In re Green Mountain Power Corp.

IN_RE_GREEN_MOUNTAIN_POWER_CORP.92-353; 162 Vt. 378; 648 A.2d 374

[Opinion Filed April 22, 1994]

[Motion for Reargument Denied July 18, 1994]

 NOTICE:  This opinion is subject to motions for reargument under V.R.A.P. 40
 as well as formal revision before publication in the Vermont Reports.
 Readers are requested to notify the Reporter of Decisions, Vermont Supreme
 Court, 109 State Street, Montpelier, Vermont 05609-0801 of any errors in
 order that corrections may be made before this opinion goes to press.

                                 No. 92-353


 In re Green Mountain Power Corp.             Supreme Court

                                              On Appeal from
                                              Public Service Board

                                              February Term, 1993


 Richard H. Cowart, Chair


 Robert V. Simpson, Jr., Montpelier, for appellant Department of Public
    Service

 Christopher L. Dutton, Karen Krug O'Neill, Michael H. Lipson, and Michael A.
    Murphy, Burlington, for appellee and cross-appellant Green Mountain
    Power Corporation

 Harriet Ann King of King and King, Waitsfield, for amicus curiae Vermont
    Yankee Nuclear Power Corp.


 PRESENT:  Allen, C.J., Gibson, Dooley and Morse, JJ., and Peck, J. (Ret.),
           Specially Assigned


      MORSE, J.   The Department of Public Service (DPS) and Green Mountain
 Power Corporation (GMP) appeal the Public Service Board's approval of a 5.6%
 rate increase for GMP.  GMP had sought a 9.96% increase, while DPS asserted
 that only a 2.65% increase was justified.  DPS claims that the Board erred
 by declining to reduce GMP's rate base to account for: (1) interim year
 accumulated depreciation on GMP's test year plant, and (2) certain projected
 operating expenses of Vermont Yankee Nuclear Power Corporation that would be
 passed on to GMP ratepayers.  On cross-appeal, GMP contends that the Board:
 (1) erred by rejecting GMP's proposed 5.5% salary increase for officers and

 

 other employees exempt from the company's collective bargaining agreement,
 and (2) engaged in unlawful retroactive ratemaking by reducing GMP's rate
 base to credit ratepayers for excess amortization expenses paid under a
 previous rate.  We affirm in part, and reverse in part.
                            I. Standard of Review
      At the outset, we acknowledge this Court's deferential standard of
 review in appeals from the Public Service Board.  Orders issued by the Board
 enjoy a strong presumption of validity.  In re East Georgia Cogeneration
 Ltd. Partnership, 158 Vt. 525, 531, 614 A.2d 799, 803 (1992).  The Board's
 decisions regarding ratemaking "are subject to great deference in this Court
 so long as it can be shown they are directed at proper regulatory
 objectives."  In re Consolidated Rate Appeals of Green Mountain Power Corp.,
 142 Vt. 373, 380, 455 A.2d 823, 825 (1983).  We accept findings and
 conclusions adopted by the Board unless the appealing party demonstrates
 that they are clearly erroneous.  See East Georgia, 158 Vt. at 531-32, 614 A.2d  at 803.  In reviewing such findings and conclusions, we defer to the
 Board's expertise.  Id. at 531, 614 A.2d  at 803.  With this standard in
 mind, we consider each of the parties' claims of error.
                               II. DPS Claims
                        A. Interim-Year Depreciation
      DPS first contends that the Board was required to reduce GMP's rate
 base to account for interim year accumulated depreciation on the test year
 plant.  We agree.
      A basic explanation of ratemaking procedure will be helpful to our
 discussion of this issue.  The Board seeks to establish utility rates for
 the immediate future that will allow investors a reasonable return without
 overcharging the ratepayers.  As the first step in arriving at a fair rate

