Attorney General's Public Counsel Unit, V Wa Utilities & Transportation Comm , 423 P.3d 861 ( 2018 )

Filed
Washington State
Court of Appeals
Division Two
August 7, 2018
IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
DIVISION II
WASHINGTON ATTORNEY GENERAL’S No. 48982-1-II
OFFICE, PUBLIC COUNSEL UNIT,
Appellant,
v.
WASHINGTON UTILITIES AND PUBLISHED OPINION
TRANSPORATION COMMISSION, a
Washington State agency,
Respondent,
AVISTA CORPORATION d/b/a AVISTA
UTILITIES,
Intervenor/Respondent.
MELNICK, J. — The Washington Attorney General’s Office, Public Counsel Unit (PCU),
appeals from the final order of the Washington Utilities and Transportation Commission (WUTC)
setting Avista Corporation’s 2016 rates for electric and natural gas services.
We conclude that the WUTC’s use of an attrition adjustment to calculate Avista’s rate base
violated RCW 80.04.250. Accordingly, we reverse and remand to the WUTC for recalculation of
Avista’s electric and natural gas rates.
FACTS
Avista is an electric and natural gas company that serves customers in Washington. The
WUTC has the statutory authority to regulate rates of utility companies such as Avista. RCW
80.01.040.
48982-1-II
Avista filed a request with the WUTC to increase its rates for electric service by $33.2
million (6.7 percent) and its natural gas service by $12 million (6.9 percent). Avista based its
proposed rate increase in part on an attrition adjustment for both its electric and natural gas
operations. The WUTC ultimately set rates significantly lower than Avista’s initial request, basing
its analysis on an attrition study and attrition adjustment. Whether to apply this attrition adjustment
in setting Avista’s rates is the fundamental dispute in this case.
I. THE PARTIES
After Avista petitioned to change its rates, WUTC Staff (Staff) and PCU both entered
notice of their appearance in the subsequent joint ratemaking case. 1 The Industrial Customers of
Northwest Utilities (ICNU), the Northwest Industrial Gas Users (NWIGU), and The Energy
Project all intervened in the case without opposition.
II. UTILITY RATEMAKING BACKGROUND
A. RATEMAKING PROCESS
People’s Organization for Washington Energy Resources v. Utilities & Transportation
Commission discussed the background principles of ratemaking in Washington. 104 Wash. 2d 798,
808-11, 711 P.2d 319 (1985) (POWER 85). The court explained:
In this state, the Legislature has conferred the ratemaking power on the
WUTC, subject, of course, to appropriate judicial review. Most states delegate their
ratemaking power to regulatory agencies in very broad terms, basically just
directing them to set those rates which the agencies determine to be just and
reasonable. Washington is such a state. . . . The statutory mandate to the WUTC
is to set fair, reasonable and sufficient rates. Indeed, as this court has also observed,
the paramount objective of the Legislature in creating the commission, now the
WUTC, “was to secure for the public safe, adequate, and sufficient utility services
at just, fair, reasonable, and sufficient rates.”
1
WUTC Staff participate as a party in ratemaking proceedings. See, e.g., PacifiCorp v. Wash.
Utils. & Transp. Comm’n, 194 Wash. App. 571, 578 n.2, 376 P.3d 389 (2016). PCU entered its
appearance as representative of the people of the State of Washington. RCW 80.01.100.
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POWER 85, 104 Wash. 2d at 808 (footnotes omitted) (citations omitted) (quoting State ex rel. PUD
1 v. Dep’t of Pub. Serv., 21 Wash. 2d 201, 209, 150 P.2d 709 (1944)). It also outlined the formula
the WUTC used to set rates:
In order to control aggregate revenue and set maximum rates, regulatory
commissions such as the WUTC commonly use and apply the following equation:
R = [O] + B(r)
In this equation,
R is the utility’s allowed revenue requirements;
O is its operating expenses;
B is its rate base; and
r is the rate of return allowed on its rate base.
POWER 85, 104 Wash. 2d at 808-09. Rate base “represents the total investment in, or fair value of,
the facilities of the utility employed in providing its service. Calculation of the rate base is of
obvious importance since the product of the rate base (B) multiplied by the allowed rate of return
(r) accrues to the utility’s investors.” POWER 85, 104 Wash. 2d at 809 (footnote omitted).
No matter how rates are determined, they must “‘enable the company to operate
successfully, to maintain its financial integrity, to attract capital, and to compensate its investors
for the risks assumed.” POWER 85, 104 Wash. 2d at 811 (quoting Fed. Power Comm’n v. Hope Nat.
Gas Co., 320 U.S. 591, 605, 64 S. Ct. 281, 88 L. Ed. 333 (1944) (Hope)). A utility is entitled to
rates that will permit it to earn a return on its investment in property it uses to serve the public.
POWER 85, 104 Wash. 2d at 813 (quoting Bluefield Water Works & Imp. Co. v. Public Serv.
Comm’n, 262 U.S. 679, 692, 43 S. Ct. 675, 67 L. Ed. 1176 (1923)).
Before the present case, the WUTC’s standard practice was to use the “‘hybrid’ or
‘modified’ historical test year” approach. Administrative Record (AR) at 3819. This process
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involved evaluating a historical test year2 and applying pro forma adjustments3 to estimate the
utility’s rate base and operating expenses in the rate year. Pro forma plant adjustments provided
the WUTC with a method of evaluating expected rate base changes between the historic model
year and the rate year. The WUTC considered whether such adjustments were “‘known and
measureable’ and ‘used and useful’ for service in Washington State.” AR at 3820.
When the historical test year relationship between revenues, expenses, and rate base does
not hold during the rate year, erosion may “deprive the utility of a reasonable opportunity to earn
a fair rate of return.” AR at 3836. This erosion of a company’s rate of return over time is generally
referred to as “attrition.”
B. ATTRITION
As described by the WUTC,
[A]ttrition occurs when the test-period relationship between rate base, expenses and
revenues does not hold under conditions in the rate effective period, such that a
utility’s expenses or rate base grows more quickly than revenues, and a utility
would likely have no reasonable opportunity to earn its allowed rate of return.
AR at 703-04.
An attrition adjustment, then, is “a discrete adjustment to the modified historical test year
that the [WUTC] may use when it determines attrition is present.” AR at 704. When developing
an attrition adjustment, parties first provide a revenue requirement analysis based on a modified
historical test year to the WUTC. “Parties then perform an attrition study to determine the utility’s
revenue requirement in the rate year. The attrition adjustment is the difference between the
2
The historical test year is generally the most recent year before the rates are being set for the
following year. In this case, the WUTC considered the year beginning October 1, 2013, and ending
September 30, 2014.
3
These adjustments include any major plant additions or other expected changes in rate base
between the test year and the rate year.
