Wash. Attorney General's Office v. Wash. Utilities & Transp. Comm'n

• Decision Date: 07 August 2018
• Docket Number: No. 48982-1-II,48982-1-II
• Citation: 423 P.3d 861
• Court: Washington Court of Appeals
• Parties: WASHINGTON ATTORNEY GENERAL’S OFFICE, PUBLIC COUNSEL UNIT, Appellant, v. WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION, a Washington State agency, Respondent, Avista Corporation d/b/a Avista Utilities, Intervenor/Respondent.

423 P.3d 861

WASHINGTON ATTORNEY GENERAL’S OFFICE, PUBLIC COUNSEL UNIT, Appellant,

v. WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION, a Washington State agency, Respondent,Avista Corporation d/b/a Avista Utilities, Intervenor/Respondent.

No. 48982-1-II

Court of Appeals of Washington, Division 2.

Filed August 7, 2018

Lisa Watson Gafken, Attorney General's Office of Washington, 800 5th Ave., Ste. 2000, Seattle, WA, 98104-3188, for Appellant.

Jennifer Cameron-Rulkowski, Office of the Attorney General, P.O. Box 40128, 1400 S Evergreen Pk. Dr. SW, Olympia, WA, 98504-0128, David John Meyer, Avista Corporation, P.O. Box 3727, Spokane, WA, 99220-3727, for Respondent(s).

Tyler Case Pepple, Attorney at Law, 333 SW Taylor St., Ste. 400, Portland, OR, 97204-2446, for Amicus Curiae on behalf of The Industrial Customers of NW Utilities.

PUBLISHED OPINION

Melnick, J.¶ 1 The Washington Attorney General’s Office, Public Counsel Unit (PCU), appeals from the final order of the Washington Utilities and Transportation Commission (WUTC) setting Avista Corporation’s 2016 rates for electric and natural gas services.

¶ 2 We conclude that the WUTC’s use of an attrition adjustment to calculate Avista’s rate base violated RCW 80.04.250. Accordingly, we reverse and remand to the WUTC for recalculation of Avista’s electric and natural gas rates.

FACTS

¶ 3 Avista is an electric and natural gas company that serves customers in Washington. The WUTC has the statutory authority to regulate rates of utility companies such as Avista. RCW 80.01.040.

¶ 4 Avista filed a request with the WUTC to increase its rates for electric service by $33.2 million (6.7 percent) and its natural gas service by $12 million (6.9 percent). Avista based its proposed rate increase in part on an attrition adjustment for both its electric and natural gas operations. The WUTC ultimately set rates significantly lower than Avista’s initial request, basing its analysis on an attrition study and attrition adjustment. Whether to apply this attrition adjustment in setting Avista’s rates is the fundamental dispute in this case.

I. THE PARTIES

¶ 5 After Avista petitioned to change its rates, WUTC Staff (Staff) and PCU both entered notice of their appearance in the subsequent joint ratemaking case.¹ The Industrial Customers of Northwest Utilities (ICNU), the Northwest Industrial Gas Users (NWIGU), and The Energy Project all intervened in the case without opposition.

II. UTILITY RATEMAKING BACKGROUND

A. RATEMAKING PROCESS

¶ 6 People’s Organization for Washington Energy Resources v. Utilities & Transportation Commission discussed the background principles of ratemaking in Washington. 104 Wash.2d 798, 808-11, 711 P.2d 319 (1985) ( POWER 85 ). The court explained:

In this state, the Legislature has conferred the ratemaking power on the WUTC, subject, of course, to appropriate judicial review. Most states delegate their ratemaking power to regulatory agencies in very broad terms, basically just directing them to set those rates which the agencies determine to be just and reasonable. Washington is such a state. ... The statutory mandate to the WUTC is to set fair , reasonable and sufficient rates. Indeed, as this court has also observed, the paramount objective of the Legislature in creating the commission, now the WUTC, "was to secure for the public safe, adequate, and sufficient utility services at just, fair, reasonable, and sufficient rates."

104 Wash.2d at 808, 711 P.2d 319 (footnotes omitted) (citations omitted) (quoting State ex rel. PUD 1 v. Dep’t of Pub. Serv. , 21 Wash.2d 201, 209, 150 P.2d 709 (1944) ). It also outlined the formula the WUTC used to set rates:

In order to control aggregate revenue and set maximum rates, regulatory commissions such as the WUTC commonly use and apply the following equation:

R = [O] + B(r)

In this equation,

R is the utility’s allowed r evenue requirements;

O is its o perating expenses;

B is its rate b ase; and

r is the rate of r eturn allowed on its rate base.

104 Wash.2d at 808-09, 711 P.2d 319. Rate base "represents the total investment in, or fair value of, the facilities of the utility employed in providing its service. Calculation of the rate base is of obvious importance since the product of the rate base (B) multiplied by the allowed rate of return (r) accrues to the utility’s investors." 104 Wash.2d at 809, 711 P.2d 319 (footnote omitted).

