Potomac Electric Power Co. v. Public Service Commission

NEBEKER, аnd Before YEAGLEY HARRIS, Judges. Associate HARRIS, Judge: Associate Company (Pep- Potomac Power Electric eo) has this court petitioned pursuant 43-705, D.C. Code to set aside as § confiscatory prescribed by the rates Public Commission of the District of Service (the Commission) for its retail Columbia to District of energy sales of electric Co- were rulings The rate lumbia customers. vote of the established a two-to-one filed, ducted, argument oral on briefs were and Commission in Order No. 5739 November September Co., Re was heard 1975. Potomac Electric Power 3, 1975. (PSC D.C.1975). 11 P.U.R.4th request for reconsideration was denied Pepeo filing original application, After January Order No. 5759 dated (by ap- sought interim rate increases twice Concluding arbitrarily that the Commission 3,1975) March and July dated plications unreasonably set the impact of accel- upon (1) based adverse at a level insufficient to allow Pepeo attrition,3 (2) length of time erating opportunity reasonable earn elapse before the obviously

return which the Commission itself found Both of those final decision. just necessary, we vacate the orders summarily by applications were dismissed pro- remand further appealed from and the Commission.4 ceedings. On November (1) It found order. opinion issued I. PROCEDURAL HISTORY be reasona- rate of return to 9.1% an overall

On December filed an in- necessary, (2) authorized ble and an increase in its retail application for operating annual Pepco’s gross crease upon was based application $27,657,000, (3) rates. determined revenues sought an in- year, calendar 1974 test new rates. Calcula- design the basic $50,832,000 gross increase approximately crease of to the revenue pertaining tions annually.1 revenues addi- a calendar 1974 essentially Such were based vigor- re- Commissioner Stratton theoretically period. tional revenues would have dissented, refusal citing majority’s ously of return on the sulted in 9.75% rate princi- as the for attrition properly to allow rate base. Fol- company’s year-end 1974 failure to for the Commission’s pal reason lowing de- postponements a series of suffi- be at a level which would set rates was on prehearing conference held lays, opportunity to permit Pepeo cient to 6, outgrowth May 1975. As an 11 P.U. of return. earn a reasonable rate conference, granted inter- 237-51. R.4th at whom, People’s vention to 13 one parties, Counsel, on appeal.2 is an intervenor opinion, Pursuant ulti- days public hearings Twenty-two of rates on new schedule Pepeo filed a July mately through Thereafter, were held from June 4 Decem- 7, on 1975. November 24,1975. 18,1975, Pepeo On filed July 1975, the Commis- 3, Pepeo petitioned ber rates. testimony updated peri- an review of those expedited its rebuttal sion for rate sched- approved for reflecting operating actual od The Commission 12,1975, become effec- 30, 12 1975. There- ules on December the months ended June following day. after, tive the was con- further cross-examination rising expenses operаting are faster Pepco’s predicated original filing and/or on an 1. PSC, eight-month Ass’n v. ba- Users actual and four-month forecast revenues. than D.C.App., encompass 293, updated (1973), actual cert. de It later was A.2d 298 sis. 304 and, prior 1448, 933, all 12 months 1974 nied, data for 39 L.Ed.2d 94 S.Ct. 415 U.S. record, six of the for the first months close importance (1974). attrition to a The 492 1975. is discussed in proper of rates determination opinion, V of this infra. section People’s was estab- 2. The Office of Counsel 2, by Congress January See on 1975. lished application an interim rate Pepco’s first 4. early Supp., The 1977 43-205. § D.C. Code 5707, by No. is- dismissed increase was Order part by delay in this case occasioned 7, 1975; was dis- April second sued on participation obtain the desire to Commission’s of 11, 5725, July 1975. No. dated missed Order Counsel, yet People’s had not which office challenged Pepeo those orders on As has during few months of the first been established They appeal, merits. their we do not consider proceedings. continuing are, however, Pepco’s illustrative inability may of a defined as the 3. Attrition Commission. from the to seek rate relief efforts utility due authorized rate return to earn its in rate base its investment to the fact

131 12,1975, Also on December 1973, filed and reasonable.” D.C.Code 43- §§ Application 301, —411; -401, Reconsideration of Order Chesapeake & Potomac No. 5739. That was denied all relevant Telephone Co. v. Public Service Commis respects by sion, 236, the Commission in D.C.App., (1974). Order No. 330 A.2d 240 12, 5759 on January 1976. These standards are the same as those em Act, bodied in the Natural Gas 15 U.S.C. appeal, Pepeo On accepts the 9.1% rate of (1970), 717c and 717d and the Federal §§ Commission, return determined but Act, Power 16 824d and 824e U.S.C. §§ charges (1) that the Commission arbitrarily (1970). Washington Light See Gas Co. v. refused to make use most Baker, 115, 118-19, 88 U.S.App.D.C. recent actual data of record for (1950), denied, F.2d 14-15 cert. period (f. e., the test data for the 12-month 95 L.Ed. after appeal S.Ct. or, ended period 1975) (2) June in the remand, U.S.App.D.C. F.2d alternative, failed adjustments to make the calendar 1974 test data for con- tinuing attrition and for certain The known constitutional basis for requir changes of record ing utility rates to meet the occurred test of reasona the first six months of bleness derives from the Pepeo alleges Fifth and Four that it thus was denied teenth Amendments. a reasonable Federal Power Com oppor- tunity Pipeline Co., mission v. Natural Gas earn the rate of return found necessary by the U.S. 86 L.Ed. Commission to maintain (1942) (hereinafter Natural Pipeline). Gas company’s financial integrity. Supreme Commission, Court has held that rates hand, other defends its which are not adequate yield a reasona use of the 1974 test period and its limited ble return on property the value used allowance for attrition primarily by singling utility company to furnish its service out two “reasons” for rapidly de- public unjust, unreasonable, and clining financial condition during the test confiscatory, and that their effectuation energy (which crisis led to re- —the deprive utility of its property duced consumption) and a decrease sales without process just due or compensation. of electricity to a pool interconnected Pipeline, Natural Gas supra, 585-86, at 62 utilities —and stressing irrelevancy their 736; S.Ct. McCardle v. Indianapolis Water to forecasts of Pepco’s financial needs. The Co., 400, 408, 272 U.S. 144, 47 S.Ct. 71 L.Ed. proceeding now before us represents (1926) 316 (hereinafter McCardle); Blue fourth years time in six found it field Water Works & Improvement Co. v. necessary apply to the Commission for Public Commission, Service 679, 262 U.S. rate increases. 690, 675, 43 S.Ct. 67 L.Ed. 1176 (1923) (here Bluefield). inafter II. SCOPE OF REVIEW In reviewing orders of the Commis Congress, however, provided has cases, sion in rate our authority is delineat no formula for determining what consti 1973, ed D.C. Code 43-706. It is § tutes rates which are “just and reasonable.” law, questions limited to and to findings To fill void, the Supreme Court has of fact they may insofar as “unreason expanded upon the statutory standard in able, arbitrary, capricious.”5 Congress the Natural Pipeline Gas case proge and its Commission, properly has vested the ny. It is axiomatic that “just to be court, primary ratemaking with the reasonable,” rates must be set at a level authority, although the Commission is permits the company to earn a fair powers bound both to exercise its rationally rate of return on its investment. Fed See “just and to set rates that are lawfully, eral Power Commission Hope v. Natural PSC, Chesapeake PSC, Potomac Tel. v. & Co. 5. supra Users Ass’n v. 3, D.C. note 304 A.2d at 236, App., (1974); Goodman v. 330 A.2d 239 296. PSC, 97, D.C.App., (1973); Tel. 309 100 A.2d 132 97, (1973) (herein 281, D.C.App., 309 A.2d 101 Co., 88

Gas 320 U.S. 64 S.Ct. accord, (hereinafter Goodman); Telephone Users (1944) Hope); L.Ed. 333 Natu- after 596-97, Commission, Pipeline, supra, ral Gas 315 at U.S. Association v. Public Service 736; McCardle, 293, supra, (1973), 62 272 at S.Ct. U.S. 304 A.2d cert. D.C.App., 144; Bluefield, 408-09, 47 supra, 1448, S.Ct. denied, 933, 415 U.S. 94 S.Ct. 690, 43 regulation at 675. While U.S. S.Ct. (1974) (hereinafter Telephone L.Ed.2d 492 utility that a will guarantee does not Users). Permian Basin Area Rate See revenues, pro- its projected achieve must 747, 790-92, Cases, 390 U.S. S.Ct. utility opportuni- vide the with a reasonable in such Only way a 20 L.Ed.2d ty to earn a rate of return sufficient reviewing effectively court evaluate may a integrity, maintain the financial reasonableness, po or the the fairness and capital attract at a reasonable necessary nature, confiscatory particular of a tentially cost, fairly compensate and to investors rate order. assumed, protect- risks have while they Cases, Permian Area Rate In the Basin ing Hope, interests. public relevant 791-92, at the Su- supra, at 88 S.Ct. at 281. This supra, 320 U.S. S.Ct. preme up responsibilities summed Court balancing a of investor involves delicate a reviewing court: Id., consumer at 64 S.Ct. interests. First, whether it must determine 281. order, light viewed in single No formula—or combination and of the Commission’s relevant facts regulatory commis of formulas—limits duties, ex- regulatory abused or broad “just to set and reasonable” power sion’s Second, authority. the court ceeded However, obliged rates. commission in which the must examine the manner adjustments appro where pragmatic make methods of employed Commission has supra, at Hope, circumstances exist. priate selected, regulation which it has itself 281; Pipeline, Natural Gas S.Ct. and must decide еach of the whether supra, 315 at 62 S.Ct. 736. Courts U.S. supported by order’s essential elements is showing” intervene “clear may Third, the court substantial evidence. process violation. If the commis of a due may whether the order must determine order, entirety, produces viewed sion’s expected fi- reasonably be to maintain result, judicial inquiry to be no necessary integrity, capi- attract nancial Pipeline, supra, Natural Gas terminated. tal, fairly compensate investors 586, 62 at S.Ct. assumed, they yet the risks have Thus, result reached not “it is the to the rel- appropriate protection provide controlling.” employed the method interests, existing both public evant Hope, supra, foreseeable. pri concern themselves are to 287. Courts adhered to the stan court has of a rate impact the overall marily with This enunciated on several of review thus dards order, theories behind than with the rather case, instant we have In the occasions.7 However, of a if the total effect Ibid. it. effect of the Commis the overall examined unjust or unrea is found to be rate order unjust find it opinion, and sion’s must delve into sonable, reviewing a court of deprived Pepeo unreasonable that give must rea of order. It the details fair rate of return to earn a opportunity ele to each contested soned consideration latest rele disregarding by improperly determine the order “to ment of the rate pertaining record historical data of presence arbitrary action.”6 vant possible Commission, Examination company’s operations. Public v. Service Goodman 5, supra (citations 309 A.2d 101 omit- Arbitrary on note at not based facts 6. action is “action ted). upon petitioner is . or The burden reason. clearly convincingly a fatal demonstrate PSC, See, supra. v. g, in the action taken.” Goodman flaw cited note 7. e. cases

133 the elements of the opinion approach earning reveals several the rate it au- of return findings (expressed and conclusions in the thorized. opinion overlapping, in an ratemaking The process involves style) unreasonable,

narrative which are ar- intelligent the making of an honest and bitrary, capricious. These include the probable forecast of future values based Commission’s refusal to utilize most upon circumstances, including all relevant record, period recent test in the its failure primarily performance during pe known a attrition, to account for continuing and its e., (i. riod of past time in immediate refusal recognize certain known changes test period). West Ohio Co. v. See Gas originally which occurred after pro- (No. 2), Public 294 Utilities Commission posed 1974 test period. calendar (1935) 773 79, 82, 79 L.Ed. U.S. 55 S.Ct. (hereinafter McCardle, Gas); West Ohio III. THE OVERALL EFFECT OF THE 144; supra, 408-09, 272 47 S.Ct. U.S. AND THE COMMISSION’S OPINION Missouri ex rel. Southwestern Bell Tele RATE OF RETURN phone Commission, Co. v. Public Service 262 to Pepco’s arguments Basic is the U.S. 43 S.Ct. 67 L.Ed. 981 contention that the Commission effected an Id., 291-92, (1923); (Bran 43 S.Ct. 544 unreasonable result when it déis, J., concurring in the judgment); Tele a rate thereby pro established base —and Users, phone 297. supra, A.2d at vided for deprived revenues —that the com validity period test approach rests pany any opportunity to earn rate of upon assumption relationship that return which was found reasonable and nec revenues, among expenses, essary by the Commission itself.8 In its year which were established the test will opinion, the Commission initially found continue future, into the near when the “that a fair rate of return for [overall] ” prescribed will be in rates effect.9 See Le It Pepeo is 9.1%. further concluded that: Co., tourneau v. Citizens Utilities 128 Vt. capital, order to attract a re equity A.2d equity turn required 13% PEPCO; and we equity find an return at valid Accordingly, period test must be level be fair and reasonable. utility’s based most recent actual Notwithstanding conclusions, experience, adjustments all those known arbi actual, historical, changes affecting costs trarily disregarding and revenues for Users, Telephone uncontroverted data submitted as immediate future. evidence 297; by Pepeo during supra, course Eng- extended A.2d at Southern New hearing, guaranteed the Commission all v. but land Co. Public Com- Utilities mission, be able Conn.Supp. would not A.2d utility ratemaking purposes, predictive Emphasizing 8. For the rate base value test (with multiplied by “relationships,” the rate of return the neces stated Commissioner Stratton sary adjustments in his for the income tax dissent: liabilities) require determines purpose approach] revenue [the base” is not ments. “Rate has been defined as the . future rates are reasona- company’s property year they pro- value of a used and useful ble if in the test have would return, deprecia public in the service minus duced a fair or that increase in accrued Telephone Users, supra, produced See tion. revenues have fair A.2d at n,6. return, ipso the in- return in the test facto For discussions of rate see WMATC, 342, crease that do so in The test will the future. Williams v. U.S.App.D.C. 134 year approach is to 922, assumes —and this vital 348, banc), (1968) (en cert. 415 928 F.2d relationship understanding denied, 1081, 860, it —that U.S. 393 89 21 L.Ed.2d S.Ct. revenues, among expenses, rate base System, (1969), and D. C. Transit Inc. v. 773 that obtained in test continue will WMATC, 375, 400-01, U.S.App.D.C. 121 350 Only assumption if is into the future. denied, 753, (1965) (en banc), cert. F.2d 798-99 valid does it follow rates which 847, 52, 389 88 19 L.Ed.2d 115 U.S. S.Ct. produced a fair rate of in the test have return (1967). produce a fair in the will rate of return future. 134 ending 31, test March periods 12-month (Super.1971); Letourneau v. Citizens 1975, 31, 1975, 30, 23-24; June and December Co., supra, 259 A.2d at see Utilities filed, projected When those Department Public 1975.10