4
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revenue requirement provided by the modified historical test year and the revenue requirement
provided by the attrition study.” AR at 704 n.60.
Attrition adjustments were frequently used in Washington as a WUTC ratemaking tool
“‘during the early 1980’s in an environment of exceptional inflation and high interest rates.’” AR
at 706 (quoting Wash. Utils. & Transp. Comm’n v. Puget Sound Energy, Inc., Dockets UE-111048
and UG-111049 (consolidated), Order 08 at 180 (May 7, 2012) (PSE Order 08)).
The two most common sources of attrition in Washington are “abnormal or excessive
inflation and exceptional and prolonged levels of plant additions.” AR at 711. The last time the
WUTC addressed attrition in a fully litigated rate case was in 1993. AR at 705. It denied the
request and announced that attrition adjustments were only appropriate in “‘extraordinary
circumstances’” when “‘without such an adjustment, the company would have no reasonable
opportunity to earn its authorized rate of return.’” AR at 705 (quoting Wash. Utils. & Transp.
Comm’n v. Wash. Nat. Gas, Docket UG-920840, Fourth Supp. Order at 30 (Sept. 27, 1993).
Before the present case, the WUTC had not directly authorized an attrition adjustment since the
1980s. AR at 723.
In 2012, for the first time in almost twenty years, the WUTC suggested the use of an
attrition adjustment in a ratemaking case for Puget Sound Energy. AR at 706. In that case, the
WUTC observed that:
“‘[A]ttrition’ in the context of utility ratemaking is limited to circumstances in
which key assumptions that underlie ratemaking theory fail to hold in reality.
Regardless whether an historical or budgeted test-period is used, the relationship
between rate base, expenses and revenues is used to represent the future and to set
prospective rates adequate to allow a reasonable return. Ratemaking rests on the
key assumption that the test-period relationships will accurately represent
relationships in the future. If this assumption fails, cost of service may increase
more rapidly than revenues and the rates approved based on test period conditions
may not be adequate to achieve the allowed level of return under future conditions.”
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AR at 706 (quoting PSE Order 08 at 180). The WUTC also discussed attrition in Avista’s last two
rate-setting cases. AR at 706.
In Avista’s 2012 ratemaking case, the WUTC opined that consideration of attrition was
appropriate in setting 2013 rates, despite it being “‘caused substantially by Avista’s ongoing
capital investment program’” and that the WUTC “‘ha[d] no absolute assurance that Avista
[would] complete the projects described in its plan for 2013.’” AR at 707 (quoting Wash. Utils.
& Transp. Comm’n v Avista Corp., Dockets UE-120436 and UG-120437 (consolidated), Order 09
and Dockets UE-110876 and UG-110877 (consolidated), Order 14 at 4 (Dec. 26, 2012) (Avista
Orders 09 and 14).
In that case, however, the parties reached a settlement. AR at 708. In accepting the
settlement, the WUTC noted “‘that the testimony and trending data offered in support of the
proposed rate increase for 2014 are substantially less precise than we would require in a fully-
litigated rate case.’” AR at 708 (quoting Avista Orders 09 and 14 at 27) (emphasis omitted). It
made clear that it was “‘not endorsing the specific attrition methodologies, assumptions, or
inputs’” but did endorse the view “‘that an attrition adjustment should not be limited to
circumstances where the utility can demonstrate extreme financial distress.’” AR at 709 (quoting
Avista Orders 09 and 14 at 30). The WUTC announced its intent “‘to clarify the conditions
wherein attrition should be considered when setting rates,’” but it felt limited in its ability to do so
by the settlement. AR at 709 (quoting Avista Orders 09 and 14 at 30).
The current case presented the WUTC with the opportunity to address attrition in a “fully-
litigated rate case.”
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III. MULTIPARTY SETTLEMENT
Avista, Staff, PCU, NWIGU, and ICNU came to a multiparty settlement pursuant to WAC
480-07-730.4 As a result of the settlement, Avista reduced its requested rate increases from $33.2
million to $17 million for electric and from $12 million to $11.3 million for gas. The settling
parties agreed that Avista should receive a 9.5 percent return on equity and a 7.29 percent rate of
return. The parties did not come to any agreement regarding attrition.
IV. EVIDENTIARY HEARING
On October 5, 2014, the WUTC commenced an evidentiary hearing to address the issues
not resolved by the settlement. The disputed issues included whether to apply an attrition
adjustment and, if so, the proper methodology for an attrition study.
A. AVISTA TESTIMONY AND ATTRITION STUDY
Scott Morris, Avista’s Board Chairman, President, and Chief Executive Officer, testified
that Avista required a rate increase because net plant and operating expenses continued to grow,
while customer and sales growth remained stagnant. Kelly Norwood, Avista’s Vice President of
State and Federal Regulation, testified that Avista had earned less than its authorized return on
equity from 2008 until 2013. It earned 9.5 percent in 2013 and 9.9 percent in 2014, both near its
authorized return of 9.8 percent.5
Based on Morris’s calculated needs for a rate increase and projected increases in plant
investment and operating expenses, Avista presented an attrition study for both its electric and
4
WUTC regulations allow for “[a]n agreement of some, but not all, parties on one or more issues”
to be “offered as their position in the proceeding along with the evidence that they believe supports
it.” WAC 480-07-730(3).
5
Avista over-earned on its electric and under-earned on its natural gas in 2013 and 2014, averaging
out to near its authorized rate of return.
7
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natural gas operations. During its rebuttal, however, it abandoned its own attrition study. Instead,
it adopted the one proposed by Staff with several changes to the methodology used to calculate
historical operations and maintenance costs.
B. STAFF TESTIMONY AND ATTRITION STUDY
Staff presented testimony of WUTC employee Chris R. McGuire. AR at 3808. McGuire
explained that:
The [WUTC’s] standard ratemaking practice requires companies filing for revised
rates to start with an historical test year, and typically with an average of monthly
averages rate base balance. The [WUTC] also allows pro forma adjustments to rate
base and expenses that often extend beyond the end of the test year. Such pro forma
adjustments are what characterize Washington as a “hybrid” or “modified”
historical test year state.
AR at 3819 (footnotes omitted). He also discussed the various requirements that go into what
specific pro forma plant adjustments the WUTC considers in setting rates using this method.
