# Washington Gas Light Co. v. Public Service Commission

> District of Columbia Court of Appeals · September 10, 1982 · 450 A.2d 1187

URL: https://www.frixlaw.com/law-library/cases/2284798

## Case

- **Full name:** WASHINGTON GAS LIGHT CO., Petitioner, v. PUBLIC SERVICE COMMISSION OF the DISTRICT OF COLUMBIA, Respondent, Apartment and Office Building Association of Metropolitan Washington, Inc., Columbia Realty Venture, General Services Administration, and People’s Counsel, Intervenors; GENERAL SERVICES ADMINISTRATION, Petitioner, v. PUBLIC SERVICE COMMISSION OF the DISTRICT OF COLUMBIA, Respondent, Washington Gas Light Co., and People’s Counsel, Intervenors; APARTMENT AND OFFICE BUILDING ASSOCIATION OF METROPOLITAN WASHINGTON, INC., and Columbia Realty Venture, Petitioners, v. PUBLIC SERVICE COMMISSION OF the DISTRICT OF COLUMBIA, Respondent, Washington Gas Light Co., and People’s Counsel, Intervenors; PEOPLE’S COUNSEL, Petitioner, v. PUBLIC SERVICE COMMISSION OF the DISTRICT OF COLUMBIA, Respondent, Washington Gas Light Co., Intervenor
- **Court:** District of Columbia Court of Appeals
- **Decided:** September 10, 1982
- **Citations:** 450 A.2d 1187; 1982 D.C. App. LEXIS 433
- **Precedential status:** Published
- **Opinion:** Opinion
- **Judges:** Newman, Harris, Pryor
- **Cited by:** 45 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/2284798

## How later opinions describe it (automated extraction)

- holding that agency must make clear that it has considered all relevant information
- affirming ruling that “ ‘the ratepayers may not be required to make forced contributions’ ”

## Opinion text

450 A.2d 1187 (1982)
WASHINGTON GAS LIGHT CO., Petitioner,
v.
PUBLIC SERVICE COMMISSION OF the DISTRICT OF COLUMBIA, Respondent,
Apartment and Office Building Association of Metropolitan Washington, Inc., Columbia Realty Venture, General Services Administration, and People's Counsel, Intervenors.
GENERAL SERVICES ADMINISTRATION, Petitioner,
v.
PUBLIC SERVICE COMMISSION OF the DISTRICT OF COLUMBIA, Respondent,
Washington Gas Light Co., and People's Counsel, Intervenors.
APARTMENT AND OFFICE BUILDING ASSOCIATION OF METROPOLITAN WASHINGTON, INC., and Columbia Realty Venture, Petitioners,
v.
PUBLIC SERVICE COMMISSION OF the DISTRICT OF COLUMBIA, Respondent,
Washington Gas Light Co., and People's Counsel, Intervenors.
PEOPLE'S COUNSEL, Petitioner,
v.
PUBLIC SERVICE COMMISSION OF the DISTRICT OF COLUMBIA, Respondent,
Washington Gas Light Co., Intervenor.
No. 79-587, 79-740, 79-745 and 79-746.
District of Columbia Court of Appeals.
Argued December 6, 1979.
Decided September 10, 1982.
*1191 Monte R. Edwards, Washington, D. C., with whom R. Stanley Harsh was on the briefs, for Washington Gas Light Co. Lewis Carroll, Washington, D. C., also entered an appearance for Washington Gas Light Co.
Melvin J. Washington, Asst. Corp. Counsel, Washington, D. C., with whom Judith W. Rogers, Corp. Counsel, and Richard W. Barton, Deputy Corp. Counsel, Washington, D. C., at the time the briefs were filed, were on the briefs, for respondent.
Frann G. Francis, Washington, D. C., for the Apartment and Office Building Association of Metropolitan Washington, Inc., and Columbia Realty Venture.
Sumner J. Katz, Gen. Services Administration, Washington, D. C., with whom Allie B. Latimer, Gen. Counsel, and Spence W. Perry, Asst. Gen. Counsel, General Services Administration, Washington, D. C., were on the briefs, for the General Services Administration.
Elizabeth A. Noel, Asst. People's Counsel, Washington, D. C., with whom Brian Lederer, People's Counsel, Washington, D. C., was on the briefs, for People's Counsel.
Before NEWMAN, Chief Judge, and HARRIS and PRYOR, Associate Judges.
PER CURIAM:
In these consolidated petitions of appeal, the various petitioners have raised numerous objections to a ratemaking decision of the Public Service Commission (the Commission or PSC) granting Washington Gas Company (WGL or the Company) an increase in operating revenues of $7.1 million (of which $3.9 million was included to cover added income taxes).
The proceeding commenced in July, 1977 when WGL filed with the Commission an application to increase its rates and charges for gas service within the District of Columbia. The Company originally sought to *1192 increase its annual gross operating revenues by $8.6 million, so as to produce a 9.85% overall return on investment and a return of 14.5% on common equity. That request was based upon a calendar 1976 test year. On December 1, 1977, the Company filed an amended application based on a test year ending June 30, 1977. The amended application sought a $10.9 million revenue increase in order to produce the same overall rate of return (9.85%) and the same return on equity (14.5%) as were originally requested.
On October 19, 1977, the Commission granted intervention to the Apartment and Office Building Association of Metropolitan Washington, Inc. (AOBA), Columbia Realty Venture (CRV), the General Services Administration (GSA) (representing the consumer interests of the executive agencies of the United States Government), People's Counsel [1] (PC), the Staff of the PSC (Staff), and other parties not pertinent to these appeals. Following lengthy hearings, briefing, and considerable decisional delay, the Commission issued its Proposed Opinion and Order No. 6051 on February 13, 1979 (Order No. 6051). After the parties noted their exceptions to the proposed order, the Commission issued its Final Opinion and Order No. 6060 on March 16, 1979 (Order No. 6060) [2] . The final order, which adopted the proposed order with minor modifications, granted WGL a revenue increase of $7.1 million and authorized rates of return of 9.25% overall (on rate base) and 13.0% on common equity. The Commission also instituted a new rate design which had the effect of increasing the disparities in rates of return among WGL's various customer classes.
Timely Applications for Reconsideration of the Commission's final order were lodged with the PSC by all pertinent parties. See D.C.Code 1981, § 43-904. The Commission thereafter denied those applications in Order No. 6069, issued April 26, 1979, and Order No. 6082, issued May 11, 1979. These petitions of appeal followed.
On appeal, the Company raises eleven separate issues. It challenges as unlawful, unreasonable, or confiscatory the Commission's decisions regarding the rate design, rate of return, attrition, and the treatment of miscellaneous gains, losses, and operating expenses. It also contests the Commission's consideration of federal wage and price guidelines in setting the new rates. The GSA, AOBA, and CRV join the Company in challenging the rate design. People's Counsel supports the Commission on each of the issues raised by WGL, but, together with the GSA, urges that it was error for the Commission to compute WGL's revenue requirements using a tax allowance based on a 48% federal corporate tax rate, when that rate had been replaced by a 46% tax rate prior to the issuance of the Commission's decision.
We conclude that, with respect to all issues, as the decision of the Commission was not unreasonable, arbitrary, or capricious, and as the Commission adequately explained the reasons for its decision, the Commission's order must be affirmed.
I. SCOPE OF REVIEW
Our review of the Commission Order is governed in the first instance by D.C.Code 1973, § 43-706, which narrowly circumscribes the scope of our review "to questions of law, including constitutional questions; and the findings of fact by the Commission shall be conclusive unless it shall appear that such findings of the Commission are unreasonable, arbitrary, or capricious." See, e.g., Metropolitan Washington Board of Trade v. Public Service Commission, D.C.App., 432 A.2d 343, 350 (1981); Potomac Electric Power Co. v. Public Service Commission, D.C.App., 402 A.2d 14, 17 (en banc), cert. denied, 444 U.S. 926 , 100 S.Ct. 265 , 62 L.Ed.2d 182 (1979); People's Counsel v. Public Service Commission, *1193 D.C.App., 399 A.2d 43, 45 (1979); Washington Public Interest Organization v. Public Service Commission, D.C.App., 393 A.2d 71, 75 (1978), cert. denied, 444 U.S. 926 , 100 S.Ct. 265 , 62 L.Ed.2d 182 (1979). To facilitate our review, the Commission must indicate "fully and carefully the methods by which, and the purposes for which, it has chosen to act, as well as its assessment of the consequences of its orders for the character and future development of the industry." In re Permian Basin Area Rate Cases, 390 U.S. 747, 792 , 88 S.Ct. 1344, 1373 , 20 L.Ed.2d 312 (1968); see Metropolitan Washington Board of Trade v. Public Service Commission, supra at 351-52. We are obliged to examine the record to determine whether the Commission has acted arbitrarily, and whether each component of the Commission order is supported by substantial evidence. In re Permian Basin Area Rate Cases, supra, 390 U.S. at 792 , 88 S.Ct. at 1373 ; People's Counsel v. Public Service Commission, supra at 45. We must further ascertain that, in striking a balance between the competing consumer and investor interests, "the Commission has given reasoned consideration to each of the pertinent factors." Id. at 45-46 (quoting In re Permian Basin Area Rate Cases, supra, 390 U.S. at 792 , 88 S.Ct. at 1373 ).
At the same time, in recognition of the authority delegated to the Commission by Congress, and of the expertise of the commissioners in the complex and esoteric area of utility regulation, we accord great respect to the decisions of the commissioners. See Goodman v. Public Service Commission, 162 U.S.App.D.C. 74, 78-79 , 497 F.2d 661, 665-66 (1974). We have stated that, "Our review of a utility commission order is the narrowest judicial review in the field of administrative law." Potomac Electric Power Co. v. Public Service Commission, supra at 17; accord, Metropolitan Washington Board of Trade v. Public Service Commission, supra at 351.
Theories of ratemaking in particular fall within the special province of the Commission. Although "[a] theory of ratemaking must be reasonable, explained, and supported, [it] is not subject to the same substantiation principle as the substantial evidence test applicable to fact-finding." Continental Air Lines, Inc. v. Civil Aeronautics Board, 179 U.S.App.D.C. 334, 342 , 551 F.2d 1293, 1301 (1977). A reviewing court may not supplant valid theories employed by the Commission with those "more nearly to its liking." Metropolitan Washington Board of Trade v. Public Service Commission, supra at 352. Accord, In re Permian Basin Area Rate Cases, supra 390 U.S. at 792 , 88 S.Ct. at 1373 ; Potomac Electric Power Co. v. Public Service Commission, supra at 18. Nor may we "reassess the weights given by a rate-making agency to different factors, absent a legislative direction as to precisely what gravity each factor bears. All that the [reviewing] court may properly do is to consider whether the agency did take into account all the relevant factors and no others." Association of American Publishers, Inc. v. Governors of the United States Postal Service, 157 U.S. App.D.C. 397, 403-04, 485 F.2d 768, 774-75 (1973).
Indeed, the Supreme Court has established that it is the "total effect" of a rate order, rather than the theory employed, that determines its validity.
Under the statutory standard of "just and reasonable" it is the result reached not the method employed which is controlling.... It is not theory but the impact of the rate order which counts. If the total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry ... is at an end. The fact that the method employed to reach that result may contain infirmities is not then important. [ Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 602 [, 64 S.Ct. 281, 287 , 88 L.Ed. 333 ] (1944) (citations omitted).]
This standard was held applicable to the District of Columbia Public Service Commission in Washington Public Interest Organization v. Public Service Commission, supra at 75:
These statutory criteria [D.C.Code 1981, §§ 43-501, -601, -611, -905, -906] *1194 are akin to those governing the Federal Power Commission and its oversight by the federal courts. In that context, the Supreme Court has held that unless the overall effect of a rate is "unjust and unreasonable," the Commission's order should be approved, irrespective of "infirmities" in the methodology used to calculate it.
Accord, Metropolitan Washington Board of Trade v. Public Service Commission, supra at 351. [3]
In Washington Public Interest Organization v. Public Service Commission, supra , we clarified our role as a reviewing court in light of the broad authority allotted the Commission under Federal Power Commission v. Hope Natural Gas Co. and its progeny:
While it is true that a regulatory commission cannot be faulted for its methodology if the "total effect of the rate order cannot be said to be unjust and unreasonable," Federal Power Comm'n v. Hope Natural Gas Co., [ supra, 320 U.S. at 602 , 64 S.Ct. at 287 ], it is also true that the methodology must be disclosed for the bearing it may have on that overall judgment. Absent precise explanation of methodology as applied to the facts of the case, there is no way for a court to tell whether the Commission, however expert, has been arbitrary or unreasonable. [ Washington Public Interest Organization v. Public Service Commission, supra at 76-77.]
This requirement is intended to assist the reviewing court:
[B]ecause ratemaking is complicated and understandably prone to technical, often shorthand terminology, there is a substantial risk that agency action will be too conclusional—not elaborate enough— for a non-expert court confidently to review. A court, without insisting on more precise explanation, could simply be fooled into accepting arbitrary agency action by the mesmerizing influence of the confidently expressed language of experts.
