Opinion
No. CV 09 4021665S
April 1, 2010
MEMORANDUM OF DECISION
This is an administrative appeal brought by the plaintiff, The Southern Connecticut Gas Company (SCG) from a July 17, 2009 final decision of the defendant department of public utility control (DPUC). SCG has also named as a defendant the office of consumer counsel (OCC) as the OCC participated fully before the DPUC. The final decision concerned a rate case filed pursuant to General Statutes § 16-19 on January 20, 2009, and also consisted of a review by the DPUC of a October 24, 2008 "over-earnings" decision pursuant to § 16-19(g), Docket No. 08-06-10.
The background to the appeal is as follows. SCG filed its application on January 20, 2009. Following a series of public hearings, on July 10, 2009, the DPUC issued a draft decision, and after a period for comment, on July 17, 2009, DPUC issued the final decision. In the decision, the DPUC allowed revenues of $376,174,309.
The DPUC summarized its position as follows: "The company is allowed a rate base of $436,709,282 and ROE [return on equity] of 9.26% for a weighted cost of capital of 8.05% using an allowed capital structure containing a 52% common equity component and a 48% debt capitalization component. These revenue requirement and rates, when applied to the rate base are reasonable and will produce operating income sufficient for Southern to operate successfully, serve its ratepayers, maintain its financial integrity and compensate its investors for the risk assumed."
SCG appealed from the final decision on August 18, 2009 and by a stipulation dated August 6, 2009, the parties agreed to a conditional partial stay pending appeal. The court subsequently decided an appeal from a related corporation, Connecticut Natural Gas Corporation (CNG), on January 6, 2010. In the course of argument of the present appeal, SCG raised as an issue involving "Distributed Generation" projects. The court remanded the case to the DPUC to review its final decision regarding these projects. On March 4, 2010, the DPUC issued another decision on the projects that SCG has agreed resolves this issue. In the course of issuing this revised decision, the allowed § 16-19(g) surcharge was altered from $0.0161 to $0.0164 per ccf.
SCG is aggrieved for the purposes of § 4-183(a). See Connecticut Natural Gas Corp. v. Dept. of Public Utility Control, 51 Conn.Sup. 307, 315, 981 A.2d 1084 (2009).
Turning to the issues raised regarding the DPUC final decision-rate order, our Supreme Court has issued several decisions on this court's function when a utility appeals from such a DPUC order. In Wheelabrator Lisbon, Inc. v. Dept. of Public Utility Control, 283 Conn. 672, 690-92, 931 A.2d 159 (2007), the Supreme Court stated: "[J]udicial review of the [department's] action is governed by the Uniform Administrative Procedure Act . . . and the scope of that review is very restricted . . . [R]eview of an administrative agency decision requires a court to determine whether there is substantial evidence in the administrative record to support the agency's findings of basic fact and whether the conclusions drawn from those facts are reasonable . . . Neither this court nor the trial court may retry the case or substitute its own judgment for that of the administrative agency on the weight of the evidence or questions of fact . . . Our ultimate duty is to determine, in view of all of the evidence, whether the agency, in issuing its order, acted unreasonably, arbitrarily, illegally or in abuse of its discretion . . ."
SCG refers on the first page of its October 2, 2009 brief to an argument that the DPUC issued a confiscatory final decision, but does not argue this point further. The court concludes that this issue has been abandoned. Goldstar Medical Services, Inc. v. Dept. of Social Services, 288 Conn. 790, 810, n. 11, 955 A.2d 15 (2008) (issue receiving only cursory attention in brief is deemed abandoned).
"Because this is a question of statutory interpretation that previously has not been subject to judicial scrutiny, our review ordinarily would be plenary. Nevertheless, in light of the extremely complex and technical regulatory and policy considerations implicated by this issue, we are not persuaded that we may substitute our judgment for that of the department. Rather, this is precisely the type of situation that calls for agency expertise . . . [C]f. Office of Consumer Counsel v. Dept. of Public Utility Control, 279 Conn. 584, 593, 905 A.2d 1 (2006) (`In the specialized context of a rate case, the court may not substitute its own balance of the regulatory considerations for that of the agency, and must assure itself that the [department] has given reasoned consideration to the factors expressed in § 16-19e[a] . . . this broad grant of regulatory authority carries with it the necessary equally broad discretion, to be exercised within legal limits . . .') (Citations omitted; internal quotation marks omitted.)."
