Appendix — Laclede Gas Co. v. Public Service Commission
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Supreme Court, U.S.
80-576 ioeceadiad
0 1980
MICHAEL RODAK, JR., CLERK
No. L™
IN THE
Supreme Court of the United States
October Term, 1980
LacLeDE Gas Company,
Appellant,
Vv.
Pusuic Service Commission or Missouri,
Appellee.
ON APPEAL FROM THE SUPREME COURT OF THE STATE OF MISSOURI
SEPARATE APPENDIX TO
JURISDICTIONAL STATEMENT
JaMes B, LiperMAn
26 Broadway
New York, New York 10004
Tel, (212) 248-6900
Counsel for Appellant
Of Counsel:
Donavp L. Gopiner
720 Olive Street
St. Louis, Missouri 63101
Tel. (314) 342-0508
Tra H. Jouues
Berlack, Israels & Liberman
26 Broadway
New York, New York 10004
Tel. (212) 248-6900
ed
TABLE OF CONTENTS TO SEPARATE APPENDIX
Appendix A
Appendix B
Appendix C
Appendix C-1
Appendix D
Appendix D-1
Appendix D-2
Appendix D-3
Appendix E
Appendix F
PAGE
Order of Supreme Court of Missouri A-1
Opinion of Missouri Court of Appeals A-2
Opinion, dated October 23, 1978 of the
Circuit Court of Cole County ....... A-17
Order dated March 28, 1978, as
amended on March 30, 1978, of the
Cireuit Court of Cole County ..... A-28
Report and Order, dated April 21,
1978, of the Missouri Public Ser-
vice Commission ..............-:..::0+--+---- A-34
Order Denying Application for Re-
hearing, dated May 1, 1978, of the
Missouri Public Service Commis-
MUD: sichissinesnindsiaaiiediiatinialiabiais A-107
Report and Order, dated July 1, 1977
of the Missouri Public Service
COUT cscicinetesstninchiapnteadininai A-171
Order Denying Application for Re-
hearing, dated July 19, 1977, of the
Missouri Public Service Commis-
IIE cciccnnevinssticdacehtieecdisscnaiiiglatantien Same A-173
Notice of Appeal .0.0....2........::::cccce000 A-175
Revised Statutes of Missouri
DT TD -sensistsisticcianesicscscddeeieetonedan A-177
DS TED icecssesenssntesecissnbcctulicteans A-177
9 SOB.140 (1) (5) ..n.cccececcsrerscccsestocoes A-178
A-1
APPENDIX A
Supreme Court No. 62303
IN THE SUPREME COURT OF MISSOURI
Western District No. 30581
May Session 1980
State ex rel, Lactepe Gas Company,
Relator-Appellant,
v.
Pusiic Servick CoMMIssION oF Missour!,
Respondent.
rrr: iim
TRANSFER
Now at this day, on consideration of Relator-Appellant’s
Application to transfer the above entitled cause from the
Western District Court of Appeals, it is ordered that said
application be, and the same is hereby denied.
State or Missourt—SCT.
I, THOMAS F. SIMON, Clerk of the Supreme Court of
the State of Missouri, certify that the foregoing is a full,
true and complete transcript of the judgment of said
Supreme Court, entered of record at the May Session
thereof, 1980, and on the 15th day of July 1980, in the
above entitled cause.
Given under my hand and seal of said Court, at the City
of Jefferson City, this 15th day of July, 1980.
Tomas F’, Simon, Clerk.
By Anne Beruorst, D.C,
A-2
APPENDIX B
MISSOURI COURT OF APPEALS
Western District
No. KCD 30581
STATE EX REL, LACLEDE Gas CoMPANY,
a corporation,
Relator-Appellant,
US,
Pusuic Service CoMmMission oF Missourt,
Respondent.
OPINION FILED
MAY 5, 1980
APPEAL FROM THE CIRCUIT COURT OF COLE COUNTY
SS
Honorable Byron L. Kinder, Judge
Before Wasserstrom, C, J., Presiding, Shangler, Pritchard,
Swofford, Somerville, Clark and Manford, JJ.
This is an appeal from a Cireuit Court judgment affirm.
ing' an order of the Public Service Commission. The order
established new rate schedules for the natural gas utility.
The judgment is affirmed.
The instant proceedings commenced with the filing of
new proposed rate schedules by Laclede Gas Co. (herein-
after referred to as Laclede) with the Publie Service Com-
1. The parties hereto agree and this court construes the judgment
. ne circuit court as affirming the P.S.C.’s order because of its
“net effect”.
f°
°°?
A-3
mission (hereinafter referred to as the P.S.C.) on August
16, 1976. The proposed rate schedule was designed to in-
crease Laclede’s gross operating revenues by an annual
amount of $13,570,000 exclusive of gross receipt taxes.
Pursuant to § 393.150(1), RSMo 1969, the P.S.C., under
date of September 7, 1976, suspended for a period of 120
days the effective date of the proposed schedule. The sus-
pension was to allow sufficient time to study tle effects of
the proposed schedule and to determine if they were reason-
able, just and in the public interest.
On October 13, 1976, pursuant to § 393.150(2), RSMo
1969, the P.S.C. further suspended the effective date of the
proposed schedule for an additional six months. This order
also established a schedule for the filing and service of the
staff’s (P.S.C. staff’s) and intervenors’ testimony and ex-
hibits; scheduled public hearings at several locations within
Laclede’s service area; scheduled a prehearing conference
for March 28, 1977 and directed hearings to cross-examine
witnesses on April 18, 1977.
On February 3, 1977, the P.S.C. permitted intervention by
the City of St. Louis, St. Louis County, General Motors
Corporation, the Monsanto Company, ACF Industries, Inc.,
Anheuser-Busch, Ine., McDonnell Douglas Corporation and
Nooter Corporation, as industrial intervenors. In addition,
Lela Vasal (a consumer advocate), the Utility Consumers
Council of Missouri, Inc., and the Missouri affiliate of the
Association of Community Organizatica for Reform Now
were also permitted to intervene.
Public hearings were conducted on March 28, 1977 at
Poplar Bluff, on March 29, 1977 at Farmington, on March
30, 1977 at Festus, on April 4, 1977 in the City of St. Louis,
on April 5, 1977 at Clayton and on April 6, 1977 at St.
Charles. On April 18, 1977, another hearing was held in
Jefferson City, which continued for eight days, and upon
the completion of this hearing, the record in these proceed-
ings was closed, except for the filing of late-filed exhibits.
A-4
Following the hearings, a briefing schedule was estab-
lished and dates were prescribed for submission of briefs
by all the parties.
On an earlier date, (April 7, 1977) a preconference
hearing had been held, at which time certain matters were
stipulated to between the parties.
The test year was established as the twelve-month
period ending September 30, 1976, based upon actual data
adjusted for that time period. In their stipulation, the
parties agreed that a year-end rate base be used. They
also agreed that the figures shown in the exhibits were
mathematically correct regarding dollar amounts. Three
major issues, which included numerous subtopics, were
defined for consideration. These were:
I Rate Base Issue :
(a) Minor construction work in progress (CWIP)
(b) Cash Working Capital—Minimum Bank
Balances
(c) Depreciation Reserve
Il Nev Operatine Items-Cost or SERVICE
(a) Unaccounted-for gas expense
(b) Charitable contributions
(c) Advertising charged to sales expense
(d) Advertising charged to administrative and
general expense (Labor negotiations adver-
tising)
(e) Dues and donations charged to administrative
and general expense
(f) Salaries charged to sales expense
(g) Rate case expense
(h) Wage expense-Missouri National Division
(i) Deferred income taxes on certain general and
administrative expense capitalized
(j) Research and development-coal gasification
' project conducted by the American Gas Asso-
A-5
ciation and the Energy Research and Develop-
ment Agency
(k) Main (piping) replacement program
(1) Other issues raised by public counsel
III Cost or Caprran AND Rate or Return
(a) Return on repriced equity
(b) Return on original cost common equity
(c) Capital structure
(d) Fair value rate base
Upon issue of its initial order, followed by a petition
for review, the P.S.C. failed to make findings of fact and to
enter conclusions of law as required, and the Circuit Court
reversed the order, directing such P.S.C. findings and
conclusions be made. The following is a listing of only
those findings relative to the issues to which this opinion
is directed.
Net OperatinG ItemMs-Cost or SERVICE
The P.S.C. concluded Laclede’s unaccounted-for gas
expense on a ten-year average amounted to $674,000. The
P.S.C. also concluded that the sum of $252,000, represent-
ing charitable contributions, was not a proper item includ-
able in the rate schedule. The P.S.C. concluded that of the
total sum expended for advertising, the sum of $219,399.40
was properly included in the rate schedule as being inform-
ative advertising designed to promote safety, conserva-
tion and/or off-peak gas use. The remainder of this
expense was held to be goodwill advertising. Laclede had
been involved in labor negotiations and had expended the
sum of $9,465 in newspaper advertisements relative to the
problems related to these negotiations, The P.S.C. con-
cluded that such advertisements were goodwill advertise-
ments and not includable in the rate schedule. The sum of
A-6
$19,470, representing dues and donations to various organi-
zations, was denied by the P.S.C. as part of the rate
schedule. Laclede proposed to include the sum of $62,553
as salary expense for the display and sale of gas appli-
ances. The P.S.C. denied this amount within the rate
schedule. In preparation for the instant proceedings,
Laclede had hired or retained the services of Foster &
Associates, utility consultants, for the sum of $5,000, and
the P.S.C. approved this amount as part of the rate sched-
ule. Laclede has within its structure a Missouri Natural
Division and its salary pension costs and FICA taxes
increase in the sum of $79,500 were included within the rate
schedule by the P.S.C. The P.S.C. denied the request to
include the sum of $483,700 in deferred taxes. Determina-
tion of this issue was made upon the conclusion that no
evidence was shown to indicate that Laclede would or might
possibly suffer any cash flow problem relating to tax
adjustments. Laclede, as a participant in a $30,000,000 coal
gasification project is required to pay, as its annual contri-
butive share, the sum of $86,000, and the P.S.C. approved
inclusion of this cost in the rate schedule. Gas utilities,
Laclede stated, are required to replace piping within their
systems and this process is referred to as the main replace-
ment program. The P.S.C. staff had recommended that
Laclede be required to budget an additional $125,000 for
pipe replacement. The P.S.C. concluded that such expense
need not be required.
A petition for review was filed by Laclede and after
being ordered to do so by the circuit court, the P.S.C. filed
its conclusions and the above findings. The circuit court,
following arguments on the issues, then entered its judg-
ment. Both Laclede and the P.S.C. filed notices of appeal.
During the pendency of the proceedings before this court,
the P.S.C. filed a motion to dismiss the appeal upon the
premise of mootness. This motion was ordered taken with
A-7
the case on appeal. The P.S.C. voluntarily dismissed its
appeal, leaving the parties as Laclede as appellant and the
P.S.C. as respondent, rather than as cross-appellant as first
recorded. The case was scheduled to the “en bane” docket
of this court, and both parties presented oral argument.
This court must first turn its attention to the pending
motion to dismiss for mootness by respondent P.S.C.
While, as will be later explained, no immediate or direct
relief to either party can ensue from this opinion, some
of the issues involved present matters of general public
interest and persuade this court to dispose of those issues.
The P.S.C. correctly argues that due to the extensive time
lag occurring as a result of the extended proceedings
hefore the P.S.C., the cireuit court and the time before
this court, Laclede has, in fact, applied for and has re-
ceived authorization for additional rate schedules. Never-
theless, as previously stated, the instant case presents
some issues of general public interest which create an
overriding influence and which cause this court to over-
rule respondent’s motion to dismiss in part.
While arguments were presented to this court upon the
issue of fair value rate base and fair rate of return, along
with claimed constitutional violations, this court, for the
reasons set forth below address only two of the arguments
presented. These arguments are (1) there was no sub-
stantial and competent evidence to support the P.S.C.’s
disallowance of $204,691, this amount representing adver-
tising charged to sales expense, because such action unlaw-
fully deprives appellant of its constitutional right to free
speech, deprives appellant of its right to meet competition,
and permits the unlawful substitution of the P.S.C.’s judg-
ment for that of appellant company and (2) there was no
substantial and competent evidence to support the P.S.C.’s
disallowance of the sum of $252,000, this amount repre-
senting charitable contributions, because such action per-
A-8
mits the unlawful substitution of the P.S.C.’s judgment for
that of Laclede’s management.
The scope of review by this court is equivalent to that
of the cireuit court. Review is made of the findings and
order of the P.S.C. and not the circuit court, see Ingram
v. Civil Service Commission, 584 8.W.2d 633 (Mo. App.
1979).
Following the review of almost 2,100 pages of trans-
seript of the P.S.C’s record, almost 300 pages of trial
transcript, lengthy briefs by both parties and some 95
exhibits, this court concludes there are only two issues to
be addressed. These are (1) was the denial of certain
advertsing costs as part of the rate structure lawful and
reasonable? and (2) was the denial of charitable contribu-
tions as part of the rate structure lawful and reasonable?
These two issues are taken up and ruled upon because
they present matters of general public interest and may
be presented in other unrelated proceedings.
The arguments related to fair value rate base and rate
of return, along with confiscatory rate making, present no
viable legal issues and in conjunction with the prohibition
against retroactive rate niaking, are found to be moot.
Review of this cause lies within the jurisdiction of this
court pursuant to Mo. Const. Art. V, Section 18 (amended
August 3, 1976). The role of this court is to determine the
lawfulness and reasonableness of the P.S.C.’s order, In
determining the lawfulness of such order, the court need
not defer to the Public Service Commission.
Regarding the reasonableness of such order however,
this court cannot substitute its judgment for that of the
P.S.C. if such order is supported by competent and substan-
tial evidence, see State ex rel. Utility Consumers Council of
Missouri, Ine. v. P.S.C., 585 S.W.2d 41, 47 (Mo. bane 1979),
citing State ex rel. Dyer v. Public Service Commission, 341
S.W.2d 795 (Mo. 1960), cert. denied 366 U.S. 924 (1961).
A-9
See also State ex rel. St. Louis-San Francisco Ry. Co. v.
Public Service Commission, 439 S8.W.2d 556, 559 (Mo. App.
1969) for the rule that commission order enjoys presump-~
tion of validity, and the burden to prove invalidity is upon
the party attacking such order.
The P.S.C. derives its authority exclusively from the
legislature. The first P.S.C. law was enacted in 1913 under
SB 1, Mo. Laws See. 1-140 (1913) and from its inception,
the courts have recognized the purpose of such enactment
to be the protection for the consuming public against the
public utilities as natural monopolies. This protection, how-
ever, has been and continues to be balanced against per-
mitted recovery by utilities of a just and reasonable return
upon their investment of properties committed to service
for the public, see May Dep’t Stores Co. v. Union Electric
Light & Power Co., 341 Mo. 299, 107 S.W.2d 41, 48 (1937) ;
State ex rel. City of Sedalia v. Public Service Comm’n, 275
Mo, 291, 204 S.W. 497 (1918), appeal dismissed 251 U.S. 547
(1920).
As regards the two issues addressed herein, Laclede
argues that advertising costs should be charged to opera-
tional expenses and hence be a factor built into the rate
schedule. Laclede also argues that to deny this expense
would deny the utility from meeting competition, would
violate its right to free speech and would constitute substi-
tution of the judgment of the P.S.C. for that of company
management. Laclede concludes that the record as a whole
herein does not contain substantial and competent evidence
to support the P.S.C.’s denial of the inclusion of such
expense.
The P.S.C. refutes Laclede’s contention on the premise
that the user or ratepayer should not be required to pay for
“goodwill” advertising by Laclede. During the test year
(1976), Laclede expended a total sum of $424,090 for adver-
tisement expense. The order entered in the instant case
A-10
permitted the sum of $219,399 to be included in the rate
schedule. The P.S.C. declared the sum of $204,691 to rep-
resent goodwill advertising and disallowed said sum.
Research reveals a scarcity of authority upon the precise
point. It should be pointed out that much attention was
given this proposal by the P.S.C. and the sum permitted
($219,399) was attributable to advertising for informative
purposes related to conservation, off-peak usage and safety.
The amount granted was 51.7% of the total advertising
expenditure.
The authority provided by both parties to this appeal
really fails to dispose of the issue entirely. Laclede offers
up a managerial and constitutional argument, and this con-
trasts with the statutory and discretional argument offered
by the P.S.C.
