Opinion
In these three telephone rate cases the Public Utilities Commission determined, inter alia, that it lacked legal authority to approve tariffs which would annually adjust telephone rates to take account of changing federal tax expenses. As a consequence, the commission found itself compelled to set a rate which, in its own words, would “create a windfall for [the telephone companies] to the detriment of the ratepayers.” (Re Pacific Telephone & Telegraph Co. (1974) — Cal. P.U.C. — (Decision No. 83162; slip opn., p. 63).) The commission took this action in spite of our having annulled its previous decisions in this matter “[f]or failure to consider lawful alternatives in calculation of federal income tax expense.” (City and County of San Francisco v. Public Utilities Com. (1971) 6 Cal.3d 119, 130 [98 Cal.Rptr. 286, 490 P.2d 798].) As we explain, we have concluded that the commission does possess the power to implement an annual adjustment scheme, and we accordingly remand these cases in order that the agency may reconsider its action with knowledge of the full scope of its powers.
In addition to this failure to consider lawful alternatives in the treatment of tax expenses, the petitioning cities assert as grounds for annulment: (1) that the commission authorized an unreasonably high rate of return for the two telephone companies in question; and (2) that the commission erred in promulgating an interim rate pending its rehearing of the General Telephone case. As to the first contention, we have concluded that the commission did not exceed the boundaries of its discretion. (Pub. Util. Code, § 1757.) As to the second contention, we show below that the commission regularly pursued its authority.
1. The background of the present litigation.
Because these cases spring from the relationship between federal taxing authority and public regulatory power, we must review pertinent developments in these two fields.
*685An extremely significant element of the operating expenses which a rate-setting agency must consider is that of state and federal taxes;1 increased tax deductions decrease a utility’s tax bill and with it the revenue it must acquire from its ratepayers. These cases turn on two such tax deductions available to General and Pacific,2 accelerated depreciation and the Job Development Investment Credit;3 both of them enable a public utility to reduce its tax expenses, and the efforts of regulatory bodies to pass the benefits of such reduced tax expenses on to the utilities’ ratepayers form the backdrop to the instant cases.4
Such regulatory efforts are of course mandatory for a state agency charged with insuring that “[a]ll charges demanded or received by any public utility . . . shall be just and reasonable” (Pub. Util. Code, § 451) and that “[n]o public utility shall raise any rate . . . except upon a showing before the commission and a finding by the commission that such increase is justified” (Pub. Util. Code, § 454). We therefore examine the background of these cases to determine whether the commission has failed to consider alternative means of dealing with unnecessary tax payments which might be eliminated to the benefit of the ratepayers.
Since 1954, section 167 of the Internal Revenue Code has given business taxpayers several options in computing depreciation deductions from their federal taxes. Thus the utilities in the instant case may, like other businesses, assume that their depreciable assets wear out at an even rate and deduct the same amount of depreciation for each year of useful life; such an assumption is known as “straight-line” depreciation. Another option, first made available by 1954 amendments to the Internal Revenue Code is “accelerated” depreciation (Int. Rev. Code of 1954, § 167(b)(2)-(4)); using this method the enterprise takes deductions as if the *686asset in question depreciates more rapidly in the earlier years of its life and more slowly thereafter.5 A taxpaying utility using accelerated depreciation would deduct the same total amount of depreciation over the useful life of the asset as a taxpayer using straight-line methods, but accelerated depreciation permits the largest part of this total to be deducted in the early years of the asset’s life.
If one thinks of a single piece of depreciable equipment, such as a desk or typewriter, over the long run it would make no difference which system of depreciation were employed since the utility could write off no more than the total value of the asset in any case. That which holds true for a single asset, however, does not do so for an enterprise considered as an evolving whole. (Bonbright, Principles of Public Utility Rates (1961) pp. 218-223; see Alabama-Tennessee Natural Gas Co. v. Federal Power Com’n. (5th Cir. 1966) 359 F.2d 318, 328.)