The Supreme Court in Connecticut Light Power Co. v. Dept. of Public Utility Control, 266 Conn. 108, 125, 830 A.2d 1121 (2003) has also stated: "the reviewing court must take into account [that there is] contradictory evidence in the record . . . but the possibility of drawing two inconsistent conclusions from the evidence does not prevent an administrative agency's finding from being supported by substantial evidence." (Citations omitted.) See also Connecticut Natural Gas Corp. v. Public Utilities Control Authority, 183 Conn. 128, 133-34, 439 A.2d 282 (1981), approving this standard in a rate order involving another gas utility.
Before applying this standard to the issues raised in this appeal, the court also indicates that its review of these issues does not depend upon the final decision issued by the DPUC in its June 30, 2009 Connecticut Natural Gas rate order. A major portion of the SGC brief of October 2, 2009 argues that the factual conclusions of the Connecticut Natural Gas final decision arbitrarily differ from those of the SCG final decision. Each decision in a rate case is drawn, however, from analysis of specific facts and must be judged separately. See, for example, Connecticut Natural Gas Corp. v. Public Utilities Control Authority, supra, 183 Conn. 135: "The length of the lag period is a question of fact. Therefore, neither the plaintiff nor the PUCA could safely rely on a previous approximation as if it were a legal precedent." See also the July 17, 2009, final decision under appeal at 1: "Each Docket's record is unique. As a result, the facts, analyses and logic employed in this Decision may differ. This Decision stands on its merits alone. Though superficially tempting, it would be inappropriate to use either Decision to find fault or support the other. In administrative law, the Department need not strictly adhere to stare decisis."
An appeal from this final decision was dismissed by this court on January 6, 2010, and is currently under appeal in the Appellate Court. Connecticut Natural Gas Corp. v. Dept. of Public Utility Control, Superior Court, judicial district of New Britain, Docket No. CV 09 4021664 (January 6, 2010, Cohn, J.); A.C. #31877.
The first issue raised by SCG is that in computing the ROE, the DPUC chose an inaccurate figure for its "discounted cash flow" (DCF) model. SCG argues that the growth rate figure should be set at 5.63% and that there was no logic for the DPUC's choosing of 5.46%. On page 164 of the final decision, the DPUC gave its reason for selecting 5.46% as follows: "The three growth figures calculated, 4.60%, 5.20% and 7.10% have a simple average of 5.63% . . . The average of the range is 5.85% . . . In comparing the simple average with the range average, the Department notes that the historic five-year growth rate is the outlier, and has selected a growth rate (g) nearer the midpoint of the range for use in the DCF calculation. The growth rate figure used by the Department is 5.46%." Moreover, also on page 164, the DPUC stated that its primary purpose for developing the DCF model was to "test the validity of the witnesses' testimony, not to endorse that method's use in this docket." This explanation is certainly rational and based on the record and therefore may be approved by the court under both Wheelabrator v. Dept. of Public Utility Control, supra, 283 Conn. 672 and Connecticut Light Power v. Dept. of Public Utility Control, supra, 266 Conn. 108.
The final decision shows that the DCF model as employed by the DPUC did include a version of an external growth rate. This is another DCF issue raised by SCG. See final decision at 164; DPUC brief at 48-49.
The second issue raised by SCG is that the "capital asset pricing" model (CAPM) employed by the DPUC did not make use of SCG's expert's (Dr. Makholm) updated materials. On the contrary, the final decision at pages 166-67 shows that the DPUC relied on studies provided by both the expert for SCG (Dr. Makholm) and the OCC (Dr. Woolridge). The DPUC found that the two experts had virtually similar outcomes. In addition, the DPUC averaged the DCF result with the CAPM result, so that any adjustment for updated data would have been minimal. SCG cannot show prejudice with the DPUC's approach to determining the CAPM figure. See Tele Tech of Connecticut Corp. v. Dept. of Public Utility Control, 270 Conn. 778, 813, 855 A.2d 174 (2004).
