ORDER NO. 96-183

ENTERED JUL 16 1996

THIS IS AN ELECTRONIC COPY

BEFORE THE PUBLIC UTILITY COMMISSION

OF OREGON

UT 80(1)

DISPOSITION: REFUND PROCEDURES CLARIFIED

Introduction

In response to reduced service quality by U S WEST Communications, Inc., (USWC), this Commission recently terminated the company’s alternative form of regulation (AFOR) plan authorized in Order No. 91-1598. USWC subsequently filed this Petition for Clarification and Request for Ruling concerning the interpretation of Order No. 91-1598 with respect to the "procedures to be followed or the rates to be charged by USWC in the event the [AFOR] is terminated prematurely[.]" USWC contends that, in determining whether a refund is warranted, we must review the company’s actual earnings for the period during which interim rates were in effect.

Staff filed a reply to USWC’s petition and disputes the company’s interpretation of the refund provisions. It contends that the January 1 to September 30, 1995, annualized test year, as modified by adjustments ordered in pending docket UT 125, should be used to determine if the company overearned during the interim rate period. On July 11, 1996, USWC filed a response to Staff’s reply.

Discussion

In November 1991, the Commission offered USWC an AFOR plan under terms and conditions set forth in Order No. 91-1598. USWC accepted the offer, and the AFOR was implemented effective January 1, 1992.

Among other things, Order No. 91-1598 contained the method for determining the amount of refund by USWC upon a premature termination of the AFOR. The relevant language in that order provides:

The Commission finds that the [AFOR] stipulation should be modified to include a provision which protects USWC and its customers in the event the Plan is terminated prematurely due to one of the [specified conditions.] We propose that Paragraph 10 should be amended to include the following language[:]

 

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(2) If the Commission declares the plan terminated, it may also order USWC to refrain from making any further changes in rates or terms of price listed services. * * * The Commission may also initiate an investigation to determine the rates and terms of service which should be placed in effect on a permanent basis.

 

(3) Unless otherwise ordered by the Commission, rates authorized under (2) of this subparagraph after the plan has been terminated shall be considered interim rates subject to refund. The amount subject to refund with interest shall be that portion of USWC’s earnings which the Commission finds have exceeded a reasonable rate of return, commencing with the date of the order terminating the plan and ending with the date that permanent rates are set and are in effect. For purposes of determining the amount of the refund, the Commission shall not be bound by the provisions of this paragraph or any other provision of the Plan.

 

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The amendments proposed by the Commission are intended to remove any uncertainty regarding the procedures to be followed in the event the Plan is prematurely modified or terminated. The changes will also prevent USWC from over or under earning while proceedings are held to establish new permanent rates. To clarify:

Subparagraph (2) provides that the Commission may freeze the rates charged by USWC at the levels in effect on the date the plan is terminated. The Commission would likely choose this option if the Plan is terminated because USWC’s earnings have exceeded the upper limits established in the Plan. * * * Lastly, subparagraph (2) permits the Commission to initiate a separate proceeding to determine the permanent rates to be charged.

Subparagraph (3) specifies that the rates in effect from the date the plan is terminated until the date new permanent rates are set shall be interim rates subject to refund. A refund will take place only where USWC has been determined to have been overearning. The amount of any refund will equal the difference between the amount USWC is actually earning and the amount subsequently found to be reasonable. Any refunds will accrue interest at USWC’s authorized rate of return on rate base.

Order No. 91-1598 at 27-29 (footnote omitted) (emphasis added).

Relying on the italicized language, USWC contends that, now that the AFOR has been terminated, our refund determination must be based on an examination of the company’s actual earnings during the period rates are interim. Comparing the process to a true-up of base earnings in an application for deferral under ORS 759.200(4), it argues that earnings cannot be adjusted for disallowances imposed retroactively, for annualization of intra-period events, or normalization adjustments for nonrecurring and unusual events.

Staff disputes USWC’s assertions and presents a different interpretation of the language cited above. It contends that the amount subject to refund is equal to the difference between the permanent rate level established by the Commission and the current, interim rate level, assuming that the latter amount of revenues is greater than the former. It argues that the Commission used the term "interim rates" to refer to the commonly understood method of refund determination used in ORS 757.215(4) and 759.185(4).

Resolution

In this proceeding, we are asked to resolve a dispute between USWC and Staff concerning what financial information should be used to determine whether the utility must refund a portion of interim rates to customers. Our resolution of that issue, however, need not be based on the specific wording of any provision contained in Order No. 91-1568. As the last sentence of paragraph (3) set forth above expressly states: "For purposes of determining the amount of the refund, the Commission shall not be bound by the provisions of this paragraph or any other provision of the Plan." Order No. 91-1598 at 28 (emphasis added). Accordingly, the terms of the accepted plan clearly authorize us to determine the amount of refund through any legal process we find reasonably protects USWC and its customers.

With that clarification, we conclude that a refund procedure similar to that in ORS 757.215(4) and 759.185(4) should be used to determine what amount of refund, if any, is warranted during the period of interim rates. The amount subject to refund by USWC should be equal to the difference between the permanent rate level we establish in Docket UT 125 and the current interim rate level. This method, we believe, will adequately assure that ratepayers will be charged the proper rates under traditional rate base/rate-of-return regulation commencing with the date of order terminating the AFOR.

We reject USWC’s proposed refund methodology for three primary reasons. First, USWC’s proposal would limit the refund determination to an examination of the company’s actual earnings, while excluding normalization adjustments for nonrecurring events, annualization adjustments for intra-period events, and new test year disallowances and imputations. As Staff notes, that proposal would allow USWC to modify its earnings picture during the period of interim rates by accelerating expenses and deferring revenues.

Moreover, the exclusion of imputations is inconsistent with other provisions of the AFOR, where USWC agreed not to challenge our authority to impute Yellow Page revenues for ratemaking purposes. See Order No. 91-1598 at 8-10, 22-24, and 42 n.32. USWC’s proposal could have the effect of allowing the company to retain more revenues during the period of interim rates than it was entitled to under the AFOR, or that it would otherwise be entitled to receive under traditional rate base/rate-of-return regulation.

Finally, USWC’s refund proposal could substantially increase its refund obligation. In order to determine the amount of USWC’s actual revenues earned during the period of interim rates, Staff would be required to perform another examination of the company’s books of account in addition to the examination of those books for the purposes of determining the company’s revenue requirement in Docket UT 125. This additional review would delay the refund determination process by several months, during which time USWC’s refund obligation would accrue interest at 11.2 percent, the authorized rate of return on rate base.

Conclusion

Accordingly, for the reasons stated above, we conclude that the amount subject to refund by USWC is equal to the difference between the permanent rate level established in pending docket UT 125, and the current interim level, assuming that the latter amount of revenues is greater than the former. We find this refund procedure, similar to that used in ORS 757.215(4) and 759.185(4), protects both the utility and its ratepayers now that the AFOR has been terminated prematurely due to USWC’s noncompliance with its terms.

ORDER

IT IS ORDERED that the annualized test year from January 1 to September 30, 1995, as modified by adjustments ordered in docket UT 125, shall be used to determine whether U S WEST Communications, Inc., overearned during the period from May 1, 1996, to the effective date of rates established in docket UT 125.

Made, entered, and effective _____________________________.

A party may request rehearing or reconsideration of this order pursuant to ORS 756.561. A party may appeal this order to a court pursuant to ORS 756.580.