* * * * * *
While our own authority is ... limited, our authority—and responsibility—to find out why an agency acts as it does is considerable. [ Id. at 78-79.]
We therefore imposed an independent burden on the Commission to explain its actions fully and clearly, by (1) announcing the criteria governing its determination, and (2) explaining how the particular order reflects application of these criteria to the facts of the case. Id. at 75.
Ratemaking orders, as the product of expert judgment, are presumptively valid; the petitioner challenging an order carries the heavy burden of demonstrating clearly and convincingly a fatal flaw in the action taken. Federal Power Commission v. Hope Natural Gas Co., supra 320 U.S. at 602 , 64 S.Ct. at 287 ; Metropolitan Washington Board of Trade v. Public Service Commission, supra at 351-52; Potomac Electric Power Co. v. Public Service Commission , at 18; Goodman v. Public Service Commission, D.C.App., 309 A.2d 97, 101 (1973). The additional requirements imposed on the Commission by Washington Public Interest Organization v. Public Service Commission do not detract from the presumptive validity of Commission rate orders. Even if the court disagrees with the Commission, if the Commission has fully and clearly explained what it does and why it does it, and the agency decision is supported by substantial evidence, the court, upon a finding that the Commission order is reasonable in its overall effect, should sustain the order.
With these considerations in mind, we turn to the individual assertions of error raised by the parties.
II. RATE STRUCTURE
AOBA, CRV, GSA, and the Company contend that the rate design prescribed by the *1195 Commission unjustifiably discriminates in favor of certain residential utility customers at the expense of other commercial and industrial customers. We find that the rate design established by the Commission was based upon sound ratemaking principles and ample consideration of the evidence, and that class-based differences in the approved rates are adequately supported in the record by both cost and non-cost factors.
A. Background
Rate design, or rate structure, is the mechanism whereby a utility realizes its revenue requirements. See Order 6051, at 80. Costs that are thus recovered include "customer costs," "demand costs," and "commodity costs." Customer costs are the fixed costs incurred in the maintenance of facilities and in providing service to customers. [4] These costs are unrelated to the quantity of gas consumption, and are virtually identical for all utility customers. Demand costs include equipment and storage costs that are incurred in serving customers collectively. [5] Equipment must be capable of meeting peak load requirements; in non-peak periods storage costs are incurred in maintaining a state of preparedness for peak period demands. Certain WGL customers, especially those who use gas for heating and cooling, are largely responsible for the occurrence of peak periods, and thus bear greater responsibility than others for demand costs. Commodity costs cover the cost of the gas itself, and, in the immediate sense, vary directly with the volume of gas consumed. [6] See generally Order 6051, at 81 & n. 1; WGL Exh. J, at 12, 17 (testimony of Edmund W. Smallwood).
Prior to 1976 WGL employed a Commission-sanctioned "declining block" rate structure. Under this system initial units of gas purchased were most expensive, in order for the Company to recoup fixed demand and customer costs. Successive purchases were incrementally less expensive, so that average commodity costs varied inversely with consumption. In times when commodity costs were relatively low, the declining block structure, which was inherently promotional, and which reflected economies of scale realized on fixed costs in sales to large scale commodity consumers, was justified on economic grounds, as closely mirroring cost causation. See In re Washington Gas Light Co., 16 P.U.R.4th 261 , 278 (D.C.P.S.C. 1976).
In 1976 the Commission, in consideration of escalating gas replacement costs and declining gas availability, reevaluated and rejected the traditional promotional rate structure:
Complicating the cost picture are several factors. One is that existing and new supplies of gas are becoming more and more costly. To the extent that the company must replace gas sold on a promotional basis with higher priced gas, its average costs will escalate. Another factor is that the company's service is limited by gas supply, as well as by pipeline capacity. In these circumstances, traditional allocation techniques must be reevaluated; customers' responsibility for fixed costs must be related more closely to their gas usage. [ Id. at 278-79 .]
Equally important, the Commission recognized the need to "stress conservation of a wasting resource, natural gas," and concluded that "[p]romotional rate structures tend to foster a misallocation of scarce resources." Id. at 279 .
In lieu of the traditional rate structure the Commission in 1976 approved a two-part *1196 rate, comprised of a uniform commodity charge of twenty-one cents per therm, and a "system" or "customer" charge. [7] A uniform commodity charge, it was reasoned, would encourage conservation and eliminate the misallocation problem inherent in the declining block structure. The system charge was designed both to insure that the Company would recoup fixed costs, and also to ease the transition from the declining block structure to a two-part rate structure. The Commission stated, "Our decision rests upon pragmatic as well as theoretical considerations. When a commission ushers in a drastically new rate structure, it has the responsibility—or at least the discretion—to temper radical changes in the historical rate patterns." Id. at 280 .
Even upon issuance of the 1976 decision the Commission anticipated periodic review and modification of the system charge levels.
Moreover, in a future general rate case, the commission will consider rate structure again. This case is only the first step in a periodic review of system charge levels. Once customers have had a fair opportunity to adjust to the new rate structure, the company can consider system charges which include more cost ingredients. [ Id. ] [8]
B. The Commission's Action in the Case Before Us
The Commission maintained the two-part rate structure in the instant case, keeping intact the commodity charge, and merely renaming the "system charge," which is now the "customer charge." Order 6051, at 81. Rate schedules, however, were reevaluated and revised. The commodity charge was increased from 21 cents per therm to 32.55 cents per therm. Order 6060, at 5. Customer charges for different classes of customers were modified as follows:
CUSTOMER
CLASS FORMAL CASE 647 FORMAL CASE 686
--------------------------------------------------------
(1976) (1979)
Residential $72/year ($8/month; $45/year ($5/month;
heating 9 months/year 9 months/year)
Residential $45/year ($3.75/ $30/year ($2.50/
non-heating month; 12 months/ month; 12 months/
year) year)
Small $148.50/year ($16.50/ $58.50/year ($6.50/
commercial month; 9 months/ month; 9 months/
& industrial year) year)
heating
(under
3,000 Cef)
(Ccf = 100
cubic feet)
Large $148.50/year ($16.50/ $148.50/year ($16.50/
commercial month; 9 months/ month; 9 months/
& industrial year) year)
heating
(3,000 Ccf
and up)
Non-heating $84/year ($7/month; $84/year ($7/month;
commercial 12 months/year) 12 months/year)
& industrial
Watergate & $.19/therm $.30/therm
Interruptible
See Order 6060, Charts A and B; In re Washington Gas Light Co., supra at 287; Order 6051, at 90-100.
1. Residential Customers [9]
a. Heating and Cooling Customers
The Commission explicitly adopted the recommendation of WGL that the monthly *1197 charge to residential heating and cooling customers be reduced from $8 to $5, to "soften the adverse impact that a fixed charge each month has on small volume customers." Order 6051, at 95 (quoting WGL Exh. J, at 19-20 (testimony of Edmund W. Smallwood)). Whereas the WGL proposal sought a reduction only for customers who consumed below 100 Ccf per year, however, the Commission remarked that "WGL concedes that there is no real difference in the customer costs based on annual consumption [between customers who consume above and below 100 Ccf per year]," Order 6051, at 96, and therefore applied the $5 charge uniformly to all residential heating and cooling customers.
b. Non-Heating and Non-Cooling Customers
Residential non-heating and non-cooling customers use gas solely for cooking and/or heating water. The Commission remarked upon the low revenues WGL receives from this class, but also noted that under the two-part rate this class of customers pays the highest unit price for service of any class. Id. WGL, the Commission found, had in the past promoted gas usage among these low-volume gas users "who are in no position to respond to more cost-based rates." Id. at 97. The Commission, in the face of this conflict between cost causation and "historic rate patterns and social considerations," id., reduced the customer charge for the residential non-heating, non-cooling customer class by approximately the same proportion as it reduced the residential heating and cooling class, from $3.75 per month to $2.50 per month.
2. Commercial and Industrial Customers [10]
a. The WGL Proposal
When two-part rates were first employed, all commercial and industrial heating and cooling customers were treated alike. In this case WGL proposed segregating these customers into three categories according to their levels of usage, and varying customer charges accordingly. Customers consuming less than 1,000 Ccf per year (the "store front commercial customer") would pay a $5 monthly customer charge; those consuming 1,000 to 3,000 Ccf per year would pay an $8 monthly charge; and those using in excess of 3,000 Ccf yearly would, under the WGL plan, pay a $25 monthly customer charge. WGL Exh. J, at 22.
*1198 b. The Commission's Order
The Commission accepted WGL's dichotomy between those commercial and industrial heating and cooling customers who consume more than 3,000 Ccf per year and those who consume less than this amount, but the Commission found no basis for distinguishing between small usage customers (less than 1,000 Ccf yearly) and medium usage customers (1,000 to 3,000 Ccf yearly). A $6.50 monthly customer charge was imposed on all customers who use less than 3,000 Ccf per year.
The Commission also rejected WGL's proposal that large commercial heating and cooling customers pay a $25 monthly customer charge. First, the Commission found the previous customer charge of $16.50 for this group effectively comprehended the greater costs accompanying these customers' comparatively greater sizes. Second, the Commission stated that "[c]ustomer costs for all customer classes exceed the respective customer charges, but we can find no reason for increasing the charge for only one sub-class, large volume commercial." Id. at 98-99.
Rates for non-heating, non-cooling industrial and commercial customers were left unchanged at $7 per month.
3. Interruptible Customers [11]
In Formal Case 647 the rate for interruptible customers was set at nineteen cents per therm, two cents below the flat firm commodity charge. The Commission concluded that that rate covered fixed and commodity costs, was fair to consumers, and was competitive with other sources of supply. In re Washington Gas Light Co., supra at 282.
In the instant case the Commission adopted the WGL proposal that the interruptible rate be increased to thirty cents per therm, to reflect increases in commodity, fixed, and capital costs; the Commission found too that the thirty cents per therm rate was still competitive with other fuel sources. Order 6051, at 99-100.
C. Analysis
1. Two-Part Rate Structure
Only People's Counsel argued to the Commission in favor of a single volumetric rate rather than a two-part rate structure. [12] A single volumetric rate would embrace both the fixed costs of serving customers (described as "customer" and "demand" costs, see pp. 1194-1195 and notes 4-5 supra ), and commodity costs. Dr. Wilson, the witness for People's Counsel, testified that gas supply, rather than delivery capacity, is the limiting factor in the Company's natural gas service area. PC Exh. D, at 13-14. The optimally efficient economic pricing solution, he concluded, would therefore be to attribute a zero weight to the sunk costs of the overbuilt transmission capacity, "and to recoup total revenue requirements largely on a volumetric basis." Id. at 13. The effect of the proposed volumetric prices would be to maximize conservation of the scarce resource, gas. Id. at 14.
The Commission agreed with People's Counsel that conservation was a major objective, Order 6051, at 85, but noted that *1199 gas supply prospects were improving, at least for the near-term future. Id. at 84-85. The Commission questioned Dr. Wilson's assertion that the Company had excess storage capacity, id. at 84, and his testimony concerning marginal cost pricing principles. Id. at 87.
Further, the Commission found that the imposition of a volumetric rate structure would aggravate the risk to the Company of under-collection of fixed costs. Fixed costs are incurred independently of the level of gas sales. Id. at 82-83. The fixed cost component of a volumetric rate would be determined on the basis of projected temperatures and fuel usage. The danger of under-collection of fixed costs as a result of unexpectedly warm temperatures and low fuel usage would be aggravated where all fixed costs were recouped through the commodity charge, as they would be under a single volumetric rate structure. [13] The Commission found rather that maintenance of a two-part rate structure, and utilization of a warmer "normal weather standard," [14] were desirable to reduce the risk to WGL of under-collection of fixed costs. Id. at 83-84.
The Commission also remarked upon the inconsistency of People's Counsel's proposal with modern utility practice. Whereas under the proposal offered by People's Counsel fixed costs would have been recovered entirely through the commodity charge, the Commission noted that the Federal Power Commission "has never designed pipeline rates which recover more than 75 percent of fixed costs through the commodity charge." Id. at 84. The Commission agreed, though, that, consistent with modern public utility practice, the majority of WGL's fixed costs would continue to be recovered through the commodity charge. Id.
