Washington Public Interest Organization v. Public Service Commission

INTEREST PUBLIC WASHINGTON al., Petitioners, et

ORGANIZATION

v. SERVICE COMMISSION

PUBLIC Columbia, Respondent,

District

Washington Light Company, Gas

Intervenor. COUNSEL, Petitioner,

PEOPLE’S

v. SERVICE COMMISSION of

PUBLIC Columbia, Respondent,

District

Washington Light Company,

Intervenor. PUBLIC INTEREST

WASHINGTON al., Petitioners, et

ORGANIZATION SERVICE COMMISSION of

PUBLIC Columbia, Respondent,

District Company, Electric Power

Potomac

Intervenor. and 12017.

Nos. Appeals.

District of Columbia Court

Argued 1977. Sept. Sept.

Decided McManus,

James T. Washington, C.,D. Risher, with Jr., whom John R. Corporation Counsel, and McManus, James T. Principal Counsel, Corp. Deputy Washington, C.,D. brief, were on the respondent for in No. 12017. Harrington,

Paul H. Washington, C.,D. with whom A. Gollomp, Lawrence Wash- C., ington, brief, D. was on for interve- nor in Nos. 11780 and Va., Barringer, Richmond, Allen C. Carroll, Ala., whom Birmingham, Lewis and Kirk, II, C., Alan Washington, G. D. were brief, for intervenor in No. 12017. NEWMAN, Before Chief and Judge, NE- FERREN, BEKER Judges. Associate FERREN, Judge: Associate Petitioners, Washington Public Interest Organization (WPIO) People’s and the Counsel, challenge grant- increases by ed the Public Service Commission of the (the District Commission) of Columbia Potomac Electric Power Company (Pepeo) and Washington Gas Light Company (WGL) October, 1976. Petitioners raise a single issue: when land no longer used in delivering public service by is sold public utility company, should the financial gain representing appreciation — service, e., while in i. while in the “rate the company’s base” —accrue to share- (in holders toor its customers the form of utility rates) reduced ?

The Commission ruled that the sharehold- ers alone should benefit. Its decision rests primarily ground that allocation of appreciation on retired land to the share- holders conforms to the mandate of the standard accounting system for com- e., panies, i. promulgated by

Accounts the Federal Pow- er adopted Commission and our own Jr., Hahn, C., Washington, D. Gilbert for for use District of Co- petitioners in Nos. 11780 and 12017. lumbia. Noel, C.,D. Washington, Elizabeth A. for simple This complex rationale belies a petitioner in No. 11786. inquiry. stating proce- After the facts and C., Washington, history (Part H. D. Deeny, I) Linus dural taking account of respondents in Nos. 11780 and 11786. our scope (Part II), review explore we III.A.) (Part relationship the historical be- and two of the intervenors exceptions filed accounting system reconsideration, the uniform applications tween all of ratemaking. concluding, After on the basis which the Commission denied. Petitioner law, body of a substantial of case WPIO filed for review this court accounting treatment does not prescribed (case 12017). No. necessarily particular ratemaking dictate 30, 1975, September On WGL filed with result, (Part III.B.) we turn to the details application the Commission an for a retail accounting system, in order to the uniform gas annually. rate increase of million $7.5 per whether the se determine Commission’s People’s WPIO and the Counsel intervened. ratemaking appears for reliance on the hearing, After a Commission on October sound, even without an historical mandate. 29, 1976, Opinion issued a Final and Order general principles We that the conclude (No. 5833) granting WGL a rate of return accounting system, while intended to 9.25%, resulting in an annualized rate ratemaking consequences, subject have are million, totaling increase almost $6.7 90% of many exceptions, application to so and their the requested. Applications amount for re- accordingly requires the exercise of so much consideration People’s WPIO and the discretion, it- system that denied, Counsel whereupon they were filed justifying self is not self as an automatic petitions (case for review by this court Nos. ratemaking Finally, basis for a decision. respectively). therefore, (Part III.C.) we consider whether question application of the Uni- We have peti- consolidated these three form of Accounts as the basis for tions for review. ratemaking on the facts here can be said to Pepeo, parties As to have stipulated pass muster. We conclude that the Com- that during ten-year period 1965-74: facts, supplied mission has not enough cou- (1) company gain received a net pled enough reasoning, jus- with detailed $542,179.22 e., (i. “the difference between tify treatment of the land transactions sole- book value price and sale on the date of ly by System. reference to the Uniform sale”) from involving 103 transactions course, only Our available is to “sale prior of land which at some date had the proceedings remand for clarification. having been classified as been devoted to service”; public (2) History; Question I. Procedural Facts and trans- “ Presented ferred ‘below the line’ public or out of service” 18 (i. Sites for which the net gain 29, 1975, Pepeo On December filed e., “the difference between book value and application with the Commission for market value transfer”) on the date of was increase for retail electric service in the $182,390.33.1 parties The stipulated also District of subsequently Columbia. As that of gain $724,569.55 the total net by Pepeo, requested modified increase transfers, “$381,938.00 from these sales and $57,578,000 would have totaled annually. Pepco’s is allocable to District of Columbia 20, 1976, eleven-day On October after an operations.” Finally, parties stipulated WPIO, hearing People’s in which Coun- 1972, Pepeo that removed its 929 “E” sel, parties participated and four other Street, property N.W. “from Utility intervenors, the Commission issued a Pro- [the] Property . . . as longer no (No. 5831) posed Opinion grant- [account] Order connection, used and useful.” In this they ing Pepeo a 9.06% overall rate of return. stipulated further that when Pepeo in a total rate increase of sold the This resulted March, 1976, $29,411,000 annually, amounting slightly gain net —the requested. more than 50% of the increase difference between market value and de- WPIO, Counsel, Peоple’s preciated $468,- Subsequently, book value —was at least stipulations agreed upon initially by stipulated purposes appeal 1. The were of their in case utility companies, Pepeo and the No. WPIO People’s accepts The the facts WGL. Counsel 324.06, $207,139.73 account. Dispositions of which at least was of retired depreciable operations. District of Columbia facilities, allocable to hand, plant the other are usu- stipulated have Accordingly, parties line”; accounted for ally typical- “above the gain the total net allocable to District ly, stand to benefit —or operations Pepeo prop- for the of Columbia lose—in the calculation of the rates $589,077.73. at issue is at least erties required III.B., pay. See Part infra. WGL, parties stipulated As to justification for such accounting 1, 1965, during period January rates, principles, impact with their 29, 1976, company received a February generally proposition based on the taxes, $6,343,270 from gain, before net ratepayers, charged who have been representing the sale of “12 transactions facilities, depreciation plant should be which at improvements land and related repaid gains, any, with the if upon eventual as hav- been classified prior some date had sale of those facilities. Because land is not (The service.” public been devoted to however, depreciable, ratepayers and the depreciable improve- breakdown between accordingly responsible have not been for provided land is non-depreciable ments and it, replenishing gains, any, if on sales of sold only Georgetown properties for certain retired land are left to the investor-owners. 30, 1975). during year ending April the test ones, They theoretically, are the at least whether, presents question case Each and, brought enterprise who the land to the increase, the granting particular result, as a should benefit. improperly failed credit Commission ratepayers stipu- customers —the Necessary general refinements of these —with WGL, gains by Pepeo received and lated principles will be discussed in due course. disposition of land re- respectively, upon say at point petition- Suffice it to this company’s utility each service moved from challenge ers the Commission’s decision to arises, question put This operation. here, apply accounting system the uniform simply, as follows: In accordance most that the dispositions such land receive “be- prescribed of Accounts the Uniform particularly, low the line” treatment. More (FPC) Power by the Federal gains accruing WPIO has asked that Commis- adopted by the Public Service Pepeo dispositions on land retirements and Columbia, District of sion of the during the ten-year period, be dispositions losses from credited to in at least allocated, are by utility companies owned $589,000.00 amount of the allocable to Dis- circumstances, either to depending operations (presumably trict of Columbia (called customer-ratepayers “above the taxes), gains accruing less and that to WGL treatment) investor-share- line” or to the 1,1965, eleven-year period, January over an line”). (described as “below the See holders 29, 1976, through February be allocated to Suelflow, Utility Accounting: J. Public $6,343,- ratepayers in the amount of at least (1973) (here- 23-24 Theory Application 000, (Presumably figure, less taxes. “Suelflow”). According to this inafter case, Pepeo in the shоuld be reduced to accounting system subject to notable —and reflect allocable to the District of previously land exceptions dispositions of — Columbia.) Counsel, however, People’s The active use in service are retired from $2,976,217 asks for a credit of to WGL line”; for “below the usually accounted ratepayers, limiting request to after-tax lose—from shareholders alone benefit —or gains during year” ending WGL’s “test de- through an increase or each transaction 30, surplus April earned 1975.2 corporate crease in the Comm’n, year” period” “span D.C.App., “test is a Service 304 A.2d 2. The “test or denied, (1973), past” immediate used as the basis cert. 415 U.S. 94 S.Ct. time in the (1974). utility company’s Bonbright, making 39 L.Ed.2d 492 See J. Prin for a forecast Rates, needs, e., Utility calculating ciples its essential of Public 150 n.7 i. financial Telephone Ass’n v. Public of return. Users Scope upheld II. of Review petitioner unless a makes a “con- vincing showing” that it fails to meet the A. In General statutory criteria. Federal Power Comm’n Commission, court, not this has the Hope Co., supra, Natural Gas U.S. responsibility setting utility rates. D.C. 602, 64 281. Apartment See House 43-301, -401, To -411. Code §§ Council Metropolitan Washington v. Pub- lawful, however, these rates must be “rea- Comm’n, lic supra, Service A.2d sonable, just, nondiseriminatory.” D.C. subject, 43-301. They Code § Given the Commission’s broad accordingly, judicial review.3 statutory authority, our own scope limited “jurisdiction This court has to hear and review, judicial emphasis on the rea any appeal from an order or deci- determine sonableness of the overall rate (irrespective sion of the Commission.” D.C.Code of Commission methodology), and peti 43-705. See D.C.Code 11-722. § § tioner’s burden to make a “convincing review, however, ques- Our is “limited to showing” unreasonableness, one might law, including ques- tions of constitutional conclude that the Commission’s authority is tions; findings and the of fact the Com- virtually plenary. Not so. While the re mission shall be conclusive unless it shall viewing court particular cannot mandate a appear findings that such of the Commis- rate, only and can set aside a rate order unreasonable, sion are arbitrary, capri- “convincing showing” of unreason cious.” D.C.Code 43-706. See § ableness, court, presented when with a Apartment Metropolitan House Council of review, nonfrivolous petition for has a re Washington Comm’n, v. Public Service D.C. sponsibility to hold Commission account App., (1975); 332 A.2d 53 Chesapeake & through as many remands as neces able — Telephone Potomac Co. v. Public Service sary satisfying a burden all its own: —for Comm’n, D.C.App., (1974); 330 A.2d 236 explain fully clearly. its actions and A Comm’n, Goodman v. Public Service D.C. utility rate cannot be deemed “reasonable” App., (1973); 309 A.2d 97 Telephone Users simply expert because an agency says it is. Comm’n, Assn’ v. D.C.App., Public Service Independent a petitioner’s of burden to (1973), denied, 304 A.2d 293 cert. 415 U.S. convincingly show Commission-pre 933, 934, 1449, 94 S.Ct. 39 492 L.Ed.2d unreasonable, scribed rate is the Commis (1974). develop sion—as we shall below —has the statutory

