Wash. Pub. Interest Org. v. Public Serv. Com'n

• Decision Date: 12 September 1978
• Docket Number: No. 12017.,No. 11786.,No. 11780.,11780.,11786.,12017.
• Citation: 393 A.2d 71
• Parties: WASHINGTON PUBLIC INTEREST ORGANIZATION et al., Petitioners, v. PUBLIC SERVICE COMMISSION of the District of Columbia, Respondent, Washington Gas Light Company, Intervenor. PEOPLE'S COUNSEL, Petitioner, v. PUBLIC SERVICE COMMISSION of the District of Columbia, Respondent, Washington Gas Light Company, Intervenor. WASHINGTON PUBLIC INTEREST ORGANIZATION et al., Petitioners, v. PUBLIC SERVICE COMMISSION of the District of Columbia, Respondent, Potomac Electric Power Company, Intervenor.
• Court: D.C. Court of Appeals

Page 71

393 A.2d 71

WASHINGTON PUBLIC INTEREST ORGANIZATION et al., Petitioners, v. PUBLIC SERVICE COMMISSION of the District of Columbia, Respondent, Washington Gas Light Company, Intervenor.

PEOPLE'S COUNSEL, Petitioner, v. PUBLIC SERVICE COMMISSION of the District of Columbia, Respondent, Washington Gas Light Company, Intervenor.

WASHINGTON PUBLIC INTEREST ORGANIZATION et al., Petitioners, v. PUBLIC SERVICE COMMISSION of the District of Columbia, Respondent, Potomac Electric Power Company, Intervenor.

No. 11780.

No. 11786.

No. 12017.

District of Columbia Court of Appeals.

Argued September 20, 1977.

Decided September 12, 1978.

Gilbert Hahn, Jr., Washington, D. C., for petitioners in Nos. 11780 and 12017.

Elizabeth A. Noel, Washington, D. C., for petitioner in No. 11786.

Linus H. Deeny, Washington, D. C., for respondents in Nos. 11780 and 11786.

James T. McManus, Washington, D. C., with whom John R. Risher, Jr., Corporation Counsel, and James T. McManus, Principal Deputy Corp. Counsel, Washington, D. C., were on the brief, for respondent in No. 12017.

Paul H. Harrington, Washington, D. C., with whom Lawrence A. Gollomp, Washington, D. C., was on the brief, for intervenor in Nos. 11780 and 11786.

Allen C. Barringer, Richmond, Va., with whom Lewis Carroll, Birmingham, Ala., and Alan G. Kirk, II, Washington, D. C., were on the brief, for intervenor in No. 12017.

Before NEWMAN, Chief Judge, and NEBEKER and FERREN, Associate Judges.

FERREN, Associate Judge:

Petitioners, Washington Public Interest Organization (WPIO) and the People's Counsel, challenge the rate increases granted by the Public Service Commission of the District of Columbia (the Commission) to Potomac Electric Power Company (Pepco) and to Washington Gas Light Company (WGL) in October, 1976. Petitioners raise a single issue: when land no longer used in delivering service to the public is sold by a public utility company, should the financial gain — representing appreciation of the property while in service, i. e., while in the "rate base" — accrue to the company's shareholders or to its customers (in the form of reduced utility rates)?

The Commission ruled that the shareholders alone should benefit. Its decision rests primarily on the ground that allocation of appreciation on retired land to the shareholders conforms to the mandate of the standard accounting system for utility companies, i. e., the Uniform System of Accounts promulgated by the Federal Power Commission and adopted by our own Commission for use in the District of Columbia.

This simple rationale belies a complex inquiry. After stating the facts and procedural history (Part I) and taking account of our scope of review (Part II), we explore (Part III.A.) the historical relationship between the uniform accounting system and ratemaking. After concluding, on the basis of a substantial body of case law, that the prescribed accounting treatment does not necessarily dictate a particular ratemaking result, we turn (Part III.B.) to the details of the uniform accounting system, in order to determine whether the Commission's per se reliance on it for ratemaking appears sound, even without an historical mandate. We conclude that the general principles of this accounting system, while intended to have ratemaking consequences, are subject to so many exceptions, and their application accordingly requires the exercise of so much Commission discretion, that the system itself is not selfjustifying as an automatic basis for a ratemaking decision. Finally, therefore, we consider (Part III.C.) the question whether application of the Uniform System of Accounts as the basis for ratemaking on the facts here can be said to pass muster. We conclude that the Commission has not supplied enough facts, coupled with detailed enough reasoning, to justify treatment of the land transactions solely by reference to the Uniform System. Our only available course, therefore, is to remand the proceedings for clarification.