2. Differentiation Among Customer Classes
The petitioners ground their opposition to the rate design established by the Commission, first, on the Commission's substantial reliance on factors other than cost causation in formulation of the rate design, and second, on the closely related problem of the alleged disparity among the rates of return the Company will receive from different classes of customers under the order. The disparity, it is asserted, renders the rate design unconstitutionally confiscatory in that, as a concomitant of that disparity, certain groups are compelled to subsidize others' gas usage, instead of merely paying for their own purchases.
a. Legitimacy of Cost-Related and Noncost factors
By now, the permissibility of relying on non-cost factors in rate design is beyond serious dispute. Inasmuch as the differences in customer charges among the various consumer classes, and the alleged differences in "class rates of return" derive *1200 from reasonable consideration of such factors, they do not render the rates invalid. [15]
Preliminarily, we note that the use of non-cost factors in addition to cost causation does not amount to a rejection of the latter. Contrary to petitioners' contention, the Commission did not repudiate the significance of the principles of cost causation for utility ratemaking. The Commission's specific denial that it was rejecting cost-causation principles, Order 6060, at 16; Order 6051, at 90, attains credence from its discussion of the lack of cost justification for discriminating between residential heating and cooling customers who consume above and below 100 Ccf of gas per year, as was proposed by WGL, id. at 96, and from its discussion of the conflict between the principles of cost causation and countervening considerations of the value of service, historic rate patterns, and equity, in setting rates for residential non-heating and non-cooling customers, id. at 97.
Furthermore, relevant cost considerations are not limited to historic costs (the cost already paid for existing fuel stocks), but include replacement costs (the cost of purchasing new fuel stocks to replace those currently being consumed). The Commission has expressed concern with escalating gas replacement costs. In Formal Case 647, the basic facts and rationales of which were reaffirmed in the instant case, Order 6051, at 89-90, [16] a two-part rate structure was first substituted for the traditional declining block rate structure. The Commission, commenting upon the increasing complexity of the economic equation for utility rate designs, which impelled this transition, stated:
Complicating the cost picture are several factors. One is that existing and new supplies of gas are becoming more and more costly. To the extent that the company must replace gas sold on a promotional basis with higher priced gas, its average costs will escalate. Another factor is that the company's service is limited by gas supply, as well as by pipeline capacity. In these circumstances, traditional allocation techniques must be reevaluated; customers' responsibility for fixed costs must be related more closely to their gas usage. [ In re Washington Gas Light Co., supra at 278-79 (citing Consolidated Gas Supply Corp. v. Federal Power Commission, 172 U.S.App.D.C. 162 , 520 F.2d 1176 (1975)).]
Accord, Midwest Gas Users Association v. State Corporation Commission, 3 Kan. App.2d 376, 382-83, 393 , 595 P.2d 735, 740, 747 (1979); United States Steel Corp. v. Pennsylvania, 37 Pa.Commw.Ct. 195, 207-10 , 390 A.2d 849, 856-57 (1978); In re Laclede Gas Co., 25 P.U.R.4th 51 , 58 (Mo.P.U.C. 1978). Although the Commission projected increasing gas supplies in the near-term future, Order 6051, at 84-85, it noted too the rising cost of the commodity. Id. at 99. It is anticipated that as local supplies of gas are depleted, the Company will eventually have to replenish its commodity supplies from more exotic and expensive sources. See Order 6051, at 88. Because gas is a limited and wasting resource, see In re Washington Gas Light Co., supra at 279, it is foreseeable too that rising recovery costs will contribute to increased commodity replacement costs, regardless of the economic climate—for we note also the effect of inflation on replacement costs.
*1201 [T]he cost of recovering natural gas can no longer be treated as just another cost of doing business. Although there is considerable controversy over the amount of natural gas which can be ultimately recovered domestically, there is little difference of opinion that the amount of natural gas ultimately recovered will cost considerably more per Mcf than gas recovered in the past. This is a reasonable assumption because not only are the factors of production (land, labor, and capital) involved in gas exploration and development increasing in cost, but the process itself is becoming more costly. Where gas could once be recovered onshore in porous wells at shallow depths and in great quantities, the depletion of these resources has forced the natural gas industry to drill deeper in tighter formations, drill offshore, or look to supplies beyond the continental limits of this country. Hence, even if the traditional costs of production level off or decrease, the cost of recovering natural gas will continue to increase or, in other words, putting an end to inflation will not put an end to increases in the price of gas. [ In re Laclede Gas Co., supra at 88.]
Under this analysis, the inclusion of substantial fixed costs in the commodity charge is cost-justified. [17] The high usage customers contribute disproportionately to the exhaustion of relatively inexpensive commodity sources, and thus accelerate future increases in commodity prices for all utility customers. See id. A higher commodity price would tend to decrease consumption, thereby reducing the upward pressure on gas prices. Petitioners allege that due to the inclusion of fixed costs in the commodity charge, customers who consume greater quantities of gas are compelled to subsidize lesser consumers. The high usage customer, however, if charged solely on the basis of current commodity prices at any given time, never covers the gas replacement costs for which he is responsible. The price system is thus distorted, with the smaller consumer absorbing higher costs caused by the greater consumer, or, in effect, subsidizing the greater gas consumer. The Commission's inclusion of substantial fixed costs in the commodity charge tends to mitigate the distortions in cost allocations caused by rising replacement costs.
By attributing to each customer the expenses for which he is responsible, the consumer has before him the correct price indicators upon which to base his purchase and resource consumption decision. The Commission expressed concern in Formal Case 647 that "[p]romotional rate structures tend to foster a misallocation of scarce resources." In re Washington Gas Light Company, supra at 279. See In re Laclede Gas Co., supra at 88-89.
If every customer on [the] company's system must pay at least the cost of replacing any gas he consumes, then those customers have the proper price information to decide whether the benefits of conserving that gas are equal to the price. If any customer on [the] company's system does not have to pay at least the cost of replacing the gas that customer consumes, then that customer is permanently insulated from the cost impact his consumption has upon [the] company's entire system.
By recovering more than historic cost in the commodity charge, the Commission's order moves toward long-term cost-reflective pricing, which contributes to a more efficient allocation of resources. [18]
*1202 We would be compelled to reject the petitioners' contention that a utility rate order depends for its validity upon a predominantly cost-based foundation, even if that concept is expanded to encompass replacement cost. On the contrary, historic and replacement costs are not the only criteria in the establishment of a rate structure, see Apartment House Council of Metropolitan Washington, Inc. v. Public Service Commission, supra at 57, and it is a function of the Commission to determine the relative weight to accord the various factors that it considers in the ratemaking process, see Association of American Publishers, Inc. v. Governors of the United States Postal Service, supra, 157 U.S.App.D.C. at 403-04, 485 F.2d at 774-75 .
The value of service to the consumer is one of the valid non-cost factors. The *1203 Commission's reliance upon value of service as a relevant factor [19] in the determination of whether there has been unlawful discrimination is supported by precedent, see, e.g., In re Washington Gas Light Co., 99 P.U.R.3d 139 , 144 (D.C.P.S.C.1973); and this court has previously endorsed consideration by the Commission of "whether customers have paid different amounts for the same service under the same circumstances.... So long as the classifications are reasonable, a difference in rates may exist between different classes of customers." Atlantic Telephone Co. v. Public Service Commission, D.C.App., 390 A.2d 439, 444 (1978). See also Florida Retail Federation, Inc. v. Mayo, 331 So.2d 308, 312 (Fla.1976); Midwest Gas Users Association v. State Corporation Commission, supra, 3 Kan.App.2d at 381-91 , 595 P.2d at 739-46 ; New England Telephone and Telegraph Co. v. Public Utilities Commission, 390 A.2d 8, 59 (Me.1978); In re Arkansas Louisiana Gas Co., 558 P.2d 376 (Okl.1976); United States Steel Corp. v. Pennsylvania, supra 37 Pa.Cmwlth. at 207-09 , 390 A.2d at 856. "[E]ach unit of natural gas has the same energy value and the same economic value no matter how many units of gas a customer may purchase." In re Arkansas Louisiana Gas Co., supra at 378. The intrinsic value of service to the customer may conflict with the cost of service to the utility, but is, we conclude, a valid equitable consideration, which the Commission not unreasonably included in the utility rate equation.
The Commission's consideration of historical rate patterns in fashioning the order was likewise not inappropriate. See Apartment House Council of Metropolitan Washington, Inc. v. Public Service Commission, supra at 58. While structuring utility rates solely on the basis of the ability of different groups of customers to pay would comprise a manner of social legislation and subsidy best left to the legislative branch of government, see United States Steel Corp. v. Pennsylvania, supra 37 Pa.Cmwlth. at 173 , 390 A.2d at 871; In re Rate Design for Electric Corporations, 26 P.U.R.4th 280 (N.Y.P.S.C.1978), in the instant case we find no abuse of discretion in the Commission's refusal to impose high gas rates on residential customers where the Company, through past advertising and favorable rate structures, promoted dependence by these customers on gas usage. Moreover, consideration of an equitable factor such as this is not invalidated simply because the same rationale might apply to certain members of other customer classes. See Metropolitan Washington Board of Trade v. Public Service Commission, supra at 358-59. Such imperfections are inherent in any system employing broad classifications, and the Commission may exercise its discretion to provide relief to those classes which, as a whole, have the greatest claim to it. [20]
The Commission also permissibly relied upon the need for resource conservation. Order 6051, at 89. We have previously affirmed the Commission's obligation to aid in the energy crisis. Apartment House Council of Metropolitan Washington, Inc. v. Public Service Commission, supra at 57; see Metropolitan Washington Board of Trade v. Public Service Commission, supra at 358. Although the Commission anticipates a ready supply of gas in the near future, *1204 Order 6051, at 84-85, recognizing that gas is a scarce, finite, and wasting resource, and that conservation is in the public interest, see, e.g., In re Washington Gas Light Co., 16 P.U.R.4th at 279, we find reasonable and within the scope of its allowed discretion the Commission's incorporation of a conservation goal into the ratemaking equation. See Central Hudson Gas and Electric Corp. v. Public Service Commission, 447 U.S. 557, 571 , 100 S.Ct. 2343, 2354 , 65 L.Ed.2d 341 (1980) ("We accept without reservation the argument that conservation ... is an imperative national goal. Administrative bodies empowered to regulate electric utilities have the authority—and indeed the duty— to take appropriate action to further this goal."); California Manufacturers Association v. Public Utilities Commission, 24 Cal.3d 251 at 260 , 155 Cal.Rptr. 664 at 669 , 595 P.2d 98 at 103 (Public Utility Commission "may properly consider prospective shortages of natural gas and the need to conserve that commodity"); Boston Edison Co. v. Department of Public Utilities, 375 Mass. 1, 47 , 375 N.E.2d 305, 333 , appeal dismissed, 439 U.S. 921 , 99 S.Ct. 301 , 58 L.Ed.2d 314 (1978) (it was reasonable to conclude that the exemption of the first 384 kilowatt hours of electricity use "would encourage energy conservation in the public interest").
b. Differences in Customer Charge Among the Various Customer Classes
It is unnecessary to reiterate in detail the Commission's rationale for its setting of customer charges, which are outlined in section B, supra. Inasmuch as these differences are reasonably based on legitimate cost and non-cost factors already discussed, they do not render the rates invalid. Two areas of contention merit a brief further mention, however: the charges applied to residential non-heating and non-cooling customers, and those applied to interruptible customers.
One factor influencing the Commission was the tension inherent between the cost to the Company of providing service, and the value of service to WGL customers. Discussing residential non-heating and non-cooling customers, the Commission commented:
Because of the very low volume of gas which this sub-class takes relative to its customer costs, a two-part rate yields an anomaly; this sub-class pays the highest unit price for service at the same time as WGL earns the least return from this service.
In designating rates for the residential non-heating/non-cooling sub-class, the Commission faces a direct conflict between the principle of cost causation, on one hand, and historic rate patterns and social considerations on the other hand. [Order 6051, at 96-97 (emphasis in original).]
We cannot say that the charge arrived at was based on illegitimate factors or embodies a capricious application of them. On the contrary, the record reflects a reasoned consideration and resolution of an issue as to which reasonable people can differ. It is not for us to substitute our preferences for the judgment confided by law to the Commission.
While in the case of residential non-heating and non-cooling customers these cost considerations led the Commission to reduce the customer charge, id., it was drawn by other factors to approve WGL's proposed increase to a thirty cents per therm rate for interruptible customers. Id. at 99-100. These included rising fuel costs, the amount of investment fairly allocable to interruptible service customers, [21] the value of the *1205 service provided to these customers, and the closely related factor of the competitiveness of the rate charged interruptible customers for gas with the price of other forms of fuel. Order 6051, at 99-100. "Utility companies operating under public franchises and having monopolistic characteristics are subject to special regulation." Public Utilities Commission v. Capital Transit Co., 94 U.S.App.D.C. 140 , 145, 214 F.2d 242, 247 (1954). Although such regulation protects utility companies to a degree from ordinary market pressures, realities of the marketplace, including the company's competitive position and, in this context, the price of alternative fuels, may be considered in establishing or assessing the reasonableness of a rate structure. See United States Steel Corp. v. Pennsylvania, supra, 37 Pa. Cmwlth. at 207-09, 390 A.2d at 856. We find that the Commission acted reasonably in predicting the interruptible rate upon the above enumerated facts, and that the rate works no unfair discrimination. As it is neither unreasonable, arbitrary, nor capricious, and is supported by substantial evidence, the rate must be sustained.
c. Alleged Differences in Class Rates of Return
The objections raised by petitioners and in dissent relating to class rates of return are based entirely on a data analysis prepared by Washington Gas Light itself that is seriously flawed, was never adopted by the Commission, and which the Commission was under no obligation to adopt. Even if the PSC had adopted it as an aid in rate design, it does not follow that those rate of return estimates would become the legal benchmark for judicial assessment of whether the rates are impermissibly discriminatory under the D.C. Code or the Constitution. While the choice of a rate design—within wide bounds—is for the Commission to make, the standards for judging where the bounds lie, i.e., what is "discriminatory", are for the court to establish. Finally, even if one hypothesizes the impossible—a single, objective, agreed upon method for allocating costs—differences in the resulting class rate of return estimates would not satisfy petitioners' burden of proving illegally discriminatory rates. If, as here, the asserted differences flow from a reasonable application of legitimate cost and non-cost policies, they are permissible. Indeed, if the non-cost factors are given weight at all, differences in class rates of return are virtually inevitable.