McGuire testified that, to be included in pro forma plant adjustments under the traditional
modified historical test year analysis, a given pro forma plant must: “1. Be in service as of June
30, 2015; 2. Meet a reasonable definition of ‘major’; 3. Demonstrate ‘quantifiable’ benefits to
ratepayers in Washington State; and 4. Include only costs that were prudently incurred.” AR at
3822. He testified that 14 pro forma plant adjustments met these criteria.6 AR at 3823.
McGuire also testified as to when the WUTC should allow a utility to receive an attrition
adjustment. He noted that:
[T]he [WUTC] has historically allowed attrition where extraordinary circumstances
beyond the regulated company’s control will cause the relationship between
revenues, expenses, and rate base to change in a manner that impedes the
company’s opportunity to earn a fair return. The [WUTC] historically has provided
attrition allowances to companies during times of rapid growth in utility plant.
6
Staff witness David Gomez detailed each of the 14 “major capital additions.” AR at 3976-4021.
In its final order, the WUTC accepted his pro forma adjustment calculations to rate base before
applying its attrition adjustment.
8
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AR at 3824 (footnote omitted). Applying these criteria to Avista’s situation, he testified that
“Avista’s low load growth is well-documented and its net plant has increased in recent years.” AR
at 3824. However, he found that “the attrition evidence presented by [Avista] [did] not
conclusively demonstrate that the circumstances currently facing [Avista] [were] sufficient to
warrant an attrition allowance.” AR at 3824. Despite this conclusion, his attrition analysis
“show[ed] that [Avista] [would] likely under-recover in the rate year at rates established using only
a modified historical test period approach.” AR at 3824.
McGuire further testified that “rates calculated using a modified historical test year
approach [would] likely be insufficient to provide [Avista] with a fair opportunity to earn the
Settlement rate of return.”7 AR at 3813. McGuire prepared two exhibits representing Staff’s
attrition study.
In calculating Avista’s revenue requirements, Staff’s attrition study “estimate[d] the
revenue required to provide Avista with a fair opportunity to earn the settlement rate of return in
2016.” AR at 3817. Because it determined that the revenue requirement calculated with a
modified historical test year approach would yield insufficient revenue, Staff recommended that
the WUTC approve an attrition adjustment to Avista’s rates. However, McGuire also noted his
concerns with Avista’s rapidly increasing investment in distribution plant and accused Avista of
failing to provide a substantive explanation or any evidence justifying the rapid expansion.
McGuire summarized Staff’s findings using both a modified historical test period approach
and the results of Staff’s attrition study. Staff’s analyses concluded that the modified historical
test year approach would yield a rate short of Avista’s attrition-adjusted revenue requirement.
7
The settlement set Avista’s rate of return on investment at 7.29 percent.
9
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Accordingly, McGuire recommended a $14.5 million attrition allowance for electric operations
and a $6.7 million attrition allowance for natural gas operations.
To perform his attrition study and calculate Avista’s electric rate base, expenses, and other
non-retail revenue in 2016, McGuire “relied upon historical, normalized data . . . to estimate rates
of growth for 1) net plant after deferred income taxes; 2) operating expense; 3) total
depreciation/amortization; 4) taxes other than income; and 5) other non-retail revenue.” AR at
3845. Once he had established the growth rates, he applied them to the 2014 levels of each
category. McGuire calculated an escalation factor of 7.83 percent and applied that rate to each
category of Avista’s 2014 rate base. McGuire thus calculated Avista’s projected 2016 rate base
by applying this escalation factor to its 2014 rate base and applying various other factors and
adjustments. McGuire used the same process to perform his attrition study for Avista’s natural
gas rates, with an escalation factor of 16.86 percent.
On cross-examination by ICNU counsel, McGuire stated that he was “not testifying to the
used and useful nature of any specific plant beyond July of 2015.” 5 WUTC Transcripts at 457.
He further clarified that “an attrition allowance is an undistributed increase in revenue” and that
the attrition study was “not any acceptance of some specific plant addition in the future.” 5 WUTC
Transcripts at 457. McGuire also stated that his attrition study did not purport to make “any
assessment of whether or not any investment is prudent or imprudent or will or will not be used
and useful.” 5 WUTC Transcripts at 445. Rather, he characterized the attrition allowance as “an
undistributed increase in revenue not associated with any specific plant” and stated that he was
“not making assessments of individual plant in an attrition study.” 5 WUTC Transcripts at 445.
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C. OTHER TESTIMONY
ICNU presented testimony from Bradley Mullins, a consultant representing industrial
customers. He testified that if “the [WUTC] were to disregard the pro forma cross check study,
and instead establish revenue requirement solely on [Avista’s] proposed trending methodology,[8]
it would allow [Avista] to earn a return on capital expenditures that have not been determined to
be prudent and in the public interest.” AR at 6457. He also warned that “[i]f a trending analysis
is used . . . the undistributed increase in rate base resulting from the reliance on historical trends
would not represent known and measureable capital items, nor could it be determined whether the
increase was the result of capital that is used and useful.” AR at 6457.
D. POST-HEARING BRIEFS
Avista, The Energy Project, NWIGU, ICNU, Staff, and PCU all filed post-hearing briefs
arguing their various positions.
Avista requested an increase of $3.6 million for its electric rates and an increase of $10
million for its gas rates, predicated on an attrition analysis.
ICNU argued in its brief that “Avista’s attrition adjustment proposal falls well short of
meeting” the “known and measurable” standard. AR at 451. It further cited case law for the
proposition that “the unknown and unmeasurable future capital expenditures represented by
[Avista’s] proposed attrition adjustment do not satisfy the statutory ‘used and useful’ requirement.”
AR at 452.
Staff described attrition as “an extraordinary mechanism used only when extraordinary
future circumstances can be demonstrated to negatively impact a utility’s financial integrity during
8
Mullins uses the terms “trending methodology” or “trending analysis” interchangeably with
“attrition methodology” or “attrition analysis” throughout his testimony. See AR at 6452-53;
6457-58.
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the rate effective year.” AR at 508. Given that Avista had earned at or above its approved rate of
return in 2013 and 2014, Staff argued that it had “a reasonable opportunity to earn its allowed rate
of return—even without an attrition allowance.” AR at 509.
Staff considered the WUTC’s test: “whether the company is facing extraordinary
circumstances beyond its control.” AR at 510. Though Staff suggested that Avista had likely not
shown that attrition should apply, it did present an attrition study. Staff described its attrition study
as follows:
It is built upon historical data that is used to project nominal amounts of both net
plant and expenses for the rate effective period. Mr. McGuire’s attrition proposal
is not and should not be construed to represent a pro-forma examination of specific
future capital expenditures. Rather, it is based on his judgment and analysis of
[Avista’s] historical trends, including forecasted capital spending not otherwise
accounted for in Staff’s case. Importantly, he did not examine the likelihood of
Avista’s specific forecasted capital projects actually going into service in the rate
year. Nor does Avista’s recent earnings history affect the results of Staff’s attrition
study given that Mr. McGuire’s attrition analysis is forward looking. Mr. McGuire
also does not address whether Avista can control its forecasted costs during the rate
year.