 

 of return, the Board determines the operating expenses and the "rate base" -
 - the utility's net plant investment -- for the "test year," usually the
 most recent full calendar year, in this case 1990.  The Board then adjusts
 the rate base by modifying the test year rate base to reflect "known and
 measurable" changes in plant investment.  These are changes that are
 measurable with a reasonable degree of accuracy and have a high probability
 of being in effect in the adjusted test year, in this case 1992.  Finally,
 the Board calculates an appropriate return on the adjusted rate base and
 devises adjusted rates that will produce a fair rate of return on the
 company's property in the immediate future.  See Letourneau v. Citizens
 Utilities Co., 128 Vt. 129, 134, 259 A.2d 21, 24 (1969) (rates should be set
 based on latest available relevant test year data to accomplish objective of
 determining fair rate of return).
      DPS argues, as it did before the Board, that the Board was required, as
 a matter of law, to reduce the test year rate base by the average amount of
 depreciation ratepayers would pay in 1991, the interim year, on the test
 year plant.  As stated in prefiled testimony by a DPS witness:
           Interim accumulated depreciation is "known and measur-
           able" with absolute certainty.  The Company has a cert-
           ain level of plant in service at the end of 1990.  The
           Company's rates currently include depreciation expense
           on this plant which will be recovered in 1991 . . . .
           [T]his is known with certainty and this fact must be
           reflected in the proforma rate base to prevent over
           recovery on plant which is already paid for.

 By not making this adjustment, DPS argues, GMP is receiving a larger return
 on investment than that to which it is entitled.
      The Board disagreed.  Citing its decision in GMP's previous rate case,
 119 P.U.R.4th 62 (Vt. Pub. Serv. Bd. 1991), the Board acknowledged that
 deducting interim year accumulated depreciation had some appeal in a strict

 

 accounting sense, but that the deduction would not give GMP a fair rate of
 return because the utility's plant investment was increasing at a faster
 rate than it was depreciating.  It declined to reduce GMP's 1992 adjusted
 test year rate base on grounds that the $3.076 million reduction, though
 known and measurable, would be "offset" by potential 1992 adjusted test year
 plant investment by GMP.  The Board pointed out that GMP's net plant
 investment had increased every year between 1978 and 1989.  While
 acknowledging that it could not be sure, on the basis of the record, that
 the trend would continue into the adjusted test year, the Board declined to
 consider the interim year accumulated depreciation as a "known and
 measurable" change absent a showing that the trend had reversed itself.
      On appeal, GMP concedes that DPS is correct from an accounting
 perspective, but argues that ratemaking policy should prevail over
 conventional accounting practices and that "'slavish' adherence to
 generalized ratemaking principles" will not succeed in balancing the
 interests of GMP's customers and investors.  Specifically, GMP argues that
 the Board was not legally bound to conclude that interim year depreciation
 was a "known and measurable" change.  Finally, GMP contends that the Board
 is obligated to use "realistic" methods and adjustments that produce results
 which are "consistent from one case to the next."
      The crux of this dispute is whether the Board acted within its
 discretion in declining to reduce the test year rate base for what the Board
 and the parties agree are known and measurable charges, on the basis that to
 do so would be to deny GMP a fair rate of return.  We hold that the Board's
 decision was erroneous, since the evidence of a known and measurable change
 in net plant as a result of interim year accumulated depreciation was
 unquestioned, and the Board's reasons for failing to follow that mandate

 

 were vague and not sustained by the record.  Though the Board's expertise is
 at the heart of the deference given its decisions, In re Telesystems, Corp.,
 143 Vt. 504, 509, 469 A.2d 1169, 1172 (1983), that expertise is not a
 license to shroud its reasoning in an all-encompassing explanation that a
 particular decision is simply necessary to yield what the Board perceives is
 the correct result.
      Central to the Board's rationale was its assumption that reduction for
 interim year 1991 accumulated depreciation would be offset by adjusted test
 year plant investment.  Yet in a lengthy and thorough record, there is no
 evidence from GMP identifying these future investments or suggesting their
 cost.  And the Board itself cast doubt on the existence and scope of such
 offsets:
              During the evidentiary hearings in this case, the DPS
           argued that, by not making this adjustment [in prior
           docket], we allowed the Company a larger rate base, and
           therefore return on rate base, than the Company actually
           had in service.  The evidence, however, was not
           unequivocal on this point.  GMP points out that
           depreciation expense and additions to plant accumulate
           annually; and historically, the two have been largely
           offsetting.  However, on the basis of this record in
           this docket, we cannot determine whether the
           relationship between the two will remain relatively
           constant or will vary significantly in the adjusted test
           year.  We will need more detailed evidence on the
           historic relationship of accumulated depreciation and
           plant additions before we can conclude that the
           adjustment recommended by the DPS is indeed "known and
           measurable.  (Emphasis supplied.)

