Argued and Submitted September 11, 2012
Public Utility Commission of Oregon. UM1224.
Daniel W. Meek argued the cause and filed the briefs for petitioners.
Erin C. Lagesen, Assistant Attorney General, argued the cause for respondent Public Utility Commission of Oregon. With her on the brief were John R. Kroger, Attorney General, and Anna M. Joyce, Solicitor General.
James N. Westwood argued the cause for respondent Portland General Electric Company. With him on the brief were Brad S. Daniels and Stoel Rives LLP.
Before Wollheim, Presiding Judge, and Nakamoto, Judge, and Schuman, Senior Judge.
WOLLHEIM, P. J.
[261 Or.App. 390] Pursuant to ORS 756.610(1), petitioners Utility Reform Project and Ken Lewis (collectively referred to as URP) seek judicial review of an order of the Public Utility Commission (PUC) denying URP's request under ORS 757.259 to direct respondent Portland General Electric (PGE) to amortize certain deferred amounts into future rates. URP asserts that legislation passed in 2005 required the PUC to order PGE to refund amounts over-collected from ratepayers for taxes from October 5, 2005 to December 31, 2005, and that, in denying its request for amortization of the excess taxes collected, the PUC acted outside the range of its discretion and in violation of the law. We review the PUC's order pursuant to ORS 183.482(8); ORS 756.610(1), and affirm.
This case involves the utility rate treatment of federal and state taxes by PGE and the PUC for the period October 5, 2005 through December 31, 2005, in light of Senate Bill (SB) 408 (2005), enacted as Oregon Laws 2005, chapter 845, sections 2 to 5. In Industrial Customers of Northwest Utilities v. PUC, 240 Or.App. 147, 246 P.3d 1151 (2010), we summarized that legislation. As we explained, a public utility is allowed to build into its rates the amount that the utility expects to pay in income taxes. Id. at 150. Before the enactment of SB 408, the PUC permitted a utility to charge ratepayers for " taxes that assume the utility is not part of an affiliate group of corporations for tax purpose." Former ORS 757.267(1)(c). As a practical matter, however, utilities were filing their taxes as part of an affiliated group, whereby losses from within the affiliated group had the potential to reduce or eliminate the utility's tax liability. Before the enactment of SB 408, there was no mechanism to verify whether the utility's projected taxes were actually paid. 240 Or.App. at 150-51. SB 408 was designed to provide that mechanism.
[261 Or.App. 391] Section 2 of SB 408, enacted as former ORS 757.267, consisted of a series of legislative
findings and statements concerning the " alignment of taxes collected by public utilities from utility customers with taxes paid to units of government by utilities, or affiliated groups that include utilities." Among the statements, former ORS 757.267(1)(f) provided that
" [u]tility rates that include amounts for taxes should reflect the taxes that are paid to units of government to be considered fair, just and reasonable."
Section 5 of SB 408 amended ORS 757.210(1), relating to hearings to establish new rates or rate schedules. Formerly, ORS 757.210(1) provided that the PUC shall " conduct a hearing to determine the propriety and reasonableness of such rate or schedule." Effective on the bill's passage, the statute provides that the PUC shall conduct a hearing to determine " whether the rate or schedule is fair, just and reasonable." Or Laws 2005, ch 845, § 5. The amendment also added to ORS 757.210(1) the statement that " [t]he commission may not authorize a rate or schedule of rates that is not [261 Or.App. 392] fair, just and reasonable." Id. Section 3 of SB 408, enacted as former ORS 757.268(1), required a public utility to file an annual tax report, from which the PUC could determine the difference between the taxes projected to be paid and the taxes ultimately paid by the utility or the utility's affiliated corporate group. As an exception to the well-settled rule requiring that utility rates be set prospectively (the rule against retroactive ratemaking), see Gearhart v. PUC, 255 Or.App. 58, 100, 299 P.3d 533, rev allowed, 354 Ore. 386, 314 P.3d 964 (2013), if the PUC determined that the difference between the amount charged to ratepayers for tax expense and the amount actually paid was $100,000 or more, the legislation required the utility to establish an automatic adjustment clause in its rate schedule that would allow for the adjustment of rates to account for the discrepancy. Former ORS 757.268(4); Industrial Customers of Northwest Utilities, 240 Or.App. at 149.
Although SB 408 itself was effective on its passage date of September 2, 2005, Or Laws 2005, ch 845, § 6, the automatic adjustment provision applied only to taxes paid to units of government and collected from ratepayers on or after January 1, 2006. Or Laws 2005, ch 845, § 4(2). Thus, the automatic adjustment provision did not assist URP in its quest to recover taxes collected from ratepayers by PGE but not paid to a government entity during the period of October 5, 2005 through December 31, 2005.
