City of Cincinnati v. Public Utilities Commission

378 N.E.2d 729, 55 Ohio St. 2d 168, 9 Ohio Op. 3d 130, 1978 Ohio LEXIS 633

• Court: Ohio Supreme Court
• Decided: July 19, 1978
• Docket: Nos. 76-1230 and 76-1326
• Status: Published

Opinions

Per Curiam.

Appellant raises numerous propositions of law in its appeals. Two of those are constitutional challenges. The remaining propositions raised by appellant primarily challenge the reasonableness and lawfulness of the rates established by the commission and the calculation of expenses used by the commission when it determined those rates.

I.

In its first proposition of law the city contends that the severance of its case from the rate cases concerning the rest of the area serviced by the gas company denied the city due process of law and a fair hearing in violation of the Fifth and Fourteenth Amendments to the United States Constitution and Article I, Section 16 of the Ohio Constitution, because the decisions as to uniform rates and earnings erosion adjustments made in the municipality and unincorporated area cases precluded any different decisions in the city’s rate increase case.¹

As a general rule, an administrative agency’s decision to consolidate or not consolidate two or more proceedings is a matter of administrative discretion and does not affect the party’s rights to due process. See 1 Ohio Jurisprudence 2d 366, Actions, Section 82; Davis, Administrative Law, Section 8.10; Transcon Builders, Inc., v. Lorain (1976), 49 Ohio App. 2d 145. However, a party’s due process rights may be violated by the decision to sever two cases if the effect of holding a hearing for one party only is to make the second party’s hearing an empty thing. Ashbacker Radio Corp. v. F. C. C. (1945), 326 U. S. 327, 330.

We do not find, however, that the Ashbacker doctrine applies to the instant cause. Under the facts of the Ash-backer case, the grant of one station’s radio broadcasting application meant the automatic denial of the second station’s license request. The two applications were mutually exclusive. In the instant cause, the commission’s .grant of one rate outside the city did not preclude the possibility of a different rate inside the city.

The commission’s order offsetting the company’s loss of sales to interruptible industrial customers by adopting a nine cent per thousand cubic foot earnings erosion adjustment in the municipalities and unincorporated areas only authorized the company to recover an allocated share of that total loss of revenue. Therefore, while it might have been economically questionable for the commission to determine that something considerably less than a nine cent rate was reasonable for the city, the city was not automatically denied a lower earnings erosion rate by the order in the earlier case.² Similarly, the adoption of uniform rates outside the city did not mandate the adoption of such a rate inside the city because there is no requirement that rates of return be uniform throughout a utility’s entire service area if those rates of return are reasonable. General Telephone Co. v. Pub. Util. Comm. (1976), 46 Ohio St. 2d 281. We therefore find that the severance of the city’s ease from the eases concerning the company’s noncity customers did not deny the city due process of law and a fair hearing in violation of the Fifth and Fourteenth Amendments to the United States Constitution and Article I, Section 16 of the Ohio Constitution. The city’s first proposition of law is, therefore, overruled.

n.

In addition to its constitutional arguments, the city also takes exception to the rate increases ordered by, and the methods for determining those increases applied by, the commission in its finding and September order on the company’s application to increase rates within the city. The methods for determining those rates which the city questions have to do with the commission’s inclusion of certain expenses in its rate-making formula. The challenged expenses include the company’s charitable contributions and (as they were computed by the commission) the company’s federal income tax and test-year operating expenses. The increases challenged by the city include (1) the nine cent per thousand cubic foot earnings erosion charge; (2) the commission’s prescription of uniform rates; and (3) the allowance of a 7.74 percent overall rate of return.

The first issue we address is the city’s contention that the commission’s inclusion of charitable contributions in its calculation of operating expenses was unreasonable and unlawful.

The value of charitable contributions by public utilities has been recognzied in other jurisdictions. Re New York Telephone (N. Y. Pub. Serv. Comm., July 1, 1970), 84 PUR 3d 321, at page 349. The federal Power Commission has allowed such contributions to be included in the cost of service, stating, in Re United Gas Pipe Line Co. (1964), 31 FPC 1180, 1189, 54 PUR 3d 285, 295:

“* * * We believe that contributions of a reasonable amount to recognized and appropriate charitable institutions constitute a proper operating expense. Corporations have an obligation to the communities in which they are located and they are expected to recognize this obligation. It is our opinion that these contributions have an important relationship to the necessary costs of doing business.”

