City & County of San Francisco v. Public Utilities Commission

703 P.2d 381, 39 Cal. 3d 523, 217 Cal. Rptr. 43, 1985 Cal. LEXIS 319

• Court: California Supreme Court
• Decided: August 15, 1985
• Docket: S.F. 24687
• Status: Published

Opinions

Opinion

MOSK, J.

The present petition for a writ to review Decision No. 83-10-035 of respondent California Public Utilities Commission (hereinafter the commission) in essence raises a single issue: Did the commission regularly pursue its authority in estimating that real party in interest Pacific Bell, then known as Pacific Telephone and Telegraph Company (hereinafter Pacific), would incur $402.1 million in total company service connection costs—commonly known as installation costs—and consequently authorizing Pacific to raise its intrastate rates by $264 million to offset the effect of such costs on its intrastate operations? The commission and Pacific answer the question in the affirmative, petitioners City and County of San Francisco and City of San Diego (hereinafter the cities) in the negative. We conclude that the commission and Pacific are correct and that the decision must accordingly be affirmed.

In August 1980 Pacific filed an application for a general rate increase. The commission initially authorized a rate increase of $610 million in August 1981. The cities applied for a rehearing, arguing that the commission had not been consistent in its treatment of the anticipated effects of the increased use of PhoneCenter Stores by Pacific’s customers.¹ Specifically, the cities contended that while the commission recognized Pacific would experience a reduction of $63.7 million in installation revenues in a 1981 test year as a result of increased use of PhoneCenter Stores, it failed to consider whether Pacific would experience a corresponding reduction in installation costs. The cities alleged that Pacific would indeed experience such a corresponding reduction and that it would be substantial—$70 million. Because installation costs were at that time capitalized, or included in the rate base, a $70 million reduction in such costs would require a reduction of $12.8 million in the annual rate increase initially authorized by the commission. The commission rejected the cities’ argument and denied their application in October 1981.

The cities then petitioned this court for a writ to review this issue. In March 1982 we granted the petition. Before oral argument, however, the parties settled the dispute: Pacific requested an order reducing its rate base by $70 million and its rate increase by $12.8 million; the commission issued such an order; and the cities and Pacific stipulated that the dispute had been mooted. We accordingly dismissed the petition for writ of review.

In the meantime the Federal Communications Commission (hereinafter the FCC) adopted a decision in November 1980 amending the Uniform System of Accounts for Class A and Class B Telephone Companies to provide for the expensing of future installation costs and the amortization of embedded installation costs over a period of 10 years. Previously such costs had been treated as capital expenditures.² In response to the FCC action, the commission initiated a proceeding in December 1980 on the revision of accounting and related ratemaking effects by its Order Instituting Investigation 84 (hereinafter Oil 84). In March 1981 the FCC released the accounting revision decision, to become effective October 1, 1981.

Along with other California telephone utilities, Pacific then initiated the present proceeding by filing an application for increased revenues to offset the increased costs associated with the accounting revision. During the period in which installation costs were capitalized, they were not directly considered in the cost of service in determining the utility’s revenue requirement, that is, the amount of revenue needed to cover its operating expenses and to provide it with a reasonable return on its investment. With the accounting revision, there was an immediate and automatic increase in operating expenses for accounting purposes and accordingly an immediate and automatic increase in revenue requirement to offset such an increase: installation costs would now immediately be recognized in full as a cost of service, instead of, as previously, being recognized over time as capital costs. Pacific’s application was combined with Oil 84 for hearing and decision.

In November 1981 the commission, in a decision in Oil 84, adopted the FCC proposal and ordered that all California telephone utilities expense their future installation costs and amortize their embedded installation costs over a period of 10 years.³ In the same decision the commission, estimating that Pacific would incur $402.1 million in total company installation costs in a 1981 test year, found that Pacific needed an additional $264 million in revenue to offset the effect of such costs on its intrastate operations, and accordingly authorized it to increase its intrastate rates by that amount. The cities applied for a rehearing, alleging that the appropriate level of rate increase for Pacific could be affected by the disposition of their then-pending petition for writ of review in the general rate proceeding. In January 1982 the commission denied the cities’ application, but modified its decision to make Pacific’s rate increase subject to refund and to reserve jurisdiction to consider what effect if any the disposition of the general rate proceeding issue would have on the present proceeding.