AR at 511-12 (footnotes omitted).
In determining whether Avista should receive an attrition adjustment, Staff pointed out that
Avista’s witnesses did “not explain the actual cause of why distribution plant expenditures are
growing so quickly.” AR at 516. Though Avista demonstrated “a narrative of its capital budget,”
it did not offer “a clear explanation of an extraordinary cause.” AR at 516.
PCU urged the WUTC to forego an attrition adjustment and set Avista’s rates using the
more established modified historical test year methodology. It argued that Avista’s and Staff’s
attrition studies were both flawed and failed to demonstrate that Avista was experiencing
extraordinary events warranting a shift in traditional ratemaking. PCU warned that an attrition
adjustment “cannot be a known and measurable change” because it is based on historic trends and
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projected escalations, but it acknowledged that attrition is an appropriate response to a “‘trend of
under-earning due to circumstances beyond the [c]ompany’s ability to control.’” AR at 371, 373
(quoting PSE Order 08 at 180).
Within its criticism of attrition’s inherent unreliability, PCU argued that “[w]ith either
Avista’s or Staff’s attrition analysis, the [WUTC] would be required to approve capital investments
that have not been demonstrated to be used and useful and trends that are not known and
measurable.” AR at 378.
V. FINAL AGENCY ORDER
On January 6, 2016, the WUTC issued Order 05—its final order in the case. It issued
findings of fact and conclusions of law.
A. WUTC ATTRITION ANALYSIS
i. Historical Treatment of Attrition
Summarizing its historical treatment of attrition in ratemaking, the WUTC observed that
“the two most common sources of earnings attrition in Washington are abnormal or excessive
inflation and exceptional and prolonged levels of plant additions.” AR at 711.
The WUTC declared that, unlike the previous two Avista ratemaking decisions in 2012
and 2014, “it is clear there is no agreement on the extent to which Avista suffers from attrition in
either its electric or gas operations, nor is there consensus between [Avista] and Staff on the exact
method for determining the extent of any reasonable attrition adjustment.” AR at 712. Therefore,
it announced: “we must conduct a closer examination of the evidentiary record in determining
whether and how to authorize an attrition adjustment.” AR at 712.
The WUTC determined that it must resolve three primary issues with regard to attrition in
this case: “1) the appropriate criteria for determining whether an attrition adjustment is warranted;
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2) the appropriate methodology for an attrition study; and 3) whether Avista has met its burden of
proof to justify granting an attrition adjustment for both electric and natural gas rates.” AR at 725.
ii. New Attrition Test
In “the early attrition cases,” the WUTC acknowledged that it “found extraordinary
circumstances that supported the use of attrition in periods of high inflation and extraordinary
levels of investment in production plant, among other criteria.” AR at 725. It acknowledged that
no such circumstances were present in this case. However, it found that “Avista is making
increased capital investments in non-revenue generating plant (primarily on the distribution
system) in an environment of low load growth.” AR at 725. The WUTC characterized Avista’s
circumstances as the “new normal.” AR at 725.
In considering its recent statements about attrition adjustments, the WUTC stated it had
“not established a different standard or criteria for attrition adjustments in more recent cases,” but
had indicated “that ‘an attrition adjustment should not be limited to circumstances where the utility
can demonstrate extreme financial distress.’” AR at 726 (quoting Avista Orders 09 and 14 at 30).
The WUTC decided that “it is not necessary to require a finding of extraordinary
circumstances to justify granting an attrition adjustment.” AR at 726. Rather, it concluded that:
An attrition adjustment is yet another tool in our regulatory “toolbox” for utility
ratemaking. However, we do require that utilities requesting an attrition adjustment
demonstrate that the cause of the mismatch between revenues, rate base and
expenses is not within the utility’s control. Without such a standard, a utility could
plan for a level of expenditures that would exceed revenues and rate base recovery,
creating the need for an attrition adjustment.
AR at 726. The new test announced by the WUTC required only that the utility seeking an attrition
adjustment demonstrate that the attrition it was experiencing be outside its control.
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iii. Attrition Study Methodology
The WUTC next articulated its perspective on the appropriate methodology for an attrition
study. It found that Staff’s approach, with some of Avista’s modifications, “provide[d] the most
appropriate methodology in this docket for supporting an attrition adjustment.” AR at 726. It
concluded that the proper methodology “begins with development of a modified historical test year
with pro forma plant additions, even subsequent to a test year. An attrition study is based on the
resulting projected earnings and revenue requirements, and the attrition adjustment is added only
if the study shows a mismatch of earnings and expenditures.” AR at 726.
The WUTC made two adjustments to Staff’s attrition study. First, it adopted Avista’s
2007-2014 time period, rather than Staff’s 2009-2014 period to calculate growth trends. Second,
it rejected the operating and maintenance (O&M) expense growth rates provided by both Avista
and Staff and opted for one between the two.
iv. Application of New Attrition Test
Finally, the WUTC set about determining whether Avista had met its burden of proof to
justify an attrition adjustment: to demonstrate persuasively that the attrition occurring was outside
of its control. In applying its new attrition methodology to Avista, the WUTC decided it was
critical to determine whether “it [was] necessary for Avista . . . to demonstrate that its need to
invest in non-revenue generating plant, particularly distribution plant, [was] so necessary and
immediate as to be beyond its control.” AR at 727-28.
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In an effort to address concerns about the “Averch-Johnson effect,”9 the WUTC declared
that, although it no longer required a showing of extraordinary circumstances to justify attrition, it
still required a persuasive demonstration “that the attrition occurring is outside of [the utility’s]
control.” AR at 728.
In applying its new methodology to determine whether Avista should receive an attrition
adjustment for its natural gas services, the WUTC noted that Avista had “reasonably demonstrated
that it is making significant investments in non-revenue generating plant for the purposes of safety
and reliability.” AR at 729. It found that Avista had “established that the need for its capital
investments in natural gas operations are beyond its control.” AR at 730. Accordingly, it
“authorize[d] an attrition adjustment in accordance with the methodology advocated by Staff” with
some exceptions. AR at 730. The WUTC granted an attrition adjustment of approximately $6.8
million for Avista’s natural gas operations, resulting in an overall increase in revenue requirement
of $10.8 million.
In applying the new attrition methodology to Avista’s electrical services, the WUTC found
that the evidence did “not convince [it] that Avista’s projected electric distribution investments
[we]re entirely outside of its control, or [were] required for the safe and efficient operation of its
system.” AR at 732. Because there was “some, but not complete, evidence” that the attrition was
9
ICNU witness Bradley Mullins described this effect as follows:
It has been widely documented that utilities subject to rate of return regulation have
an incentive to over-invest in capital in order to increase earnings. This
phenomenon is often referred to as the Averch-Johnson Effect, based on the
economists who first developed the model to describe the phenomenon, and has a
real and significant impact on how utility operations are managed.
