Virginia Elec. & Power Co. v. Public Service Commission

• Decision Date: 04 April 1978
• Docket Number: No. 14050,14050
• Citation: Virginia Elec. & Power Co. v. Public Service Commission, 242 S.E.2d 698, 161 W.Va. 423 (W. Va. 1978)
• Court: West Virginia Supreme Court
• Parties: VIRGINIA ELECTRIC AND POWER CO. v. The PUBLIC SERVICE COMMISSION of W. Va.

Page 698

242 S.E.2d 698

161 W.Va. 423

VIRGINIA ELECTRIC AND POWER CO. v.The PUBLIC SERVICE COMMISSION of W. Va.

No. 14050.

Supreme Court of Appeals of West Virginia.

April 4, 1978.

Syllabus by the Court

The Public Service Commission may employ such methods for determining utility rates as it deems suitable, so long as the end result guarantees West Virginia consumers good service at fair rates and enables utilities to earn a competitive return for their stockholders upon their investment in West Virginia.

Jackson, Kelly, Holt & O'Farrell, F. Paul Chambers and Michael A. Albert, Charleston, Hunton & Williams, Guy T. Tripp, III and Moira K. Donoghue, Richmond, Va., for petitioner.

C. Terry Owen, Legal Division, Public Service Commission, Charleston, for respondent.

HARSHBARGER, Justice:

This is an appeal by Virginia Electric and Power Company from a final order of the West Virginia Public Service Commission granting Vepco a rate increase of $330,000 of a requested $1,770,000.

Vepco is engaged in the electric utility business in West Virginia and North Carolina and in the electric and gas business in Virginia.It furnishes retail electric service to 18,960 customers in five counties and eight municipalities in West Virginia.

I.

The Company assigns as errors the Commission's method of allocating to West Virginia rates, its operating expenses pertaining to electric transmission and distribution facilities in West Virginia; and the method of allocation used by the Commission in dealing with tax credits.

A.

The company books show several accounts that make up distribution expenses.For example, it has an account numbered 583 for company-wide "Overhead Line Expenses."It chose to establish West Virginia overhead line expense by comparing the "value" of West Virginia overhead lines with the "value" of company-wide overhead lines.It determined that its West Virginia overhead lines represented 2.81% In "value" of all its overhead lines.It reasoned, then, that 2.81% Of company-wide overhead line expense of $2,065,292 should be allocated to its West Virginia overhead line expense ($58,082).

The Commission, however, added all the company distribution expenses and allocated to West Virginia the proportion of those expenses that the West Virginia total plant bears to the entire company plant, 1.5621% Being the factor.Applying 1.5621% To the company-wide distribution expense resulted in $41,423 being allocated to its West Virginia operating expenses.

Vepco contends that its method is more precise.And in this case, its method would add about $73,000 to its West Virginia operating expenses, a part of its rate structure here.¹

It is obvious to us that the basic factoring premise used by both parties is very imprecise.The use of factors to apportion expenses, based upon West Virginia plant compared to total company plant whether finely categorized as to "overhead,""underground" or what not, is it seems to us, presumptuous.For example, a new line built in West Virginia at a cost of $100,000 per mile would become part of West Virginia plant.Yet because of its modernity it should require much less maintenance expense than, say, a line in North Carolina built thirty years ago when the cost was $10,000 per mile.Any attempt to allocate to West Virginia rates, distribution expenses on the basis of a ratio of plant-to-plant, whether by separate distribution expense accounts or total distribution expense accounts, is therefore inherently inaccurate.But apparently the method is the best that can be devised, and we must abide with it without something better being presented to us.However, given the lack of a more precise basic formula, there is no reason for us to require any more precision in calculations than the Commission has in its method.

The principle is well established by the decisions of this Court that an order of the public service commission based upon its finding of facts will not be disturbed unless such finding is contrary to the evidence, or is without evidence to support it, or is arbitrary, or results from a misapplication of legal principles.Boggs v. PSC, 154 W.Va. 146, 174 S.E.2d 331, 337(1970).