¶ 7 No matter how rates are determined, they must " ‘enable the company to operate successfully, to maintain its financial integrity, to attract capital, and to compensate its investors for the risks assumed." 104 Wash.2d at 811, 711 P.2d 319 (quoting Fed. Power Comm’n v. Hope Nat. Gas Co. , 320 U.S. 591, 605, 64 S.Ct. 281, 88 L.Ed. 333 (1944) ( Hope )). A utility is entitled to rates that will permit it to earn a return on its investment in property it uses to serve the public. 104 Wash.2d at 813, 711 P.2d 319 (quoting Bluefield Water Works & Imp. Co. v. Public Serv. Comm’n , 262 U.S. 679, 692, 43 S.Ct. 675, 67 L.Ed. 1176 (1923) ).

¶ 8 Before the present case, the WUTC’s standard practice was to use the " ‘hybrid’ or ‘modified’ historical test year" approach. Administrative Record (AR) at 3819. This process involved evaluating a historical test year² and applying pro forma adjustments³ to estimate the utility’s rate base and operating expenses in the rate year. Pro forma plant adjustments provided the WUTC with a method of evaluating expected rate base changes between the historic model year and the rate year. The WUTC considered whether such adjustments were " ‘known and measureable’ and ‘used and useful’ for service in Washington State." AR at 3820.

¶ 9 When the historical test year relationship between revenues, expenses, and rate base does not hold during the rate year, erosion may "deprive the utility of a reasonable opportunity to earn a fair rate of return." AR at 3836. This erosion of a company’s rate of return over time is generally referred to as "attrition."

B. ATTRITION

¶ 10 As described by the WUTC,

[A]ttrition occurs when the test-period relationship between rate base, expenses and revenues does not hold under conditions in the rate effective period, such that a utility’s expenses or rate base grows more quickly than revenues, and a utility would likely have no reasonable opportunity to earn its allowed rate of return.

AR at 703-04.

¶ 11 An attrition adjustment, then, is "a discrete adjustment to the modified historical test year that the [WUTC] may use when it determines attrition is present." AR at 704. When developing an attrition adjustment, parties first provide a revenue requirement analysis based on a modified historical test year to the WUTC. "Parties then perform an attrition study to determine the utility’s revenue requirement in the rate year. The attrition adjustment is the difference between the revenue requirement provided by the modified historical test year and the revenue requirement provided by the attrition study." AR at 704 n.60.

¶ 12 Attrition adjustments were frequently used in Washington as a WUTC ratemaking tool " ‘during the early 1980’s in an environment of exceptional inflation and high interest rates.’ " AR at 706 (quoting Wash. Utils. & Transp. Comm’n v. Puget Sound Energy, Inc. , Dockets UE-111048 and UG-111049 (consolidated), Order 08 at 180 (May 7, 2012) (PSE Order 08)).

¶ 13 The two most common sources of attrition in Washington are "abnormal or excessive inflation and exceptional and prolonged levels of plant additions." AR at 711. The last time the WUTC addressed attrition in a fully litigated rate case was in 1993. AR at 705. It denied the request and announced that attrition adjustments were only appropriate in " ‘extraordinary circumstances’ " when " ‘without such an adjustment, the company would have no reasonable opportunity to earn its authorized rate of return.’ " AR at 705 (quoting Wash. Utils. & Transp. Comm’n v. Wash. Nat. Gas , Docket UG-920840, Fourth Supp. Order at 30 (Sept. 27, 1993). Before the present case, the WUTC had not directly authorized an attrition adjustment since the 1980s. AR at 723.

¶ 14 In 2012, for the first time in almost twenty years, the WUTC suggested the use of an attrition adjustment in a ratemaking case for Puget Sound Energy. AR at 706. In that case, the WUTC observed that:

" ‘[A]ttrition’ in the context of utility ratemaking is limited to circumstances in which key assumptions that underlie ratemaking theory fail to hold in reality. Regardless whether an historical or budgeted test-period is used, the relationship between rate base, expenses and revenues is used to represent the future and to set prospective rates adequate to allow a reasonable return. Ratemaking rests on the key assumption that the test-period relationships will accurately represent relationships in the future. If this assumption fails, cost of service may increase more rapidly than revenues and the rates approved based on test period conditions may not be adequate to achieve the allowed level of return under future conditions."

AR at 706 (quoting PSE Order 08 at 180). The WUTC also discussed attrition in Avista’s last two rate-setting cases. AR at 706.

¶ 15 In Avista’s 2012 ratemaking case, the WUTC opined that consideration of attrition was appropriate in setting 2013 rates, despite it being " ‘caused substantially by Avista’s ongoing capital investment program’ " and that the WUTC " ‘ha[d] no absolute assurance that Avista [would] complete the projects described in its plan for 2013.’ " AR at 707 (quoting Wash. Utils. & Transp. Comm’n v Avista Corp. , Dockets UE-120436 and UG-120437 (consolidated), Order 09 and Dockets UE-110876 and UG-110877 (consolidated), Order 14 at 4 (Dec. 26, 2012) (Avista Orders 09 and 14).

¶ 16 In that case, however, the parties reached a settlement. AR at 708. In accepting the settlement, the WUTC noted " ‘that the testimony and trending data offered in support of the proposed rate increase for 2014 are substantially less precise than we would...