These criteria are akin to burden showing fully of and clearly why it governing those the Federal Power Com has taken the particular ratemaking action. oversight by mission and its the federal comprehensive Absent such explanation, ju context, Supreme courts. In that Court dicial review of the Commission’s substan has held that unless the overall effect of a tive decisions completed cannot be and the “unjust unreasonable,” rate is the Com finally rate order approved set aside. —or mission’s order approved, should be irre There are two aspects of this spective methodolоgy of “infirmities” in the elabo ration required (1) used to calculate it. Federal Power Commission: an Co., nouncement of the Hope governing v. Natural criteria Comm’n Gas 320 U.S. determination, 591, 602, 281, (2) (1944). explanation 64 S.Ct. 88 L.Ed. 333 particular how the Federal Power Comm’n v. Natural Gas rate order appli See reflects 575, 585-86, cation Pipeline 315 U.S. 62 of these criteria to the S.Ct. facts of the 736, particularly, first, 86 L.Ed. 1037 It follows that a case. More any order, product expert judg as “the valid rate presupposes determination valid; ment,” presumptively it should be the Commission has suitably pre- selected Comm’n, allegations D.C.App., does not concern dis- Public 3. This case Service 332 A.2d 53 against (1975). Accordingly, crimination one or more classes of we confine our discussion Apartment users under the rate schedule. See to an evaluation of whether ‍​​​‌​‌​‌​‌​‌‌‌​‌‌‌‌​​​‌‌‌​‌‌​​‌​​​‌​​‌​‌​​‌‌​‌‌‌‍the rates at issue Metropolitan Washington just. House Council of v. are reasonable and 76 JJ., (Black, Douglas, and Murphy, concur “reasonableness” by

cise criteria which ring), and the rate itself cannot be “exorbi judged. can be the order Baker, Washington Light Co. v. tant.” has law nor economics Although neither 119, U.S.App.D.C. 88 at 188 F.2d at supra, standards accepted generally devised yet from the orders, Equitable ratepayer factors rate-making the evaluation equally part re- are nonetheless, perspective, must, be obvious it more require criteria and reasonable rate calculus. See viewing courts will Cases, justice supra, than and arbitrari- Area Rate 390 discriminating Permian Basin appraise 1344; sensibly ness if 88 S.Ct. Democratic U.S. Basin orders. Commission’s Washington Committee v. Metro [Permian Central 747, 790, Cases, 88 390 U.S. Comm’n, Area Rate U.S.App. 158 politan Area Transit 1344, 1372, (1968) 312 20 L.Ed.2d 7, denied, S.Ct. (1973), cert. 415 D.C. 485 F.2d 786 omitted; added).]4 (footnote emphasis 1451, 94 39 L.Ed.2d 493 U.S. S.Ct. ”). (1974) (“Democratic Central Committee I from criteria follows explicit This need for summary, responsibili the Commission’s will be a in each case there the fact that reasonableness,” development and announce ty begins Federal Power “zone Co., supra, the “zone of Pipeline circumscribing Natural Gas ment of criteria v. Comm’n 64 with bounda S.Ct. reasonableness.” 320 U.S. must define and