Laclede cites First National Bank of Boston v. Bellotti,
435 U.S. 765 (1978), cert. denied USS. , 98 S.Ct.
3126 (1978), which involved a state statute prohibiting
banks and other corporations from influencing referendum
proposals which did not affect the property, assets or
business of the particular corporation. The statute in
question imposed criminal sanctions. The court held the
statute invalid as its breadth caused an absolute prohibition
of corporate communications. This case is obviously dis-
tinguishable and not controlling herein. As to other
authority offered up by Laclede, such is equally not con-
trolling or persuasive. Thus, Virginia State Board of
Pharmacy v. Virginia Citizens Consumer Council, Ine., 425
US. 748 (1976), dealt with a state statute involving criminal
sanctions to be imposed upon pharmacies for advertising
prices for drugs. While the court in Virginia held the
statute to be unconstitutional as an absolute prohibition
upon free speech, the court was careful to emphasize that
the real issue was the authority of the state to suppress the
dissemination of truthful information. In addition, Laclede
refers the court to Bigelow v. Virginia, 421 U.S. 809 (1975),
A-11
which dealt with newspaper advertising for an abortion
clinic. In this case, the court held that a statute may not,
by its overbreadth, violate the first amendment. Schneider
v. New Jersey, 308 U.S. 147 (1939) was a case where a city
ordinance was declared unconstitutional because it prohib-
ited the distribution of pamphlets and the canvassing of
residents for a religious cause, even though this religious
cause was found to be fraudulent.
Laclede futher directs this court’s attention to New
England Telephone and Telegraph Company v. Massa-
chusetts Department of Public Utilities, 275 N.E.2d 495
(Mass. 1971). In this case, the Supreme Court of Massa-
chusetts held that since the advertising costs involved were
so negligible as they related to the overall revenues of
the utility and that the Department of Public Utilities did
not find such costs to be unreasonable, that the utility as a
service provider was entitled to promote and enlarge its
business through advertisement. It should be noted in the
New England Telephone and Telegraph case that the court
appeared to emphasize the “service” agreement of the util-
ity. This, the court feels, must be contrasted with, as in
the instant case, a utility which provides an energy source
which has an ultimate depletion status. Further, Laclede
cites Alabama Power Company v. Alabama Public Service
Comission, $59 §8.2d 776 (Ala. 1978) wherein Alabama’s
highest court permitted as operational cost advertisement
of honest and efficient management of the power company.
State of Oklahoma v. Oklahoma Gas and Electric Company,
536 P.2d 887 (Okla. 1975) was a decision holding invalid
the prohibition against institutional advertising. This
latter decision, however, also pointed out the necessity of
the utility to establish a benefit to all rate payers from
advertising, and upon failure to do so, the regulatory com-
mission could disallow such costs. State ex rel. Kansas
City v. Publie Service Commission, 301 Mo. 179, 257 S.W.
A-12
462 (1923) was a Supreme Court case involving a common
carrier. The court held that the Public Service Commission
holds no property interest in utilities. In State ex rel. City
of St. Joseph v. Public Service Commission, 325 Mo. 209,
30 S.W. 2d 8 (bane 1930), a case involving a water company,
the State Supreme Court declared that the company man-
agement could not be interfered with as long as the result
thereof did not affect the public’s rights. State ex rel.
Harline v. Public Service Commission, 343 8.W.2d 177 (Mo.
App. 1960) was a case involving a power utility. This case
declared that the regulatory power of the P.S.C. does not
embrace the general management of the utility incident to
ownership. The last case Laclede cites on this issue is
State ex rel. Southwestern Bell Telephone Co. v. Missouri
Public Service Commission, 262 U.S. 276 (1923), which
stands for the proposition that the regulatory power of the
P.S.C. does not clothe the P.S.C. with general powers of
company management incidental to ownership.
While it is correct that utilities operate within our free
enterprise system, the courts remain mindful that these
same utilities are, in fact, by their nature monopolies. The
history of regulation of such monopolies has been one of a
continued balance between preserving the existence and
integrity of the utility so it might continue service to the
users, and protection to the users and ultimate ratepayers
against unwarranted costs for utility services.
From the authorities considered upon this point, certain
principles emerge, which permit disposition of this issue.
It is obvious that the P.S.C. has no authority to take over
the general management of any utility. It is just as obvi-
ous that a utility is a person under our laws entitled to all
the constitutional safeguards as to free speech provided
for under the first amendment to the United States Con-
stitution and made applicable to the states by the 14th
amendment.
A-13
These principles, however, esteemed and remaining as
basic matters of right, must also, at each instance, be placed
in prospective to the matters at hand.
Taclede is in the business of supplying a product neces-
sary to modern living and admittedly deals in a product
which has a limited source because it is a fossil fuel. As
the limitation of source continues, prices react in relation
to that progressive limitation.
The P.S.C. gave specific attention to the nature and ex-
tent of the advertising in question. The evidence is com-
petent and substantial to support the finding of the P.S.C.
that costs of advertising related to safety, off-peak usage
and conservation are proper cost items to be included
within the rate schedule.
The evidence herein does not support Laclede’s argument
that the P.S.C. undertook the management of the company
or that such action by the P.S.C. violated any constitu-
tional right of Laclede to the exercise of its right of free
speech.
The order of the P.S.C. does not prohibit advertising by
Laclede. If it had, this order would, without question,
have violated the constitutional and managerial rights of
Laclede. What the order prescribes is that advertising
cost items directly related to the benefit of ratepayers are
justified operational costs permitted to be included within
the rate schedule. All other such expenses, while they too
are decisions of management, are not operational costs
ineludable in the rate schedule.
This court is persuaded that §3938.140(5) and
§ 393.270(4), RSMo 1978 authorize the P.S.C. to examine
the methods, practices, regulation and property employed
by public utilities, and that such authorization extends to
examination of advertising cost. This court finds of partic-
ular persuasion the case of State of Oklahoma v. Okla-
homa Gas and Electric Company, supra, at 894, in that it
adopts the principle therein when it states:
A-14
“We conclude the Commission may disallow any
institutional advertising expenditures from operat-
ing expenses for ratemaking purposes unless the
utility establishes such expenditures benefit all rate-
payers.”
By the adoption of such a rule, the managerial preroga-
tives of Laclede are maintained, and the right of Laclede
to continue to exercise its right of free speech is preserved,
while at the same time the P.S.C. can perform its regu-
latory role of balancing the integrity of regulated utilities
against the protection of the ratepayer.
This court concludes that pursuant to the statutory
authority cited herein, denial of certain advertising costs
was lawful and further, there was substantial or competent
evidence that the finding of the P.S.C. was reasonable.
Turning to the question of charitable contributions,
Laclede argues that the sum of $251,574.26, which repre-
sents charitable contributions, should be permitted as part
of the company’s total operating expenses and hence in-
eluded within the rate schedule. The P.S.C. denied the
requests, claiming inclusion of such expenditures would vio-
late the long-standing policy against ineluding such sums, a
policy which dates back to 1918 when in In Re Kansas City
Light & Power Co., 8 Mo. P.S.C. 223, such request was
denied.
Laclede argues that the P.S.C. cannot lawfully disallow
such sum absent a showing by competent and substantial
evidence of bad faith or abuse of discretion by the com-
pany’s management. Laclede further argues that to deny
such sum is to unlawfully substitute the P.S.C.’s judgment
in lieu of the company’s management’s judgment.
The P.S.C. is granted authority under § 393.150, RSMo
1978 to fix utility rates upon a showing that the increased
A-15
rate is just and reasonable. The realm of this authority
has been defined as including “...the power to determine
what items should be included in a utility’s operating ex-
pense and what items should be excluded...in order that
the commission may arrive at a reasoned determination of
the issue of ‘just and reasonable’ rates.” State ex rel. Hotel
Continental v. Burton, 334 S.W.2d 75, 80 (Mo. 1960).
From the foregoing, it cannot follow that there must be a
showing of bad faith or an abuse of company discretion in
denying certain operatioral cost requests. The reasoning
formulated by the P.S.C. in its denial of this sum falls
within the discretion of the P.S.C. to render the decision to
deny the request. The reasoning is summarized as follows:
(1) Donations are adequately encouraged through income
tax deductions. (2) Contributions are discretionary, thus
not normal business expenditures. (3) Benefits from such
expenditures accrue primarily to the stockholders, there-
fore, the stockholders should bear the burden of such ex-
pense. (4) The amount of contributions would have an
effect on decisions in rate cases and should, for that reason,
not be included. (5) Allowance of the contributions would
require the ratepayers to make involuntary contributions to
the various charities.
The action taken by the P.S.C. does not override the
management of the company. The company may still
exercise its judgment as to the giving or not giving of sup-
port to any one or several charitable causes. On the re-
cord, it is shown that the P.S.C. did not make an arbitrary
decision, but in fact accorded Laclede full opportunity to
make the request for inclusion of this sum.
Pursuant to § 393.150, RSMo 1978, and the evidence upon
this record, it is concluded that the action of the P.S.C.
was lawful, and there is competent and substantial evi-
dence to uphold the ruling of the P.S.C. as reasonable on
A-16
its denial of charitable contributions as a sum includable
in the rate schedule.
As has been pointed out, this court is not authorized to
afford immediate relief to either party, and can only affi-m
the action taken by the P.S.C. or remand for further pro-
ceedings by the P.S.C., see Union Electric Company v.
Clark, 511 S.W.2d 822 (Mo, 1974); State ex rel. Fee Fee
Trunk Sewer, Inc. v. Public Service Commission, 522 S.W.
2d 67 (Mo. App. 1975) ; State ex rel. Detroit-Chicago Motor
Bus Co. Ine. v. Public Service Commission, 324 Mo. 270,
23 S.W.2d 115 (1929); State ex rel. Egan v. Public Service
Commission, 319 S.W.2d 917 (Mo. App. 1959) ; State ex rel.
Middlewest Freightways, Inc. v. Public Service Commis-
sion, 261 S.W.2d 252 (Mo. App. 1953); State ex rel. Byers
Transportation Co., Ine. v. Public Service Commission,
246 S.W.2d 825 (Mo. App. 1952) ; State ex rel. Kansas City
Transit, Inc. v. Public Service Commission, 406 S.W.2d 5
(Mo. bane 1966); State ex rel. Chicago, Rock Island and
Pacific Railroad Company v. Public Service Commission,
312 S.W.2d 791 (Mo. bane 1958); State ex rel. Dyer v.
Public Service Commission, supra; State ex rel. Pitcairn
v. Public Service Commission, 232 Mo. App. 609, 110 S.W.
2d 367 (1937); State ex rel. Dail v. Public Service Com-
mission, 240 Mo. App. 250, 208 S.W.2d 491 (1947) ; Peoples
Telephone Exchange v. Public Service Commission, 239
Mo. App. 166, 186 S.W.2d 531 (1945) and State ex rel.
Utility Consumers Council of Missouri, Inc. v. Public Serv-
ice Commission, swpra, because to do otherwise would be
retroactive rate making prohibited by the authority cited
herein.
The judgment of the circuit court is, for the reasons set
forth herein, affirmed.
All econeur.
Donald L. Manford, Judge
A-17
APPENDIX C
[Under date of October 23, 1978, the following entry
appears of record in the office of the Circuit Clerk, Circuit
Court of Cole County, in Causes Nos. 29542 and 30398,
Laclede Gas Company v. Public Service Commission. ]
“Now on this date the Court again takes up the
matter previously taken under advisement. The
Court finds the issues in favor of Petitioner and
against the Respondent. Respondent reversed. See
Findings of Fact and Conclusions of Law and Judg-
ment.”
FINDINGS OF FACT
CONCLUSIONS OF LAW, AND JUDGMENT
This action is before the Court on petition filed by the
Relator Laclede Gas Company seeking judicial review of
the Report and Order of Respondent Public Service Com-
mission of Missouri issued on July 1, 1977 in Case No.
GR-77-33 in which the Commission permitted Relator to file
new rates to produce $8,718,140 additional gross revenues
annually rather than the $13,570,000 annual increase
sought by Relator.
By its order entered on March 28, 1978 as amended
March 30, 1978, Division No. 2 of the Cole County Circuit
Court in Cause No. 29542, reversed the Commission’s July
1, 1977 order and remanded said cause to the Commission
with instructions that “appropriate findings of fact” be
made. Thereafter on April 21, 1978 the Commission
adopted a new order and Relator filed a writ of review as
Case No. 30398 which was consolidated with this case.
The entire record, proceedings and evidence before the
Commission have been filed with and considered by the
A-18
Court. Relator and Respondent have filed briefs and made
oral argument in support of their respective positions.
The Court, having considered the pleadings, the entire
record, proceedings and evidence before the Public Service
Commision, the briefs and oral arguments of the parties,
the applicable law, and being fully advised in the premises,
now makes and files its Findings of Fact, Conclusions of
Law and Judgment thereon as follows:
FINDINGS OF FACT
1. The proceedings under review were commenced by
Relator filing with Respondent on August 16, 1976, new
rates for gas service designed to increase Relator’s gross
revenues in the amount of $13,570,000 annually, exclusive
of gross receipts taxes.
2. Pursuant to Section 393.150 V.A.M.S., Respondent
suspended the rates, held extensive hearings and on July
1, 1977 issued its Report and Order denying the rates
proposed by Relator and allowing Relator to file new
rates to produce additional gross revenues of $8,718,140
annually, exclusive of gross receipts taxes. Respondent’s
subsequent order issued on July 1, 1977, adopted the rates
allowed in the first order permitting Relator to file new
rates to produce additional gross revenues of $8,718,140
annually, exclusive of gross receipts taxes.
3. The parties stipulated and Respondent agreed that
the appropriate test year was the twelve months ended
September 30, 1976, based on actual data as adjusted for
that period and that a year-end rate base should be used,
that is, a rate base as of September 30, 1976.
4. In determining the percentage of common equity in
Relator’s capital structure for purposes of determining
cost of capital, Respondent removed from Relator’s com-
A-19
mon equity the sum of $9,894,934 consisting of Account
124.00 investments of $2,442,934 and investments in non-
utility subsidiaries of $7,452,000. Related facts are as
follows:
a. The Account 124.00 investments of Relator
are all utility related except the investment in St.
Louis Pipeline Company, the revenues of which were
included in Relator’s operating revenues, and which
was earning a return greater than that sought by
Relator. Respondent so found in its Order.
b. The amount of $7,452,000 representing invest-
ments in nonutility subsidiaries was never included
in the capital structure used by Relator and Respond-
ent in the rate case.
e. The funds ($7,452,000) originally loaned by
Relator to its nonutility subsidiaries had been repaid
to Relator three days prior to the end of the test
year and restored to its capital structure by one of
such subsidiaries with the proceeds of the subsid-
iary’s loan from a bank. Respondent so found in
its Order.
d. Even if the $7,452,000 could be considered to
be in the capital structure, it is impossible to deter-
mine from what source (component of the capital
structure) the dollars represented by the two invest-
ments aggregating $9,894,934 came. Respondent so
found in its Order.
e. The total capital structure of Relator for the
purpose of this case is $227,150,056. Respondent so
found in its Order.
f. The two investments in question, to the extent
they are in the capital structure, are presently pro-
A-20
rated among the various components of Relator’s
actual capital structure which, with agreed adjust-
ments, is as follows:
Customer deposits ................ $ 3,207,096
Long-term debt .................0+++ 118,333,000
Preferred stock .................... 10,790,600
Common equity .. . 94,819,360
$227,150,056
g. The percentages of the various components of
Relator’s capital structure are as follows:
Customer deposits ................-0-+-- 1.41%
Long-term debt. .................c..ssccsese 52.10
PATI TE secctcipriesevicerccvessess 4.75
ComMOn CQUITY .........ceeceeceereeenees 41.74
100.00%
5. Respondent failed to make a proper finding of a fair
value rate base for Relator. Related facts are as follows:
a. In determining a fair vaiue rate base, Respon-
dent weighted trended cost by 39.09% which it had
arrived at by removing $9,894,934 from Relator’s
equity. The percentage of equity with the $9,894,934
restored is 41.74%.
6. Respondent concluded that Relator should be entitled
to a return on book equity of 13.4%. Related facts are as
follows:
a. Witnesses for Relator offered evidence of the
earnings of nonregulated companies for periods
prior to 1976 which companies in their opinion were
comparable in risk to Relator and applied those
A-21
earnings to the common equity of those companies
repriced by the use of the Consumers Price Index.
b. Earnings data for 1976 on such nonregulated
companies, which were up over prior years, were
considered by Relator’s witnesses.
ce. The average return on repriced equity of Re-
lator’s chosen comparable nonregulated companies
was 9.4% over a 10 year period and 8.8% over a 5
year period, both being in excess of the related re-
turn on common equity being sought by Relator in
this case.
d. The Staff witness did not determine companies
of comparable risk, did not consider 1976 earnings
data because it was not available to him, and did not
take fair value into account in his analysis on the
advice of counsel.
e. The Staff witness found returns on book equity
of 17 gas distribution companies to range from 12.5
to 14.5 percent and of 124 nonregulated companies
to range from 13 to 15 percent.
f. The Staff witness placed Relator’s recom-
mended return at a lower position in the ranges of
rate of return because Relator had limited financing
requirements and a favorable gas supply situation.
g. None of the witnesses for Relator or the Staff
recommended that return on common equity be de-
termined by reference to what ratio of market value
to book value of common stock should be available
to Relator.
h. The Staff witness was of the opinion that the
market to book ratio should be above 1, with a
A-22
cushion for flotation costs, but could not say how far
above 1 the ratio should be.
i. Relator’s witness was of the opinion that utili-
ties should be granted a return which would permit
their common stock to be sold at 1.30 to 1.50 times
book value to compete with the group of nonregu-
lated companies he considered of comparable risk.
j. Respondent rejected all of the evidence on rate
of return other than that relating to market value to
book value ratios.
k. Respondent’s determination of 13.4% as the
permissible rate of return on equity for Relator was
predicated solely on a calculation which would
permit Relator to sell common stock at a market to
book ratio of 1.03.
