PUBLIC SERVICE COMMISSION OF WEST VIRGINIA

CHARLESTON a*- Entered: Ju ly 1. 1983

CASE NO. 81-320-E-D

MONONGAHELA POWER COMPANY, a corporat ion.

P e t i t i o n f o r Change of Depreciation Rates Pursuant to Rule 20 of the Commission's Rules of Practice and Frocedure.

CASE NO.

THE POTOMAC EDISON COMPANY, a corpora t ion ,

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P

Request t o Change Depreciation Rates Pursuant to Rule 20 of the Commission's Rules of Practice and Procedure.

HEARING EXAMINER'S DECISION

PROCEDURE

ZASE NO. 81-320-E-D

On Ju ly 15, 1981, Monongahela Power Company ("Mon Power"), a

so rpora t ion , f i l ed a pe t i t i on pu r suan t t o the appl icable p rovis ions o f

Zhapter 24, Article 4, o f t h e West Virg in ia Code ("Code"), 'ps amended,

znd Rule 20 of the Commission's Rules of Practice and Procedure, to

2hange i t s deprec ia t ion ra tes , e f fec t ive October 1, 1981.

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By Commission order en te red on August 2 7 , 1981, use of. the proposed

shanges i n d e p r e c i a t i o n r a t e s was defer red pending inves t iga t ion and

?ubl ic hear ing .

On September 1 6 , 1982, t h i s matter was set for hear ing to be he ld

in the Commission's Hearing 'Room a t t h e C a p i t o l i n t h e C i t y of Charleston

In October 7 , 1982. A t t h a t time and place the respondent was t o appear

2nd offer evidence in support of i t s request.ed changes in dep rec i a t ion

r a t e s , and anyone i n t e r e s t e d was granted leave t o appear and make such

Ib jec t ion t o the proposed changes, as might be deemed proper. Notice of

:he f i l i n g o f t he pe t i t i on and of the time and place of hearing was t o

)e given by Mon Power by publ ishing a copy ,of t h e Commission's September

L6, 1982 o r d e r , a t least once between the date of The order and October

7 , 1982, i n newspapers published and of general circulation in each of

:he Cities of Clarksburg, Elkins, Fairmont, Grafton, Keyser, Lewisburg,

{organtown , Parkersburg , and Weirton. Due return of proper c e r t i f i c a t i o n

If publ ica t ion was t o be made t o t h e Commission on o r be fo re t he day of

:he hear ing . Conta ined wi th in the case f i l e a re a f f idavi t s o f publ ica t ion

, .

and post ing which indicate substant ia l compliance with the not ice requir

ments of the Commission's September 16, 1982 o rde r .

On October 6 , 1982, a motion was f i l e d by Commission's S t a f f

r eqes t ing a continuance of t h i s matter. The purpose of the continuance

was to allow continued informal discussions which would hopefully lead

t o a s t i p u l a t i o n i n t h i s matter, I t was requested that the October 7 ,

1982 hear ing be cancel led, and a new hearing be rescheduled for October

1 9 , 1982.

Hearing was he ld on October 7 , 1982, as previsouly scheduled. Appea:

i n g a t t h a t h e a r i n g were Thomas C . Sheppard, J r . , Esquire , in behalf of

the respondent , Mon Power, and William H . Rober . ts , Esquire , in behalf of

Commission's S t a f f , A t the hear ing S ta f f renewed i t s motion, and i t was

granted with the mat ter being rescheduled for hear ing to be held on

October 18, 1982.

By Procedural Order issued on October 15, 1982, the hearing scheduled

for October 18, 1982, was cancel led. The mat te r was rescheduled for

fu r the r hea r ing t o be he ld on October 2 9 , 1.982.

Hearing was he ld on October 2 9 , 1982, as previously scheduled.

Appearances a t tha t hear ing were the same as those made a t t h e October

7 , 1982 hear ing , A t the conclusion of the taking of testimony and

presentat ion of evidence, pending receipt o f b r ie fs submi t ted in accord-

ance wi th the schedule es tab l i shed a t the hear ing , th i s mat te r was

submit ted for a dec is ion .

CASE NO. 82-347-E-D

On July 20, 1982, The Potomac Edison Company ("Potomac Edison"), a

c o r p o r a t i o n , f i l e d a pe t i t i on pu r suan t t o t he app l i cab le p rov i s ions of

Chapter 24, Article 4 , of the Code as amended, and Rule 20 of t h e

Commission's Rules of Practice and Procedure to change i t s deprec ia t ion

r a t e s .

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By Commission order en te red on September 7 , 1982, Potomac Edison

was made respondent to this proceeding, and pending investigation,

hearing and decision, the requested changes were suspended and t h e

u s e o f t h e r a t e s d e f e r r e d u n t i l f u r t h e r o r d e r of t h e Commission. The

purpose o f the suspension and deferral was to enable the Commission

t o examine and i n v e s t i g a t e t h e d a t a f i l e d w i t h t h e ' r e q u e s t and to provide

time f o r t h e Commission's S t a f f t o make a study and report concerning the

. .

mcitters involved, The September 7 , 1982 o rde r a l so set t h i s m a t t e r f o r

hea r ing t o be he ld i n t he Commissi.on's Hearing Room a t t h e C a p i t o l i n t h e

City of Charleston on December 16 , 1982. . A t t h a t time and place the

respondent was requi red t o appear and offer evidence in support of i t s

reques ted change in deprec ia t ion ra tes , and anyone%interes ted was granted

leave to appear and make such objection thereto, as might be deemed

proper.

Although not required by t h e Commission, Potomac Edison gave notice

of i t s p e t i t i o n t o change i t s depreqiation rates, and of the scheduled

hear ing date . This not ice was made by post ing in conspicuous places

where b i l l s f o r e l e c t r i c s e r v i c e a r e p a i d , and by publ ica t ion of a copy

of the Commission's September 7 , 1982 order in newspapers published and

.of general c i rculat ion throughout the area served by Potomac Edison.

A f f i d a v i t s v e r i f y i n g t h i s n o t i c e a r e l o d g e d i n t h e c a s e f i l e on t h i s

matter.

Hearing was he ld on December 1 6 , 1982, as previously scheduled.

IIAppearing a t tha t hea r ing were Thomas C . Sheppard, Jr. , Esqu i re , i n II behalf of the respondent , Potomac Edison, and William H. Roberts, Esquire

in beha l f o f t he Commission's S t a f f . A t the conclus ion of the t ak ing I of testimony and presentation of evidence on t h a t d a t e , i t was determined

t h a t t h e t r a n s c r i p t h a d n o t y e t been re turned for Case No. 81-320-E-D,

and the re fo re no b r i e f s had been f i l e d . It was therefore dec ided tha t ,

s ince the i s sues in bo th cases were the same, one b r i e f f o r t h e two cases

could be f i l ed . A schedule was e s t ab l i shed fo r t he submiss ion o f b r i e f s ,

and pending receipt of t h o s e b r i e f s , the matter w a s submitted f o r a

decis ion .