The record contains no decisive projection of the several rates of return reasonably to be expected under the instant rate order. During the hearings, Mr. Smallwood, vice-president of WGL, presented evidence indicating a range of rates of return from firm service customers varying from a negative 8.42% from residential non-heating customers to 26.11% from commercial and interruptible fuel users. On cross-examination, however, Mr. Smallwood renounced the figures he had earlier espoused, due to the erroneous methodology—the misallocation of mains to individually metered apartments [22] —that he had relied upon in calculating those figures. [23] WGL Exh. N, at 26. *1206 He testified further that he had not, since learning of the error, recomputed the rates of return, and could not state with certainty whether the resulting rate would be negative. The Commission, acting within the scope of its allowed discretion, accordingly disregarded WGL's erroneous projection of class rates of return in fashioning the rate order. [24]
Since the Company's cost causation analysis failed to pass muster, and despite the extensive consideration the Commission gave to cost allocations and cost causation during the rate hearings, no specific cost data clearly underlie the rate order. This lack of specificity does not alone imperil the validity of the order. We have previously held that
[i]t is not necessary that differences in rate of return be specifically and quantitatively supported by customer class-cost considerations. The Supreme Court has stated that "[a]llocation of costs is not a matter for the slide-rule. It involves judgment on a myriad of facts. It has no claim to an exact science." [ Apartment House Council of Metropolitan Washington, Inc. v. Public Service Commission, supra at 57 (1975) (quoting Colorado Interstate Gas Co. v. Federal Power Commission, 324 U.S. 581, 589 , 65 S.Ct. 829, 833 , 89 L.Ed. 1206 (1945)).]
Accord, Midwest Gas Users Association v. State Corporation Commission, supra, 3 Kan.App.2d at 391, 393 , 595 P.2d at 746, 747 .
Apart from the problems of accounting for individually-metered vs. group-metered apartments, the Washington Gas Light analysis is based on more fundamental assumptions that the Commission is not compelled to accept as a guide to rate design. Neither is this court compelled to accept those assumptions as the foundation for determining what is impermissibly discriminatory under the Constitution or D.C. Code. [25] In particular, petitioner's approach assumes that fixed costs must be allocated on a per-consumer basis, without regard to how much each consumer used the system. Even if one corrects the error of failing to account for the fact that individually-metered homes should not pay the same share as an entire building of group-metered apartments, see note 10 supra, it is not obvious that a per-unit allocation would be the only permissible one. For example, one might rationally allocate fixed costs, other than those directly attributable to particular customers or groups of customers, [26] in proportion to consumption. Indeed, this is the cost recovery method that overwhelmingly predominates in the sale of consumer goods and services generally. In the typical *1207 business, there is no "customer charge" and therefore one hundred percent of fixed costs are covered by the "commodity charge"—the price of the good or service in question. Most observers would not consider it unfairly discriminatory that a customer who buys one dollar's worth of goods contributes less to the overhead costs of the store than the customer who buys $100's worth of goods. Indeed, it might be considered unfairly discriminatory if the two were required to pay a separate and equal fee for overhead.
If the Commission or this court adopted the principle of cost allocation in proportion to consumption, then the current set of rates would result in higher estimated rates of return for the classes of smaller consumers than for the classes of smaller consumers than for the other categories. Under the utilities' terminology, this would reflect a suspiciously unjust "cross-subsidy" of the large by the small user. It would be eliminated by recovery of all fixed costs through the commodity charge. We do not raise this possibility for the purpose of suggesting that it be adopted by the Commission as a guide to rate design. Nor do we adopt it as the standard for finding unconstitutional discrimination. If we did, we would have to reject the proposed rates and require the elimination of the customer charge, thus moving further from the result sought by the utility. Rather, we raise it to refute the suggestion that the "imprecision" in cost allocation is only a matter of technical differences in methodology. It is also a question of fundamental choices among alternate basic assumptions, no one of which can "objectively" be identified as the "correct" one. Under these circumstances, the dissent's unexamined presumption that we are compelled to rely on the petitioner's preferred choice, after correction of certain acknowledged errors, is specious.
Even if one hypothesizes an objective, agreed-upon standard for estimating class rates of return, substantial disparities among the resulting estimates would not satisfy petitioners' burden of making a convincing showing of unlawful discrimination. "Discriminatory rates" cannot simply be equated with differences in estimated rates of return from subparts of the utility's business. [27] We have never imposed a requirement of uniformity among the rates of return from different customer classes; differences have indeed traditionally been tolerated. Our scrutiny of the legality of allegedly discriminatory differences in charges imposed upon utility customers focuses rather upon the reasonableness of the customer classifications. Metropolitan Washington Board of Trade v. Public Service Commission, supra at 360-61; Atlantic Telephone Co. v. Public Service Commission, supra at 444; Apartment House Council of Metropolitan Washington, Inc. v. Public Service Commission, supra at 57. [28] Indeed, insofar as the Commission may permissibly *1208 consider factors other than cost causation in structuring the rate design, it is inevitable that differences among rates of return will exist.
Because the utility's revenue requirement is based on cost (expenses plus capital return) and because customer rates are designed to provide the revenue requirement, it is apparent that consideration by the commission of any factor other than cost will result in some customers paying less while others necessarily pay more than cost. Having discretion to consider factors other than cost, the commission must necessarily create some disparity among users.... [ California Manufacturers Association v. Public Utilities Commission, 24 Cal.3d 251, 261 , 595 P.2d 98, 103 , 155 Cal.Rptr. 664, 669 (1979) (en banc).]
Only a minor part of the differences in class rates of return, as calculated by petitioners, is due to the differences in the customer charges applied to various classes. The differences are predominately due to the fact that a substantial part of fixed costs is recovered through the commodity charge. As a result, a larger absolute amount of fixed costs is borne by large users. However, they bear a smaller proportion of such costs in relation to their consumption, since part of fixed costs are borne through flat customer charges. Thus, if there are permissible grounds for recovering a portion of fixed costs in the commodity charge, notwithstanding a cost causation theory that allocates fixed costs on a flat per-customer basis, the rates must be upheld.
The discussion in subsection a, supra, shows that there are indeed adequate bases for the Commission decision to recover a substantial portion of fixed costs through the commodity charge. It will suffice simply to summarize them here. One reason is conservation of energy resources. The higher the marginal cost of gas to the consumer (the commodity charge), the greater the incentive to reduce energy waste or to shift to lower cost energy sources. Concern that commodity prices cover replacement costs is another permissible consideration. As existing sources of gas are exhausted, finding and exploiting new ones becomes increasingly expensive. If the commodity charge is not higher than the historic cost, it will fail to cover the higher replacement cost, leading to an undesirable allocation of resources. Moreover, high demand is a contributing factor to higher resource prices. It is therefore not unjust that those who consume more and therefore are more responsible for overall consumer demand bear a proportionately higher burden of replacement costs. Value to the consumer, ability to pay, and historical rate patterns are additional reasons for not recovering fixed costs exclusively through the customer charge. [29]
Finally, at each juncture the Commission has balanced countervailing criteria, and in so doing has satisfied the independent burden imposed on it by Washington Public Interest Organization v. Public Service Commission, supra at 75-77, to announce the criteria governing the rate determination and to explain how the order reflects application of these criteria to the facts before it. The Commission acted within the scope of its discretion in balancing the various criteria upon which it relied. Mathematical formulae are not required. "Allocation of costs is not a matter for the slide-rule. It involves judgment on a myriad of facts. It has no claim to an exact science." Colorado Interstate Gas Co. v. Federal Power Commission, 324 U.S. 581, 589 , 65 S.Ct. 829, 833 , 89 L.Ed. 1206 (1945). *1209 As petitioners have failed to demonstrate that the order is unjust and unreasonable in its total effect, the rate design must be sustained.
III. RATE OF RETURN
By determining and weighting the cost of each portion of WGL's capital structure, the Commission found that the Company is entitled to the opportunity to earn a maximum overall return of 9.25% on its rate base. [30] Only the Company disputes this finding, contending that this allowance is unreasonable and confiscatory. It traces the alleged error to two facets of the "cost of capital" analysis used by the Commission to establish the authorized overall return: (1) the Commission's determination that WGL should be allowed a 13% return on common equity; and (2) the Commission's reduction of the test-year cost of debt by means of amortizing gains which had been realized in past years upon WGL's redemption of certain long-term debentures. [31]
The statutory authority of the Commission to design "reasonable, just, and nondiscriminatory" rates, D.C.Code 1981, § 43-501, is, we have stated, "deliberately *1210 broad." Metropolitan Washington Board of Trade v. Public Service Commission, supra at 350.
[T]he Commission [is given] authority to formulate its own standards and to exercise its ratemaking function free from judicial interference, provided the rates fall within a zone of reasonableness which assures that the Commission is safeguarding the public interest—that is, the interests of both investors and consumers.... From the investor standpoint, courts have defined the lower boundary of this zone of reasonableness as "one which is not confiscatory in the constitutional sense." Federal Power Commission v. Natural Gas Pipeline Co., 315 U.S. 575, 585 [ 62 S.Ct. 736, 742 , 86 L.Ed. 1037 ] (1942); Washington Public Interest Organization v. Public Service Commission, [ supra at 76]. From the consumer standpoint, the upper boundary cannot be so high that the rate would be classified as "exorbitant." [ Metropolitan Washington Board of Trade v. Public Service Commission, supra at 350 (emphasis in original).]
If the overall effect of a rate order is found to be reasonable, judicial inquiry must stop; any infirmities in the method employed to determine those rates becomes immaterial. Federal Power Commission v. Hope Natural Gas Co., supra 320 U.S. at 602 , 64 S.Ct. at 287 ; People's Counsel v. Public Service Commission, supra at 46. As the return on equity authorized in this case lies within the "zone of reasonableness," we find no error with respect to either aspect of the rate of return determination.
A. Return on Common Equity
Three witnesses presented evidence on the cost of WGL's common equity. Each relied primarily upon a "discounted cash flow" (DCF) analysis to arrive at a proposed return on common equity.
The DCF method takes into account current and anticipated income to the investor from dividends and the eventual sale price of the stock. The method of determining the cost of equity under the DCF approach can be stated by a rather simple formula, i.e., market capitalization rate (cost of equity) equals the current dividend yield plus anticipated growth. This constitutes the marginal cost of equity and is commonly referred to as the "barebones" cost of capital. Rate analysts usually adjust this figure to allow for market pressure upon the issuance of additional shares of common stock and for the costs of issuing the stock. [Order 6051, at 17 (emphasis added).]
See also In re Washington Gas Light Co., 16 P.U.R.4th at 274 n. 8; Staff Exh. 14, Sch. 5.
The Company's witness, Patrick J. Maher, first determined the "yield" component in his DCF analysis. He assumed that utility common stocks are interest-rate sensitive: i.e., that their dividend/price ratios tend to follow the general level of interest rates for long-term bonds. WGL Exh. C, at 13. Using data on newly-issued Aa-rated long-term utility bonds and stock yields for selected companies in Moody's and Standard & Poor's indices of gas distributors and electric utilities, id. at 13-15, Maher concluded that investors in gas distribution companies over the preceding two years had been requiring stock yields (dividends) at a level of approximately 90% of the corresponding bond yields. He further stated that long-term utility bonds had recently been selling with yields of 8 to 9%. Id. at 22. Assuming average future bond yields of 8.5%, he projected that the stock dividend/price ratio of his comparison companies would be about 7.5% to 7.75%. Id. at 23.
To derive the "growth" component of his DCF analysis, [32] Maher calculated the *1211 growth in retained earnings for the Standard & Poor's and Moody's groups of natural gas distributors during the period 1974-76. Those companies showed an average growth of 4.72% in 1974, 5.02% in 1975, and 5.97% in 1976. WGL Exh. 3. Sch. 19. Based on these figures, Maher estimated that investors reasonably could expect growth in the neighborhood of 5.5% to 6.0% when investing in the gas distribution industry. WGL Exh. C. at 21. Adding that projection to the dividend yield component, he concluded that the "investors' capitalization rate" or "marginal cost of equity" in the industry was approximately 13% to 13.75%. Id. at 23.