Under ORS 757.259, in exceptional circumstances, the PUC has authority to permit the retroactive adjustment of rates through " deferral" of costs or revenues for later incorporation in rates:
" (1) In addition to the powers otherwise vested in the Public Utility Commission, and subject to the limitations contained in this section, under amortization schedules set by the commission, a rate or rate schedule:
" (a) May reflect:
" * * * * *
" (B) Amounts deferred under subsection (2) of this section.
[261 Or.App. 393] " * * * * *
" (2) Upon application of a utility or ratepayer * * * and after public notice, opportunity for comment and a hearing * * * the commission by order may authorize deferral of the following amounts for later incorporation in the rates:
" * * * * *
" (e) Identifiable utility expenses or revenues, the recovery or refund of which the commission finds should be deferred in order to minimize the frequency of rate changes or the fluctuation of rate levels or to match appropriately the costs borne by and benefits received by ratepayers."
Under the limited circumstances listed in ORS 757.259, the PUC may exercise its discretion to defer expenses or revenues to a subsequent rate or rate schedule. " Amortization" is the process by which a deferred expense or revenue becomes incorporated into a subsequent rate or rate schedule. ORS 757.259(5) provides that, unless subject to an automatic adjustment clause, the deferral and amortization of amounts described in subsection (2)
" shall be allowed in rates only to the extent authorized by the commission in a proceeding under ORS 757.210 to change rates and upon review of the utility's earnings at the time of application to amortize the deferral. The commission may require that amortization of deferred amounts be subject to refund."
In the exercise of its discretion to defer and amortize an expense or revenue, the PUC must hold a hearing under ORS 757.210, relating to hearings to establish new rates or rate schedules. Because the automatic adjustment clause provision of SB 408 was not applicable to the period for which URP sought relief, URP sought relief under ORS 757.259, by requesting a deferral of amounts collected from ratepayers from October 5, 2005 through December 31, 2005, for taxes during that period that were not paid to units of government. URP sought the deferral so that the amounts could then be refunded through amortization in future rates.
[261 Or.App. 394] Although the PUC determined that URP's deferral application was " procedurally insufficient," for the sake of administrative efficiency, the PUC decided to construe URP's application liberally to assert a request for deferral. After considering the legislature's policy statement in former ORS 757.267(1)(f), as well as the statement in ORS 757.210 that " [t]he commission may not authorize a rate or schedule of rates that is not fair, just and reasonable," the PUC was persuaded that setting up a deferral account was an appropriate mechanism for treatment of taxes to be collected from ratepayers but unpaid by PGE during the " pre-adjustment clause period" --after the passage of SB 408 but before implementation of the statute's automatic adjustment clause provision. Concluding that the impact of the passage of SB 408 was " sufficient to warrant an exercise" of discretion and that the requested deferral " will appropriately match ratepayer costs and benefits pursuant to ORS 757.259(2)(e)," in Order No. 07-351, the PUC exercised its discretion under ORS 757.259 to order that PGE give deferred accounting treatment to revenue of $26.5 million, with interest, attributable to PGE's liabilities for federal and state income tax for which ratepayers were to be charged for the period beginning October 5, 2005 (the date petitioners filed their application for deferral) and ending December 31, 2005, but that PGE had not paid, as calculated using the methodology of SB 408. The PUC noted that the impact of the deferral on PGE's earnings " will be reviewed at the time we consider amortization of the deferral. ORS 757.259(5)." The PUC directed PGE to file an " earnings test" by December 1, 2007.
Indeed, the PUC did subsequently consider the impact of the deferral on PGE's earnings. On January 11, 2008, URP requested that the PUC order PGE to amortize the amount in the deferred account, as authorized by ORS 757.259(5). In a further proceeding,
which the PUC characterized as the " amortization phase," the PUC considered whether the deferred amount should be amortized and " what rate change, if any, was appropriate as a result of the deferral," " concurrent with changes in rates that would result, on June 1, 2008, from the automatic adjustment clause under SB 408." Based on the earnings test it filed for the period of October 5, 2005 through December 31, 2005, PGE took the position that the deferred account should not be amortized.
[261 Or.App. 395] The PUC agreed with PGE, concluding that a review of PGE's earnings during the deferral period of October 5, 2005 through December 31, 2005, showed that PGE's return on equity was significantly lower than authorized by the PUC, that an amortization of the deferred amount would result in a return on equity below a reasonable range, and that PGE needed to retain the deferred revenues in order for PGE's return to not fall further outside the range of reasonableness. The PUC therefore denied URP's request to amortize the deferral amount. The PUC's Order No. 09-316, denying URP's request to amortize the deferred amount, is the subject of this judicial review.
In a single assignment of error, URP asserts for multiple reasons that the PUC erred in declining to return to ratepayers the deferred amount via amortization in subsequent rates. As best we can determine, URP's arguments distill down ...