Boston Gas Co. v. Utilities, high as those later found nearly 359 Mass. N.E.2d were not as (1971); Commission, Telephone New York Co. v. Public be and actu- required by to Commission, 29 to unduly Service N.Y.2d them experience proved al N.Y.S.2d N.E.2d 554 See Gas, supra, 294 West optimistic. See Ohio Goodman, It is supra, 309 A.2d at 100. forecasts, also The 324. U.S. at S.Ct. may the rate maker well settled actual, historical data submitted well as the when more rely on out-of-date information attrition; continuing reflected by Pepeo, experience, which a recent actual shows part of the is, inability a chronic on the the earlier disparity substantial between rate of re- to its authorized company earn actually the rate of return forecasts and expenses increases its turn because the earned, Gas, supra, available. West Ohio consistently outpaced and/or rate base 82, 55 ad- 324. Suitable in revenues.11 increases accommodate justments must be made to alerted to further was the latest available relevant data which continuing attrition the dramatic effects received in evidence. Pepeo requests filed utility on the when two eyes to latest To shut one’s available [the relief, refund, subject for interim rate altogether, from figures] exclude them opinion. pending the Commission’s final reckoning, as much action requests the interim company filed guesswork upon build schedule position realization that its financial with a 81-82, [Id., with evidence available. interval declining rapidly during the 55 S.Ct. at 325.] de- administrative which was occasioned New v. Public Ser- Telephone See York Co. applications noted, the interim lay. As Commission, (PSC supra vice reversed 1975, re- July were in March and filed hearing receive actual reopen refusal by updat- accompanied spectively, and were from projections). data differed reflecting exhibits testimony ed direct re- continuing operating deterioration A. The Most Recent Available Data noted, we sults. As have those applications. denied clear to the Commission Pepeo submitted respect Pep- Cross-examination its rapidly evidence and uncontroverted began on June presentation direct co’s occa- on several declining position financial pointed witnesses out 1975. The between month sions HV2 experi- which had been severe attrition application and filing original the end of enced since opinion. of the Commission’s issuance period originally the test based its Pepeo first demonstrated application, period, irrelevant to the com- a calendar 1974 had become proposed request princi- results also forecast its financial status.12 The pany’s but it actual 10.The Return Return on (unadjusted) Average End of Period Average End of forecasts Rate Equity Period Base reflected CDCO -O <3CD March <1 CO 12 Months CD O CD Í-* CD <1 © June following Ü1 Ending December, <1 ^[00] h- <1 <1© -4 to CD b) data: A12. 11. See escalating with the sioner Stratton tween rate base which the between Where I attrition as minimal In his its treatment of the attrition majority’s plant part company with the Commission remedy prescribed placebo dissent, official emphasized his Users, supra, treatment expense financing while emphasized that bloodletting. or nonexistent: distinguishing be- attrition, of manifest costs, lies disagreement 304 A.2d at somewhere malady for dramatic Commis- sharply

135 pal witness, Pepco’s presentation updated Staff while adher- of the also ing period, 1974 test to the calendar data in the same format as had was continuing recognized deplored original (filed application been utilized in its presence attrition.13 1974), and as it on December thereafter then of ac- prepared compilation amended to show actual re- had been results for the 12 months tual changed were Only sults. the numbers That was ended June 1975. submission altera- significant intervening reflect 18, 1975, with the July company’s filed on Pepco’s status due to con- tion in financial testimony. filing That prepared rebuttal tinuing attrition. cross-examination of was made intro- part presentation, Pepeo As of this Commission’s Staff the witnesses for the table of following duced into the record The cross-examina- and the intervenors. results Pepco’s company’s operations: witnesses on actual began tion of rebuttal 23, 1975.14 July Earnings Per Ratio of Return on Earnings Average Share of Common to Fixed Common Stock Capital Equity

_Stock_Charges Year 2.94x 10.5% $1.35 1.09 2.28 8.3 1.25 2.10 9.1 1.33 2.10 9.4 1.53 2.58 10.5 1.71 2.70 11.4 Twelve Months Ended June 1.87 2.81 30,1974 12.3 1.86 2.74 31,1974 12.2 July August 1.78 2.63 31,1974 11.7 1.76 2.56 30,1974 11.5 September October 1.72 2.51 31,1974 11.3 November 1.70 2.47 30,1974 11.1 December 1.63 2.43 31,1974 10.7 1.57 31,1975 2.36 10.3

January 1.52 2.30 February 28,1975 . 9.9 March 1.44 31,1975 2.20 9.5 1.32 30,1975 2.09 8.7 April 1.24 2.01 31,1975 8.2 May June 1.21 1.90 30,1975 8.1 capi- additional “obtaining] from Pepco’s company witness stressed that the practical on securities markets public effect of those was tal funds preclude results * * * resulting increases fuel costs making from purposes. the na- rate base energy crisis, tional substantial construction opinion Staff is of the conditions [T]he programs only rising curtailed, recently rapidly existing in 1973 rate that led to the [the case] capital and embedded costs of senior finding ‍‌‌​‌​​​‌​​‌​‌‌‌‌​‌​‌​‌‌​​‌‌​‌​‌‌‌‌‌​​‌​‌​​​​​‌​‌‍present.” still attrition are were for the deteriorat- responsible ing testimony financial situation. The official’s chronology hearing as fol- 14. The supported by independent several ana- The cross-examination of direct lows. lysts, as well as representa- other began case on June 10 and ended on June tives. 1975. cross-examination of the Staff and July lasted from 2 to intervenors’. witnesses July prior Pep- 13. The Staff witness “In stated: 1975. The cross-examination [the began immediately Commission found ‘a classic order] rebuttal co’s witnesses picture end-of-period thereafter, July attrition’ and used an terminated Characterizing objection to the content of No substantial acceptable terms.”15 any made, Pepco’s testimony rebuttal “critical,” he continued: position Pepco's concerning calcula- no issue was raised begun to lose Pepeo clearly has [investor] utilizing the actual tion of the base will accelerate and the loss confidence for ended June 1975. data a is able obtain the Company unless Subsequent hearing, Pepeo sup- achieve the level relief sufficient plied for its financial results the record required Compa- results enable the periods August, July, the 12-month ended present potential and attract ny to retain September they of 1975 as became its securities.16 investors available: on Return Earnings Average Per Ratio of Common Earnings Share Stock Equity to Fixed Common Capital _Stock_Charges Twelve Months Ended 31,1975 July % 1.90x 8.1 $1.21 31,1975 August 1.18 1.90 7.9 30,1975 September 1.16 1.89 7.78 brief, argument, contrary, ef- opinion in its oral Commission’s Finally, reconsideration before Com- petition for fectively impact of con- ignored overall mission, need its company repeated tinuing, post-1974 compa- attrition greater rate rеlief than that afforded gen- integrity.17 Concurring financial ny’s upon the outdated calendar rates based erally with the recommendations made period. 1974 test Staff, de-emphasized the Commission Pepco's role attrition in financial Exclusion B. Data woes, Most Recent Available selecting phenomena two al- instead to attrition —the 1974 en- legedly unrelated however, largely went un- Pepco’s pleas, pool in sales to a and a decrease ergy crisis Despite pro a forma recitation heeded. capital any organized markets will at- access to the further testified that 15.The official tempt financing through common to obtain continue to be blocked. offerings illegal or either would be debt stock lost, Pepeo witness added that once 16. value, par price (if fell the market below confidence could be reestablished investor least, very likely), seemed then substantially higher earnings than re- with compound present process of dete- simply quired maintain such confidence. to a financial situation rioration addition, partic- recovery process would be recovery satisfactory point financial ularly painful for the since slow and require time and more health would more by many still remembered investors it is rate increases. utility, only significant electric other than “the Moreover, he stated: Edison, to have omitted a cash Consolidated practical Pepco’s position is For all critical. its common stock in modem dividend on public Pepeo purposes is foreclosed from the times.” Company capital markets at a time when the outstanding $60 has million of short-term took “official notice” of 17. The Commission minimum con- The continuation of our debt. data, principally increasing program certain 1975 will necessitate struction approxi- against Company’s project PJM debt an offset of retail sales short-term year, mately interchange end of the $100 million sales. See infra. Addi- note during tionally, It is im- with further increases perative minor rate made two placed Company data, namely in the adjustments that the to reflect 1975 being position finance these ex- receipts able to wage gross increase tax union increase, permanent capital. penditures How- into and took consideration ever, again able to demonstrate until retirement. Other- sales and 1975 debt stock earnings on its levels of at least minimum wise, discus- based entire margins pro- adequate stock and common years 1970-74. on data derived sion securities, its in senior for investors tection companies of interconnected electric ally experienced as of the end of could —as Pepco’s the “causes” of primary economic raise conceivably Pepco’s eq- return on doing, troubles. In so the Commission did uity “required” from the 13% level the historic acknowledge problem of attri- experienced by company 8.1%rate the as of expressed tion and concern over its own (or experi- June from 7.78% ineffectiveness in coping with the compa- enced 1975). as of September ny’s problems past. financial in the None- The attrition-related rate significant one theless, it did not even mention the substan- Commission, adjustment base made by the tial reflecting data 1975 financial develop- that of for Plant using year-end 1974 data by Pepeo ments which were submitted on Service, in general consid- reflected data, numerous manifestly occasions. Such eration of the historical trend of such costs. significantly relevant and different from post-1974 available data of record were upon by the outdated statistics relied excluded the calculations. from Commission, presented by were Pepeo in following ways: (1) in the forecasts and us, In its before the Commis brief trends with the original application; filed Pepco’s sion as one complaint characterizes (2) in the later requests two interim essentially directed “the ever toward relief, by which were supported updated present problem lag un regulatory —an exhibits; and testimony (3) during the part regu fortunate —but inevitable of the cross-examination of company’s wit- latory process,” the risk of which must be cases; nesses direct (4) in its and rebuttal in company shouldered invest testimony of the Commission’s own However, ors.18 the readily recognized witnesses; (5) Staff in presentation pri- problem lag has been con regulatory closing or to the of the record of actual sidered by the Commission earlier cases figures for the more recent test ended as a factor to dealt with in calculating be 1975; (6) June in written and oral return, the rate of and as one be allocat made closing submissions after the of the ed consumers equitably to as well inves hearing. public The Commission’s exclusion Chesapeake Telephone tors. & of this Potomac Co. substantial and relevant evidence Commission, supra, from its Public consideration was an unreasonable v. Service A.2d at ratemaking (permitting exercise of its 241—42 an interim ad authority. justment Users, lag); for future Telephone supra, (justifying 304 A.2d 299 n.15 The overall effect of the Commission’s use of year-end light rate base in opinion deny was to chance to attrition). evidence regulatory lag earn the rate return termed “required,” ratemaking Realistic today’s economic “fair,” and “reasonable” in the opinion it- climate length must take into account the Actual, self. historical which evidence ening delays regulatory occasioned in the for at record least several months processes, need recognizing while prior to the issuance of the Commission’s preserving appropriate an balance between opinion clearly that Pepco’s demonstrated investor In the and consumer interests. on equity rate of return steadi- had declined case, instant arbitrarily ly on December 10.7%. —from regula unreasonably problem cited (and, 8.1% on June after tory lag justify in an effort to its failure to closed, September record was 7.78% utilizing strike the 1975). review, order needed balance suppos- under most recent data of edly designed raise return on historical common from the actu- record. equity 13% 10.7% argument, People’s proof. This is her oral Counsel like- return. not [fool-] [But] something wise stated: does have attached to which risks * * * is, course, it. of these risks One Those investors who invest common regulatory lag. regulated industry given are stock of a fair, opportunity to earn a rate of reasonable precipitous earnings, decline most current actual and the in its

Urging the use of the available, has Supreme Court duly data of which made clear evidence calculations which record, warned that “elaborate showed part unequivocally no avail.” are at war with realities unrepresentative the 1974 test Co., Illinois Bell Lindheimer v. future new 151, 164, 54 78 L.Ed. would be effect. The rates Gas, (1934), supra, West Ohio quoted revenue/expense/rate emphasized 324. The Commis 55 S.Ct. U.S. relationships changed signifi- had so case, electing not to be attuned sion in of the cantly application Commission’s continuing inflation and to the realities to more recent ratemaking formula own attrition, cognizance to proper refused take would have necessitated an increase of data changes of record. of known and relevant revenues, million in rather than the $48.6 thereby disadvantaged It both investor and actually million authorized. When ac- $27.7 interests, Pepeo its and denied consumer figures reflecting companied by the actual to constitutionally-guaranteed opportunity continuing decline in its rate of Pepco’s a fair rate of return on its investment. earn the evidence demonstrat- equity, return of the most recent available The exclusion clearly convincingly rates ed from and evaluation data consideration of rec- latest available data based nature, was Commission the 12 months ended June ord —data for effect, and made its decision confiscatory in company an 1975—could have afforded the inconsistent with both reason one which is approach the rate of opportunity earning to Users, Telephone and the evidence. See the Commis- required by return found to generally at supra, 304 A.2d 300-01. See utility’s to overall finan- sion maintain Gas, supra, U.S. West Ohio confidence, to integrity, cial retain investor 324; v. Pub York Co. New viability which and to assure economic Commission, supra. lic Service to Pepco’s ability pro- is vital to continued public. vide reliable service to THE ELEMENTS OF IY. THE seeking justify THE In to its use of calen- ORDER: COMMISSION’S period, PERIOD 1974 test the Commission con- CORRECT TEST dar primary that there were two “caus- cluded effect Having concluded that overall Pepco’s during es” of financial decline unjust and unreason- No. 5739 Order 1974 which the test part latter rendered -401, 43-301, -411), (D.C.Code able §§ “atypical” pres- historically both elements proceed we must consider the normalcy.” of a “new ently representative Pepeo. Tele- challenged by See thereof due to A in retail sales substantial decrease 298; Users, supra, 304 A.2d at see phone fuel crisis еnergy conservation Cases, supra, Rate Permian Basin Area also significant in 1974 and a which surfaced 790-91, 1344. Primari- 88 S.Ct. U.S. utility drop energy pool sales to that the Commis- ly, company contends two factors companies were cited refusing replace outdat- sion erred in 1974 from earlier distinguished which with the 1974 test data ed calendar responsible years.19 They allegedly were pe- the 12-month data submitted for actual earnings, for the downward trend in According 1975. riod ended June acknowledged expenses trend which the Commission striking increases in its Pepeo, energy purchases Pepeo approximately also 12 utilities The one of demand. Jersey- Pennsylvania-New when it is economical- comprise other PJM utilities from which Pep- technically so. (PJM) ly for it to do Maryland As a PJM beneficial Interconnection. member, participation in has to reduce Pepeo PJM served has used interconnected co’s service, considerably systems thereby to relieve its customers transmission its overall cost However, benefitting part carrying significant costs cir- of the its retail customers. of a off-peak kilowatt-hour means of have combined reduce facilities cumstances Pepco’s plant significantly. PJM deliveries to from sales PJM during periods of be idle low would otherwise “shows no sign reversal.” calendar (M S). Materials Those ad- Supplies & 1974 test therefore selected justments over alone reduced arbitrarily previous years being representa- approxi- “more a total million, tive of reasonably expected mately conditions and correspondingly $36.8 chosen, exist in the future.” It also was requirements by ap- reduced its revenue however, without reference known proximately million. $7.5 changes of occurring record more recently diluted, By adopting end-of-1974 rate than the end of as we have discussed. base, the all but made cer- (although Commission further found tain that would not be able earn its dissenting disagreed) member that these the rate of return which the Commission “causes” were not related to attrition. The necessary capital found to be to attract stated, however, majority maintain confidence. an at- investor down, tempt to rates keep impermissibly ignored the consumers’ and clear record is the increase in long-range the investors’ with the concerns per investment costs output unit of noted * * stability utility.21 financial See in our continued, last decision has 281; Hope, at supra, 320 U.S. 64 S.Ct. we are persuaded that attrition is a [so] Bluefield, 692-93, 262 supra, U.S. at 43 us, phenomenon that is still with and we 675. Missouri ex rel. S.Ct. Southwestern now, will therefore have in we Bell Co. v. Public Com- Service past, period base, use an end of with mission, 291-92, supra, U.S. adjustments, appropriate in order to com- J., (Brandéis, concurring judg-