Maher further stated his belief that the return on equity should be higher than the marginal cost of equity. If the Company realized only the marginal cost of equity capital on sales of common stock, he claimed, its stock would sell at book value. Due to the cost of floating additional common shares, however, he argued that the utility would actually receive less than the book value of its present stock from new investors. Thus he concluded that sales at book value would dilute existing equity and reduce the value of outstanding shares. Id. at 23. Maher recommended a return on common equity of 14.0% to 14.5%, which he believed would promote the sale of WGL's stock at a market-to-book premium of approximately 11.5%. Id. at 24-25. [33]
The Staff's witness, Gerald J. Glassman, like Maher based his DCF analysis on historical yield and growth data for a representative group of gas distributors. Glassman selected from Standard & Poor's data file on 155 utility companies, twelve comparison companies with characteristics approximating those of WGL; these characteristics included 1976 sales between $65 million and $500 million, with gas sales providing at least 90% of total revenues, and equity ratios between 25% and 45%. (WGL during 1976 had operating revenues of $270 million, entirely from gas sales; its equity ratio was approximately 35%.) Staff Exh. 14, at 28-29 & Sch. 6. Using data on WGL and the comparison companies for the years from 1967 to 1976, see id., Sch. 6, he estimated that WGL's dividend yield should be approximately 8.25%. Id. at 36. He further concluded that a reasonable expectation of growth in common stock value would be "no more than 4%." Id. at 34. Adding these two components together, he determined that the market capitalization rate or marginal cost of WGL's common equity was approximately 12.25%. Id. at 36. To this figure Glassman recommended adding a 7.5% allowance to compensate for the effect of flotation costs and market pressure. [34] His resultant proposed return on equity was 13.24%. Id. at 39-40.
People's Counsel's witness, Dr. Caroline M. Smith, used a DCF methodology similar to the one employed by Glassman. She selected as comparison companies fifteen gas distribution companies that were listed in the Value Line Investment Survey and *1212 that derived 85% or more of their gross revenues in 1976 from residential, commercial, and industrial gas sales. PC Exh. B, at 10 & Sch. 3. Smith calculated the "current dividend yield" for each company, (the dividend/price ratio based on average prices for June through November, 1977), and then used the average of those yields—8.22%—as the dividend yield component of her DCF analysis. Id. at 11. To derive the growth component, she studied trends in her comparison companies' earnings per share, dividends per share, and book value per share. Results for several time periods were used. From those data she concluded that investors' expectations for growth in the value of gas utility common stocks were approximately 3.5% to 4%. Id. at 12 & Sch. 4. Combining the yield and growth factors, she estimated that the market capitalization rate for the comparison companies' common equity was approximately 11.75% to 12.25%. Id. at 15 & Sch. 6. Smith then conducted a regression analysis, which indicated that the ratio of common equity in a utility's capital structure is the single most important factor influencing investor assessments of relative risk among gas distributors. The lower the common equity ratio, she found, the higher the risk. She further found that WGL's common equity ratio was significantly lower than the average for her fifteen comparison companies, thus increasing the cost of WGL's common equity by more than a quarter of a percentage point above the fifteen companies' average. She concluded that the "bare-bones" cost of common equity for WGL is in the range of 12.05% to 12.55%. Id. at 17-22 & Schs. 7-8.
Unlike Maher and Glassman, Smith disputed the need for any adjustment to cover flotation costs or market pressure. Based upon studies of the effect on securities markets of new stock and bond issuances by utilities, she concluded that market pressure has been an insignificant or nonexistent phenomenon in recent years. Id. at 30-33. She recommended that a market pressure adjustment, if made, should not exceed 3% of the price of the stock to be issued. Id. at 34. Smith also testified that WGL was not likely to issue any additional common stock within the next five years, as, she surmised, its capital needs during that period would be financed largely by debt, retained earnings, depreciation, deferred taxes, and investment tax credits. Id. at 29. This testimony was uncontradicted. See Order 6060, at 46 (Stratton, C., dissenting). Smith therefore concluded that no flotation cost adjustment was warranted, but added that if the Commission did allow such an adjustment, it should not exceed .06%. PC Exh. B, at 34-36.
The Commission, acting within the scope of its discretion, decided that the cost-of-equity evidence submitted by the Staff and People's Counsel was more reliable than that supplied by WGL. It explained:
The Company repeats one of the same errors which caused us to place little reliance on its return-on-equity evidence in the last case. The companies which Mr. Maher used in his analysis simply are not comparable to Washington Gas Light Company. For his long-term study, 1960-1976, he used Standard & Poor's natural gas distributors indices. When focusing on more recent industry experience, 1974-1976, Mr. Maher expanded his analysis to include the Moody's group. Unfortunately, these indices include companies which are not only in the gas distribution business, but which also have transmission facilities and produce significant quantities of gas. One company is even engaged in oil production, the sale of chemicals and chemical products, and engineering and construction services. Each of these companies had returns on equity and retained earnings growth which were greater than the average from 1974-1976. And their common stock has consistently sold at a market-to-book premium, whereas the group as a whole sold at an average discount from 1974-1976. In light of this lack of comparability, we again cannot place principal reliance on the Company's evidence.
The return-on-equity evidence of the Staff and People's Counsel avoids this deficiency. Mr. Glassman studied the *1213 growth and dividend yield of Washington Gas Light Company and a group of 12 gas distribution companies which were selected as being representative of the gas distribution industry and similar to Washington Gas Light Company from the standpoint of investment uncertainty. Similarly, Dr. Smith studied 15 gas distribution utilities, each of which received 85 percent or more of gross revenues from gas sales in 1976. [Order 6051, at 18-19.]
In accordance with the Glassman and Smith studies, the Commission determined that WGL's marginal (or "bare-bones") cost of common equity was 12.25%. Order 6051, at 18-19. This ruling cannot be said to be arbitrary, unreasonable, or unsupported by reliable and probative evidence. The Commission properly may give more credence to certain evidence than it does to other evidence which it deems less reliable. See Goodman v. Public Service Commission, 162 U.S.App.D.C. at 78 , 497 F.2d at 665 ; Washington, Marlboro & Annapolis Motor Lines, Inc. v. Public Utilities Commission, 114 F.Supp. 328, 333 (D.D.C.1952), aff'd, 93 U.S. App.D.C. 63, 206 F.2d 490 (1953). The Commission had a reasoned basis for rejecting the Company's studies.
The Commission also adopted the recommendation of People's Counsel that no allowance be made for market pressure and flotation costs because "it does not appear that the Company is planning to issue new equity in the foreseeable future." Id. at 20. The Commission did, however, add seventy-five "basis points" to WGL's bare cost of equity, thereby raising the Company's authorized return on equity to 13%, because the Commission did not believe that a 12.25% return on equity would provide an adequate spread between the bare cost of equity and current high yields on government and utility bonds. Id. at 21-22. The Commission was influenced too: (1) by the substantial market-to-book discounts on the sale of WGL stock from 1974 to 1977, id. at 23; see note 33 supra; (2) by the fact that the average rate of return on equity for the comparison companies selected by the Staff had been consistently higher than WGL's, Order 6051, at 23; and (3) by "the continuing uncertainty surrounding the gas supply picture." Id. at 24.
The Company contends that the authorized return and the resultant level of rates are unreasonable and confiscatory. In the Company's view, it was illogical for the Commission to lower WGL's authorized return on equity from 13.4%, (as established in WGL's last rate proceeding, in 1976, In re Washington Gas Light Co., 16 P.U.R. 4th at 277), to 13%, in the face of "spiralling" interest rates, particularly after the Commission had acknowledged WGL's recent poor performance with regard to market-to-book ratios, growth rates, and actual return on equity. People's Counsel and the Commission, on the other hand, urge that the rate levels established in this case are ample. They take issue with the Company's assertion that costs of capital "spiral" in the long run; on the contrary, they argue, capital costs fluctuate over time. Therefore, a reduction in the allowed rate of return on common equity is not per se unreasonable merely because interest rates have risen since the last rate order. Moreover, they argue, the 13% return compares favorably with the common equity earnings of those gas distributors that Staff witness Glassman found comparable to WGL. [35]
In assessing the rate of return authorized by the Commission, we are guided by two landmark decisions of the Supreme Court. In Bluefield Water Works & Improvement Co. v. Public Service Commission, 262 U.S. 679, 692-93 , 43 S.Ct. 675, 678-79 , 67 L.Ed. 1176 (1923), the Court stated:
*1214 A public utility is entitled to such rates as will permit it to earn a return on the value of the property which it employs for the convenience of the public equal to that generally being made at the same time and in the same general part of the country on investments in other business undertakings which are attended by corresponding risks and uncertainties; but it has no constitutional right to profits such as are realized or anticipated in highly profitable enterprises or speculative ventures. The return should be reasonably sufficient to assure confidence in the financial soundness of the utility and should be adequate, under efficient and economical management, to maintain and support its credit and enable it to raise the money necessary for the proper discharge of its public duties. A rate of return may be reasonable at one time and become too high or too low by changes affecting opportunities for investment, the money market and business conditions generally.
In Federal Power Commission v. Hope Natural Gas Co., supra 320 U.S. at 603 , 64 S.Ct. at 288 , the Court elaborated upon the Bluefield criteria:
The rate-making process under the Act, i.e., the fixing of "just and reasonable" rates, involves a balancing of the investor and the consumer interests.... From the investor or company point of view it is important that there be enough revenue not only for operating expenses but also for the capital costs of the business. These include service on the debt and dividends on the stock.... By that standard the return to the equity owner should be commensurate with returns on investments in other enterprises having corresponding risks. That return, moreover, should be sufficient to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and to attract capital. [Citation omitted.]
The Bluefield and Hope cases continue to provide the basic framework for analyzing the fairness or reasonableness of allowed rates of return.
On the record before us, it is apparent that the 13% authorized return on common equity compares favorably with the actual returns on equity realized by those gas distributors that were found similar to WGL. See note 35 supra. Only once during the ten-year period from 1967-76 was the comparison companies' average return on equity over 13%. In the most recent year for which data was available, 1976, those companies averaged only an 11.45% return on equity.
This comparison may be somewhat misleading, because it compares WGL's authorized return on equity with other companies' actual returns. In his dissenting opinion, Commissioner Stratton matched WGL's authorized return in this case against the common equity returns authorized by respective state commissions in each of the comparison companies' most recent rate proceedings. [36] All but two of the eleven gas distributors in the Staff's comparison group had been authorized nominal equity returns in excess of the 13% allowed in this case. Nevertheless, we are unable to conclude that WGL's authorized rate of return falls outside the "zone of reasonableness." See In re Permian Basin Area Rate Cases, supra 390 U.S. at 767 , 88 S.Ct. at 1360 (quoting Federal Power Commission v. Natural Gas Pipeline Co., 315 U.S. 575, 585 , 62 *1215 S.Ct. 736, 742, 86 L.Ed. 1037 (1942)); Metropolitan Washington Board of Trade v. Public Service Commission, supra at 350. WGL's authorized rate of return is in the same general range as that of comparable utilities. The Commission's cost-of-equity determination is supported by the evidence, and its upward adjustment of that figure by seventy-five basis points, although not supported by specifically quantifiable evidence in the record, appears to be a rational attempt to bring the Company's equity return up to a competitive level.
Moreover, an inadequate authorized rate of return has not been primarily responsible for WGL's financial plight in recent years: The Company has been unable to earn its allowed return. This appears to be a common experience. Compare the table of authorized earnings for comparable companies, note 23 supra, with the table of actual earnings for comparable companies, note 22 supra. A utility's inability to realize its authorized return is usually caused by inflationary forces (in the form of attrition in the rate base and increased operating expenses), inefficient management, or both. There is no evidence (nor has any party alleged) that WGL has been improvidently managed; there is, however, no doubt that inflation has affected, and continues significantly to affect, regulated utilities. We later discuss separately the question of whether the Commission has taken legally adequate steps to account for attrition and inflation. At this juncture, we conclude that the Commission's determination of a 13% rate of return on equity is supported by the record and is not confiscatory or unreasonable as a matter of law. [37]
B. Treatment of Gains Realized on Reacquisition of Long-Term Debt
As part of a predetermined sinking fund obligation, WGL periodically repurchases some of its outstanding long-term debt. The Company is able to reacquire these obligations at less than their par value when their coupon rate is lower than the coupon rate in the current bond market. When a bond is repurchased at less than par, the company realizes a gain. From 1955 through 1977, WGL realized from such purchases gains totaling $3,747,000.
