Supreme Court Seal
South Carolina
JUDICIAL DEPARTMENT
Site Map | Feedback
24714 - Porter v. SCPSC, et al.

Davis Adv. Sh. No. 31
S.E. 2d


THE STATE OF SOUTH CAROLINA

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


PORTER v. SCPSC, et al.

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


1 Company cross-appeals on the ground Advocate's petition for judicial

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


PORTER v. SCPSC, et al.

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


PORTER v. SCPSC, et al.

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


2 The amount of revenue generated per customer is Company's total pro

forma revenue generated at the rate in effect during the test year, divided

by the number of customers.

p. 48


PORTER v. SCPSC, et al.

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.


3 In other words, one-third of the $146,191 was allowed as an expense

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


PORTER v. SCPSC, et al.

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.


5 Advocate does not challenge deferred charges relating to Hurricane

Hugo which would properly qualify as extraordinary expenses. See Popowsky

I, supra (weather-related expenses qualify as extraordinary for retroactive

treatment).

p. 50


PORTER v. SCPSC, et al.

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


PORTER v. SCPSC, et al.

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,


6 We held the Commission should instead consider extraordinary

amounts generated when setting the next rate.

p. 52


PORTER v. SCPSC, et al.

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.


7 Of course, any reduction is subject to the requirement that the utility

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