SCG also asks the court to direct the DPUC "to recalculate Southern's CAPM using the same methodology this Court directs in the CNG case." SCG brief at page 27. The court does not understand the nature of this argument. The DPUC reasonably and thoroughly analyzes CAPM on pages 165-67 of its final decision. SCG has also inadequately explained to what "inconsistent timeframes" (SCG brief at 28) it refers. The DPUC has the discretion to analyze evidence from the record as it deems appropriate.
The lack of demonstrated prejudice also resolves the next issue raised by SCG. It claims that the DPUC erred in not allowing it to amortize "accumulated deferred income taxes" (ADIT) in the amount of $4.2 million. On the other hand, the DPUC stated in its final decision that ADIT was a non-recurring "offset" to the rate base that it did not believe was justified. (ROR, final decision at 38.) The DPUC indicates that the $4.2 million would remain in the rate base and SCG would earn a return on this amount.
The court has previously indicated that it adopts the DPUC view that "[SCG's] ratepayers should not have to pay for an expense because a similar adjustment was not addressed in CNG's case." (ROR, final decision, p. 39.)
The next issue raised by SCG is that the DPUC allowed just above $4 million for new business expenditures while SCG had sought $6.7 million. The DPUC reduced the amount allowed because it accepted the OCC's position that the most typical year to compare with the rate year was 2002. SCG argues that the DPUC should have taken an average of five years' expenditures instead. The DPUC, however, permissibly stated:
"The Department agrees with OCC concerning new business expenditures. Given the current and projected rate-year economic environment, housing and business starts can be expected to be at an all time low, not the average of five years with economically dissimilar characteristics." (ROR, final decision, p. 29.)
This issue is also fact-specific to the region where SCG has its business and again a comparison to the CNG final decision is inappropriate.
SCG questions next the amount set by the DPUC for municipal property taxes. SCG asked for $5.388 million while the DPUC allowed $4.77 million. The basis of the DPUC's ruling was that SCG did not present sufficient information to show that these were accurate and required an increase over the prior year's bills. There was no mill rate information nor was there a showing that municipal tax appeals had been taken. (ROR, final decision, pp. 92-93.) The DPUC was justified in computing a figure from the information in the record. ( Id., p. 93.)
SCG argues next that the DPUC erred in not accepting its figure for the non-hardship bad debt write-off (essentially for customers that do not pay their bill for reasons other than poverty or illness). SCG claims that its figure of 2.74% is based on a four-year average, while the DPUC's figure of 1.985% is based wrongly upon the amount allowed in 2008. The final decision states that the DPUC figure is drawn from a decline in bad debts from 2005 to 2008. It raised the allowed amount by $348,692 above the test year amount. (ROR, final decision, pp. 62-63.) The DPUC certainly might make use of the test year figure, which was found more reliable than SCG's four-year average approach. See Connecticut Natural Gas Corporation v. Public Utilities Commission, 29 Conn.Sup. 379, 389, 289 A.2d 711 (1971).
The next issue is the SCG hardship program expenses. SCG set this figure at approximately $4.8 million, while the DPUC allowed approximately $2.8 million. The DPUC, in its final decision, pages 48-49, stated that it had chosen its amount by balancing SCG's requirements against the "noticeable decline" in hardship debt since 2005 and the steep decline in gas prices from the summer of 2008. The DPUC thus appropriately balanced the revenue needs of SCG against protection of the public's interests. See Office of Consumer Counsel v. Dept. of Public Utility Control, 279 Conn. 584, 601, 905 A.2d 1 (2006) (noting "[DPUC's] "broad discretion" as limited by § 16-19e(a)(4)).
SCG also raises a similar concern over a program of hardship forgiveness known as the Matching Payment Plan (MPP). It sought to amortize prior outstanding balances in MPP over a three-year period from 2005-2007. The DPUC concluded that the MPP balances for 2008 better served as a "proxy" for the rate year amortization, because of a decline in MPP grants since 2006. (ROR, final decision, p. 50.) The court, again recognizing the DPUC's "broad discretion," defers to its expertise on this point.
SCG objects to a DPUC conclusion on page 139 of the final decision setting its debt to equity ratio at 48 % to 52%. On page 138, the DPUC found that SCG's current equity was at 58% and that was too "rich" when compared to other utilities. While SCG objects to the DPUC's restrictions, it was within the discretion of the DPUC to make this determination. See Office of Consumer Counsel v. Dept. of Public Utility Control, Superior Court, judicial district of New Britain, Docket No. 08 4019047 (May 11, 2008, Cohn, J.) (approving adjustment of debt/equity ratio).