Prior to the ratemaking proceeding in issue here, it was WGL's practice to account for these gains as "below-the-line" profits— that is, net earnings accruing to the benefit of the company's stockholders, rather than its ratepayers—in the year the applicable debt was retired. Thus, whenever WGL repurchased one of its debentures at less than face value, the resultant gain was treated as part of the Company's retained earnings and, presumably, was taken into account when the Company declared shareholder dividends. [38]
*1216 Until the ratemaking proceeding presently before us, this accounting practice apparently was not challenged by the Commission. In the instant proceeding, however, the Commission ruled that this treatment of gains is unrealistic and inequitable, at least for ratemaking purposes. The Commission instead determined that the gain realized from each repurchase should be amortized over the remaining life of the particular debt retired, and that each year during that remaining life, the amounts so amortized should be used to offset the Company's overall cost of debt. The effect of this policy is to shift the benefits of these gains from the Company's shareholders to its ratepayers, since a utility's cost of debt is a factor considered by the Commission in setting the authorized overall rate of return. [39] The rationale behind this policy shift was described by the Commission as follows:
Any reduction in or savings associated with the cost of debt should be passed on to the customers. This is the corollary of the principle that all legitimate costs incurred in financing or refinancing debt are part of the cost of debt and should be passed on to the consumer. [Order 6051, at 12.]
The policy thus prescribed by the Commission is not a novel one. Rather, the Commission followed the decision of the Federal Power Commission (FPC) in Manufacturers Light and Heat Co., 44 F.P.C. 314, 319-26, 84 P.U.R.3d 511 , 516-22 (1970), in which the FPC announced a policy virtually identical to that adopted in this proceeding. The FPC has reaffirmed its Manufacturers Light & Heat Co. ruling on several occasions. See, e.g., Columbia Gulf Transmission Co., 53 F.P.C. 2016, 2024-25, 10 P.U. R.4th 116, 122-23 (1975); Kansas-Nebraska Natural Gas Co., 53 F.P.C. 1691, 1708, 9 P.U.R.4th 481 , 496-97 (1975), aff'd sub nom. Kansas-Nebraska Natural Gas Co. v. Federal Power Commission, 534 F.2d 227 (10th Cir. 1976); Consolidated Gas Supply Corp., 52 F.P.C. 454, 465, 5 P.U.R.4th 418 , 427-28 (1974). See also Accounting for Premium, Discount and Expense of Issue, Gains and Losses on Refunding and Reacquisition of Long-Term Debt, and Interperiod Allocation of Income Taxes, Order No. 505, 51 F.P.C. 714, 39 Fed.Reg. 6,093 (1974), rehearing denied, 51 F.P.C. 1746 (1974), clarified & aff'd, 59 F.P.C. 591 (1977), aff'd mem. sub nom. Texas Eastern Transmission Corp. v. Federal Energy Regulatory Commission, 187 U.S.App.D.C. 426 , 574 F.2d 637 , cert. denied, 439 U.S. 836 , 99 S.Ct. 119 , 58 L.Ed.2d 132 (1978). In addition, a nearly unanimous consensus of state regulatory bodies agree that gains as well as losses resulting from the repurchase of debentures should be passed on to ratepayers. [40]
*1217 WGL does not contest the Commission's decision to implement such a policy. The Company contends, however, that the Commission properly could consider only those gains realized on purchases in the test year and thereafter. Instead, the Commission adopted the approach followed by the Federal Power Commission in Manufacturers Light and Heat Co., supra:
[T]he amount of gains to be used as an offset to interest costs should be the pro forma amount that would have been amortized during the test year had such gains been amortized over the remaining life of the debt from the date of realization to the date of maturity of the issues involved. [Order 6051, at 14-15 (citing Manufacturers Light and Heat Co., supra at 324-26, 84 P.U.R.3d at 520-21).]
Put in simpler terms, the Commission announced that for ratemaking purposes it would look to all gains realized since the repurchasing scheme began in 1955; that it would treat those gains as if they had been amortized from the time of repurchase over the remaining lives of the bonds involved; and that it would offset the cost of long-term debt in the test year (1977) by the sum of the portions of these gains which would have been amortized in that year under such a system of accounting. WGL argues that by dipping back into gains realized prior to the test year, which were recorded by the Company as "below-the-line" earnings under the then-acceptable method of accounting, the Commission has engaged in a type of retroactive ratemaking proscribed in Board of Public Utility Commissioners v. New York Telephone Co., 271 U.S. 23 , 46 S.Ct. 363 , 70 L.Ed. 808 (1926). In that case, the Supreme Court struck down an order that the telephone company make up future earnings deficiencies out of excessive depreciation reserves accumulated in the past.
The Court stated:
The revenue paid by the customers for service belongs to the company. The amount, if any, remaining after paying taxes and operating expenses, including the expense of depreciation, is the company's compensation for the use of its property. If there is no return, or if the amount is less than a reasonable return, the company must bear the loss. Past losses cannot be used to enhance the value of the property or to support a claim that rates for the future are confiscatory.... And the law does not require the company to give up for the benefit of future subscribers any part of its accumulations from past operations. Profits of the past cannot be used to sustain confiscatory rates for the future. [ Id. at 31-32 , 46 S.Ct. at 366 (citations omitted).]
In the proceedings below, the Commission acknowledged that "past excessive earnings belong to the regulated utility just as past losses must be borne by it. A course of action which would violate this doctrine is commonly referred to as retroactive ratemaking." Order 6060, at 7. The Commission, however, went on to rule:
We were very careful not to indulge in retroactive ratemaking. The Commission's decision does not deprive stockholders of any past gains to which they were entitled prior to our decision in this case. They are permitted to keep all those gains which would have been amortized prior to the test year had the Commission instituted a policy of passing on the gains to the customers at the time the gains were realized. The customers get only the remaining pro forma unamortized gains which fall within the test period and in successive years. Under these circumstances, we do not think that it can be fairly said that we have engaged in retroactive ratemaking. [ Id. ]
WGL contends on appeal that the Commission did not go far enough to avoid retroactivity. The Company argues, in effect, that because the Commission until now has tolerated the utility's practice of accounting for these gains as below-the-line *1218 earnings, its stockholders acquired a vested entitlement to the entire amounts of all gains realized prior to the 1977 test year. The Commission and People's Counsel urge, on the other hand, that since it is the ratepayers who ultimately bear the cost of the utility's debt, any gains arising from reacquisitions of long-term debt should inure to the ratepayers' benefit in the form of a reduction in current debt cost. People's Counsel contends that it is no more an act of retroactivity to use these past gains as offsets to present debt cost than it is to permit WGL to charge present ratepayers for the current cost of debt securities issued in years past.
We agree with the Commission and People's Counsel that the Company's argument denies the realities—as well as the equities—of long-term debt financing. When a utility repurchases a debenture in the open market at a discount, the effect of such a transaction is to reduce the company's embedded cost of debt. This is true regardless of whether the discount is treated for accounting purposes as a reduction in debt expense or, as has been WGL's practice, as retained earnings. In other words, gains on reacquired debt reduce the company's embedded cost of debt, irrespective of the utility's accounting practices. As the Federal Power Commission noted in Manufacturers Light and Heat Co., supra at 323-24, 84 P.U.R.3d at 519-20:
[T]he discounts on repurchased debt under consideration here represent a savings which is virtually automatic. [The utility] is required to repurchase its debentures for sinking fund purposes. So long as interest rates continue above the levels of the early 1950's, such repurchases will continue to be made at discounts each year. Unless amortization of these amounts is required, the cumulative effect will be to add large sums to retained earnings, with no benefit to consumers. Yet consumers will continue to pay the cost of debt, including new debt issued at higher rates to replace that retired.
* * * * * *
Patently, all legitimate costs incurred in financing or refinancing debt are part of the cost of debt, and should be passed on to the consumer. Conversely, any reduction in or savings associated with cost of debt also should be passed on to the consumer.
* * * * * *
Since management is required ... to incur both premiums and discounts associated with prudent retirement of debt, it is neither accurate nor equitable to describe such charges and credits as fortuitous. Instead, sound principle requires that they be treated as a normal and recurring part of utility financing and given appropriate recognition in determining the true cost of debt.
The question of retroactive ratemaking was not discussed as such in Manufacturers Light and Heat Co. In that case, however, the FPC amortized gains over the remaining lives of debentures retired from 1956 through the test year, 1969, even though it apparently had never before announced such a ratemaking policy. Later, in Columbia Gulf Transmission Co., 53 F.P.C. 2016, 2024-25, 10 P.U.R.4th 116 , 122-23 (1975), the FPC rejected a utility's argument that the agency properly could amortize only those gains realized since the date the utility began amortizing such gains for accounting purposes. Cf. Washington Public Interest Organization v. Public Service Commission, supra at 82-85 (PSC is not bound to conform ratemaking policies with accounting method used by utility even where system of accounting was prescribed by the Commission).
We think that the ratemaking policy announced in the federal precedents and adopted by the Commission here is soundly supported by the realities of long-term debt financing. As the FPC noted in Manufacturers Light and Heat Co., the savings in debt cost associated with the repurchase of debentures at a discount are "virtually automatic." 44 F.P.C. at 323, 84 P.U.R.4th at 519. Furthermore, it is the ratepayers, rather than the stockholders, who are burdened with payment of income taxes on the *1219 gains realized, as well as with the cost of financing new debt issued by the Company to replace the retired debt. [41] Accordingly, we find that the Commission's amortization of all gains realized since 1955 did not constitute illegal retroactive ratemaking. The fact that the Commission until now has acquiesced in the Company's use of a method of accounting that did not reflect the actualities or the equities of debt financing provides an insufficient basis to hold that WGL's stockholders acquired an immediate "vested" interest in all gains realized prior to the 1977 test year. We therefore affirm the Commission's treatment of gains realized on the reacquisition of long-term debt.
IV. PROPOSED ADJUSTMENTS TO ACCOUNT FOR POST-TEST-PERIOD CHANGES IN OPERATING EXPENSES AND RATE BASE
A. Attrition
The Company challenges the Commission's denial of its request for an additional 0.5% authorized return on rate base above and beyond the return indicated by the cost-of-capital computation in order to offset the effects of attrition. [42] The Company's request for an incremental attrition allowance was in addition to its plea for more conventional attrition remedies such as a year-end rate base and pro forma adjustments to its test-period operating expenses. The 0.5% figure represented approximately one-half of the projected effect upon the Company's earnings of two specific factors that WGL anticipated would cause attrition: expanding rate base and increased direct labor costs. See WGL Exh. C, at 29-31. The Company's witness, Maher, estimated that WGL's year-end rate base for the District would be $87 million for 1977 and $92.4 million for 1978, representing an annual growth rate of 6.21%. He further projected that when the Company's then-current labor agreement expired on May 31, 1978, a new settlement would be reached at a five or six percent increase. Id. at 29-30.
The Commission Staff also recommended that a specific attrition allowance be granted. Its witness, Glassman, estimated WGL's 1978 rate base growth at about three percent, to $89.6 million by year-end. He suggested that the attrition allowance should be based solely on expected rate base expansion, and not on anticipated increases in operating costs (such as wages and pensions). Accordingly, he proposed an incremental allowance of 0.27% on the year-end 1977 rate base. Staff Exh. 14, at 46-58; see id., Schs. 14-15.
People's Counsel opposed any lump-sum attrition allowance. Its witness, Daniel Sack, testified that attrition would be mitigated adequately by the use of a year-end rate base and by allowing the Company to make pro forma adjustments to reflect known increases during 1977 and 1978 in the costs of labor, pensions, insurance, taxes, peak-shaving gas, and other expense items. PC Exh. C. at 30-31. See also WGL Exh. D, at 6-9; WGL Exh. 4, at 4-21, 23, 25-26 (testimony and exhibits prepared by Lewis G. Unkle). People's Counsel suggested also that the effects of attrition would be offset further by increased operational efficiencies, which a WGL witness had predicted would be forthcoming. See WGL Exh. A, at 5-7 (testimony of Paul E. Reichardt). Finally, People's Counsel referred to testimony by Staff witness Glassman to the effect that customer contributions to capital in the form of deferred income tax accumulations would continue to rise each year and would not be reflected in the Company's cost of service until the next rate proceeding is instituted.
*1220 The Commission essentially adopted the position urged by People's Counsel. It stated in part:
The Commission is sympathetic to the attrition problem which the Company has been experiencing throughout the 1970's. It is a matter of great financial importance to the Company as well as to District customers. Nevertheless, on the basis of this record we are hesitant to adopt the proposed solution of a lump-sum adjustment; we are not convinced that a lump-sum adjustment to the revenue requirement is a reasonable approach to the attrition problem in this case.
For purposes of this case, we will continue to rely on the corrective measures adopted in past cases. The year-end rate base which this Commission uses has long been recognized as a device to compensate for attrition resulting from a growth in investment which outstrips growth in revenues. Although this device does not alleviate attrition stemming from expenses growing faster than sales, the Commission does adjust test-year expenses for "known changes" which occur during, or within a reasonable period subsequent to, the test year.
In an effort to formulate policy for future cases, the Commission has decided to undertake a thorough reevaluation of the problem. We recognize that year-end rate base and pro forma adjustments may not be adequate in the years to come. Much depends on the future trends in the underlying factors which affect the Company's attrition rate. [Order 6051, at 27-28.]