pensate the presence of attrition. ment). The reasoning and conclusions thus enun- Reviewing the abundant record incongruous. ciated are The Commission decline Pepco’s precipitous evidence of found the 1974 earnings trend to be de- earnings beginning through 1974 mid-way creasing pace at a faster that experi- than continuing unabated into we con enced in previous years, and admitted that that clude the Commission’s decision use time, “the expense effort and involved in partially end-of-period a 1974 rate calendar 1972, and 1973 ap- PEPCO cases arbitrary as law. base was a matter of pear to have solving been ineffectual in relationships revenue/expense/rate economic problems of utility.”20 this This a provided that would have fair allegedly acknowledgement was made face of during rate of return calendar mani record evidence demonstrating Pepeo that festly had and no could be changed, longer failed significant margins to earn the upon relied fair rate return produce rates of return necessary by found the new period the future when Commission in 1970 and or at any requisite in effect. The rates would be time from 1970 to 1975. The company’s “delicate balance” between investor and rate base increased almost three times as attained, consumer interests was not as the fast operating as its income from 1973 to shouldering placed burden of was losses 1975. Notwithstanding such facts find- company and its investors. ings, proceeded the Commission nominally apply remedy same in the used earli- strikingly Confronted with similar cir- er rate end-of-period cases—an telephone rate base. cumstances in a However, it remedy case, then diluted that the New Public Commis- York Service including the lower average routinely incorporated sion data from the Construction in Progress (CWIP) Work following months originally-filed six Co., 20. See Re Potomac Electric Power principal 3 P.U. 21. The witness Staff (PSC D.C.1973); ultimately Re Potomac Electric remedy R.4th 65 acknowledged had that Co., Power (PSC D.C.1972); prescribed Re 95 P.U.R.3d 99 to alleviate would be insufficient Co., Pepco’s Potomac Electric Power 83 P.U.R.3d 113 financial woes. (PSC D.C.1970). the new City Pepco’s introduction of year. aspects a new test test into Commission, 42 v. first New York Public Service into evidence. data That A.D.2d 346 N.Y.S.2d in- not manifest an argues Pepeo did adoption explained commission for the 12-month tention to have the data it year “by stating that substituted test 30, 1975, constitute the period ended June Company unfair to the would be period. To bases for more valid the first include actual results for contention, ex- the Commission support 346 N.Y.S.2d six months 1971.” Pepeo offi- testimony of a cerpted from the case, the Commission should the instant following: cial conclusion.22 have reached the same are suggesting . . . we not —not Furthermore, focusing narrowly on for the of the June substitution fi- company’s isolated “causes” two . but I do ask year, December distinguishing them nancial decline and note of this the Commission take (for which factors from attrition-related reaching apply information made), adjustments other year-end or case. conclusions in this to evaluate properly failed bit of testi- By the date of isolated economic and deal overall already elapsed months had mony, seven dissenting agrеe with Com- problems. We applica- filed its rate increase since of the ma- assessment missioner Stratton’s time, fi- During tion. action: jority’s rapidly worsening nancial situation today’s decision the commission With the an- earnings approaching level giant Back- step takes a —backwards. urgent requests level.23 nual dividend Two rate-making ethos of a into the wards refund had subject for interim rate relief realities of era when the harsh departed experienc- was been denied. The environment, and energy uncertain $75,000 per day during of an actual loss ing To- not with us. rampant inflation were understandably seeking was reality, delay, the and the abun- day’s decision denied record, re- of rate increase in of resolution its dantly expeditious demonstrated the in ev- reali- price virtually escalation with those application. Confronted morseless service, and the cost ery component ties, urged official the substitu- the relitiga- prompt so insures the doing by current information availa- tion of the most in this case. of all the issues 30, 1975), tion ended June (that year ble for the reopening or continu- object any but did attempts justify further The Commission new to consider the hearings ance of the period to utilize a test ended its failure data. He stated: by attacking procedural the June Co., (1975). necessity That solution 8 P.U.R.4th 277 to insure that the rates set 22. The meaningful pre- simultaneously prophesies avoided the inherent fair and would have would be years, imba- to utilize a future test and the inevitable value led one commission in dictive Id., by fully period year-end accompanied rate bases. at 286. future test lance of Co., Georgia Thus, projected Power in the instant rate base. Re Commission’s error the Finding egregious that this would view is seen to be in of the P.U.R.4th case period, many attrition for the test the Geor- it eliminate available to for set- alternative means any gia ting non-confiscatory that difference commission concluded realistic and rates. actually experienced the allowed and between us, Pepco’s During argument 23. oral before for instead of return would be accounted filing that after its initial counsel contended According by projection. that errors immediately request, company “fell the commission, prove de- errors would less . such “the a financial decline” described as into public un- than the interest trimental worse, history,” Pepco’s in than fact worst in Id, 385- attrition. known effects future company was forced to “when the that point This same its accrued dividends.” halve problems the Another commission solved hear- made the administrative had been lag by utilizing regulatory a rolled- attrition ing, Chairman of the President and e., (/. “proformed” which [sic ] in test one Board, testimony during the in direct rebuttal encompass upcom- capital the structure to the phase. ing year). Power Re Central Maine calendar opportunity nothing A. There should be There is which should ample Counsel. it. require, opinion, delay between now in and the time about July my the case is concluded for Commis- tо have the addition, Pepco’s In intent sion figures staff to review the June accepted regulatory Commission follow assure themselves that it [sic] determinations practice basing its rate comparable to the figures December data most actual upon utility’s recent that originally were submitted. presentation was manifested Q. But we are still on the formulas, basis of same new data on the basis of a 1974 format, the 1974 data and in the same purposes of this proceeding; correct? were Only filed. the numbers originally A. Yes. I think it would be far prefera- eco- changed Pepco’s worsening to reflect

ble to use changed most current informa- Those numbers nomic situation. available, tion that is most data which would recent historical represented June, but we would not want in- bound to take which Commission was so, Gas, delay by doing supra, troduce a we into account. West Ohio See 324; be, thought it present would 294 U.S. at 55 S.Ct. 297; complete Users,

now as a summary of the A.2d at New York supra, 304 June figures present and also to v. Public Commis- Telephone Co. Service forecasts, figures June sion, supra. They the same form as were not they special were been accorded traditionally submitted staff have would make it as possi- ratemaking proceedings.24 convenient as treatment ble for testimony the Commission to use and the actual historical those both reviewing data, therefore, evi- the ease. there sufficient intent on the record dence In this apparent context finding concluding to warrant our Pepeo official intended that the most recent contrary capricious. data be utilized lieu of the outdated 1974 figures, but was reluctant to insist argues The Commission also doing substitution if so would risk further late, the new data were filed too Moreover, substantial delay. on the next adoption new test day, the President and Chairman of the unduly prolonged proceeding have Board of Pepeo unequivocally urged rights other prejudiced parties. the of adoption of the most recent the data within However, the reciting only: (1) fact test period. He testified: the the new data were filed with rebuttal quite

I will be open pro candid and testimony; (2) “[a]ny with this the truism that Commission and in the come a conclusion at everybody ceeding simply room. must Hobelman, I instructed you, point”; (3) adoption Mr. and law- the of some and in this yers update case to the would “necessi year, test the new results for recognition and the June 30 test of year, proceedings this case. tate further * * * rights I I other say parties,” Commission that the of the procedural urge the Commission to base its failed to substantiate delay results on the and figures. regarding any possible June 30 conclusion There re might for have plenty potential prejudice time staff audit of those which figures. All the ex- the new issues have been sulted from its utilization of intervenors, by amined People’s period data. recently play important

24. Forecasts two has held that roles in rates. This court ratemaking process. times, data “There are to be refusal to consider forecast surе, prophecy ratemaking proceeding when resort er- becomes inevita- in a was reversible Users, precise.” Telephone supra, ble in default of methods 304 A.2d at 300- more West ror. honest, Gas, supra, Nonetheless, “prophecy, Ohio U.S. at S.Ct. at 325. however 01. PSC, supra, experience.” Bell generally poor See Southwestern v. Tel. Co. substitute addition, Gas, at supra, U.S. S.Ct. 544. In Ohio at West U.S. supplementing experience forecasts actual at 325. prospective essential a determination Users, supra. ample reasoning time to new were filed our data case, utility sought and to introduce analysis and intervenor allow Staff In that cross-examination, sought ad- party part and no wage adjustments as two additional facts. updated time to review the ditional case, despite the fact that its rebuttal to the admission of objection No was made pending aware fully of the accompanying exhib- and its testimony changes testimony. of its direct the time the reve- concerning No new issue its. adjust- disallowed the The Commission relationships nue/expense/rate ments, they concluding that did not afford cross-examination of during raised either opportunity intervenor the the Staff or (which rebuttal witness be- company’s offsetting adjustments present evidence after the new data were gan days five proceeding. unduly prolonging without filed), during the five months after the or reversed, following four fac- citing the We hearings, during which time briefs were holding: (1) for our the bases tors as heard, filed, were and the arguments oral all wage was known to fact of increase from were issued.25 appealed two orders began (it arose hearings before the parties await audit of the Finally, Pepeo offered to three-year contract between from a data, there was more certainly and new union); (2) the amount utility only and the nearly four ample than time unknown; initially was wage increase elapsed hearings between the months parties all counsel alerted (3) for such an the Commission’s decision compa- that the prehearing at a conference only accomplished.26 to be It was audit for the added em- ny might seek allowance opinion, issued its after ex- expenses; (4) the additional ployee for Reconsidera- Application filed its utility’s in the fore- were submitted penses tion, arguments against were advanced operations filed two weeks before cast actual data. utilizing the most recent 304 A.2d Staff filed its evidence. thus consisted As the new data 302. uncontested, figures which were historical (1) the Similarly, in instant case: fact audited, filed, timely easily considera- deteriorating financial Pepco’s rapidly would not have re- process tions of due great- corresponding need for condition reopening quired an extension relief than that which would er rate hearings testimony further con- admit employing the 1974 data was afforded See, Del- cerning g., the new data. e. Re long before the parties made known to all Co., Light 337 A.2d marva Power & (in the forecasts filеd hearings began City York (Del.Super.1975); of New 518-19 application and in the interim original Commission, supra, 346 v. Public Service updated accompanied by fully requests ap- have been at 9. This should N.Y.S.2d exhibits); (2) only the exact Commission, testimony reflected parent noted, Pepeo People’s sug- its most appeal, facilitated audit of 26. As brief on Counsel by submitting adoption in accordance updated recent data them gests of test that the format, 30, 1975, may and as it did required with the Staff’s formulas a reve- have ended June Moreover, gen- original is “synchronize” expense adjustment submission. to nue and (and argu- erally company’s was confirmed at oral known with the investment those elements continuously ment), plant, members of the Staff audit Unit No. 3. its new Chalk Point How- books, cite, company’s ever, People’s which are maintained and we Counsel does not Commission-prescribed find, support uni- accordance with a to this conten- evidence cannot Moreover, accounting system. princi- belatedly Verification of the form raised. tion so witness, therefore would have re- on latest actual data pal cross-examined Staff when quired on any attempt syn- and effort subject, at minimal additional time such stressed that “ inter- specula- Staff and the of the Commission's . . too behalf would be . chronization Additionally, opinion my in its the Com- purposes,” venors. would have de- and tive for acknowledged: specifically “On this partially Pepeo mission prived the benefit of even record, any questions about if were raised proposed, few year-end he and rate base which income, operating expense, results re- inadequate to counteract then conceded books.” existing on the PEPCO’s corded attrition. effects Pepco’s compo- amounts of rate pro- later base rate frequently co so to initiate new ceedings, which in- nents and financial un- the substantial costs of requirements were evitably are borne known until were consumers. more current data filed; (3) the parties all were alerted to rejection contests the Commission’s period need for updating test both when for the major as the reason attrition the interim rate applications increase were continuing financial decline. At- company’s filed and Pepco’s testimony; direct which phenomenon occurs trition and (4) data for the successive 12-month base, in rate when the investment utility’s periods ending January through ofMay expenses required pro- or support 1975 were submitted in Pepco’s both, a faster sales, duce a unit of rise at request increases, for interim rate sales. rate than the from such revenues hence prior were available for some time 298; Users, supra, Telephone 304 A.2d the filing of the Staff’s and intervenors’ of Public Department Boston Gas Co. v. Utilities, evidence. 257 n.19. supra, 269 N.E.2d at largest single component utility’s The of a un Commission contends that rate the value overall base is attributed wage adjustment like the in the Telephone Typically, particularly its Plant in Service. case, Pepco’s period Users new figures largest com- utility, for an electric next were changes not “known and certain” Progress Work in ponent Construction disagree. record. re We The new data (CWIP), expansion projects which covers actual, only flected historical evidence of prior to their time completion, which the company’s financial situation for the value simply their transferred to the period 30,1975. 12-month They ended June previous Plant in Service account. rate estimates, conjecture, included no or forec cases, the the seri- recognized asts.27 authenticity Their was not chal facing Pepeo, ous problem attrition lenged during or hearings. after the sought help by adopt- for it compensate new only changes data consisted of known ing than aver- year-end, weighted rather record, and the Commission erred in fail age, figures compo- for such rate base all ing to use the figures for the 12-month Go., See Re Electric nents. Potomac Power period ended June 1975—the most (PSC D.C.1973); Re Potomac P.U.R.4th recent data actual available —to establish Co., (PSC Power 83 P.U.R.Sd 113 Electric the test base its calcu D.C.1970). case, In the instant the Commis- Pepco’s lations of allowable retail rates. recognized continuing ad- again sion Cf. Boston Co. v. Department Gas of Public impact verse of attrition on the Utilities, supra; New York v. Co. earnings, acknowledged previ- Commission, Public supra. Service ously-applied remedy fully year-end had not None- been effective.28 V. THE EXISTENCE AND EFFECT theless, proceeded al- make a smaller OF ATTRITION for lowance attrition than it had we holding, So address additional past. (1) by year-end This was done using challenges to Order primarily No. compo- for the Plant in Service aid the base, Commission both remand and in (2) nent the rate by applying future proceedings. Our average figures conclusions lesser and Mate- CWIP (3) hopefully necessity Pep- (M S), will reduce the rials Supplies & forecasts, however, applications We make The inclusion increase PEPCO. necessarily by way excuse the Commission for of this observation not of criticism adopt period. regulatory predecessors, the failure to new test See note either PEPCO or our 24, supra. deep expression rather as an of our con- but time, expense in- cern that the effort and decision, of its the At the outset Commission in PEPCO volved the and 1973 observed: appear in solv- been ineffectual cases have utility. problems by ing the of this fourth economic decision will be the decision [T]his years past rate the in the six Commission in relationship those which new rates based on this order is rooted locking into the high allow- components unreasonably long an apply beyond, will in 1976 and so the profits time, for net ance the same this order is in effect. At the result from to believe would purported protestations of are en- bewilderment capacity of generating sale excess compa- fact that this the tered the Interchange pool. PJM ny’s years. rate casе in six fourth expense reason obvious: increases in the concerning Pepco’s protestations rate the increases in outpaced and base to combat attri- unwillingness record, the form after 1972 and 1973 permeate the revenue tion allegations company’s specific cases, for the after the 1975 they bases rate will do alternative, Arguing an however of error. in absence of an order that rec- case undesirable, adoption the formal ognizes the fact and allows for it. Un- year ended June period test for the updated no the commission has done more happily, 30, 1975, Pepeo year-end, contends stage for in this case than set figures for weighted average, rather than the company’s lamentations over fifth M have included and & S should been CWIP in request, which is sure to come rate noted, ar- its rate base. As also For, future. if ever a record demon- near been period should have gues that test attrition, If ever a strated this one does. major known adjusted to reflect several steps to deal record called for realistic changes of record. attrition, one If there does. moment, consid Deferring, for the a demonstration of the failure was ever error, allegations of specific eration of those up with the growth keep of revenue the historical evi generally we note investment, it growth expenses rate decline in precipitous dence appears spread in the record before the (which began earnings return and case, in this where there are commission through and continued unabated mid-1974 data not for the test but also 1975) thoroughly documented following the nine for months —data record, However, by as discussed above. accepted into which the commission disregarding the evidence submitted record, purpose I thought, had for rationalizing that the 1974 by reaching a decision that took account allegedly was attributed to factors decline to us real as it was revealed world crisis (i.e., energy unrelated to attrition dur- results of the to the PJM Inter decline sales pendency case. ing change pool), arbitrarily agree We with his evaluation.29 consequent test period utilized a predictive base devoid of value. concluded that When the Commission a less may play future “attrition in the dissent, Stratton his Commissioner past,” in the significant than it has role for failure to majority criticized the substantial, evi- uncontradicted ignored the reasonable to correct adopt approach demonstrating an unabated dence record expense for as well as rate base compensate compa- decline in both exacerbated attrition: It and actual rate return. ny’s earnings following test-year traditional By following its conclusion on premised rate-making in this case with- approach (1) disputed by Pepeo: all findings, three for making appropriate allowance out to have appear “sales retail customers attrition, commission assumes that pat- growth normal revenue/expense/rate base resumed a somewhat the distorted Co., (1958) Tel. land Tel. & comparison 22 P.U.R.3d used of the various means 29. For a months); rates, (test year following updated see other commissions to set realistic Co., Co,, supra & Georgia Re Mountain States Tel. Tel. (future 8 P.U.R.3d Re Power test n.22 (1954) (estimates fully months follow- accompanied projected for the six ‍‌‌​‌​​​‌​​‌​‌‌‌‌​‌​‌​‌‌​​‌‌​‌​‌‌‌‌‌​​‌​‌​​​​​‌​‌‍period Co., compensate supra ing used); Re Central Maine Power the test selected Eng- attrition). (rolled-in year utilized); Re New n.22 tern”; (2) best, appear “sales to PJM to have able particularly light in degree”; (3) off in large leveled to a inexorable increases fuel costs. has con- substantially “PEPCO reduced its manner in the Commission struction . . .” budget . The Commis- short-circuited efforts to achieve incorrect, premise factually sion’s second is rate is il- meaningful glaringly relief most interchange as the net revenues uncontest- by the treatment afforded the luminated edly not were forecast to but did in company’s funds invested in the newest throughout fact Additionally, decline 1975. plant, 3. generating Chalk Point Unit No. premise, its first and third factually while This unit was construction all under correct, do not contradict the substantial and the related investment was continuing record evidence of attrition.30 It May carried in CWIP account. In clear, therefore, is “appeared” what was and the completed, construction Commission be an abatement of at- related investment was transferred to

