Opinion
No. CV 04 4001457S
March 29, 2005
MEMORANDUM OF DECISION
The plaintiff, Office of Consumer Counsel (OCC), has brought this administrative appeal against the defendants Department of Public Utility Control (the DPUC) and the Connecticut Light and Power Company (CLP), seeking review of two points in the decision in Docket No. 03-07-02RE01, where the DPUC allowed reconsideration in part of the final decision in Docket No. 03-07-02. In this reconsideration decision dated August 4, 2004, Return of Record (ROR) XI-1, the DPUC concluded that CLP was permitted to have recovery of unrecognized pension gain dating from a 1993 DPUC decision and also approved a rental expense sought by CLP.
OCC is aggrieved in this matter. See OCC v. DPUC, 234 Conn. 624, 636 (1995).
The record shows that the pension gain issue arose as follows. In Docket No. 92-11-11, CLP submitted its estimated pension costs for fiscal years 1993 to 1995. Those costs were developed by CLP's pension actuary in accordance with Financial Accounting Standard No. 87 (FAS 87). The estimated pension costs included the amortization over 18.3 years of CLP's share of the pension plan's unrecognized net gain of $68.3 million as of December 21, 1992; the 18.3 years represented the average expected future working life of employees at that time.
The gain occurred when the projected amount in the pension fund was exceeded by actual results. The late 1980s and early 1990s investments of the pension fund resulted in this unanticipated gain.
In the final decision in Docket No. 92-11-11, issued June 16, 1993, the DPUC noted that "[i]n the history of regulation in the State of Connecticut, 1993 is the worst year to be confronted with rate cases since the depression of the 1930s." 1992 Decision, p. 7. One step that the DPUC took to minimize the amount of the rate increase was to amortize the unrecognized pension gain over only an eight-year period, rather than the 18.3 years of amortization required by the FAS 87 accounting regulation. The effect of this adjustment to the amortization period was to reduce CLP's annual pension expense for rate-making purposes by approximately $5 million per year for each of the three years (1993-95) of increases approved in that decision, or a total reduction of $15.7 million.
In CLP's written exceptions in Docket No. 92-11-11, CLP alerted the DPUC that its shortened amortization period might lead to a write-off of the 315.7 million amount on the company's books. Therefore the DPUC added the following language to its final decision to indicate that the amount would be considered a deferred charge, reflecting the difference between book and rate-making pension expense: "[T]he Authority recognizes the fact that as a result of using an eight-year amortization of the unrecognized net gain, the Company's pension expense for book purposes calculated under FAS 87 will be over $5 million higher [on an annual basis] than the amount to be included in rates. The Authority recognizes that, all things being equal, rate-making pension expenses in years 9 through 18 will be higher than the Company's FAS 87 booked pension expense." 1992 Decision, p. 47. In non-technical terms, the DPUC had given a benefit to the rate-payers in the 1993-95 period, but left open the possibility that after the amortization period ended, CLP might be allowed a regulatory asset recovery.
While OCC argues otherwise, the phrase "all things being equal" indicates, as the DPUC ultimately concluded that, no final determination as to the status of the unrecognized pension expense needed to be made until a later date.
Understandably, as it occurred during the eight-year amortization period, there was no discussion of the pension expense in the next rate filing in January 1998. The matter was discussed in Docket No. 99-02-05, where CLP requested stranded cost treatment for the generation portion of the unrecognized pension gain. The DPUC reacted to arguments that the pension gain be eliminated by stating that "it would be inappropriate to eliminate the regulatory obligation to recover the expense difference of the 1993-95 unrecognized pension gain." 1999 Decision, p. 71. The DPUC cited language from the 1993 decision, and stated that "[i]n that [1993] Decision, the DPUC fully recognized that shortening the amortization period from 18 years to eight years would result in lower pension costs in the early years, offset by higher pension expenses in the later years." Id., 71. The DPUC stated that its recovery "will be addressed in the Company's next rate case." Id., 72.
On August 1, 2003, CLP filed an application with the DPUC to amend its rate schedules. ROR, S-I.-1, p. 1. In this proceeding, CLP asked to transfer the unrecognized pension gain, shown as a "deferred asset" to a regulatory asset account. Id., p. 30. The original decision stated at page 32: "The Department has denied the Company's request for recovery of its $15.726 million unrecognized pension gain. Accordingly, average 2004 rate base will be reduced by $13.760 million for this issue." Also at page 86, the decision states: "The Department views the unrecognized gain/loss as any other in-between rate case expense that fluctuates, and therefore concludes that the Company's proposal would constitute retroactive rate-making, regardless of whether the difference between FAS 87 expense and allowed rate-making expense was caused by the modification of amortization in Docket No. 92-11-11 . . . Consequently, the Department denies the Company's request."
