Arkansas Power & Light Co. v. Arkansas Public Service Commission

289 S.W.2d 668, 226 Ark. 225, 1956 Ark. LEXIS 421

• Court: Supreme Court of Arkansas
• Decided: April 16, 1956
• Docket: 5-875
• Status: Published

Opinions

J. Seaborn Holt, Associate Justice.

Proceeding under the provisions of Act 324 of the Acts of the Legislature of 1935 [Sec. 73-201 et seq. Ark. Stats. 1947] and an order of the Commission made June 24, 1944, appellant, Arkansas Power and Light Company, on May 27, 1954, filed its application with the Arkansas Public Service Commission asking for approval of an increase in electric rates over its present rates in order to increase appellant’s revenues in the amount of $3,900,000. In its petition the power company appears to admit that its overall net earnings then amounted to a rate of return in excess of 5%. Following a long and patient hearing, resulting in the taking of more than 1,500 pages of testimony, the Commission found that the company was earning — ,5.985%, — approximately 6%, all to which it was entitled, and denied the company’s petition. Later (December 2, 1954) the company’s petition for a rehearing was filed and also denied. Thereafter, (December 3, 1954) after filing an additional bond in the amount of $1 million, the company appealed to the Circuit Court of Pulaski County and that court, after a consideration of the record made before the Commission, on September 23, 1955 dismissed the company’s petition for review and in all things affirmed the Commission’s findings. This appeal followed.

At the outset we point out certain well defined rules governing this court in reviewing the powers and actions of the Arkansas Public Service Commission in a utility rate case such as is presented here. The Commission must and does have broad powers and is a fact finding body. Our Legislature has delegated and entrusted the administration of Act 324 to the Commission, and not to the courts. The primary object of the Commission is to provide that rate of return which is adjusted to appellant’s needs consistent always with the interest of the public. Apart from the judicial review that may he resorted to under the Act, it is not for us to advise the Commission how to discharge its functions. When an appeal is taken to the circuit court, that court, as well as this court on appeal from the circuit court, shall not extend the review of the Commission’s findings and actions “further than to determine whether the Department [Commission] has regularly pursued its authority, including a determination of whether the order, or decision under review, violated any right of the complainant under the Constitution of the United States or of the State of Arkansas.” [Sec. 73-233 (d) Ark. Stats.] The Circuit Court, and this court on appeal, reviews the Commission’s findings on the record before the commission, and if we find any substantial evidence to support it, it is our duty to permit the Commission’s order to stand if it is not arbitrary and is free from fraud. We said in the recent case of City of Fort Smith v. S. W. Bell Tele. Co., 220 Ark. 70, 247 S. W. 2d 474, “If the Department’s [Commission] order is supported by substantial evidence, free from fraud, and not arbitrary, it is the duty of the Courts to permit it to stand, even though the Courts might disagree with the wisdom of the order.”

As to the power of the Commission to regulate rates of utilities § 73-218 Ark. Stats. 1947 provides: “The Department [Commission] upon complaint, or upon its own motion, shall, upon reasonable notice and after a hearing, have the power to: (1) Find and fix just, reasonable and sufficient rates to be thereafter observed, and enforced and demanded by any public utility.”