The next issue raised by SCG relates to the surcharge allowed at page 171 of the final decision, pursuant to § 16-19(g), which provides in part: "The department shall hold . . . a special public hearing . . . on the need for an interim rate decrease . . . when a public service company has, for six consecutive months, earned a return on equity which exceeds the return authorized by the department by at least one percentage point . . . At the completion of the proceeding, the department may order an interim rate decrease if it finds that such return on equity or rates exceeds a reasonable rate of return . . . Any such interim rate decrease shall be subject to a customer surcharge if the interim rates collected by the company are less than the rates finally approved by the department." (Emphasis added.)
As set forth in the interim rate decision of October 24, 2008, the DPUC used "the most recently achieved historical overearnings results for the 12-months ended July 31, 2008 in determining an appropriate interim rate reduction. The [DPUC] will revisit these expenses and rate base items in a fully adjudicated proceeding subsequent to finalizing this § 16-19(g) proceeding result." DPUC Final Decision, October 24, 2008, p. 10.
In the final decision, issued on July 17, 2009, the DPUC set a new rate with a surcharge that commenced after October 1, 2009. On March 4, 2010, the DPUC issued a modification in the surcharge, in light of the new DG project determination. The adjusted surcharge as set by the DPUC is smaller than that requested by SCG. SCG argues that the DPUC should have interpreted the phrase "rates finally approved" in § 16-19(g) to mean that a larger surcharge, calculated on the original 10% ROE, should have been allowed for the period from October 24, 2008 to July 17, 2009.
In its brief, SCG sets the period as running from October 24, 2008 to August 18, 2009.
The DPUC and OCC reply that the permanent rates were finally approved on July 17, 2009 in the final decision. These rates, including a surcharge, were properly placed to reflect corrected earnings from October 24, 2008 to July 17, 2009, based on the 10% ROE. In addition, the setting of two rates would be time consuming and costly.
The court concludes that the DPUC construction of the statute is preferable. It takes into account both the wording of the statute and practical matters of enforcement. Under Wheelabrator Lisbon, Inc. v. Dept. of Public Utility Control, supra, 283 Conn. 692, some deference is due to the DPUC on its "own balance of the regulatory considerations." See also MacDermid, Inc. v. Dept. of Environmental Protection, 257 Conn. 128, 139, 778 A.2d 7 (2001) (favoring "a construction given a statute by the agency charged with its enforcement"). In addition, Office of Consumer Counsel v. Dept. of Public Utility Control, 252 Conn. 115, 118, n. 3, 742 A.2d 1257 (2000), the only appellate case to consider § 16-19(g), notes that when additional over-earning came to light, it was to be resolved in the "full rate case." In addition, the decision notes that "an interim rate hearing results in only temporary rate making until more information is available at a subsequent full rate case hearing." Id., at 124.
Thus, on the final determination of the earnings in the full rate case, there would be one surcharge commencing after the date of the final rate order. As the DPUC stated in its final decision, page 171: "Nothing in the interim rate increase section requires the Department to guarantee a specific ROE, nor to construct a distinct revenue requirement for an ERP period, as the Company insists must be done for the interim rate decrease. On the contrary, the interim rate increase section specifically requires the Department to compare the rates collected on an interim basis to the amounts which would have been collected pursuant to the rates finally approved." See also Southern New England Telephone Co. v. Dept. of Public Utility Control, 274 Conn. 119, 125, 874 A.2d 776 (2005) ("A regulatory commission is powerless to `guarantee' a specified rate of return").
The next contention of SCG is that while the DPUC identified rates of return for nine "proxy companies," it did not make use of these rates of return in a "comparable earnings" analysis. (ROR, final decision, pp. 162-63.) The rates of return from the nine companies, according to SCG, had a mean ROE of 11.6%. SCG argues that the DPUC erred in not following the comparable earnings approach in setting the rate of return in the final decision. On the other hand, the DPUC was legally permitted to decide not to make use of the comparable earnings approach. See Greenwich v. Dept. of Public Utility Control, 219 Conn. 121, 126, 592 A.2d 372 (1991) ("the legislature, however, has not imposed upon the DPUC any specific formula or policy to use in setting rates"); Power Commission v. Pipeline Co., 315 U.S. 575, 586, 62 S.Ct. 736, 86 L.Ed. 1037 (1942) ("[R]ate-making bodies [are not bound] to the service of any single formula or combination of formulas. 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").