Br i e f s were submit ted in accordance with the schedule es tabl ished

a t t h e December 1 6 , 1982 hear ing. Based upon those b r ie fs , and the

testimony and evidence presented, this decision i s reached,

DISCUSSION OF THE EVIDENCE INCLUDING FINDINGS OF FACT

For purposes of this decis ion, reference to the t r a n s c r i p t s w i l l be by t h e i n i t i a l s o f t he t e s t i fy ing witness, followed next by the t ranscr ipt volume, and fo l lowed f ina l ly by the per t inent page of t h e t r a n s - c r i p t , e . g . , . ( A B C , Vol. I , p . 0 ) . The t r a n s c r i p t from the October 7 , 1982 proceeding (Case No. 81-320- E-D) w i l l b e c i t e d a s "Vol. I", and t h e t r a n s c r i p t from t h e December 16 , 1982 proceeding^ (Case No. 82-347-E-D) w i l l be c i t ed a s "Vol. 11. I t Exhib i t s w i l l be re fe r red t o as marked fo r i den t i f i ca t ion pu rposes and /o r en t e red into evidence.

. .

CITED WITNESSES

DLF - David L. Fink JWN - James W. Nicol JWC - Jimmie W. Crider

Through these filings, Mon Power and Potomac Edison are seeking

?ermission to change their depreciation accrual rates' to more accurateiy

reflect the latest estimates of asset lives. The proposed changes are

Jased on studies which were performed for each utility. The study for

9on Power was broken down into four asset categories: production, trans-

nission, distribution and general plant; the study for Potomac Edison

involved only the first three categories. (DLF, Vol. I, pp. 9 - 1 0 , 1 5 ;

9on Power Ex. No. 2 ; Potomac Edison Ex. No. 2 ) . Production plant and

step-up substations at power stations were studied using the life-span

study method, Transmission and distribution plant were studied using

the Simulated Plant Records (''SPR") method developed by Iowa State

Jniversity. General plant was also studied using the life-span study

nethod (for Mon Power only). Based,upon'those studies, the following

increases in depreciation expense for each company's West Virginia

jurisdictional operations were originally requested:

ASSET CATEGORY MON POWER

Production 3 , 5 4 7 , 6 6 0 6 0 1 , 3 6 0 Transmission 6 4 0 , 4 7 9 1 0 2 , 3 7 4 Distribution 1 , 4 0 2 , 4 1 2 1 3 6 , 7 1 6 General Plant - 8 , 4 3 4 -

T - POTOMAC EDISON

Total 5 , 5 9 8 , 9 8 5 - 8 4 0 , 4 5 0

(Mon Power Ex. No. 2 , pp. 1 - 2 ; 'Potomac' Edison Ex,. No, 2 , . pp. 1 - 2 ) .

A more detailed compilation of each company's depreciation accruals

is found on page 2 of each company's Exhibit No. 2 . .Those studies clear1

reveal many asset retirements in excess of theoretical retirements. The

primary significance of this is that it indicates that depreciation

sccrual rates currently in use are not adequte for the estimated asset

lives to correspond with actual asset-life experience. i.e., actual

ssset lives in many instances have proved to be substantially shorter

than projected by the original interim retirement curves. Without

nodification of the current accrual rates, several million dollars

uoreh of assets will be taken out of service before being fully depreciatec

(DLF, Vol. I, pp. 1 2 - 1 5 ; Mon Power Ex. No. 1, p. 8 ; Potomac Edison Ex.

Yo. 1, p. 8 ) .

As indicated above, the SPR method was used to study each company's

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transsfiission and distribution accounts. This was done because the 'data

ava i lab le to per form comple te ac tuar ia l s tud ies -- t h e p r e f e r r e d method-

ology - - was inadequate t o de r ive a curve t o compare with the general ized

survivor (Iowa) curves. The SPR method i s t h e same one used by each

company in o the r ca ses submi t t ed t o , and accepted by, th is Commission.

(Mon Power Ex. No. 1, pp. 4 - 6 ; Potomac Edison Ex. No. I, pp . 4 - 6 ) . A s a

r e su l t , t he re a r e on ly minor chan.ges i n t h e a c c r u a l r a t e s f o r assets i n

the t ransmiss ion and d i s t r i b u t i o n c a t e g o r i e s . The main changes made i n

them are due t o s l i g h t changes i n a s s e t l ives and salvage values,

primarily being caused by increased labor and veh ic l e cos t s . Also , while

f o r Mon Power t h e r e was included a s tudy of general p lant a s se t s , t h e

r e s u l t s were no t g rea t ly d i f fe ren t f rom the cur ren t accrua l ra tes . (Mon

Power Ex. No. 1, p . 9 ; Potomac Edison Ex. No. 1, p . 9 ) .

The major changes i n a c c r u a l r a t e s f o r e a c h company a r e i n t h e p r o -

duct ion plant category. Two factors have pr imari ly lead to those changes

F i r s t , when Mon Power and Potomac Edison approached t h i s Commission i n

1978 and 1 9 7 9 , r e spec t . i ve ly , t he Commission adopted each company's

deprec ia t ion ra tes based upon an an t i c ipa t ed l eve l o f r e t i r emen t s i n t he

new s u p e r c r i t i c a l power s t a t ions . Ne i the r Mon Power nor Potomac Edison,

n o r t h e e l e c t r i c i n d u s t r y a s a whole for that mat ter , had any experience

with the stresses and opera t ing charac te r ics o f supercr i t ica l equipment .

Accordingly, educated estimates had to be used based on experience with

nonsupe rc r i t i ca l s t a t ions . Recen t , e a r l i e r - than -expec ted l a rge r e t i r e -

ments i n p r o d u c t i o n f a c i l i t i e s h a v e c r e a t e d a l a r g e n e t d e b i t i n e a c h

company's d e p r e c i a t i o n r e s e r v e . I f t h i s s i t u a t i o n i s no t co r rec t ed ,

a c o n d i t i o n r e f e r r e d t o as "permanent r a t e base" L/ w i l l r e s u l t and

1 Permanent r a t e b a s e i s a term used by Witness Fink t o def ine a s i t ua t ion wh ich r e su l t s when u t i l i t y p l a n t i s r e t i r e d b e f o r e it i s f u l l y depreciated. Ret i red plant which i s no t fu l ly dep rec i a t ed c r ea t e s a debi t (cont ra ) en t ry to deprec ia t ion reserve equal to the undeprec ia ted cost of the asset . This i s a resul t of the mechanics of depreciat ion accounting: When one writes o f f any r e t i r e m e n t , t h e a s s e t c o s t i s c red i t ed t o p l an t i n s e rv i ce , t he reby r educ ing g ross p l an t i n s e rv i ce , and a corresponding debi t entry i s made to dep rec i a t ion r e se rve . When the deb i t t o dep rec i a t ion reserve exceeds the amount o f t he a s se t p re - v ious ly c red i ted t o the account , i t c r e a t e s a permanent reduction in the depreciat ion reserve account (which resul ts in an increase in net p lant i n s e r v i c e [ ra te base ] ) un t i l t he undeprec ia t ed po r t ion i s e i t h e r amor t ized , an a f f i rmat ive e f for t i s made t o remove i t , o r a c c r u a l r a t e s sre changed so t h a t a c t u a l a s s e t l ives a re longer than provided for in t he acc rua l r a t e s . (Mon Power Ex. No. 1, pp. 10-11; Potomac Edison Ex. No. 1, pp. 10-11; DLF, Vol. I , p . 2 5 ) . This accounting i s d i f f e r e n t from what an unregulated enti ty would use. It would recognize a gain o r loss on the undeprec ia t ed po r t ion a t t he time t h e a s s e t i s r e t i r e d -- something u t i l i t i e s cannot do. (DLF, Vol. I, pp. 26-28, 30-31).

