Summary
In Consumers' Counsel v. Pub. Util. Comm. (1983), 6 Ohio St.3d 412, we upheld the inclusion in costs of pre-test year depreciation reserves, by relying heavily on the fact that R.C. 4905.18 specifically authorized depreciation reserves to be considered in fixing rates.
Summary of this case from Columbus v. Pub. Util. CommOpinion
No. 82-1461
Decided August 31, 1983.
Public Utilities Commission — Amortization of depreciation reserve deficiency lawful — R.C. 4905.18 and 4909.15 in pari materia.
APPEAL from the Public Utilities Commission of Ohio.
This appeal by the Office of Consumers' Counsel (hereinafter "OCC") is taken from an order of the appellee, Public Utilities Commission of Ohio (hereinafter "commission"), granting intervening appellee, the United Telephone Company of Ohio (hereinafter "United"), a rate increase in case No. 81-627-TP-AIR. On May 27, 1981, United filed its application to increase rates for telephone service with the commission. The commission designated March 1, 1981 to February 28, 1982 as the statutory test period and established August 31, 1981 as the date certain. After the conclusion of public hearings, the commission issued its opinion and order on June 23, 1982. The order provided, inter alia, that United be allowed, through an increase in rates, a supplemental depreciation expense of $5,871,000 per year for ten years, in order to recover a depreciation reserve variance.
The commission's order was predicated upon an earlier determination, in 1980, in case No. 80-992-TP-AAM. In that case the commission determined that if previously approved depreciation accrual rates remained in effect, United would incur a reserve deficiency in excess of $58,000,000. Accordingly, the commission authorized United to book supplemental depreciation expenses totaling $5,871,000 per year, for ten years, in order to avoid the deficiency. The commission's decision in this case was never appealed.
In the instant proceeding the commission received testimony from Jerome C. Weinert, Supervising Appraiser for the American Appraisal Company, who conducted the 1979 depreciation studies upon which the commission based its 1980 decision to amortize the depreciation variance. Weinert testified as follows:
"The $58,709,392 figure arises from a theoretical reserve calculation using average service lives and net salvage parameters recommended by the staff of the Public Utilities Commission. Using these parameters, this theoretical reserve calculation of $177,109,169 less the Company's actual 12/31/79 book reserve of $118,399,777 yields the $58,709,392 figure at issue in this proceeding."
In its June 1982 opinion and order, the commission authorized United to include the ten-year supplemental depreciation expense as an allowable expense for ratemaking purposes, stating as follows:
"The main point at issue with respect to depreciation expense involves a supplemental depreciation expense of $5,871,000 per year for 10 years authorized in the applicant's most recent depreciation case, No. 80-992-TP-AAM (December 30, 1980). This authorization was based upon a finding that the company's books reflected a reserve deficiency of $58,709,392.
"The company proposes that this reserve deficiency be recovered through an amortization adjustment to depreciation expense. In addition, the company proposes that the unamortized portion of this deficiency be included in rate base. * * *
"* * *
"This same issue was presented to us in Toledo Edison Company, Case No. 81-620-EL-AIR (June 9, 1982). Although the Toledo case presents a slightly different situation, in that the issue presented was whether or not to continue an amortization rather than whether or not to initiate an amortization, we find that our holding is applicable. As we pointed out in that case, the issue presented is actually whether a past Commission decision with respect to an accrual problem should be overturned. We find the company's proposal on this issue to be appropriate."
Appellant timely filed an application for rehearing which was denied.
The cause is now before this court upon an appeal as of right.
Mr. William A. Spratley, consumers' counsel, Mr. Richard P. Rosenberry and Ms. Gretchen J. Hummel, for appellant.
Mr. Anthony J. Celebrezze, Jr., attorney general, Mr. Harris S. Leven and Mr. James R. Bacha, for appellee.
Mr. John A. Rozic, Messrs. Squire, Sanders Dempsey, Mr. Alan P. Buchmann and Mr. Arthur E. Korkosz, for intervening appellee.
The question presented in this appeal is whether the commission's order approving the amortization and recovery of the depreciation deficiency is unreasonable or unlawful.
Appellant argues that the commission's order authorizing United to recover its depreciation reserve deficiency by virtue of a ten-year amortization schedule is unlawful under R.C. 4909.15. Specifically, appellant asserts that a change in depreciation estimates, or a prior depreciation miscalculation, culminates in a "past loss," which is not a cost of rendering utility service during the test year.
In support of this contention, appellant relies upon Consumers' Counsel v. Pub. Util. Comm. (1981), 67 Ohio St.2d 153 [21 O.O.3d 96] (hereinafter " CEI"). Therein, this court reversed an order of the commission providing the Cleveland Electric Illuminating Company a ten-year amortization schedule to recover costs associated with the cancellation of four nuclear power plants.