trition no more than “the of a hope component Plant in Service of the rate life to by better come” which “fp]resent Commission, however, base. The arbitrari- confiscation not atoned for”. West Ohio ly excluded substantial sums related to Gas, supra, U.S. at 325. new unit from rate base not

once, but twice. VI. WORK IN CONSTRUCTION noted, Initially, as we have the Commis- PROGRESS AND MATERIALS average sion prescribed year- rather than AND SUPPLIES end in CWIP for inclusion

Pepco’s arguments pertaining rate By refusing the more base. utilize CWIP, Commission’s refusal adopt year-end representative year-end figures figures for CWIP and M & S also are well arbitrarily disregarded only justifications founded. The by offered Pepeo substantial sums invested in that the Commission for its decision to use aver plant, thereby new approxi- excluded age 1974 data are that the accounts fluctu mately million from the District of $27.5 widely, ated their in De amounts rate Columbia base. This effected a result- “appear cember be abnormally ant in re- utility’s decrease revenue high.” It also the position took that aver quirement of some million. Such $5.5 age amounts would be representative “more deficiency revenue more than offset of the flow of dollars in out from attrition allowance which resulted accounts.” end-of-period an rate permitting base portion the invest- Plant in Service. The justifications advanced do sup- not “averaged ment had in CWIP that been port the Commission’s decision. fluc- Wide out” simply tuations in CWIP irrelevant for the (To al- to earn a return. have permitted purpose determining Any the rаte base. end-of-period rate fully lowed the use of a leaving investment CWIP enters Plant Pepeo would have to earn permitted Service, thereupon simply switched an additional million —an return $2.5 from one rate base account another. To re- substantially amount which would have end-of-period “ap- conclude an account earnings deficiency duced the million $4.3 pears” high to be is not proper material to a forecast to result from the Staff consideration of base. overall decision.) Moreover, while an average figure might result, represent unjust better cash flow over a defi- effecting addition to past, predictive precedent. nite of time such decision deviated from value, vacuum, in a or- question- ascertained In both the 1970 and 1973 substantial, ap- plant 30. Sales to retail did increase investment new customers remained greater generation proximately in- but attrition and unit crease, costs continued to 6% expected. It occurred then than Pepeo also is true that budget, but its reduced its construction ders, sought to predecessor principal Commission The Commission’s witness Staff admitted virtually on cross-examination against attrition discard- protect Pepeo adjustment that his recommendation of this average the traditional ing to reac- sensitivity public rooted in was end-of-period in favor of an rate base. recommendation, adopting that By tion.31 to hoped give In so the Commission doing, destroyed the delicate bal- the Commission recognition to increased future unit greater investor and consumer inter- ance between arising generation compa- from the costs ests, goals of sacrificing long-range Although the ny’s program. construction apparently perceived it groups both to what present revealed —and the Commis- record interests of pecuniary be the immediate to recognized this method sion’s Staff —that ac- the consumers. Stratton Commissioner proven inade- attrition had combatting point his curately on this dissent: focused for provide chose to quate, the Commission agency expertise, If one concedes our towards counteract- even less relief directed must be CWIP-averaging decision than it had in the instant case attrition ing to an informed decision. deemed in the earlier cases. the circum- clearly wrong, it is and Since (and costly) explana- action second more one other point In its stances to expediency perpe- namely, the Com- for an Point Unit No. tion regarding Chalk it— holding down trated in the interest to the known recognize refused mission is, arbitrary seen as rates it must be May change that occurred certain basis, error. probably on that reversible in investment million when the $160 from the was transferred facility emphasized also Commissioner Stratton the Plant Service account into CWIP adopt 1974 the decision to his belief that the end of 1974 backing up to By account. M was average investment in & S Service, of Plant for a determination capricious, as the known and certain simple such a refusing account for in M for the more thus & S average investment funds, was shift of recent test ended June major but figure obsolete being higher able million than the $6.7 million from kept $160 agree. We adopted by the Commission. of Plant Service part return as earn a In case. company’s next rate until the FOR THE FAILURE TO ADJUST VII. dramatically built at- way, CHANGES OF RECORD KNOWN in a manner ratemaking, into trition standpoint writing an arbitrary and unreason- From the patently this, it inevitable in a case such opinion able. readily agreed A. This a situation . . where- with “the current Com- 31. He increase, respect came in for its Pepeo practice when mission you great it deal of rate-making” (f.e., using well know attracted of CWIP for treatment end-of-period * * * attention. compensate for attri- thought appropriate it even I would be tion), and stated: though though “averaging” even the use of ability Obviously, on the con- to earn recommended, the end-of-rate base [sic] work-in-progress, at the same struction average work- the use of the for construction flow, obviously improve cash time in-progress was unusual. ability borrowing an effect on the have company. thought unusual I the times called for why we treatment. thought That is the reason following exchange then occurred: adopt we would it. Now, you it fair and if don’t feel that Q. methodology be- reasonable abandon separating in this it from attrition We are substantially cause the dollar amounts are words, particular rec- we instance. other then, you whyV... larger, do . . . computation ognize to be used in the has averaging justify . dur- . CWIP . attrition, applica- separate but we it from the you grounds ing period, on the the test tion of attrition to the rate base. place the method done so in order have “sepa- Obviously, thus to for the Commission equal by Pepeo employed basis with merely to fail from attrition is not rate” CWIP for funds used AFUDC [allowance attrition, consciously compensate but Accounting Convention. construction] aggravate it. for there to be an & overlapping some investment in M These S. we deal. problems changes with which must were of record known and certain allegation final of Pepco’s presented which or required testimony no further error — as an cross-examination, alternative —asserts reversible error and the Commission in adjust the Commission’s failure to the the disregarding erred in them to severe 1974 results for three known and certain utility. economic detriment post-1974 of While our changes record.

holding proper year as to the test VIII. THE REMEDY essential- contentions, we ly moots these mention the basis the On the of Commission’s arbi- briefly. three factors trary and unreasonable refusal utilize The first net involves the re- of operating latest historical data record ceipts Interchange from PJM During sales. ensuing op- and the denial to of an Pepeo year, calendar 1974 test the net inter- to earn either portunity the overall 9.1% change margin applicable to District of Co- rate of return or the rate of return on 13% lumbia was business million. The $17.3 еquity required capital, found we attract results which were received Pepco's appeal, must sustain vacate Order in jurisdiction- evidence reveal that the net 5739, No. and remand the to the case Com- margin al had by declined million an- $7.6 remedy mission with instructions to its le- Pepeo nually. demonstrated that the 1974 gal do so authority defects. Our is delin- margin unusually was high, and the Com- 1973, 43-705, eated in which D.C.Code § acknowledged mission “we see no evi- part:32 states in relevant dence of persuades record which us that Upon the conclusion hearings of its there be a past normalcy will return to in any such shall appeal court either the near-term future in sales],” [PJM appeal dismiss said and affirm the that “. . . sales to appear PJM to have order or decision or Commission large degree. leveled off to a . . .” sustain the appeal vacate the Com-

Therefore, mission’s order as evidence demonstrated or decision. either accompany that the 1974 net event the court shall its order revenue benefit to ac- unrepresentative expected a statement of reasons for its future tion, margins, and more in the case of the an recent data of better vacation of predictive available, order or decision value Commis- Commission sion unreasonably arbitrarily shall relate the in particulars failed to statement interchange substitute the margin expe- net and the extent to which such order rienced the test ended June decision was defective.