; -5-

. . . . . ""

custoiners will have to pay a return on it until it is amortized (removed:

from the reserve. (Mon Power Ex. No. 1, p. 9; Potomac Edison Ex. No.

1, p. 9; DLF, Vol. I, pp. 28, 31-32).

Secondly, there have been additional net debits related to the

removal of the retired assets. In some instances, the net cost of

removal has exceeded the original removal cost estimates. This has also

caused permanent rate base. Like the early retirements, these costs

must be handled in some manner to remove the permanent rate base. Furtht

future estimates must be adjusted to reflect lower.net salvage values so

that it can be assured that this condition will not recur, (Mon Power

Ex. No. 1, p. 10; Potomac Edison Ex. ?YQ, 1, p . 1 0 ) .

, I

The companies' proposed solution to the permanent rate base problems

involves amortizing the permanent rate base arising from these two

factors. Specifically, since the interim retirements curve includes a

factor for early retirements, it is recommended that retirements above

or below this amount each year be amortized through a depreciation

accrual. To keep the accrual in line with actual experience, each

company would submit annually to the Commission a five-year history of

retirements for review, along with the level of retirements included in

the current interim retirements curve. The net amount over or under the

interim retirements shown by the current curve would then be amortized

over five years. This should keep the amortization relatively accurate

and current. (Mon Power Ex. No. 1, p. 12; Potomac Edison Ex. No. 1, p.

12; DLF, V O ~ . I, pp. 32-35, 37).

Neither company recommends changing the current interim retirements

curve to increase the allowance for interim retirements. This is because

the interim retirements curve is designed to make allowance for "normal"

early retirements that occur in a "predictable" pattern. Such normal

early retirements would include pipes, motors and conveyors. The retire-

nents which have .occurred in the last two years do not fit the companies'

definition of "normal" or "predictable. I ' Instead, they are considered

t o be somewhat extraordinary in that they involved large dollar amounts

and included complete mechanical systems. (Mon Bower Ex. No. 1, pp. 12-

13; Potomac Edison Ex. No. 1, pp. 12-13).

Somewhat tempering the companys' joint opinion concerning the

lormalcy and predictability of these items are actual experiences which

nave occurred during the two years sime the study was performed. While

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the exact same problems have not been experienc'ed, each company has

continued to experience early retirement of large dollar amounts of

complete mechanical systems. Thus, the problems with early retirements

now are recurring in nature, and are fast-becoming ordinary rather than

extraordinary, i.e., normal and predictable. Nevertheless, it is

believed that it will take another five-ten years of actual experience

before it will be known whether amortization should be discontinued and

interim curves should be changed. (DLF, Vol. I, pg. 5 8 - 5 9 , 7 4 - 7 5 ) .

For each company, Staff reviewed their depreciation study, and

based on its review, found them, for the most part, to b.e reasonable and

proper. Accordingly, Staff generally accepted the figures the studies

establish. (JWC, Vol. 11, pp. 3 5 - 3 6 ) .

Differences between Staff and the companies were settled through

negotiations. A joint stipulation and agreement reflecting the

negotiated settlement is in evidence for each case, and Appendix B to

each stipulation reflects the settlement of all issues except the issue

of how to handle permanent rate base, and the issue of when the companies

should be required to begin booking the new accrual rates subsequently

approved herein. (Joint Stipulation Ex. No. 1 [in each case]; DLF,

Vol. I, pp. 2 2 - 2 4 ) . The following table summarizes the stipulated

depreciation accrual rates:

ASSET CATEGORY MON POWER POTOMAC EDISON

Production 2 , 9 1 4 , 5 8 1 4 1 8 , 1 7 2 Transmission 6 3 9 , 7 6 5 7 1 , 6 6 4 Distribution 9 2 1 , 8 5 1 1 1 3 , 1 2 8 General 'Plant 8 , 4 3 4 -

---"- 7

Total 4 , 4 8 4 , 6 3 1 6 0 2 , 9 6 4

The Mon Power joint stipulation results in a net difference of

$ 1 , 1 1 4 , 3 5 4 between what the company sought, and what was stipulated to,

Primarily, this difference is due to the elimination of $ 8 6 7 , 3 8 3

( $ 3 , 5 4 7 , 6 6 0 $ 4 , 1 9 2 , 6 0 9 x $ 1 , 0 2 5 , 0 7 0 ) associated with permanent rate

base, and the amount necessary to correct a substantial error in the

company's study. The remainder of the difference is, for the most part,

associated with changes in the estivated salvage values and costs of

removal. (Joint Stipulation Ex. No. 1, Appendices A and B; JLC, Vol. I,

pp. 8 9 - 9 2 ) . For Potomac Edison, the stipulation is $ 2 3 7 , 4 8 6 below the

amount originally sought by the company. Of this reduction, $ 1 9 1 , 2 0 8

( $ 6 0 0 , 6 7 3 L $ 3 , 5 3 8 , 3 6 4 x $ 1 , 1 2 6 , 3 4 2 > is associated with the elimination

of permanent rate base. Once again, the rest is associated with changes

in the estimated salvage values and net costs of removal. (Joint Stipu-

lation Ex. No. 1, Appendices A and B; JLC, Vol. 11, pp. 34-35).

It is the joint position of the companies that the stipulations will

hopefully prevent formation of additional permanent rate base since the

accrual rates are being altered. (DLF, Vol. I, p. 36). However, a s is

indicated, the stipulations do not address the problems associated with

existing permanent rate base, Instead, evidence was presented to support

different conclusions as to how this should be handled.

The companies feel that present day customers should pay for the

amortization of permanent rate base as opposed to deferring it for

future customers. (DLF, Vol. I, p . 42) . Amortization would be done ovel

five years in the manner discussed above. Until amortization commences,

and during the entire period of amortization, all unamortized permanent

rate base would remain in rate base, and would have a return earned on

it. (DLF, Vol. I, p. 70) .

With regard to permanent rate base, it is Staff's opinion that:

"the company at this point in time has not proven their (sic) case to us that an amortization of the difference between what . , . the interim retirement curves that they (sic) are (sic) using and what the actual retirements have been . . . justifies a departure that would . . [result in] amortization of a balance of dollars that are (sic) actually not represented by anything specifically, other than what an interim retirements curve says the level of retirements should be, and what, in fact, the retirements have been."