      Even more critically, no justification is advanced by the Board for
 failing to recognize interim year accumulated depreciation as a "known and
 measurable change," even if GMP had presented evidence of adjusted test year
 investments.
      In sum, the Board failed to identify a nexus between its denial of an
 undisputed "known and measurable" change in the interim year and offsets --

 

 proven or chimerical -- in the adjusted test year.  As we stated in In re
 Green Mountain Power Corp., 131 Vt. 284, 303-04, 305 A.2d 571, 583 (1973),
 findings of fact must be "based exclusively on the evidence and on matters
 officially noticed by the Board."  On review, "we will sustain [the Board's]
 weighing of the evidence if there is evidence to support it."  Id. at 305,
 305 A.2d  at 584.  (Emphasis added.)   When the Board itself declines to
 make the requisite findings, we cannot affirm its conclusions.  See also
 In re New England Tel. & Tel. Co., 120 Vt. 181, 192, 136 A.2d 357, 365
 (1957) ("Without supporting evidence, the Commission was not at liberty to
 resort to the 1953 rate proceedings in determining a just and reasonable
 return in 1956.  The justness of the return allowed must be based on present
 requirements.").
      The essential reason to apply the "known and measurable change"
 principle to the test year rate base is that once customers have, in effect,
 returned a portion of a utility's investment, they should not be required to
 pay for that portion a second time, once as depreciation expense and again
 as a return on plant value which had not been correspondingly reduced to
 reflect the "return of" the investment through depreciation expense
 payments.   See State Utilities Comm'n v. Duke Power Co., 287 S.E.2d 786,
 796 (N.C. 1982) (rejecting power company's suggestion to adjust test period
 depreciation expenses without an offsetting increase to accumulated
 depreciation because customers would then pay twice, once for adjustment for
 depreciation and then again based on an inflated rate base); Re Idaho Power
 Co., 76 P.U.R.4th 326, 369 (Idaho Pub. Util. Comm'n 1986) (test year rate
 base should be adjusted by known depreciation to prevent double counting).
 See generally, C.F. Phillips, The Regulation of Public Utilities at 312

 

 (1984) (discussing double payment issue).  The Board's decision has not
 explained why it should have varied from that principle.  GMP argues that
 the evidence of offsets in the adjusted test year is not the point -- that
 this dispute is not about the existence of facts or the computation of data,
 but rather the appropriate perspective from which to view the information
 provided by the parties, and that resolution of the issue will depend on
 which perspective is deemed correct.  While the "appropriate perspective" is
 a factor that we may assume is an important element of the Board's
 expertise, it is not a substitute for a rationale.  As we stated in In re
 Burlington Elec. Light Dep't, 149 Vt. 300, 303, 542 A.2d 294, 296 (1988):
 "[T]here must be a 'full disclosure of the criteria underlying' the order,
 In re Consolidated Rate Appeals of Green Mountain Power Corp., 142 Vt. 373,
 380, 455 A.2d 823, 825 (1983); otherwise, the Court cannot evaluate whether
 the agency's conclusions are supported by the findings."
      In the face of undisputed evidence of interim year accumulated
 depreciation and a clear mandate to adjust the rate base for known and
 measurable changes, the Board's failure to deduct the depreciation was not
 within its discretion as a choice "directed at proper regulatory
 objectives."  In re Green Mountain Power, 142 Vt at 380, 455 A.2d  at 825.
 Based on the careful and thorough record before us, the Board's decision may
 not be sustained as falling within the scope of its discretion, and must be
 reversed.
      Finally on this issue, we note that DPS attempted to show that in the
 previous rate case, the Board had overestimated GMP's rate base, and that
 the Board's refusal to include interim year depreciation in that docket
 resulted in GMP recovering excess rates because the adjusted test year plant
 was overestimated.  DPS argued that the same result would occur in this rate
 case.  The Board disagreed, essentially accepting GMP's analysis.  We need