The Commission suggested that alternative remedies, such as a projected test year, might be preferable to a lump-sum attrition allowance, and stated its intention to institute a separate proceeding "in the near future" to reevaluate the problem. [43] Id. at 28-29.
In its Application for Reconsideration of the Commission's final order (submitted April 16, 1979), the Company renewed its request for attrition relief. It proffered new data tending to demonstrate that the newly-approved rates were already insufficient to allow WGL its authorized return. [44] It asked that the Commission recompute WGL's revenue requirement using a pro forma test year ending December 31, 1978.
On April 26, 1979, the Commission issued its First Order on Reconsideration (Order No. 6069), in which it denied the Company's plea that updated figures be substituted for the "stale" test-year data. The Commission found that WGL's request to supplement the record came much too late. It noted that if it decided to incorporate the Company's post-1977 test-year evidence into the case at that time, it would be compelled to reopen the record in order to allow other parties to confront WGL's witnesses and test their 1978 and 1979 calculations. Such an endeavor, it found, would be tantamount to initiating a new rate proceeding. Order 6069, at 2-3.
We agree with the Commission that it was under no obligation to consider extra-record evidence that was offered for *1221 the first time after the Commission's final order had been issued. While it may be an abuse of discretion for an agency to ignore the most recent data on the record of a proceeding, see West Ohio Gas Co. v. Public Utilities Commission (No. 2), 294 U.S. 79, 81-82 , 55 S.Ct. 324, 325 , 79 L.Ed. 773 (1935); Potomac Electric Power Co. v. Public Service Commission, supra at 18-19; Telephone Users Association v. Public Service Commission, D.C.App., 304 A.2d 293, 298 (1973), cert. denied, 415 U.S. 933 -34, 94 S.Ct. 1448 , 1449, 39 L.Ed.2d 492 (1974), the same cannot be said as easily for evidence submitted after the record has been closed and a final opinion issued. See Bowman Transportation, Inc. v. Arkansas-Best Freight System, Inc., 419 U.S. 281, 294-96 , 95 S.Ct. 438, 446-47 , 42 L.Ed.2d 447 (1974) ("we have always been loath to require that factfinding begin anew merely because of delay in proceedings of such magnitude and complexity"); Illinois Commerce Commission v. United States, 292 U.S. 474, 480-81 , 54 S.Ct. 783, 785 , 78 L.Ed. 1371 (1934); cf. Potomac Electric Power Co. v. Public Service Commission, supra at 19 ("[A] request to use more recent data submitted in a last minute filing ... is not necessarily a fair or reasonable request. It is to be resolved in the reasonable exercise of the Commission's discretion.") (footnote omitted). Only in exceptional circumstances is it appropriate for a reviewing court to remand a final ratemaking decision in order to update a "stale" record. See Atchison, Topeka & Santa Fe Railway Co. v. United States, 284 U.S. 248 , 52 S.Ct. 146 , 76 L.Ed. 273 (1932) (Commission's refusal to reopen record in light of the economic metamorphosis brought on by the Great Depression was an abuse of discretion). Although the PSC consumed a considerable amount of time before rendering a decision after the record in this case was closed—perhaps due to the number of novel and complex issues raised—we do not find any "exceptional" circumstances justifying a reopening of the record. On appeal, WGL contends that the Commission failed to state adequate findings of fact in support of its decision, and argues, in effect, that, in light of the continuing erosion to its rate of return caused by inflation, the failure to provide an attrition allowance was per se unreasonable.
No party disputes the fact that WGL's earnings have suffered from attrition in recent years, or that inflation is likely to remain an economic reality in the near future. The Commission recognized the Company's earnings erosion and took several steps that it considered sufficient to combat attrition in this case. Besides routinely allowing WGL to amend its original application (based on a calendar 1976 test year) to incorporate a test year ending June 30, 1977, the Commission also (1) adjusted the mid-1977 test period to reflect known changes in operating costs occurring shortly thereafter, and (2) used a year-end rate base (as of December 31, 1977) in establishing WGL's revenue requirements. WGL's argument, that the Commission was required to grant further relief in the form of an attrition allowance to compensate for expected growth in the rate base and anticipated increases in labor costs, is, we find, without merit.
Although other jurisdictions have accepted separate attrition allowances as a valid means of hedging against inflation, see, e.g., Legislative Utility Consumers' Council v. Granite State Electric Co., 119 N.H. 359, 362-63 , 402 A.2d 644, 646-47 (1979) (attrition allowance of 0.5% of rate base upheld); In re Georgia Power Co., 30 P.U.R. 4th 409, 420-21 (Ga.P.S.C.1979) (authorized return on equity increased by 0.7% to account for attrition), a majority of state regulatory commissions adhere to the view that, absent extraordinary conditions, using a year-end rate base and making adjustments for known and measurable changes occurring within a reasonable time after the test period are sufficient steps to offset attrition. See, e.g., In re General Telephone Co., 19 P.U.R. 4th 227, 232-35 (Fla.P.S.C.1977); In re Kansas Power and Light Co., 13 P.U. R.4th 213, 223 (Kan.St.Corp.Comm'n 1975); In re East Ohio Gas Co., 16 P.U.R.4th 137 , 153-54 (Ohio P.U.C. 1976); In re Chesapeake and Potomac Telephone Co., 19 P.U. R.4th 349, 363-64 (Va.St.Corp.Comm'n *1222 1977). General allegations of as-yet-unquantified future cost increases and rate base expansion do not provide an automatic entitlement to incremental attrition relief.
Effective ratemaking requires "an honest and intelligent forecast as to probable price and wage levels" in the near future. McCardle v. Indianapolis Water Co., 272 U.S. 400, 408 , 47 S.Ct. 144, 147 , 71 L.Ed. 316 (1926). See also Telephone Users Association v. Public Service Commission, supra at 300-03. To be sure, WGL made a bona fide attempt to quantify the expected growth in its rate base during the year 1978 and the estimated increase in labor costs that would be engendered by the new labor agreement (to be negotiated following the expiration of the then-existing contract on May 31, 1978). However, there were a number of countervailing factors in the record that support the Commission's refusal to grant a supplemental allowance based on those estimated increases. First, there was a significant lack of unanimity as to the expected growth in WGL's rate base. The Company's prediction was more than 100% greater than that of the Staff, and People's Counsel challenged the methodology used by both. Second, the Company's projection with respect to future wage levels not only was speculative, but also related to a labor settlement that was yet to be negotiated and, in any event, would not take effect until June 1, 1978. The Commission did not act unreasonably in refusing to grant rate relief on the basis of conjectural costs so far removed from the test period. Third, there was evidence that the size of WGL's labor force had declined steadily in recent years, due in part to productivity efficiencies. There also was evidence that the Company expected to cut costs in some areas through improved technologies in the near future. In addition, a Company witness pointed out that customer contributions in the form of deferred income taxes should continue to rise each year. Evidence was adduced that the gas supply picture for the near future had improved since WGL's last rate proceeding. The Company recently had been authorized to expand its service obligation by up to 5,000,000 therms per year to a maximum of 3,000 new customers. See note 49 infra. And finally, we observe that the Commission computed WGL's operating expenses using a 48% federal corporate income tax rate, whereas Congress had recently lowered the actual rate to 46%, effective January 1, 1979. Since we today affirm the Commission's use of the 48% tax rate ( see Part IV (B) infra ), the savings that the Company realizes on the difference between the two rates will serve also to mitigate attrition. [45]
In sum, although it is generally desirable for the Commission to account for changes in costs or in the rate base occurring within a reasonable period after the test year— even when this entails making educated forecasts—there were sufficient offsetting factors in this case to justify the Commission's refusal to grant the Company separate relief based on projected post-test-year rate base expansion and labor expense increases. On the basis of the record before us, we cannot conclude that the Commission committed reversible error in finding that the Company had failed to justify its request for a separate attrition allowance.
B. Federal Income Tax Rate
The Commission computed WGL's revenue requirements using the 48% federal corporate income tax rate, which was in effect until December 31, 1978. [46] Order 6060, at *1223 9-10. People's Counsel and the GSA contend here, as they did before the Commission, that since the rates in issue here went into effect on March 16, 1979, upon the issuance of Order 6060, the Commission should have used instead the newly-enacted 46% tax rate, which became effective on January 1, 1979. The Commission and the Company respond that the 46% rate was properly rejected because of its remoteness from the test year. [47] If it were to be utilized, they argue, equity then would require that a number of post-test-period cost increases (which were not reflected in WGL's pro forma test-period expenses) also be incorporated. WGL additionally contends that People's Counsel's espousal of the 46% tax rate is inconsistent with its position opposing an attrition allowance. The Commission stated:
Were we to consider the new 46 percent corporate income tax rate, fairness and consistency would dictate that we likewise consider other offsetting changes in the tax laws, together with changes in other expenses, such as higher wage rates for labor. And in fact, the reduction in the income tax rate effective in 1979 is not the only change in the tax laws. Both the taxable wage base and the percentage rate for the social security tax (FICA) have been increased for 1979. There could well be other changes which, in the aggregate, might more than offset any rate reduction occasioned by using the 46 percent tax rate. But People's Counsel has failed to address this question of offsetting post-test year increases in expenses. For the reasons stated, we cannot grant People's Counsel's exception on this point. [Order 6060, at 10 (footnote omitted).]
The Commission's interest in using income and expense data from a discrete time period, the test year, and its reluctance continually to extend that period until the issuance of its Final Order, are, we conclude, not unreasonable limitations on the ratemaking process. See Potomac Electric Power Co. v. Public Service Commission, supra at 18-19. The Commission's use of the 48% tax rate must therefore be affirmed.
V. TREATMENT OF EXPENSES INCURRED FOR ADVERTISING, TRADE ASSOCIATION MEMBERSHIP, COMMUNITY AFFAIRS PROGRAMS, AND BUSINESS AND CIVIC ORGANIZATION SUPPORT
The Commission, over the dissent of Commissioner Stratton, found that certain expenses, including $95,000 for general advertising, $56,000 for trade association dues, $130,000 incurred in providing information to schools and community groups, and $35,000 for membership dues and support payments to civic and business organizations, did not inure to the benefit of WGL's customers. The Commission therefore concluded that these expenses should be borne by the Company's shareholders, rather than its ratepayers. Order 6051, at 68-74. The Commission concurrently announced its intention to initiate rulemaking hearings on the treatment of advertising expenses in the near future. Id. at 69.
On appeal the Company argues that the Commission's change of policy was arbitrary and unreasonable. The Commission and People's Counsel respond that the Commission acted within the scope of its allowed *1224 discretion and that, as the Company failed to prove that these expenditures directly benefited the ratepayers, the Commission's action must be sustained. Finding no error, we affirm the Commission's treatment of these expenses.
A. Advertising expenses
In the proceedings before the Commission, People's Counsel proposed that WGL's general and administrative expenses be reduced by $95,000, the amount expended by WGL on general advertising during the test year. First, People's Counsel contended that WGL had for accounting purposes treated the advertising expenses as being "of a good will or institutional nature which is ... designed to improve the image of the utility or the industry," rather than as "informational." [48] Second, Daniel Sack, the witness for People's Counsel, stated in prepared testimony that, in light of restrictions on the Company's authorization to expand service to new customers, [49] he considered it inappropriate to charge advertising expenses to the ratepayers. [50]
WGL's witness, Unkle, responded that, despite the "technical wording" of the Uniform System of Accounts, over half the expenses in the account represented the Company's contribution to the American Gas Association's media advertising program, which informs customers about gas safety, gas supply, fuel characteristics, and the rising cost of gas. Unkle acknowledged that the Company had in the test year kept another, separate account, which covered informational advertising to customers.
The Commission accepted People's Counsel's proposed adjustment to the Company accounts, stating:
Whenever WGL wants to charge its advertising to the ratepayers, it must carry the burden of proof. In this instance, People's Counsel alleged that WGL's advertising program was strictly for "image" building. Faced with this challenge, WGL should have come forward with a detailed presentation. Instead, although WGL presented a rebuttal witness, he contented himself with a three-sentence response. The witness' statement that the advertising was "informational" is phrased in generalized and conclusory language. It defies analysis or verification. In these circumstances, the Commission will not require the ratepayers to underwrite these advertising costs. [Order 6051, at 69 (emphasis added).]
On appeal, the Company contends that the Commission erred in its allocation of the burden of proof. The Commission charged the Company with the burden of responding to the challenge by People's Counsel to WGL's accounting practice. The Company argues instead that "the Commission bears the burden of explaining the reasonableness of any departure from a long-standing practice, and any facts underlying its explanation must be supported by substantial evidence." Columbia Gas Transmission Corp. v. Federal Energy Regulatory Commission, 202 U.S.App.D.C. 219 , 299 n. 31, 628 F.2d 578 , 586 n. 31 (1979). See also Atchison, Topeka & Santa Fe Railway Co. v. Wichita Board of Trade, 412 U.S. 800, 808 , 93 S.Ct. 2367, 2375 , 37 L.Ed.2d 350 (1973).