1975, for margin. the 1974 remand, On the Commission

The also rates making erred first should calculate modified accord adjustments appropriate ing ratemaking for the actual to the Staff’s own formula million for the transfer from CWIP funds based data submitted $160 30, 1975, component to the Plant in rate base then calcu Service ended June experi for the Chalk Point Unit No. 3 which oc- late the revenue losses improperly above), in May (as by Pepeo during curred of 1975 discussed enced that Or and for the million increase der No. 5739 was in effect.33 Absent $5-7 appeals previously $29.4 32. have held tional We million revenues became effec- provisions the Administrative Procedure tive means Order No. 5849. revised Act, 1-1510(1), supersed- pursuant ratemaking § D.C.Code rates were set to another ed this and other relevant sections proceeding which, predicted, followed close public Code which deal with utilities. See on the heels of the instant case. PSC, Chesapeake & Potomac Tel. Co. v. D.C. urged, Commission has in Motion To App., 339 A.2d 14, 1977, January Dismiss filed on issuance of the revised rates in Order No. 5849 No. 5739 on Decem- Order became effective impractical question renders moot and expired ber on December authorizing when addi- revised rates on the issue of a any determination before experienced atypical patterns weather Id, made. rate of return was 1976-’77, fair we would direct empha- court Payne 904. The restoring 415 F.2d at a means then devise not shown to be has the losses were improperly sized that Pepeo the revenues projеcted materially means of ac- from those been denied. A reasonable different as to assure complishing this so order: the interim its vital service ability perform continued honest, generally however “[Pjrophecy, application of a public could be the experience,” poor substitute for [West currently to the rates temporary surcharge Gas, supra, 294 U.S. at Ohio the calculated in force in order to amortize showing and actual results 324] period way over a of time. In this loss than those the greater losses or less Com- the interests of delicate balance between might properly projected mission had could be main- consumers investors and conclu- have affected the Commission’s Gas, supra, 320 Hope tained. See Natural a fare increase or sion as to the need for 603, at 64 S.Ct. 281. U.S. of needed. U.S. the amount increase [134 331, F.2d at App.D.C. 415 remain 911.] relief would The nature such lost reve- calculating In prospective. after case, losses occurred In the instant nues, place will itself in in had been determined a fair rate of return legally rate it position provide relief 5739, lost revenues have No. and the Order at the time of its now- give was bound to of rec- shown, evidence by abundant been 12, 1975. To opinion of November vacated ord, and unrea- to be the result give perpetual be to do otherwise would rulings. sonable Commission order, and to to an unlawful legal effect with that set Our conclusion is consistent unwarrantedly unnecessarily penalize Chesapeake in & Potomac forth investors, and indeed custom- Pepeo, Commission, supra, 330 v. Public Service Co. passage of time necessitated ers for the case, the losses at issue A.2d 236. In that order. review that unlawful appellate an the release of experienced were between opposes impo order, in which the rate relief interim rate involving a calculation any remedy determined, final sition and the of return was losses, contending that such losses, said, revenue past Those we order. would constitute retroac improperly relief the time the losses past were not Washington Payne v. ratemaking. See tive determined, and of return was 8.8% rate Commission, 134 Area Transit Metropolitan in into consideration were not taken they 901, F.2d 910 415 U.S.App.D.C. in- The Commission’s setting that rate. recognize general we (1968). While pro- . authorized proposal terim . . charging utility from precluding a principle . . Past loss- only . . spective relief recoup in order to in the future rates higher in any consideration not accorded es were not bar the losses, concept does past for the rate of return establishing the to be entitled. Pepeo appears to which relief not the order did question in period recoup losses Company provide for in sought to be recovered The losses revenues, experienced during any, in if an interim pursuant to were suffered Payne 330 A.2d at [Id., proceeding, period. but 240.] the rate issued order However, (1973); v. Pepeo Pacific Terminal Co. 147 Southern in the instant case. relief ICC, L.Ed. 310 recoup 31 S.Ct. losses the revenue never allowed broadly applies in (1911). exception in most experienced of the Order at issue This as a result agency reviewing question actions. of relief therefore cases administrative case. CAB, issue, Holiday v. U.S. To Dis- Tours and the Motion See a contested Golden still App.D.C. F.2d denied. miss is legal ques- Additionally, presents appeal if the Order here under substantial even moot, presents technically in is- action were remedial call for review tions that recognized readily capa- continuing long themselves, nature of a but which and of sues v. exception mootness doctrine. Roe repetition to the in cases. an ble of future Wade, L.Ed.2d U.S. Likewise, case, in the instant the losses to involves in- expenses reimbursement for past be calculated were not on remand service, performing curred in return opinion the time of the in which the 9.1% service, on the investment used in overall of return and 13% profit a reasonable on the transaction. established, return were nor were equity This much due whether the service they setting considered those rates. The past or future. [Ibid.] increasing Commission issued its final order case, In the instant for which compensate revenues to fu- anticipated for the revenue losses are to be calculated came earnings. ture deficiencies The losses to not only filing application after the essentially be calculated thus are like those rates, increased but after effective case, Chesapeake & Potomac authorizing date of prospective the order would not constitute a basis for retroactive rates. The lost revenues for which ratemaking. may recoupment be entitled to became due reviewing proceeding similar while the in- disputed and a rate compensation past adequate They rates were effect. there- determined, period was the circuit court past fore losses bear- analogous are not the result distinguished past isolated expected revenues ing no relation to future capital sale assets (which could not be part prospective a play which no valid in a rates) included calculation of future ratemaking proceeding. compensation from for the per service Regarding col- suggested the method of regulated formed (which company losses, Court, lecting Supreme under included), could be so regardless of whether comparable circumstances, or- but reversed past the service or future. was Summer dered a refund of v. excessive amounts collect- Board, field Civil Aeronautics 92 U.S. ed 248, 251-52, during the course of a rate App.D.C. 200, proceeding 207 F.2d 203-04 (1953), aff’d Federal Power v. grounds on other Tennessee sub nom. Co., 145, Western Air Lines v. Gas 371 83 Civil Aeronautics Transmission S.Ct. U.S. Board, 347 (1962). U.S. 98 L.Ed. circuit S.Ct. L.Ed.2d 199 The court Referring general view also to the rate has ordered distribution ratemaking inherently prospective a payers resulting invalid rate of funds from concept, court stated: granted by the previously increases Com- But we Gas Co. v. Bak- impressed by Washington Light mission. practical er, aspects of the 188 F.2d supra, U.S.App.D.C. situation. this instance the Board in fact to looking period Reviewing power was at a courts with which had passed. The actual facts as to direct on basis of invalid refunds orders expenses period revenues and for that also to direct power have the concomitant * * * were known. In saying that possible consideration of the need for sur- looking past period Board was at a orders, to for charges on the basis such we are not departing the rule in the from permit function otherwise be to T.W.A. case. West- & [Transcontinental perpetuation confiscatory of demonstrably Air, Board, ern v. Inc. Civil Aeronautics rates, a rendering appellate review but L.Ed. meaningless exercise. (1949).] peti- The when the began .; for tion was filed . rate-making weather, however, Time and pro- as of that rate-making date the may have for a sur tempered the need spective. got When the Board around to for charge compensate to making peri- findings and decision the we those aspects of the rate order od It past. service] [of hold to have been The differ confiscatory. actuality latter that we refer. U.S. [92 ing majori views which have a resulted App.D.C. at 207 F.2d at 204.] ty, concurring opinion a a dissenting, and rate, regrettably have ordinary purpose utility permitted case We observed, elapse appeal. lengthy period court Contrary repeated assertions summer of 1976 was note that the judicially normal, and that moderately warmer than has in fact set majority, uniquely cold. winter of 1976-’77 was 52-page opin- in its final quite clearly forth may factors have led to These and other a discussion of the evidence ion and order for high revenues unexpectedly relevant reasoning on the issues. and its which, months, may have equitably, those from myself I must divorce Accordingly, surcharge. In the offset the need for a “arbitrary the effort to label the decision on remand computation capricious.” shortfall at- revenue improperly proscribed of its diminution tributable ERROR OF I. ASSERTIONS which we vacate the order base in herein, offset possible we sanction majority the asserted er- summarizes high unusually have been may what thereto appealed order from as rors it finds Pepeo during that experienced by revenues follows: course, at we have no Of this time period. of the elements of the Examination knowing prove the facts will what way con- opinion findings reveals several be; parties that must remain for the (expressed clusions in the Commission’s and for the Commission to de- demonstrate style) opinion overlapping in an narrative on remand. termine unreasonable, arbitrary, which are or ca- and remanded. Vacated pricious. These include the Commission’s refusal to utilize the most recent YEAGLEY, Judge, dissenting: Associate record, to account period in the its failure I view the Cоmmission’s order Because attrition, continuing and its refusal as the culmination of a conscientious here changes which recognize certain known the extensive evi- analysis and careful originally of the occurred after the close incorporating findings in the case and dence proposed period. calendar 1974 test [At amply are conclusions on each issue that 132,133.] record, dissent. in the I must supported majority though that even The holds disagree one could with some of the While company based its year on which the conclusions, none is either ar- Commission’s 1974, it was was calendar application bitrary capricious. or and therefore er- capricious, and of the majority’s The severe criticism used the for the not to have ror Commission opinion might and order leave Commission’s year-end as of company figures revised that the Commission denied impression Since, 30, 1975, year. as June as the test company any increase in revenues seen, discussed and will be the Commission when in fact the Commission au- whatever figures, 1975 many company’s of the used so a substantial increase in rates thorized standing to be on the majority appears $27,657,000 company with provide to as a matter of that it was error proposition Particularly annual revenue. additional to have used all not law for Commission to me the remand of the is troublesome thereby effectively chang- figures of those to estab- majority directing Commission June even ing the test con- substantially larger rate base in lish put not in the record though such data was of June company with formity I testimony. came time rebuttal until it 1975, provide retroactively as to 30, so clearly a juncture it was that at that submit revenues. company increase in substantial It the Commission. matter discretion beyond well my goes view this remand indicia just to me what far from clear review.1 is legitimate agency bounds of tions; 43-706, findings the Com- of fact provides: and the § 1. D.C.Code it shall unless shall be conclusive mission any appeal determination of from an In the findings appear the Commission such that of the the re- or decision order unreasonable, arbitrary, capricious. or are ques- by the court shall be limited to view law, including ques- constitutional tions of action, justify applica- however, there are to action majority’s Arbitrary is not adjectives “arbitrary capri- tion of the or . . The based on facts reason. . cious” to that determination. mere merely upon petitioner burden is not affixing of a label confer such cannot valid- put acceptable forth an alternative but ity on an appellate ruling wholly that clearly and con rather to demonstrate unjustified. unsupported An examina- taken. vincingly a fatal flaw in the action of each findings tion has not met that Petitioner and conclusions reveals that none was ar- a difference simply burden. He asserts arbitrarily, rived at but rather after opinion the Commission. with [Good thoughtful consideration of the evidence Commission, man v. Public Service D.C. of the arguments each side. (citatiоns App., (1973) 309 A.2d

The majority also concludes omitted).] deny set oppor- rates years Four when ago intervenors contest a fair tunity to earn rate of return. I $12,000,000 ed increase for the com pure submit that this is speculation. The pany, quoted approval this court majority not support does its conclusion guiding appellate utility rule for review with any computation projection or other agency Williams v. orders as set forth in justification except complete its indicate Washington Metropolitan Area Transit acceptance evidence and Commission, U.S.App.D.C. witnesses, the estimates an insig- denied, (1968), F.2d cert. nificant part of was contested by (1969): L.Ed.2d intervenors staff reject- witnesses2 and Our role is not reviewing as a court selectively ed Commission. make an determination as independent whether fares fixed II. THE REVIEW STANDARD OF just reasonable, but rather recognizes majority power Commission, insure that exercising make delegated rates was by Congress to rate-making power, has acted rational Commission, forgets but as an ap- ly lawfully. Our function normal pellate court our review utility of a commis- ly when we exhausted have determined order strictly sion limited. It is the nar- proce the Commission has respected judicial rowest review the field of admin- requirements, dural findings has made Davis, istrative law. K. Administrative evidence, based on and has substantial 29.00, (June Law the 647 Seventies at § applied legal the correct standards to its 1976); 2 Cooper, F. State Administrative [Telephone substantive deliberations. (1965). Law 756-72 Users Association v. Public Com Service scope our the review of Com “[T]he 293, mission, D.C.App., 304 296 A.2d mission’s questions actions ‘limited to denied, 933, (1973), 94 415 S.Ct. cert. U.S. law . . . and the of fact findings by 1448, (1974).] 39 492 L.Ed.2d the Commission shall be conclusive unless it That statement of the law is reduced to a appear shall that such findings Com opinion. final nullity by today’s opin- The unreasonable, arbitrary mission are or ca ” the here easily ion and order of Commission Watergate pricious.’ Improvement Asso Telephone meets the test of the Users case. Commission, ciates v. Public Service D.C. thorough could well one 778, It be of the most App., (1974), 326 A.2d 788 quoting D.C. 1973, comprehensive decisions this court has Code 43-706. In an an appeal § increase, intervenor of earlier agency received from an administrative Judge Harris, speaking for the court said: District the of Columbia. See, A, 39-43; 4; example, 1-3; P.C. Exhibit Ex- Exhibit 21 at GSA at Exhibit 22 GSA 10; 25-26; 11-13; hibit Staff Commission Order at Exhibit 22A at the Com- GSA brief with 4, 24-28; 1111, 10, 25, 29; 1112, 4, 5, transcript Exhibit mission brief at at and P.C. on 1457-1484, A; 2516; 4, appeal Staff sch. Exhibit GSA at 11-17.

152 the refused to disagreement majority ‍‌‌​‌​​​‌​​‌​‌‌‌‌​‌​‌​‌‌​​‌‌​‌​‌‌‌‌‌​​‌​‌​​​​​‌​‌‍I have with Commissioners basic

The suggesting reopen proceedings instead treatment of the opinion is in its majority proceeding a new rate be initiated. application facts and in its law appellate The court held that: “Where ap- example, majority For the facts. great disparity pre- is a between the there capri- “arbitrary standard of plies the necessary by return found dicted where trans- cious” circumstances actually return Commission no of which it are more gressions complains earned,3 a adjustment suitable should be who judgment. than differences in One attrition trend or the made to reflect that the examines the order will find Com- Id. at place.” has taken erosion that pick did not its conclusions out mission 56, 272 N.E.2d at 557. 324 at N.Y.S.2d did arrive at conclusions thin air. It except noting evidence after neither a In the instant case we have each be and in the conclusion could based confiscatory the rates are concession that support- set forth instance the Commission nor a blanket refusal Commission court’s ing responsibility reasons. “The In figures. fact the 1975 updated consider supplant not to the Commission’s [balanc- many were used data were considered with one more ing] of factors detailed, involved] infra. [the as will by the Commission but instead assure liking, nearly case is not Telephone York Co. New given rea- Commission has itself it was today’s holding that authority for pertinent to each soned consideration arbitrary capricious for Commission Cases, Rate Permian Basin Area factors.” at the changed the test not to have 1344, 1373, 20 747, 792, 88 S.Ct. hearing. U.S. conclusion of (1968). L.Ed.2d 312 Co., the Commission In West Ohio Gas long As there is substantial evidence as confined data for itself to conclusion of Com- support reasoned data as to and refused to consider available Watergate we Im- mission must affirm. for 1930 and 1931. It operations actual said, quoted as v. Public Service provement Associates context that the Court Commission, supra majority: 326 A.2d 783-84. See Park, Inc. to Preserve Overton also Citizens available To shut ones latest eyes [the v. 401 U.S. S.Ct. Volpe, them from altogether, to exclude figures] (1971). reckoning, L.Ed.2d action is much upon guesswork to build schedule much reliance majority places available. U.S. with evidence [Id. v. Public Utilities Com- West Ohio Gas Co. 81-82, 55 S.Ct. at 325.] 79 L.Ed. mission, was not In instant case v. (1935) York Co. and New old and did not years two using Commission, 29 N.Y.2d Public Service reck- “from its updated figures exclude the 272 N.E.2d 324 N.Y.S.2d oning.” case an inter- Telephone Go. the New York ordered but enjoin rate increase was company sought im a gas When reduction. by partial by an interim confiscatory followed rates set a state allegedly commission, actu- developed company’s it that the Supreme When the Court regulatory a yielded complaint orders earnings under those a affirming al in dismissal Commis- question return than the constitutional significantly lower “That said: [the reasonable, lower even as fixed are had said was whether the rates question] sion question to the the earnings prior And that confiscatory. than the proof and that the burden of asked has the application, company complainant the the exer- interfere with may the final order the not reopened be before court hearings authority unless confisca- did cise the state’s Although the was entered. Angeles Los clearly confiscatory, tion is established.” rates were that the deny not rates, to discard the would have “the the new it majority itself to not blind If would the V., “confiscatory.” infra. See section by Pepeo actually under label in 1976 earned” return

153 Gas v. Railroad Co. Commission Cаlifor- III. THE TEST YEAR nia, 637, 643-44, 53 S.Ct. Contrary majori- to the contention the L.Ed. 1180 it a ty that was not to have used the

When Fourth Circuit reversed a deci- year in a fair arriving June test rate sion the Federal Power Commission base, it can demonstrated there is no gas which had reduced rates of a company, on justification this record for the whatever on grounds the the Commission had that the Commis- company to now contend failed the consider certain costs in using year sion erred in test base and improperly computed had deple- made, warranted, being modifications for tion and depreciation, Supreme Court seen, the June data. As will be it was showing great held that a of a deal more by properly parties a matter left on the required if courts were to reverse record to the discretion of the Commission such an order. consequently is not a matter to be sensibly: appellate The Court taken over court. observed rather Rates which company oper- enable the In the application for rate increase filed successfully, ate to maintain its financial company it that it on asked be based integrity, capital to attract and to com- a 1974 test it year supplied calendar pensate its investors for the risks as- figures actual for the first eight months certainly sumed cannot be condemned as augmented with detailed estimates for invalid, though they produce even might four remaining figures months. As for only meager return on the so-called operations the company’s actual for those “fair value” . rate base. . . And he they four months became were available who would order under the upset supplied by company. Thirteen differ- Act carries the heavy making burden of parties ent intervened. After cross-exami- convincing showing that it is invalid be- completed nation of witnesses was unjust it cause unreasonable respondent and as the and intervenors were consequences. Power Commis- [Federal completing testimony opposition, their v. Hope Co., sion Gas Natural U.S. 18,1975, on company, Friday, July filed 591, 602, 605, 281, 288, 289, 64 S.Ct. 88 proposed testimony rebuttal of its Sr. Vice- (1944).] L.Ed. Pres.-Finance, with two exhibits which set Applying Supreme Court’s standard data reflecting operating forth financial re- case, Hope, facts in this it becomes January 30,1975. from through sults June majority clear the has failed to carry 14.) exhibits (Company G That witness burden” of “heavy showing $27,- testified on those “in rebuttal” on 657,000 increase revenues awarded the Wednesday, July 23rd. company by the so Commission is inade- following out brought quate that the company would not be able of that cross-examination rebuttal witness operate successfully, by counsel Commission: thereby integrity lose its financial and its Davis, Q. Mr. a new you proposing capital. to attract That ability conclusion Commission to use year justified by made majority is in this case? facts of this case. I would note in this testimony A. I have indicated improved regard remarkably important place that we think it is standing financial at the end of after this information a test reve- experience one the new under requirement nue basis before devastating rates4 testament falla- we Commission. Now are not —not cy majority’s speculation inherent in the suggesting a of the June that the increased rates would be confisca- substitution year for tory. year, the December V., 4. See section infra. year, it apparent tried on a test ask, my in suggest I or do

but do ask, necessarily Thompson I would was testimony, and that President rebuttal leaving note of of the Commission take to the discretion that Commission it apply to how much consideration this information the decision as con- Thompson conclusions in this case new data. Mr. reaching give to saying: [Emphasis supplied.] testimony by .. cluded his upon this urge I would Commis- . relies on the majority quotes necessity prompt ac- urgent sion President, Reid J. testimony is completed, case after it on the tion that who testified in rebuttal Thompson, you alacrity with which with the same he first: “I wherein stated at day same Madam hearings, conducted the have to base its re- urge the Commission Chairperson. figures.” on the sults June there hearing When the was terminated However, po- his Thompson changed Mr. but People’s question no on the record that when cross-examined sition Counsel, company this majority ignored year, but the has was still the test that to brand testimony give great in its effort damaging should believed Commission in not but with arbitrariness updated the Commission to the consideration period. to a 1975 test new changing delay explore June any that further as follows: Thompson Mr. testified company. acceptable data was not intervenors, respondent Accordingly, a Q. suggesting . not You are depth having You still want not had time obtain period, you? new data, did not cross- familiarity rate base con- with the new your end of December, the new Mr. Davis in detail on sidered this case examine their wit- they not an amend- recall requesting You are information nor did regarding updated ment of that this time? testify nesses right their had figures as would have been bogged I down in get A. don’t want announced that it game. play semantics or a testi- year. a new test The earlier adopting Well, Q. get bogged down. let’s respondent of all witnesses of the mony lawyer. You are a Let’s understand— intervenors had of all witnesses saying A. What I am this Commission year 1974 calendar data. dealt with the at the truth here as trying arrive pages first 2600 out That is what all of the to what is a fair and reasonable rate were pages testimony of a of 2900 total suggesting of return. I am to this new data for the wholly all about. When if it can be done in Commission case, of a at the end test furnished understanding light their con- as well as basic procedural process due delaying responsibility their without require opportuni- an siderations of fairness case, open- further any without it and cross-ex- ty parties for all to review record, ing they adopt should utility’s regarding it witnesses amine year. suggesting I am a June 30 test further evidence surrebuttal. and to offer that, I suggesting but am precisely that, however, reopen- a requires if it compa- testimony view of the case, in a ing lay of the record to officеrs, surprising I it own find ny’s Rather, grant an don't do that. they petition subsequently would claim take allowance to additional attrition that the use for reconsideration Commission figures. into account June 30 [Em- 30,1975, was an issue of June supplied.] phasis importantly, I must con- case. More how, on loss to understand complete fess a then seems to be clear position His final defend, majority can record, here such on a insisting was not I advance, argument. let such alone urging in the test but was change year, majority not in- does hope that into consideration the would to take by taken suggest position tend to that a the case was filed figures. June 30 Since party However, on the record a or hearing, the Supreme Court of Arkansas into, that a stipulation repre- entered or a to has had occasion address a strikingly sentation made to an administrative tribu- similar situation. In Arkansas Power & nal, something is not in good advanced faith Light Co. v. Arkansas Public Com- Service and to be relied on Commission. mission, 226 Ark. S.W.2d (1956), where the Commission refused to