 

 not reach this issue in light of our present decision.  Even if GMP is right
 in this instance, as the Board pointed out: "[W]e cannot determine whether
 the relationship between the two will remain relatively constant or will
 vary significantly in the adjusted test year."  A general trend is no
 substitute for evidence, especially when, as here, the utility seeking the
 rate increase has had an ample opportunity to introduce evidence as to its
 adjusted test year additions to plant, and did not do so.
                         B. Vermont Yankee Expenses
      GMP owns 17.8% of the stock of Vermont Yankee Nuclear Power
 Corporation.  Accordingly, Vermont Yankee provides GMP with approximately
 the same percentage of its output, and GMP ratepayers pay that percentage of
 Vermont Yankee's operating costs.  DPS argues that the Board should have
 reduced Vermont Yankee's $155.65 million projected operating expenses by
 some $2.12 million because the following projected costs were not "known and
 measurable": (1) $785,000 for a feedwater check valve replacement that was
 canceled because the Nuclear Regulatory Commission approved retention of the
 existing valves; and (2) $1.36 million for implementation of future
 regulatory requirements.
      GMP argued before the Board that the "known and measurable" standard
 should be applied to Vermont Yankee's aggregate operating expense
 projection, not to individual projects, while DPS argued for a more detailed
 analysis in which the standard should be applied to each component of the
 projection.  The Board ruled that the projection in its entirety satisfied
 the "known and measurable" standard, reasoning that Vermont Yankee, as
 regulated by the Federal Energy Regulatory Commission (FERC), historically
 had accurately projected its costs, and that the actual costs had been
 prudent.

 

      Without challenging the Board's conclusion that generally it may apply
 the "known and measurable" standard against Vermont Yankee's aggregate
 projection, we conclude that GMP failed to meet its burden regarding the
 canceled feedwater check valve project.  See In re Green Mountain Power, 142
 Vt. at 381, 455 A.2d  at 826 ("burden of supporting change in rates or rate
 structure [lies] squarely on the proponent utility").  When it is undisputed
 that an expenditure will not take place, it cannot remain as a projected
 operating cost.  The Board should rely on actual figures as much as possible
 in approving projected costs.
      On the other hand, the $1.36 million projected for future regulatory
 requirements does not represent phantom costs for canceled projects.
 Rather, Vermont Yankee based this projected expense on regulations being
 considered that would impact on specific projects, taking into account
 several variables.  Given Vermont Yankee's accuracy in past projections and
 its detailed analysis regarding this particular expense, the Board did not
 err by refusing to deduct the expense, which is, by its very nature,
 difficult to measure.  In this instance, the Board was justified in
 accepting the expense as part of the overall projection, relying on the
 "variance of the sum" principle, which holds that the variance of a sum made
 up of individual volatile items will be less than the variance of the
 individual items taken separately.
                               III. GMP Claims
                   A. Salary Increase for Exempt Employees
      GMP first claims that the Board erred in lowering GMP's requested wage
 increase for officers and other employees exempt from the company's
 collective bargaining agreement from 5.5% to 4%.  According to GMP, the
 Board's findings were insufficient to support a conclusion that the 5.5%

 

 increase was "excessive," and even if the Board made sufficient findings,
 those findings were unsupported by the record.
      The Board found that GMP's salary-increase proposal in this case was
 similar to the one rejected in the previous rate case, 119 P.U.R.4th 62
 (1991), which it specifically referred to in its findings.  In the prior
 case, GMP had proposed an increase of 3.5% for hourly employees, 5% for
 exempt employees, and 6% for officers.  Id. at 83.  Finding that GMP had
 failed to establish a basis for the disparity between classes of employees,
 and that GMP executives were among the highest paid in their job categories
 according to a recent study of fifteen utilities, the Board concluded in
 that case that the requested increase was excessive considering the
 depressed economic climate.  Id.  The Board used much of the same reasoning
 in this case, pointing out further that salary issues would be thoroughly
 examined in another docket it had opened to investigate GMP's executive
 compensation policies.
      The Board considered conflicting testimony regarding the reasonableness
 of the wage increase and the disparity between the increases requested for
 non-exempt and exempt employees.  GMP argues that certain market data it
 presented should have been controlling.  However, the mere presentation of
 such evidence does not entitle the company to approval of its plan.  In
 light of the conflicting evidence presented to the Board, "it was free to
 determine for itself what was to be believed and accepted, without
 intervention by this Court except on some basis related to bad faith, fraud
 or demonstrable mistake."  In re Green Mountain Power Corp., 142 Vt. at 382,
 455 A.2d  at 826.  On the evidence presented, the Board could reasonably
 conclude that GMP had failed to justify its wage increase proposal, and that