AR at 6454 (citing Harvey Averch & Leland L. Johnson, Behavior of the Firm Under Regulatory
Constraint, 52 AM. ECON. REV. 996, 1052 (1962).
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outside Avista’s control, the WUTC decided that it “retain[ed] broad discretion to consider other
factors, such as [Avista’s] intent to file another rate case within the next year, and the analysis
under Hope,[10] Bluefield,[11] and Permian Basin.”12 AR at 733. The WUTC announced that it
believed it could “exercise broad discretion to consider such seminal cases using [its] informed
judgment in deciding whether or not an attrition adjustment is warranted given the specific facts
and circumstances in a rate case.” AR at 733.
The WUTC noted that, if it were to reject the attrition adjustment for electric revenue,
Staff’s modified historical test year analysis would reduce Avista’s electric revenue requirement
by more than $20 million. Although PCU and ICNU recommended higher reductions than that,
the WUTC determined that it could not “reasonably conclude such an end result would be
appropriate under the standards in Hope and Bluefield.” AR at 734. It announced that its
ratemaking responsibility “turns not on the particular rate making methodology it selects, i.e.,
modified historical test year or attrition, but on its outcome, or ‘end results.’” AR at 734 (citing
Hope, 320 U.S. at 603). The WUTC then quoted the Washington Supreme Court’s analysis of
Hope and Permian Basin, to conclude that “‘within a fairly broad range, regulatory agencies
exercise substantial discretion in selecting the appropriate rate making methodology.’” AR at 735
(quoting POWER 85, 104 Wash. 2d at 812).
The WUTC concluded that “[a] drastic rate reduction, such as proposed by parties that urge
us to reject an attrition adjustment, would run afoul” of the ratemaking principles discussed in
10
320 U.S. at 603.
11
262 U.S. at 692.
12
In re Permian Basin Area Rate Cases, 390 U.S. 747, 791-92, 88 S. Ct. 1344, 20 L. Ed. 2d 312
(1968).
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POWER 85. AR at 735. Based on its interpretation of POWER 85 and its analysis of Hope,
Bluefield, and Permian Basin, the WUTC granted Avista an attrition adjustment for its electric
operations using Staff’s attrition analysis, with two modifications. First, because Avista could not
show that its proposed elevated investments in distribution plant were beyond its control, the
WUTC removed all escalation of distribution plant in calculating Avista’s rate base. Second, it
rejected both Avista’s and Staff’s calculation of the O&M escalation rate, instead calculating the
escalation rate itself.
The WUTC applied an attrition adjustment of $28.3 million and concluded that Avista’s
electric services revenue requirement should be reduced by approximately $8.1 million. Despite
having granted Avista the attrition adjustment, the WUTC expressed frustration “about continuing
to authorize recovery for these significant capital investments, absent a complete demonstration
by [Avista] of quantifiable benefits to ratepayers.” AR at 737.
B. FINDINGS OF FACT AND CONCLUSIONS OF LAW
The WUTC found that “[t]he evidentiary record support[ed] a finding that Avista [would]
experience attrition in its electric and natural gas operations over the rate effective year” and that
“[a]bsent an attrition adjustment, [Avista] may not have an opportunity to achieve earnings on
electric operations at or near authorized levels.” AR at 773.
The WUTC concluded that Avista had met its burden to demonstrate that its gas rates were
insufficient to yield reasonable compensation and required an upward adjustment, but that it failed
to meet its burden to show the same for its electric rates. To set new rates, the WUTC “accept[ed]
and modif[ied] Staff’s attrition methodology for the purposes of setting rates for Avista’s natural
gas operations as reasonable.” AR at 776. It also accepted Staff’s attrition methodology for setting
electric rates, but “remove[d] any escalation of projected capital investments for distribution plant”
18
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because distribution plant costs had not been demonstrated “as necessary or beyond [Avista’s]
control.” AR at 776. It also modified the electric O&M expense escalation rate.
Avista filed tariff sheets reflecting the changes in rates. The new rates went into effect on
January 11, 2016. 13
PCU petitioned the Thurston County Superior Court for judicial review of the WUTC’s
decision and then applied for direct review by this court. The Superior Court certified the case to
us for direct review pursuant to RCW 34.05.518.
ANALYSIS
I. WAIVER
PCU assigns error to the WUTC’s use of an attrition adjustment in determining Avista’s
rates because it relied on estimates that were not associated with any particular “used and useful”
Avista plant. The WUTC contends that this challenge is untimely because PCU never made this
argument before the WUTC and thus may not raise it on appeal. Because ICNU raised the issue
before the agency, we consider its merits.
A. LEGAL PRINCIPLES
The Washington Administrative Procedure Act (APA) provides that “[i]ssues not raised
before the agency may not be raised on appeal” unless a specific exception applies. RCW
34.05.554(1). “In order for an issue to be properly raised before an administrative agency, there
must be more than simply a hint or a slight reference to the issue in the record.” Citizens for Mount
13
PCU alleges that the WUTC erred in its calculations of the final attrition adjustment based on
confusion relating to Avista’s updated power supply costs. The WUTC denied PCU’s and ICNU’s
motions for clarification of its order and Staff’s motion for reconsideration, finding that the electric
rates set by Order 05 were a fair, just, reasonable, and sufficient end result based on substantial
evidence. Because we resolve the case on other grounds, we do not reach the alleged
computational errors and do not discuss them further.
19
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Vernon v. City of Mount Vernon, 133 Wash. 2d 861, 869, 947 P.2d 1208 (1997). Washington law
“require[s] issues to be first raised at the administrative level and encourage[s] parties to fully
participate in the administrative process.” Citizens for Mount Vernon, 133 Wash. 2d at 869.
Neither party addresses whether a party waives an argument when a different party raised
the issue before the agency.
B. PCU’S TREATMENT OF THE ISSUE
The WUTC argues that PCU, for the first time on appeal, argues that attrition adjustments
are never lawful because “they incorporate the value of rate base assets that are not ‘used and
useful.’” Br. of Resp’t at 27.
PCU identifies one place in the record where it argued that an attrition adjustment would
violate RCW 80.04.250’s “used and useful” language. In PCU’s post-hearing brief, it argued that
“[w]ith either Avista’s or Staff’s attrition analysis, the [WUTC] would be required to approve
capital investments that have not been demonstrated to be used and useful and trends that are not
known and measureable.” AR at 378 (citing 5 WUTC Transcripts 612). Its argument was a single-
sentence conclusory paragraph and its brief did not discuss the issue further. It cited ICNU witness
Mullins’s testimony on cross-examination that the attrition study would require reliance on capital
that was not used and useful. PCU did not cite any law, argue that this made the adjustment illegal,
or explain the significance of the “used and useful” terminology. PCU’s treatment of the issue
before the WUTC was one sentence in a fifty-nine page brief, in an administrative record spanning
thousands of pages.