It was permissible for the DPUC to develop the list of comparable companies to obtain a basic range of rates of return and to use these proxy companies in its DCF and CAPM analysis. The figures in the companies' rate of returns were not based on the record developed in this rate case, however, and were not binding on the DPUC in preparing its final decision.
The next issue raised by SCG is that the DPUC ordered $22.5 million in short-term debt to be included in SCG's capital structure. (ROR, final decision, pp. 134-35.) The SCG expert, Dr. Makholm, did not believe an allowance for short-term debt was necessary, while the OCC's expert Dr. Woolridge supported short-term debt. SCG argues that the DPUC used out of date data in its final decision; short-term debt is used to finance gas purchases and the cost of gas had dropped at the time of the final decision.
The DPUC, however, stated at page 135: "Southern's short-term debt averaged $22,567,738 during calendar year 2008. Response to Interrogatory OCC-115. Southern regularly uses its Joint Facility for the purchase of gas supply, typically during the winter heating season months. Although it does not always carry a balance of short-term debt, the evidence suggests that short-term debt is relied upon frequently. Response to Interrogatory OCC-115. The Department's analysis indicates that while not a majority of local gas distribution companies include short-term debt in their capital structure, a significant number do. The Department concludes that including short-term debt in the capital structure is not as unusual as Southern has portrayed it." The DPUC has required short-term debt as a back-up resource for SGC. The DPUC decision to add short-term debt, and its decision to credit one expert over another, is within its discretion as a rate-maker.
SCG next argues that the DPUC erroneously reduced its common equity by $13,517,027 which reflects accumulated ammortized goodwill. (ROR, final decision, pp. 136-38.) SCG's position succeeds only if the DPUC is required by law, which it is not, to adopt SCG's actual capital structure. The DPUC did not make such an adoption in its final decision, but has modified it (as seen above, it included $22.5 million in short-term debt). The adoption of a hypothetical financial structure was within the DPUC's rate-making authority.
SCG claims that a federal filing through FERC demonstrates that it had deducted amortized good will in 2000 and 2001. However, the FERC form was never presented to the DPUC as an exhibit, and only referenced with SCG's exceptions to the draft decision. SCG had the burden to move to re-argue after the final decision, pursuant to § 4-181a(a), if it wanted the DPUC to review the FERC form and consider its effect. In addition, the DPUC cannot be criticized for allowing good will to be reflected in common equity in previous rate cases. Each rate case must be considered separately.
In the next issue, under § 16-19e(a)(5), the DPUC is allowed to take into account "that the level and structure of rates charged customers . . . reflect prudent and efficient management of the franchise operation." In the case of MDQ (maximum daily quantity) billings for certain SGC customers, the DPUC penalized SCG 10 basis points for "imprudent management." (ROR, final decision, pp. 113-17.) SCG had not properly billed these MDQ customers on a quarterly basis, but only yearly. This led some customers to be billed too low and others too high. To the degree that SCG objects because it terms this penalty "retroactive rate-making, it is incorrect in this contention, as the rate was not set retroactively, but only prospectively. See Office of Consumer Counsel v. Dept. of Public Utility Control, supra, 279 Conn. 603 (2006).
SGC apparently also contends that the penalty was not warranted because it was unclear why its procedures were inadequate. The record shows, however, that SGC had been advised as many as eight years ago on how the MDQ bills were to be rendered. (ROR, final decision, p. 116.) SGC failed to bill correctly in the amount of $270,502 during the test year. ( Id.) The DPUC thus correctly found that a penalty was warranted.
In the next issue, the DPUC disallowed 15.22 days that were added to working capital for a service lag related to the purchase gas adjustment clause (PGA) of § 16-19b(b). (ROR, final decision, p. 43.) The DPUC found as to the PGA that under its operation the service lag was "zero." SCG apparently argues that the DPUC has in prior rate orders allowed for a service lag under PGA and that the present ruling is inconsistent. As the court has previously stated in this opinion, however, the DPUC is not bound in ruling on a rate application to follow past rulings. See Connecticut Natural Gas Co. v. Dept. of Public Utility Control, supra, 183 Conn. 128, 135 (discussing lag time and prior orders of DPUC).
