The Department of Public Service (DPS) and Green Mountain Power Corporation (GMP) appeal the Public Service Board’s approval of a 5.6% rate increase for GME GMP had sought a 9.96% increase, while DPS asserted that only a 2.65% increase was justified. DPS claims that the Board erred by declining to reduce GMP’s rate base to account for: (1) interim year accumulated depreciation on GMP’s test year plant, and (2) certain projected operating expenses of Vermont Yankee Nuclear Power Corporation that would be passed on to GMP ratepayers. On cross-appeal, GMP contends that the Board: (1) erred by rejecting GMP’s proposed 5.5% salary increase for officers and other employees exempt from the company’s collective bargaining agreement, and (2) engaged in unlawful retroactive ratemaking by reducing GMP’s rate base to credit ratepayers for excess amortization expenses paid under a previous rate. We affirm in part, and reverse in part.
I. Standard of Review
At the outset, we acknowledge this Court’s deferential standard of review in appeals from the Public Service Board. Orders issued by the Board enjoy a strong presumption of validity.
In re East Georgia Cogeneration Ltd. Partnership,
II. DPS Claims
A. Interim-Year Depreciation
DPS first contends that the Board was required to reduce GMP’s rate base to account for interim year accumulated depreciation on the test year plant. We agree.
A basic explanation of ratemaking procedure will be helpful to our discussion of this issue. The Board seeks to establish utility rates for the immediate future that will allow investors a reasonable return without overcharging the ratepayers. As the first step in arriving at a fair rate of return, the Board determines the operating expenses
DPS argues, as it did before the Board, that the Board was required, as a matter of law, to reduce the test year rate base by the average amount of depreciation ratepayers would pay in 1991, the interim year, on the test year plant. As stated in prefiled testimony by a DPS witness:
Interim accumulated depreciation is “known and measurable” with absolute certainty. The Company has a certain level of plant in service at the end of 1990. The Company’s rates currently include depreciation expense on this plant which will be recovered in 1991 .... [T]his is known with certainty and this fact must be reflected in the proforma rate base to prevent over recovery on plant which is already paid for.
By not making this adjustment, DPS argues, GMP is receiving a larger return on investment than that to which it is entitled.
The Board disagreed. Citing its decision in GMP’s previous rate case,
On appeal, GMP concedes that DPS is correct from an accounting perspective, but argues that ratemaking policy should prevail over conventional accounting practices and that “‘slavish’ adherence to generalized ratemaking principles” will not succeed in balancing the interests of GMP’s customers and investors. Specifically, GMP argues that the Board was not legally bound to conclude that interim year depreciation was a “known and measurable” change. Finally, GMP contends that the Board is obligated to use “realistic” methods and adjustments that produce results which are “consistent from one case to the next.”
The crux of this dispute is whether the Board acted within its discretion in declining to reduce the test year rate base for what the Board and the parties agree are known and measurable changes, on the basis that to do so would be to deny GMP a fair rate of return. We hold that the Board’s decision was erroneous, since the evidence of a known and measurable change in net plant as a result of interim year accumulated depreciation was unquestioned, and the Board’s reasons for failing to follow that mandate were vague and not sustained by the record. Though the Board’s expertise is at the heart of the deference given its decisions,
In re Telesystems, Corp.,
Central to the Board’s rationale was its assumption that reduction for interim year 1991 accumulated depreciation would be offset by adjusted test year plant investment. Yet in a lengthy and thorough record, there is no evidence from GMP identifying these future investments or suggesting their cost. And the Board itself cast doubt on the existence and scope of such offsets:
During the evidentiary hearings in this case, the DPS argued that, by not making this adjustment [in prior docket], we allowed the Company a larger rate base, and therefore return on rate base, than the Company actually had in service. The evidence, however, was not unequivocal on this point. GMP points out that depreciation expense and additions to plant accumulate annually; and historically, the two have been largely offsetting. However,on the basis of this record in this docket, we cannot determine whether the relationship between the two mil remain relatively constant or mil vary significantly in the adjusted test year. We will need more detailed evidence on the historic relationship of accumulated depreciation and plant additions before we can conclude that the adjustment recommended by the DPS is indeed “known and measurable. ” (Emphasis supplied.)
Even more critically, no justification is advanced by the Board for failing to recognize interim year accumulated depreciation as a “known and measurable change,” even if GMP had presented evidence of adjusted test year investments.
In sum, the Board failed to identify a nexus between its denial of an undisputed “known and measurable” change in the interim year and offsets — proven or chimerical — in the adjusted test year. As we stated in
In re Green Mountain Power Corp.,
The essential reason to apply the “known and measurable change” principle to the test year rate base is that once customers have, in effect, returned a portion of a utility’s investment, they should not be required to pay for that portion a second time, once as depreciation expense and again as a return on plant value which had not been correspondingly reduced to reflect the “return of” the investment through depreciation expense payments. See
State Utilities Comm’n v. Duke Power Co.,
In the face of undisputed evidence of interim year accumulated depreciation and a clear mandate to adjust the rate base for known and measurable changes, the Board’s failure to deduct the depreciation was not within its discretion as a choice “directed at proper regulatory objectives.”