On December 31, 2003, CLP petitioned the DPUC pursuant to General Statutes §§ 4-181a(a)(1) and 16-9 to reconsider this final decision of December 17, 2003. ROR, I-1. According to CLP, the Decision incorrectly viewed the pension expense as an "item [that] fluctuates between rate cases as any other expense might." Pension expenses were unique due to "the high equity earnings exceeding long-term projected returns and historical averages, not to excessive or unnecessary payments by CLP ratepayers." ROR, 1-1, p. 7, quoting the "Stranded Cost Decision," Docket No. 99-02-05. "With customers already benefitting from the high returns in the mid-1980s through late 1990s through lower pension expenses, the Decision would now bestow an incremental benefit to which they are not entitled by disallowing the Company's previously-approved regulatory asset." Id.
The DPUC reopened this matter and, in the decision under appeal, agreed with CLP. "The Department agrees with the OCC and AG that the Department did not in Docket No. 92-11-11 establish a regulatory asset for the unrecognized pension gain . . . The Department's final Decision in Docket No. 92-11-11 permitted the recording of deferred charges, leaving all rate-making considerations of the deferred charges (including regulatory asset treatment and rate recovery) to be decided in a future rate case, at which all parties could present evidence on such issues. In this proceeding, CLP requested recovery of the deferred charges, and a full and complete record was created. Upon review of the record of the rate case and this reopener, the Department concludes that it is appropriate to allow CLP to establish a regulatory asset to recover the unrecognized pension gain. As OCC states, CLP's actual pension expense over 1993, 1994 and 1995 was below the allowed pension expense; however, the fact remains that, but for the Department's actions in reducing the unrecognized pension gain assumptions, the gap between allowed and actual would have been greater." ROR, XI-1, p. 4. CLP asked that it be allowed to recover the $15.7 million as a regulatory asset over four years, but the DPUC allowed recovery over a thirteen-year period with no return.
OCC has appealed from this reconsideration decision. It argues in its brief that the DPUC never termed the unrecognized pension gain a regulatory asset until the reconsideration decision. In addition it argues that the 1993 rate decision did not create deferred charges. The DPUC is accused of allowing "single-issue rate-making" as well as "retroactive rate-making."
In deciding this issue, the court relies upon the following standard of review articulated in a similar appeal of an accounting method used to determine a utility's working capital. "Although we do not judge the wisdom of the decisions of the Commission, our review is not a mere formality but seeks to determine whether the findings are properly supported and that there has been no abuse of discretion. We do not advise the Commission how to discharge its function of arriving at findings of fact or the exercise of its discretion . . . The Commission has broad discretion in choosing its approach to rate regulation and is free within its statutory authority to make the pragmatic adjustments which may be called for under particular circumstances. The appellate court is generally not concerned with the methodology used by the Commission in reaching its result, so long as its findings are based on substantial evidence and are not arbitrary. In these cases, it is the result reached, not the method employed, which controls; and judicial inquiry is concluded if the decision is supported by substantial evidence and the total effect of the order is not unjust, unreasonable, unlawful or discriminatory." General Telephone Company of the Southwest v. Arkansas Public Service Commission, 744 S.W.2d 392, 395 (Ark.App.), aff'd, 751 S.W.2d 1 (Ark. 1988).
In an administrative appeal of an order by the DPUC regarding the means of calculating a rate of return, Judge Satter sets forth the standard of review as follows: "When an accounting method is an express deviation from past practice and so unreasonable as to be without rational basis, the use of that method is arbitrary and capricious." Connecticut Light Power Co. v. Department of Public Utility Control, 40 Conn.Sup. 520, 535 (1986). More generally, "[i]n reviewing the administrative rate decision, the court must, therefore, ensure that the agency's decision making process was conducted pursuant to the appropriate procedures and that the outcome of the process reflects reasoned decision making — a reasonable application of relevant statutory provisions and standards to the substantial evidence on the administrative record. Section 4-183(g) coupled with the presumption of validity that attends a DPUC rate order . . . establishes a standard for judicial review that is appropriately deferential to agency decision making, yet goes beyond a mere judicial `rubber stamping' of an agency's decisions." (Citation omitted; internal quotation marks omitted.) Connecticut Light Power Co. v. DPUC, 219 Conn. 51, 57 (1991).