OCC made precisely the same contentions in Consumers' Counsel v. Pub. Util. Comm. (1983), 6 Ohio St.3d 405 (hereinafter " Toledo Edison"), decided this same day, which involved the continued amortization of a depreciation reserve variance first recognized by the commission in 1975. In Toledo Edison we distinguished CEI and rejected OCC's test-year contentions, stating at pages 408-409 as follows:
"* * * [I]n CEI this court reversed the commission for its transformation without statutory authorization of a `major capital investment,' which had never provided any service to the utility's customers, into an item of expense. We are confronted with no such transformation in the case at bar because depreciation, unlike unbuilt generating facilities, is a `cost to the utility of rendering the public utility service.' For this reason the case at bar and CEI are distinguishable. This conclusion does not, however, end our inquiry. We must now consider whether the amortization of the depreciation reserve deficiency `represent[s] the type of anomalous condition for which inclusion of costs not incurred during the test period would be permissible.' Dayton Power Light Co. v. Pub. Util. Comm. (1983), 4 Ohio St.3d 91, 94.
"* * *
"A depreciation reserve is an expense item specifically contemplated by statute. R.C. 4905.18 provides in pertinent part:
"`Every public utility shall carry a proper and adequate depreciation or deferred maintenance account, whenever the public utilities commission, after investigation, determines that a depreciation account can be reasonably required. The commission shall ascertain, determine, and prescribe what are proper and adequate charges for depreciation of the several classes of property for each public utility. * * * The charge for depreciation shall be such as will provide the amount required over the cost and expense of maintenance to keep the property of the public utility in a state of efficiency corresponding to the progress of the art or industry. The commission may prescribe such changes in such charges for depreciation as it finds necessary.'
"* * * R.C. 4905.18 speaks directly to depreciation charges and changes * * * and R.C. 4909.15 (D)(1), a part of the ratemaking section, states that the commission is to give `due regard * * * to the necessity of making reservation out of the income for * * * depreciation * * *' in fashioning rates. * * *"
We continue to adhere to the view that if the legislative intention underlying R.C. 4905.18 is to be given effect, then the statute must be read in pari materia with R.C. 4909.15. We therefore conclude that the commission's order authorizing the amortization of the depreciation reserve deficiency constitutes a reasonable and lawful adjustment to United's expenses and, accordingly, the order is hereby affirmed.
Order affirmed.
CELEBREZZE, C.J., W. BROWN, SWEENEY, HOLMES, C. BROWN and J.P. CELEBREZZE, JJ., concur.
LOCHER, J., dissents.
I dissent from the majority opinion because this case sidesteps the rationale of Consumers' Counsel v. Pub. Util. Comm. (1981), 67 Ohio St.2d 153 [21 O.O.3d 96], dismissed in 455 U.S. 914 (" CEI"), and for the additional reasons stated in my dissent in Consumers' Counsel v. Pub. Util. Comm. (1983), 6 Ohio St.3d 405 (" Toledo Edison") (case No. 82-1428).
Once again the commission has ignored the testimony of its own staff witness: "The Staff would agree that if an amortization is used, or if remaining life based accrual rates are used, then a depreciation reserve adjustment would be appropriate. However, the Staff policy is that recovery of under-accruals or the makeup of past losses should not be borne by the current and future ratepayers." The staff position, therefore, reflects this court's holding in CEI, the basis of which is the test-year concept.
In CEI, we refused to allow the utility to pass on the costs of a speculative investment to consumers. We held that investors should bear that kind of risk.
Yet, in this case the commission has ratified what is — in the words of a company witness — a "prospective method" to arrive at a "theoretical reserve calculation" and created a new expense for consumers to pay without any commensurate enhancement of service. "Furthermore, a minority of this court has already recognized the inequity of permitting utilities to manipulate depreciation figures to increase rates. See Duff v. Pub. Util. Comm. (1978), 56 Ohio St.2d 367, 382 [10 O.O.3d 493] (Locher, J., dissenting)." Toledo Edison, supra, at 412.
Likewise, the commission errs by relying on R.C. 4905.18. That provision permits depreciation accounts but does not endorse the "prospective method" and "theoretical reserve calculation" employed to the utility's benefit in this case.
Therefore, the decision and order of the commission is unreasonable because it ignores the testimony of its own staff witness as well as those of both the utility and the Office of Consumers' Counsel. Likewise, the commission's ruling is unlawful because (1) the Revised Code does not provide a basis for this type of expense; and (2) this amortization of a depreciation variance is expressly contrary to this court's holding in CEI.
Accordingly, I would reverse the order of the commission.