In King County v. Washington State Boundary Review Board, the county pointed to the
ordinance at issue in the administrative record and a memorandum from another party arguing the
20
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other side of the issue. 122 Wash. 2d 648, 670, 860 P.2d 1024 (1993). The court held that these
factors were insufficient to preserve the issue for judicial review. King County, 122 Wash. 2d at 670.
In this case, PCU argued that the attrition adjustment considered investments that were not
“used and useful” in its post-hearing brief in a single sentence. PCU’s treatment of the issue before
the WUTC was exactly the type of “hint” or “slight reference” to the issue that is insufficient to
preserve it on appeal. If PCU had been the only party raising this issue, it would have waived its
“used and useful” argument.
C. ICNU’S TREATMENT OF THE ISSUE
PCU also points out where ICNU raised the “used and useful” issue before the WUTC.
ICNU argued in its post-hearing brief that “according to the Supreme Court of Washington in
POWER I,[14] the unknown and unmeasurable future capital expenditures represented by [Avista’s]
proposed attrition adjustment do not satisfy the statutory ‘used and useful’ requirement.” AR at
452. ICNU argued that “the used and useful statute prohibits [Avista’s] proposal to incorporate
indeterminate future capital amounts into tariff charges.” AR at 452.
We have not addressed whether a party must raise an argument before the agency when
another party has raised the issue during the administrative proceedings. Federal courts
considering the issue, however, have decided that the exhaustion requirement should be excused
where the agency “‘has had an opportunity to consider the identical issues . . . but which were
raised by other parties.’” Nat. Res. Def. Council, Inc. v. U.S. Envtl. Prot. Agency, 824 F.2d 1146,
1151 (D.C. Cir. 1987) (quoting Buckeye Cablevision, Inc. v. United States, 438 F.2d 948, 951 (6th
14
People’s Org. for Wash. Energy Res. v. Utils. & Transp. Comm’n, 101 Wash. 2d 425, 430, 679
P.2d 922 (1984).
21
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Cir. 1971)). The Washington Supreme Court has cited the D.C. Circuit for the policies underlying
the waiver doctrine, noting that the rule furthers the purposes of:
“(1) discouraging the frequent and deliberate flouting of administrative processes;
(2) protecting agency autonomy by allowing an agency the first opportunity to
apply its expertise, exercise its discretion, and correct its errors; (3) aiding judicial
review by promoting the development of facts during the administrative
proceeding; and (4) promoting judicial economy by reducing duplication, and
perhaps even obviating judicial involvement.”
King County, 122 Wash. 2d at 669 (quoting Fertilizer Inst. v. U.S. Envtl. Prot. Agency, 935 F.2d
1303, 1312-13 (D.C. Cir. 1991).
These policies are all supported by allowing another party to preserve an issue. Further,
the D.C. Circuit, where those policies come from, expressly allowed this practice so long as the
agency “had an opportunity to consider” the issue. Nat. Res. Def. Council, 824 F.2d at 1151.
Because ICNU placed the issue before the WUTC, we consider PCU’s statutory “used and useful”
argument.
II. USED AND USEFUL
PCU contends that the WUTC “exceeded its statutory authority by setting rates for Avista’s
utility services that included amounts for utility plant that were not ‘used and useful’” as required
by statute. Br. of Appellant at 20. It argues that the WUTC considered “projected amounts of
potential future utility plant” that was “not associated with actual utility plant that could be used
to provide utility service, and is thus not ‘used and useful.’” Br. of Appellant at 23-24.
The WUTC responds that “rate base assets that are valued through an attrition adjustment
are ‘used and useful’ within the meaning of RCW 80.04.250.” Br. of Resp’t at 30. It argues that
the attrition adjustment derives asset values “through a process that predicts, with a high degree of
certainty, capital investments that will improve or maintain the utility’s system” during the rate-
22
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effective period. Br. of Resp’t at 30. Therefore, it claims that it “reasonably assumes that the
associated investments will benefit current ratepayers.” Br. of Resp’t at 30.
RCW 80.04.250 gives the WUTC authority to “determine the fair value for rate making
purposes of the property of any public service company used and useful for service in this state.”
However, the WUTC exceeds its authority if it calculates a utility’s rate base including property
that is not “used and useful” for service in Washington. People’s Org. for Wash. Energy Res. v.
Utils. & Transp. Comm’n, 101 Wash. 2d 425, 434, 679 P.2d 922 (1984) (POWER 84). We conclude
that the WUTC’s use of attrition to calculate rate base violates the “used and useful” principle of
RCW 80.04.250.
A. LEGAL PRINCIPLES
We review the WUTC’s final orders under the APA, chapter 34.05 RCW. PacifiCorp v.
Wash. Utils. & Transp. Comm’n, 194 Wash. App. 571, 586, 376 P.3d 389 (2016). “The party
asserting the invalidity of the [WUTC’s] action has the burden of demonstrating invalidity.”
PacifiCorp, 194 Wash. App. at 586.
We review the WUTC’s findings for substantial evidence supporting the finding.
PacifiCorp, 194 Wash. App. at 586. Substantial evidence is “‘evidence sufficient to persuade a fair-
minded person of their truth.’” City of Vancouver v. Pub. Emp’t Relations Comm’n, 180 Wash. App.
333, 347, 325 P.3d 213 (2014) (quoting City of Vancouver v. Pub. Emp’t Relations Comm’n, 107
Wash. App. 694, 703, 33 P.3d 74 (2001))). The substantial evidence standard is highly deferential
and unchallenged findings are verities on appeal. PacifiCorp, 194 Wash. App. at 586-87.
We will overturn an agency order if the order “is outside the statutory authority or
jurisdiction of the agency conferred by any provision of law,” “is not supported by evidence that
is substantial when viewed in light of the whole record before the court,” or is “arbitrary or
23
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capricious.” RCW 34.05.570(3)(b), (e), & (i). We will also reverse if the agency has “erroneously
interpreted or applied the law.” RCW 34.05.570(3)(d).
The legislature has tasked the WUTC to “[r]egulate in the public interest, as provided by
the public service laws, the rates, services, facilities, and practices of all persons engaging within
this state in the business of supplying any utility service or commodity to the public for
compensation.” RCW 80.01.040(3). Among the duties the legislature has delegated to the WUTC
is that to set rates for utilities, subject to appropriate judicial review. POWER 85, 104 Wash. 2d at
808. “The [WUTC] must set ‘just, fair, reasonable and sufficient’ rates.” PacifiCorp, 194 Wn.