Based on the foregoing, the court holds against OCC on this issue. It is not necessary to pigeon-hole or separate the analysis of a regulatory asset from that of deferred charges, as OCC attempts. In 1993, the DPUC concluded that CLP must amortize its pension responsibilities over eight years rather than the standard 18.3 years. This created a book value that had to be considered in a later rate case. In the "Stranded Costs" decision, the DPUC first addressed the amount and indicated that a regulatory asset was created. While rejecting CLP's position in the original decision, in the reconsideration decision of 2004, the DPUC accepted CLP's contentions and found a regulatory asset.
This action by the DPUC meets the reasonableness standard. As the court stated in Connecticut Light Power Co. v. Public Utilities Control Authority, 176 Conn. 191, 215 (1978): "The determination of the time when the amortization period begins to run, for rate-making purposes, is a matter that, in the absence of a statute or regulation or order specifically making that determination, has to be left to the sound discretion of the PUCA, to be exercised under the guidelines in General Statutes § 16-19e." The DPUC reconsidered its earlier denial in the original decision and has properly relied on Business Professional People v. Commerce Commission, 585 N.E.2d 1032 (Ill. 1991) in now allowing a regulatory asset.
The decision to allow the establishment of a regulatory asset is not affected by the rule against single-issue rate-making. That prohibition ensures that when a utility seeks agency approval of its revenue requirements, the utility fully disclose aggregate costs, rather than certain specific costs related to a component of its operation. The utility must divulge all aspects of its business, including possible savings, thereby possibly removing the need for greater revenue. The agency must not consider revenue requirements in isolation. See Business Professional People v. Commerce Commission, at 1061. Here the DPUC was furnished the various costs that formed the basis of CLP's proposed rate schedules and the agency conducted a review of these costs. The DPUC's decision allowing a regulatory asset for the pension gain was a portion of a multi-tiered process and cannot be labeled as single-issue rate-making.
The DPUC decisions relied upon by OCC on pages 12 and 13 of its brief do not support its contention that the DPUC is engaging in single-issue rate-making here. For example, in the matter discussed on page 13, United Illuminating Company was not allowed by DPUC to raise its rates "for pension costs alone" because the company did not consider the totality of its business circumstances. This situation is not analogous to the process followed by the DPUC in the decision under appeal.
Nor does the allowance of the regulatory asset constitute retroactive rate-making. The DPUC had properly reserved the $15.7 million amount and "red flagged" it for further action. This does not amount to retroactive rate-making. There is no question that rate-making must, in general, be prospective, Business Professional People, supra at 1061. Here, however, the DPUC was not illegally revising a rate previously set; rather the agency was giving finality to an issue previously left unresolved. The court concludes in favor of the defendants on the first issue raised by OCC.
Turning to the second issue, OCC questions the level of the rental expense to be charged by CLP. In the original decision the DPUC completely denied an increase in the rental expense of $2 million claimed by CLP, for rent charged by Rocky River Realty Company (RRR), a sister subsidiary to CLP. ROR, S-I-1, pp. 51-53. The DPUC was concerned that CLP was basing the increase solely on changes to RRR's capital structure.
The parties do not deny that CLP is entitled to consideration of its rental expense in the rate-setting process. General Statutes §§ 16-19, 16-19e. See also Southern New England Telephone Co. v. Public Utilities Commission, 29 Conn.Sup. 253, 259-60 (1970).
In its application for reconsideration, CLP stated that the DPUC should allow the same capital structure and cost of capital in setting the rental expense as the original decision had determined for CLP in general. The final decision the DPUC acknowledged that "it cited in the [original] decision and that it is reasonable to allow CLP a level of rent expense that does not exceed the comparable market rents or an estimate of cost CLP would incur if it owned the facilities." ROR, XI-1, p. 11.
OCC contends that the DPUC's methodology was flawed in setting the rental expense based on RRR's capital structure, and in failing to point to record evidence allowing the increased rental expense. However, in making its revisions, the DPUC did not rely on RRR's capital structure; rather it used a comparable rental analysis and the logically-estimated cost that CLP would incur if it owned the facilities. The final decision allows a portion of the rental expense originally sought ($1.4 million), rather than denying the increase entirely. The DPUC is also planning to monitor the rental charges in future filings by CLP. ROR, XI-1, p. 12. The techniques used by the DPUC to approve the rental expense were reasonable, and there is no showing of any arbitrary action by the DPUC requiring reversal of its decision. See Connecticut Light Power Co. v. DPUC, supra, 219 Conn. 57.
OCC's appeal is dismissed.
Henry S. Cohn, Judge