It incorporates this by reference to the brief filed in CNG.
SCG also apparently argues that the DPUC erroneously concluded that the service lag under PGA was "zero." The DPUC should have focused not only on the "differences between the estimated and actual price of purchased gas," but also the service lag when CNG "renders service or reads a customer's meter." (Reply brief, CNG appeal, p. 9.) However, the court defers to the expertise of the DPUC. See Connecticut Light Power Co. v. Dept. of Public Utilities Control, supra, 216 Conn. 644. The DPUC concluded that the PGA methodology aligns meter readings with service rendered and eliminates the service lag. (ROR, final decision, p. 43.) This conclusion was also reached by the DPUC with a retained consultant in Docket No. 07-04-01 which reviewed the PGA and found no service lag.
SCG next contests the DPUC's treatment of projected expenses and regulatory asset treatment of six non-qualified retirement plans (essentially for officers and directors). The DPUC denied the expenses and regulatory asset treatment on the ground that these expenses gave the ratepayers no current benefit and were inappropriate in these challenging economic times. (ROR, final decision, pp. 73-74.)
The claim is apparently made that SCG will have to pay pension benefits to attract higher level employees. While these expenses have been allowed in the past, in 1995, the DPUC has noticed utilities that it would not allow such expenses in a poor economy. Docket No. 95-02-07, October 13, 1995, Application of CNG for Rate Increase. Moreover, the decision to deny the retirement fund expenses was merely part of the balancing of varying factors in which the DPUC engaged in setting the rates in the final decision. See Connecticut Light Power v. Dept. of Public Utility Control, 219 Conn. 51, 64, 591 A.2d 1231 (1991).
The next point that SCG raises is that in the final decision at page 140, the DPUC rejected its request to show long-term merger debt at 7.24%; instead the DPUC set this figure at 7.19%. The DPUC based its figure on sales of medium-term notes issued by SCG in 2004 and 2005. The DPUC also stated: "While the Department believes it appropriate to exclude the effects of the merger-related expenses, the approved capital structure has more debt and less equity in it than Southern's actual capital structure. As such, it is appropriate to assign some of Southern's equity to merger-related financing and some of the merger-related debt to Southern's approved capital structure." The DPUC's conclusion is reasonable and supported by the record.
SGC next argues that the DPUC erred in the final decision, pages 41-42, in not allowing SCG to amortize $1,973,000. This figure was a one-time expense for its proposed change from six to three months to write off uncollectible accounts. The DPUC approved the shorter write-off period, but refused amortization of the one-time expense, not "leaving this policy change to the discretion of [SCG]." The DPUC could reasonably conclude, as it did, that the policy change did not materially impact SCG revenue requirements, such that the amortization was required.
The next issue raised by SCG relates to district regulators and gate stations. SCG requested $421,000 for the rate year for these expenditures. The DPUC surveyed SCG projects for the past ten years and allocated $169,000. SCG objects to the amount as arbitrarily low. The choice by the DPUC to select this figure, based on the record and its understanding of economic conditions, cannot be set aside by the court as outside the discretion of the rate-maker. The discretion of the DPUC also extends to SCG's claims that the DPUC did not allow for certain technological related devices. (SCG brief, pp. 39-40.)
The court also has reviewed the section of the final decision relating to affiliate charges to SCG by its parent, Energy East, and a related company, Utility Shared Services. (ROR, final decision, pp. 81-82.) The DPUC correctly refused, for the reasons stated above, to allow a charge for non-qualified pension plans. The stock option charge was correctly viewed as a non-recurring expenditure.
Finally, SCG complains that in the final decision, pages 83-85, the DPUC did not allow expenses for two leakages that SCG had to remedy — one at Chapel Street in New Haven, the other at Marsh Hill Road in Orange. The DPUC precedent is that such charges are not allowed unless they relate to coal tar and are not non-reoccurring. The DPUC concluded that the charges did not fall within this precedent (at New Haven a one hundred year old pipe broke, at Orange, hydraulic lifts failed).
The court has discussed the contentions of SCG and finds them without merit. Therefore, the appeal is dismissed.