cited decisions did not occur in the case at bar.

We begin with a review of the factual and legal background of this dispute. In a general rate proceeding in 1971 the commission granted Edison a rate increase of $105.5 million so that it might realize a return of 7.9 percent in the test year 1972. (Re So. Cal. Edison Co. (1971) 72 Cal.P.U.C. 282, 317.) The commission's estimate for Edison's cost of fuel in 1972 was based on actual prices paid in the period preceding the decision. In the months following the decision, however, Edison's fossil fuel costs together with those of all utilities rose substantially. Edison thereupon filed an application for immediate rate relief and for authority to amend its tariff to include an adjustment clause permitting periodic future billing adjustments "to reflect future increases in the cost of fuel." The commission granted an immediate rate increase of $14.3 million, and authorized the requested fuel clause. (Re So. Cal. Edison Co. (1972) 73 Cal.P.U.C. 180.)

The clause operated as follows: at regular intervals Edison prepared a forecast of the quantity of fossil fuel it would need to purchase in the ensuing 12-month period under average weather conditions. It then calculated the cost of such fuel at current prices, and compared that figure with the cost of the same quantity of fuel at the prices reflected in its existing base rates. If the difference worked out to .001 cent per kilowatt-hour or more, ⁴ Edison notified the commission of this fact by filing an "advice letter" requesting authority to increase future billings to compensate for its predicted higher fuel expenses.

Formal hearings on such requests were not contemplated; during the period here in issue none was held, and commission approval was routinely granted. In each instance the ensuing adjustment was then a matter of simple arithmetic: on each bill the number of kilowatt-hours sold was multiplied by the "fuel cost adjustment billing factor" necessary to raise the additional revenue, and the resulting "adjustment amount" was added to the customer's monthly charge. The process was repeated in each billing until the next such adjustment was granted and took effect, and revisions of the billing factor were permitted as often as every three months. (Id. at pp. 184-185.) ⁵

It is important to keep in mind that the periodic adjustments in Edison's rates brought about by operation of the fuel clause were intended to contain no element of profit whatever. A utility's rates are essentially the sum of two distinct components: its operating expenses and its return on invested capital. "The basic principle (of ratemaking) is to establish a rate which will permit the utility to recover its cost and expenses plus a reasonable return on the value of property devoted to public use." (Italics added.) City & County of San Francisco v. Public Utilities Com. (1971) 6 Cal.3d 119, 129, 98 Cal.Rptr. 286, 291, 490 P.2d 798, 803.) It is thus elementary regulatory law that the "return" i.e., the profit of the utility is calculated solely on the rate base i.e., the capital contributed by its investors; the utility is not entitled to earn an additional profit on its expenses, but only to "recover" them on a dollar-for-dollar basis as part of the rates. A fortiori, the same principles apply to an increase in rates resulting from operation of a fuel cost adjustment clause: as its name indicates, the purpose of such a clause is to permit prompt rate adjustment to offset unusual changes in fuel costs, and no portion of such a rate increase may lawfully represent a profit to the utility.

It is clear that the fuel clause in the case before us was designed to operate within the law. The commission set forth its reasons for adopting the clause in a formal finding of fact: "Edison's proposed fuel cost adjustment billing factor will be adopted because (1) in an inflationary period with rapid changes in the cost of fuel, an expedited method is required to permit a utility to recover these costs so that its ability to function is not impaired; (2) because fuel costs are at least 20 percent of Edison's total costs, an expedited proceeding to recover these increases will lessen the frequency of general rate cases; and (3) the provision enhances a utility's position in the financial community." (Italics added.) (Re So. Cal. Edison Co. (1972) 73 Cal.P.U.C. 180, 190.)

As the emphasized language demonstrates, the purpose of Edison's fuel clause was primarily to permit the company to "recover" its increased fossil fuel costs in an expedited manner. ⁶ When in the following year the commission authorized the use of a similar fuel clause by the other major California electric utilities, it reiterated that purpose each time in identical words. (Re Pacific Gas & Electric Co. (1973) 74 Cal.P.U.C. 781, 790-791; Re San Diego Gas & Electric Co. (1973) 75 Cal.P.U.C. 267, 274.) And throughout the decision now under review the commission consistently describes the purpose of such fuel clauses as "dollar for dollar reimbursement" for the increased cost of fossil fuel. (---Cal.P.U.C. ---, ---(D...