Arkansas Western Gas Co. v. Arkansas Public Service Commission

Citations: 266 Ark. 668; 588 S.W.2d 424; 1979 Ark. LEXIS 1558Docket: 79-171

Court: Supreme Court of Arkansas; October 15, 1979; Arkansas; State Supreme Court

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Arkansas Western, a public utility distributing natural gas in northwest Arkansas, sought approval from the Public Service Commission in 1975 for a rate increase. After hearings, the Commission approved some increases and required the utility to submit revised rate schedules. The circuit court upheld the Commission's decision. Arkansas Western contends that the Commission's findings are erroneous and confiscatory, particularly concerning annualized depreciation. The Commission allowed an annualized depreciation expense of $255,795, which it added to the depreciation reserve, effectively reducing the rate base by the same amount. Arkansas Western agrees with the expense figure but argues against the corresponding addition to the reserve, claiming it leads to double charging ratepayers. The court notes that while the issue is rooted in accounting, it is framed as a legal question. The Commission's position is supported by multiple administrative decisions from other states, emphasizing that depreciation expenses must align with adjustments to the reserve. Arkansas Western acknowledges the contrary authorities but maintains that the Commission's deduction from the rate base is incorrect both theoretically and legally. However, the court finds no legal counterarguments presented by the utility to challenge the Commission's conclusions, affirming the necessity of matching depreciation expenses and rate bases as determined by regulatory standards.

Arkansas Western requested inclusion of minimum bank balances totaling $404,500 in its rate base, which the Commission denied. The Commission stated that it had considered the company's need for funds to meet normal obligations when calculating a $381,533 working capital allowance. Arkansas Western operates approximately 35 bank accounts, with two out-of-state accounts unrelated to the current issue. It maintains a substantial non-interest-bearing checking account at Worthen Bank, alongside accounts at two Fayetteville banks. The Company provided no detailed justification for the $404,500 figure, merely noting it has been used historically, with the Commission having previously disallowed a similar amount in 1969.

Two company witnesses testified in favor of the requested amount, but their opinions lacked detailed substantiation. The Commission highlighted that the Company failed to distinguish between basic minimum balances, which prevent service charges, and compensatory balances, which are meant to enhance credit standing. Testimony from bank officials indicated that while adequate balances could improve credit and lower loan interest rates, no specific figures were provided to demonstrate benefits to ratepayers. Conversely, maintaining the requested minimum balances would impose an estimated annual cost of $84,000 on ratepayers.

Management lacks incentive to oppose the lending banks’ demand for maintaining compensatory balances, as stockholders benefit regardless. The Company effectively incurs higher interest costs without enabling ratepayers to utilize increased interest as a tax-deductible expense, as referenced in Re Boston Edison Co. 16 PUR 4th 1 (1976). There was insufficient effort from the Company to distinguish compensatory bank balances from other account requirements. Witness Lewis estimated approximately $150,000 in deposits necessary for checking privileges, though he provided no detailed basis for this estimate and lacked direct knowledge of the Company’s accounts, being affiliated with one of the Fayetteville lead banks. The Commission considered the Company's banking needs when determining a working capital allowance but noted a lack of concrete figures related to the $404,500 requested for minimum bank balances in the rate base. The absence of specific determinations regarding compensatory balances and the associated costs and benefits meant the Commission lacked adequate information, placing the burden on the applicant to provide it.

Regarding the rate of return on equity capital, the Commission adhered to the principle established in Bluefield Water Works Improvement Co. v. Public Service Commn. of West Va. that a public utility should be allowed a return commensurate with investments of similar risk. The Company’s expert, Samuel Joseph, proposed a 14% return, while the staff's expert, Basil Copeland, suggested 9.63%. The Commission favored Copeland's approach but deemed his figure too low, ultimately adopting an average return of 12.33% based on data from 20 utility companies. The situation parallels a jury's need to reconcile conflicting expert testimonies, and there is no basis to assert that the Commission's decision lacks substantial evidence or that the return is excessively low to be deemed confiscatory.

Arkansas Western, a utility company involved in natural gas production, has retained profits from its nonutility business instead of distributing them as dividends, resulting in retained earnings of $11,716,227 for the 1974 test year. The Commission staff proposed an adjustment that removed $6,834,021 from retained earnings, arguing that these earnings were derived from fair-field pricing and should not affect the capital structure used for determining the weighted average cost of capital. However, the Commission rejected this method, stating that while they did not adopt the staff's approach, they reached the same conclusion based on testimony from Arkansas Western’s president, Mr. Scharlau, regarding potential adjustments under F.A.S.B. Rule No. 9.

Scharlau's testimony was deemed speculative and not substantial evidence, as it lacked concrete figures and relied on conjecture about potential outcomes had the proposed rule been adopted. The calculated difference between Scharlau's estimate and the staff's figure further undermined his credibility. Consequently, the court affirmed the Circuit Court's judgment, except for the adjustment of the capital structure, which was reversed due to insufficient evidence. The case was remanded to the Commission for further action to align the rate schedule with the modified order. Judge Fogleman did not participate, and Judge Byrd dissented.