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Davis Adv. Sh. No. 31
S.E. 2d
In The Supreme Court
Philip S. Porter,
Consumer Advocate for
the State of South
Carolina, Appellant/Respondent,
v.
South Carolina Public
Service Commission and
Carolina Water Service,
Inc., Defendants,
Of whom South
Carolina Public Service
Commission is Respondent,
and Carolina Water
Service, Inc., is Respondent/Appellant.
Appeal From Richland County
R. Markley Dennis, Jr., Judge
Opinion No. 24714
Heard September 17, 1997 - Filed November 10, 1997
-AFFIRMED IN PART; REVERSED IN PART;
AND REMANDED
Philip S. Porter, Nancy Vaughn Coombs, and Elliott
p. 45
F. Elam, all of S.C. Department of Consumer
Affairs, of Columbia, for appellant/respondent.
F. David Butler and Florence P. Belser, both of
S.C. Public Service Commission, of Columbia, for
respondent.
William F. Austin and Richard L. Whitt, both of
Austin, Lewis & Rogers, P.A., of Columbia, for
respondent/appellant.
MOORE, A.J.: This is a water and sewer rate case. We affirm
in part, reverse in part, and remand for further findings.
FACTS
In December 1993, respondent/appellant Carolina Water Service
(Company) commenced this action seeking an increase in various fees. The
total requested revenue increase was $804,492. By order dated May 31,
1994, respondent Public Service Commission (Commission) granted an
increase of $664,542. The circuit court affirmed. Appellant (Advocate)
appeals the calculation of rate base on several grounds and contests the
amount allowed for Company's new account charge. 1
DISCUSSION
1. Capitalization percentage for operators' salaries
In determining rate base, the Commission used a test year of June
30, 1992, to June 30, 1993. The Commission reduced test year expenses
for operators' salaries by a 5.74% capitalization percentage to reflect the
amount of salary expense attributable to capital projects since expense for
capital projects is not considered for rate-making purposes. Advocate
review was insufficient to bestow jurisdiction on the circuit court. We affirm
pursuant to Rule 220(b), SCACR. See Pringle v. Builders Transport, 298 S.C.
494, 381 S.E.2d 731 (1989); Smith v. S.C. Dept. of Social Services, 284 S.C.
469, 327 S.E.2d 348 (1985).
p. 46
contends the Commission should have used a higher capitalization
percentage calculated by averaging the capitalization percentage for the
test year and the previous two years.
We have approved the historical test year as a basis for calculating a
utility's rate base as long as adjustments are made for any knov,7n and
measurable out-of-period changes in expenses, revenues, and investments
that would materially alter the rate base. Hamm v. Southern Bell Tel. &
Tel. Co., 302 S.C. 132, 394 S.E.2d 311 (1990); Southern Bell Tel. & Tel.
Co. v. Pub. Serv. Comm'n, 270 S.C. 590, 244 S.E.2d 278 (1978). The test
year is established to provide a basis for making the most accurate
forecast of the utility's rate base, reserves, and expenses in the near future
when the prescribed rates are in effect. Hamm v. S.C. Pub. Serv. Comm'n
309 S.C. 282, 422 S.E.2d 110 (1992). Where an unusual situation exists
resulting in test year figures that are atypical and thus do not indicate
future trends, the Commission should adjust the test year data. Id.
In this case, the Commission found 5.74% accurately reflected the
amount of time operators actually spent on capital projects during the test
year. This finding is supported by the record. The Commission also found
that although the amount of capital activity varied from year to year, the
variation was not so great as to require normalization. Further, it
rejected Advocate's proposed 8.85% (based on a three-year average of
percentages) because this amount was not "significantly different" from the
5.74% used by the Commission.
We begin by noting the comparison between the test year percentage
(5.74%) and the normalized percentage (8.85%) is not dispositive. The
question is whether the amount for the test year is markedly different
than that for other years, thereby indicating it is atypical. Id. The record
indicates a 10.62% capitalization percentage for 1991 and 10.22% for 1992.
These percentages are nearly 50% higher than the percentage for the test
year and appear to indicate an atypical variation in the allowable expense
for operators' salaries. Moreover, there is nothing in the record indicating
the lower test year capitalization percentage is a more accurate predictor
of Company's expenses.
Having said this, however, we note that an adjustment is required
only if the variation in expense "materially alters" the rate base. Hamm
v. Southern Bell, supra. According to the record, using the capitalization
percentage of 10.22% or 10.62% from the previous years rather than 5.74%
from the test year would result in a difference to the total rate base of
p. 47
approximately .3%. We conclude this amount does not represent a
material alteration of the rate base. Accordingly, we affirm the
Commission's finding that the test year capitalization percentage was
appropriate.
2. Customer growth adjustment
In determining Company's rate base, the Commission increased test
year revenue by a standardized per customer adjustment to reflect the
impact of a projected number of new customers on Company's net
operating income. Advocate complains this standardized per customer
adjustment assumes an equal increase in expenses per customer that
Company has failed to demonstrate.