Moreover, given the vigorous fund-raising efforts of charities, contributions made by utilities are frequently less than voluntary (1 Priest, Principles of Public Utility Regulation [1969], 87). In addition, most charities depend upon corporate contributions, including contributions by utilities, for their existence. (Re New York Telephone, supra, at page 350.) The realities of charity fund raising and the benefit to society provided by charitable organizations would appear to justify including the cost of a utility’s charitable contributions in its operating expenses. Moreover, the cost of a utility’s charitable contributions borne by an individual consumer should be minimal if the utility’s total contributions are reasonable, and the contributions themselves might directly benefit the consumer if the organizations supported by the utility provide services in the communities in which the consumers reside. We therefore find that the commission operates reasonably and lawfully when it includes a utility’s reasonable charitable contributions³ which benefit the communities in which they are made in its calculation of the utility’s operating expenses. The city’s fifth proposition of law is therefore rejected.

The remaining operating expense calculations challenged by the city as unreasonable and unlawful are those resulting in the commission’s figures for federal income tax and test-year expenses.

This court’s standard of review for a determination by the Public Utilities Commission is set forth in R. C. 4903.13.

R. C. 4903.13 provides:

“A final order made by the public utilities commission shall be reversed, vacated, or modified by the supreme court on appeal, if, upon consideration of the record, such court is of the opinion that such order was unlawful or unreasonable. ’ ’

Under the “unlawful” or “unreasonable” standard of R. C. 4903.13, this court will not reverse or modify a determination unless that determination is manifestly against the weight of the evidence and so clearly unsupported by the record as to show misapprehension, mistake or willful disregard of duty. Delphos v. Pub. Util. Comm. (1940), 137 Ohio St. 422, 424; Cleveland Electric Illuminating Co. v. Pub. Util. Comm. (1975), 42 Ohio St. 2d 403, paragraph eight of the syllabus; and General Motors Corp. v. Pub. Util. Comm. (1976), 47 Ohio St. 2d 58, paragraph two of the syllabus.

The commission’s federal income tax and test-year expense calculations are not manifestly against the weight of the evidence.

In its fourth proposition of law, the city challenges as unreasonable and unlawful “the establishment of rates, based on an allowance for federal income taxes in excess, of the company’s actual tax liability.” To begin with, the record reveals that any discrepancies which may exist between the company’s effective tax rate and the rate applied by the staff were not due to consolidation. Therefore, the city’s reliance on Federal Power Commission v. United Gas Pipe Line Co. (1967), 386 U. S. 237, is misplaced. Moreover, the record does not clearly indicate that the staff applied a 48 percent corporate tax rate when it calculated the company’s federal income tax liability for rate-making purposes. (The witness who mentioned a 48 percent tax rate merely stated that the 48 percent tax rate used to calculate the federal income tax would be on revenues accrued after the company received rate relief. In addition, since the company in the instant cause is a flow-through company for accounting purposes and the staff accountants started with the tax expense recorded in the utility’s books, it is likely that the difference in the effective tax rate and the 48 percent rate was reflected in the staff’s figures.) In light of the above evidence, we cannot say that the commission’s calculation of federal income taxes is manifestly against the weight of the evidence and so clearly unsupported by the record as to show misapprehension, mistake or willful disregard of duty. General Motors Corp., supra. The city’s fourth proposition of law is, therefore, overruled.

The last calculation challenged by the city is the test-year expense figure used by the commission. Since the record reveals that the test-year expenses recommended by the staff did not include an adjustment for post-year wage increases,⁴ we find this argument to be without merit, and we find it unnecessary to address the issue of whether such wage increases may be considered in test-year expenses. The city’s sixth proposition of law is thereby overruled.

III.

The city also challenges three rate increases ordered by the commission. The first rate increase which the city takes exception to is the commission’s application of a nine cent per thousand cubic foot earnings erosion charge. While it is true that the commission applied a uniform earnings erosion charge to the city and noncity areas serviced by the company even though the greatest proportion of the eroded earnings occurred outside the city, the application of that rate in the instant cause is not unreasonable or unlawful. The commission found that establishing a uniform earnings erosion rate was justified because the gas made available by the interrupted service causing the earnings erosion ‘is of benefit to all its firm customers, without regard to the chances of municipal boundaries.” In light of the testimony at the rate increase hearing that the gas not delivered to interruptible customers becomes available to the entire system, including the city of Cincinnati, we cannot say that the commission’s determination was manifestly against the weight of the evidence or that its establishment of a nine cent earnings erosion charge was unreasonable or unlawful. The city’s first challenge to the rates imposed upon it is therefore overruled.