It strikes me as misleading somewhat for consider information after the end of the majority suggest an inference should test held: year, court 142) (page flow from the fact that “[n]o objection was made to the admission of the testing period, clearly ap- As to the it exhibits,” its testimony and accompanying pears us the record that from (referring to the June figures) appellant, itself, application its rate when was patently there no cause for an chose the testing period, and the Commis- objection after the Financial Vice-President accepted appellant’s Appel- sion choice. of the company presented who new application throughout lant’s was tried data, flatly financial that compa- stated theory that test period should be ny was requesting change not to a June 31,1954. ending the 12 months March In year. 1975 test words, other March 31 towas be the

Furthermore, record, period pattern view this this year. cut-off majority’s statement that: “It was reasoning The of the Arkansas decision is after the opinion, Commission issued its compelled unassailable and by reasons of Pepeo [appealed] arguments were ad- fairness. vanced against utilizing the most recent actual data” is equally vulnerable. The ob- IV. ATTRITION AND OF USE jections were at that be- forthcoming point 1975 DATA strong cause of arguments of the com- pany raising petition majority issue in its contends that failure “its argument continuing reconsideration. In oral account for attrition” arbi- Pepeo Commission did raise any trary. However, clear that ques- patently tion about a June year. 1975 test In- did not fail Commission to account for stead appeared lawyers assume that a attrition. The final order of the Commis- 1974 test to be used. replete sion is with comments that demon- strate its careful consideration of the evi- counsel, Company Hobelman, Carl D. said dence of attrition. It will be noted that the example: plainly found in order at Now what solutions to the attrition pages 24 and 25: problem exist? shоrt, persuaded we attri- traditionally one that’s been used phenomenon us, is a with tion is still by this Commission most others now, will and we therefore have in we year-end base, we if think that base, past period use end this Commission is to stick going with adjustments, appropriate in order to 1974 test period that’s a minimum. presence compensate for the of attrition. Caine, Edward A. the other counsel problem majori- The real here is that the argued, stated, flatly discussing who while disagrees ty with the extent of attrition possible of company effect land transac- tions, recognized that the Commission in its com- test in this case is 1974.” “[t]he That, course, putation. simply a dif- having The case been filed tried on and is year up judgment 1974 test the last ference not demonstra- day, almost evi- bly arbitrary The best every right capricious. Commission had use a 1974 year, utilizing updated dence which to conclude whether the appropriate arbitrarily its discretion. None Commission acted is to found reading cited I majority the authorities on this in a of its final order. Because pose comparable self-explanato- issue factual situation. believe the final to be order ry, copies pages of 23-28 inclusive of the regard to its With of consideration embed- appendix order are attached in an to hereto ded of costs debt capital Commission dissent, a this of typical sample the order noted the experts agreed that the end- judging to assist the reader whether the of-year figure in for adjusted 1974 should be acted reasonably arbitrarily. Commission to August reflect the retirement in 1975 of (Order million in debt at securities. $10 years ago, practice Some of Com- 15.) determining It observed: “In the cost average had been mission to use the reaching of debt that we have our used period. base for the test order to com- In conclusion, recog- rate of return we have attrition, exception bat the effects of accepted changes nized and from the known rule so general recognized 31, figure.” December a It noted that when attrition was found to exist the rate- issue anticipated million debt in 1975 $50 making authority company’s use a could made, two witnesses was not but year-end compensate rate base to for it. capital instead to had chosen meet its 1975 Telephone Users v. Public Ser- Association through borrowings. needs short-term Ac- Commission, A.2d at supra, vice adjusted it cordingly, the 1974 embedded citing Chesapeake of & City Lynchburg v. debt cost to reflect only August Telephone Co., Potomac 200 Va. figure retirement. resulting debt The ar- also S.E.2d See Good- at rived of 6.97% was rounded to 7% Commission, v. Public supra. man Service recognition (1975) that at of “current costs” exactly This is what was done in the instant capital, any new by Pepeo debt debt issue to follow this case. Commission chose necessarily will fig- the embedded increase suggestion court’s Users (order 16). considering ure In the cost and, by case the end-of-the- large, used stock, preferred took into making rate base when year adjustments consideration the сost company’s pre- of the necessary large end-of-the- abnormally ferred stock sale in it April 1975 and that figures. adjust- It also made other a (Id. involved convertible at 16 preferred. light appearing ments in the changes 17.) part It concluded its discus- company’s June data. by saying: sion “While are reluctant we regulatory A bases its final commission attempt predict the future costs of debt on a relevant data order consideration all stock, preferred cur- ignore we cannot updated for the year. available When adjust rent costs We will therefore [1975]. following the test offered mathematically rate of arrived at 9.05% hearing part late in 9.1%, judg- return feature which in our testimony, rebuttal it fall necessarily must just ment is today’s reasonable under the discretion of the Commission to de- (Id. 20.) economic conditions.” how much cide consideration shall be ac- Although Pepeo sought a 9.75% rate corded such evidence to determine return it has not contested rate set signifi- which items would have a seem to highest it the Commission. Indeed is the bearing projection cant of future I reported have noticed in the cases. He its deci- operations. upset who would heavy carries a sion burden. regard to attrition the Commission said: The Commission examined the carefully began point

data for 1975 and its consideration of is made that use by PEPCO figures by noting: the effect of the 1975 an end will rate base data, “Although 1975 of which we reflect in earn- partially “attrition” notice, resump- may ings place take official indicates that has taken since our growth persuaded, in retail kilowatt hour We tion trend PEPCO decision. are not however, sales, earnings reduction that the has appears that the over 60% decline in (Re- attrition, solely PJM sales is . . . .” due but has in continuing been large drop been due in sales ferring Pennsylvania, Jersey, Mary- part New Interchange 7].) previously. sales to retail land sales at 6 noted Since [order customers sion appear to have resumed did not include the full December pattern 1974, figure $359,000,0005 somewhat normal growth construc- [in 1975], (CWIP) tion appear and since sales to PJM work in instead of the progress have leveled off to a since PEPCO has large degree, substantially ^[1975] re- of weighted average $284,000,000. This used is a major the Commission contention majority of the that the Com- 1975], duced its construction asserts budget [for arriving figure mission’s act in at this was appears it reasonable to conclude that error of merely judgment but was in may play attrition the future a less capricious. I do not find this significant in past. role than has in supported claim to be There record. at [Id. 26.] evidence, seen, is substantial as will be in “drop The sales” refers to the dramatic support Commission in its decision to energy effect 1974 national crisis weighted average. use the The Commission which resulted in a marked in drop sales of the simple question not faced with of as a electricity emphasis by result of accept company whether not to fig- government groups and consumer on the ures and the comрut- method of need to energy. conserve ing the rate base. It had consider all discussing In CWIP and M S the Com- & including the evidence on both sides con- mission said: flicting expert testimony argu- and the The record shows wide fluctuations in full, against using ments intervenors these accounts over time and a substan- value, face note year-end CWIP. See tial increase in fuel inventories in supra. resulting from stockpiling due the un- The Commission was well aware that usual fuel market year. in that CWIP its nature no provides service for at amounts the end of the period in both the public any nor income for investors. In accounts appear to be abnormally high. only very jurisdictions, including a few In view PEPCO’s projected reduction Columbia, District of is CWIP included in in its program construction and the re- included, the rate If it for base.6 it is in inventory duction fuel in we do purpose providing the investor with a not believe that the end part return for that of his funds which are can be called representative of anticipa- currently up nonproducing plants. tied in ted future adjustment conditions. The Many jurisdictions instead using figure a materials and supplies consistent with CWIP, for figure use a that allows for the Commission’s treatment accorded to funds used (AFUDC) construction this item in Formal Case No. 610 [Order (Tr. 1501; 1116; at Tr. at Exhibit at 25-26.] 7; 21), at People’s Counsel brief or a thoughtful Such consideration the rele- figure capitalizes interest on funds throughout vant factors used in plants construction. When new be- opinion precludes holding that its order come operational and move out of CWIP arbitrary. As was said Goodman v. service, into plant they become revenue Commission, Public Service 162 U.S.App. producing the company for after which (1974): D.C. 497 F.2d time “Since must begin investor bear the profit chose between alternatives risk of or loss. result, and achieved a reasonable we cannot considering problem, the Kansas (cid:127) findings.” disturb [its] City Corporation said: and the majority opinion If plant under construction were to be both emphasize point that the Commis- included in the rate base which a figure represents 5. That over 6. Tr. at 1501. 29% utility plant. gross (Testimony McCabe, of J. III, 36.) only P.C. Exhibit CWIP C formed average for 9% (P.C. 3). 1970-1974 was Exhibit M at 13.17% for Id. plant held future use. operation re- computed, equity fair return from may for CWIP result figure also of estimated addi- The lower inclusion quire III, such construc- produced revenue Chalk Point then under tional fact that construction, Mary- revenue Aquasco, tion is located Otherwise, existing telephone period. 8, at 2-3. Pepeo Exhibit land. pay would be forced return users Counsel, examples of People’s citing constructed for future subscrib- property was used in some 60% of CWIP where these fu- ers with the result when recommended that the Com- jurisdictions, service, begin customers receive ture the rule followed others adopt mission re- applicant would derive double up 10% of the only allow CWIP that on of such construction.” turn the cost Ex- plant (People’s value. Counsel useful Co., re Bell Southwestern [In C, 38.) of League at The Women hibit (1973).] P.U.R.3d the to return to asked Commission Voters indicated that evidence here The greаt followed a policy its former still unusually large had been an 1974 there excluding of CWIP many regulatory bodies $197,000,000 into from flow of dollars CWIP 6). (brief rate at altogether from the base $359,000,000 31, 1973, to on on December high year-end the unusually In view of comparison 1974. December Administra- figures, the General Services $95,000,- only year-end CWIP was urged weight- the Commission to use tion average 000. The annual anticipated CWIP, as figure for did the average ed $288,000,- through predicted be high argued staff. It that the 28). (Staff Exhibit at nor- figure adjusted should be year-end Pepeo operates Maryland in Since may it that rea- to reflect conditions malize Columbia, as well as the District of Virginia expected experienced to be dur- sonably be those of only percentages company figures in effect the rates will be ing District of Colum- properly allocated to the at (brief 5). in operation computing bia are used of Pepco’s proposed amount It added example, For base for District. rate $88,177,0007 supplies for materials figure plant Columbia in for District of clearly is excessive as demonstrated (M&S) 44.82% of the computed by taking service (Exhibit at throughout the record.” G plant Consequently, total in service. 4.) at brief figure arrived at a company originally witness, recognized $657,634,000 plant principal of the total Staff or 44.82% The were unas- qualifications $1,467,207,000. whose expert sailed, that: testified Likewise, in CWIP computing only rate should be I do believe total attributable to part figure in place of what will take representative operation used. Of District Columbia future, averaging and I think the $377,508,000 originally the total of claimed progress in construction work method for $155,863,- only it company, allotted just that. does of the District computation 000 in Pepeo Ex- base or 41.29%. progress Columbia rate in construction work puts It 30. anticipate W 29 and W will hibit that we can on a basis more the future and will be occur fig- the same percentage staff used on. going of what representative in service but allocated plant ure for time, the flow get we At the same to the District of of total CWIP 36.69% program the construction into SM-2, dollars Exhibit 4 Sch. Staff Columbia. See during construc- hand, interest if were the other the staff allo- A, 1.p. On or AFUDC basis. 1458.]8 to the District of Columbia tion 53.64% [Tr. cated figure admitted Only applica- itself 8. 42.91% drastically budget operation. construction 1975-1978 the District of Columbia ble to page 26 of The Commission concluded 2) (“weighted” base); its order: values on last day test-year given considera- We have most serious (“end-of-period” base). [Id.