(JWC, V O ~ . I, pp. 92-93).

To support its position, Staff points out that while each company's

study covered a five year period (1977-1982), it is allegedly in the

last two years (1981-1982) that most of the permanent rate base has

developed. Also, Staff knows o f at least one large anticipated retire-

ment of $875,000 which has been delayed. (JLC, Vol. I, pp. 93-94, 108-

109) . Moreover, for Mon Power, Staff considers the five year total of

amortization involved, $5,125,352,, to be insubstantial and to not warrant

any action at this time; the five year total 'of amortization is only .19%

of the company's $430,781,000 West Virginia jurisdictional investment.

(WLC, V O l . I, pp. 9 4 - 9 5 ) .

Staff did not summarily reject the permanent rate base issue. Instea

i-t made an attempt to determine what specific asset retirements were

creating permanent rate base. However, it found it impossible to

reconcile different lists of retired assets, and th.erefore has accepted

the companies' joint statement that there appears to be a problem, and

. .

3ccordingly, Staff w i l l continue t o watch it . I n two t o t h r e e years,

Staff may have enough information available to agree with the company.

3owever, f o r now i t i s be l i eved t ha t s ince t he l i f e span method i s "one

3ig averaging process" which may experience short-term imbalances, it

should in the long run cor rec t i t s e l f . (JLC, Vol. I , pp. 95-98, 101-

103) . Staf f ' s f ina l reason for oppos ing amor t iza t ion i s tha t whi le i t

2grees with the companies' new deprec i a t ion acc rua l r a t e s , due t o t h e

subjec t iv i ty involved in the l i fe -span method, the rates may prove t o b e

vrong, o r t h e r e may be other equal ly val id curves which would l e a d t o

I d i f f e r e n t r e s u l t . ( JLC, Vol. I , pp. 98-100).

I f S ta f f had been ab le to ob ta in a s p e c i f i c i d e n t i f i c a t i o n o f t h e

Issets c rea t ing permanent ra te base , it would have accepted amortization

If it through Account No. 182 of the Uniform System of Accounts, a t

Least t o t he ex t en t t he ea r ly r e t i rmen t s a r e cons ide red ex t r ao rd ina ry .

(JLC, Vol. I, pp. 95-98, 101-103) . In the event i t decided to amort ize

Iermanent r a t e b a s e , S t a f f recommends excluding i t from ra te base dur ing

:he per iod of amor t iza t ion . (JLC, Vol, I, pp. 1 1 7 - 1 1 9 ) .

The companies did not use Account No. 182 t o write off permanent

ra te base as ex t r ao rd ina ry l o s ses fo r t h ree r easons : (I) s p e c i f i c p e r -

nission must be obtained from FERC pr io r t o do ing s o ; ( 2 ) t h e companies

j o no t be l i eve i t i s a proper use of the account; and, ( 3 ) the i s sue o f

a i n g it never came up u n t i l S t a f f r a i s e d it . E s s e n t i a l l y , t h e companies

cons ide r t he ea r ly r e t i r emen t s t o be somewhat ex t raord inary , bu t no t

" that" extraordinary such tha t using Account No. 182 i s warranted.

(DLF, Vol. I, pp. 59-60).

There are numerous cons ide ra t ions i n f avor o f t he pos i t i on t aken by

each party. Admittedly, a port ion of this problem i s r e l a t e d t o a

change in philosophy by the companies a s t o how to handle deprec ia t ion

of assets , Th i s has r e su l t ed i n an i nc rease i n t he amount of p lan t

re t i rements . (DLF, Vol. I, pp. 54-55) . , 'Despi te the fac t tha t the need

to change accrual ra tes i s somewhat self- induced by the companies,

S t a f f cons ide r s t he new accrua l , rates more accura te than those p resent ly

i n u s e . (JWC, Vol. I, p. 9 0 ) . However, s ince i t w i l l be sometime

before it i s known whether the interi 'm' retirement curves should be

changed, Staff prefers to defer any act ion.

. ( - _. .- ."

One problem with the Staff position is that the evidence does

not completely support its contention that the permanent rate base

primarily developed over the last two years; While a substantial amount

did develop in those years, it also developed in prior years. The actua:

experience with permanent rate base for Mon Power is:

YEAR

1 9 7 7 1978 1979 1980 1981 1982

- AMOUNT

759,364 (125,424) 411,904 510,130 535,078

1,523,875

-"--

(JWC, Vol. I, pp. 136-137).

Moreover, there is an internal inconsistency in accepting 'new

depreciation accrual rates, and at the' same time arguing that while the

rates should be accepted, previous years' excesses of actual retirements

over theoretical retirements should not be amortized because the curves

establishing the new accrual rates may later prove to be wrong ( JLC,

Vol. I, pp. 98-100; 110-113): Either they are right or they are not.

Finally, accepting the contention. that the inability to identify

specific items causing permanent rate base warrants not doing anything

would only serve to defeat the primary benefit of mass accounting. ( JLC,

Vol. I, pp. 121-122). In mass accounting, specific items are not

identified, rather gross dollar amounts are used. This facilitates an

ease of accounting without compromising the accuracy of the records kept.

To require that specific items be accounted for would sacrifice this

benefit.

After considering the evidence as a whole, the Wearing Examiner

finds it appropriate to take action with regard to permanent rate base.

It is a relatively subjective determination as to whether or not the

amount involved is substantial at this point in time, but since recent

experience indicates that early retirements are continuing, and are

becoming normal and recurring, amortization should be commenced. As a

safeguard that this amortization may be wrong, the company has not

sought amortization of the .full difference between the theoretical

reserve and the actual reserve. ( JLC, Vol. I, pp. 113-114). Furthermore

the annual reviews which will be conducted will allow the amortization

to remain consistent with actual experience. Thus, if actual experience

were to reverse itself and assets last longer than the depreciation

. . n

ll . ,

accruals provide, th is procedure would be used t o o f f s e t t h e permanent

r a t e base amor t i za t ion un t i l ' a change i n t he i n t e r im r e t i r emen t s cu rves

i s deemed advisable . (DLF, Vol. I , p . 62) .

This decis ion may be considered to be a departure from what i s

l l typical ly required by Rule 20 of the.Ru1,e.s of Practice and Procedure. Tc

t h e e x t e n t t h i s may be t rue , the Hear ing Examiner s t i l l i s of the opinior

t h a t i t should be approved on an experimental basis so t h a t t h e r e s u l t s

o f hand l ing dep rec i a t ion i n t h i s manner can be compared with what would

occur under normal procedures, and also what might have occurred under

other depreciat ion methods such as remaining l i fe . This should be

e s p e c i a l l y b e n e f i c i a l due to the l imi ted exper ience by a11 with super-

c r i t i c a l e l e c t r i c a l g e n e r a t i n g p l a n t s .