1. It is impossible to determine from the record
how the ratio of 1.03 was derived.
7. Respondent excluded from Relator’s operating ex-
penses the sum of $204,691, being a part of advertising
charged to sales expense. Related facts are as follows:
a. The advertising which was disallowed was
advertising promoting the general use of gas and
was designed to sell Relator’s product and meet its
competition. Respondent so found in its Order.
b. Relator’s gas supply situation is such that it
can now and into the indefinite future supply the
needs of its present and future customers except
new large industrial customers.
ce. Increased utilization of a gas distribution sys-
tem spreads fixed costs and overheads over more
A-23
sales, thereby reducing unit costs and maintaining
rates lower than would otherwise be possible.
d. Respondent disallowed the advertising in ques-
tion upon the sole ground that it was goodwill
advertising.
e. There is no evidence in the record of bad faith
or abuse of discretion on the part of Relator’s man-
agement in making the expenditures in question.
f. The expenditures in question are not in viola-
tion of Respondent’s general order prohibiting
promotional practices. Nor has Respondent held
any generic hearing or given any other notice to
Relator of its intention to disallow such advertising
expense. Nor has Respondent disallowed such
advertising expense of Relator’s principal compet-
itor Union Electric Company.
8. Respondent decreased Relator’s booked income tax
expense by $483,700.
9, Respondent increased Relator’s actual test year-end
depreciation reserve by $224,015 in determining rate base.
10. Respondent disallowed as operating expenses char-
itable contributions aggregating $252,000 made by Relator
during the test year. There is no evidence in the record
of bad faith or abuse of discretion on the part of Relator’s
Management in making the expenditures.
CONCLUSIONS OF LAW
1. Respondent erred in removing the sum of $9,894,934
from Relator’s common equity because:
a. There was no factual basis for removing the
$7,452,000 from the capitai structure because it was
never there to begin with.
A-24
b. Even if the $7,452,000 could be considered in
the capital structure, there was no factual basis for
removing the $9,894,934 from the capital structure at
all since the Account 124.00 investments were utility
related and the funds loaned by Relator to nonutility
subsidiaries had been repaid to Relator and couid
therefore not be financed by Relator’s equity. Re-
spondent so concluded in its Order.
ce. Since the source of the investment was fungi-
bly financed by all of Relator’s sources of finance,
such investment was appropriately represented in
Relator’s capital structure prior to the Staff remov-
ing it from equity. It therefore, had to be restored
to equity. Respondent so concluded in its Order.
d. Respondent found that the sum had been re-
moved by its Staff from equity but had been repaid
by Relator’s subsidiary to Relator. Therefore, the
payment must be restored to such equity.
e. Respondent’s purported prorating in fact dis-
torted the existing proration and in fact had the
same effect as removing the entire $9,894,934 froin
Relator’s common equity contrary to Respondent’s
findings and the finding of this Court.
f. Respondent’s determination of Relator’s capi-
tal structure and the weighting of the various com-
ponents thereof is not supported by competent and
substantial evidence upon the whole record.
g. Respondent’s determination of Relator’s capi-
tal structure created fictitious amounts of customer
deposits, long-term debt and preferred stock in ex-
cess of any deposits taken or any debt or preferred
stock actually issued. Respondent created such by
transferring a portion of Relator’s equity to de-
A-25
posits, debt and preferred stock. No basis exists for
such transfer.
h. Relator’s capital structure and the weighting
of the various components thereof which are sup-
ported by competent and substantial evidence upon
the whole record, are as follows:
Customer deposits .......... $ 3,207,096 1.41%
Long-term debt ................ 118,333,000 52.10
Preferred stock ................ 10,790,600 4.75
Common equity ................ 94,819,360 41.74
$227,150,056 100.00
2. Respondent erred in failing to make a proper finding
of a fair value rate base for Relator because:
a. Respondent improperly removed from Re-
lator’s common equity $9,894,934, thereby weighting
trended cost by only 39.09% rather than by the
41.74% which should have been used.
3. Respondent’s determination in establishing Relator’s
allowable rate of return on equity at 13.4% is lawful,
reasonable, proper and is based on competent and sub-
stantial evidence upon the whole record.
4. Respondent’s excluding the sum of $204,691 from
Relator’s operating expenses as “goodwill” advertising is
lawful, reasonable, proper and is based on competent and
substantial evidence upon the whole record.
5. Respondent’s reduction of Relator’s booked income
tax expense by $483,700 relating to certain administrative
and general expenses capitalized per books but expensed
for tax purposes is lawful, reasonable, proper and is based
on competent and substantial evidence upon the whole
record.
A-26
6. Respondent’s increase of Relator’s test year-end de-
preciation reserve by $224,015 in determining rate base is
lawful, reasonable, proper and is based on competent and
substantial evidence upon the whole record.
7. Respondent’s disallowance of $252,000 of charitable
contributions as operating expenses made by Relator dur-
ing the test year is lawful, reasonable, proper and is based
on competent and substantial evidence upon the whole
record.
8. By reason of Respondent’s unreasonable and unlaw-
ful actions described in paragraph 1 and 2 of these con-
clusions, the rates fixed by Respondent for Relator are
confiscatory and deprive Relator of its property without
due process of law and without just compensation in viola-
tion of Sections 10 and 26 of Article I of the Constitution
of Missouri and Section 1 of the Fourteenth Amendment
of the Constitution of the United States because they do
not permit Relator an opportunity to earn a fair and
reasonable return on the value of its property at the time
it is being used to render service to the public. State ex
rel. Southwestern Bell Telephone Company v. Missouri
Public Service Commission, et al., 262 U.S. 276, 43 S.Ct.
544, 67 L.Ed. 981, PUR 1923 C, 193 (U.S. Sup. Ct., 1923) ;
Bluefield Water Works & :mprovement Company v. West
Virginia Public Service Commission et al., 262 U.S. 679, 43
S.Ct. 675, 67 L.Ed. 1176, PUR 1923 D, 11; Central Maine
Power Company v. Maine Public Utilities Commission, 136
A.2d 726, 21 PUR3d (1975).
JUDGMENT
IT 1S THEREFORE ORDERED, ADJUDGED AND DECREED THAT:
1. The Orders of Respondent Public Service Commis-
sion of Missouri issued on July 1, 1977 and April 21, 1978
A-27
in MoPSC Case No. GR-77-33, are reversed and set aside
for reasons set forth in the foregoing Conclusions of Law;
and that the Court finds that said orders are not based on
substantial and competent evidence on the record as a
whole and are unreasonable and unlawful.
2. The costs of these actions are assessed 50% against
Relator and 50% against Respondent.
Dated this 23rd day of October, 1978.
FILED:
Octoser 23, 1978.
A-28
APPENDIX C-1
IN THE CIRCUIT COURT OF COLE COUNTY,
MISSOURI
Division Two
No. 29542
LacLEDE Gas CoMPANY, a corp.,
Petitioner,
v.
Pusuic Service CoMMISsION
Respondent.
ORDER
On July 22, 1977, a Petition for Writ of Review was filed
by Petitioner herein. The Return was filed by Respondent,
Public Service Commission on August 22, 1977. Briefing
schedule was completed on November 14, 1977. On January
20, 1978, the parties appeared by their respective counsel
and argued the case to the Court. The case was then taken
under advisement.
Since that date, the Court has on numerous occasions
examined the file and has attempted to rule this case as this
Court is so directed to rule under the provisions of Section
386.510 of the Missouri Revised Statutes.
The purported Findings of Fact prepared by the Com-
mission begin on Page 3 of the Commission’s Report and
Order and ramble for the next 44 pages and nowhere in
that volume of verbage does this Court find anything that
closely approximates a recitation of the ultimate facts
actually found. .
As far back as 1917, and as recently as 1958, the Supreme
Court of Missouri has held that the Public Service Com-
A-29
mission is a creature of the legislature formed for the pur-
pose of finding facts and drawing conclusions of law from
those facts. (See Atchison, T & S F Railroad Company,
et al v. Public Service Commission, 192 SW, 460 (1c) 462,
and State of Missouri ex rel Chicago Rock Island and
Pacific Railroad Company v. Public Service Commission,
312 SW2d, 791 (1c) 796). Rudimentary English and basic
logie dictate that the facts must be set forth in an intel-
ligible manner.
This Court does not mean to single out this Report and
Order for chastisement, however, this report represents a
practice of the Commission which substitutes verbage for
concise findings.
I, therefore, must in the discharge of my statutorly de-
fined duties remand this case to the Public Service Com-
mission with direction that appropriate Findings of Fact
be rendered. To aid the Commission in that task, I attach
to this Order a copy of a Memorandum opinion written by
the Honorable Frank Cottey in the case of City of St.
Joseph v. Chicago, Great Western Railway Company, a
corporation, No. 23833. This Court adopts that Memoran-
dum and makes it a part of this Order as though it were
fully set out herein.
The Court further admonishes the Commission to follow
the dictates of that Memorandum in full.
Now Txererore, It Is OrnpErED, ApJuUpDGED AND DECREED
that this matter be, and it hereby is, remanded to the Public
Service Commission with instructions that appropriate
Findings of Fact be made.
Dated: March 28, 1978
Byron L. K1nper
-Crrcurr. Juper, Drviston Two
A-30
IN THE CIRCUIT COURT OF COLE
COUNTY, MISSOURI
Case No. 23833
City or St. JosepH, a MunicrpaL CorPorATION,
Complainant,
—VsS—
Cuicaco, Great Western Rartway Company, A CoRPORATION,
Defendant.
+ rr <i
MEMORANDUM
This cause was argued, submitted, and by the court taken
under advisement on July 26, 1968. I have reached the
following conclusions:
The “Finding of Fact,” beginning on Page 2 of the
Commission’s Report AND OrpER in this case, is surely the
most inept and inadequate effort of its kind ever to be
brought to any court’s attention. It is in no sense a finding
of fact—it is simply a rehash of the testimony of the wit-
nesses who appeared at the hearing before the Commission,
and a summary of various exhibits introduced at that
hearing. Material of this sort is the grist from which a
finding of facts may indeed be ground, but it is indigestible
in its present state. It shows how the dispute arose and
was developed, but not how it was resolved. It shows what
facts were testified to, but not what facts were established.
The reviewing court has neither the duty nor the author-
ity to sift the evidence in a search for the facts. It is the
exclusive prerogative and bounden duty of the Commission
to resolve all factual disputes, and to state its factual con-
clusions with sufficient clarity and precision to enable the
A-31
reviewing court to determine, from an examination of the
transcript, whether there is any substantial evidence to
support the findings made. That requirement is simple,
logical and explicit. And in the absence of any compliance
with it, there is no way the reviewing court can discharge
its duty within the limits of its authority.
It is obvious the case will have to be remanded to the
Commission with directions to prepare a finding of facts
upon which an orderly review of the issues can proceed.
Ordinarily, it would be thought sufficient to say that and
nothing more. But the document submitted in the case at
hand is so distressingly deficient in every particular that
it may not be amiss to extend this memorandum to include
a primer of instruction on the preparation of this essential
ingredient of the record. To that end, these suggestions
may be followed with profit:
The “Finding of Fact” should begin with some such reci-
tation as this: “We find the facts to be as follows: (a)
such-and-such, (b) such-and-such, (c) such-and-such,” ete.
In each instance state the wtimate fact which the Commis-
sion believes has been established by the conflicting evi-
dence on it. It is unnecessary to summarize the evidence
on which any particular finding is based, but it is permis-
sible to do so; and instances will no doubt present them-
selves in which it would be helpful to the reviewing court
to be informed on the basis on which the finding has been
made, after the finding itself has been stated.
The findings should be made with the understanding that
they are not a separable and unrelated part of the Com-
mission’s order, but are the very foundation upon which
the propriety of that order must be determined. They
must buttress the Commission’s decision so solidly as to
make it impregnable to attack from any quarter.
Finally, since the most violent attack is bownd to be
launched from the vantage point of the recent amendment
A-32
to Sec, 389.640, V.A.M.S., the necessity of guarding against
disaster from that quarter will surely be apparent to any-
one of minimal prudence. The requirements of the amend-
ment are mandatory. READ IT! It has been totally
ignored in this case, not to say contemptuously flouted!
Criteria are fixed and standards set by that amendment;
specific limitations on the discretion of the Commission
are imposed by it; evidentiary and procedural compliance
with both its letter and its spirit is now demanded. Let
the findings show that the demand has been satisfied.
And if the hearing has been conducted in the same
ignorance of the amendment, or in the same impervious-
ness to it, that the purported “findings” in this case reflect,
then let the case be reopened for the reception of such
additional evidence as will enable the reviewing court to
determine that the statute has been complied with.
The case will be remanded to the Commission with in-
structions to take such additional steps as may be neces-
sary to put the record in an intelligible shape. I will ask
Mr. Brown to prepare the judgment entry, to be effective
as of this date, and to send it to me for appreval.
Done this 10th day of September, 1968.
EEE EEE EEE RRR RRR REE EEE eee
Special Judge
A-33
IN THE CIRCUIT COURT OF COLE COUNTY,
MISSOURI
Division Two
No. 29542
a
LacLepre Gas CoMPANy, & corp.,
Petitioner,
vs
Pustic Service CoMMISsION
Respondent.
EO
AMENDED ORDER
Now on this 30th day of March, 1978, the Court on its
own motion modifies its Order of March 28, 1978, to correct
a typographical omission in that order. The last para-
graph of page two of said Order is amended in the second
line by adding the words “reversed and” between the words
is and remanded.
Ir Is THEREFORE ORDERED that the last paragraph of the
Order of March 28, 1978, shall read “Now THererorg, It Is
OrpERED, ApJUDGED AND Decreep that this matter be, and it
hereby is, reversed and remanded to the Public Service
Commission with instructions that appropriate Findings
of Fact be made”.
Byron L. Kinper
Circuit Judge, Division Two
A-34
APPENDIX D
BEFORE THE PUBLIC SERVICE COMMISSION
OF THE StaTE oF Missouri
Casz No. GR-77-33
In the matter of Laclede Gas Company of
St. Louis, Missouri, for authority: to file
tariffs reflecting increased rates for gas
service provided to customers in all areas
served by the Company.
APPEARANCES:
Ricuarp L. Eckuart, Vice President and General Counsel,
Laclede Gas Company, 720 Olive Street, St. Louis,
Missouri 63101, for Applicant: Laclede Gas Company.
THomas W. Wenrie, County Counselor, and HrrmMan
Barken, Associate County Counselor, St. Louis County,
Missouri, 7900 Forsyth Boulevard, Clayton, Missouri
63105, for Intervenor: St. Louis County, Missouri.
Jack L. Kornr, City Counselor, and Roperr C. McNicnHo.as,
Associate City Counselor, City of St. Louis, Missouri,
Room 314, City Hall, St. Louis, Missouri 63103, for Inter-
venor: City of St. Louis, Missouri.
Robert G. Brapy, Attorney at Law, and Rosert C. Jonnson,
Attorney at Law, 500 North Broadway, St. Louis, Mis-
souri 63102, for Intervenors: General Motors Corpora-
tion;) Monsanto Company;: ACF Industries, Ine.;
Anheuser-Busch, Ine.; McDonnell Douglas Corporation;
Nooter Corporation,
A-35
Raura Levy, Attorney at Law, 500 Northwest Plaza, Suite
308, St. Louis, Missouri 63074, for Intervenor: Utility
Consumers’ Council of Missouri, Ine.
Parricia E. Rousseau, Attorney at Law, Legal Aid Society
of the City and County of St. Louis, 607 North Grand
30ulevard, St. Louis, Missouri 63103, for Intervenors:
Lela Vasel, et al.
STEPHEN R. BacuMan, Attorney at Law, 523 West Fifteenth
Street, Little Rock, Arkansas 72202,
and
Epwarp I’. Wrieut, Jr., Attorney at Law, 2335 South Grand
Boulevard, St. Louis, Missouri 63104, for Interven-
ors: Missouri affiliate of the Association of Community
Organizations for Reform Now.
Kent M. Ragspaue, Assistant Public Counsel, Office of Pub-
lie Counsel, Department of Consumer A ffairs, Regulation
and Licensing, 100 East Capitol Avenue, P. O. Box 1216,
Jefferson City, Missouri 65101, for the Public.
THomas A. HuGurs, Assistant General Counsel, W. R.
KM nGLAND, LIT, Counsel and James 8. Hatngs, Jr., Counsel,
Missouri Public Service Commission, P. O. Box 360, Jef-
ferson City, Missouri 65101, for the Staff of the Missouri
Public Service Commission.