 

 a maximum increase, to be allocated at the discretion of GMP, was
 appropriate.
      GMP argues that the Board exceeded its authority by "micromanaging" the
 company and overseeing its salary policies.  We agree with the Board's
 assessment that while the allocation of salary increases should remain
 within the discretion of the utility, setting levels of overall salary
 increases that ratepayers must bear is within the discretion of the
 regulatory agency.  GMP's reliance on Latourneau v. Citizens Utilities Co.,
 125 Vt. 38, 209 A.2d 307 (1965) is unavailing.  In Latourneau, this Court
 ruled that the Public Service Commission intruded into the affairs of the
 utility when it made a finding indicating the appropriate salary of the
 company president.  See id. at 46-47, 209 A.2d  at 314.  Here, the Board did
 not attempt to dictate individual salaries, but merely set an overall cap on
 salary increases.  We find no error.
                   B. Demand-Side Management Expenditures
      In the previous rate case, the Board had permitted projected demand-
 side management (DSM) program costs for 1990 and 1991 in the rate base, and
 amortization of those projected amounts in cost of service for the adjusted
 test year, 1991.  Because GMP's investment in DSM programs during 1990 and
 1991 was lower than projected, the amount of amortization expenses paid by
 ratepayers in 1991 exceeded GMP's actual expenses.  Although GMP included
 only actual DSM expenditures in this docket, the Board reduced the company's
 rate base by $306,294 to credit ratepayers for the excess amortization

 

 payments.  We agree with GMP that this constituted improper retroactive
 ratemaking. (FN1)
      Retroactive ratemaking occurs when rates are set at a level that
 permits a utility to recover past losses, or that requires it to refund past
 excess profits, that resulted from a disparity between projected expenses of
 a prior rate base and actual incurred expenses.  In re Central Vermont Pub.
 Serv. Corp., 144 Vt. 46, 52, 473 A.2d 1155, 1158 (1984).  While "the Board
 may consider a utility's recent past operating experience with such
 adjustments as will make the test period reflect typical conditions in the
 immediate future," it may not set a rate "that requires a utility to refund
 to consumers a portion of its previously earned profits."  Id. at 53, 56,
 473 A.2d  at 1158, 1160.  "[T]he Board has no statutory authority to make
 whole either the utility company or its customers for inequities that
 existed in the past."  Id. at 53, 473 A.2d  at 1159.
      We agree that the Board's order, in effect, directs GMP to refund the
 excess rates that it collected based upon the estimated rate base from the
 prior docket.  The principles enunciated in Central Vermont Public Service
 Corp. clearly prohibit the reduction of rates, to which GMP would otherwise
 be entitled, on the basis that prior projections proved inaccurate.  Id.
 ("'Subsequent cases cannot correct past errors.'") (quoting In re Central
 Vermont Pub. Serv. Corp., 141 Vt. 284, 290, 449 A.2d 904, 907-08 (1982)).
 Accordingly, we reverse on this issue.

 

      The parts of the Board's order declining to reduce GMP's rate base to
 account for interim year accumulated depreciation on the test year plant,
 accepting Vermont Yankee's projected expenditure for the feedwater check
 valve replacement, and reducing the rate base to credit ratepayers for
 excess amortization payments are reversed.  In all other respects, the order
 is affirmed.  The matter is remanded for recalculation of the rate increase.

                                    FOR THE COURT:



                                    _____________________________
                                    Associate Justice



------------------------------------------------------------------------------
                              Footnotes 

FN1.   We reject DPS's argument that GMP waived this issue by failing to
 include it in its motion for reconsideration.  Unlike In re Twenty-Four
 Vermont Utilities, 159 Vt. 339, 352, 618 A.2d 1295, 1303 (1992)
 (intervenors had obligation to raise argument before the Board before
 raising it with Court), here GMP squarely raised the issue before the Board
 at the hearing.