ries which the Commission Second, equal importance, and of Light Washington Gas Co. apply. See duty explain clearly has a 115, 119, 188 F.2d Baker, U.S.App.D.C. by the rate how its criteria are satisfied denied, (1950), 340 U.S. cert. particular at the re- order —how it arrived re appeal after 95 L.Ed. Supreme sult. As the Court has noted: F.2d 29 mand, U.S.App.D.C. or- Judicial review of the Commission’s standpoint, the investor (1951). From accurately ders will . . . function floor of that zone— boundary lower —the efficaciously only if the Commission defined the courts already been methods fully carefully indicates only remains to be terms and constitutional which, which, purposes and the standing “By long case. applied in each has chosen to act . . . . [Permian regulation, field of rate usage in the Cases, supra Basin Area Rate 390 U.S. at is one which is not reasonable rate’ ‘lowest 1373, emphasis 88 at S.Ct. added.] sense.” in the constitutional confiscatory regulatory While it is true that a commis- Gas v. Natural Power Comm’n Federal methodology sion cannot be faulted for Co., at 62 S.Ct. supra 315 U.S. Pipeline if the “total effect of the rate order cannot standpoint, the the consumer at 742. From unreasonable,” unjust be said to be and less well ceiling boundary upper —is —the Hope Natural Federal Power Comm’n con defined, is clear that although it “[t]he at 64 at supra, U.S. disregarded in de cannot be sumer interest methodology it is also true that ‘just and reasonable’ termining what bearing mаy disclosed for the at 753 must be .,” id. at 62 S.Ct. . . rate must determine whether the order Supreme three “in- court has elaborated Court 4. The reasonably expected judicial to maintain financial review which criteria” for terrelated necessary fairly integrity, capital, commission-type incorporate for rea- attract and criteria they compensate investors for the risks have sonableness: assumed, yet provide appropriate protec- First, the Com- whether it must determine interests, public relevant both tion to the order, light rele- of the mission’s viewed respon- existing The court’s and foreseeable. broad facts and of the Commission’s vant supplant sibility is not to Commission’s duties, regulatory its au- abused or exceeded of these interests with one more balance Second, thority. must examine the court nearly liking, but instead to assure to its has em- the Commission manner in which given has rea- itself that the Commission regulation ployed which it the methods pertinent selected, to each of the soned consideration and must decide whether itself Cases, sup- Basin Area Rate factors. [Permian order’s essential elements each Third, supra 1373.] 88 S.Ct. ported evidence. substantial judgment. on that overall Absent strate that the overall rate determination is reliable, methodology ap- probative, “in accordance with the precise explanation of case, and substantial evidence.” the facts of the there is no D.C.Code plied to Supp. 1-1509(e). Chesapeake whether the & Potomac way § a court to tell Commis- Comm’n, Tel. Co. v. Public Service D.C. sion, expert, arbitrary has been however App., Telephone 339 A.2d 714. See unreasonable. Users Ass'n v. Public Comm’n of Service on creation Supreme emphasis This Court D.C., supra. criteria, ratemaking reasonably precise explain clarity coupled duty with This “substantial evidence” test is not each in support how the facts relate to directed solely quantity at the of evidentia- order, ry is inherent in the support overall for an administrative determinat Equally important under the ion.6 responsibilities preceding Commission’s Dis is the language l-1509(e), trict of Columbia Administrative Procedure “in accordance § (“DCAPA”), [Emphasis with . . . .” Supp., Act D.C.Code 1978 There added.] “must be a demonstration in the seq., findings 1-1501 et which a rate order also §§ a ‘rational connection between specifies This statute facts found must be tested.5 and the choice made’ imposed party on each to an burden admin [citation omitted].” Brewington App. Rev., v. Bd. of D.C. as well as the proceeding, istrative burden App., (1973) 299 A.2d (emphasis in agency particularly, itself. More original). Liquors, Jameson’s Incorpo See “the of a rule or order shall have proponent Bd., rated v. Alcoholic Bev. D.C.App., Cont. 1-1509(b). proof.” the burden of In the § (1978); Kopff 384 A.2d v. Alcoholic case, therefore, present Pepeo and WGL Bd., Bev. D.C.App., Cont. 381 A.2d 1372 burden, level, have the at the Commission (1977); Dietrich v. Bd. Zoning Adjust establishing proposed their rate or ment, D.C.App., (1972). Thus, 293 A.2d 470 reasonable, including ders are applied ratemaking, there must be (and losses) allocations of on land evidence, enough rationally related to the proposed transactions inherent in their rate- (through clearly order articulated cri making methodology. Included in that bur teria), justify the Commission’s decision. responsibility develop den is a a record sufficiently complete support a Commis obligation Commission’s DCAPA any sion order in their favor on contested justify its decisions on the basis of substan- contrаst, issue. and People’s WPIO tial possibility evidence creates the that a have no formal pre Counsel burdens. To petitioner judicial review of a Commis- vail, however, must defeat sion’s rate order fail to carry its bur- companies argument with evidence and/or convincingly den to show that the Commis- Commission, land-gains issue. The invalid; yet sion action is the court decision-maker, as must evaluate all the uphold cannot the Commission itself be- presentations and then fashion the most satisfy cause of its failure to the substantial order, including and reasonable a de evidence test. The Commission’s failure land-gains the termination of issue. The may be attributable to the utility compa- Commission, however, validly failure, cannot do so proponents nies’ own of the or- der, furnishing findings without detailed of fact supply quantity to a sufficient of evi- and conclusions of law sufficient to demon- dence in or the support; Commission’s fail- applies quantity requirement, held that the to 6. As to the 5. We have DCAPA “substantial “ Commission, subject provi- evidence” actions of is ‘more than a mere scintilla’ it “ organic setting scope of the act forth our sions is ‘such relevant evidence as a reasonable review, 11-722, 43-706, might accept adequate support §§ of D.C.Code mind a ” requiring petitioner Vestry a to seek reconsidera- conclusion.’ Grace Parish v. Alco- Commission, by Bd., D.C.App., 43- § tion D.C.Code holic 366 A.2d Bev. Cont. judicial prior petitioning omitted). (1976) (citation for review. Chesapeake v. Public Ser- & Potomac Tel. Co. Comm’n, D.C.App., 713 n. vice 339 A.2d too enough— to its insufficient conclusional —not elaborated solely be due ure confidently of the reasonableness a court to re- explanation non-expert event, will be a remand court, In either insisting order. view. A withоut on more necessary. precise explanation, simply could be fooled accepting arbitrary agency by into action nor petitioner neither possibility that This mesmerizing influence of confident- being, for the time prevail, can Commission ly expressed language experts. precisely more when we focus clear becomes pro- remand administrative why courts that a make a requirement petitioner The most, cases, perhaps ceedings. many In judicial “convincing showing” prevail judicial re- remands after a court where therefore, is, wholly compatible review merits be- view, can reach the the court requirement the DCAPA Commis- sufficiently has articulat- agency cause sion, upheld, sup- must demonstrate to be When the for its actions. reasons ed the port of its order substantial evidence. case, it holds that the such a remands court independent These burdens in the ratemak- facially substantively defective —is is action derived, respectively, context are from In unsupported. or otherwise arbitrary a traditional burden at the level petitioner’s short, prevails. In other petitioner judicial review and the Commission’s however, finding a lack cases, court —in statutory provide sufficient evi- burden not reach the evidence —does of substantial support dence to its decision. It would be articulation of agency’s merits because judicial wholly concept at odds with the petitioners The cryptic. is too position its review to close a rate case in Commis- carried their bur- review have judicial favor, showing sion’s an insufficient convincing the court to the extent den own by petitioner, when the Commission’s is not position their frivolous — order, expertise, may guise under the agen- thаt the point a valid may have —and inadequately preclude effective attack evidence marshalled substantial cy has not has done explaining what decision; they have not but support of its it. why supports the evidence convincing ultimate burden carried their whereas a Commission rate summary, action cannot be agency the court petitioner be set aside unless order cannot such why reason principal supported. “convincing showing” that it makes a meeting this succeed in petitioners unreasonable, unjust, discriminatory, one, burden, the ultimate but not threshold the same rate D.C.Code § fuzzy given them agency is that approved by reviewing order cannot be sufficiently in focus target —one court, clarification un- without remand for D.C. Transit careful aim. See at with shoot has com- less—and until —the Commission Metropolitan Washington Inc. Systems, Comm’n, by specifying with the DCAPA U.S.App.D.C. plied Transit Area (1965) (en clearly explaining, 375, 401-2, F.2d 779-80 criteria for order “an (Commission provide gaps, findings failed to material how its ra- banc) without knowing it what why did Per- adequate tionally support basis for that determination. did”). less paradoxically, haps job of the the court is to do the equipped ratemaking proceeding perhaps A thus the more deference agency, and type of for this latter likely candidate most the agency’s court must show to reviewing petitioner’s A judicial review. result greater authority expert judgment, and upset a rate heavy to especially is burden obligation explain exactly is to agency’s merits; thus, reviewing a order course of particular it chooses to take a why overturning be cautious before court must scope agency’s of an action. The broad On the determination. expert agency’s an why agen- that authority very is the reason compli- hand, ratemaking is because other explain precision. itself with cy obliged is to techni- understandably prone cated the con- authority implied, to If such broad there is a cal, terminology, shorthand often explain agency need not trary, that will be agency that action risk substantial fashion, itself, choice, only do so shortcut Our realistically, or could in is to assume nullity. be judicial respondents, then review would a that aware of the overall ef- authority test, own to intrude fect “end result” While our or Permian Basin limited, Cases, our agency supra, functions is therefore Area Rate U.S. out responsibility any compensat- find will reveal such

authority —to —and does is why ing petitioners acts as it considera- factor. It follows that agency obliged part would be to refute the point ble. make “convincing of their burden to a showing” case, In this unreasonableness. of an Element of the Rate B. Review however, it say respondents is fair to that Order proffered compensating have not factor issue, upon judicial While the ultimate otherwise; thus, from Case No. 12023 or we review, overall of the rate is the effect can consider the record before us as the order, not to that our review say this is review purposes, entire universe for with- encompass aspects must all of that order. portion out concern that a vital of the rate case, example, present the overall proceeding transcript missing is or that we directly rate is of return not issue. None been provided additionally have not with an levels, questions petitioners rate interpretation of the relevant data. such, granted Pepeo; agree WGL (or contest) do Co- for District of positiоn The logical extension of our operations lumbia is entitled WGL petition more than this: whenever one rate year, 9.25% overall of return each for review of a order is Commission rate Pepeo annually while is entitled to 9.06% court, and filed with this the Commission or question, overall. The narrow party advocating another the overall —in pre- a portion company’s whether of each or effect “end result” test —concludes that already scribed return should be deemed petitions be should consolidated to paid (or gain the realization apprecia- requisite perspective, achieve the the Com value) service, tion in longer on land no in or party mission other must assume the entitling the to a customers short-term filing burden a motion to that effect. It sort; whether, instead, credit of some or will freely granted absent unusual cir each company’s return should be recovera- consolidation, cumstances. Without such ble in charges full from to its customers. however, any division of the will have court Thus, we are asked to limit our review disregard in pending the issues the other scrutiny of expert judg- Commission’s case and evaluate the rate order with re applied ment many but one of elements spect to the one more present elements of the ratemaking calculus. ed. so,

While we can —and will—do we con- We turn now to what the Commission has possible problem front a myopia. As- why. done —and We focus on relation- petitioners sume that apparent do reveal an making ship between and the Commis- infirmity ratemaking Commission’s accounting prescribed system sion’s for util- here. can we How be sure that as- other companies. ity pects of the rate not compensate order do reprеsented by the class petitioners for that System of Accounts III. The Uniform infirmity, such that the overall effect of the Relationship to Ratemak- A. Historical just note, order is reasonable? We ing example, challenge aspect another 1976 Pepeo initially promulgated of the same uniform pend- order is FPC court, accounting systems before another division of this 1937 and 1940 for 12023; thus, gas companies, No. we are not natural dealing with electric Kripke, Study order only element that could A Case respectively. See revision, undergo affecting parties’ Accounting: re- Law and Relationship 107, positions. 100.5and 57 Harv.L. spective Accounts 80 Brandeis, however, 433, (1944). dissenting It did so out of 435 Southwest