A-36
REPORT AND ORDER
Findings of Fact*
The Missouri Public Service Commission having con-
sidered all of the competent and substantial evidence upon
the whole record, reaches the following ultimate findings of
fact:
1. Test Year and Related Items
The appropriate test year, for purposes of this case, is
the twelve (12) months ending September 30, 1976, based
on actual data, as adjusted. A yearend rate base as of
September 30, 1976, is also appropriate for purposes of
this case. The Commission finds that the dollar amounts
shown as adjustments in Company’s and Staff’s exhibits
are arithmatically correct. (For further discussion see
Part II. 2. of Appendix “A”).
2. Rate Base Issues
A. Minor Construction Work m Progress (CWIP)
The Commission finds that minor CWIP in the amount
of $311,000 does not represent plant-in-service and, thus,
should be disallowed from Company’s rate base. (For
further discussion see Part II. 3. A. of Appendix “A”).
B. Cash Working Capital—Minimum Bank Balances
The Commission finds that Company’s minimum bank
balances were not required to be maintained pursuant to
any written agreements and that such balances were merely
incidental to the transacting of Company’s day-to-day busi-
ness. Therefore, minimum bank balances in the amount of
$805,804 will not be included in Company’s rate base. (For
further discussion see Part II. 3. B. of Appendix “A”).
* For a discussion of the procedural background of this case see
Part I of Appendix “A” attached hereto.
A-37
C. Depreciation Reserve
The Commission finds that Company’s year-end depre-
ciation reserve should be increased $224,015 to properly
match the increase in Company’s annual depreciation ex-
pense. (For further discussion see Part II. 3. C. of
Appendix “A”).
3. Net Operating Income-Cost-of-Service
The Commission finds that the adjusted operating reve-
nues of the Company for the test year are $219,220,049 ;
that the manufactured gas production expense is $1,461,091 ;
that the underground storage expense is $726,402; that
other storage expense is $278,918; that the adjusted distri-
bution expense is $8,124,676; that customer account ex-
pense adjusted for other increased revenues and annu-
alized for year-end customers is $9,452,425; and that the
adjusted maintenance expense is $6,528,686.
The Commission further finds that the proper adjusted
depreciation expense is $10,713,033 and the proper amor-
tization expensc is $85,633. The adjusted operating income
for exploration and development (K&D) is $929,224, and
the operating income for the Laclede Pipeline Company
is $173,000.
The Commission finds that it is not proper at this time
to adjust Company’s bad debt expense and E&D income
as a result of Federal Power Commission Order No. 770-A.
Such adjustments will be made only after F.P.C. Order
No. 770-A becomes final. (For further discussion see Part
Il, 4. of Appendix “A”’).
A. Unaccounted for Gas Expense
The Commission finds that Company’s unaccounted for
gas expense is the ten-year average (1967-1976) of actual
costs of this item. Thus, Company’s cost-of-service should
, A
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reflect a $674,000 unaccounted for gas expense. (For
further discussion see Part II. 4. A. of Appendix “A”).
B. Charitable Contributions
The Commission finds that the Company’s test year
charitable contributions totaling $252,000 are not a proper
expense for ratemaking purposes and are, thus, disallowed.
(For further discussion see Part II. 4. B. of Appendix
“A”),
C. Advertising Charged to Sales Expense
The Commission finds that the Company’s test-year
advertising expense (i.e., TV, radio, newspaper and maga-
zine) charged to sales amounted to $424,090. Of this
amount, the Commission concludes that $219,399.40 repre-
sents informative advertising or advertising designed to
promote conservation, safety, or off-peak gas use. Such
advertising is an allowable expense for ratemaking. The
remainder of Company’s advertising (i.e., $204,691.00) is
merely aimed at promoting good-will and is of no direct
customer benefit. Good-will advertising will not be allowed
for ratemaking purposes. (For further discussion see
Part II. 4. C. of Appendix “A”).
D. Advertising Charged to Admwmistrative and
General Expense
The Commission finds that the Company spent $9,465
during the test year on newspaper advertisements designed
to marshall community support for the Company during
labor negotiations with the Union. Such advertising is
good-will in nature and of no direct benefit to Company’s
ratepayers. Therefore, this expense will not be allowed in
Company’s cost-of-service. (For further discussion see
Part II. 4. D. of Appendix “A”).
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K. Dues and Donations Charged to Administrative
and General Expense
The Commission finds that Company’s test;yccr dues and
donations should be reduced $19,740 as this amount repre-
sents payments to organizations which provided no direct
benefit to Company’s ratepayers. (For further discussion
see Part II. 4. E. of Appendix “A’’).
F. Salaries Charged to Sales Expense
The Commission finds that the Company spent $62,553
on the salaries of nine of its employees whose primary
functions were the displaying and selling of gas appliances.
Such expenditures are non-utility related and should not
be passed on in Company’s rates for gas service. (For
further discussion see Part II. 4. F. of Appendix “A”).
G. Rate Case Expense
The Commission finds that the expense of retaining
Foster Associates, utility consultants, who aided in the
preparation and presentation of this rate case, should be
included in Company’s cost-of-service. (For further dis-
cussion see Part II. 4. G. of Appendix “A”).
H. Wage Expense—Missouri Natural Division
The Missouri Natural Division of the Company will in-
eur, as of April 15, 1977, an increase in its wage expense of
approximately $70,000. Associated pension costs and
FICA taxes will also increase by $6,400 and $3,100, respec-
tively. The Commission finds that though these expenses
occur outside the test year they are nevertheless known and
measurable and ought to be included in the Company’s
cost-of-service. (For further discussion see Part II. 4. H.
of Appendix “A”),
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I. Deferred Income Taxes on Certain General and
Administratwe Expenses Capitalized
The Commission finds that Company’s actual income tax
expense related to certain general and administrative
expenses is properly includable in its cost-of-service. The
Commission rejects the Company’s request to “normalize”
these tax-timing differences because it would result in a
greater tax expense for ratemaking purposes than actually
incurred by the Company. (For further discussion see
cost-of-service. (For further discussion sett Part II. 4. |
of Appendix “A”),
J. Research and Development Expense—Coal
Gasification Project Conducted by AGA/ERDA
The Commission finds as a proper ratemaking expense
$86,000 which represents the Company’s portion of the
$30,000,000 annual expense of the AGA/ERDA coal gasifi-
cation project. (For further discussion See Part II. 4. J.
of Appendix “A”).
K. Main Replacement Program
The Commission rejects, at this time, the recommenda-
tion of Staff that Company spend an additional $125,000
a year on its main replacement program. This recom-
mendation should be brought to the Commission’s attention
in the Staff’s fina! management audit report of the Com-
pany. (For further discussion see Part II. 4. K. of Ap-
pendix “A”).
4. Cost of Capital and Rate of Return
A. Return on Repriced Equity
While regulated utilities should be permitted an oppor-
tunity to earn a rate of return comparable to that of other
firms with comparable risk, the Commission rejects the
notion that repricing equity is the proper method to
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achieve this end. The Commission finds that the indices
(i.e. Handy-Whitman and Consumer Price Index) used to
reprice regulated and nonregulated firms’ common equity
are not compatible. (For further discussion see Part II.
5. A. of Appendix “A”).
B. Return on Equity
The Commission finds that in order for Company to
maintain its financial integrity, it or its equity investors
should be permitted an opportunity to market its common
stock at a price in excess of book value, more specifically,
1.03 times book value. This requires a return on common
equity of 13.4 percent which the Commission finds to be
fair and reasonable in this case. (For further discussion
see Part IT. 5. B. of Appendix “A”).
C. Capital Structure
The Commission finds that the long-term debt portion
of Company’s capital structure should be reduced $162,574
representing unamortized premium on long-term debt.
The Commision finds that the common equity portion of
Company’s capital structure should be reduced as follows:
(1) $1,003,494 which represents Company’s equity invest-
ment in non-utility subsidiaries, (2) $2,442,934 which repre-
sents other investments (Account No. 124.00) of the Com-
pany; and (3) $7,452,000 which, until three (3) days prior
to the end of the test year, represented an investment in
a Company-owned land development subsidiary. The
resulting capital structure and corresponding weightings
are:
Customer Deposits ........ $ 3,352,551 1.47%
Long-Term Debt .......... 123,722,771 54.47%
Preferred Stock ............ 11,282,378 4.97%
Common Equity ............ 88,792,356 39.09%
MI xcslaneiaiilabi tints $227,150,056 100.00%
(For further discussion see Part II. 5. C. of Appendix
“A”’),
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D. Original Cost Rate Base
The Commission finds that Company’s original cost
plant-in-service as of September 30, 1976 is $319,054,365
(Staff Exhibit No. 1, Schedule 19). Company’s original
cost plant-in-service less depreciation is $215,659,268 (Staff
Exhibit No. 1, Schedule 19). Company’s net original cost
rate base as of September 30, 1976, is $218,181,548 (Staff
Exhibit No. 1, Schedule 19).
E. Fair Value Rate Base
The Commission finds that Company’s fair value of prop-
erty devoted to gas service as of September 30, 1976, should
be $514,652,595 which represents the sum of (1) Com-
pany’s original cost plan-in-service ($319,054,365) times
the debt portion of its capital structure (60.91%) plus
(2) Company’s trended original cost plant-in-service
($819,433,566, Company Exhibit No. 67, page 2 of 2) times
the equity portion of its capital structure (39.09%). Offset
against this “gross” amount is the reserve for depreciation
of $212,171,616 which is the sum of (1) the original cost
depreciation reserve ($103,395,097), Staff Exhibit No. 1,
Schedule 19) times the debt portion of the capital structure
(60.91%) plus (2) the trended original cost depreciation
reserve ($381,667,082, Company Exhibit No. 67, page 2 of
2) times the equity portion of the capital structure
(39.09%). The fair value rate base is, thus, computed as
follows:
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Fair Value of Property Devoted to Gas
Ns soscaenshacavncononersaseesanecoccoses $514,652,595
Reserve for Depreciation ...................-..-:.0+-0-0--- 212,171,616
Net Fair Value of Property Devoted to Gas
EES a $302,480,979
Add:
Gas Stored Underground—
acs tacccsemssanenes $3,701,635
L.P. Gas Inventory .................. 3,041,732
Materials and Supplies ............ 3,173,034
SE ee 871,810
L.P. Gas Costs Deferred.......... 703,935
Special Deposits .......................- 5,690
Working Capital ........................ 860,254
$ 12,358,090
Deduct:
i i cca edcscininemiinbensounatnys 9,250,759
Customer Advances for Construction ........ 663,476
Fair Value Rate Base .....................:cc0000-. $304,924,834
F. Fair Value Rate of Return
The Commission finds that given present revenues, the
Company would earn a rate of return on its fair value rate
base of 5.21 percent. Under the Company’s proposed rates,
it would earn a rate of return of 7.44 percent on its fair
value rate base. The Commission finds as fair and reason-
able a rate of return on fair value rate base of 6.64 percent.
G. Original Cost Rate Base Rate of Return
The Commission finds that a rate of return on net
original cost rate base of 9.28 percent is fair and reason-
able.
5. Rate Design
The Commission finds that all of the Company’s cus-
tomers should pay at least $1.67 per Mef, which is Com-
pany’s minimum incremental or replacement cost of gas,
and the rate increase allowed by this Commission should be
recovered on a “per therm” basis and in such a manner that
the lowest rate block offered to any of Company’s firm cus-
tomers shall be no lower than $1.67 per Mcef.
In addition, the Commission finds that Company should
eliminate the prompt payment discounts currently existing
in all divisions of the Company except the Laclede Divi-
sion. Such discounts are nothing more than late payment
penalties which the Commission finds to be unreasonable.
Finally, the Commission concludes that a study of the
Company’s rate design should be commenced. This study
should be separately docketed and all interested parties
should be given an opportunity to participate. (For
further discussion see Part IT. 6. of Appendix “A”).
Conclusions of Law
The Missouri Public Service Commission has arrived at
the following conclusions of law:
1. The Company is a public utility subject to the
jurisdiction of this Commission pursuant to Chap-
ters 386 and 393, RSMo 1969.
2. The Company’s tariffs which are the subject
matter of this proceeding were suspended pursuant
to authority vested in this Commission by Section
393.150, RSMo 1969.
3. The burden of proof to show that the proposed
increased rates are just and reasonable is upon the
Company.
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4. The Commission, after notice and hearing,
may order a change in the rate, charge, or rental, in
any regulation or practice affecting the rate, charge,
or rental, and it may determine and prescribe the
lawful rate, charge, or rental, and the lawful regu-
lation or practice affecting said rate, charge, or
rental thereafter to be observed.
5. The Commission may consider all facts, which
in its judgment, have any bearing upon a proper
determination of the price to be charged with due
regard, among other things, to a reasonable average
return upon the capital actually expended, and to
the necessity of making reservations out of income
for surplus and contingencies.
6. The Commission’s express statutory power to
determine and prescribe just and reasonable rates
and to determine what rates will permit a fair re-
turn, includes the power to determine what items
should be included in a utility’s operating expense
and what items should be excluded, and how ex-
cluded items, if any, should be handled and treated.
State ex rel. Hotel Continental v. Burton, 334 S.W.2d
75 (Mo. 1960).
7. The Order of this Commission is based upon
competent and substantial evidence upon the whole
record.
8. The Company’s existing rates and charges for
gas service are insufficient to yield reasonable com-
pensation for gas service rendered by it in this state,
and accordingly, revisions in the Company’s appli-
cable tariff charges, as herein authorized, are proper
and appropriate and will vield the Company a fair
return on the net original cost rate base or the fair
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value rate base found proper herein. Rates resulting
from the authorized revisions will be fair, just, rea-
sonable and sufficient and will not be unduly dis-
criminatory or unduly preferential.
9. The Company should file in lieu of the pro-
posed revised tariffs, new tariffs designed to increase
gross revenues by approximately $8,718,140.
It is, therefore,
OrveRED: 1. That the proposed tariffs filed by Laclede
Gas Company of St. Louis, Missouri, in this case on August
16, 1976, be, and are, hereby denied, and the Company shall
file tariffs in accordance with the provisions of this Report
and Order to produce additional revenues in the Missouri
service area of the Company in the sum of $8,718,140 ex-
elusive of gross receipts and franchise taxes.
OrpereD: 2. That the Company shall file its tariffs in
compliance with this Report and Order on or before July
11, 1977, by using a rate design as set out in this Report and
Order.
OrperRED: 3. That when Federal Power Commission
Order No. 770-A becomes final, the Company shall file new
rate schedules reflecting prospectively the increase in ex-
ploration and development income and the associated in-
erease in Company’s bad debt expense resulting from said
Order No. 770-A.
OrpERED: 4, That a separate case be initiated for the
purpose.of examining the Company’s rate design presently
in effect and for examining those concepts of rate design
previously set out in this Report and Order. Parties and
Intervenors to this case should be notified of the commence-
A-47
ment of the rate design case so that they may participate
in that case to the extent they so desire.
Orverep: 5. That the rates established in the new
tariffs filed on or before July 11, 1977, shall become effec-
tiv. for gas service rendered after the effective date of this
Report and Order.
OrperepD: 6. That any motions not heretofore ruled on
are denied and any objections not heretofore ruled on are
overruled.
OrpvereD: 7. That this Report and Order shall become
effective on the lst day of May, 1978.
By THE CoMMISSION
R. MicHaret JENKINS
Secretary
[SEAL |
Sprague, Jones, and McCartney,
CC., Coneur.
Fraas, Chm., Slavin, C.,
Not Participating
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APPENDIX “A”
I. Procedural Background
On August 16, 1976, Laclede Gas Company of St. Louis,
Missouri (“Laclede” or “Company”) filed with the Missouri
Public Service Commission (“Commission”) revised rate
schedules applicable to all customer classifications, de-
signed to increase its gross operating revenues in the
amount of $13,570,000 annually, exclusive of gross receipts
taxes.
By its order dated September 7, 1976, the Commission,
pursuant to the provisions of Section 393.150(1), V.A.M.S.,
suspended the proposed effective date of the proposed re-
vised rate schedules for a period of one hundred twenty
(120) days to January 13, 1977, for the purpose of allow-
ing sufficient time to study the effect of the proposed
increases and to determine if they were just, reasonable
and in the public interest. The order also directed Com-
pany to file with the Commission on or hefore December
17, 1976, the minimum filing requirements data described
in an appendix to the order. In compliance therewith, the
Company on December 17, 1976, nade the required filing in
accordance with the Commission’s minimum filing require-
ments and served same upon all intervenors and the Public
Counsel.
