Opinion
No. 79-1423
Decided November 5, 1980.
Public Utilities Commission — Water service companies — Rate increase — Rate of return — Determination of interest expense — Consolidated capital structure approach reasonable and lawful, when.
APPEAL from the Public Utilities Commission.
Ohio Water Service Company (hereinafter appellant) is a public utility which provides water service to various Ohio communities.
On July 27, 1978, appellant filed with the Public Utilities Commission of Ohio (hereinafter appellee) a notice of intent to file an application for an increase in its rates, pursuant to R.C. 4909.18.
The appellee granted appellant's request for a test year beginning October 1, 1977, and ending September 30, 1978, with a date certain of March 31, 1978. The application was accepted for filing as of October 27, 1978.
The proposed rate increases were for the Struthers district of the company, an area made up of the Ohio communities of the city of Struthers, the villages of Poland and Lowellville and an adjoining unincorporated area in Mahoning County. Appellant, on a total company basis, serves other non-adjoining communities within the state.
In determining the interest expense for the test year, appellant employed the actual amount of its interest expense booked which was allocable to the Struthers district. The appellee, by and through its staff, made a determination of appellant's interest expense for the test year based on a computation made on a theoretical basis. Appellee, adopting its staff's method of determining interest expense for the test year, used the dollar valuation of appellant's date-certain property (the rate base) in substitution for the actual principal balance of appellant's long-term outstanding debt. Then, it multiplied the rate base by the weighted cost of long-term debt for a group of entities consisting of appellant's parent corporation, Consumers Water Company, and all of the parent company's water utility subsidiaries. Such weighted cost of long-term debt for the parent company's "consolidated" group was the same as that computed by the staff for purposes of its determination of an allowable fair rate of return in the case. Appellee accepted its staff's methodology and determination and, thereby, rejected appellant's determination and methodology for computing the interest expense for the test year.
On July 18, 1979, appellee issued its opinion and order in this case, granting appellant a rate increase of $486,719 for the Struthers district.
Appellant timely filed an application for rehearing, which, on August 29, 1979, was granted in part by appellee on an issue not on appeal herein.
On October 25, 1979, appellant filed its notice of appeal with this court. Initially, three issues were presented on appeal. However, both the appellant and the appellee agreed, through a joint motion, that two of the issues should be decided by this court in a separate appeal ( Ohio Water Service Co. v. Pub. Util. Comm., 61 Ohio St.2d 308) and such decision should be adopted as its decision in this appeal. As that motion was allowed, the only issue now before this court is the proper determination of appellant's interest expense for the test year.
The cause is now before this court upon an appeal as a matter of right.
Messrs. Murphey, Young Smith and Mr. Frank C. Dunbar, III, for appellant.
Mr. William J. Brown, attorney general, Mr. Marvin I. Resnick and Ms. Judith B. Sanders, for appellee.
The sole issue on appeal herein is the proper treatment of appellant's interest expense for the test year.
Appellant is a wholly-owned subsidiary of its parent company, Consumers Water Company. In Ohio Water Service Co. v. Pub. Util. Comm., supra, and Ohio Suburban Water Co. v. Pub. Util. Comm. (1980), 62 Ohio St.2d 17, this court approved the use by the appellee of a consolidated capital structure approach for the calculation of a rate of return of a wholly-owned subsidiary.
The appellee, in the two above-mentioned cases, determined that the debt and preferred equity investors obviously knew of the parent-subsidiary relationship and also that the investors were aware that the parent company would distribute common equity funding among the various subsidiaries in order to maximize the overall rate of return.
In the instant cause, appellee also used the consolidated capital structure approach in setting a reasonable rate of return in reference to the Struthers district. The application of this consolidated approach, when applied specifically to determine an appropriate level of interest expense for the test year, has not specifically been passed on by this court. But, the commission's determination and our approval of a consolidated capital structural approach for setting the rate of return of a wholly-owned subsidiary are quite persuasive herein.
By using a consolidated capital structure in determining a fair rate of return, appellee has asked the ratepayers to pay to appellant a higher return on debt than is actually paid in interest expense. For ratemaking purposes, a utility is not granted a specific allowance for interest charges as a part of the cost of service, in that such costs are already recognized in the rate of return calculations. The ratepayer, the ultimate consumer, will be paying to appellant a higher debt cost through the rate of return calculation and, therefore, as the level of interest expense is increased, the federal income tax expense is decreased. Consequently, it is only proper that the ratepayer benefit from the higher interest expense deduction and, therefore, lower federal income tax expense, than reflected on the company's books. The appellee's approval of its staff's methodology achieves consistency between the test year rate base and the rate of return.
A majority of other jurisdictions, when pressed by a similar issue as that in the instant cause, have supported the approach and rationale taken by the appellee. Re Chesapeake and Potomac Telephone Co. (D.C. 1974), 4 P.U.R. 4th 1; Re West Coast Telephone Co. of California (Cal. 1963), 48 P.U.R. 3rd 89; Re New York Telephone Co. (N.Y. 1970), 84 P.U.R. 3rd 321; South Carolina Generating Co. v. Federal Power Comm. (C.A. 4, 1958), 261 F.2d 915, 27 P.U.R. 3rd 198.
As stated by this court in the syllabus in C SOE v. Pub. Util. Comm. (1979), 58 Ohio St.2d 120:
"A finding and order by the Public Utilities Commission will not be disturbed unless it appears from the record that such finding and order are manifestly against the weight of the evidence and are so clearly unsupported by the record as to show misapprehension or mistake or willful disregard of duty. ( Cleveland Elec. Illuminating Co. v. Pub. Util. Comm., 42 Ohio St.2d 403, paragraph eight of the syllabus approved and followed.)"
In that the method chosen by the appellee has been ascertained to be reasonable and lawful, based on the particular situation herein, we will not disturb the appellee's determination.
Accordingly, the order of the Public Utilities Commission is affirmed.
Order affirmed.
CELEBREZZE, C.J., W. BROWN, P. BROWN, SWEENEY, LOCHER, HOLMES and DOWD, JJ., concur.