tion to all of these recommendations. We App.D.C. at 497 F.2d at 669.] our disposed agree Staff and today’s Until decision correctness of accept Mr. Manheimer’s recommendation that proposition has never been doubted of an amount average the use jurisdiction. courts in this work in and an progress construction av- erage sup- amount the materials and more

plies repre- account rate base as V. 1976 RESULTS OPERATING the flow of in and sentative of dollars out DECEMBER 1975 UNDER THE of the accounts. The shows record wide RATE ORDER fluctuations these over time accounts setting herein increased Since order fuel and a substantial increase in invento- rates became effective in December 1974, resulting ries in from stockpiling panel and it has over taken this well due to the unusual fuel market case, to resolve this we need not resort The amounts at the end of the year. speculation whether as to or not rates period in both accounts to be ab- appear might by deny established the Commission normally high. In view PEPCO’s a Pepeo earning an fair rate opportunity reduction in projected its construction company. return as asserted the We the program and reduction in fuel inven- need what the only earnings examine actual we do not that the tory believe were for 1976 under new the rates. called period repre- end can be anticipated sentative of future conditions. Commission, On March adjustment supplies of materials and 666 issued No. 5866 Formal Case No. order with is consistent the Commission’s treat- sell authorizing up “to issue and to this ment accorded item Formal stock, 4,000,000 of its shares common $10 Case No. 610. . .” The was based par value . . order compa reasoning carry upon supplied by seems to me to financial data That con- and to be more than exhibits logic ny application supporting siderable ade- any quate defeat contention take notice9 it being of which I can arbitrary. decision as to CWIP was formal record of Public Service Com consisting of data prepared mission agree I the Corporation Counsel’s (28 B.C.Register filed itself company in exercising contention that its ratemakihg 7254). is not responsibility bound any particular methodology, to use nor is it application filed on Janu- Attached to the adopt any particular bound to alternative 28, 1977, SEC form ary company’s proposed. Goodman v. Public Service Com- of the stock with showing registration S-7 mission, supra. Exchange & Commission. Securities the court that: annual net company Goodman held This exhibit reflected earnings per share as of December $1.16 In its ultimate determination of future 31, 1975, improved per share $1.72 requirements, revenue 31, 1976, an increase of 1) as of December figures: a choice two the aver- had nearly 50%. age applying throughout values test- changed slashed due to forecasts of taking customer judicial This is not a notice of evi years (brief demand 9). over the next several at hearing dence agency that the could have used establishing deciding a rate base or in what a Washington Light Baker, Gas Co. v. 90 U.S. be, fair rate of merely return would but is the 98, 104, App.D.C. (1951); 195 F.2d 35 Com taking realistic, fact, of a after the view of the monwealth Corp., v. United States Steel allegedly results of an confiscatory rate order. 408, 410, Pa.Cmwlth. 311 A.2d 16,1976, was shown increase on December price of the stock of $29.4 market reflect even better re- million which should

to be: earnings.10 in its 1977 company sults for the high 12M low quarter 4th high 147/8 low in this court quarter presently pending 4th That case is by an intervenor. an taken appeal on According company figures last January transaction 15%. VI. REMEDY argued the ‍‌‌​‌​​​‌​​‌​‌‌‌‌​‌​‌​‌‌​​‌‌​‌​‌‌‌‌‌​​‌​‌​​​​​‌​‌‍instant When case was before order, the majority vacating After 1975, Pepco’s the Commission in September the case with di- it remands states out pointed counsel to “calculate rections to the Commission day common stock had been traded the be- . . . based modified rates

fore This means that in 16 $10V2. submitted for the test ended June data the stock increased approximately months revenue Furthermore, in market value. then calculate 50% accord- records, ing to these dur- experienced by Pepeo on Janu- improperly losses 21, 1977, raised ary quarterly dividend 5739 was in Order No. ing per from annual rate of share $1.16 to understand the I am at loss effect.” per rate of share. $1.28 “losses” or how it majority’s discussion of If the re- them to be calculated. expects self-proclaimed In view of this record of contemplates company being au- mand I earnings, dispose increased would rates in the fu- charge higher assertions thorized majority’s here that conclu- (1975), losses it recoup past in order to sions the Commission were ture confiscatory juris- the rates set were re- to the law in this contrary minding Supreme it of the Court’s admoni- Payne Washington Metropolitan v. diction.

tion that: Commission, U.S.App.D.C. Transit Area 333, ignore 321, 901,

“Estimates for tomorrow cannot 913 415 F.2d of Bell prices today.” Southwestern Tel something remand is Although the less ephone Co. v. Public Service Commission specific, point through quite one comes than 288, 276, of Missouri U.S. 43 S.Ct. [262 clearly, directing that is the majority the 544, 67 L.Ed. We have said of an 981]. accept company’s to all of the Commission aby utility give prophecy attempt to the 1975, 30, at ending June face value figures place experience first the second that the limited examination accorded despite “elaborate calculations which are at war by the staff the fact them Commission realities are of no avail.” Lindheim they were not the sub- coming late Co., v. er Illinois Bell by and comment ject testimony of counter 663, 54 78 L.Ed. 1182. S.Ct. or intervenors’ witnesses. any of the staff a say attempt We same of like by of equivalent ordering to seems be This government prescribing of rates officers accept to Commission years experience be effective in when to grant and based thereon to updated spoken. gives A us one rate. has forecast of increased the full amount survey gives prefer To A another. of well over mil- requested it $20 revenues survey is an forecast unprecedented and a whol- I this find lion. Public judgment. Ohio Gas v. [West by this court of assumption ly unwarranted Commission, supra, 294 U.S. at Utilities regulatory body. the functions 82, 55 at S.Ct. 325.] go, may court reviewing to As how far remand, has majority In this blinded Supreme Court has said: “experience spo- to fact that has itself contradiction to its doomsday ken” direct have heretofore em- important, we More forecast. Congress has entrusted phasized industry to gas of the natural regulation records reflect that a

Commission judgment of Commis- larger the informed it another and granted later 10. See D.C.Register 4147. No. order sion, and not of re- preferences by today’s Those words are overruled dеci- viewing presumption majority’s validi- sion. The remand order in the courts. A appeal recognize fails to ty therefore instant the critical attaches each exercise telling distinction between expertise, the Commission’s those Commission decision, where it erred and reconsider its who would overturn the Commission’s directing the Commission arrive judgment at undertake burden heavy “the new on updated company fig- rates based making a convincing showing it is may ures some which the Commission is unjust invalid because it and unreason- acceptable. not have found This court’s consequences.” Hope able in its FPC v. role ends when the has pointed error been Co., at supra Natural Gas [320 U.S.] out agency case remanded for the . S.Ct. . . [64 281]. correcting apply expertise er- Moreover, Court has ac- often appellate ror. An court cannot dictate the knowledged that the Commission is not agency result the must reach. by the required Constitution the Natu- responsibility “The court’s is not to sup- ral to adopt just Gas Act and reasona- plant the Commission’s level; balance these particular rather, ble any nearly with one more its liking, courts authority are without to set aside [factors] but instead to assure itself that Com- any rate selected given has mission reasoned consideration to is within “zone of reasonable- each the pertinent factors.” Co., ness.” FPC Permian Pipeline v. Natural Gas Cases, Basin Area supra Rate U.S. U.S. 792, 88 S.Ct. at 1373. L.Ed. 1037. No other rule would con- sonant with the responsibilities giv- broad scope of the remand order here so far en to the Commission by Congress; power exceeds the this court it goes free, must be within im- the limitations making a long way toward us a superregu- posed pertinent constitutional latory though even commission we are de- commands, statutory to devise methods regulatory expertise. void of of regulation capable equitably recon- act majority’s directing the Com- ciling conflicting diverse and interests. mission to compute speci- new rates on Cases, supra, Basin Area Rate [Permian done, fied company figures doubt, no U.S. 88 S.Ct. at 1360.] rehearing avoid also Federal Power See Commission v. remand, which at this late date would nec- Line, Transcontinental Pipe Gas be essarily a cumbersome and confusing 579, (1976) 96 S.Ct. 46 L.Ed.2d 533 tangle. Commission, administrative The curiam). (per remand, would compelled be to use the June In Users Association v. Public though 1975 even aon later Commission, supra, Service this court held Pepeo rate application in December 1975 it that because Commission failed to make already (in has issued order December adequate findings based on evidence in the 1976) granting company another rate in- record regarding utility’s claim of attri- all crease based on of calendar tion, the case be had to remanded for the including the identical data for the first six required to make those Commission find- issue here. By ordering months 1975 in ings. specifically We that: noted substantially Commission add not tqday holding We are that C&P’s rates ret- company’s revenues with revised in finding roactively evidence the record a back to December ma- requires attrition, jority validity or that if in puts question Commission serious Commission finds attrition it would of the later rate order of December 1976 year-end year. to use C&P’s rath- which was based on a full 1975 compelled be experi- did not in fact weighted average company er than its rate base. Since the the rates (footnote omitted) A.2d ence a deficit in under here [Id. issue, in but than met its in more (emphasis original).] any is- especially possible remaining a handsome net for that with expenses left, over, applica- revenues of restricted a new the added sues are also income $20,000,000 surcharge Company from the of the to the Commission more than tion increase, majority argument constitute rate filed since by the for a ordered compa- profit for 1976. Will which we take appeals, net of these and of additional for a revision down- petition Remand the Commis- ny judicial customers notice. case, sion, 1976 rate order of the December of this ward in the circumstances up- revision light very substantial a rate to be not be to enable order could earnings 1976 result- company ward in superimposed application, old remand, the cus- and would ing from this July [Washington Gas filed Pepeo for the against assert claims Baker, tomers Light U.S.App.D.C. Co. v. the now resulting from overcharges (1951).] 195 F.2d increase? December 1976 rate erroneous perceive Com- is difficult how the It who are as- today’s Will new customers re- grant further affirmative mission could up the surcharge this to make $20 sessed application on the for an increase lief an ex- for 1976 claim million in revenues appeal. at issue in this revenues having any as not received emption here I submit that reversal year? service unjustified, it an admin- wholly but creates pending of the December 1976 appeal forego- For all of the nightmare. istrative on a record that proceeding order will be reasons, I would dismiss the ing I dissent. a first for longer no valid unless remanded and affirm the order of Commis- appeal the order. hearing and revision of further sion. 1976 could be here for surcharge levied customers for over- followed rebate APPENDIX do rates become in 1977. When payments Order No. to an end? litigation come final under the re- issue we must address event, that a The next appears it now any perennial ques- is the Although heading the ma- of rate base useless. would be mand average or end of motion of whether to use the Commission’s tion jority has denied mootness, not, figures. remains There is and indeed the fact to dismiss for from, 5739, no record any No. on this appealed question order there cannot be having or effect a decline any experienced is of real force has longer that PEPCO 16, 1976, by on December of 1974 and that superseded been in the latter half earnings company signs under which declining order No. 5849 trend shows no this order awarded the operating. fact, course, That now does not reversal. This pro- designed increase presence further comрany and of itself demonstrate in revenues. million an additional said in the $29.4 duce As the “attrition.” already has been Consequently the a decline in case “while last PEPCO over million $5 increase of well may awarded an the result of attri- of return As a appeal. than it seeks in tion, may validity more be said equal to the is remanded factors, case to be g., imprudent if this e. result from other result greater no it can afford expenses.” excessive investment or grant- already that of relief than measure preliminary in our we have indicated As ed. views, major fac- to us. that the appears it by the was faced in problem similar decline contributing to PEPCO’s When tors in holding that an increase in kilowatt the reduction earnings Circuit were invalid, said: the court rates was gas significant customers and the sales to retail two Putting to PJM. these disposed by drop in sales having been matters These aside, however, is the record clear now factors possible as it insofar opinion per in costs the increase investment so, will left which that little be very do Commission, last decision has output noted in our to the unit remanded be could continued; and in this case not is this period. the test Intervenor All Souls Uni- fact by demonstrated the actual dollar in- urged tarian has that PEPCO’s in- Church in figures vestment the record it but in the Point nuclear sta- Douglas vestment believe, confirmed, we by vigorous ad- eliminated from rate base. Mr. tion be vocacy on the part consumer intervenors that Manheimer also recommends we aver- marginal of the use of incre- long run over age supplies materials and the test making pur- mental cost for rate figures that period, and we eliminate amounts re- poses. The underlying theory of this advo- flecting preliminary surveys, land transac- cacy is that the cost of production new undistributed, insurance, prepaid tions plant is higher than the average embedded balances, compensating bank in our calcula- Thus, cost of plant. that while we are tion of rate base. urged revenue, by some parties match given We have most serious consideration expense by average and rate base using these to all of recommendations. We are rate base we figures, support find little in disposed agree accept with our Staff the record for those recommendations. Mr. Manheimer’s recommendation short, we are persuaded that attrition is a average use amount of of an construction phenomenon us, is still with and we progress average work in an amount in now, will past, therefore as we have in the supplies the materials and account in rate use base, an end of period appro- with representative base as more of the flow of priate adjustments, in compensate order to dollars in and out of the accounts. The for the presence of attrition. record shows wide fluctuations in these point made PEPCO that use of over time accounts and a substantial in- an end period rate base will only partial- fuel crease in in resulting inventories ly reflect the “attrition” in earnings stockpiling from due to the unusual fuel has taken our place since deci- PEPCO year. market in that The amounts at the however, sion. persuaded, We are not period end in appear both accounts the decline in earnings has been solely due abnormally high. be In view PEPCO’s attrition, large but has in part been due projected reduction in pro- its construction drop sales noted previously. Since gram and reduction in fuel inventory in sales to retail appear customers to have do we not believe the end resumed a growth pat- somewhat normal representative can be called of an- tern, and since to PJM appear sales have future ticipated adjust- conditions. large leveled off to degree, since supplies ment of materials and is consistent PEPCO has substantially con- reduced its treatment accorded struction budget appears reasonable to this in Formal No. 610. item Case conclude that may attrition the future play significant a less role regard than it has the With to Mr. McCabe’s recommen- past. progress dation that construction work (a excluded from base recommenda- adjustments A number of to rate base subsequently permit tion modified to 10% of presented have been for consideration to be as a plant in service included construc- our and by intervening Staff several of the allowance) progress tion we are work parties in this People’s case. Counsel wit- First, disturbed two factors. the 10% McCabe, example, support ness with the appears wholly allowance to us to be arbi- parties, other consumer urged has elimi- Second, without trary and foundation. we nation of construction progress work in including would note that CWIP in rate from the rate substitution base without AFUDC and capitalizing allowance for funds used during construc- excluding AFUDC but from rate Accountant, CWIP tion (AFUDC). Our Chief Mr. re- Manheimer, produce base about same ultimate noting the unusually large Essentially timing is amounts in in sult. differ- included construction work ent; end, run, in progress long has recommended av- use of AFUDC but eraging progress may greater construction work in over result in a overall cost to the reasons, then, having base of For these and con- than inclusion in

customer data and recommendations of sidered all Projects be- progress. work in construction record, appropriate find the District of we cases, gun in the between rate $650,091,000, base to as Columbia rate be example, earn no return under the CWIP A, Page Attachment shown on approach, placed prior and if in service to in appear the next rate case rate base at achieve 9.1%rate of return on a rate To project. the actual cost of Were $650,091,000, operations PEPCO’s used, ap- $59,158,000, the same would project AFUDC as produce a return of must A, pear project Page in rate base at the cost of the 3. We turn on Attachment shown interest, capitalized expenses and now to consideration of observed plus ratepayers results, may from which we required provide would be a return on needed of revenues determine the amount consideration of all higher that cost. In this net return. produce factors, that the interest of both we believe be customer and investor would better NEBEKER, Judge, concurring: Associate continuing long standing our by served and tone of view of both the content con- In allowing PEPCO include practice dissent, I feel constrained to Brother’s my progress work in its rate base. struction my majority in the upon joining elaborate regard Douglas Point nuclear With majority convinced that the opinion. I am sub- question is no but that project, there mani- wholly legally valid and opinion in that stantial funds have been invested (and assess- dispassionate) a realistic fests projects require nuclear project, and that Moreover, the issues in this case. ment of time extraordinarily long required lead precedent are conclusions mandated complete. We understand and plan sense. as well as common appreciate expressed by the views All Souls dissenting majority opinions Both the support Millard in of his witness Father re- recognize principles certain of the basic al- million $28.6 recommendation scope lated of our review over Douglas Point ready invested in now decisions; many of the a few In consideration excluded from rate base. majority also decisions relied and the 8 of current fuel uncertainties our dissen- are cited in the dissent. Where however, time, longer lead we are not or view, appar- his goes astray, my ter we at this time de- convinced that should agency belief that if action is “con- ent un- project imprudent clare the nuclear or sidered,” against finding immunized necessary. capriciousness. The dis- arbitrariness disposed agree with our Chief are We accept simply would at face value sent reflecting prelim- Accountant that amounts as conclusions individu- Commission’s broad undistributed land trans- inary surveys and reached, and avoid further in- ally actions should not be included rate base. supporting the correctness quiry into out, pointed As has there is conflicts, Mr. Manheimer evidence, into the as well of these amounts will certainty any omissions, no practical and the effect plant majority opinion, in service and for opinion be transferred as a whole. The however, necessary exclusion is goes inescapably reason we believe their agree making we with Mr. the dissent those appropriate. Similarly, step beyond prepaid premi- inquiries. insurance Manheimer that bank balances compensation ums ERROR I. OF ASSERTIONS base, from rate since should be excluded over time expensed premiums majority’s insurance determination disputing opinion balances are in our compensating bank the Commission’s begins by charac- part capricious, of the cost of the dissent properly more view whol- opinion being terizing majority in our calcu- been included money and have unjustified.” Yet the “unsupported and ly rate of return. lations of fair such majority opinion convincing concrete and replete supporting evidence can- evidence, and of the analysis its law as not Pepeo be allowed to stand. thus itsmet to the applied facts is in accordance with showing severe and un- “heavy burden” of controlling precedent. prejudice resulting constitutional from the Commission’s orders. dissent The declares: examination of the An of each Commis- findings and reveals