On October 13, 1976, and pursuant to Section 393.150(2),
V.A.M.S., the Commission issued an order further sus-
pending the effectiveness of the proposed revised rate
schedules for an additional period of six (6) months from
January 13, 1977, to July 13, 1977. The order also estab-
lished a schedule for the filing and service of the staff’s
and intervenors’ testimony and exhibits; scheduled hear-
ings at several locations in the Company’s service area for
the purpose of receiving testimony of publie witnesses:
A-49
scheduled a prehearing conference to begin March 28, 1977,
and directed hearings for the purpose of cross-examining
witnesses to commence on April 18, 1977, in the Commis-
sion’s hearing room in Jefferson City, Missouri. In a sub-
sequent order issued on January 11, 1977, the dates of
some of the public hearings were changed and the date for
the prehearing conference was changed to April 7, 1977.
By orders issued on February 3, 1977, and at the pre-
hearing conference on April 7, 1977, the Commis-
sion granted interventions requested by the City of St.
Louis, Missouri (“St. Louis”); St. Louis County, Missouri
(“St. Louis County”); General Motors Corporation, Mon-
santo Company, ACF Industries, Ine., Anheuser-Busch,
Ine., McDonnell Douglas Corporation and Nooter Corpora-
tion (“Industrial Intervenors”) ; Lela Vasel, et al. (“Vasel,
et al.”); Utility Consumers’ Council of Missouri, Ine.
(“UCCM”); and Missouri affiliate of the Association of
Community Organizations for Reform Now (“MoACORN’).
As scheduled, public hearings were held in Poplar Bluff
on March 28, 1977: in Farmington on March 29, 1977; in
Festus on March 30, 1977; in the City of St. Louis on
April 4, 1977; in Clayton on April 5, 1977; and in St.
Charles on April 6, 1977. A further hearing was convened
in Jefferson City on April 18, 1977, and continued for a
period of eight days through April 27, 1977, at which time
the record was closed with the exception of certain late-
filed exhibits.
By letter dated May 4, 1977, the hearing examiner
established the following briefing schedule: Company’s
brief due on or before May 24, 1977; answering briefs of
all other parties due on or before June 3, 1977; Company’s
reply brief due on or before June 10, 1977.
The prehearing conference held on April 7, 1977,
resulted in a hearing memorandum (Joint Ex. 1) executed
by all of the parties in which there are delineated the
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issued in agreement and those in dispute between the Com-
pany, the staff, Public Counsel, and the several intervenors.
Certain stipulations agreed to by some or all of the parties
are set out in the hearing memorandum and will be appro-
priately noted herein.
II. Discussion of the Evidence
1. Local Hearings. The Commission conducts local
hearings in cases such as this for the purpose of obtaining
input in the ratemaking process from the general body
of ratepayers and for the purpose of receiving information
concerning any service problems the customers may be
experiencing. The Commission also finds the local hear-
ings afford the Commission an opportunity to learn of con-
ditions which may be particularly local in nature which
should be considered in the ratemaking process, and also
they provide a wider basis so that individuals who can-
not travel to Jefferson City will have an opportunity to
express their opinions on controversial proposals, and, thus,
aid the Commission in reaching its final determination.
From those ratepayers who availed themselves of the
opportunity to testify at these local hearings, the Com-
mission finds the quality of the Company’s service is not
an issue in this case, with the exception perhaps of the
method by which the Company estimates the customers’
bills. The Commission believes the Company should make
an intensive study of its procedures and practices in
estimating bills, as this was one of the most frequently
voiced complaints. The ratepayers in general were stren-
uously opposed to any increase in rates and charges of
any nature, especially considering (1) the difficulty they
were experiencing with meeting present utility bills, (2)
the Company’s history of earnings, and (3) the ever-
increasing cost of living. Senior citizens and those rate-
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payers on fixed incomes expressed particular hardship in
meeting present and anticipated utility bills.
Other serious complaints and concerns expressed by the
ratepayers were the termination of gas service during cold
periods and the Company’s alleged discriminatory and
inconsistent policy regarding deposits. Some concern was
expressed as to Company tax matters involving deferred
taxes due to accelerated depreciation and investment tax
credits.
Many individuals expressed the belief that the Company
was insensitive and cavalier in seeking a rate increase in
this period of high inflation and general economic hardship.
Specific proposals as to actions which the Company might
take to ease the burden of utility bills were expressed and
recommendations as to future policies that the Commission
might adopt were expressed.
The Commission has considered the testimony received
at the local hearings in great detail, including the general
comments as to the hardship caused by ever-increasing
utility rates. The specific proposals as #changes in the
Commission’s policies and practices have been given serious
consideration and have been discussed by the Commission
with its staff, and some of these issues will be addressed
in this Report and Order. Other issues raised above and
not discussed in this Report and Order are, nevertheless,
being currently considered by the Commission; and many
are the subject of statewide investigations initiated by this
Commission and presently in progress throughout the state,
involving many different utilities and many different
aspects of utility operations and utility regulation.
The Commission considers local hearings to be an integral
part of the ratemaking process, and all comments and sug-
gestions such as those enumerated above have been given
full thought and consideration in this Report and Order.
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2. Test Year and Related Items. All of the parties to
the hearing memorandum except UCCM stipulated and
agreed that the appropriate test year be established as the
twelve months ended September 30, 1976, based on actual
data as adjusted for that period. Inasmuch as UCCM
thereafter made no contention for a different period, the
Commission finds as an appropriate test year the twelve
months ended September 30, 1976, based on actual data as
adjusted for that period.
All parties to the hearing memorandum stipulated and
agreed that a year-end rate base be used.
All parties to the hearing memorandum stipulated and
agreed that the figures shown in the adjustments in Com-
pany’s and staff’s exhibits as to dollar amounts are arith-
metically correct.
3. Rate Base Issues.
A. Minor Construction Work in Progress (CWIP).
The Company seeks to include in its rate base the sum
of $311,000 which represents minor construction work in
progress at September 30, 1976. Minor CWIP is defined
by the Company as consisting of those utility construction
jobs which are estimated individually to take less than
thirty days to complete and for which the Company does
not capitalize an allowance for funds used during construc-
tion (AFDC). Staff opposes the inclusion of any CWIP in
Laclede’s rate base.
Basically, Company argues that this minor CWIP repre-
sents an ongoing amount of money invested in utility
operations and, therefore, it ought to be allowed an oppor-
tunity to earn a return on this investment.
Staff, on the other hand, contends (1) that this CWIP is
not “used or useful” ia serving the ratepayers as of the end
of the test year; (2) that a part of this construction work
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represents “revenue-producing” plant and Company has
not made a pro forma adjustment to its test year revenues,
thus creating a mismatch of revenues and expenses; (3)
that Company, by its own admission, is capable of caleulat-
ing AFDC on these minor projects which, in effect, allows
it to earn a return on its investment; and (4) that the en-
actment of Section 393.135, RSMo 1976 (“Proposition No.
1”), offers persuasive public policy arguments for exclud-
ing CWIP from a utility’s rate base.
The Commission finds that the arguments of staff on this
issue are persuasive. By its very nature, construction work
in progress denotes plant that has not been completed and
devoted to the public service. The Commission is of the
opinion that in periods of escalating energy costs it is not
fair, nor is it reasonable, to require a utility’s ratepayers
to pay for plant that is not presently in service. To the
extent that this construction represents plant to serve new
customers it can be expected to generate new revenues. To
include this revenue-producing CWIP in rate base without
accounting for the additional revenues does create a mis-
matching of test year revenues and expenses.
Company argues that to exclude CWIP from rate base
is to ignore a utility investment and thus deny a return
on it. Such action, Company contends, is violative of its
process rights as guaranteed by the United States and
Missouri Constitutions. The Commission finds that this
“return of investments” that Company feels it is entitled
to may alternatively be provided for by caleulating AFDC
on these projects and adding this to the construction pro-
ject cost. The Commission finds that Company is able to
calculate AFDC on these minor projects; however, because
of convenience it has chosen not to do so. Therefore, Com-
pany’s inability to receive a return on these invested con-
struction funds is not of this Commission’s making, but
rather of Company’s own choosing.
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Finally, on November 3, 1976, the general electorate of
the State of Missouri voted to amend the Public Service
Commission Law by adding Section 393.135. This section,
popularly referred to as Proposition No. 1, specifically
provided :
“Any charge made or demanded by an electrical
corporation for service, or in connection therewith,
which is based on the costs of construction in prog-
ress upon any existing or new facility of the elec-
trical corporation, or any other cost associated with
owning, operating, maintaining, or financing any
property before it is fully operational and used for
service, is unjust and unreasonable, and is pro-
hibited.” Section 393.135, RSMo.
The Commission recognizes that this section does not ad-
dress itself to gas utilities; however, the mandate is clear
and the Commission finds that it is persuasive on the issue
at hand. See also Re: Gas Service Company, Commission
Case No. 18,662 (December 6, 1976).
Thus the Commission concludes that Company’s request
to include in its rate base minor CWIP in the amount of
$311,000 should be denied.
B. Cash Working Capital—Minimum Bank Balances.
Company seeks to include in the cash working capital
component of its rate base $905,804 which represents Com-
pany’s test year minimum bank balances. These minimum
balances allowed the Company to avoid paying “transac-
tion fees” or “activity charges” for the test period.
Although staff recognizes that actually incurred transac-
tion fees or activity charges are a proper expense for rate-
making purposes, it objects to the inclusion in rate base of
any minimum bank balance amounts.
A-55
Laclede argues that it maintains minimum cash balances
in banks throughout its service area in order to avoid in-
curring transaction fees which would be imposed by the
banks absent such balances. These balances were deter-
mined by applying the transaction charge of each bank to
the test period transactions of the Company in that bank,
then applying an earnings allowance to such potential
activity charge and then increasing the balance by allowing
for a bank reserve requirement. Since Company’s actual
bank balances were more than twice the minimum balances
during the test period, Company was of the opinion that
these balances did not include monies needed to assure
short-term lines of credit with these banks. Finally, Com-
pany asserts that staff’s refusal to recognize its commit-
ment of funds to this purpose would result in Company’s
receiving no return on such funds although the ratepayer
receives the benefit of a lower cost of service in that no
transaction fees were incurred.
The staff in its presentation on this issue objected to the
inclusion of these balances in rate base because it was not
confident that these balances were “net” of compensating
bank balances. In other words, staff believed that monies
used to assure short-term lines of credit were confused or
comingled with balances necessary to offset transaction
fees. In addition, staff presented its Exhibit No. 7 which
compared the revenue requirement effect of Company’s test
year, potential transaction fee expense with the revenue
requirement effect of including $805,804 in Company’s rate
base. Thus, Company’s course of action in this rate case,
according to Staff Exhibit No. 7, results in the ratepayer
being required to pay four times as much as the potential
transaction fee expense for the test period. This conclu-
sion was not contested by the Company.
The Commission finds that these minimum bank balances
maintained by Company are not pursuant to any written
A-56
agreement and that these minimum balances represented
less than one-half of the actual balances maintained at
these banks. The Commission takes particular note of the
Company’s assertion that it is practically impossible to
have maintained zero balances and incurred transaction
fees only. Indeed, the Commission is of the opinion, and so
finds, that a company such as Laclede cannot escape the
fact that it will have average bank balances sufficient to
cover the transaction of daily business. That the fact that
Laclede Gas Company has average cash balances in these
banks that negate the necessity of paying transaction fees
is simply a necessary result of doing business. The Com-
mission further finds that the Company has not made a
conscious decision to commit funds to maintain sufficient
balances in order to avoid incurring activity charges.
Therefore, the Commission concludes that minimum
bank balances in the amount of $805,804 should not be in-
cluded in Company’s rate base. In reaching this result the
Commission is not unmindful of the decision in Re: Gas
Service Co., Comm. Case No. 18,662 (December 6, 1976),
Nevertheless, a review of the Commission’s Report and
Order in that case will readily reveal a substantial distine-
tion. At page 4 of that Report and Order the following
language appears:
The Applicant contends that it maintains minimum
bank balances in many banking institution in Mis-
souri, the average minimum bank balances for the
test period being $1,068,305. It contends that if
these minimum bank balances were not maintained,
the Applicant would have to pay transaction fee
expenses. Jt also makes the point that if it did not
maintain these minimum bank balances, the transac-
tion fee expenses would be far in excess of the amount
allowed as rate of return on this $1,068,305. In sum,
A-57
the Applicant contends that the customer is better
served by the maintenance of minimum bank bal-
ances and the avoidance of transaction fees rather
than the paying of such transaction fees to various
banks through which it does business. (Emphasis
ours. )
In the case at bar, Staff Exhibit No. 7 conclusively shows
that the ratepayer is not better served by the maintenance
of minimum bank balances vis-a-vis the paying of resulting
transaction fees.
ce. Depreciation Reserve.
By its adjustment R-5, R-6, R-7, R-8 and R-9, the staff
has proposed to increase Laclede Gas Company’s actual
depreciation reserve at September 30, 1976 in the amount
of $224,015 to reflect the annual depreciation expense based
upon plant in service at September 30, 1976. Both the
Company and the staff agree that when a year-end rate
base is used, it is appropriate to calculate the depreciation
expense as though the year-end plant has been in service
for the full year and make an expense adjustment to reflect
that level of depreciation expense. Staff argues for a
further adjustment increasing the depreciation reserve to
reflect this annualization. Company opposes these adjust-
ments to the reserve.
Staff has traditionally maintained that in those instances
where, for ratemaking purposes, a company is allowed to
include annualized depreciation expense in its cost of serv-
ice, an offsetting adjustment to the reserve must be made
in order to effectuate a proper regulatory matching of rate
base, revenues and expenses. Thus, in the absence of such
an offsetting adjustment Laclede Gas Company’s customers
will be required to cover in their gas rates Company’s an-
nualized depreciation expense, dollar for dollar, and they
A-58
will further be required to pay in their rates a return on
Company’s unadjusted rate base.
Company argues that to adjust its depreciation reserve
as advocated by staff would in essence eliminate from its
rate base, property on which the Company has had no
opportunity to earn a return. Thus, such action repre-
sents a “taking” or “confiscation” of Company’s property
without just compensation and in violation of the due proc-
ess clause of the Fourteenth Amendment to the Constitu-
tion of the United States.
The Commission is reminded of the language in its Re-
port and Order in Re: Kansas City Power & Light Co.,
Comm. Case No. 18,433 et al. (April 23, 1976) wherein it
stated at page 11:
While the Staff treatment and rationale might be
appropriate for companies in a static situation or
for companies having a declining rate base, this
Commission would be ignoring realities if it were to
accept Staff treatment for Kansas City Power &
Light, a company whose investment in plant are
[sic] rapidly increasing.
The facts presently before the Commission reveal that
over the period 1969 through 1976 the relationship of gross
additions to gross plant in service was 4.92 percent for
Laclede Gas Company as compared with 7.96 percent and
7.66 percent for Union Electric Company and Kansas City
Power & Light Company experiencing rapidly increasing
investments in plant and therefore finds that staff adjust-
ments R-5, R-6, R-7, R-8 and R-9 are appropriate in this
case and Company’s test year reserve for depreciation
should be increased in the amount of $224,015.
In reaching this decision, the Commission finds that to
allow an annualized depreciation expense predicated on
test year-end plant-in-service absent a matching adjustment
A-59
to the depreciation reserve results in an over-collection in
rates. The Commission is unpersuaded by Company’s
argument that it will not be allowed to earn a return on
that portion of the rate base represented by these adjust-
ments to the reserve. Company will, in fact, receive
through its test year depreciation expense a dollar for dol-
lar recovery of staff adjustments R-5, R-6, R-7, R-8 and
R-9.
4. Net Operating Income Items—Cost of Service
Introduction.
Several matters affecting net operating income were re-
solved in the hearing memorandum. All parties stipulated
and agreed that the adjusted operating revenues of the
Company for the test year are $219,220,049, that for the
test year the manufactured gas production expense
is $1,461,091, that the underground storage expense is
$726,402, the other storage expense is $278,918, and that
the adjusted distribution expense is $8,124,676; that cus-
tomer accounts expense for the test year, adjusted for
other increased revenues and annualized for year-end cus-
tomers, is staff’s figure of $9,452,425; and that the adjusted
maintenance expense is the staff’s figure of $6,528,686.
In addition, all parties except Public Counsel agreed that
the proper adjusted depreciation expense is $10,713,033 and
that the proper adjusted amortization expense is $85,633.
Public Counsel later waived its reserved right to assert
a different position. All parties except Industrial Inter-
venors, Vasel, et al., MoACORN and Public Counsel stipu-
lated that adjusted operating income, exploration and
development is $929,224, and that operating income,
Laclede Pipeline Company is $173,000. Vasel, et al., and
Public Counsel later waived their reserved rights to take
a different position. The Industrial Intervenors and
MoACORN did not participate in the hearings at that
point.
A-60
Finally, the effect of Federal Power Commission Order
No. 770-A on bad debt expense and exploration and devel-
opment revenues was resolved by stipulation in the follow-
ing terms (Joint Ex. 1, page 4):
“Staff has recommended that no adjustment be
made in this case for such bad debts or for the ef-
fect on E & D revenues, but that in its decision here-
in the Commission should order the Company that
when Order No. 770-A becomes final, to file new rate
schedules reflecting prospectively the increase in
& D income resulting from Order No. 770-A in its
final form and the bad debt adjustment discussed
herein.