The case before us differs materially from Columbia Gas Transmission Corp. v. Federal Energy Regulatory Commission, supra , upon which petitioner relies. In Columbia Gas, the Commission itself, and its predecessor, the Federal Power Commission, for nearly twenty-five years had used *1225 one method of accounting (the Seaboard formula) for purposes of both cost allocation and rate design. 202 U.S.App.D.C. at 295 & n. 12, 628 F.2d at 582 & n. 12. In rate proceedings one party had suggested substitution of another accounting method (the United formula) for purposes of rate design. Several parties presented substantial evidence in opposition to such a substitution, while its proponent simply contended without evidentiary support that the substitution would distribute certain costs more equitably. The Commission staff also supported the United proposal. An administrative law judge found the United proposal inapplicable, but was overruled by the Commission which in conclusory fashion adopted the United proposal. Id. 202 U.S.App.D.C. at 296-98, 628 F.2d at 583-85. The court reviewed the record and found no evidence that adoption of the United proposal would serve any purpose. Under these circumstances, the court stated that, although the Commission was empowered to reconsider its policy and change its approach, in case of such a change the Commission was at least required fully to articulate the basis for its decision. Id. 202 U.S.App.D.C. at 305-06, 628 F.2d at 592-93. See also West Ohio Gas Co. v. Public Utilities Commission (No. 1), 294 U.S. 63, 72 , 55 S.Ct. 316, 321 , 79 L.Ed. 761 (1935) (commission's disallowance of certain advertising expenses as business expenses chargeable to ratepayers was wrong where the commission's action had no basis in evidence, either direct or circumstantial ).
In this case, unlike Columbia Gas, the Commission had never before ruled on the accounting treatment of advertising expenses. [51] We are thus not confronted with a departure from a long-standing Commission practice. Under these circumstances, the Commission did not bear the burden of explaining the reasonableness of its ruling.
The Commission's ruling on the burden of proof issue, that it was incumbent upon the Company to demonstrate that the advertising benefited its ratepayers in order to charge its ratepayers for these expenses, was consistent with modern utility practice. See, e.g., In re General Telephone Co., 37 P.U.R.4th 127 , 155 (Cal.P.U.C.1980); In re Mountain States Telephone and Telegraph Co., 22 P.U.R.4th 516 , 541 (Colo.P.U.C.1977); In re Hawaiian Telephone Co., 23 P.U.R.4th 385 , 404 (Hawaii P.U.C.1978); In re Central Illinois Public Service Co., 34 P.U.R.4th 267 , 280-81 (Ill. Commerce Comm'n 1979); In re South Carolina Electric and Gas Co., 37 P.U.R.4th 441 , 480 (S.C.P.S.C.1980). Courts too have ruled that institutional advertising expenses should not be charged to ratepayers "unless the utility establishes [that] such expenditures benefit all ratepayers." State v. Oklahoma Gas and Electric Co., 536 P.2d 887, 894 (Okl.1975); accord, e.g., State ex rel. Laclede Gas Co. v. Public Service Commission, 600 S.W.2d 222, 228-29 (Mo.App. 1980), appeal dismissed, 449 U.S. 1072 , 101 S.Ct. 848 , 66 L.Ed.2d 795 (1981); City of Cleveland v. Public Utilities Commission, 63 Ohio St.2d 62, 70-73 , 406 N.E.2d 1370, 1377-79 (1980); cf. Washington Public Interest Organization v. Public Service Commission, supra at 85 (the question before us in determining the propriety of a Commission ruling on an accounting issue was whether the Company had made a "convincing showing" that the Commission's ruling was unreasonable, unjust, or discriminatory.) But see note 55 infra.
The Commission fairly described the Company's evidence as a "generalized and conclusory" refutation of People's Counsel's proposal. Order 6051, at 69. [52] The evidence presented by People's Counsel, although weak, was at least as substantial *1226 as the Company's. Circumstantial evidence was presented—the recording of the disputed expenses in Account 930.1, and the existence of a second separate account for informational advertising, as testified to by the Company's witness Unkle on cross-examination—indicative that the Company had made an internal judgment that the expenses were image-building in nature. [53] Also, Sacks's argument, that since WGL would in the near future be permitted to expand only minimally promotional advertising was unnecessary, buttressed the position of People's Counsel. [54] Under these circumstances, we cannot conclude that the Company has made a convincing showing that the Commission's determination, that the Company failed to prove that the advertising was other than image-building in nature, was factually unreasonable.
Nor did the Commission err as a matter of law in concluding that such expenses must be charged to the Company's shareholders rather than its ratepayers. The principle underlying public utility accounting systems is that gains and losses on assets which are "used and useful" in serving the public are allocated to the ratepayers, while expenses for and profits from nonutility assets are allocated to the company's shareholders. Washington Public Interest Organization v. Public Service Commission, supra at 82. "A regulated utility may not impose unnecessary costs upon its consumers." Cities Service Gas Co. v. Federal Power Commission, 424 F.2d 411, 417 (10th Cir. 1969), cert. dismissed, 400 U.S. 801 , 91 S.Ct. 9 , 27 L.Ed.2d 33 (1970). A large number of public utility commissions have in recent years concluded that "institutional" advertising, which is "designed to enhance or preserve the corporate image of the utility, and to present it in a favorable light," City of Cleveland v. Public Utilities Commission, supra 63 Ohio St.2d at 70 , 406 N.E.2d at 1377 (quoting In re Promotional Practices of Public Utilities and Cooperative Utility Associations, 97 P.U.R.3d 1 , 4 (Okla.Corp.Comm'n 1972)), benefits company shareholders, rather than ratepayers, and should be disallowed as an operating expense upon which to base utility rates. See, e.g., In re Southwestern Bell Telephone Co., 27 P.U.R.4th 493 , 509-11 (Ark.P.S.C. 1979); In re Mountain States Telephone and Telegraph Co., supra at 541 (Colo.); In re Southern Bell Telephone and Telegraph Co., 21 P.U.R.4th 451 , 471-72 (Fla.P.S.C. 1977); In re Hawaiian Telephone Co., supra at 403-04; In re Idaho Power Co., 29 P.U. R.4th 183, 204 (Idaho P.U.C.1979); In re Interstate Power Co., 32 P.U.R.4th 494 , 509 (Minn.P.S.C.1979); In re Empire District Electric Co., 30 P.U.R.4th 1 , 3-4 (Mo.P.S.C. 1979); In re Gas Co., 35 P.U.R.4th 106 , 127-28 (N.M.P.S.C.1980); In re South Carolina Electric and Gas Co., 34 P.U.R.4th 458 , 489 (S.C.P.S.C.1979); In re Otter Tail Power Co., 30 P.U.R.4th 26 , 34-36 (S.D.P.U.C. 1979); In re Monongahela Power Co., 25 *1227 P.U.R.4th 449, 455 (W.Va.P.S.C.1978); In re Madison Gas and Electric Co., 34 P.U.R.4th 569 , 575 (Wis.P.S.C.1980). Courts have sustained such determinations as being reasonable and within the scope of the commissions' authority. E.g., State ex rel. Laclede Gas Co., supra at 226-29; City of Cleveland v. Public Utilities Commission, supra 63 Ohio St.2d at 72-73 , 406 N.E.2d at 1378-79 ; State v. Oklahoma Gas and Electric Co., supra at 894; Pacific Northwest Bell Telephone Co. v. Davis, 43 Or.App. 999, 1015 , 608 P.2d 547, 556 (1979); cf. Consolidated Edison Company of New York, Inc. v. Public Service Commission, 47 N.Y.2d 94 , 417 N.Y.S.2d 30, 34, 103 , 390 N.E.2d 749, 752-53 (1979), rev'd on other grounds, 447 U.S. 530, 544 , 100 S.Ct. 2326, 2337 , 65 L.Ed.2d 319 (1980) (sustaining the Commission's ruling disallowing the company's accounting method under which promotional advertising expenses were considered above-the-line expenses chargeable to ratepayers). [55]
We conclude that the Commission's ruling, that the Company bears the burden of demonstrating why ratepayers should cover the cost of institutional advertising expenses, and that the Company had failed to meet this burden, was not unjust, unreasonable, or discriminatory. The ruling of the Commission must therefore be sustained. [56]
B. Trade Association Dues
People's Counsel's witness Sack proposed that $56,000 expended by WGL for trade *1228 association dues be excluded from the company's operating expenses. Sack suggested that "[t]he ratepayer gets no benefit" from these dues, and that such expenses are "not a necessary part of providing gas service to the consumer." PC Exh. C, at 23-24. On cross-examination, Sack conceded that he had made no attempt to discover what the Company's trade association membership entailed.
In his rebuttal testimony, WGL's witness Unkle stated:
Of the $56,000 of association dues included in the rate case, ... $55,400 represents annual dues paid by the Company for its membership in the American Gas Association [AGA].
As a member of the American Gas Association, the Company has available to it resources for prompt, competent analysis of significant issues affecting the short and long term viability of the gas industry. The American Gas Association also acts as an industry clearinghouse for information on new techniques in coping with industry problems related to gas operations. [WGL Exh. L, at 6.]
The Commission adopted People's Counsel's proposal and eliminated $56,000 from WGL's operating expenses. In so doing, the Commission remarked:
[Trade associations] represent their members in matters affecting them, such as proposed legislation, activities of relevant regulatory agencies, litigation, information dissemination, and image-building advertising.
* * * * * *
Although AGA's general activities are undoubtedly valuable to investors, the record does not demonstrate that they improve customer service. Accordingly, it is more appropriate for WGL's stockholders to fund the gas industry's legislation and public relations programs.
To illustrate our rationale for excluding AGA dues from cost of service, we contrast these dues to WGL's payments to AGA regarding a coal gasification project. In Case No. 647 [16 P.U.R.4th at 267], we allowed WGL to recover those payments to AGA through rates. We viewed the coal gasification project as related to future customer service, in the sense that it enhanced gas supplies. On the other hand, the general activities of the AGA, as funded by the dues in question, are far less tied to improving service to the customer. [Order 6051, at 69-71 (emphasis added).]
Review of the accounting treatment of expenditures such as trade association dues is typically and appropriately entrusted to the Public Service Commission. The purpose of Commission oversight is to protect the consuming public against monopolistic exploitation, see State ex rel. Laclede Gas Co. v. Public Service Commission, supra at 226, in part by assuring that utility customers are compelled to pay only for expenses that accrue to their benefit. The Commission's allocation of the burden to the Company to demonstrate that the payment of trade association dues benefits customers comports with modern utility commission regulatory practice. See Colorado Ute Electric Association, Inc. v. Public Utilities Commission, 198 Colo. 534, 541 , 602 P.2d 861, 865-66 (1979) (en banc); In re Florida Gas Co., 13 P.U.R.4th 255 , 259 (Fla.P.S.C. 1975); In re Idaho Power Co., 23 P.U.R. 299 , 319-20 (Idaho P.U.C.1977); In re Rules and Regulations Covering Rate Case Treatment of Certain Expenses, 30 P.U.R.4th 338 , 343 (N.M.P.S.C.1979). Likewise, the Commission's disallowance of trade association dues as operating expenses for ratemaking purposes, in the absence of evidence that the expenses directly benefit the ratepayer, parallels the practice of many other utility commissions. See, e.g., In re Idaho Power Co., supra at 319-20; In re Kansas City Power and Light Co., 28 P.U.R.4th 398 , 437-38 (Mo.P.S.C.1979); In re Rules and Regulations Covering Rate Case Treatment of Certain Expenses, 30 P.U.R.4th at 343; In re Minnesota Gas Co., 32 P.U.R.4th 1 , 27-28 (S.D.P.U.C.1979); Washington Utilities and Transportation Commission v. Washington Natural Gas Co., 32 P.U.R.4th 530 , 542-43 (Wash.Utils. & Transp. Comm'n 1979); In re Pennzoil Co., 6 P.U.R.4th 189 , *1229 194 (W.Va.P.S.C.1974). Contra, In re Southwestern Bell Telephone Co., 28 P.U. R.4th 519, 537 (Kan.St.Corp.Comm'n 1979); In re Columbus and Southern Ohio Electric Co., 24 P.U.R.4th 261 , 287 (Ohio P.U.C. 1978).
We conclude that here, in the absence of evidence that AGA activities benefited customers, the Commission acted reasonably and within the scope of its allowed discretion in concluding that ratepayers should not be compelled, by inclusion of those expenditures in the Company's operating expenses, to pay the AGA dues. [57]
C. Community Affairs Expenses
The Company's witness, Unkle, testified that, at the invitation of schools and community groups, WGL sends out speakers to talk about matters relating to gas service, including fuel conservation, safety considerations, the two-part billing system, estimated billing, the gas supply situation, and the rising cost of gas. WGL Exh. L, at 6. During the test year, WGL incurred expenses of $130,000 on this speakers program. People's Counsel's witness, Sack, recommended that the entire amount be disallowed as a

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/2284798. Public record. Not legal advice.