Company's accountant, Patricia Cuddie, testified that certain
expenses increase with a growth in customers, including the cost for
electricity, chemicals, billing supplies, additions to plant, and increased
staffing. The customer growth adjustment was calculated by multiplying
the average annual increase in customers by the average amount of pro
forma (adjusted) revenue generated per customer.2
Adjustments for known and measurable changes in expenses are
within the discretion of the Commission. Absolute precision is not
required so long as adjustments are "know-n and measurable within a
degree of reasonable certainty." Hamm v. S.C. Pub. Serv. Comm'n, 309
S.C. at 291.
We find no abuse of discretion in averaging the amount of net
income generated as a practical means of determining the adjustment for
customer growth, especially since the actual amount of income generated
for a particular customer is not a readily ascertainable amount.
Employing the average net income generated by each customer results in
an adjustment that is know-n and measurable within a degree of
reasonable certainty since it reflects the average expense attributable to
generating per customer income. Accordingly, we affirm this finding of the
Commission.
3. Rate case expenses
forma revenue generated at the rate in effect during the test year, divided
by the number of customers.
p. 48
In calculating rate base, the Commission allowed an
adjustment to expense for Company's unrecovered rate-case expense
incurred during two prior rate cases. The Commission had previously
approved these expenses when a prior rate increase was granted in May
1993, amortized over a three-year period. At the time of the hearing in
this case, the May 1993 rate had been in effect for approximately one
year. The unamortized amount of rate-case expense was $146,191
reflecting the remaining two years of unrecovered rate-case expense.
Accordingly, the Commission allowed in this case an adjustment to
expense for the two years of unamortized rate-case expense ($146,191)
amortized over the next three years.3
Advocate contends allowing recovery of the unamortized rate-
case expense results in retroactive rate-making.4 We disagree.
Rate-making is a prospective rather than a retroactive process.
S.C. Elec. & Gas Co. v. Pub. Serv. Comm'n, 275 S.C. 487, 272 S.E.2d 793
(1980). Retroactive rate-making is prohibited based on the general
principle that those customers who use the service provided by the utility
should pay for its production rather than requiring future rate payers to
pay for past use. Popowsky v. Pa. Pub. Util. Comm'n, 642 A.2d 648 (Pa.
Commnw. Ct. 1994) (Popowsky I).
There is an exception to this rule, however, for expenses
deemed "extraordinary." An extraordinary expense is one that is
unanticipated and non-recurring. Popowsky I; see also Stewart v. Utah
Pub. Serv. Comm'n, 885 P.2d 759 (Utah 1994) (extraordinary and
unforeseeable). Generally, amortizing an extraordinary expense incurred
in the past does not result in retroactive rate-making. Popowsky v. Pa.
Pub. Util. Comm'n. 695 A.2d 448 (Pa. Commnw. Ct. 1997) (Popowsky II).
It is common practice to include the amount of unamortized costs from
prior rate cases as an amortized expense in calculating rate base. See
Providence Gas Co. v. Malachowski, 656 A.2d 949 (R.I. 1995). Ideally the
amortization period matches the expected interval between rate cases. Id.
in calculating the rate base in this case.
4 Advocate contends generally that rate-case expense should be
normalized rather than amortized because it has become an ordinary cost of
doing business. Advocate, however, does not challenge the amortization of
current rate case expense that was also approved in this case.
p. 49
The Commission found a three-year amortization period usually
represents the time period in which utilities file for rate increases. Rate-
case expense is therefore expected to be fully recovered before the next
rate case. Accordingly, the remaining unamortized rate-case expense,
previously approved but un-recovered, is unanticipated and non-recurring
and qualifies as an extraordinary expense. Amortization of this expense
does not constitute retroactive rate-making and we affirm this finding of
the Commission.
4. Deferred charges
The Commission adjusted test year expense by allowing certain
deferred charges for expenses actually incurred before the test year.
These charges include such expenses as tank maintenance and press
washing sewer mains that were incurred between 1988 and 1993.
Advocate contends some of these expenses are not extraordinary and
therefore do not qualify for the exception to retroactive treatment.5 We
agree.
Company accountant Cuddie testified that "many of [the
deferred charges] will continue to occur year after year. For example,
tank paintings are routine and required at regular intervals. In addition,
main breaks and major repairs also occur each year." The Commission
approved these deferred charges finding:
As painting tanks and repairs to mains are
expenses which must be paid for when the work is
completed but the useful life of which is for a
period longer than a given test year, the
Commission has allowed the treatment of these
expenses as deferred charges with the recovery
spread over several years.
The expenses described by witness Cuddie are routine and
required at regular intervals. They therefore do not qualify as
extraordinary because they are not unanticipated or non-recurring. See
Phila. Elec. Co. v. Pa. Pub. Util. Comm'n, 502 A.2d 722 (Pa. Conunw. Ct.