Rev. Com’n, Bell Tel. v. difficulty determining ern Co. Public Serv. about the 262 concern 276, 289, 544, allowed U.S. 43 S.Ct. 67 L.Ed. utility properties 981 the true value of (1923), reproduction had attacked the During base. cost comprise the rate approach, arguing that investors should 1920s, and con- rapid turnover period only entitled capital to a return on the ownership, regulatory commis- solidation of prudently invested in the enterprise, not on by accelerating infla- sions were confronted appreciating value of the property ac utility properties costs as con- tion of book quired. Utility companies changed understandably hands —sometimes tinually feared, therefore, the FPC’s uniform length arm’s but often transactions be- accounting system, by segregating cost prices max- designed tween affiliates data, presaged an effort to contract each top corporate imize the share at the utility’s rate reproduction base from costs pyramid. See Duke Power Co. v. Federal original cost. Comm’n, 389, 393, U.S.App.D.C. 130 Power 930, (1968). cases, many 401 F.2d 934 In agencies The rеgulatory sought to avoid purchase prices and, conse- — judicial scrutiny of their new accounting quently, utility proper- bases —for by insisting systems systems these were derived from book ties values reflect- would not be considered conclusive for rate- capitalization hopes (more com- making purposes. The Supreme Court ac- monly “water”). characterized as Accord- assurances, cepted holding such in Ameri corresponding ingly, approach to an taken States, v. can Tel. & Tel. Co. United the Federal Communications Commis- 232, 170, (1936), 57 S.Ct. 81 L.Ed. 142 U.S. (FCC) years 1935, a few sion earlier in accounting that FCC did not violate due system utility property FPC’s new divided process was a merely system because (1) categories: book values into three notation, significance.7 without substantive cost” of the “original first conclusion, however, reaching In service; public that devoted it ‍​​​‌​‌​‌​‌​‌‌‌​‌‌‌‌​​​‌‌‌​‌‌​​‌​​​‌​​‌​‌​​‌‌​‌‌‌‍to powerful Court was not oblivious to the (2) adjustment” re- “acquisition account regulatory influence that commissions’ flecting utility’s the difference between the accounting systems inevitably would have acquisition depreciated cost own fact, ratemaking. years two before (3) property; any cost of the original decision, the American Tel. & Tel. Co. appreciation “writeups” reflected in further already recognized signifi Court had company over the sum of the first by the accounting system cance of the for the rate Kripke, supra at 436. categories. two structure. In Lindheimer v. Illinois Bell Co., Telephone 292 U.S. 54 S.Ct. accounting rules were At the time these (1934), L.Ed. 1182 the Court had held that enti- utility companies were promulgated, depreciation charges properly annual were (called return “fair val- tled to a financial original based on comрutations limited to ue”) utilizing base re- computed on cost. reproduction cost rather than Greater costs, commonly which combined production had charges depreciation, Court See, categories. g., e. all three of the FPC said, capital contri would be tantamount Cases, The Minnesota Rate 230 U.S. 169, 54 658. butions. Id. at S.Ct. 454-55, (1913); 57 L.Ed. 33 S.Ct. 1940s, Supreme 212 U.S. Court was By Willcox v. Consolidated 19, 41, 52, (1909); regulatory agencies ready 53 L.Ed. to allow federal S.Ct. Ames, accounting systems, 18 to utilize the new Smyth 169 U.S. feared, (1898). companies had to aban- utility 42 L.Ed. 819 Justice alone, By of electric utilities announce that From the books the FPC could eventually by promul- $1.6 ordered the removal of accounts initiated FPC reclassification of original plants gation costs of Accounts had billion in excess of the of the Uniform FPC, Report previously substantially completed. $8.4 out of billion recorded been (1965). Report plant Original Annual of Electric accounts. FPC Reclassification and Cost Licensees Plant of Public Utilities and

81 the “fair don value” doctrine of ratemak- ed to the Commission. There it should ing. spirit In the of Justice Brandeis’ dis rest. Power Comm’n v. Natural [Federal Co., sent in Bell supra, Southwestern Tel. Co., Gas Pipeline supra, 607, 315 U.S. at Supreme Court held that utility inves (Black, 62 Douglas, S.Ct. and Mur- tors —while entitled to a fair rate of return JJ., phy, concurring).] on the historical cost attributable to their The Supreme Court the ear- capital investment —have no constitutional ly 1940s, had shifted the utility investor’s entitlement to a return on the increased right constitutional from a and reason- value, any, represented if by reproduction able rate of return based on current “fair original cost over cost. Federal Power particular value” of assets to a rate of Co., Hope Comm’n v. Natural Gas supra; original base, return on an cost rate with Federal Power Comm’n v. Natural Gas particular being justified by the Co., Pipeline supra. Consequently, the FPC regulatory expert commission’s view of the regulatory and state commissions received company’s needs. A only commission need green for the first time a light for rate assure the “financial integrity” of the en- solely orders based on historical costs. terprise, including ability capi- to attract cases, however, These went further than compensate tal and its investors for the risk justification mere of historical cost-based assumed, though approved even principal rates. Their significance lies in may “produce only meager return on the departures two broader previous from hold- so-called ‘fair value’ rate base.” Federal ings: (1) the Court away shifted from a Power Hope Co., Comm’n v. Natural Gas particular focus on property values and supra, 320 U.S. at 64 S.Ct. at 289. rates general, of return to a more limited concern about “the integrity financial facilitating In this transition from the the company whose being regulat- rates are “fair value” to the integrity” ap- “financial ed.” Federal Power Comm’n v. Hope Natu- proach, the System of Accounts Co., ral supra, 320 U.S. at 64 S.Ct. premise did not become a sacred for rate- 281, 288, (2) emphasized Court making. Although provid- had granting considerable deference to the ex- ed the mechanism for accomplishing a re- pertise regulatory of a commission in arriv- jection doctrine, of the “fair value” it was ing proper at a ratemaking judgment. As all along, clear as enunciated in American matter, a constitutional according to three Co., supra, Tel. & Tel. accounting deci- Justices, concurring sions, such, could not be considered deter- [irrespective of what the may return be minative ratemaking itself. See United value,” permits “fair if the rate Telephone States v. New York 326 U.S. operate successfully and to 638, 653, (1946); 90 L.Ed. 371 S.Ct. capital questions “just attract as to Colorado Interstate Gas Co. Federal Pow and reasonable” are at an end so far as Comm’n, 581, 608, er 324 U.S. 65 S.Ct. investor interest is concerned. Various (1945); 89 L.Ed. 1206 Northwestern Elec routes to that end be worked out Comm’n, tric Co. v. Federal Power 321 U.S. the expert charged administrators 119, 125, (1944); 64 S.Ct. 88 L.Ed. 596 duty regulation. It is not Light American Power & Co. v. Securities what prescribe function courts to Comm’n, Exchange (1st 158 F.2d 771 fact formula should be used. The 1946), denied, Cir. cert. 331 U.S. one be fair to investors does L.Ed. 1842 mean that another would be unfair. The jurisdiction, own example, our in each ease turn on consid-