F ina l ly , w i th r ega rd t o t he pe rmanen t r a t e base i s sue , i t should be

removed from rates base. It i s a common concep t and p rac t i ce i n u t i l i t y

regula t ion tha t asse ts which a re no longer used and useful be excluded.

This i s c l e a r l y t h e c a s e h e r e , and the re fo re , exc lus ion i s warranted.

The sole remaining issue concerns the time for implementation of the

depreciat ion accrual ra tes being approved herein. It i s the companies'

posi t ion that the depreciat ion changes should be made as soon as possible

to properly match revenue and expenses, but before doing s o , correspond-

ing revenue changes must be made based on cost of s e r v i c e r e f l e c t i n g t h e

increased depreciat ion expense. (JWM, Vol. 11, p . 2 4 ) . In other words,

t h e companies want depreciation expense t o match revenues including that

deprec ia t ion , no t necessar i ly deprec ia t ion matching the time period

over which the depreciable asset is being consumed. (Potomac Edison Ex.

No. 3 , pp. 1-3; JWN, Vol . 11, pp. 2 7 - 2 9 ) . Un t i l a cos t o f se rv ice i s

approved i n a r a t e c a s e which includes an allowance for the increased

deprec i a t ion acc rua l s , t he companies propose to con t inue t o u se t he

cu r ren t acc rua l r a t e s . (Potomac Edison Ex. 3 , p . 3 ; DLF, Vol. I , p . 83).

The companies t a k e t h i s p o s i t i o n n o t o n l y t o o b t a i n what they

consider proper matching, but also because they consider depreciation t o

be different from other expenses which might be increased prior to

inclusion in an approved cost of s e rv i ce . The pr imary differences deal

wi th the fac t tha t deprec ia t ion expense a f fec ts to ta l expense on t h e

income statement, and accumulated depreciation and plant in service on ,

the ba lance shee t . To t h e e x t e n t t h a t n e t p l a n t i n s e r v i c e a l s o a f f e c t s

t h e income statement through the amount of r a t e b a s e on which a company

is allowed to earn a return,,’it a lso affects total return, and ultimately

rates (revenue levels). (JWC, .Val. I, pp. 122-123). If the new

depreciation rates were implemented immediately, all of the foregoing

items, except rates, would be .affected. This would allegedly result in

depriving the companies’ shareholder of the opportunity to earn both a

return on, and of, his investment. (JWC, Vol. I, pp. 124-125).

The company also considers depreciation to be special based on the

contention that the companies lack control over it. Specifically, Rule

20 requires application and 60 days notice to the Commission prior to a

utility changing its accrual rates, However, the rule does not require

booking immediately upon approval. A s a result, while a utility can, to

a certain extent, control such things as employee wages, it is the Commis

sion which ultimately controls depreciation. (DLF, Vol. I, p . 80).

While pointing out this difference, the company admits that other

rate base items, such as new plant additions, are not included in rate

base and cost of service immediately.. However, the company contends that

they generate revenues, and thus cover their costs, (JWN, Vol. 11, p.

It is Staff’s position that the companies should begin booking the

new depreciation accrual rates upon approval. In most cases the Staff

witness has been involved in, if no rate case was associated with the

depreciation case, the accrual rates became effective on the first day of

either January or July. (JLC, Vol. I, pp. 104-105; Staff Ex, JWC-1).

Thus, in Staff’s opinion, there would be no precedent for delaying

implementation of the new rates.

Staff also contends that the companies are seeking an improper

matching: they seek to match depreciation with rates including increased

depreciation expense when. the purpose of depreciation is to match the

cost of the portion of the assets consumed .over the period of its

consumption. To accomplish this purpose,’ booking the new rates irrmdiately

is required. (JWC, Vol. 11, pp. 37-38, 55-56) .

I

Staff also disagrees with the companies’ contention that it cannot

control depreciation. This disagreement stems from the fact that it is

the company which must choose .to file a depreciation case, and in its

filing, it proposes the effective date. The only,thing the utility lacks

control over is what the ultimate decision will be. (JWC, Vol . 11, pp.

37-38, 55-56).

. I " ""

This i s sue e s sen t i a l ly i nvo lves no t on ly some fac tua l f i nd ings , bu t

a l s o some legal conclusions. Therefore , before resolving i t , i t would be

best t o see what t h e a p p l i c a b l e law provides.

DISCUSSION OF APPLICABLE LAW INCLUDING CONCLUSIONS OF LAW

Rule 2 0 of the Commission's Rules of Practice and Procedure provides

a s t a r t i n g p o i n t f o r a s c e r t a i n i n g t h e law app l i cab le to th is case . That

Rule r e q u i r e s e a c h p u b l i c u t i l i t y which d e s i r e s t o a l t e r i t s deprec ia t ion

r a t e s t o f i r s t f i l e c e r t a i n i n f o r m a t i o n w i t h t h e Commission concerning

the proposed changes. (Rule 20(a)). This f i l ing must be made a t l e a s t

s i x t y d a y s p r i o r t o t h e l a s t day of the month i n which the change w i l l

f i r s t be r e f l ec t ed on t h e company's books. ( I d . ) . - A s i s i nd ica t ed

p rev ious ly , t he f i l i ng must a l s o i n d i c a t e t h e e f f e c t i v e d a t e o f t h e

proposed changes. (Rule 20 (a) 1).

Based upon the Hearing Examiner's own r e sea rch , and t he b r i e f s

submitted by t h e p a r t i e s , t h i s c a s e a p p e a r s t o be a mat ter of f i r s t

impression insofar as when new deprec ia t ion acc rua l r a t e s should become

e f f e c t i v e when t h e r e i s no companion r a t e c a s e i n which t o incorpora te

those r a t e s i n a cos t o f se rv ice . S ta f f Ex. J W C - 1 seems to conf i rm th i s .

go twi ths tanding the fac t tha t i t i s a matter o f f i r s t i m p r e s s i o n , p r i o r

zases should s t i l l be examined t o see what guidance, i f any, they can

?rovide.

For many yea r s t he Commission has he ld in ra te cases tha t changes

in depreciat ion ra tes cannot be sought to support an increase in ra tes .

?or example, i n Amere Gas Ut i l i t i es Co. , Case No. 45.82 , November 2 6 , 1959

it was h e l d t h a t :

"It i s t h e s t r o n g b e l i e f o f t h i s Commission t h a t t h e question of changes in deprecia,t ion rates should be dis- a s soc ia t ed from cases pending before regulatory ,commissions involving proposed changes in tar i f fs . I1

Similarly, in Huritington Water Corporation, Case No. 6 7 9 7 , 58

IRPSCWV 1 6 7 , 1969 (1970), the following discussion was made:

"For many y e a r s t h i s Commission has refused to approve i n c r e a s e s i n d e p r e c i a t i o n rates made in contemplat ion of a ra te case. While we cannot say in any specif ic case that the mot iva t ion behind the increase in the deprec ia t ion ra tes i s t o support higher ra tes , we can say that the temptat ion would be present. For this reason, we w i l l continue our long-standing pol icy and disal low the increased depreciat ion expense in t h i s p roceed ing .

rhus, i t would appear that in the p a s t t h e Commission would only accept

l e p r e c i a t i o n c a s e s f i l e d and ru l ed upon between r a t e c a s e s .