App. at 587 (quoting RCW 80.28.010). The “function of rate-making is legislative in character,
and the judicial branch is not empowered to undertake the job of fixing rates.” PacifiCorp, 194
Wash. App. at 587. The utility has the burden of proof for increasing its rates. PacifiCorp, 194 Wn.
App. at 587.
The WUTC’s duties require it “to not only assure fair prices and services to customers, but
also to assure that regulated utilities earn enough to remain in business.” POWER 85, 104 Wash. 2d
at 808. “A utility is not permitted to recover every expense in its rate structure; the WUTC ‘has
the power to review operating expenses incurred by a utility and to disallow those which were not
prudently incurred.’” Willman v. Wash. Utils. & Transp. Comm’n, 122 Wash. App. 194, 204, 93
P.3d 909 (2004) (quoting POWER 85, 104 Wash. 2d at 810). However, the WUTC “must ‘assure
that regulated utilities earn enough to remain in business.’” PacifiCorp, 194 Wash. App. at 588
(quoting Willman, 122 Wash. App. at 204).
“‘The [WUTC] has broad generalized powers in rate-setting matters.’” PacifiCorp, 194
Wash. App. at 588 (quoting US W. Commc’ns, Inc. v. Wash. Utils. & Transp. Comm’n, 134 Wash. 2d
48, 56, 949 P.2d 1321 (1997)). Courts “are not at liberty to substitute their judgment for that of
24
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the [WUTC] in rate cases” and “within a fairly broad range, regulatory agencies exercise
substantial discretion in selecting the appropriate rate-making methodology.” US W. Commc’ns,
Inc., 134 Wash. 2d at 56.
We give “substantial deference to a regulatory agency’s judgment about how best to serve
the public interest.” Att’y Gen.’s Office, Pub. Counsel Section v. Utils. & Transp. Comm’n, 128
Wash. App. 818, 824, 116 P.3d 1064 (2005). “An agency’s decision cannot be set aside absent a
clear showing of abuse of discretion.” PacifiCorp, 194 Wash. App. at 588. We do not weigh
evidence or judge witness credibility, and we defer to the WUTC’s discretion in weighing
testimony of experts. PacifiCorp, 194 Wash. App. at 588-89.
However, statutory interpretation is a question of law we review de novo. Williams v.
Tilaye, 174 Wash. 2d 57, 61, 272 P.3d 235 (2012). “Where the language of a statute is plain, free
from ambiguity, and devoid of uncertainty, there is no room for construction because the meaning
will be discovered from the wording of the statute itself.” POWER 84, 101 Wash. 2d at 429-30.
B. POWER CASES
PCU argues that the WUTC acted beyond the scope of its authority when it used an attrition
adjustment to calculate Avista’s utility rates. We agree that WUTC’s use of an attrition adjustment
to calculate Avista’s rate base violated RCW 80.04.250.
When setting rates, the WUTC has the power to “ascertain and determine the fair value for
rate making purposes of the property of any public service company used and useful for service in
this state and shall exercise such power whenever it deems such valuation or determination
necessary or proper under any of the provisions of this title.” RCW 80.04.250(1) (emphasis
added). When calculating a utility’s rate base for ratemaking, if the WUTC considers utility plant
that “is neither employed for service nor capable of being put to use for service; . . . such a plant
25
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is not ‘used and useful’ for service” and the WUTC exceeds its statutory authority. POWER 84,
101 Wash. 2d at 430.
In POWER 84, the WUTC included construction work in progress (CWIP) in calculating
the company’s rate base for determination of its electric rates. 101 Wash. 2d at 427. It determined
that “because of the magnitude of the company’s present and future construction programs, the
company [would] not be able to finance its construction projects on reasonable terms without
including a portion of CWIP in rate base.” POWER 84, 101 Wash. 2d at 428. The Supreme Court
analyzed the “used and useful” language of RCW 80.04.250(1) and held that an “uncompleted
utility plant is neither employed for service nor capable of being put to use for service; therefore,
such a plant is not ‘used and useful’ for service as required by RCW 80.04.250.” POWER 84, 101
Wash. 2d at 430. Therefore, it concluded, “the [WUTC] exceeded its statutory authority by including
CWIP in [the company’s] rate base.”15 POWER 84, 101 Wash. 2d at 430.
The Court in POWER 84 further noted that RCW 80.04.250 contains no “indication that
the [WUTC] possesses untrammeled discretion with respect to which property may be included in
rate base for ratemaking purposes.” 101 Wash. 2d at 434. Neither did it “find any indication in the
statute that the financial condition of the utility is relevant in determining whether property may
be included in rate base.” POWER 84, 101 Wash. 2d at 434. In POWER 85, the Court also specified
15
In 1991, the legislature amended RCW 80.04.250 to expressly authorize the WUTC to include
CWIP in calculating rate base. RCW 80.04.250; LAWS OF 1991, ch. 122, §2.
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in dicta that the “property on which a public utility is entitled to earn a fair return is that which is
used and useful for public service at the time the inquiry as to rates is made.” 16 104 Wash. 2d at 815
(emphasis added).
In POWER 84, the WUTC had further erred by using rate base attributed to CWIP to
calculate an attrition allowance for the company. 101 Wash. 2d at 428. The court noted that a
significant portion of the attrition allowance the WUTC had authorized was “directly attributable”
to CWIP expenses. POWER 84, 101 Wash. 2d at 428.
In POWER 85, the Supreme Court addressed another challenge to utility rates set by the
WUTC. In that case, the WUTC had included costs associated with an abandoned power plant
project in determining the company’s operating expenses. POWER 85, 104 Wash. 2d at 814.
POWER argued that the “used and useful” statute should be applied to operating expenses in the
same way POWER 84 had applied it to calculation of rate base. POWER 85, 104 Wash. 2d at 815.
The Court held that RCW 80.04.250 “is purely a rate base statute and does not apply to operating
expenses,” and so the costs of the abandoned power plants were not required to be “used and
useful.” POWER 85, 104 Wash. 2d at 815. Accordingly, insofar as the attrition adjustment is not a
method of calculating rate base, it avoids the “used and useful” requirement of RCW 80.04.250.
C. ANALYSIS
PCU argues that, like the CWIP in POWER 84, the projections used to calculate Avista’s
attrition adjustment “are not associated with any specific investment in rate base, and thus are not
tied to utility plant employed for service or capable of being put to use for service.” Br. of
16
POWER 85 held that the WUTC may consider O&M expenses that are not “used and useful”
when calculating a company’s operating expenses because RCW 80.04.250 “is purely a rate base
statute.” 104 Wash. 2d at 815. Its statement of the temporal element in RCW 80.04.250 therefore
had nothing to do with its ultimate holding.