And, as the United States Supreme Court wrote in Smith v. Illinois Bell Telephone Co., 282 U.S. 133, 51 S.Ct. 65, 75 L.Ed. 255(1930) where it dealt with apportionment of telephone company expenses between interstate and intrastate service based upon the plant used in each type of service, ". . . While the difficulty in making an exact apportionment of the property is apparent, and extreme nicety is not required, only reasonable measures being essential (citations omitted) it is quite another matter to ignore altogether the actual uses to which the property is put."282 U.S. at 150, 51 S.Ct. at 69.

Our Commission did not "ignore altogether" any aspect of the expense claimed by the utility.It simply calculated the impact of the expense upon West Virginia rates differently than did the Company.

B.

Vepco also contends that there is no factual or logical basis for the Commission's use of the ratio of West Virginia total plant to total system plant as the allocation factor by which to include in the West Virginia rate base, company-wide tax credits and tax deferrals.The company's detailed allocation of these accounts, whereby it traced tax beneficence to particular generating stations and transmission lines, and used its "factor" to assign to the West Virginia rate base a portion of the credits and deferrals, would have resulted in $77,112 less reduction from the West Virginia rate base than resulted from the method used by the Commission.²

Vepco contends that its allocation was precise and logical, but not used by the Commission apparently only for the reason that it showed a higher cost of West Virginia service.It cites Anchor Coal Co. v. PSC, 123 W.Va. 439, 15 S.E.2d 406(1941) where this Court held that it would not interfere with the action of the Commission except under certain circumstances.The Court said at page 411:

However, this does not exclude the right to correct a decision of the commission where it has failed to give consideration to evidence proper to be considered, and failure to consider such evidence may be classified as a mistake of law.

That case concerned the setting of railroad rates.We held that the Commission had erred in not considering evidence introduced by the petitioners about its cost of providing service.

Vepco also cites United Fuel Gas Co. v. PSC, 143 W.Va. 33, 99 S.E.2d 1(1957), in which the Court reversed a decision of the Commission because it failed to consider the cost of gas supply and facilities located in other states that were used to supply service to West Virginia customers, in fixing West Virginia rates.

Our ruling on the point is that there is no showing by the company that there was disregard by the Commission of the tax credits and deferrals.Again, as in the other allocation question in this case, we recognize the imprecision of both methods and find no legal authority compelling us to interfere with the Commission choice.

II.

Petitioner alleges that the Commission erred in determining the Company's federal tax liability.The Company made an adjustment of $97,000, rejected by the Commission, that Vepco contends resulted in understatement of Vepco's tax liability and thus overstatement of its net income.This tax deduction was for interest expense incurred by the company when it borrowed money to build new facilities.The facilities, which are not yet in use, are referred to in the briefs as "construction work in progress" or "CWIP."

The record reflects that interest expense related to West Virginia CWIP was $202,000 and that a $97,000 tax reduction resulted.The Company contends that the Commission is not only requiring the Company to carry the burden of building new facilities without any return from the West Virginia ratepayers during construction, but is also reducing the amount of revenue the Company would collect if it were building no facilities at all, by reducing the rate base $97,000.Vepco argues that this result is arbitrary and capricious and that the Company's adjustment should be allowed.It maintains that during the construction period West Virginia ratepayers are paying nothing for the construction, and to give the benefit created by the tax credit to the ratepayer is to deprive the Company of a real asset ($97,000) without compensation.

The Commission argues that since Vepco saved $97,000 of federal income tax through credits for CWIP, the savings should be passed on to West Virginia customers, not to common stockholders as profit.

The Commission cites a prior case where it refused to consider any taxes other than those actually paid in the computation of the rate base.In Case No. 7613(Cabot Corp.) the Commission stated:

The Commission has a long-standing policy of not allowing as an expense item taxes other than those actually paid to the Federal Government.It has never allowed income tax recovery to be more or less than the actual tax paid. . . .The Commission's basic philosophy is that the company cannot pass on to the rate payers the obligation of taxes that have not actually been paid to the Government.

The Commission basically justified its decision not to allow CWIP and incidental emoluments such as tax credits to affect the rate base, by its practice of allowing capitalization of interest.The Company is ultimately allowed to recover construction expense, including capitalized interest, after construction is completed and the project is put into service.

Of course, the fact is that the Commission merely allows no expenses to be included in rates that are not actually paid or payable by the Company.

It seems to us that there is no difference in the Commission's ruling on the point, than would be the case if the utility attempted to...