After the 1982 settlement in the general rate proceeding, the commission turned to consider whether it should make any adjustment in the $264 million allowed to Pacific in the present proceeding. In October 1983 the commission issued Decision No. 83-10-035, which is the subject of the present petition. In that decision the commission concluded that the $264 million rate increase was supported by the record in this proceeding and that it was therefore not reasonable to reduce it automatically as a result of the settlement in the general rate proceeding: the 1981 test-year installation cost estimate presupposed in the general rate proceeding and the 1981 test-year installation cost estimate developed in the present proceeding were different and were based on materially different evidentiary records. Accordingly, the commission declined to reduce the additional rate increase allowed to Pacific. The cities now petition for a writ to review that decision.

The scope of our review of a commission decision is limited: “The review shall not be extended further than to determine whether the commission has regularly pursued its authority, including a determination of whether the order or decision under review violates any right of the petitioner under the Constitution of the United States or of this State.” (Pub. Util. Code, § 1757; accord Toward Utility Rate Normalization v. Public Utilities Com. (1978) 22 Cal.3d 529, 537 [149 Cal.Rptr. 692, 585 P.2d 491].) Moreover, the commission’s findings are ordinarily conclusive and not subject to review: “The findings and conclusions of the commission on questions of fact shall be final and shall not be subject to review except as provided in this article. Such questions of fact shall include ultimate facts and the findings and conclusions of the commission on reasonableness and discrimination.” (Pub. Util. Code, § 1757.) Further, if they are supported by any evidence, such findings may not be set aside. (See Yucaipa Water Co. No. 1 v. Public Utilities Com. (1960) 54 Cal.2d 823, 828 [9 Cal.Rptr. 239, 357 P.2d 295].) Accordingly, the commission’s findings based on conflicting evidence or on undisputed evidence from which conflicting inferences may reasonably be drawn are final and not subject to review. (Southern Pac. Co. v. Public Utilities Com. (1953) 41 Cal.2d 354, 362 [260 P.2d 70]; see City of Los Angeles v. Public Utilities Com. (1972) 7 Cal.3d 331, 351 [102 Cal.Rptr. 313, 497 P.2d 785].) In short, “[t]here is a strong presumption favoring the validity of a Commission decision.” (Toward Utility Rate Normalization v. Public Utilities Com., supra, at p. 537; accord Greyhound Lines, Inc. v. Public Utilities Com. (1968) 68 Cal.2d 406, 410 [67 Cal.Rptr. 97, 438 P.2d 801].)

The cities, as we shall explain, have failed to carry their burden. The present proceeding is what is commonly referred to as an “offset proceeding,” as all parties recognize. “In a general rate setting proceeding, the commission determines for a test period the utility expense, the utility rate base, and the rate of return to be allowed. Using those figures, the commission determines the revenue requirement, and then fixes the rates for the consumers to produce sufficient income to meet the revenue requirement. ... [1] The rates are fixed in the general proceedings on the basis of historical data. Adjustments may be made in that proceeding for anticipated future extraordinary changes. [Citation.] It is obvious revenue, expense, and rate base arrived at on historical data will not remain constant in future years when the rates take effect. The assumption underlying fixing of future rates on historical data is that for future years changes in the revenue, expense, and rate base will vary proportionately so that the utility will receive a fair rate of return.” (California Manufacturers Assn. v. Public Utilities Com. (1979) 24 Cal.3d 251, 256-257 [155 Cal.Rptr. 664, 595 P.2d 98].)

In an offset proceeding, by contrast, both the purpose and the scope of the commission’s inquiry is limited. In such a proceeding, the commission, without waiting until the utility’s next general rate proceeding,⁴ determines whether there has occurred a significant and not reasonably foreseeable change in an item of expense or revenue that, unless taken account of, would seriously affect the utility or its ratepayers. (See California Manufacturers Assn. v. Public Utilities Com., supra, 24 Cal.3d at p. 257; see also Southern Cal. Edison Co. v. Public Utilities Com. (1978) 20 Cal.3d 813, 828-830 [144 Cal.Rptr. 905, 576 P.2d 945] [annual adjustment clause].) As a consequence, the commission is not required to conduct an inquiry equivalent to that in a general rate proceeding, “recalculating all expenses, revenues, rate base, and rate of return . . . .” (California Manufacturers Assn. v. Public Utilities Com., supra, at p. 258.) Rather the commission need only determine the relevant extraordinary change and then take account of it by adjusting the utility’s rates to offset the effect of such change, with all other items of expense and revenue held constant as estimated in the utility’s most recent general rate proceeding. (See id. at p. 258; City of Los Angeles v. Public Utilities Com. (1975) 15 Cal.3d 680, 691-692 [125 Cal.Rptr. 779, 542 P.2d 1371].)

