On October 29, 2018, the Oregon Public Utility Commission (Oregon Commission or OPUC) issued an order finding that it lacks the legal authority to allow utilities to defer, for later ratemaking consideration, the costs associated with their capital projects. The Oregon Commission’s decision represents a departure from its past practice, and also marked an instance of the Oregon Commission reaching a conclusion that was not advanced by any party to the proceeding.
In the proceeding, Docket No. UM 1909, the Commission undertook a generic investigation to review its authorities under Oregon Revised Statutes (ORS) 757.259(2)(e). This statute allows the Commission to authorize utilities to defer certain “identifiable utility expenses or revenues,” which the utilities can then seek to recover through rates in the future. This deferral process represents the exception to how utility rates are normally set, because under the “rule against retroactive ratemaking,” utilities’ rates usually are set based only on their future costs.
In its Order, the Oregon Commission analyzed the statutory language, and determined that “expense,” should be interpreted consistent with the usage of that term in the field of accounting. It reasoned that under accounting principles, investments in utility capital projects are not counted as an expense on a utility’s income statement, and are instead considered assets. For this reason, the OPUC determined that no aspect of capital costs can be deferred under the law.
Other parties to the proceeding (the Commission Staff, the Oregon Citizens’ Utility Board, and the Alliance of Western Energy Consumers) had taken the position that the Commission could legally defer part of the costs of utilities’ capital investments, but not the rest. Specifically, they argued that the Commission could defer “depreciation expense,” or the expense that utilities recognize over time as a capital asset loses value from age and use. But they argued that the Commission could not defer a utility’s “return on” the investment, or the utility’s cost of debt and returns for shareholders. These parties asked the Commission to not allow deferrals on either component as a matter of policy, however.
In contrast, Oregon’s Investor-Owned Electric and Natural Gas Utilities joined together in the case, and argued that the law allowed the Oregon Commission to defer all components of their costs related to capital, as the Oregon Commission has done in the past, and that the Oregon Commission should continue to do so as a matter of policy.
The Oregon Commission rejected all parties’ views, and instead found that it could not defer any component of cost related to utility capital projects. The effect of the Oregon Commission’s order is that utilities are required to change their rates in order to gain the ability to recover any costs associated with capital projects. Prior to the order, utilities had somewhat routinely left their current rates in effect, and used the deferral mechanism to capture capital project costs until their next planned rate change.
Sanger Law represented a party to this case that did not take a position on the legal matters presented. We will, however, monitor future activity in the case, since it affects a significant aspect of ratemaking in Oregon, and could have implications on how investor-owned utilities approach rate cases or rate adjustment mechanisms. On December 24, 2018, the Joint Utilities filed at the OPUC for reconsideration of the Commission’s order, and they could seek future judicial review of the Commission’s order as well, depending on the Commission’s decision regarding reconsideration.
The Commission’s order can be read Here.
Disclaimer
These materials are intended to as informational and are not to be considered legal advice or legal opinion, nor do they create a lawyer-client relationship. Information included about previous case results does not assure a similar future result.