S i m i l a r d i scuss ion i s r e f l e c t e d i n Cabot CorDoration. Case No. 8289.

. . _._l

54 ARPSCWV 386, 392 (1976). After quoting the preceding passage from

Wntington Water Corporation, i t was s t a t e d :

"The Commission can see l i t t l e d i f f e r e n c e between the changing of depreciation rates in the middle of the tes t yea r s e l ec t ed by t h e u t i l i t y and such a change a t o r before the beginning of the t es t year. For [ the] above reasons, we w i l l continue our long-standing policy and disal low the increased depreciat ion expense.

"Fundamental changes in account ing, such as changing deprec ia t ion ra tes , may be mat te rs for a separate proceeding, whether formal or informal, before this Commission. Questions of how to t rea t account ing changes in ra temaking a re ma t t e r s fo r ra te case determination. We may adhere to pas t va l id accoun t ing dec i s ions made by a u t i l i t y and r e fuse t o a l l ow new accounting decisions which may be made i n l a r g e p a r t t o i n c r e a s e t es t year costs for ra temaking purposes. I'

The f ea r t ha t dep rec i a t ion r a t e changes would be f i l e d s o l e l y f o r

mrposes of increasing ra te case cost of service lead to the adopt ion

)f Rule 20 of the Rules of Practice and Procedure. Appalachian Power

Zompany, Case No. 8182, 64 ARPSCWV 283, 293 (1977) confirms t h i s :

"This Commission has re fused to permi t u t i l i t i e s t o i n c r e a s e t h e i r d e p r e c i a t i o n rates, and expense in contemplation of a ra te case . (Ci ta t ion omi t ted) . Changes i n d e p r e c i a t i o n r a t e [ s ] may be p roper in o rder to p ro tec t inves ted cap i ta l : which i s sub jec t t o r ap id phys i ca l de t e r io ra t ion , obso le scence or func t iona l ly reduced seyvice L i fe . However, t h e r e i s always a temptat ion for a u t i l i t y t o i n c r e a s e i t s deprec ia t ion r a t e s i n o r d e r t o a t t e m p t t o j u s t i f y a n i n c r e a s e i n r a t e s and charges t o i t s customers. For t h i s r e a s o n , i n o u r new Rules of Practice and Procedure dated March l', 1 9 7 7 , we have adopted Rule 20.covering changes of depreciation r a t e s , so a s t o ease the problem,of how t o r e c o n c i l e accounting changes required by good engineering, accounting and management p r i c ip l e s , with ,proper ratemaking. The i n t e n t i s to e s t ab l i sh p rope r dep rec i a t ion rates p r i o r t o and independent of ratemaking to t he . ex t en t pe rmi t t ed by the circumstances. "

Recent decis ions of the Commis.sion seem t o have relaxed somewhat

: h i s s t r i c t , l o n g - s t a n d i n g p o l i c y by al lowing inclusion of cer ta in

mcreased depreciation rates in the cost of service approved in those

:ases. For example, see. The Chesapeake and Potomac Telephone Company,

lase No. 82-317-T-42T (Apri l 2 9 , 1983), a t p . 38. However, t h i s

tpparently was o n l y a f t e r a full review of the proposed changes was

mdertaken by Commission's Staff. For other examples, see generally,

:he cases c i ted in S ta f f Ex. J W C - 1 .

None o f t h e c a s e s c i t e d p r e v i o u s l y , g i v e s t h e s l i g h t e s t i n d i c a t i o n

1s t o when t h e new deprec ia t ion rates were t o b e e f f e c t i v e if t h e r e was

LO companion ra te case; while i t was s t a t ed t ha t t he p rope r r a t e s had t o

,e dec ided p r io r t o a r a t e c a s e f i l i n g , no dec is ion was made of when

ipproved r a t e s would be e f fec t ive . Therefore , the Hear ing Examiner must

. . , .

exercise the best judgment possible in the circumstances. In order to

do this, it would be best to summarize and then analyze the reasons

offered by each side in support of their position.

Mon Power and Potomac Edison contend that booking new rates should

not begin until they are incorporated in a cost of service in a rate case

because:

1. Rule 20 provides both some mandatory and permissive actions, none of which requires that new depreciation rates be implemented immediately after approval;

2. There is a substantial difference between depreciation expense and other expenses affecting a company's cost of service;

3 . To require earlier booking would reduce the utility's bottom- line earnings ;

4 . It enables the utility investor to earn a return both on and Df his investment; and

5 . It is necessary to obtain a proper matching of revenue granted for depreciation expense with that expense.

Staff relies on its position because:

1. Booking new rates immediately on approval is consistent with the clear and plain meaning of Rule 20;

2. It would be "patently unreasonable" for all concerned parties to agree that an expense is being accrued at one level and at the same time to allow the utility to book that expense at a different level.

The Hearing Examiner must agree that while Rule 20 does provide

Some mandatory and permissive actions on the part of the utility, nowhere

is implementation of new depreciation rates required to be done

immediately after approval; Rule 20 simply is not s o clear and plain as

to require this. However, the Hearing Examiner remains unpersuaded that

there is a substantial difference between depreciation expense and other

3xpenses in a utility's cost of service. For example, while it is

lertainly true that some plant additions made between rate cases may

senerate additional revenue to cover their costs, it is also true

:hat a substantial number do not. Furthermore, some of the expenses

,he utility controls have an impact on rate base. For example, even

xhough the utility controls, to a certain extent, its union labor contrac

sage rates, those wage rates are included in rate base whenever the

Labor is capitalized whether or not additional revenue is generated.

The Hearing Examiner cannot deny that, a11 other things being

:qual, requiring immediate implementation of new depreciation rates

qould reduce a utility's bottom-line earnings. All other things being

3qua1, this is true for any expense. Therefore, the relevant consider-

2tion is the magnitude of the effect of immediate implementation on

...I_. .e" ..... cc ._.I - i r

. . - ." " -

earn ings .

Requiring an immediate change in dep rec i a t ion r a t e s does no t

necessar i ly depr ive a u t i l i t y i n v e s t o r o f h i s a b i l i t y t o e a r n a r e t u r n

on, and o f , i t s investment. Such deprivation can occur only when ce r t a i l

other factors remain unchanged, e . g . , revenues and other expenses.

Therefore , for th i s cons idera t ion a l so , the u l t imate concern should the

magnitude of the effect on t h e u t i l i t y and i t s inves to r .

Two f ina l cons idera t ions l ead the Hear ing Examiner t o h i s c o n c l u s i o ~

3n t h i s i s s u e . F i r s t , i t i s incons i s t en t , i f no t un reasonab le , t o

recognize that a c e r t a i n a c c r u a l r a t e i s reasonable and p rope r , and a t

the same time requ i r e a d i f f e ren t acc rua l r a t e t o be u sed . Jus t a s i t

was t r u e t h a t , i f t h e a c c r u a l r a t e i s proper for depreciat ion purposes ,

then the problem of permanent rate base has to be addressed, i t i s

l ikewise t rue that implementat ion should commence soon a f t e r t he p rope r

s cc rua l r a t e s are approved.