Hugo which would properly qualify as extraordinary expenses. See Popowsky
I, supra (weather-related expenses qualify as extraordinary for retroactive
treatment).
p. 50
1985) (costs that recur as part of maintaining the existing facility are not
extraordinary). The Commission improperly allowed a retroactive rather
than prospective recovery of these deferred charges. Since these types of
expenses are recurring and anticipated, they should be considered
prospectively as known and measurable adjustments to test year expenses.
Southern Bell Tel. & Tel. Co. v. Pub. Serv. Comm'n, supra (Commission
should make adjustments for known and measurable changes in expenses
occurring after the test year).
Accordingly, we remand for the Commission to remove from
the rate base calculation any deferred charges that are not unanticipated
and non-recurring.
5. Cash working capital
In determining an allowance for cash working capital to be
included in the rate base, the Commission used per book amounts of
operating expenses to adjust cash working capital. Advocate contends for
consistency the Commission should have used pro forma amounts of
operating expenses for this adjustment since pro forma adjustments were
made to the operating and maintenance expenses for purposes of
determining rate base. The Commission found the per book amounts were
known figures and therefore appropriate.
We have examined the figures found in the record and
determine this issue to be without merit: The adjustment to cash working
capital applied by the Commission is $30,695. The adjustment proposed
by Advocate is $23,987, which would result in a difference in rate base of
$6,708. This difference represents .06% of the total rate base.
The Commission has wide latitude to determine its
methodology in rate-setting and there is no abuse of discretion where
substantial evidence supports the finding of a just and reasonable rate.
Heater of Seabrook, Inc. v. Pub. Serv. Comm'n,__S.C.__, 478 S.E.2d
826 (1996). Here, the Commission based its reduction of cash working
capital on known amounts supported by the record. Further, a rate base
calculation employing either methodology is substantially the same. We
find no abuse of discretion. The finding of the Commission regarding cash
working capital is affirmed.
6. New account charge
p. 51
Company sought a $1.00 increase in the $27.00 fee it charges
new customers to set up an account. In support, Company submitted an
itemized list of its costs in setting up a new account. Advocate responded
by pointing to the fact that $14.83 of the total $28.82 in costs was related
to turning off service for an existing customer and not setting up new
service. The Commission agreed with Advocate that these costs were not
properly attributable to a new account charge and denied Company's
request for an increase. Advocate contends the Commission erred in
refusing Advocate's request that the new account charge be reduced to
$14.00, the amount of costs supported by the evidence.
The Commission refused to entertain Advocate's request for a
reduction because the $27.00 fee had been previously approved without
objection in a May 1993 rate case. Company argues in support of the
Commission's decision that reconsideration of a pre-approved fee would be
retroactive rate-making.
In S.C. Elec. & Gas Co. v. Pub. Serv. Comm'n, supra, we held
the Commission could not order a refund for excess revenue collected
under a past-approved rate because this would violate the rule against
retroactive rate-making.6 We agree with Advocate, however, there is no
violation of the rule against retroactive rate-making where the reduction
sought is prospective only as in this case.
The Commission is statutorily charged with the authority to
supervise and regulate all public utilities' and fix just and reasonable
rates. S.C. Code §§ 58-3-140 (Supp. 1996) and -5-210 (1976). Further,
S.C. Code Ann. § 58-5-290 (1976) specifically provides:
§ 58-5-290. Correction by Commission of
improper rates and the like.
Whenever the Commission shall find, after
hearing, that the rates, fares, tolls, rentals [or]
charges ... however or whensoever they shall have
theretofore been fixed or established ... are unjust
[or] unreasonable . . . the Commission shall, subject
to review by the courts as herein provided,
determine the just and reasonable fares, tolls,
amounts generated when setting the next rate.
p. 52
rentals [or] charges . . .to be thereafter observed
and enforced and shall fix them by order as herein
provided.
Clearly, under this statute, the Commission has the continuing power to
prospectively correct or reduce a previously approved charge. In
conjunction with this power, S.C. Code Ann. § 58-5-300 (1976) provides:
§ 58-5-300. All facts may be considered in
making correction.
In connection with a determination under § 58-5-
290 the Commission may consider all facts which in
its judgment have a bearing upon a proper
determination of the question, although not set
forth in the complaint or application and not within
the allegations contained therein.
Accordingly, the fact that this matter came before the Commission
pursuant to Company's request for an increase in the new account charge
does not impact the Commission's power to consider all the facts before it
and order a reduction in this charge.7
In rejecting Company's request for an increase and Advocate's
countervailing request for a decrease, the Commission made no specific
finding that the existing $27.00 new account charge was supported by the
evidence. Accordingly, we remand for the Commission to make findings
regarding the appropriate amount that should be allowed for the new
account charge.
AFFIRMED IN PART; REVERSED IN PART; AND
REMANDED.
FINNEY, C.J., TOAL, WALLER, JJ., and Acting Associate
Justice George T. Gregory Jr., concur.
receive notice and an opportunity to be heard. See Stono River Envtl.
Protection Agency v. S.C. Dept. of Health and Envtl. Control, 305 S.C. 90,
406 S.E.2d 340 (1991).
p. 53