decision must significant precedent there is demonstrat- justness and fairness which erations ing that circumstances will dictate ratemak- legalistic cannot be cast into a formula. independent judgments of the uniform any The rate of return to be allowed given highly expert judg- accounting system. example, case calls for a For in Re judgment Inc., ment. That has been entrust- System, D.C. Transit 30 P.U.R.3d aff’d, appears F.2d It thus that there is no mandato- U.S.App.D.C. 110 292 734 Sys- Uniform relationship the predecessor, ry the between (1961), the Commission’s of the rate- tem Accounts and Commission’s Columbia Public Utilities Com- of District examine the making. We must therefore (PUC), abandoned the normal mission whether System to determine details of the accounting treatment when D.C. Transit on it for per se reliance the Commission’s shops Inc. sold its Fourth System, Street judg- expert as matter of ratemaking, a the Redevelop- carhouse to and Southern nonetheless, ment, to be appear, would $1,921 If Agency. the million of ment Land sound. proceeds deprecia- the sales attributable to property depre- ble had been credited to the System of B. of the Uniform Details reserve, required by ciation as the Uniform Implications for Ratemak- Accounts: Accounts, of System reserve would swollen to 180%of the original have cost company’s sheet regulated A balance properties. accordingly The the PUC devi- (includ plant” “utility the assets segregates accounting by allowing ated the rules from and useful” ing land), which are “used company surplus to credit to the earned oth serving public, company’s from the by proceeds which the amount attributable “nonutility property”— er assets —called depreciable property exceeded the books, most com are carried on the which original cost.8 PUC noted: Suelflow, supra at monly, investments. as fully cognizant of the desirability While company’s income Similarly, 25-31.9 adhering System to the Uniform “utility separates oper carefully statement conditions, we Accounts under normal expenses from its related ating income” and recognized Sys- have never the Uniform be arising out of activities “other income” Accounts as tem of an inflexible code Id. at jurisdiction. yond Commission’s departures special or un- from which opera “utility” losses on 20-25. Gains permit- usual circumstances would not be “above generally are allocated tions by ted when authorized the commission. “nonutili whereas ratepayers, line” at [Id. 410.] “below are allocated ty” gains and losses I, Id. at 23-24. line” the investors. supra Democratic Central Committee See sense, therefore, is at public each a U.S.App.D.C. 158 485 F.2d at 819- serving and one companies: least two 20. There have been instances where the good (through public FPC, accountable too, rеjected strict application Commission) the other offices accounting ratemaking the uniform rules in to its investors. solely accountable & proceedings. Light Manufacturers Heat denied, Co., 314, 321-25, 44 rehearing F.P.C. ratepayers either to These allocations (1970) (contrary to uniform F.P.C. compa- implemented to investors rules, FPC accounting granted “above accounts estab- through use of books ny’s recognition and losses in com line” System to reflect lished under Uniform securities); reacquisition debt pany’s consequences specified transactions Line Pipe Fundamentally, F.P.C. United Gas the line. above or below (1964) (contrary accounting system is accounting uniform utility’s a rules, accounting into FPC allowed “above line” treat entries designed to channel prescribed a categories contributions intended ment of reasonable charitable at 24. ratemaking. Id. periodic expense). impact as an operating taken, position whereas no- is rate of return 8. Consistent with the Commission’s allowable placed case, nutility by present agreed outside property $.950 definition the PUC is properly provide profit obligation on the sale of land was return. million the customers’ surplus. Telephone to earned Service credited Ass’n v. Public Users See Comm’n, supra, n.6. 304 A.2d (minus deprecia- Utility plant assets accrued tion) comprise the “rate base” on which the System When the Accounts transferred out of the rate base but re- examined, carefully tained company “nonutility” three characteristics prop- erty, receive having bearing appar- the benefit of this case became removal First, from the rate base—the same ben- ent. when owned utili- efit they would sold, have received if the propеr- ty does ty instead had been sold an operating generally favor either the shareholders or Thereafter, unit. Account 121. if this “no- ratepayers; the System allocates sold, nutility” property is all gains or losses (or losses) other, to one or the de- group on both land depreciable and plant facilities pending specified circumstances. accrue the to shareholders. Accounts 421.1 Second, significant there are number of 421.2; 7.E., If, Plant Instr. 10.1. exceptions principles to the allocation them- hand, other nonoperating utility is property selves, generalizations making even more immediately sold retirement, with- Third, the System difficult. calls the prior out transfer out of the rate base to exercise of substantial the discretion account, “nonutility” all proceeds allocable regulatory determining commission in sale land will gain or accrue— a particular whether transaction better is shareholders; but, loss—to the to contrary way characterized one or another under the the results when “operating” or “nonutili- System, significant consequences often with sold, ty” property is all proceeds the or the respon- above below line. Given depreciable plant facility upon “retirement” dents’ substantial on this reliance account- will be allocated the ratepayers. ing System ratemaking, a basis as it is 10.B., Thus, Account Plant Instr. 10.F. crucial to understand the extent to which if the “salvage” net value of the electric or System’s principles, subject the fixed gas plant facility exceeds depreciated book exceptions, various applied with the Com- costs, ratepayers gain will from the transac- hand, discretionary mission’s can said tion. But see Re System, Inc., D.C. Transit provide a petitiоners’ coherent defense to supra (discussed III.A., in Part supra). assertions. Otherwise, course, ratepayers will break There is a threshold distinction the even or lose.12 System utility between property that is In summary, general under the account- “operating” and “nonoperating.” When a applicable rules to dispositions of land “operating utility’s system” sold, unit or is (in contrast with depreciable plant facili- or gain plant loss10 both land is ties), gains or losses are not credited or allocated “below line” to the sharehold- charged to the ratepayers under cir- any “[ujnless otherwise ordered ers— cumstance. Whether land is sold as part of Usually, Commission.”11 an operating unit, or sold immediately upon only benefit to is ratepayers removal of service, retirement from or sold after trans- facility residual book value of the from fer to the “nonutility” status of property, the rate base. System Uniform of Accounts generally utility property “non- Whenever becomes provides that the shareholders alone shall (f. e., however it is “retired” operating,” benefit any gain from bear any loss. —and from active service rather than sold as an rules, however, facility), These are operating accounting general subject becomes exceptions. of significant to a number For ratepay- complex more —sometimes utility example, compa- as an incentive for merely is property ers’ benefit. If price, together solely is cal or loss derived from sale and hereafter will be cited Gain as expenses, against depreciated (“Def.”), book (“Gen. taken less Definition General Instructions Instr.”), (“Plant Instr.”), cost. Plant Instructions “Accounts,” applicable. 5.F., System 11. Plant Inst. Uniform of Accounts Licensees, (Class For Utilities and A and Public 12.“Salvage value” is defined as “the amount B), (1977); Part Inst. Class 18 C.F.R. Plant retired, property any expenses received for less 5.F., System of Accounts For Natural incurred in pre- connection with sale or in Companies, 18 C.F.R. Part 201 paring for sale.” Def. 30. See systems applicable, respectively, These two Suelflow, supra at 92. gas companies virtually identi- electric e., (usually losses ex- vice,” i. Account acquire stockpile nies to —indeed —land income) “which (or land) retired for “future use” ceeding percent to retain five arise, the need the Uniform been foreseen reasonably have could not utility company to add such land permits a Instr. 7. Id. Gen. provided for.” See base, though may never to the rate even by the would be borne Normally, such losses is, in service. Account 105. There be used normal the sense that shareholders in nevertheless, quo for the rate- quid pro ratepayers chargeable to depreciation held in Upon disposition of land payers. as the rapidly the loss as would not cover account, losses) gains (or are allocat- permit. extraordinary provisions loss 105, 411.6, Accounts ed “above the line.” discretion, however, they the Commission’s approach policy This reflects a 411.7. ratepayers be shifted to can —which costs should underwrite the earn- “the happen unless likely to but, as a matter of long-range planning return and ing a sufficient disposi- receive all from equity, should plant fully the cost of to recover ample time never used. tions of land held for use but Suelflow, supra at through depreciation.” for Land Held Accounting See Treatment 7.13 Gen. Instr. 73. Account See for Profits or Utility for Future Use and of Those Through Losses Realized Sales form, simplified Lands, 45 F.P.C. 106 which Uniform accоunting treatment and losses gains accords System generally to unforesee- exception pertains Another ‍​​​‌​‌​‌​‌​‌‌‌​‌‌‌‌​​​‌‌‌​‌‌​​‌​​​‌​​‌​‌​​‌‌​‌‌‌‍can be utility property dispositions property “extraordinary able losses depicted as follows: abandoned or otherwise retired from ser- I. OPERATING UNIT II. OR SYSTEM NONOPERATING FACILITY plant Depreciable Nondepreciable or losses on A. B. [Gains (Plant) (Land) facilities and land alloca- ble to shareholders] upon retire- 1. Sold Sold retire- ment ment or losses alloc- or lossed alloc-

[Gains [Gains ratepayers] able to able to shareholders] 2. Transferred to 2. Transferred to “nonutility” property “nonutility” property account; account; sold sold thereafter thereafter from from [Elimination [Elimination base; base; gains gains or or losses allocable to losses allocable to shareholders] shareholders] place- place- after after 3.Sold 3.Sold ment in “held for ment in “held for future use” account future use” account elimination elimination [After [After base, base, gains from rate from rate or losses allocable or losses allocable ratepayers] to shareholders]14 use,” future land “held extraordinary 14. In contrast under be considered 13. “To depreciable appears losses on it utility guidelines, be more an item should percent the above account income, plant in that same assets carried com- approximately 5 than See the shareholders. extraordinary allocable . . . items. puted before 421.1, 421.2, 411.6, 411.7, Plant 435.)” Accounts Instr. (See 7.] [Gen. 434 and Accounts above, Prom this subject discussion it should be clear ments discussed to the Com- that respondents’ defense on the basis of discretionary gloss, mission’s are not rele- System adherence to the Uniform Despite vant to this casе. these considera- given Accounts be question-begging, tions, however, we must conclude that be- the considerable room for Commission dis- cause of the substantial discretion of the in characterizing approving par- cretion System, Commission under the a defense of ticular accounting example, entries. For particular ratemaking per appli- based on se particu- the determination as to whether a System says cation of that little more than lar an “operating” sale involves or “retired” “ratemaking expert based on facility often is far from clear— —which Thus, discretion.” before we can draw a determine, matter, accounting as an conclusion as to whether reliance on the whether the transaction shall be treated System provides this case below or above the line.15 Similarly, rational companies’ connection between the Commission has discretion over inclusion land transactions and the Commission’s de- land, land, and removal of especially retired place cision to them ratemaking pur- in the “held for future use” account —a poses line,” “below we have to examine critical determination as to allocation of System very carefully applied here. potential gains and losses to Commission, moreover, shareholders. The C. The Uniform of Accounts as has discretion to determine whether retired Applied property should —or should not —be trans- precise question is this: have a nonutility account, ferred to petitioners made a “convincing showing” consequent with the impact on rate base the Commission’s rate determinations proceeds and eventual allocation of the unreasonable, unjust, discriminatory, or Finally, sale. the allocation of an 1973, D.C.Code because § the deci “extraordinary loss” to or share- in sion each case to allocate gains partic on is discretionary. holders dispositions ular of retired exclusively land This is not say that reliance on the to the investors is not rationally connected as a ratemaking basis for by “reliable, probative, and substantial evi unjustified present in the case. Obvious- dence,” Supp., l-1509(e), D.C.Code 1977 § ly, System, which is designed to assist in Thus, the rate of return selected? we are ratemaking, years reflects tuning of fine gains particular asked to relate on land premised expert views balancing about transactions to the Commission’s determina investor and Moreover, consumer interests. tion of an overall rate of return —a complex many prescribed accounting treat- inquiry.16 7.E., Ch., (1973) (Nassikas, Instr. 10.E. This different treatment of F.P.C. dissent- plant appears ing.) land and held in Account 105 Compare be anomalous. Account Plant experience Our reveals that when losses oc- 10.E., Instr. 10.F. ordinary accounting cur retirement is more followed, likely gain to be but when a from further con- specialized accounting