Secondly, to do otherwise would resul t in an improper matching. It

is not the matching of expenses with revenues designed to recover those

2xpenses that i s the goa l o f proper f inanc ia l account ing . Rather , the

?urpose of f inancial accounting i s t o match expenses incurred during a

?eriod with the revenues produced during that period. Further, as Staff

=ontends, the purpose of depreciation expense i s t o match the consumptior

)f an asset: over t h e period or periods which it i s consumed. Thus, t h a t

2xpense should be matched with the revenues produced during that period,

uhether they are designed specif ical ly to recover that expense or not .

Such a conclusion i s consistent with Generally Accepted Accounting

? r i n c i p l e s which provide that depreciat ion i s genera l ly a systematic and

r a t iona l a l l oca t ion o f t he cos t o f an a s se t ove r i t s es t imated usefu l

. i f e , It i s also consis tent with pr ic ing theory which would require

mecovery of costs from those customers served by t h e f a c i l i t i e s .

' i n a l l y , so long as the effects of immediate implementat ion are not too

levere, i t i s cons is ten t wi th the 'purpose o f deprec ia t ion under regula t io

rhich i s to p rovide recovery o f inves ted cap i ta l , ad jus ted for ne t

ialvage. See "Public Uti l i t ies F o r t n i g h t l y , " December 9 , 1982 , a t page

I O .

The Hearing Examiner cannot dispute that requiring implementation

If t h e new acc rua l rates immediately could has t en t he t ime a t which t h e

:ompanies w i l l have t o f i l e new r a t e c a s e s . However, t h e paramount -

ob jec t ive i s t o have a proper matching of the expenses with the revenue

levels being incurred, and t o have those who r ece ive s e rv i ce pay f o r i t .

The tes t imony in the Potomac Edison case ind ica tes tha t the impact of

requiring immediate implementation w i l l be l ess than one-half of one

percent of the company's rate of return. Considering that Potomac

E d i s o n ' s l a s t ra te case was ru l ed upon during a per iod of h igh i n f l a t ion

and h igh cos t o f cap i ta l , it would not be unreasonable to consider i t

l i k e l y t h a t a lower r a t e o f r e t u r n would be approved i n a c u r r e n t r a t e

case. Even i f t h i s i s no t t rue , the impact i s too small to warrant

noncompliance with the paramount goals of depreciation. Accordingly,

implementation of new rates should be made a s c l o s e t o f i n a l a p p r o v a l a s

p r a c t i c a b l e , i . e . , Ju ly 1, 1983.

For Mon Power, no evidence was presented with regard to the impact

on t h e company's r a t e o f r e t u r n . The Hearing Examiner presumes t h a t t h e

impact would be similar to that on Potomac Edison s ince s imi l a r f ac i l i t i e s

and companies are involved. I f th is presumption i s i n e r r o r , t h e n Mon

Power h a s f a i l e d t o meet i t s burden of proof to demonstrate otherwise

such that the Hearing Examiner could r u l e t h a t implementing higher

a c c r u a l r a t e s a t t h i s time would not be warranted due t o t h e f i n a n c i a l

impact,

ULTIMATE FINDINGS OF FACT AND CONCLUSIONS OF LAW

1. Rule 20 of the Commission's Rules of Practice and Procedure

/ I r equ i r e s app l i ca t ion t o t h i s Commission p r i o r t o implementing any changes

i n d e p r e c i a t i o n r a t e s . When, as in these cases , those ra tes have been

suspended, no change may b e a f f e c t e d p r i o r t o ' a ' r u l i n g by t h e Commission.

2 . The evidence presented in these cases s 'upports the reasonable-

n e s s o f t h e s t i p u l a t e d r a t e s , and therefore , they should be approved.

3 . Added to , t he s t i pu la t ed r a t e s shou ld be an amount s u f f i c i e n t

t o amor t i ze t he West V i r g i n i a j u r i s d i c t i o n a l p o r t i o n o f the permanent

r a t e b a s e i n d i c a t e d by each company i n i t s app l i ca t ion , w i th t he

amor t iza t ion tak ing p lace over f ive years. Add i t iona l ly , annua l f i l i ngs

should be made by both Mon Power and Potomac Edison which r e f l e c t t h e

most r e c e n t f i v e y e a r s of experience with actual re t i rements versus the

theo re t i ca l r e t i r emen t s p rov ided i n t he i n t e r im r e t i r emen t cu rves cu r -

r e n t l y i n u s e . Based on these f i l ings, adjustments should be made t o

the amort izat ion amount t o r e f l e c t t h e a n n u a l f l u c t u a t i o n s i n i n t e r i m

requirements.

. ,

"

I

cs , .

4 . " I f no t be fo re , a t t he end o f f i ve yea r s t he i n t e r im r e t i r emen t

3urves should be reevaluated and adjusted i f necessary.

5 . During the period of amortization, permanent rate,base should

le removed from rate base.

6 . The booking of new deprec ia t ion acc rua l r a t e s as c l o s e t o

2pproval as practicable best complies with the paramount goals of proper

natching of revenues and expenses, and to have those who r ece ive t he

3enef i t s o f se rv ice pay for i t . Fur ther , i t w i l l no t adverse ly a f fec t t h

E inanc ia l cond i t ion o f e i t he r u t i l i t y t o book the deprec ia t ion accrua l

rates herein 'approved commencing on .July 1 , 1983.

ORDER

I T I S , THEREFORE, ORDERED:

1. That Monongahela Power Company be granted approval to change

i t s deprec ia t ion accrua l rates i n t h e manner p re sc r ibed he re in , w i th

implementation of the new accrua l rates commencing Ju ly I, 1953.

2 . That The Potomac Edison Company be authorized to change i t s

l ep rec i a t ion acc rua l rates i n t h e manner prescr ibed here in , wi th imple-

nentation of the new a c c r u a l r a t e s commencing on Ju ly 1, 1983.

3. That commencing on Ju ly 1, 1984, and each July 1 t h e r e a f t e r

for the next four years , Monongahela Power Company and The Potomac

Idison Company submit annually to the Commission for review, a f ive yea r

Lis t ing o f ac tua l re t i rements versus theore t ica l re t i rements so t h a t

:he amount of permanent ra te base amort izat ion can be adjusted as

zecessary.

4 . That the Executive Secretary serve a copy o f t h i s d e c i s i o n

lpon t h e Commission by hand de l ive ry , and upon a l l par t ies of record by

Jn i ted S ta tes Cer t i f ied Mai l , re turn rece ip t reques ted .