sion’s conclusions II. THE OF REVIEW STANDARD none was at arbitrarily, arrived but Contrary assertion, dissent’s to the thoughtful after considera- rather majority opinion carefully adheres to the arguments of the tion evidence and each side. by Congress, by standards set as well as Supreme our precedents. Court and own consideration, Thoughtful however, does considered the majority first overall ensuing being not results from preclude at arbitrarily. opinion, arrived The Commission un- effect of the did doubtedly give consideration thoughtful was bound to Federal do under Power Com raised, the issues still it but reached a Co., mission Hope supra, v. Natural Gas invalid legally conclusion. That it did by 281, U.S. at S.Ct. Permian Basin significant ignoring through data submitted Cases, Area Rate 88 S.Ct. June of 1975. (1968), 20 L.Ed.2d 312 and our own The dissent also as “pure specula- attacks Telephone Users v. Public Association Ser tion” the majority’s conclusion that the rel- Commission, D.C.App., vice 304 A.2d atively small granted increase in revenues (1973). ef Having concluded that by the Commission allow the unjust fect of the Commission’s action was company opportunity to earn a fair rate unreasonable, and that it would not allow return, financial integri- maintain its opportunity its reasonable earn to attract ty, capital, required by authorized rate of return maintain Federal Power v. Hope Commission Natural integrity, majority proceeded financial Co., Gas U.S. give reasoned consideration con L.Ed. Yet the record contains opinion, practice tested elements of the abundant, clear, and uneontroverted evi- Supreme by established Court and fol (1) of Pepco’s rapidly declining dence finan- by lowed this court in Users position,1 (2) cial that the practical effect of case, supra, Finding 304 A.2d 298. then was to position preclude that several of the Commission’sconclusions attracting capital from maintaining in- they ig were because effect confidence,2 (3) vestor the data sub- most nored volumes of the recent uncon for the first mitted half 1975 showed record, tested data of we vacate and re convincingly steep decline in rate instructions, mand the decision with as au on equity of return rendered useless had Legal 43-705. thorized D.C.Code § corresponding year figures 1974 test errors and such as these omissions cannot Commission,3 (4) used the narrowest appel be shielded from even previously by the Com- adopted measures review merely late because mission to combat the attrition in conclusory sup several statements made earnings proved inadequate had in times of insufficient, mis ported by contradictory, inflation.4 A conclusion a review- lesser evidence, leading regarding or erroneous which is such extensive ing court based on issues. trans consideration of the Such full purely specula- evidence cannot be record contraction to con are in direct gressions tive, agency effectively and an order trolling logic. away precedent ignores improperly rationalizes pages See 1. See 3. id at 137. 134-136. id at See id at 139 145-146.

2. See 135-136. Pepeo that did not exhibit an posits primarily the dissent argument, its

To bolster data, pick not its con- have the new unequivocal “the Commission did intent that however, Surely, thin air.” clusions out of in a format identical presented were by review are not set judicial bounds of data, the duly to that of the calendar noted, As standard. this novel “thin-air” evidence, substituted for it. received into its conclusions may reach the Commission subject is thoroughly discussed As this thoughtful but neverthe- a manner which opinion,5 I shall mention majority the here be To hold otherwise would arbitrary. less fact the dissent relies only the meaning- appellate review a any to render accompanying Pep- condition expressed the formality. less updated to substitute data to request co’s the Finally, suggests the dissent request. of the eradicate existence fig updated inclusion some Commission’s thorough majority’s more examination opinion “reckoning” in its removes ures e., issue reveals that the condition —i. defined in from the zone arbitrariness afford a Pepco’s insistence that could not v. Utilities Com West Ohio Gas Co. Public hearings added out of the reopening —was mission, L.Ed. part, Pepco’s of caution on of an abundance However, (1935). ex Commission’s prerequisite to the legally and was parts of the clusion of the most crucial ultimate determination data, majority, updated by as discussed hearings primarily are held issue.6 Public action condemned was as as the assist the Commission’s determination Commission's selective West Ohio Gas. The among components relationships proper therefore, updated figures, use of certain rates; for those the actual of new from our review. does not insulate its action by simple components only must verified opinion in the Commission’s The flaws proc- of due requirements to meet the audit orders, accordingly, may not be shelved no au- and fairness. The dissent cites ess judg- of “a difference being as reflective The Commission contrary. thority ment,” as would have us do. the dissent hearings, have to and in reopen did not not hold that the Commission’s mayWe significance of fact it did Hence the not. consid- conclusory regarding its statements evaporated. Pepco’s caveat issues, did statements which eration Moreover, I note that the Commission— not take into account crucial and substan- like the Federal Power Commission record, finding preclude our tial data routinely public state service capricious in this case. arbitrary and action commissions— incorporates opinions into its accepts specific assertions I now address turn proceedings in rate new data submitted late by contested the dissent. of error data, the old purpose updating for the YEAR III. THE TEST an audit of a short time for allowing only See, e. figures. g., City New the new test once regards proper year, As Commis- New York Public York v. Service unwilling analyze again the dissent is sion, 42 A.D.2d 346 N.Y.S.2d presentation superficial beyond evidence for its cognizable is no reason As there majority opinion. the Commission’s by case, I can so in this refusal do use of calendar of the Commission’s defense erred.7 argues the dissent conclude year, 1974 as the test reopening such a of the record. dissent’s IV thereof. 5. See section contrary suggestion unsupported majority new that as the sub- erroneous. 6. The reasoned origi- the same format as mission followed nal, argument purpose proceedings forwarded as 7.The —to point” relationships among proceedings “the must end some revenue /ex- determine the already components unpersuasive new in this context. The data pense/rate —had prior five to the is- been ad- were submitted months and could not have been fulfilled opinion, hearings, and be- of the Commission’s of fair- suance vanced new considerations Moreover, they hearings. required process fore the close of the would not have ness and due fore, The dissent also is in error when it states: results and finan- argument “In oral to the Commission underwent af- changes cial condition drastic any raise a June question did not about test originally-submitted ter the end of year.” To this state- support delay occasioned year, and ment, the quotes dissent from the follows the process quite long, administrative argument Pepco’s of counsel: consideration of the data only appropriate (cid:127) what Now solutions to the attrition for the of 1975 must involve their first half problem exist? period. use in a test The one that’s been used traditionally this Commission and most others is IV. ATTRITION AND USE OF base, rate that if year-end and we think 1975 DATA going the Commission is with the to stick of contesting majority’s In the treatment period test that that’s a minimum. attrition, again dissent once mistakes the . . . [Tr. 2821-22] simple acknowledgment the Commission’s IWhile believe that counsel’s use of “if” us” that “attrition ... is still with against (partic- the dissent’s cuts contention valid effort to solve the legally prob- for a when recognized it is the Com- ularly statement, the support for its lem. As ultimately average, mission used rather Commission added: year-end figures

than for Construction now, will therefore as we have in Progress [W]e Sup- Work and Materials and base, period the an end of rate past use the plies), part argument counsel’s adjustments, immediately appropriate followed order dispositive is for compensate presence contention: of attrition. . . and that minimum ... is effect, however, The inevitable of the “ad- enough. not . (i. e., justments” weighted made the use of Now, there are things you other could for average, year-end figures rather than do. major compo- two of the three of them recognize One is to the need nents) the creation of a revenue defi- updating рeriod. for test [the] more than ciency which offset the small resulting attrition from use allowance The result majority opin- reached in the figure compo- of a for the period-end third question ion on the updating test (This fact not nent. mentioned in is valid and period long conforms to the line Moreover, the dissent.) predictive value Supreme prece- Court cases our own figures which setting may have been which require dent that a rate maker con- sider, year, the test without adjustments and make reasonable appropriate for, most considering recent data of record.8 There- more recent data which differ data, constituted most recent available consider the from March which, among precedents, 31, 1954, testing August other Ohio Gas West as an additional Comm’n, supra, appeared specific v. Public Utilities period, Co. to be no there reason 82, 324, Telephone 55 S.Ct. Users request. Ass’n for this in the or real need Unlike Comm’n, supra, Public 304 A.2d re- case, significant v. fi- no assertions of a instant given quires to be serious Here consideration. change nancial status were effectively they ignored. were made, length up by ad- and the of time taken delay Moreover, was short. ministrative Light case of Arkansas Co. v. Power & mid-1950’s did witness inflation Comm’n, Arkansas Pub. Serv. 226 Ark. today’s to which utilities fuel cost increases (1956), dissent on 289 S.W.2d cited being subjected. point, Far more to the subject, factually distinguishable from example, York is New Co. v. Public Arkansas, utility case. filed the instant Comm’n, Serv. N.Y.2d 342 N.Y.S. May application for new rates on (1971), in 272 N.E.2d 554 which the New York request ended and based its on a test readily Appeals Court reversed that state’s hearings March 1954. After extensive were give proper refusal effect held, on the Commission issued No- its order utility’s most recent historical Although year. vember of the same data. point requested at some

significantly presented subject from those for the true when the of attrition is larly discussed, as, year, negligible. regardless It was for this of how the Com- existence, Supreme clearly away any reason that Court so rationalized mission proscribed perceive the use of out-dated knowledgeable person data could West Ohio Gas Co. v. Public Utilities Com- remained on record uncontradict- there mission, continuing 294 U.S. at ed and exacerbated supra evidence first half of 1975. through and its controls the resolution of attrition holding the test issue in the instant case. Y. 1976 OPERATING RESULTS ruling Pepco’s In the Commission’s Perhaps alarming aspect the most reconsideration, again paid petition dissent, however, use is its unfettered lip service to the existence of con- supposedly provid- material as extra-record decline, tinuing financial and added: position. major support for its It refers ing fully by This fact was considered and Ex- prices to stock and to a Securities arriving in at its decision in Commission evi- change filing by Pepeo as case, though even the decision was this that, dence with the contested rates ef- year based on a 1974 calendar indeed fect, to make financial Pepeo was able period. use of such extra-record progress. This to offer two proceeded Yet the Commission proscribed by material not control- unsupported weak and reasons for its fail- statute, ling by case law and the relevant As grant requested. ure the relief re- in its dangerously incomplete but also is reason, the first there was no basis in gards this analysis suggests erroneously that logic the record or in for the Commission to judgments routinely are court’s decisional request that not that assume did by “facts.” affected extra-record 30, for the ended June data 1813, Supreme long ago As Court asserting Secondly, be used. while appear not held that facts which do fi- persuaded was not reviewing by record cannot be noticed could be attributed nancial decline court, if suffi even those facts would be “attrition”, no rea- gave the Commission change outcome of the case. cient to conclusion, this and did not reaching son for Carson, Cranch) (7 Thornton v. U.S. such a decline should not be why state (1813). gam 3 L.Ed. 451 dissent’s even if it were way for in some adjusted beyond bol the confines of the record also conclusion not related to attrition. Such a by statute. D.C.Code prohibited than anything could not be labeled other provides part “Any 43-705 that: such § capricious. It difficult upon the record appeal shall be heard be dissenting appar- how our Brother fathom and no appeal], fore the Commission [on believe that the Commission’s rea- ently can new or additional evidence shall be received logic,” thereby soning carries “considerable appeal As can be taken court.” [this] “any that the decision defeating contention as issued the Com only from order arbitrary.” toas CWIP was mission, evidence may we not consider (by misuse Concerning the Commission’s to the Commission which was not available recent nonuse) the most substantial Moreover, the ex at the time of issuance. data, only refer the read- available I would do not contain facts of tra-record materials of the June majority’s er to the discussion knowledge, they capable nor are common data, attrition, and the rate base they may verification such certain superficial as- components, repeat Massachusetts v. West judicially noticed. concerning the Commission’s sertions 1755, 52 L.Ed.2d cott, 97 S.Ct. data, the 1975 consideration” of “thoughtful action, may not followed remedial when material selective use of The dissent’s what otherwise are disguise successfully Pepeo during proceeding unreasonable, unavailable arbi- readily recognizable exist), (since it ‍‌‌​‌​​​‌​​‌​‌‌‌‌​‌​‌​‌‌​​‌‌​‌​‌‌‌‌‌​​‌​‌​​​​​‌​‌‍did not or particu- This is capricious rulings. trary, vacating accompanied 43-705.11 It has formulating opinion, also makes no § in no detailed rea- practical sense. materials cited order with treatment of way meaningful action, constitute a has related “the sons for its reliable, inherently are not subject, they the extent to which such in and particulars meaningful no may and their contents have It has not or decision was defectivе.” order relationship contemporaneously to the rates function of set- the administrative assumed in effect.9 The reliance ex- dissent’s rates, and, correcting after the Com- ting material is as erroneous as it is tra-record errors, has left the actual legal mission’s curious when one considers the dissent’s just rates to the Commis- establishment our Brother position on the test issue: Moreover, its decision tempered sion. it has sanctions the Commission’s effective disre- equitable considerations to assure fair gard compelling of the most current and consumer, as well as the treatment record, heavily evidence of but relies him- investor. The dissent does not address self on “information” which did not even aspect of our decision. One must remember until some two after the record years exist of the consumers do that the true interests which we review was closed. solely utility low artificially not rest In the analysis, rates. ultimate con- VI. REMEDY sumer cannot and will not afford the inade- Finally, the dissent’s discussion of the quate utility inevitably services which remedy prescribed two rests miscon- a consequence would follow as of short- ceptions. majority first is that term, confiscatory rates. I remain con- specific directed dollar results in its remand reasoning majority vinced that fact, In majority order. mandated the opinion only wholly is not sound but also is only Commission to recalculate the rate public.12 in the best interests of the requirements using base and revenue actual and audited data of record for the ended June 1975. This cer- done, accuses,

tainly was not as the dissent hearing by

“to avoid a

remand,” necessarily but to conform to le-

gal standards.

Secondly, the dissent contests our author-

ity to outline the remedies on remand.10 majority opinion

Yet the conforms to the

procedures mandated by D.C.Code claim, Contrary earnings may to the dissent’s the Tele- 9. The increase in be attributable 11. parameters phone unusual Users case does not set weather conditions discussed authority. language quoted majority opinion, of this court’s to a trend in stock invest- only specifies Pep- did not do —it patterns, what court ment to increases in rates which could do in many no means indicated what we may charge non-District of eo Colum- any given situation. (of which we have no record bia customers any knowledge), of other factors. or to number following para- Additionally, knowledge Warranting quotation is the we have no as to what dissenting expenses happened graph Stratton’s and rate from Commissioner has years opinion: since the record before us base in the two was closed. posits up, the commission’s order To sum reminiscent of the an economic environment early acknowledge dissent also states its belief —which the failing 10. The 1960’s. validity majority capital does not share —that fact that deal with the granted subsequent risen, per increase to the one requirements the rate unit of sales have Any placed question.” rise, “in serious fur- here faster than revenues continue step review of that decision would be occa- ther has taken a that can commission only by parties, bring regulation action of the and not of in the sioned District of Columbia necessity. disrepute among fair-minded and into knowledgeable.

Case Details

Case Name: Potomac Electric Power Co. v. Public Service Commission

Court Name: District of Columbia Court of Appeals

Date Published: Mar 2, 1978

Citation: 380 A.2d 126

Docket Number: 10490

Court Abbreviation: D.C.