“Company and all other parties hereto accept
Staff’s recommendations and stipulate and agree
that bad debt expense related to the $55,501,615
increase and E & D income related to Order No.
770-A shall not be adjusted, and that Staff’s recom-
mendation for a prospective net rate reduction after
Order No. 770-A becomes final is a joint reeommen-
dation to the Commission by all the parties hereto.”
A. Unaccounted-for Gas Expense.
The sole question in dispute on this issue is the period
which the Commission should utilize in computing the Com-
pany’s average unaccounted-for gas expense, which would
be includable as an above-the-line expense for ratemaking
purposes.
The Public Counsel proposed that the Commission base
its average unaccounted-for gas expense calculation on the
Company’s experience over the past five years. These
figures were included as part of Public Counsel’s Exhibit
Nos. 2 and 3 and when averaged, yielded an annual per-
centage figure of 1.50. In terms of actual dollars allowed
A-61
above-the-line as unaccounted-for gas expense, the 1.50 per-
cent figure proposed by the Public Counsel translated into
$453,098.
The Company’s proposal called for a ten-year average of
unaccounted-for gas expense. The Company’s witness on
this issue contended that the ten-year average was the more
preferable because the five-year period proposed by the
Public Counsel (1972 through 1976) began and ended with
the lowest percentage of unaccounted-for gas expense in
the Company’s history. It was felt, therefore, that a
reliance upon the period 1972 through 1976, reflecting what
was considered to be an abnormally low period o: un-
accounted-for gas expense, would be far less accurate in
projecting the probable future rate of expense than would
the ten-year average proposed by the Company itself. The
Company’s ten-year average yielded an annual percentage
figure of 1.70, which translates into $674,800 of annual
expense.
The staff’s witnesses on this issue both testified that
based upon their independent analyses the ten-year aver-
age was preferable to the five-year average proposed by
the Publie Counsel.
After a consideration of the record which was developed
on this issue, the Commission is of the opinion that the
ten-year average for calculating annual unaccounted-for
gas expense should be adopted in this case. An examina-
tion of the Public Counsel’s own Exhibit No. 2 indicates
that the proposed five-year average would be much more
prone to distortion from factors such as short-run abnor-
malities in weather than would the ten-year period advo-
cated by the Company and staff. It is in the belief that
a longer averaging period will be more likely to accurately
reflect the Company’s probable future unaccounted-for gas
expense, that the Commission adopts the calculation based
upon a ten-year average in this case. The figure of
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$674,800, representing an annual percentage of 1.70, is
therefore adopted as properly includable in the test year
as unaccounted-for gas expense.
B. Charitable Contributions.
The Company proposed to bring above-the-line one hun-
dred percent of the expenditures it made to various chari-
table organizations during the test year. As reflected in
Publie Counsel’s Exhibit No. 7, the aggregate of these con-
tributions during the test year was nearly $252,000.
In support of its argument for inclusion of these ex-
penses above-the-line, the Company contends that as a good
corporate citizen it is expected to support worthwhile chari-
table activities carried on within its service area. It further
submits that since such contributions are expected of Com-
pany that those amounts so expended should be considered
“proper and necessary business expenses” by the Commis-
sion and thus includable above-the-line for ratemaking
purposes. An impressive and substantial list of adminis-
trative and judicial decisions from other jurisdictions is
also provided by the Company in support of its proposed
treatment of the contributions.
The staff points out in its brief on the issue that (1) the
Commission has traditionally refused to treat charitable
contributions made by a regulated company as normal,
above-the-line operating expenses for ratemaking purposes,
and (2) that the Uniform System of Accounts adopted by
the Commission for gas corporations specifically provides
that charitable contributions be treated below-the-line. The
staff notes the Commission has traditionally reasoned that
to allow the inclusion of charitable contributions as above-
the-line expenses would require the ratepayers to involun-
tarily participate in charitable campaigns from which no
direct benefit accrues to all of the ratepayers. Based upon
this rationale, the staff points out that this Commission
A-63
has, in the past, left the burden of corporate generosity to
fall on the shoulders of the stockholders.
The brief of the Public Counsel indicates full support of
the staff’s proposed exclusion of charitable contributions
above-the-line.
Although the arguments advanced by the Company rela-
tive to this issue are compelling, they are not sufficiently
persuasive to warrant abandonment of the well-established
policy of this Commission to disallow charitable contribu-
tions as above-the-line operating expenses for ratemaking
purposes. The lenghty list of reasoned conclusions reached
by administrative and judicial tribunals in other jurisdic-
tions simply lacks the precedential mandate that the Com-
pany seems to imply through its recitation. The relevant
Missouri law on the issue is contained in the case of State
ex rel. Hotel Continental, et al., v. Burton, 334 S.W.2d 75
(1960), wherein the Supreme Court stated, at page 80:
“[Wle hold here, that the commission’s express
statutory power to determine and prescribe just and
reasonable rates and to determine what rates will
permit a fair return, includes the power to determine
what items should be included in a utility’s operating
expense and what items should be excluded, and how
excluded items, if any, should be handled and
treated, in order that the commission may arrive at
a reasoned determination of the issue of ‘just and
reasonable’ rates.”
As has been noted previously, the long established policy
of this Commission has been to disallow the inclusion of
charitable contributions above-the-line. The rationale for
this policy was succinctly stated in the Report and Order
issued by this Commission in Re: Missouri Public Service
A-64
Company, Case No. 18,180 (June 13, 1975), wherein it was
held, at page 48:
The reasons for the disallowance may be sum-
marized as follows: (1) A substantial incentive al-
ready exists to encourage donations through stat-
utory income tax deduction provisions; (2) While
contributions are commendable, they are nontheless
discretionary and thus are not normal business
expenditures; (3) Whatever benefits accrue to a
public utility or other similarly regulated businesses
are enjoyed primarily by the stockholders of that
business. It should, therefore, be the stockholders
rather that [sic] the ratepayers that bear the burden
of such expenditures; (4) However small the total
amount of corporate expenditures for contributions
may be it has some effect on the decision in a rate
ease and should therefore, not be included as an
operating expense; (5) The requirement that the
ratepayers recompense a utility for its charitable
activities constitutes an involuntary contribution to
the charity by the ratepayer.
The Company has failed in its presentation in this case
to put forth sufficiently convincing evidence to warrant an
abandonment of this Commission’s long established treat-
ment of charitable contributions. The Commission con-
cludes, therefore, after considering the record as a whole,
that the position advanced by the staff regarding this issue
is the correct one. The entire amount of the Company’s
charitable contributions made during the test year will be
disallowed. |
C. Advertising Charged to Sales Expense.
Staff through its Adjustment 6(a) proposes to disallow
$424,090 (revised at hearing) of advertising charged by
/
/
A-65 /
Company during the test year to its — expense. Com-
pany objects to this disallowance.
Staff in making this adjustment appeared to be guided
by this Commission’s Report and Order i in Re Kansas City
Power & Light Company, Commission Case No. 18,433,
et al. (April 23, 1976). At pages’ 23 and 24 of that order
the Commission held as follows on the issue of advertising:
. The Commission finds that the following cate-
gories of advertising are appropriate for the Com-
pany to expect to be’reimbursed by its ratepayers:
(1) Conservation-Advertising dealing with the
methods by which the ratepayer can effectively,
efficiently and economically use electricity ;
(2) Safety-Advertising dealing with the making
of the ratepayer-aware of certain dangers connected
with electricity and ways to avoid possible injury;
(3) Off-Peak Load Building-Advertising designed
to encourage the use of electricity when consumption
is low to make the cost of service more economical ;
and,
(4) Information-Advertising designed to provide
information of substantial benefit to the consumer in
the use of the product or service sold, or in promot-
ing customer-company relations.
“Good will advertising should not be reimbursed
by the Company’s ratepayers.”
With this in mind, staff made its Adjustment 6(a) based
on the following criteria:
(1) Conservation—advertising dealing with meth-
ods by which the ratepayer can use less gas. Ex-
ample: Good heating techniques and thermostat
settings.
A-66
(2) Safety—advertising dealing with potential
hazards relating to the use of gas. Example: pro-
eedures to follow in emergency situations.
(3) Off Peak Sales—advertising to promote use
of gas when general consumption is very low. Ex-
ample: gas air conditioning.
(4) Good Will—advertising designed to promote a
favorable image of the Company. (Tr. 684.)
Thus, the staff argues that there are direct benefits to the
ratepayer from the first three categories (i.e., Conserva-
tion, Safety, and Off Peak Sales). However, the last cate-
gory, i.e., “Good Will”, is of no direct benefit to the rate-
payer and money spent on this type of advertising should
not be allowed as an operating expense for ratemaking
purposes. Admittedly, staff had difficulty pigeonholing all
of Company’s advertising in these four categories; never-
theless, this $424,090 amount represents radio, television
and printed ads that staff believed are good will in nature
and ought to be disallowed.
Company objected to this adjustment of staff and offered
rebuttal testimony of Mr. W. H. Otto, director of Com-
pany’s public relations and advertising, in order to show
that this advertising was not good will in nature, but had
other significant and laudatory purposes. Company also
offered into evidence Exhibits Nos. 77-95, which repre-
sented scripts from all its test year television and radio
advertising. The bulk of staff’s adjustment, according to
Mr. Otto, is made up of disallowed television advertising
in the amount of $256,500 (TR. 1,783) and disallowed
radio advertising in the amount of $120,030 (Tr. 784). Mr.
Otto went through these scripts and categorized their con-
tent as devoted to the following themes: conservation
through the efficient use of gas, conservation through care-
A-67
ful consumption, the economy of gas, the availability of
gas, the pollution-free quality of gas, and Company’s serv-
ice or repair program. Next, Mr. Otto attempted on a
word-by-word and frequency basis to show the amount of
television and radio advertising expense assignable to
these themes. His results showed the following:
Television Advertising:
Conservation through efficient use
| NER CN SL AEM at Pind ome PRM 40 percent
TI 5a ci isescincinks Xersticaceecasgae 21 percent
TOI eccieshpearitsicinntocsitct ects euaibaantacs 15 percent
Conservation through careful con-
RNAS RROD DORs sae 14 percent
Er eR DEAE RE RUNG Ra & OMe 8 percent
Pollution-free quality ..............2..2..--.-+- 2 percent
100 percent
Radio Advertismg:
Conservation through efficient use
OE OE iiss ees ».... 49 percent
Conservation through careful con-
IID eiciicoctsedcisstsicieinipinasteacsbanbcsacaties 27 percent
RO acceler wussonainncssnccininaitoeianiiel 12 percent
IIE cactecsanselineciceienpiianinecnocaiicmaninbond 6 percent
Pollution-free quality ...............2..+- 5) percent
Fa LRE SER TR eT 1 percent
100 percent
Company believes that its advertising program is con-
sistent with a 1973 national energy policy which Company
feels would bring this country’s energy supplies and de-
mands into balance. Furthermore, Company argues that
if the Commission were to disallow this expense, it would
be substituting its judgment for that of Company manage-
ment, which is contrary to the law as stated in State ex rel.
Southwestern Bell Telephone Company v. Missouri Public
A-68
Service Commission, et. al., 262 U.S. 276 (1923). Finally,
Company cites the recent United States Supreme Court
ease of Virginia State Board of Pharmacy v. Virgimia Citi-
zens Consumer Council, Inc., U.S. , 48 L.Ed.2d
346, 358 (May 24, 1976), for the proposition that to disallow
advertising expense may involve an abridgement of Com-
pany’s First Amendment right to free speech.
The Commission takes this opportunity to reaffirm its
position of disallowing for ratemaking purposes expenses
associated with good will type advertising. Generally
speaking, this type of advertising is aimed at creating a
favorable image of the Company or the Company’s product
in the public’s view. The Commission is of the opinion,
and so finds, that this type of advertising is of no direct
benefit to the ratepayers and ought not to be borne by them
in their rates. The Commission does recognize, however,
the need to establish uniform guidelines with respect to
the issue of advertising so as to put utility companies and
ratepayers on specific notice as to what types of advertis-
ing will, or will not, be permitted as an allowable expense
for ratemaking purposes. For purposes of this discussion,
however, the criteria set out by this Commission in Re:
Kansas City Power & Light Company, supra, is appro-
priate and serves as a basis from which to work until this
Commission has had an opportunity to conduct a generic
type proceeding on this issue.
The Commission now turns its attention to the specific
facts before it in this case. The Commission finds that
there is competent and substantial evidence in this record,
consisting of testimony of staff and Company witnesses
and actual scripts of Company’s television and radio ad-
vertising, upon which this Commission can make a valid
determination. It should also be mentioned that this Com-
mission will not quibble with Company’s assertion that its
Mr. Otto is an expert on the purpose of advertising; how-
A-69
ever, the Commission does reject Company’s contention
that he is also an expert with respect to the effect of adver-
tising. The Commission notes with considerable interest
the testimony of public witnesses Steinmeier (TR. 220-
223), Mever (TR. 379), Von Eimen (TR. 420), and Beussink
(TR. 520-525), who expressed displeasure and annoyance
with Company’s advertising program. The Commission be-
lieves, and so finds, that the best judge as to the effect of
advertising is the segment of the public to which that ad-
vertisement is directed.
The Commission, for purposes of this case, finds that
Company’s advertising efforts may generally be catego-
rized as directed at those themes as have been listed by
Company witness Otto. This does not say, however, that
some of this advertising is not good will in nature. With
this in mind, the Commission concludes that those portions
of Company’s advertising that are directed at the servicing
and repairing of appliances (i.e., Mr. Otto’s “service” cate-
gory) and information concerning estimated bills are within
the ambit of the Commission’s previously described infor-
mation-advertising category.
Those areas of Laclede Gas Company’s advertising di-
rected at conservation through careful consumption ade-
quately fall within the conservation-advertising category
inentioned in the Kansas City Power & Light Company Re-
port and Order. Athough these conservation messages do
not specifically entail admonishments to dial down ther-
mostats or methods to better insulate residences, the Com-
mission concludes that the expenses associated with Com-
pany’s conservation through careful consumption advertis-
ing ought to be allowed in this case. The Commission adds
that this appears to be a situation where the Company is
complying with the letter of the Commission’s advertising
guidelines but not the spirit, and Company is strongly urged
to fill out its conservation ads with more substantive in-
formation.
A-70
The Commission also finds that those portions of Com-
pany’s advertising directed at informing the public of the
availability of natural gas in Company’s service area fall
within the category of informational type advertising pre-
viously allowed by this Commission, although the Commis-
sion is aware of Laclede Gas Company’s efforts in the ex-
ploration and development of natural gas and storage
areas, and is thus inclined to alla advertising informing
or assuring the public of its supplies. While the Commis-
sion notes the displeasure expressed by public witnesses
toward this type of advertising, the Company is in a unique
situation with respect to its gas supplies, and the Commis-
sion concludes that some amount of advertising is justified
to assure its ratepayers of that supply.
In addition, Company’s advertising that extolls the eco-
nomical and pollution-free qualities of gas are found to
relate to informational type advertising and ought to be
allowed. In making these allowances, the Commission is
cognizant of its lack of definitive and uniform advertising
guidelines. It is also somewhat moved by Company’s argu-
ment as to lack of notice as to what is and what is not
proper advertising for regulate’ utilities. The Commis-
sion, however, is quick to point out that the above-men-
tioned allowances are “borderline” and admonishes Com-
pany to take a serious look at its future advertising pro-
gram.
As mentioned previously, this Commission still finds it
appropriate to exclude good will type advertising expense
from ratemaking consideration. With this in mind the
Commission is of the opinion, and so finds, that Company’s
advertising directed at the theme “conservation through
efficient residential use of gas” is good will in nature, of no
direct benefit to the ratepayer, and ought to be disallowed
from Company’s test year operating expenses. Basically,
Company’s message in this area is to promote the use of
natural gas directly in the home wherever possible. By
A-71
using gas rather than electricity for all the jobs gas per-
forms more efficiently in the home, Company argues this
aids in the conservation of all finite natural energy re-
sources. The Commission, however, finds that this type of
advertising is nothing more than a thinly-veiled effort to
keep the name of Laclede Gas Company before the public’s
eye and to promote the image of Company’s product. ‘To
a lesser degree, such advertising promotes the sale of gas
appliances (a nonregulated function that Laclede performs)
and benefits that accrue from these sales will not accrue to
the general ratepayers.
Finally, the Southwestern Bell Telephone Compamy case,
supra, cited by Company, is unpersuasive on the Com-
mission and its ability to allow or disallow Company ex-
penses in the setting of just and reasonable rates. See
State ex rel. Hotel Continental, et al., v. Burton, supra.
Also, this Commission is not moved by the Virginia Citizens
case, supra, and finds it inappropriate to the situation at
hand. In that case the question of First Amendment rights
centers around the outright prohibition of advertising by
pharmacists. Here, the Commission is merely disallowing
a part of Company’s advertising expense for ratemaking
purposes. Thus, the Company, regardless of this Com-
mission’s action on this issue, is free to advertise as it sees
fit.