5 . That leave be, and i t hereby i s , g ran ted t o t he par t ies t o

f i le wr i t ten except ions suppor ted by a br ie f wi th the Execut ive Secre ta ry

If t h e Commission w i t h i n f i f t e e n (15) days o f the da te th i s o rder i s

na i l ed , I f excep t ions a r e f i l ed , t he pa r t i e s f i l i ng excep t ions sha l l

: e r t i f y t o t h e E x e c u t i v e S e c r e t a r y t h a t a l l parties of record have been

;erved said except ions.

6 . That i f no except ions a re so f i l e d , t h a t t h i s d e c i s i o n s h a l l

lecome the o rde r o f t he Commission, w i thou t fu r the r ac t ion o r o rde r ,

f ive (5) days fo l lowing t he exp i r a t ion o f t he a fo resa id f i f t een (15) day

I i m e per iod; un less i t i s ordered stayed or postponed by t h e Commission.

7 . That any pa r ty may r eques t wa ive r o f t he r i gh t t o f i l e excep-

: ions to a Hearing Examiner's Decision by f i l i n g an appropr i a t e pe t i t i on

.n wr i t i ng w i th t he Sec re t a ry . No such waiver w i l l b e e f f e c t i v e u n t i l

Lpproved by order of the Commission, nor shall any such waiver operate

:o make any Hearing Examiner's Decision the order of the Commission

.ooner than f ive (5 ) days a f t e r app rova l of such waiver by t h e Commission

-$a%&& Marc A . H a l b r i t t e r Hearing Examiner

PUBLIC SERVICE COMMISSION OF WEST VIRGINIA

CHARLESTON

At a session of the PUBLIC SERVICE COMMISSION OF WEST VIRGINIA, at

the Capitol in the City of Charleston on the 1 9 t h day of December, 1983.

CASE NO. 81-320-E-D

MONONGAHELA POWER COMPANY, a corporation.

Petition for Change of Depreciation Rates Pursuant to Rule 20 of the Commission's Rules of Practice and Procedure.

CASE NO. 82-347-E-D

THE POTOMAC EDISON COMPANY, a corporation.

Request to Change Depreciation Rates Pursuant to Rule 20 of the Commission's Rules of Practice and Procedure.

ORDER MODIFYING HEARING EXAMINER'S DECISION

PROCEDURE

On July 15, 1981, Monongahela Power Company (Mon Power), a

corporation, filed a petition pursuant to the applicable provisions of

Chapter 24, Article 4 , of the - West Virginia Code, as amended, and Rule 20

of the Commission's Rules - of Practice - and Procedure, to change its

depreciation rates. Hearing was held on October 29, 1982.

On July 20, 1982, The Potomac Edison Company (Potomac Edison) , a corporation, filed a petition pursuant to the applicable provisions of

Chapter 24, Article 4, of the West Virginia Code, as amended, and Rule 20

of the Commission's Rules - of Practice - and Procedure, to change its

depreciation rates. Hearing was held on December 16, 1982. At the

conclusion of the taking of testimony and presentation of evidence on

that date, it was determined that, since the issues in both of these

PUBLIC SERVICE COMMISSION

OF WEST V IRGINIA C H A R L E S T O N

cases were the same, one brief for the two cases could be filed and the

decisions for both cases would be addressed in one order,

On July 1, 1983, the Hearing Examiner's Decision was issued wherein

it was ordered that Mon Power and Potomac Edison begin booking their

respective newly-approved depreciation accrual rates and amortizing

permanent rate base on July 1, 1983. On July 18, 1983, exceptions to

this decision were filed separately by Mon Power and Potomac Edison.

Said exceptions assert that:

1. Hearing Examiner erred in making order to begin booking of new,depreciation accrual rates effective before order is final . 2. Hearing Examiner erred in finding that to book approved depreciation rates as of July 1, 1983 would not adversely affect the financial condition of the Company, thereby departing from traditional timing of booking new depreciation rates under Rule 20 of the Commission's "Rules of Pracatice (sic) and Procedure".

3. Hearing Examiner erred in changing, without notice, interpretation of said Rule 20.

4 . Hearing Examiner erred in applying the applicable law to the case.

5 . Hearing Examiner erred in providing for amortization of the permanent rate base element starting July 1, 1983 before the Company has the opportunity to increase revenues to offset the increase in depreciation expense. (Mon Power Exceptions, p. 1; Potomac Edison Exceptions, p. 1).

DISCUSSION

The issue to be determined is when companies should be required to

begin booking new depreciation accrual rates and amortizing permanent

rate base. The companies maintain that it is Commission policy to begin

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CHARLESTON

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[ I . booking depreciation accrual rates concurrently with the final order in

the company's subsequent rate case. However, the companies were unable

to cite to a statement of Commission policy on this issue because this

Commission has never adopted a blanket policy on this issue; instead,'the

Commission makes this determination on a case-by-case basis, such

determination being dependent upon the facts of each individual case.

Therefore, the Hearing Examiner's Decision is not contrary to Commission

policy or our Supreme Court of Appeals' recent decision in CbP Telephone

Co. v. Public Service Commission, W.Va., 301 S.E. 2d 798 (1983), which

mandates the Commission to provide notice prior to adopting a change in

its policy.

Nevertheless, the Commission recognizes that the intent of

depreciation is to allow recovery of related expenses by the company.

The Hearing Examiner's Decision would decrease the companies' rates of

return and, at the same time, cause the companies to absorb expenses

below the line, thereby depriving the companies the opportunity to

adequately recover their expenses. It is unreasonable to require a

company to book deprec2ation accrual rates without providing a vehicle

for recovery of related expenses, Therefore, the Commission hereby

modifies the Hearing Examiner's Decision t o the extent that Mon Power and

Potomac Edison will be required to book their depreciation rates and

amortize permanent rate base contemporaneously with the approval of rates

based on cost-of-service where depreciation rates are included as part of

expenses or January 1, 1985 , whichever occurs first.

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OF WEST VIRGIMI'A CHARLESTON

FINDINGS OF FACT

1. The Commission determines when a company must begin booking

depreciation on a case-by-case basis, such determination being dependent

upon the facts of each individual case.

2. When a company changes its depreciation accrual rate, its

expenses also change.

CONCLUSIONS OF LAW

1. The Hearing Examiner's Decision in this case is not contrary to

Commission policy or our Supreme Court of Appeals' recent decision in - ChP

Telephone Co. v. Public Service Commission, W.Va., 301 S.E. 2d 798

(1983), which mandates the Commission to provide notice prior to adopting

a change in its policy.

2. It is unreasonable to require a company to book higher

depreciation accrual rates without providing it an opportunity to recover

related expenses.

ORDER

IT IS, THEREFORE, ORDERED that the Hearing Examiner's Decision be,

'and hereby is, affirmed, as modified above, and adopted as the order of

the Commission in all other respects.

PUBLIC S E R V I C E C O M M I S S I O N

OF W E S T V I R G I N I A CHARLESTON

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Commissloner Otls D. Casto

h

Chairman E. Da'rSdridge McDonald

CCF: lc

PUBLIC SERVICE COMMISSION 5 O F WEST VIRGINIA

CHARLESTON