State ex rel. Utilities Commission v. Heater Utilities, Inc.

ARNOLD, Judge. By this appeal, applicant Heater Utilities, Inc., presents two related questions for review: (1) Whether the Utilities Commission is required, under G.S. 62-133 (b) (1) and the state and federal constitutions, [407] to include contributed plant in applicant’s fair value rate base; and (2) Whether the applicant is entitled, under G.S. 62-133 (b) (3) to have depreciation expense on contributed plant treated as an operating expense for ratemaking purposes. G.S. 62-133 (b) (1) provides that in fixing rates the Commission sháll: “Ascertain the fair value of the public utility’s property used and useful in providing the service rendered to the public within this State, considering the reasonable original cost of the property less that portion of the cost which has been consumed by previous use recovered by depreciation .expense, the replacement cost of the property, and any other factors relevant to the present fair value of the property. Replacement cost may be determined by trending such reasonable depreciated cost to current cost levels, or by any other reasonable method.” Heater contends that all of its “property used and useful” should be included in the rate base regardless of whether it was paid for by the utility or acquired by donation. We note that Heater does not object to the Commission’s conclusion that $175,591 recorded as “contributions in aid of construction” (amounts paid directly by the customers to the utility) should be deducted in determining the fair value rate base. Heater objects only to the deduction of $242,164 recorded as “acquisition adjustment” representing the difference between depreciated original cost and purchase price of certain property. The Commission concluded that amounts recorded in the “acquisition adjustment” account should be treated as “contributions in aid of construction,” since they also represented property provided by the customers, although indirectly, and did not represent actual investment by the utility or actual cost to it. Although case law in other jurisdictions offers some support for the proposition that the source of a utility’s property is not determinative of fair value, when that source is the very customers who will pay the rates based thereon, courts have deemed it inequitable to include such property in the rate base. See DuPage Utility Co. v. Commerce Com., 47 Ill. 2d 550, 267 N.E. 2d 662, cert. denied 404 U.S. 832 (1971) ; Mississippi Public Serv. Com’n v. Hinds County W. Co., 195 So. 2d 71 (Miss. 1967); Utilities Corp. v. Commonwealth, 211 Va. 620, 179 S.E. [408] 2d 714 (1971) ; cf. City of Covington v. Public Service Com., 313 S.W. 2d 391 (Ky. App. 1958). In a recent North Carolina case, our state Supreme Court affirmed the Utilities Commission’s deduction of customer-supplied monies from the allowance for working capital, a component of the fair value rate base. Utilities Comm. v. Power Co., 285 N.C. 398, 206 S.E. 2d 283 (1974). See also Utilities Comm. v. Morgan, Attorney General, 277 N.C. 255, 177 S.E. 2d 405 (1970). The rationale behind these and the above cited cases we believe is apposite to the case at bar. The fact that Heater’s “acquisition adjustment” account represented a cost of plant borne by customers at time of' construction and never by investors is one of the “other factors -relevant to the present fair value of the property” under G.S. 62-133 (b) (1). We hold that the Commission is not required by statute to include contributed plant in. applicant’s fair value rate base. Nor is the inclusion constitutionally required. As a public utility, Heater has submitted to the regulatory authority of 'th'e State in return for State sanction of its monopoly position. Heater’s stockholders are entitled to no more than a reasonable return on their investment. See generally Utilities Com. v. State and Utilities Com. v. Telegraph Co., 239 N.C. 333, 80 S.E. 2d 133 (1954). The Commission’s refusal to allow them a return on property in which they have not invested, and to force the cüs-tomers who are the real investors to pay twice, does not constitute a taking without just compensation. G.S. 62-133(b) (3) provides that the Commission shall: “Ascertain such public utility’s reasonable operating expenses, including actual investment currently consuined through reasonable actual depreciation.” Heater contends that the Commission should include depreciation on contributed plant as part of operating expenses. The Commission concluded that the applicant is not entitled to depreciation on property in which it has no investment. There is case law supporting Heater’s contention. See, e.g., DuPage Utility Co. v. Commerce Com., supra; cf. Utilities Corp. v. Commonwealth, supra. But see Utilities Com. v. State and Utilities Com. v. Telegraph Co., supra, at 346, 80 S.E. 2d at 142, in which our Supreme Court discusses depreciation deductions. [409] The Commission’s conclusion, however, seems to be compelled by the language of the statute, which limits depreciation to “actual investment” and which we are powerless to amend. For the reasons stated, the order appealed from is Affirmed. Chief Judge Brock and Judge Parker concur.