The Commission on November 22, 1954, after the extended hearing as indicated, made the following findings: “1. The Commission has jurisdiction under applicable statutes to determine the reasonableness of the Company’s rates upon its own motion or upon application of the Company for approval of a change in rates. 2. The filing of a new rate schedule and application for approval thereof by the Company put in issue the reasonableness of the rates, and in that connection the Commission has the right to determine any and every question incidental and pertinent thereto, notwithstanding its previous orders. 3. Consistent with the law and reason, the question of whether the company’s rates are reasonable depends upon the amount of the rate base and the rate of return determined in the light of present day conditions and circumstances, and not upon a formula process for determining the rate base of the Company devised in the year 1944 which obviously did not contemplate conditions and circumstances now apparent which require adjustment of such process; nor upon the fairness of a rate of return calculated under conditions and circumstances in the year 1944. 4. In determining the rate base of the Company, as well as determining the revenue and expenses of the Company, for the purpose of determining whether it is earning an adequate return upon its investment, some point of time must be fixed for the purpose of submitting pertinent facts and data, and in this proceeding sound reasoning requires that this period be fixed as the year commencing April 1, 1953 and ending March 31, 1954, which is the period used by the Company in submitting its application in this proceeding. 5. In determining the Electric Rate Base as provided for in the 1944 order, the percentage relationship between electric property and total property must be determined in order to arrive at the electric rate base, which is the portion of capital, liabilities and surplus that is invested in electric property according to the procedure specified in the 1944 order. All of Account 100.3, Construction Work in Progress, is included in • electric property; and over the past ten years the Company’s plant under construction has included substantial amounts which represented plant which, upon completion, brought in additional income or reduced expenses of operation. It is improper to use this plant under construction in the determination of the. rate base unless some provision is made for the inclu-; sion of additional revenues, or the exclusion of expenses' saved, particularly where it appears that interest is capitalized by the Company during the construction period which, as of the period, ending March 31, 1954, amounted to $1,097,655. The better procedure is to remove from electric property that portion of plant under construction which, when completed, will be revenue producing, or will effect substantial savings in operation cost; and Appendix (i) shbws the calculations as they should be made for the applicable period.

[Appendix i Arkansas Power & Light Company Determination of Deficiency in Return Under Staff Motion

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The portions of the amounts in plant under construction which represent plant which will he revenue-producing when completed, $22,096,692 at April 1, 1953, and $29,269,798 at March 31, 1954, should be included in the classification of “Other Property.” To include this plant under construction in electric plant in calculating the rate base would result in distortion because the Company would be permitted to earn a return on that property before it is useful in providing utility service and before the full influence of the property on revenues and expenses has been felt. By this process the Electric Rate Base as of April 1, 1954, is $151,101,618.

“6. While the Commission’s order of June 24,1944, specified a rate of return of 6%, Arkansas Statutes and Court decisions do not require that the rate of return be 6%. The only requirement is that the rate of return be reasonable. In Appendix (i) [above], a rate of return of 6% has been applied to the rate base of $151,-101,618, and the resulting figure $9,066,097, is the annual allowable return. To this figure are added $96,258, which represents interest on customers deposits, and $415,070, which represents amortization of electric plant acquisition adjustments. Both of these figures are taken from Company Exhibit “F.” The total $9,577,425, is the base allowable return. 7. On the basis of the Company’s operating revenues and operating expenses for the year ended March 31, 1954, the amount available for allowable return has been determined to be $9,358,255 according to Company Exhibit “G.” To this, the amount of $196,482 should be added because of over-accrual of Federal Income taxes during the year ended March 31, 1954. The total of these two amounts is $9,554,737, which is the total available return. The total available return, $9,554,737, after taking into consideration the allowances for interest on customers deposits and the amortization of electric plant acquisition adjustment, represents a rate of return of 5.985% on the rate base as determined in Appendix (i). The difference between this and the 6% allowable under the 1944 order expressed in dollars amounts to $22,688, which is negligible. 8. Therefore, (1) the application of the Company to increase its rates should be dismissed; (2) the company should refund to its customers all amounts collected in excess of those amounts which would have been collected under the superseded rates, by rates placed into effect under bond; (3) the order of June 24, 1944, with respect to Sections II-A and IY-A should be amended, as hereafter provided. It is, therefore, ordered that: 1. The application of the Arkansas Power and Light Company for increase in its rates which was filed with this Commission on May 27, 1954, be, and is hereby, dismissed. 2. The Arkansas Power and Light Company within sixty (60) days from date of this order shall make refund to its customers all amounts collected in excess of those accounts which would have been collected under the rates superseded by the rates placed into effect under bond together with interest at the rate of six per cent (6%) per annum. 3. Section II-A of the order of June 24, 1944, be, and is hereby amended as follows: ... ” Then follows the amendment which would, in effect, disallow, as part of the rate base Account 100.3 (Work Under Construction) supra, and also would disallow the right to capitalize 6% thereon as part of the rate base. As thus amended, “the order of June 24, 1944, and amendments thereto, shall be continued in full force and effect. This order shall become effective fifteen (15) days from the date hereof. ’ ’

For reversal appellant presents the following points: “I. The Commission’s Amendment of its own Prudent Investment Standard was arbitrary and unreasonable and its findings of fact are not supported by any substantial evidence.