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Appellant at 28. It contends that if “actual, unfinished plant under construction fails to meet the
used and useful test, then mere projections of potential future capital investment also fail.” Br. of
Appellant at 28.
The WUTC “exercise[s] substantial discretion in selecting the appropriate ratemaking
methodology.” US W. Commc’ns, 134 Wash. 2d at 56. However, it does not have discretion to
include rate base that is not “used and useful.” POWER 84, 101 Wash. 2d at 430. Therefore, if the
attrition study and attrition adjustment was a methodology for determining Avista’s used and
useful rate base and O&M expenses, the WUTC did not exceed its authority by using it. However,
if the attrition study considered rate base that was not “used and useful,” the WUTC exceeded its
authority.
The attrition adjustment the WUTC applied in this case was based on the study performed
by McGuire. In that study, McGuire calculated Avista’s electric rate base for 2016 by determining
its average rate of growth from 2009 to 201417 and applying that rate to the 2014 rate base. He
then arrived at a rate base more than one hundred million dollars higher than the 2014 rate base.
He used an identical process to calculate Avista’s natural gas rate base, resulting in a predicted
2016 rate base nearly fifty million dollars higher than the 2014 rate. McGuire acknowledged that
he was “not testifying to the used and useful nature of any specific plant beyond July of 2015.” 5
WUTC Transcripts at 457. He also made clear that his attrition study did not purport to make “any
assessment of whether or not any investment is prudent or imprudent or will or will not be used
and useful.” 5 WUTC Transcripts at 445.
The WUTC made modifications to McGuire’s attrition study in its final order. In the tables
it attached to its final order, it did not include any of McGuire’s heightened attrition numbers in
17
The WUTC ultimately adjusted the time period to 2007–2014 as suggested by Avista.
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rate base. Rather, it included only the uncontested rate base adjustments and numbers reflecting
planned capital additions for 2014 and 2015, based on the pro forma calculations. Then, after
calculating rate base among other factors, it applied an attrition allowance it reached based on
McGuire’s attrition study, with the WUTC’s modifications, at the end.18
Although the WUTC’s final attrition analysis excluded all escalation of capital investment
in distribution plant, McGuire’s attrition analysis applied escalation to four other types of plant
and several other categories of rate base,19 none of which was excluded by the WUTC. Rather
than assessing Avista’s used and useful 2014 rate base, this process projected Avista’s likely rate
base in 2016 using historical trend data. As acknowledged by McGuire, these projections are not
based on “assessments of individual plant,” but general projections of Avista’s likely rate base as
a whole.
In POWER 84, specific, identifiable, but incomplete plant was not “used and useful” as the
term is meant in RCW 80.04.250. 101 Wash. 2d at 430. Here, the WUTC based its calculation of
Avista’s rate base on projections rather than any specific identifiable plant. Regardless of their
accuracy, use of projections in determining rate base ignores the requirement that the WUTC only
consider property “used and useful for service” in Washington. Like the CWIP in POWER 84, the
projected data in this case is not tied to any particular used and useful plant.
We clarify that, as the Supreme Court ruled in POWER 85, RCW 80.04.250 “is purely a
rate base statute and does not apply to operating expenses.” 104 Wash. 2d at 815. To the extent the
WUTC relied on its attrition adjustment to account for increases in Avista’s O&M expenses, it did
18
It is unclear where the exact numbers the WUTC reached in its attrition study came from. The
record indicates that it held two order conferences in January and February of 2016 where an expert
explained the numbers, but nothing from those conferences is in the record.
19
These other types were intangible, production, transmission, and general plant.
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not violate the statute. However, its reliance on projections to calculate Avista’s rate base was
improper.
The WUTC urges us to view its attrition study as a method of calculating rate base that we
must defer to. It asserts that the “asset values are derived through a process that predicts, with a
high degree of certainty, capital investments that will improve or maintain the utility’s systems
during the period in which the newly approved rates will remain in effect.” Br. of Resp’t at 30.
The WUTC does “exercise substantial discretion in selecting the appropriate ratemaking
methodology.” US W. Commc’ns, 134 Wash. 2d at 56. However, it does not have “untrammeled
discretion with respect to which property may be included in rate base for ratemaking purposes.”
POWER 84, 101 Wash. 2d at 434. Because its attrition adjustment accounted for rate base that has
not been shown to be “used and useful” in Washington, the WUTC exceeded its statutory authority.
The WUTC quotes a law review article for the proposition that costs and investments are
“used and useful if . . . there is a direct and immediate benefit to customers; traditionally, the
investment is made in plant that is operational now or in a future test year or in the period during
which the rates may reasonably be expected to be in effect.” Br. of Resp’t at 31-32 (quoting James
J. Hoecker, “Used and Useful”: Autopsy of a Ratemaking Policy, 8 ENERGY L.J. 303, 312 (1987)).
However, this fails to account for the Washington Supreme Court’s conclusion that “property on
which a public utility is entitled to earn a fair return is that which is used and useful for public
service at the time the inquiry as to rates is made.” POWER 85, 104 Wash. 2d at 815.
Avista cites numerous out-of-state cases for the proposition that “whether utility property
is ‘used and useful’ and therefore to be included in rate base, is a factual determination.” Br. of
Intervenor-Resp’t at 21. This is directly at odds, however, with POWER 84, which addressed
whether CWIP was “used and useful” as a matter of statutory construction. 101 Wash. 2d at 429-30.
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Avista also argues that we should defer to the WUTC’s reasonable interpretation of RCW
80.04.250. Br. of Intervenor-Resp’t at 24. Despite this principle of construction, however, the
POWER 84 court held that RCW 80.04.250 is “plain, free from ambiguity, and devoid of
uncertainty,” such that “there is no room for construction because the meaning will be discovered
from the wording of the statute itself.” 101 Wash. 2d at 429-30.
CONCLUSION
Because the projections of future rate base were not “used and useful” for service in
Washington, we conclude that the WUTC may not base Avista’s rates on them. Accordingly, the
WUTC erred in calculating Avista’s electric and natural gas rates. The WUTC order provided one
lump sum attrition allowance without distinguishing what portion was for rate base and which was
for O&M expenses or other considerations. We strike all portions of the attrition allowance
attributable to Avista’s rate base and reverse and remand for the WUTC to recalculate Avista’s
rates without relying on rate base that is not used and useful.20
Melnick, J.
We concur:
Johanson, J.
Lee, A.C.J.
20
PCU also alleges that the WUTC arbitrarily and capriciously applied its new attrition test to
Avista’s electric rates. Br. of Appellant at 31. Because the WUTC exceeded its statutory authority
by using attrition to calculate Avista’s rate base, we do not reach this issue.
31