15. the FPC withdrew indicated the for sales modify proposal Plant plant an earlier sideration of is elected. at [Id. 405.] provide the line” treatment 5.E. to “above point: Inst. The Chairman illustrated his operating sale of and losses on the “operating system” The term unit or has nev- systems. Nassikas dissent- units or Chairman specifically er been defined the Commis- commonly ed, citing was his belief that there (7 pipeline sion. A 10.14 mile section of FPC characterizing in facilities abuse of discretion 279) 7.586 mile section of a transmis- “retired,” “operating” in order to either (32 1263) sion line FPC have been held to be Accounting investors over consumers. benefit operating systems. units or at 404 [Id. n.2] and Losses on Treatment to Account for Gains Utility Disposition Property That Had 16. If the on the land are deemed relevant Utility ratemaking process, would com- Service and Consoli- Been Classified Accounts, prise compo- Depreciation one “land factor —a transactions” dation of Certain in two health financial to WGL’s course, interest focus, as much We must inter- ways: investor as on the interest consumer

est. in Natural Gas According to Pipeline: concurring Justices ny’s capital ^[1] Since customers costs, they gain by keeping pay Compa- garded The consumer interest cannot be disre- determining what is a “just those costs within Even more importantly, consumers have prudent bounds. ^[2] Conceivably, reasonable” rate. a return overriding an interest in continued ser- to the company of the cost of the service vice which rivals their interest in low might “just not be and reasonable” to the By aiding rates. the Company to main- public. Power Comm’n v. Natu- [Federal tain financial stability, the Commission Pipeline ral Gas supra 315 U.S. helps high to insure quality gas service. (Black, at 753 Douglas, [Id 2.] JJ., Murphy, concurring).] Pepeo, As to the Commission noted that the force, equal With the United States Court company had “turned the economic corner” Appeals for the District of Columbia prior proceedings. Proposed since PSC Circuit has stressed that public “the end of Opinion and Order No. October utility regulation has recognized been to be Thus, at 3. the Commission ap- protection of consumers from exorbitant proached its decision. rates.” Washington Light Co. v. Bak- inherent in an at- anxiety without er, supra 88 U.S.App.D.C. at 188 F.2d if not floundering to rescue a tempt (footnote omitted). at 15 We therefore unable to admittedly drowning utility, еxamine how the Commission has ac- must itself, objective save but rather with the consumer, investor, as well as commodated affording Pepeo opportunity an (1) (2) selecting applying interests degree achieve an appropriate finan- II.A., ratemaking supra. criteria. Part See stability cial and to earn a and rea- general- announced The Commission return, while at the sonable same Pepeo criteria for the WGL and ized assuring time that the retail electric cus- WGL, the determinations. As to Commis- Pepeo tomers of in the District of Colum- slump” in recognized “earnings sion pay bia will no higher rates than neces- years. Accordingly, recent the Commission sary Pepeo opportunity. to afford that company saw a need for the to have “an at [Id 3-4.] regain earnings a level of opportunity criteria, overly precise, These while not protect and to capital needed to attract reflect (PSC specifically approved by the factors integrity.” Opinion Final financial 5833, 29, 1976, Supreme at Court. See Permian Basin No. October Order Cases, 1-2.) supra tied the customers’ Area Rate 390 The Commission U.S. prior utility company’s gain-loss appeal gains overall allocation of these to the test nent of a year by receiving the Commission foreclose their credit for the be evaluated situation —to now, ratemaking policy gains long-run pay- for the as an offset to issue of scheduled rate as a if, argument (2) gains company. To for the sake of ments? what extent do on land Thus gains during year provide appropri- sales the test an were to conclude the Commission ratepayers, projecting gains ate —or distorted —basis for be credited to the land should future, gains part company’s necessarily all the into the as mean that does dollar, credited, projected Conceivably, dealing dollar for revenues? after issue here should be questions, payments; nor does the with these and other Commis- to the customers’ suggest land sales in the test sion could conclude that how conclusion help past year used to forecast entitled to less credit than claimed for should be or earlier transactions, revenues, part of the rate-of-return and/or calculation of the rate therefore, Commission, would of return for the future should not reflect use of calculation. test-year following questions, figures gains alone for realized on deal with the have to among (1) extent, all, land. others: To what if at ratepayers’ challenge should the failure to

87 29, Opinion No. (quoted supra). 88 S.Ct. 1344 at note and Order Oct. Moreover, very (WGL).] contrast between the at 58 respective analysis overall of WGL and Proposed (cid:127)See PSC Opinion and Order No. Pepeo intention balance inves- reflects 20, 1976, Oct. (Pepeo); at 34-36 PSC in very carefully tor consumer interests Opinion 16, 1976, and Order No. Dec. Finally, company’s each situation. none of at 9-10 (Pepeo). criteria, parties challenged hold, therefore, We articulated. that these Petitioners counter with principal one ar- acceptable. criteria are gument: because the ratepayers have borne turn, question 2. We (/. e., the “burdens” carry- taxes and other particular whether the elements the rate ing charges) of providing a “return” on the satisfy orders the criteria selected. land base, while in the rate are enti-

tled to the sale, “benefits” received concluded, principles re- accordance with The Commission has with announced thé the United spect companies, proper to both States Court of Appeals for the balancing consumer and investor inter- District of Columbia Circuit in similar liti- (and requires losses) ests ordi- gation directed at the Washington Metro nary transactions land retired from ser- politan Area Transit Commission vice be allocated to the investors. This (“WMATC”).17 Democratic Central Com application decision is based on a conscious I, mittee supra; Bebchick Washington of Accounts to the Metropolitan Comm’n, Area Transit 158 ratemaking process, coupled specific with a U.S.App.D.C. (1973); 485 F.2d 858 Dem contrary policy conclusion that a allocation ocratic Central Committee v. Washington consumers, would be ill advised because as a Metropolitan Comm’n, Area Transit result, exposed would be to routine losses. U.S.App.D.C. 107, (1973), 485 F.2d 886 cert. denied, U.S. passes If the those (1974) L.Ed.2d (“Democratic Central

consumers, longer then it can protect no II”).18 Committee being consumers from charged with loss- es on land transactions which are routine. Democratic Central Committee lit- People’s proposal Once Counsel’s is adopt- igation, circuit court overturned deci- ed, as its acknowledged (Tr. witness sions WMATC to credit the shareholders 1080), the Commission should follow a of D.C. System, (Transit) Transit Inc. rule compelling customers to underwrite capital gains accruing to Transit on its Company’s ordinary losses depreciable disposition of and non-deprecia- circumstances. The Commission is not properties acquired price ble at a total con- inclined to follow path. siderably that Final Capital below book value from [PSC case, argue petitioners In also that We hold that the WGL ers shareholders. therefore Brandywine gains to the is allocation of the contested share- the Commission’s decision irrel- unjust proceeding; and because evant to this it does not in holders is unreasonable itself imply particular is the Com- result here. Petitioners are such treatment inconsistent with free, however, imposition “extraordinary” on losses remand to advance the Bran- mission’s of evidence, “Brandywine” dywine prop- as to extent from the decision the on however, value, Petitioners, challenge probative question erty. do not on broader haS circumstances, Brandywine all result itself —either the charac- under alloca- whether, “extraordinary” (see gains of on the losses as tion land transactions terization of unjust. 7) appropriateness or the of their shareholders unreasonable Gen. Instr. petition- ratepayers. do allocation to Nor ratemaking principle specifically binding ers advance not on 18. These decisions our generally extraordinary gains Ryan, D.C.App., losses See M.A.P. v. 285 A.2d court. group, ratepay- same should be allocated to the 310 us; the case before parent in Democrat- Company (Capital) in 1959. Transit Transit litigation ic Central Committee is distin- acquired Capital’s system had streetcar-bus guishable egregious as more on the facts. subject by Congress, imposed to a condition award, support Nor do other cases lend automatic that Transit part as of the franchise enterprise system petitioners’ position. Litigation to an all-bus over al- convert the throughout metropolitan area. Demo gains nondepreciable location of assets I, supra 158 U.S. infrequent, although cratic Central Committee courts has been out- at 485 F.2d at 812. This was App.D.C. generally of Columbia have side the Distriсt to involve “removal of abandoned streetcar “gain followed a follows the risk of . repaving of the regrading tracks and principle. loss” Democratic Central Com- areas, track at an estimated cost abandoned I, supra U.S.App.D.C. mittee at 55- $10,441,958 Id. [footnotes omitted].” 485 F.2d at 834-35. This has re- Transit The Commission authorized be, sulted, as the case in allocation to removal, regrad charge this cost of track customers, see, g., e. New York Water through ing, repaving to its customers Comm’n, 12 Corp. v. Public ‍​​​‌​‌​‌​‌​‌‌‌​‌‌‌‌​​​‌‌‌​‌‌​​‌​​​‌​​‌​‌​​‌‌​‌‌‌‍Service Service while adjustments in the rate structure (1960), A.D.2d 208 N.Y.S.2d or to disposition nonop- awarding shareholders, see, g., City Lexing- e. to Transit’s share erating trolley facilities Lexington ton v. Water 458 S.W.2d 778 arguably amounting to an investor holders — windfall in view of the Columbia, District of (Ky.1970). In the acquisition price at judicial precedent there no aside from the considerably below book value. litigation. Democratic Central Committee Simply put, decisions, the circuit court concluded court (Prior to these circuit ad- transactions, that the net result of these as rulings by ministrative WMATC and WMATC, approved by was unfair routinely had allocated on non- PUC ratepayers. taking position, depreciable asset to the investors. See aspect. court stressed the windfall I, supra, Democratic Central Committee bought ongo- What the investors was an 19-20, 55-56, U.S.App.D.C. at 485 F.2d at ing mass-transportation system 798-99, 834-35.) the lands physical components, including question, long public since dedicated to argue true, petitioners as It —and imply service. We do not mean to in Democratic indicated the circuit court case, value-appreci- had that not been the 32, 485 F.2d I, at supra Central Committee necessarily would have been im- ations steadily environment in an at 811—that say We do farepayers. mune to claims of values, application climbing land case, that was the it makes that since is not principle of loss” follows risk “gain appreciations susceptible those more so, petitioners, But even meaningful test. those claims. Central Com- [Democratic conclusiveness supposed on the relying II, supra U.S.App.D.C. mittee carefully cases, not court circuit 485 F.2d 899.] argument their own fundamental developed thereupon distinguished the The court the “bur- bearing ratepayers, Transit situation from one in which “the charges carrying and other taxes dens” of properties originally purchased been [had] base, have the in the land while with a view Transit’s investors outright by For here. the “benefits” claim to superior Id. they pleased.” deployment the rele- analyzed they have example, capital vance, of the source any, if equi- peculiar aspect windfall —the ratepayers.19 or the land —investors ap- for is not Transit situation D.C. ty the—of showing capi- 19. The facts who contributed the assume the investors did so alone. The answer acquiring tal may very the land have not complicated been devel- be and thus difficult to oped record, published following in the find ry. ratemaking but a number of because of the histo- automatically decisions that we cannot indicate