“The arbitrary Amendment of the June 24, 1944, Order deprives Company of its property without due process of law. II. The Commission’s Findings of Fact and its Selection of a Test Period were not supported by the evidence and were arbitrary. The Commission’s action deprived the company of due process of law. III. The Company was denied its Constitutional Rights of Procedural Due Process of Law. (a) The Commission denied the Company due process by amending the order of June. 24, 1944, without prior notice to the company or a hearing and acted beyond the powers granted by Act 324 of 1935. (b) The Commission denied the Company due process by rejecting all evidence of operations after March 31,1954, without prior notice and hearing to the Company. IV. The Commission’s Order of November 22,1954, was retroactive in effect and is therefore void. V. The Commission’s calculations and findings were erroneous and contrary to the order of November 22, 1954.”

The record reflects that the company, pursuant to the 1944 order, kept three separate accounts: (1) Account 100.1 denominated Plant in Service, (2) Account 100.3 •— “Construction Work in Progress” and (3) a special account called “Excess Net Electric Revenue Deferred Credit Fund” and was required to place in this last fund any earnings in excess of 6% of its capital investment allowed under the 1944 order. So, appellant, in effect, will always be held to 6% earnings.

In short, appellant stoutly argues (1) that the Commission was bound by the 1944 order which required it to follow the Prudent Investment theory, invaded its constitutional guarantee of due process and equal protection by refusing to include as a part of the rate base a proper average, or portion, of Account 100.3 (Construction Work in Progress) and also 6% interest thereon, in the amount of $1,097,655. In this connection appellant says: ‘‘The inclusion of construction work in progress in the rate base is expressly authorized by the order of 1944 and the accrual of interest during construction is authorized by the Uniform System of Accounts.” Appellant further contends, (2) that the Commission was without authority to change the 1944 order without first giving notice to appellant, and (3) that the Commission arbitrarily selected the testing period of the 12-month period ending March 31, 1954, and in refusing to consider as an additional testing period that period from March 31 to August 31, 1954. We do not agree :to any of these contentions.

(2). As to the question of notice [which we first consider] we hold that ample notice was in fact given to appellant. This was evidenced in the order of June 2, 1954 and that of August 24, 1954, suspending the effective date of the rates in order that an investigation could be made. As indicated, appellant, initiated the present action for increased rates on May 27, 1954; and, it further appears that on August 20, 1954, one of the city intervenors, the City of Little Bock, filed its intervention which it denominated: “Petition for review of all prior orders establishing rate of return on plant investment,” and asked the Commission to review all orders previously made by it as to percentage of earnings allowable on net plant investment. The Attorney General’s intervention contained this prayer: “Wherefore, the intervenor prays that the foregoing matter be fully developed as to the Bate Base, Bate of Beturn and all other particulars in order that a fair and equitable rate may be established for all parties and classes of consumers concerned.” As indicated, the Commission’s order denying appellant’s petition was not made until November 22, 1954.

(3). As to the testing period, it clearly appears to us from the record that the appellant, itself, in its Bate Application chose the testing period, and the Commission accepted Appellant’s choice. Appellant’s Application was tried throughout on the theory that the test period should be the 12 months ending March 31, 1954. In other words, March 31 was to be the cut-off period of this pattern year. As we read the record, the Commission, in effect, appears to have adopted the course of using a test period selected by appellant and based on appellant’s most recent actual experience, and adjusted to known charges affecting operating costs and revenues in the immediate future. We, therefore, hold that appellant is not in position to question the test period.