The cities in essence make a single, factual contention: the commission’s estimate of Pacific’s installation costs and the rate increase based on it are unreasonably high. The claim is without merit. As will appear, the commission’s estimate is firmly based on evidence in the record; indeed, neither the cities nor anyone else has presented any evidence that would support a lower estimate and hence a smaller rate increase.

The cities first argue that the commission erred in failing to automatically reduce its estimate of Pacific’s installation costs by $70 million. The commission, they assert, initially failed to recognize the effect of increased use of PhoneCenter Stores on Pacific’s installation costs in the general rate proceeding; it subsequently corrected this error by adopting a $70 million reduction in Pacific’s rate base; it has refused, however, to correct a similar error in this proceeding.

The commission and Pacific respond that the commission neither made nor corrected any “error” in the general rate proceeding. They argue that the commission made the reduction at the request of Pacific, which was acting to settle the dispute between the cities and itself.

In any event, the cities cannot show, as they must, that any error in the general rate proceeding automatically affected this proceeding and consequently required the same $70 million reduction. The reason is simple: the two proceedings were separate and distinct and were based on materially different evidentiary records containing materially different data. In the general rate proceeding, the commission staff developed and the commission adopted an estimate of $865.8 million for Pacific’s total station equipment costs (of which installation costs are a part)—an estimate that contained no separate figures for installation costs. In this proceeding, on the other hand, the commission had available more recent data, including five months of recorded 1981 results. Using such data the commission staff developed a total station equipment cost estimate of $767 million—which is $98 million lower than its general rate proceeding estimate—and a separate installation cost estimate of $402.1 million, which expressly takes into account the effect of increased use of PhoneCenter Stores.⁵

Further, the cities do not show that the installation cost estimate, which they allege is unreasonably high, is unreasonable in itself. First, the estimate is supported by the testimony of the staff witness who developed it. Although they attack this testimony here as they did below, the cities do not succeed in discrediting it. Second, the estimate is also supported by the testimony of Pacific’s witness, which the cities did not even attempt to controvert. Finally, the cities have offered no evidence that would support a lower estimate and a smaller rate increase.⁶

The cities next contend that the commission made inconsistent findings on installation costs and revenues and that under Cal. Portland Cement Co. v. Public Util. Com. (1957) 49 Cal.2d 171 [315 P.2d 709], its decision must be annulled.

The simple response is that no such inconsistency exists: the commission did not make a finding on installation revenues in this proceeding and was not required to do so. The purpose of the present offset proceeding is to keep Pacific whole in the face of the accounting revision. Unlike, for example, the increased use of PhoneCenter Stores considered in the general rate proceeding, which could affect both revenues and costs, the accounting revision considered here could by definition affect only costs: it merely transformed installation costs into an expense item. Thus, installation costs were a material issue, but installation revenues were not.

The cities finally assert in effect that the commission may not use estimates of installation costs and revenues based on different data in different proceedings. The argument in essence runs as follows: In the general rate proceeding the commission used certain data to estimate installation costs and revenues and based the rate increase allowed to Pacific in part on such estimates; in the present offset proceeding, by contrast, the commission used more recent data, which yielded a higher estimate of installation costs and would correspondingly yield a higher estimate of installation revenues. To prevent Pacific from receiving a windfall, the commission must assertedly do one of two things: use the lower estimate of installation costs developed in the general rate proceeding in the present offset proceeding and thereby reduce the rate increase allowed to Pacific to offset the effect of the accounting revision, or use the higher estimate of installation revenues that can be developed from the data in the present offset proceeding in the general rate proceeding and thereby reduce the general rate increase allowed to Pacific.