In conclusion, the Commission finds that Staff Adjust-
ment 6(a), in the amount of $424,090, should be reduced by
the following amounts:
(Total disallowed television advertising expense
of $256,500)
Availability (21 percent) ...................... $ 53,865.00
Economy (15 percent) .........-......:.:c00++ 38,475.00
Conservation through careful
consumption (14 percent) ................ 35,910.00
Service (8 percent) ...............scecseeeeeeee 20,520.00
Pollution-free (2 percent) .................... 5,130.00
Amount Allowed $153,900.00
A-72
(Total disallowed radio advertising expense
of $115,779.99)
Conservation through careful
consumption (27 percent) ................ $ 31,222.28
Service (12 percent) -..............sc+eceececee: 13,589.92
Economy (6 percent) ................020-.002 7,545.49
Pollution-free (5 percent) ................-..- 5,038.19
Availability (1 percent) ...................-..- 836.52
Estimated bills (0 percent) .................. 192.00
Amount Allowed $ 58,924.40
(Total disallowed printed advertising expense
of $20,966.(0)
Availability (Post-Dispatched and
Globe-Democrat) -.................c.00-0+--00--- $ 6,575.00
Total Amount Allowed $219,399.40
Thus, Staff Adjustment 6(a) should properly exclude
$204,691.00 from Company’s test year sales expenses
associated with good will type advertising.
The Commission feels it is important to add that though
Company may be in a competitive situation with respect to
Union Electric Company, this is not an appropriate reason
for allowing advertising costs. The area served by Laclede
and Union Electric Company desperately need the services
that each company provides, and to permit an advertising
campaign aimed at meeting the competition of the other
at the ratepayers’ expense is not reasonable nor should it
be permitted.
D. Advertising Charged to Administrative and
General Expense (Labor Negotiations Adver-
tising ).
Staff Adjustment 7(a) disallows certain advertising ex-
penses of the Company charged to administrative and gen-
eral expense in the amount of $9,465 (revised at hearing).
A-73
This adjustment represents the cost of a newspaper adver-
tisement taken out by the Company during its labor nego-
tiations with the union in fiscal year 1976. Staff disallowed
this advertising expense because it felt it was more in the
nature of good will advertising and, as such, is of no direct
benefit to the ratepayer.
Company opposes this adjustment and argues that the
purpose of the ad was to get public opinion behind the Com-
pany in its negotiations with the union. Thus, the ad could
result in smaller labor wage increases and possibly avoid
a winter strike by the Company’s labor personnel.
The Commission finds that the record is devoid of any
specific benefits received by the ratepayers from this adver-
tisement. It would not surprise the Commission to learn
that a significant number, if not a majority, of the Com-
pany’s ratepayers are union members, in which case, such
advertising would be more inflamatory than image build-
ing. Nevertheless, the touchstone in allowing this type of
advertising is ratepayer benefit, and the Commission finds
that this ad is good will in nature and no benefit accrues to
the general ratepaying public. For these reasons, the Com-
mission concludes that Staff Adjustment 7(a) is appropri-
ate, and Company’s test year administrative and general
expense ought not to reflect this $9,465 advertising charge.
K. Dues and Donations Charged to Administra-
tive and General Expense.
Staff Adjustment 7(b) proposes an elimination of $19,740
worth of the total amount paid by the Company as dues
and donations during the test year. The specific payments
which the staff proposes to disallow were made to the fol-
lowing organizations: Missouri Chamber of Commerce
($2,500), Downtown St. Louis, Ine. ($3,565), Associated In-
dustries of Missouri ($2,175), Missouri Community Better-
ment ($500), Civic Progress ($6,400), and Civic Develop-
A-74
ment Fund ($4,600). Staff proposes to disallow these
expenses on the ground that “they represent a voluntary
contribution by the Company from which no direct benefits
(i.e., increased revenues, lower rates) befall the ratepayer.”
The staff also contends that allowing dues and donations
such as these would place the ratepayer in the position of
an involuntary contributor through his or her utility rates.
The Public Counsel supports staff Adjustment 7(b) as
far as it goes, but proposes an additional reduction of
$51.578, thus raising the total proposed reduction in the
Company’s test year expenditures for dues and donations
to $71,318. The Publie Counsel bases its proposal on the
ground that consistency demands that the principles under-
lving the reductions contained in Staff Adjustment 7(b) be
applied to test all dues and donations expenditures. The
result of such an application of principle, it is contended,
is an additional reduction of $51,578.
The Company opposes any adjustment in. its test year
expenditures for dues and donations on the ground that its
ratepayers are clearly and directly benefited by the “im-
proved business climate” which results from the Company's
financial support of the various institutions.
The approach represented by Staff Adjustment 7(b) re-
flects this Commission’s long established policy relative to
the inclusion of dues and donations as above-the-line ex-
penses. Where no direct benefit accrues to the utility rate-
payer, this Commission has traditionally disallowed dues
and donations above-the-line. Re: Gas Service Company,
Case No. 18,662 (December 16, 1976); Re: Missouri Utili-
ties Company, Case Nos. 18,246, 18,352 and 18,371 (Decem-
ber 12, 1975); Re: Continental Telephone Company, Case
No. 18,281 (October 31, 1975); Re: Missouri Public Service
Company, Case No. 18,180 (July 1, 1975).
In addition, it should be noted that the evidence in the
record tends to indicate that many of the disallowed expen-
A-75
ditures involved organizations or institutions whose activi-
ties were duplicative of those of other organizations, insti-
tutions, and even the Company itself, for which the rate-
payer was already being assessed. Such double payment,
if aliowed, would be contrary to the well established rate-
making principles embraced by this Commission.
Insofar as the additional reduction proposed by the
Public Counsel is concerned, the Commission does not feel
that such a sweeping reduction is supported by competent
and substantial evidence on the record as a whole.
The Commission concludes, therefore, that Staff Adjust-
ment 7(b) should be adopted and the Company’s adminis-
trative expenses for dues and donations during the test
year be reduced by $19,740.
F. Salaries Charged to Sales Expense.
Staff Adjustment 6(c) proposes to transfer below-the-
line an amount totaling $62,553 (revised at hearing), which
represents the base salaries paid by the Company to nine
employees whose primary functions are the displaying and
selling of merchandise. The Company had previously
charged the approximately 64 percent of these employees’
salaries attributable to commissions to its below-the-line
merchandising account. The additional disallowance re-
sulted from an analysis conducted by staff witness Liddy
who testified that the nine employees in question devoted
virtually all of their time to merchandising activities.
The Company contends that the employees perform a
number of utility-related functions in addition to their
merchandising activities and, therefore, a portion of their
salaries should be allocated above-the-line as legitimate
business expense for ratemaking purposes. Company wit-
ness Jaudes testified that the employees in question per-
formed such functions as responding to general customer
inquiries concerning appliance safety and efficiency, pro-
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viding insulation assistance to on-site building inspections
at residential premises, and making recommendations to
customers as to how they can make their homes more en-
ergy efficient. He estimated that such activity accounted
for roughly thirty-six percent of the employees’ time and,
therefore, that amount, reflected in the $62,553 base salaries
paid by the Company, should be included above-the-line.
The Commission is of the opinion that Staff Adjustment
6(c) should be adopted. Although it is possible that some
portion of the business hours logged by these employees is
devoted to utility-oriented activity which directly benefits
the ratepayers, the Company has failed to put forth suf-
ficient evidence to enable this Commission to make any sort
of quantitative determination in that regard. If anything,
the Company’s evidence on the subject tends to indicate
that whatever utility-oriented activities are carried on are
merely means directed toward a merchandising end.
Company witness Jaudes testifies that the Company ex-
ercises few, if any, restrictions on the activities in which
these employees direct their energies. He further testified
that it would be logical for an employee in such a situation
to devote as much time as possible in attempting to sell
appliances, from which sales commissions accrue, rather
than devoting time to the nonremunerative utility-oriented
activities.
The Commission is confident that the adoption of Staff
Adjustment 6(c¢) is well within the powers which were con-
ferred by the General Assembly through Section 393.140-
(12), RSMo 1969. It should further be noted that it has
been the long standing policy of this Commission to dis-
allow expenses incurred for nonutility related functions of
’ regulated companies for ratemaking purposes. See, e.g.,
Re: Gas Service Company, Case No. 18,682 (December 6,
1976).
}
A-77
The Commission concludes, therefore, that for the fore-
going reasons, Staff Adjustment 6(¢) should be accepted,
thereby transferring $62,553 in employee wage expense
below-the-line for ratemaking purposes.
G. Rate Case Expense.
Staff Adjustment 7(f) provides for amortization of the
Company’s rate case expense incurred in connection with
this case. This adjustment, however, neglects to provide
for any amortization of the estimated cost of Company’s
employment of Foster and Associates for services per-
formed in connection with this rate case. Company con-
tends that this adjustment should, therefore, be increased
by $5,000 to provide for a three year amortization of such
expense as a proper rate case expense.
Staff argues that this is an unnecessary expense because
(1) Company’s management possesses the necessary ex-
pertise in all financial phases of the Company’s activities
and (2) this rate case had been filed prior to the Company
receiving the work product of Foster and Associates.
Company argues that staff’s disallowance of this expense
is made in ignorance of tne actual services provided by
Foster and Associates. Also, Foster and Associates had
been consulted at or prior to the filing of the proposed
rates, and it is not unusual that the work product or de-
tailed evidence in support of a rate filing is prepared after
the filing. Finally, Company maintains that since the con-
sulting expense was actually incurred, only where there has
been evidence of abuse of management discretion may this
Commission disallow the expense.
The Commission finds that Foster and Associates pre-
pared considerable testimony and exhibits in this case.
The Commission notes that it was Foster and Associates
employee, not the Company’s, who shouldered the lion’s
share of the testimony on rate of return and who drew the
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most cross-examination on this issue. The Comunission
recognizes that reasonable consulting fees have, in the past,
been allowed to be included in an applicant’s rate case ex-
pense and, based on the instant record, finds that there has
been no abuse of discretion by this Company in its employ-
ment of Foster and Associates. For these reasons, the
Commission concludes that Staff Adjustment 7(f) should
be increased $5,000 to reflect a three year amortization of
the cost of Foster and Associates consulting firm for serv-
ices provided in this case.
H. Wage Expense—Missouri Natural Dwision.
The Company urges that the wage adjustment of the staff
contained in its Adjustment 9 should be increased by $70,000
to provide for the wage increase at the Missouri Natural
Division which only became effective April 15, 1977. Should
the Commission allow this, then it is noted that it would
be appropriate to also increase Staff Adjustment 7(d)
(pension costs) by $6,400 and Staff Adjustment 12(c)
(F.1.C.A. taxes) by $3,100.
The staff opposes these additional adjustments to wage
expense, pension costs and F.1.C.A. taxes because the effec-
tive date of the wage increase is a full six and one-half
months out of the test period. Thus, to permit an adjust-
ment to test year expenses without an offsetting adjust-
ment to test year revenues results, in the opinion of staff,
in a mismatching.
The Company argues that even though this expense was
ineurred outside of the test period it occurred prior to hear-
ing in this case and is a known and determinable expense
and should not be ignored in the setting of future rate
levels.
The Commission is aware of its decision in the recent
Gas Service Company case (Re: Gas Service Company,
A-79
Commission Case No. 18,662) and finds it persuasive on
this issue. This wage increase will be in effect before this
Report and Order becomes effective and new rates are
charged to its customers. The Commission also notes that
the test year utilized in this case will be nearly one year
old when this Report and Order becomes effective. Since
the Commission is attempting to set rates for the future,
it is not unreasonable to pick up this out-of-period but
known and measurable wage expense in light of the par-
ticular facts of this case.
Staff Adjustments 9, 7(d) and 12(c) should be increased
$70,000, $6,400 and $3,100 respectively.
I. Deferred Income Taxes on Certain General
and Administrative Expense Capitalized.
The staff, through its Adjustment 13(c), proposes to re-
duce the Coripany’s test year income tax expense by
$483,700. This reduction reflects the staff’s acceptance of
and commitment to the “flow-through” approach for certain
administrative and general expenses which were capitalized
by the Company in the test year. Company opposes this
adjustment.
Company’s argument does not hinge on the issue of
“cash flow”, which has historically been the Commission’s
criteria in deciding whether or not to grant normalized ac-
counting treatment. See Re: Missowri Public Service
Company, Commission Case No. 18,502 E and G (June 11,
1976); Re: St. Joseph Light & Power Company, Com-
mission Case No. 18,626 (September 30, 1976); Re: Capital
City Water, Commission Case No. 18,608 (October 29, 1976)
and Re: Southwestern Bell Telephone Company, Com-
mission Case Nos. 18,660 and 18,661 (December 10, 1976).
Company has been normalizing these administrative and
general expenses with Commission approval since Com-
A-80
pany’s last rate case in 1974. See Re: Laclede Gas Co.,
Commission Case No. 18,015, (August 22,1974) Report and
Order, Stipulation Paragraph No. 9. However, it is im-
portant to note that that Stipulation was not binding as to
its ultimate conclusions and findings of fact or law on any
party or the Commission for ratemaking purposes in that
proceeding or any future ratemaking proceedings.
The Company’s opposition to staff’s Adjustment 13(c) is
premised primarily upon its fear that recent decisions by
various federal courts will cause Company to be subjected
to substantial tax liability for which it will not be compen-
sated by its ratepayers. Thus, the income tax deduction
that Company has in the past enjoyed for these expenses
may 0 longer be available to the Company. The Company
cites Commissioner v. Idaho Power Co., 74.2 U.S.T.C. Par.
9521, 418 U.S. 1 (1974); William K. Coors, Dee. 32.003, 60
T.C. 368 (1973), affd. sub. nom.; Adolph Coors Co. v. Com-
missioner, 75.2 U.S.T.C. Par. 9605, 519 F.2d 1280 (10th
Cir. 1975), cert. denied, 423 U.S. 1087 (1976); and Lowis-
ville and Nashville Railroad Company, Petitioner v. Com-
missioner of Internal Revenue, Respondent, Docket Nos.
4614-67, 5384.67, 66 T.C. » No. 98.
The Commission reaffirms its position with respect to the
issue of tax normalization. The proper test for determin-
ing whether or not normalization of book-tax timing differ-
ences should be authorized is whether or not the utility
company has experienced, or will experience in the follow-
ing year, severe cash flow problems and internally gene-
rated fund reductious of significance. See Re: Missouri
Edison Co., Commission Case Nos. 18,569 and 18,705
(October 14, 1976), Report and Order pages 16 and 17. The
Commission concludes that Laclede Gas Company is not
presently experiencing, nor will it experience in the near
future, cash flow problems and internally generated fund
reductions of significance. For this reason, the Com-
mission finds that Staff Adjustment 13(c) is appropriate.
A-81
Implicit in this finding is the belief of the Commission
that any action it takes on this issue will not materially
affect what the Internal Revenue Service will or will not
do in the future. All Comany seeks in this proceeding is
the blessing of this Commission to acerue funds through
normalization to pay for a future, potential tax liability.
It is also important to point out that this liability is poten-
tial only and not known and measurable. Moreover, the
Commission notes that such potential liability is a problem
of Company’s own creation.
With respect to the argument of MoACORN concerning
“phantom taxes” or deferred taxes due to accelerated de-
preciation and investment tax credits, the Commission
finds that there is no evidence upon this record that would
support the position taken by MoACORN in its brief.
Although MoACORN reserved in the Hearing Memoran-
dum the right to asert a different position on the issue of
deferred taxes, the Commission notes that its attorney had
excused himself from the hearing prior to the time set
aside for the discussion of this issue. Thus the assertion
of MoACORN in its brief is totally without factual basis
in the record. In addition, the Commission finds that as
a matter of law the Company will lose the right to use
accelerated tax depreciation and investment tax credit if
MoACORN’s suggestion is followed.
J. Research and Development Expense—Coal
Gasification Project Conducted by AGA/
ERDA.
At issue here is the treatment which the Commission
should accord the sum of $86,000 expensed by the Company
for the AGA/ERDA (American Gas Association/Energy
Research and Development Agency) coal gasification
project. The amount in question constitutes the Com-
pany’s assessed one-third share of the $30,000,000 annual
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project expense which is to be borne by AGA. The total
estimated cost of the entire project, which is to be com-
pleted during the summer of 1978, is $183,000,000.
The Company proposes to treat the entire $86,000 as a
test year expense for ratemaking purposes. The Public
Counsel, while admitting the legitimacy of the expenditure
itself, proposes to amortize the total over three years. The
Publie Counsel, therefore, proposes to reduce the allowable
test year expense for research and development of the
coal gasification project by $57,333.
The Public Counsel bases its proposal upon what it con-
siders toa. be the Company’s admission, implied from its
proposed three year amortization of rate case expense, that
no additional rate increases will be necessary for at least
three years. It is contended, therefore, that to include the
full amount of the Company’s research and development
expense attributable to the coal gasification project in the
test year for ratemaking purposes will result in an exces-
sive recovery by the Company over the period until its
next rate case. The Public Counsel submits that the pro-
posed amortization would remedy the situation by provid-
ing for a recovery by the Company equal to its actual
expenditure.