In re Green Mountain Power,
Finally on this issue, we note that DPS attempted to show that in the previous rate case, the Board had overestimated GMP’s rate base, and that the Board’s refusal to include interim year depreciation in that docket resulted in GMP recovering excess rates because the adjusted test year plant was overestimated. DPS argued that the same result would occur in this rate case. The Board disagreed, essentially accepting GMP’s analysis. We need not reach this issue in light of our present decision. Even if GMP is right in this instance, as the Board pointed out: “[W]e cannot determine whether the relationship between the two will remain relatively constant or will vary significantly in the adjusted test year.” A general trend is no substitute for evidence, especially when, as here, the utility seeking the rate increase has had an ample opportunity to introduce evidence as to its adjusted test year additions to plant, and did not do so.
GMP owns 17.8% of the stock of Vermont Yankee Nuclear Power Corporation. Accordingly, Vermont Yankee provides GMP with approximately the same percentage of its output, and GMP ratepayers pay that percentage of Vermont Yankee’s operating costs. DPS argues that the Board should have reduced Vermont Yankee’s $155.65 million projected operating expenses by some $2.12 million because the following projected costs were not “known and measurable”: (1) $785,000 for a feedwater check valve replacement that was canceled because the Nuclear Regulatory Commission approved retention of the existing valves; and (2) $1.36 million for implementation of future regulatory requirements.
GMP argued before the Board that the “known and measurable” standard should be applied to Vermont Yankee’s aggregate operating expense projection, not to individual projects, while DPS argued for a more detailed analysis in which the standard should be applied to each component of the projection. The Board ruled that the projection in its entirety satisfied the “known and measurable” standard, reasoning that Vermont Yankee, as regulated by the Federal Energy Regulatory Commission (FERC), historically had accurately projected its costs, and that the actual costs had been prudent.
Without challenging the Board’s conclusion that generally it may apply the “known and measurable” standard against Vermont Yankee’s aggregate projection, we conclude that GMP failed to meet its burden regarding the canceled feedwater check valve project. See
In re Green Mountain Power,
On the other hand, the $1.36 million projected for future regulatory requirements does not represent phantom costs for canceled projects. Rather, Vermont Yankee based this projected expense on regulations being considered that would impact on specific projects, taking into account several variables. Given Vermont Yankee’s accuracy in past projections and its detailed analysis regarding this particular expense, the Board did not err by refusing to deduct the expense, which is, by its very nature, difficult to measure. In this instance, the Board was justified in accepting the expense as part of
III. GMP Claims
A. Salary Increase for Exempt Employees
GMP first claims that the Board erred in lowering GMP’s requested wage increase for officers and other employees exempt from the company’s collective bargaining agreement from 5.5% to 4%. According to GMB the Board’s findings were insufficient to support a conclusion that the 5.5% increase was “excessive,” and even if the Board made sufficient findings, those findings were unsupported by the record.
The Board found that GMP’s salary-increase proposal in this case was similar to the one rejected in the previous rate case,
The Board considered conflicting testimony regarding the reasonableness of the wage increase and the disparity between the increases requested for nonexempt and exempt employees. GMP argues that certain market data it presented should have been controlling. However, the mere presentation of such evidence does not entitle the company to approval of its plan. In light of the conflicting evidence presented to the Board, “it was free to determine for itself what was to be believed and accepted, without intervention by this Court, except on some basis related to bad faith, fraud or demonstrable mistake.”
In re Green Mountain Power Corp.,
B. Demand-Side Management Expenditures
In the previous rate case, the Board had permitted projected demand-side management (DSM) program costs for 1990 and 1991 in the rate base, and amortization of those projected amounts in cost of service for the adjusted test year, 1991. Because GMP’s investment in DSM programs during 1990 and 1991 was lower than projected, the amount of amortization expenses paid by ratepayers in 1991 exceeded GMP’s actual expenses. Although GMP included only actual DSM expenditures in this docket, the Board reduced the company’s rate base by $306,294 to credit ratepayers for the excess amortization payments. We agree with GMP that this constituted improper retroactive ratemaking. *
Retroactive ratemaking occurs when rates are set at a level that permits a utility to recover past losses, or that requires it to refund past excess profits, that resulted from a disparity between projected expenses of a prior rate base and actual incurred expenses.
In re Central Vermont Pub. Serv. Corp.,
We agree that the Board’s order, in effect, directs GMP to refund the excess rates that it collected based upon the estimated rate base from the prior docket. The principles enunciated in
Central Vermont Public Service Corp.
clearly prohibit the reduction of rates, to which GMP would otherwise be entitled, on the basis that prior projections proved inaccurate.
Id.
(“‘Subsequent cases cannot correct past errors.’”) (quoting
In re Central Vermont Pub. Serv. Corp.,
The parts of the Board’s order declining to reduce GMP’s rate base to account for interim year accumulated depreciation on the test year plant, accepting Vermont Yankee’s projected expenditure for the feedwater check valve replacement, and reducing the rate base to credit ratepayers for excess amortization payments are reversed. In all other respects, the order is affirmed. The matter is remanded for recalculation of the rate increase.
Notes
We reject DFS’s argument that GMP waived this issue by failing to include it in its motion for reconsideration. Unlike
In re Twenty-Four Vermont Utilities,