89 important, they analyzed More have not the mark. the This contention misses The Com- likely impact of their proposed ratemaking authority allocation on is not mission’s limit- the financial strength company, wooden, of the in- symmetrical applications ed to cluding price the market of its stock. as the gains standard criteria. Just on land inexorably outside the rate base are not

Instead, petitioners argue generality. shareholders, the are awardable to also deny to the logically inconsistent [I]t inexorably assignable ratepayers not val- the benefit of a market shareholders part the land was once a simply because (by original base use of cost as ue rate Commission, rightly the rate base.20 base) simultaneously grant to ordained the wrongly, has shareholders to appreciation the in-service of the them appropriate the more beneficiaries of the be to market value. ... If base presumptive validity the gains. Given original juris- in an cost the shareholders expert judgment in the Commission’s bal- the District diction like of Columbia interests, to a return investor and consumer apprecia- ancing not entitled value, against petitioners’ incomplete own in then it is inconsistent taken tion petitioners conclude that capitalized value analysis, we must them to retain the allow e., “convincing showing” made the (;. appreciation in have not of this return 6; value). They to overturn a rate order. required WPIO’s brief [Petitioner time. emphasis original.] prevail in cannot at this predecessor, by continuing pay (though The Commission’s the Public on an inflated Utility (PUC) declining) period years, of the District of rate base over a Columbia, ratepayers provided allowed the burden of the write- have rates of return con- by plant sistently downs occasioned during higher reclassifications than those which the Commis- (see nineteen-thirties and -forties had found sion to be Po- reasonable. III.A., supra) substantially Part to be shifted tomac Electric Power Comm’n., Co. Public Utilities ratepayers, notwithstanding the PUC’s supra, 227, U.S.App.D.C. 81 158 adoption System of the Uniform of Accounts. Thus, effect, ratepayers, F.2d at 523. prescribing System Pepco the Uniform paid cоmpany appreciation for the WGL, 1559, 3182, see Order No. PUC No. acquisition rate-base assets and/or of other 31, 1846, (Pepco) Dec. 1936 and Order No. PUC property (through to be added to the rate base 3197/1, 11, (WGL), No. Jan. 1940 did PUC capitalization earnings). of excess It would transition; abrupt required not order an ratepayers follow that the should benefit from System phased long period to be in over a property they, on sale of in which particularly, time. More conditioned PUC manner, invested; should not application on the continued use paid twice. by Pepeo “sliding and WGL of the scale” rate however, argument, This is far from conclu- (sometimes formula referred to as the “Boston record, developed It has not sive. been in the Sliding Scale”), promulgat which the PUC had including evidence as to how the 1935 cost data companies, ed earlier for these see Order No. traceable, all, prop- if at values of the 5, 1476, 1458, (Pepco) Feb. 1936 and Order No. erties involved in the land transactions here. Yet, 13, (WGL), pursuant Dec. ato consent orders, published on the basis of PUC decree entered the federal district court in Pepco’s there is some evidence that and WGL’s 1924. See Potomac Electric Power Co. v. Pub equitable (based have an claim Comm’n., U.S.App.D.C. lic Utilities capital contributions) portion on de facto to a 226-28, (1946), 158 F.2d 522-24 cert. de Obviously, of the land values at issue. nied, 331 U.S. 91 L.Ed. 1834 elusive, dramatic, spread claim is more less formula, (1947). In accordance with this ratepayers’ back further over time than the newly acquired assets were to be valued at equitable assertions in the Democratic Central cost, original their but the assets held as of cases, claim, nevertheless, Committee but the year 1935—the of a valuation— PUC theoretically appears available —unless over- repro were to continue in the rate base at their shadowed, staleness, ground more (on duction cost which the 1935 valuation had recent, expectation. valid investor result, based). reproduction As a been these disappear from cost elements were prevail, petition- rate base until the related assets themselves If the Commission were to Washington presumably oppose logic were retired from service. See ers would of in- - Light Byrnes, U.S.App.D.C. creasing Co. v. the rate base to reflect the current aff’d, (1943), nondepreciable 137 F.2d 548-49 value of assets used service public. U.S. 64 S.Ct. 88 L.Ed. 883 Accordingly, petitioners here have a de- following argument: basis for monstrable follow, however, company’s price each common stock or It that does not (According above value. to argu- slightly book orders valid. Petitioners’ are frivolous; Commission, including the- this is the plausible yield, not it is a ment is required sis, growth, minimally to assure as the Democratic Central Committee integrity company’s keeping to financial while Petitioners’ failure litigation attests. high- right to faith with the consumers’ to “no grips the issue be due come to with of re- er” than a and reasonable rate invalidity position; of their the ultimate turn.) The then combined this due, instead, utility Commission but be figure weighted averaging with of essential develop to the adminis- companies’ failure stock, preferred long- on sufficiently support rates return trative record to debt, WGL) (for depos- customer with the land term and respect order to Commission’s issue, company’s to overall rate failure determine each or to the Commission’s gains return.21 overall rate was cal- that Once this way draw the record in a tо culated, applied it to each sufficiently supports its land conclu- Commission Thus, II, supra, year to company’s indicated in Part rate base the test sion. utility Finally, a to the Com- revenues. responsibility we have hold determine overall its ac- explaining mission accountable for customer rate schedule existing since revenues, fully clearly, substantial yield tions based on these essential would Accordingly, respon- evidence record. a rate increase to approved the Commission obligated are to come forward dents required the level each confirming that the evidence Commission’s overall rate of re- achieve established all the share- decision to allocate (on assets). neces- It is turn rate-base particular dispositions holders on the capital sary to how analyze, rationally land are connect- retired at issue at all—in gains on land are reflected —if “reliable, and substantial probative, ed process. this to the rates of return selected. evidence” of a price begin by noting that We to con- important, finally, It therefore reflects stock utility company’s common a whether the Commission has done sider and nonutili- utility on both return financial complete enough job. thus, the Commis- (if any); operations

ty methodology presupposes DCF sion’s at 9.25% has arrived The Commission transactions nonutility Pepco’s or WGL WGL’s of return for overall rates 9.06% virtually the average, bring, methodology will Pepeo, respectively. side (DCF) rate of return as same be cash flow said to a discounted Otherwise, their depending on business. comparison of WGL analysis based on a nonutility trans- company’s magnitude, securities, with those respectively, Pepeo the dividend likely to affect catego- actions in the same utility companies other (and the stock share thus per common yield the Com- particularly, of risk. More ries down, yield compared up evaluated, help price), of such with the mission Commission-ap- (and price) premised on yield per dividend comparison, what current example, one return. For rate of share, expected growth proved coupled with aon of return rates of different dividend, maintain result required would projected projected equity (13.00%), was 21. The result for WGL returns from 13.4% equity, figure preferred (7.87%), return common which took (6.92%). stock and debt price per company’s “the Apparently, parties pro- into account the agreed share has below book value.” When ceeding fallen price the “market should through weighted combined value; return was “companies exceed book” selected 13.4% pre- averaging with essential rates of return on comparable Pepeo experienced long (6.5%), (7.1%), and ferred stock term debt substantially equity lower return on than that deposits (6.0%), customer the overall rate level witnesses, Pepeo recommended but have became 9.25%. nevertheless achieved a market to book rate Similarly, Pepeo approximately overall rate-of-return 1.3.” averag- weighted based on level became 9.06% nonutility low company’s utility nonutility operations remain so that the side —the might nonutility revenues, substantially when subsidizing be that investors —were earnings customers, the coupled ap- utility especially with derived from the when the return, proved utility rate produce nothing would customers had contributed higher a total to return investors from assets. That would raise a fun- nonutility the company’s operations than the question Commis- damental about the Commission’s necessary sion had the deemed to maintain beyond jurisdiction reaching utility over price of common stock at the appropriate hand, operations. On the other let us as- Alternatively, course, level. nonutility out property sume a transfer of of the rate might transactions be a drag compa- side, (after nonutility resulting base to the ny, causing a lower overall rate of return sale) capital gains in eventual substantial than the Commission had thought essential the based on while in company appreciation to sustain investor interest. We therefore present the rate base —as in the case. As- bearing, any, to consider what a if further, sume, gains these alone are company’s nonutility transactions have on higher price for a responsible market of the ratemaking especially transactions involv- price stock the essential by than deemed the — ing nonutility property, such as the lands at (based comparisons here, issue formerly that were part stocks) utility other investors attract rate base. thus maintain the financial in- company’s then, the tegrity. Arguably, customers The Federal Power Commission has taken an claim to equitable could have those position that ratepayers right have no such as gains, depending on factors contri- to revenues derived from opera- nonutility taxes, charges, carrying capi- butions to tions. Re Duke Power 97 P.U.R.3d 396 tal land. Another relevant factor for the (1972) (disallowed discovery into transac- the land might risk of loss while was in be tions of a utility company’s land and lumber base, perhaps the rate discounted how company subsidiary). true, Even if how- unreal —that risk was when real —or com- ever, that principle does nоt reach a funda- prospect gain.22 pared with Given question mental in present case: considerations, therefore, equitable such what extent earnings do nonutility from permitted fact that Commission had transactions affect the price? stock With- to transfer the to a company nonutility land out an answer question, to that regula- account before sale would not be determi- tory commission will not have enough data jurisdiction native of Commission’s determine how much revenue should be generated gains consider the on that land ratemak- from the utility side of the busi- ing purposes.23 ness to cover its share of maintaining the common stock. no indication in record that There is Commission, determining in particularly,