To address this argument properly we must start with certain observations. First, the commission may prescribe rates only prospectively; if its determination is reasonable when made, it will stand even if subsequent events prove it to be otherwise. (See City of Los Angeles v. Public Utilities Com., supra, 7 Cal.3d 331, 338; Pacific Tel. & Tel. Co. v. Public Util. Com. (1965) 62 Cal.2d 634, 649-656 [44 Cal.Rptr. 1, 401 P.2d 353].) Second, in any test-year proceeding the commission must choose a test period that “presents] as nearly as possible the operating conditions of the utility which are known or expected to obtain during the future months or years for which the commission proposes to fix rates” and that consequently yields estimates of results of operations that “will be as nearly representative of future conditions as possible.” (Pacific Tel. & Tel. Co. v. Public Util. Com., supra, at p. 645.) Thus, the commission properly makes a choice between two or more test-year estimates on the ground that one is based on more recent data and is therefore likely to be a more accurate representation of the utility’s actual experience during the relevant period. (See SoCal Edison Co. (1980) 5 Cal.P.U.C.2d 39, 69-71; SDG&E Co. (1980) 5 Cal.P.U.C.2d 208, 232-233.)

The commission may therefore use different estimates based on different data in different proceedings. The present offset proceeding is separate and distinct from the general rate proceeding; it was initiated later and had available more recent data. The commission properly used more recent data in the later offset proceeding in order to develop an estimate of installation costs “as nearly representative of future conditions as possible”; and it has properly refused to make any revision in its estimate of installation revenues in the earlier general rate proceeding—an estimate that neither Pacific nor the cities attacked as unreasonable there. Thus the cities’ argument fails.

In other words, neither of the alternatives the cities propose is appropriate. First, in the present offset proceeding the commission should not use the estimate of installation costs developed in the general rate proceeding. Here it has a reasonable estimate developed from more recent data to support its determination of the rate increase necessary to offset the effect of the accounting revision on Pacific.⁷ Second, the commission should not use in the general rate proceeding the higher estimate of installation revenues that can allegedly be developed from the data in the present offset proceeding. Such an action would in effect reopen the general rate proceeding, which is now final and no longer subject to review; it would also threaten impermissible, retroactive ratemaking.

The decision is affirmed.

Broussard, J., Reynoso, J., Grodin, J., Lucas, J., and Sabraw, J.,

* concurred.

1 PhoneCenter Stores are retail telephone equipment outlets. Instead of arranging for—and paying—Pacific to deliver and install a telephone, a customer may select one at a Phone-Center Store, take it home, and install it himself.

2 One of the objectives of the FCC in requiring the expensing of installation costs was to shift the burden of such costs from the general body of ratepayers to the customers who actually cause them. (FCC Final Rule, 47 C.F.R. pt. 31, 46 Fed.Reg. 19481 (Mar. 31, 1981).)

3 Although in the near term the accounting revision would result in an increase in revenue requirements and consequently an increase in telephone rates, the commission adopted the FCC proposal as being in the public interest in the long term: the accounting revision would apparently serve to shift a larger share of installation costs from the general body of ratepayers to those who actually cause such costs—that is, the relatively small percentage of generally more affluent customers who move often and have more than one extension telephone. (See fn. 2, ante.)

4 Previously a general rate proceeding might be initiated only once every two years (Cal.P.U.C., Regulatory Lag Plan for Major Utility General Rate Cases, Res. M-4706 (June 5, 1979)); now it may be initiated only once every three years (Cal.P.U.C., Revised Scheduling for Test Year Rate Increase Filings Under the Rate Case Plan, Res. ALJ-149 (June 6, 1984)).

5 In denying rehearing of Decision No. 83-10-035, the commission explained: “As we concluded in D.83-10-035, if we accepted the Cities’ suggestion that Pacific’s estimated station connection expense be reduced by the intra-state portion of $70 million, the result would have been incompatible with the later data on that item, including five months of actual expenses for 1981 . . . .”

6 If Pacific’s actual results for the first five months of 1981—part of the more recent data available to the commission in this proceeding—were annualized on a straight line basis, they would yield a figure of over $398 million for total company installation costs—very close to the commission’s estimate of $402.1 million. Moreover, in July 1982 Pacific made an offer of proof to show that its actual recorded installation costs for 1981 were $404.2— just about one-half of 1 percent higher than the estimate. The commission rejected Pacific’s offer of proof, preferring to stand on its original estimate.

7 We observe generally that the commission should not be barred from adopting in an offset proceeding an estimate that is based on more recent data and is accordingly different from that adopted previously in a general rate proceeding. To do so would be antithetical to the very purpose of offset proceedings—viz., to recognize the effect of a change in an item of expense or revenue that is both significant and not reasonably foreseeable at the time of the last general rate proceeding.

Assigned by the Chairperson of the Judicial Council.