THE RATE BASE. (1) It appears that the Commission determined the rate base to be $151,125,571 (Appendix i above) and the allowable rate thereon of 6% (or 5.985% or approximately 6%) amounting to $9,554,-737, as the annual allowable return. In establishing this rate base the commission refused to allow the average amount over the test period that the power company had invested in “Work Under Construction” (Account 100.3) .and not revenue producing. We hold that there was substantial evidence to support the findings and conclusions reached by the Commission, under the broad powers granted to it, and that the Commission in its actions did not invade the company’s constitutional rights. It was clearly the duty of the Commission, when the company sought an increase in rates, to determine whether the company was entitled to any increase in order to earn a fair return on its invested capital. It was not bound by its 1944 Order, and could make changes in it, on proper notice to appellant — which it did — just as long as, in so doing, it did not invade the constitutional rights of the power company. “Whenever there is filed with the Department by any public utility any schedule stating a new rate or rates, the Department may, either upon complaint or upon its own motion, upon reasonable notice, enter upon an investigation concerning the lawfulness of such rate or rates; ...” [Section 18 (b) Act 324 of 1935, now § 73-217 b Ark. Stats. 1947].

In a well considered and reasoned case — from which we' shall quote somewhat at length — where the situation was similar, in effect, to that on which our Commission acted here, the Supreme Court of Vermont in Re Central Vermont Public Service Corp., 116 Va. 206, 71A 2d 576, 83 PUR NS 47, with reference to the duty and powers of a public service commission of that state to follow any certain formula in fixing rates, announced certain rules and principles of law applicable here. It was there said: “In the employment of its test-year basis the commission made no adjustment for the revenues which would be produced from the plant under construction when completed. Once it had been decided to eliminate plant under construction from the rate base [as here] the exclusion of revenues to be received therefrom automatically followed. Only so could it be determined whether the petitioners’ earnings were adequate to provide a fair return on the property producing those earnings. Both property under construction and the estimated revenues therefrom must be included in the rate base, or neither.” Here the commission included neither, which was proper. “. . . The inclusion of property under construction before the plant which it is designed to replace has actually been retired would obviously result in a double return ... In the computation of the rate base, allowance is afforded the petitioner for capitalization of materials used in construction and inventories on hand before they were used in the process of construction . . .

“The issue here presented, that is, inclusion or exclusion of property under construction, is essentially one of fact for the commission’s determination. The commission has found for exclusion, and no error appears.

“An administrative agency performing the delegated legislative function of rate making has a broad discretion. Mr. Justice Cardozo, speaking for the United States Supreme Court, said of it: ‘Regulatory Commissions have been invested with broad powers within the sphere of duty assigned to them by law. Even in quasijudicial proceedings their informed and expert judgment exacts and receives a proper deference from courts when it has been reached with due submission to constitutional restraints . . . Indeed, much that they do within the realm of administrative discretion is exempt from supervision if those restraints have been obeyed.’ Ohio Bell Teleph. Co. v. Ohio Pub. Utilities Comm. (1937) 301 U. S. 292, 304, 81 L. ed. 1093, 1101, 18 PUR NS 305, 313, 57 S Ct 724, 730. Such Commissions are not bound to the service of any single formula or combination of formulas. Federal Power Commission v. Natural Gas Pipeline Co. (1942) 315 US 575, 586, 86 L ed 1037, 1049, 1050, 42 PUR NS 129, 138, 62 S Ct 736, 743. In that case Mr. Chief Justice Stone said for the court: ‘Agencies to whom this legislative power has been delegated are free, within the ambit of their statutory authority, to make the pragmatic adjustments which may be called for by particular circumstances. Once a fair hearing has been given, proper findings made and other statutory requirements satisfied, the courts cannot intervene in the absence of a clear showing that the limits of due process have been overstepped. If the Commission’s order, as applied to the facts before it and viewed in its entirety, produces no arbitrary result, our inquiry is at an end.’ ”

Having concluded that our Commission here, has acted within its statutory authority, and that there was substantial evidence adduced to support its findings and order, we must and do affirm the judgment of the Pulaski Circuit Court.

Chief Justice Seamster not participating, Justice McFaddin dissenting in part.