The Commission feels that the treatment proposed by
the Company should be adopted. The expense is part of
a continuing program in which the Company has partici-
pated for several years and which is projected to continue
until at least the summer of 1978. There is, therefore, no
basis for treating the expense as nonrecurring. The Public
Counsel has further failed to put forth clear and con-
vineing evidence in support of its proposed amortization.
The Commission concludes, therefore, that the entire
$86,000 expenditure for research and development in con-
nection with the AGA/ERDA coal gasification project
should be treated as a test year expense for ratemaking
purposes.
A-83
Kk. Main Replacement Program.
The Gas Safety Section of the Missouri Public Service
Commission staff recommended, in this proceeding, that
Company budget additional amounts of bare steel pipe to
be replaced annually at a cost of $125,000 a year. Company
opposes this recommendation and maintains that, should
such recommendation be adopted, the cost would be con-
siderably more than the $125,000 estimated by staff.
Staff predicates its recommendation on its responsi-
bility to enforce the Commission’s rules relative to gas
safety (4 CSR 240-40.030, formerly General Orders Nos. 45
and 454) and upon an update of an economic evaluation
of repair versus replacement costs submitted by Company
in 1971 to the Commission as a criterion for replacing bare
steel pipe. Currently Company is budgeting for replace-
ment of 60,000 feet of pipe anually, By staff’s calculation
using this economic evaluation Company should be budget-
ing for replacement approximately 70,000 feet of pipe
annually.
Company argues that it has pursued an aggressive and
well managed replacement program for over twenty years.
Approximately 83 percent of original bare steel mains in
Company’s system have been replaced through 1976. Com-
pany points out that the corrosion rate on the Laclede sys-
tem has, in fact, declined from 1971 to the present time.
Company believes that, contrary to staff testimony, it has
been and continues to be in absolute compliance with the
Commission’s corrosion control requirements. Finally, the
Company finds fault with the updated economic evaluation
of staff and, if correctly updated, according to Company it
would show that fewer feet of pipe would be required to
be replaced.
The Commission finds that there exists widely divergent
views between staff and Company concerning the interpre-
tation of the Commission’s rules relative to gas safety.
A-84
There also appears to be significant disagreement as to
whether Company’s updated economic evaluation shows
that more or less feet of bare steel pipe ought to be budg-
eted for replacement. In addition, the costs associated with
the budgeting of additional pipe for replacement cannot be
determined. From the facts in this record, it is conceiv-
able, as stated in staff witness Richey’s testimony, that a
review of Company’s safety programs would result in
elimination of overlapping programs. The cost savings
realized from an elimination of these duplicative programs
could be applied toward the replacement of bare steel pipe
thus saving the ratepayer any additional expense. In light
of the fact that the staff is currently involved in a manage-
ment audit of Laciede Gas Company, the Commission finds
it more appropriate to bring to the Commission’s attention
in that proceeding its recommendation to replace more bare
steel pipe. When that audit has been completely edited
and finalized, the Commission believes it would be in a bet-
ter position to examine the pertinent gas safety rules, the
economic evaluations of staff and Company, the possibility
of eliminating overlapping safety programs and determin-
ing a more accurate cost for the replacement of additional
pipe.
Thus the Commission finds that this recommendation of
staff will not be accepted at this time but directs staff to
present this recommendation in its final management audit
report where additional review and discussion can be given
to it.
L. Other Issues Raised by Public Counsel.
Two areas of concern were brought to the attention of
the Commission in the brief of the Public Counsel. Based
on the testimony received from the publie at the local hear-
ings, the Public Counsel requests the Commission to inves-
tigate Company’s meter reading department and attempt
7
A-85
to determine the reason for the high incidence of estimated
bills. Also, the Public Counsel requests that the Commis-
sion investigate the possibility that Company’s merchandis-
ing employees, trained in the area of insulation and
conservation, devote all of their attention to “field” visits
and inspections in areas of inordinately high gas con-
sumption.
The Commission finds that its staff is currently involved
in a customer service audit of the Company and feels that
the requests of the Public Counsel will be duplicative of
staff’s efforts. Since such areas of concern would appear
to be an integral part of this audit, they should more prop-
erly be raised in the context of this audit.
5. Cost of Capital and Rate of Return.
A. Return on Repriced Equity.
Company presented two witnesses on the issue of return
on repriced equity. Company’s first witness developed the
overall theoretical and structural framework for arriving
at a specific return on Company’s repriced common equity,
while Company’s second witness performed the calculations
necessary to achieve the final result.
Company’s first witness began with the traditional cri-
teria for determining a fair rate of return set out in Hope
and Bluefield, i.e., that a utility should be permitted a re-
turn which is comparable to other firms of comparable risk
and which will allow the utility to preserve its financial in-
tegrity, attract capital and maintain its credit. It was his
position that the Company could not preserve its financial
integrity unless it was allowed to compete for capital funds
on roughly equal terms with nonregulated firms exhibiting
comparable risks and that Company in fact does not com-
pete on equal terms, because comparable nonregulated
firms offer monetary opportunities superior to those which
Company can offer.
\
A-86
The greater opportunities offered by nonregulated firms
come about, he claimed, because nonregulated firms are free
to set the prices for their products at a level which reflects
the impact of inflation. More specifically, a nonregulated
firm can price its products to reflect the replacement cost
of the assets which produce those products and, if the em-
beded cost of those assets is less than the reproduction cost,
the firm’s equity holders will experience a greater return
on their investment followed by an increase in value of that
investment. Hence, the purchasing power of the dollars
representing the investment is preserved intact. By con-
trast, a regulated utility cannot offer potential equity in.
vestors similar protection against inflation when it is
required to base its price on the original cost of its assets
unadjusted for inflation or, in other words, the embedded
cost of those assets.
Company witness maintained that this Commission
should permit Company to offer its equity investors the
same protection against inflation which nonregulated firms
of comparable risk offer their equity investors and, to
achieve this objective, it was his further opinion that (1)
nonregulated firms of comparable risk could be identified,
and (2) the protection they offer their investors could be
quantified.
The first proposition he supported with the generaliza-
tion that regulated and nonregulated firms are in fact com-
parable in the context of risk because the greater business
risks of a nonregulated firm are offset by the greater finan-
cial risks of a utility, so that the investor who is concerned
only with that combination of the two (which Company
witness referred to as investment risk) will overlook the
distinction between regulated and nonregulated companies
and evaluate them on substantially the same basis. Restat-
ing his premises, nonregulated firms must concern them-
selves with unpredictable demands for their products as
A-87
well as maintaining their share of the market for those
products (business risk) and, because of the uncertainty
surrounding their total sales, they must have a high per-
centage of equity in their capital structure (common stock
versus debt). Conversely, where a utility generally faces
a steady level of total sales (because it has no competitors),
it is in a position to increase the portion of debt in its capi-
tal structure because its debt holders are confident that the
utility will produce enough net operating income to pay
the fixed obligations of interest on that debt.
The Commission would like to observe at this point that
the word “risk” is used loosely in most proceedings before
it. The implication is almost always that a lesser level of
risk can be equated with a more attractive investment and
vice versa. Though there may very well be a strong ten-
dency in this direction, the Commission would further like
to observe that the application of the capital attraction
test primarily involves investor expectations about the fu-
ture (both short and intermediate term) and it is quite con-
ceivable that when investors in general foresee a period of
. generally increasing earnings for a utility without drastic
changes in its embedded cost of debt, the more highly lever-
aged a utility is the more attractive its common stock he-
comes. Likewise, if expectations are the opposite, the
equity of a highly leveraged utility (or any firm, for that
matter) will not be attractive regardless of how favorable
its more recent earnings record has been. This is not to
say that the Commission concludes that regulated and non-
regulated firms are incapable of comparison—only that the
proposition that, because of greater — risks, utilities
will reach an overall risk equality with nonregulated firms,
cannot be applied to all situations at all times.
Proceeding with the assumption that he could identify
nonregulated firms with comparable risk, Company witness
selected from the entire universe of nonregulated firms the
A-88
twenty types of businesses generally classified as industrial
firms. He reasoned that firms in this category, to be com-
parable, should have a stable record of earnings (similar
to a utility) and that those types which have in the past
experienced either an uncomparably high level or a low
level of earnings should be excluded. He then went to the
individual companies within the surviving types of busi-
nesses and selected those companies which had compatible
characteristics with the Company in question.
The yardsticks he used to measure compatibility were
Company’s Moody’s bond rating (Aa), Standard & Poor's
stock rating (B+), and Value Line’s safety rating (2).
These criteria were expanded in one instance to include
nonregulated firms of “lesser risk” and in two instances to
include firms of “higher risk” so the resulting sample (54
companies) would be large enough to be a representative
sample. Company’s second witness then took the 54 com-
pany sample and repriced the equity component of the
capital structure of each company from 1944 up through
1975 by using the consumer price index. In other words,
the equity component of each company in 1944 was in-
creased to the 1966 price level and each year thereafter
through 1975, « id then the additional equity added by each
company each year was also brought forward to the vears
1966 through 1975. Finally, the actual earnings available
for common equity were applied to the repriced equity base
for each year 1966 through 1975 to determine the return on
inflation adjusted investment which the equity holders of
these companies received over their ten-year period. The
results ranged from 8.8 percent to 9.8 percent (App. Ex. 29,
page 17 of 18).
Assuming temporarily that the Commission accepts the
comparable nature of Company’s sample of nonregulated
companies, it finds reasons to view this process with mis-
givings. The first is purely theoretical and is based on the
A-89
observation that Company’s repriced equity, based upon
the Handy Whitman Index, is over twice its book equity
compared to Company’s Anheuser-Busch example (Com-
pany Exhibit 27, page 10 of 18), where its 1975 repriced
average equity is only approximately 1.6 times its 1975
book equity.
Two conclusions can be drawn from this observation—
one being that repricing equity using the Consumer Price
Index for nonregulated companies (the Handy Whitman
Index is not applicable to nonregulated industries) and
using the Handy Whitman Index for utilities is basically
noncompatible (the traditional apples and oranges com-
parison) ; and the other being the possibility that in reality
the assets of capital intensive utilities are experiencing a
higher rate of capital inflation than nonregulated firms.
Both are reasonable conclusions except to observe further
that if both regulated and nonregulated firms are offering
protection against asset inflation, it would behoove the ra-
tional investor to select the regulated firm, particularly if
its rate of asset inflation exceeds the general rate of infla-
tion. Put another way, the rational investor can more than
offset the decline in the purchasing power of his dollar if
he selects the regulated firm.
Possibly because of the theoretical misgiving stated
above, Company did not quite demonstrate the courage of
its convictions when its second witness selected a 6.35 per-
cent return on its repriced equity as a recommendation to
the Commission. When “comparable” nonregulated com-
panies earned average returns on their repriced equity of
between 8.8 percent and 9.8 percent, the selection of a
figure approximately two-thirds of the high figure creates
considerable concern. The Commission finds that either
Company should be willing to offer its equity holders pro-
tection against asset inflation equal to comparable non-
regulated companies, or the importance of protection
A-90
against asset inflation, as it relates to its financial integrity
—capital attraction tests, is called into question. By ree-
ommending a rate of return on its repriced equity consid-
erably below the return offered by “comparable” nonregu-
lated firms, the Commission finds that Company is, in effect,
saying to its equity investors, we will give you some pro-
tection against asset inflation, but the protection will not
be equal to the protection that our competitors for capital
can give you. The next logical issue the Commission must
examine is whether any protection at all is necessary to
meet the financial integrity—capital attraction tests.
An example for the purpose of clarification is in order.
Begin with an informed investor whose future expectations
include a belief that the general rate of inflation for the
intermediate term will be five percent per annum and his
investment objectives are as follows:
(1) If he invests in an Aa rated utility, he expects
a dividend yield approximately equal to what that
utility’s bondholders receive (roughly 8.5 percent)
and growth in earnings per share (given a constant
payout ratio) equal to the anticipated rate of infla-
tion (five percent).
(2) If he invests in a similarly rated nonregu-
lated firm, any lesser dividend yield he anticipates
from this firm will be offset by an equal increase
over the alternative utilities in the rate of growth
as far as earnings per share are concerned (again
assuming a constant payout ratio).
(3) If both of these firms meet his objectives, he
will pay a market price equal to each firm’s book
value per share and both investments would be
equally attractive.
(4) He has narrowed his choice to a utility and
a nonregulated firm, both with book values of $20.00
per share.
A-91
It is now a simple matter to show that the utility, in
order to meet this hypothetical investor’s expectations of a
yield of 8.5 percent, must be earning 13.5 percent on book
equity (after retained earnings have been added to book
value) and maintain a payout ratio of 63 percent. This
would result in earnings per share (EPS) of $2.70 and
dividends of $1.70 per share (8.5 perce.it yield on a market
investment of $20.00 per share). Likewise, if the utility
ean continue to earn this return on book equity, his EPS
will grow at approximately five percent or the converse
of the payout ratio (37 percent) times return on book
equity (13.5 percent).
If the nonregulated firm offers a dividend yield of only
five percent, then the investor is going to expect a growth
in EPS of 8.5 percent. In other words, he is accepting a
lesser yield in order to receive greater growth so that the
two balance, and again it can be simply demonstrated that
the nonregulated firm must earn 13.5 percent on book
equity and maintain a 37 percent payout ratio to offer a
yield of five percent (dividends of $1.00 per share on a
$20.00 investment per share) and a growth in EPS of 8.5
percent (63 percent—the converse of the payout ratio—
times 13.5 percent).
At this point an equilibrium exists between the two
investment alternatives, but add the further assumption
that this investor is told that the nonregulated firm offers
greater protection against asset inflation and he, plus other
informed investors, bid the price of the nonregulated firm
up to 1.5 times book value or $30.00 per share. It is then
necessary for the nonregulated firm to improve its return
on book equity to 16.0 percent and increase its payout
ratio to 47 percent in order to meet his original investment
objectives of a yield of five percent (dividends of $1.50 per
share on a $30.00 per share) and growth of 8.5 percent
(EPS of $3.20 per share less dividends of $1.50 per share
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equal retained earnings of $1.70 per share times return on
book equity of 16.0 percent).
Had this investor selected the utility at $20.00 per share
or the nonregulated firm at $30.00 per share, in both cases
his protection in the short run against inflation would be
identical and the firms comparable except that the latter
had a higher market to book ratio and consequently has to
earn a higher return on book equity.
The Commission must now examine the possibility that
in the long run this investor made a wise choice in select-
ing the nonregulated company on the premise that the
process of capital inflation will continue, that the nonregu-
lated firm will reprice its products accordingly, and that
his earnings will improve accordingly and that future in-
vestors also looking for protection against asset inflation
will bid the market price of his stock up to an even higher
market to book ratio. The Commission observes that the
problem of asset inflation is only one consideration in mak-
ing an investment decision. When a regulatory Commis-
sion refuses to permit a utility under its jurisdiction to
price its services based upon the reproduction cost of its
assets, it also gives something in return.
A utility operating under the regulatory framework
faces a high probability that it will be able to recover its
equity investment in its entirety regardless of whether the
dollars received have the same purchasing power as the
original dollars. On the other hand, a nonregulated firm
may be unable to recover some or all of an equity invest-
ment because technological change renders the assets pur-
chased with the equity dollar obsolete before they are fully
depreciated. In other words, an investor who selects the
nonregulated firm in order to enjoy the protection it might
give him against capital inflation is also exposing himself
to risk of technological obsolescence.
It is impossible for this Commission to conclude how a
universe of informed investors would weigh these tradeoffs
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or which option they would select. It is possible, however,
to conclude that they will not all make the same choice and
that the possibility of protection against asset inflation
does not bestow upon the nonregulated firm an inherent
advantage vis-a-vis the regulated firm in their competition
for capital.
Hence, a regulated firm will not sell at market to book
ratios comparable to nonregulated firms and still be com-
petitive in terms of capital attraction. This does not mean
that it will be able to attract equity capital on terms as
favorable as those experienced by the “comparable” non-
regulated firms, but the tradeoff is that it need not earn
as high a return on book equity in order to meet investor
expectations (or at least some investor expectations).
B. Return on Original Cost Common Equity.
Staff witness on this issue expressed considerable doubt
about selecting a sample of nonregulated companies and
using them as a surrogate in determining a particular
return on equity for Company. It was his position that
only in times of stable economic conditions ean valid spe-
cifie comparisons be made and even then both regulated and
nonregulated firms should be ineluded in the sample. How-
ever, Staff witness did look at historie returns and market
to hook ratios of selected nonregulated and regulated com-
panies (Staff Exhibit 15) to establish a broad range of
equity returns between 12.5 and 15 pereent. He then nar-
rowed his recommendation for Company to between 13.0
percent and 13.5 pereent. This range
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