The second rate challenged by the city is the uniform rate imposed on it by the commission. The city argues that the commission’s application of a uniform rate should not be sustained because the record reveals no substantial evidence supporting the establishment of uniform rates. At the hearing, the company presented testimony that traditional wisdom concerning the cost of providing gas to city and noncity residents no longer applies and that, instead, the cost of noncity service has so decreased and the cost of city service has so increased that a uniform rate is justifiable. In support of that position, the utility’s witness cited the increasing density of noncity populations which lowers noncity service cost, the age of the city’s plant, the location of its pipelines and the numbers of the city’s uncollectible accounts which raise its service costs and the ever-increasing percentage of cost which is attributable to expenses like gas purchases which remain the same regardless of whether the customer is a city or a noncity resident. In light of that testimony, we cannot agree with appellant that the commission’s prescription of a uniform rate is manifestly against the weight of the evidence. The city’s second challenge to the commission’s rate determinations is without merit.

The city’s third challenge to the rates imposed on it by the commission is that “the overall rate of return of 7.74 percent was also unlawful.” We disagree. Of the two expert witnesses testifying before the commission, one suggested as fair and reasonable a rate of return of 8.8 percent to 10.2 percent. The commission’s staff witness suggested a wider range, including the 7.74 percent finally adopted. In the absence of evidence refuting this testimony, we do not find that overall rate of return to be unlawful or unreasonable. The city contends further that despite the expert testimony supporting a 7.74 percent rate of return as reasonable, the rate of return adopted by the commission was per se unreasonable because the commission relied on an excessive estimate of the company’s rate of return on common equity to arrive at the 7.74 percent figure. Even if we assume, arguendo, that the 12 to 13 percent rate of return on common equity figure adopted by the commission is excessive per se, we cannot find that the 7.74 percent rate of return was excessive in the absence of evidence showing a direct correlation between the rate of common equity and the rate of return. We therefore find that the commission’s adoption of a 7.74 percent rate of return was reasonable and lawful. The city’s final challenge to the rates imposed on it by the commission is, therefore, without merit.

The orders of the Public Utilities Commission being neither unreasonable nor unlawful are accordingly affirmed.

Orders affirmed.

O’Neill, C. J., Herbert, W. Brown, P. Brown and Sweeney, JJ., concur. Celebrezze, J., concurs in the judgment. Locher, J., dissents.

1 The city also contends that it was denied due process and a fair hearing because the commission’s staff and the other areas serviced by the company effectively settled their rate disputes before it was afforded the opportunity to participate in those negotiations. We find this argument to be without merit. It is undisputed that the city was informed of the negotiations. Appellant’s second proposition of law is, therefore, overruled.

2 Given the evidence that the city benefited from the increased gas resources made available by the utility’s sales losses, it was highly unlikely that the commission would have found a rate significantly lower than nine cents per thousand cubic feet to be reasonable and lawful.

3 This position was given implicit support in our recent decision in Franklin Co. Welfare Rights Org. v. Pub. Util. Comm. (1978), 55 Ohio St. 2d 1, which upheld the commission’s allocation of charitable contributions. It has also been expounded in a number of commission cases including Re Ohio Bell Telephone Co. (1976), 74-761-TP-AIR, 15 PUR 4th 344. The contributions which the commission has approved in the Ohio Bell opinion and in the past have not exceeded 0.10 percent of gross test-year operating revenues. The charitable contributions at issue in the instant cause amount to about a 0.11 percent of the gross test-year operating revenues. We do not find this amount of deviation from 0.10 percent sufficient to render the commission’s inclusion of charitable contributions as operating expenses to the instant cause unreasonable or unlawful.

4 In the Staff Report of Investigation in the case involving customers in Cincinnati, the staff incorporated by reference all accounting recommendations contained in the Staff Report in the case involving customers in unincorporated areas. The latter Staff Report recommended that no adjustments should be made for the test-year cost increases.