More essen- apropos of Duke Pow- er, Pepeo, of return for WGL and if the had a tial fates booming nonutility impact of operation, such considered the land actually lumber company, either struggling division, price compa- contrast with a transactions on the regulatory stock. We might acting ny’s commission be ca- common therefore confront priciously if permitted utility question: revenues to an was Commis- unanswered Accounts, gains 22. “It be more than an would allocable to would little exercise be gain- shareholders, logic principle abstract to invoke are after wholly nonutility follows-loss where illusory.” financial risk is has been transferred to a account. I, III.B., su- supra. According analy- Democratic Central Committee to our See Part pra, U.S.App.D.C. above, at 811. however, 485 F.2d sis text the allocation in the legally justified must such an ad connection, (as lands explicit analy- In this assume that part hoc basis DCF base at the sale as merely by were still the rate time of methodology) sis or refer- оther ordinary nonoperat- part of an retirement of a system. accounting the uniform ence to facility. the Uniform Under utility-rate cases, used in the share- such as allocation of the “benefits sion’s “gain related announced criteria to its follow burdens” or follows risk holders companies’ the fi- stressing protection of loss,” would be irrelevant if the Commis- instead, or, was integrity; it attrib- nancial analysis sion’s DCF were to show that the the judgment a normative that utable to price essential minimum of common stock owners, alone, have a shareholders an all presupposes capital allocation of gains? the “right” to the gains land to shareholders. That on is be, the first may apropos say, It alterna- to if the Commission were to conclude Commission, tive, in the rethinking that the gains the that on the land allocation to to rate structure with reference the rather ratepayers, than the sharehold- transactions, conclude that in- land would ers, drop price in would cause stock below expected vestors over the have years —and required the level attract minimum to in- expect ordinary continue should to —-that vestors, the ratepay- then such allocation to land service will inure gains on retired from meaningless, ers for there would be would benefit, expectations their and that these to offsetting have in the to be an increase rate stock, price been the have reflected in price. return to maintain the stock consequent impact companies’ with a Second, analysis if the Commission’s DCF If is the ability capital. to attract this show, contrary, were that alloca- to e., accruing if the on appreciation case —i. the gains tion of the to shareholders would utility’s in the nondepreciable property required boost the price the stock above capitalized been the fully into base minimum, gains the or that allocation of to the con- price stock Commission —then ratepayers, either group, shareholders or gains already that these have inured clude price, could to stock not be shown affect the in the sense to the benefit of up down, then the Commission would price, company’s thus the the stock that have all directly to deal more with the earnings (including payments), customer equitable controlling factors under the justifiable level. the at the lowest On supra, mandate of Natural Pipeline, hand, facing question squarely, in other Gas, Natural Hope supra, namely that conclude that inves- the Commission the company’s is integrity” “financial all have not in the future should tors had —or obliged the Commission is guarantee anticipate they have —reason to not per- investors. Whether the is Commission which accrue on non- will receive more, guarantee mitted to investors property during period depreciable given statutory requiring standard case, In that while in rate base. rates, question reasonable reflect allocation of price would not stock not now before us. investors, on land to the essentially be faced would Commission summary, Commission has not question: whether there exists equitable yet explained analysis its financial connect investors for the to receive justification disputed land transactions capital appreciation of rate- the benefit has merely orders. Commission assets, in excess of return neces- base quoted from a 1975 rate determination in- company’s assure the financial sary to where, response raising WPIO’s any giving сorresponding without tegrity, issue, same no Commission did more the ratepayers. benefit distinguish than the Democratic Central speculate what willing We are on on Committee cases their facts and issue may be these position Commission’s following conclusional —but not at all record absent evidence questions, conclusive—statement: they explicitly and substan- been compa- Treatment in accordance with the However, implica- two tially addressed. ny’s handling of this matter is in accord- inquiry by such an tions of ance with the FPC future guide consider- should be stressed First, commonly which equitable principles Accounts this Commission has ation. adopted, thereby establishing its policy ed the Act. . . . For the courts this issue. An post change ex facto duty cannot exercise their of review un- policy would be inappropriate. [Re less are advised of the considerations Potomac Electric Power 11 P.U.R.4th underlying the action under review. . (PSC D.C.1975).] orderly functioning process [T]he Proposed Opinion requires See PSC of review grounds upon and Order No. that the 20, 1976, Oct. at 34-36. The Commis- which agency the administrative acted be present cases, therefore, sion in the has not clearly adequately disclosed and sus- affirmative, advanced particularized rea- tained. [Id. 462.] justifying sons its capital treatment of the We therefore remand the proceedings for gains on land. Unless and until the Com- clarification, pursuant to our authority un- so, mission does reflecting attention to the der D.C.Code 43-705.24 § interest, consumer as well as investor we We direct the Commission to issue supple- say cannot Pepeo that and WGL rates mentary findings conclusions, consist- at issue here have been established on the ent opinion, supporting with this “reliable, basis of probativе, and substantial present or revised rate orders. The Com- evidence.” D.C.Code Supp., 1- § may, discretion, mission in its rely on the 1509(e). present reopen record or the record for re- Accordingly we hold that when a ceipt of supplementary evidence and sup- regulatory commission calculates ap porting papers by parties. all The Commis- proves an (and overall rate of return conse sion, event, in any give parties shall an quent schedule) for utility operations, opportunity to proposed comment on its comparative based on prices, stock it must conclusions, findings, and orders before the factor into its determination analysis Commission deems them final for our fur- impact of nonutility transactions on the ther review. The Commission’s findings, price of the company’s stock, including spe conclusions, and orders shall filed with cific findings and conclusions as to wheth court, accompanied by supporting deci- why investors, er —and ratepayers, —the sions or memoranda and the records of the both, or have a revenues, claim to nonutility proceedings days on remand. Within 30 especially those derived from former court, filing that with petitioners (such here) as the land at issue and intervenors shall responses, file their appreciated which while in the rate base. after which this court will either set the Mere reference to the Uniform hearing proceed matter directly to Accounts begs question; it will not suf make its decision. fice. point hope On one we especially to be IV. Conclusion By holding clear. that the Commission’s E. Chenery Corp., S. C. v. 318 U.S. supported by orders are not substantial evi- (1943), 63 S.Ct. 87 L.Ed. 626 dence, Su- we are not suggesting petition- preme Court articulated our point central ers arе —or are likely prevail. We not— as follows: merely are holding petitioners have presented up- challenge requires Commission’s action cannot be a satis- answer, merely factory

held findings might because and that to date the Com- mission, made and failing been considerations disclosed to respond particu- would justify appro- larity, which its order as an sufficiently connected its de- priate safeguard for the interests protect- cisions on the allocations of on land to “may require 24. The court and direct the Com- tial evidence.” D.C.Code § 43-705. Im- upon court, plicitly, prior mission to receive additional evidence under 43-705 the § to con- any subject appeal cluding hearing appeal, related to the issues on said its also concerning improperly require which evidence was ex- clarification of the Commission’s find- hearing ings reopening cluded in the before the Commission or and conclusions short of which the record contain no substan- record for additional evidence. rates of re- particular determinations its LITTLE, Appellant,

turn. A. Michael in the expressed is better position Our man: Judge Pretty following words STATES, Appellee. UNITED case, court, has not present in the This the conclusions of Commis- reversed 12609. No. sion, sense neces- except procedural in the Appeals. Court of District ‍​​​‌​‌​‌​‌​‌‌‌​‌‌‌‌​​​‌‌‌​‌‌​​‌​​​‌​​‌​‌​​‌‌​‌‌‌‍of Columbia remand. It has remanded sary to a clarity is not clarification where case for Aug. Submitted where incom- completion and for present, 2, 1978. Decided Oct. findings now exists. When pleteness clear, complete and conclusions then, appropriate pro- will if

the court brought, consider whether

ceedings are of the Commission rulings

the ultimate permissible bounds of

are within Corp. River Fuel

power. [Mississippi Comm’n, U.S.App.D.C.

Federal Power

208, 227, (1947).] 163 F.2d proceedings. for further

Remanded

NEBEKER, Judge: Associate my remains intention

It has been and majority’s disposition of

dissent from the case, my convic- principally because of

this majority sorely misconceives

tion this na- review role in cases of proper

our

ture. scope of our review is question

The pending the issues which now are

among in Potomac Elec-

before the court en banc

tric Power Co. v. Public Service Commis-

sion, 126. It D.C.App., 380 A.2d No. dispose my belief that we should been until the en banc case has

this case nonetheless, has majority,

resolved. before the publish opinion

elected to It does so under

preparation my dissent. VII, G, new Internal Paragraph of our

Part (from adoption of Procedures

Operating dissent).

which I dissent in my

I shall write and release after the court’s case as soon as feasible in No. proceeding en

resolution of the banc

Case Details

Case Name: Washington Public Interest Organization v. Public Service Commission

Court Name: District of Columbia Court of Appeals

Date Published: Sep 12, 1978

Citation: 393 A.2d 71

Docket Number: 11780, 11786 and 12017

Court Abbreviation: D.C.