I. Procedural History; Facts and Question Presented

On December 29, 1975, Pepco filed an application with the Commission for a rate increase for retail electric service in the District of Columbia. As subsequently modified by Pepco, the requested increase would have totaled $57,578,000 annually. On October 20, 1976, after an eleven-day hearing in which WPIO, the People's Counsel, and four other parties participated as intervenors, the Commission issued a Proposed Opinion and Order (No. 5831) granting Pepco a 9.06% overall rate of return. This resulted in a total rate increase of $29,411,000 annually, amounting to slightly more than 50% of the increase requested. Subsequently, WPIO, the People's Counsel, and two of the intervenors filed exceptions and applications for reconsideration, all of which the Commission denied. Petitioner WPIO has filed for review by this court (case No. 12017).

On September 30, 1975, WGL filed with the Commission an application for a retail gas rate increase of $7.5 million annually. WPIO and the People's Counsel intervened. After a hearing, the Commission on October 29, 1976, issued a Final Opinion and Order (No. 5833) granting WGL a rate of return of 9.25%, resulting in an annualized rate increase totaling $6.7 million, almost 90% of the amount requested. Applications for reconsideration by WPIO and the People's Counsel were denied, whereupon they filed petitions for review by this court (case Nos. 11780 and 11786, respectively).

We have consolidated these three petitions for review.

As to Pepco, the parties have stipulated that during the ten-year period 1965-74: (1) the company received a net gain of $542,179.22 (i. e., "the difference between book value and sale price on the date of sale") from 103 transactions involving the "sale of land which at some prior date had been classified as having been devoted to public service"; and (2) the company transferred "`below the line' or out of public service" 18 Sites for which the net gain (i. e., "the difference between book value and market value on the date of transfer") was $182,390.33.¹ The parties also stipulated that of the total net gain of $724,569.55 from these sales and transfers, "$381,938.00 is allocable to Pepco's District of Columbia operations." Finally, the parties stipulated that in 1972, Pepco removed its 929 "E" Street, N.W. property "from [the] Utility Property [account] as no longer used and useful." In this connection, they further stipulated that when Pepco sold the property in March, 1976, the net gain — the difference between market value and depreciated book value — was at least $468,324.06 of which at least $207,139.73 was allocable to District of Columbia operations. Accordingly, the parties have stipulated that the total net gain allocable to District of Columbia operations for the Pepco properties at issue is at least $589,077.73.

As to WGL, the parties have stipulated that during the period January 1, 1965, to February 29, 1976, the company received a net gain, before taxes, of $6,343,270 from "12 transactions representing the sale of land and related improvements which at some prior date had been classified as having been devoted to public service." (The breakdown between depreciable improvements and non-depreciable land is provided only for certain Georgetown properties sold during the test year ending April 30, 1975).

Each case presents the question whether, in granting the particular rate increase, the Commission improperly failed to credit the customers — the ratepayers — with the stipulated gains received by Pepco and WGL, respectively, upon disposition of land removed from each company's utility service operation. This question arises, to put it most simply, as follows: In accordance with the Uniform System of Accounts prescribed by the Federal Power Commission (FPC) and adopted by the Public Service Commission of the District of Columbia, the gains and losses from dispositions of property owned by utility companies are allocated, depending on the circumstances, either to the customer-ratepayers (called "above the line" treatment) or to the investor-shareholders (described as "below the line"). See J. Suelflow, Public Utility Accounting: Theory and Application 23-24 (1973) (hereinafter "Suelflow"). According to this accounting system — and subject to notable exceptions — dispositions of land previously retired from active use in utility service are usually accounted for "below the line"; shareholders alone benefit — or lose — from each transaction through an increase or decrease in the corporate earned surplus account. Dispositions of retired depreciable plant facilities, on the other hand, are usually accounted for "above the line"; typically, the ratepayers stand to benefit — or lose — in the calculation of the rates they are required to pay. See Part III.B., infra.

The justification for such accounting principles, with their impact on utility rates, is generally based on the proposition that the ratepayers, who have been charged for depreciation of plant facilities, should be repaid with the gains, if any, upon eventual sale of those facilities. Because land is not depreciable, however, and the ratepayers accordingly have not been responsible for replenishing it, the gains, if any, on sales of retired land are left to the investor-owners. They are the ones, at least theoretically, who brought the land to the enterprise and, as a result, should benefit.

Necessary refinements of these general principles will be discussed in due course. Suffice it to say at this point that petitioners challenge the Commission's decision to apply the uniform accounting system here, such that the land dispositions receive "below the line" treatment. More particularly, WPIO has asked that gains accruing to Pepco on land retirements and dispositions during the ten-year period, 1965-74, be credited to ratepayers in at least the amount of the $589,000.00 allocable to District of Columbia oper...