Ratemakers have discovered that if the total enterprise is either expanding or stable, the use of accelerated depreciation does not merely defer taxes, but eliminates them entirely. (See FPC v. Memphis Light, Gas & Water Div. (1972) 411 U.S. 458, 460 [36 L.Ed.2d 426, 430, 93 S.Ct. 1723]; Note, The Effect on Public-Utility Rate Making of Liberalized Tax Depreciation Under Section 167 (1956) 69 Harv.L.Rev. 1096, 1102.) This effect occurs because in the later years of an asset’s life (when its value as a depreciation deduction has been used up), its place is taken by a new piece of equipment, which replaces it as a deduction in income tax calculation. This replacement effect means that the higher depreciation taken in early years does not have to be paid for by lower depreciation in later years; the tax never catches up. The result is a net tax savings to any utility using accelerated depreciation.6
*687For a rate-setting agency the comprehension of this counter-intuitive fact has important implications. If the Public Utilities Commission in setting rates were to assume that tax deductions for depreciation under both the straight-line and accelerated methods would yield the same result in the long run, it would, in fact, award the utility a rate windfall. For it would have set rates as if the utility would incur tax expenses which it would never have to pay.
In 1960 the California Public Utilities Commission after studying this problem issued a report indicating that it would pass on to ratepayers any savings effected by the adoption of accelerated depreciation and suggesting that the utilities’ managements elect this method. (Commission Investigation Regarding Rate Fixing Treatment for Accelerated Amortization and Depreciation for all Utilities, 57 Cal. P.U.C. 598.)7
Pursuant to this recommendation “[apparently all utilities other than Pacific and General Telephone have used accelerated depreciation.” (City and County of San Francisco v. Public Utilities Com., supra, 6 Cal.3d 119, 124; italics added.) Because “Pacific and General Telephone, unlike other utilities . . . refused to use accelerated depreciation . . . [o]n November 6, 1968, in Decision No. 74917 the Commission determined that Pacific’s management was imprudent” in not electing the option and “concluded that... for purposes of rate making Pacific would be treated as if it had obtained the tax saving of accelerated depreciation and that the saving would be [passed on] ... to the consumers in the form of lower rates. (Imputed accelerated depreciation with flow-through.)” (Id.) 8
*688In 1969, however, Congress amended the Internal Revenue Code.9 The amendments, some of a highly technical nature, provided that utilities which had not taken accelerated depreciation before 1969 could do so subsequently only if they “compute[d] their cost of service, which includes federal income taxes, ' as if they were using straight-line depreciation. This method, referred to as ‘normalization,’[10] was designed to avoid giving the present customers of a utility the benefits of tax deferral attributable to decelerated depreciation. If a utility used accelerated depreciation in determining its actual tax liability, the difference between the taxes actually paid and the higher taxes reflected as a cost of service for. ratemaking purposes was required to be placed in a deferred tax reserve account. See Amere Gas Utilities Co., 15 FPC 760.” (FPC v. Memphis Light, Gas, & Water Div., supra, 411 U.S. 458, 460 [36 L.Ed.2d 426, 430].) After the passage of these laws Pacific and General reversed their longstanding opposition to accelerated depreciation and began to take the larger deductions it authorized; they contended, however, that if the commission passed on to the ratepayers any of the savings thereby achieved, “degradation of service and possible financial collapse” would result and the utilities would “go bankrupt.”11
In the wake of these developments a divided Public Utilities Commission decided that it “could not continue the existing method of imputing accelerated depreciation” to the utilities (City and County of San Francisco v. Public Utilities Com., supra, 6 Cal.3d 119, 125; italics added) and therefore that “ ‘it would now be futile to consider’ ” other methods benefitting the ratepayer because normalization was the only available alternative. (Id., at p. 126.) We annulled.
*689In a unanimous opinion we held that the commission had not regularly pursued its authority in failing “to consider lawful alternatives in calculation of federal income tax expense.” (Id., at p. 130.) Specifically, we ruled that the commission should consider alternatives, which, while taking into account “the imprudent management”12 of the real party in interest, might serve as “a compromise striking a proper balance between the interests of the ratepayers and . . . [real party in interest] in the light of current federal income tax statutes.” (Ibid.) The instant case arises from the commission’s action on remand.13
Following our annullment of its decisions in City and County of San Francisco and City of Los Angeles, the commission held new hearings. In the case of Pacific we had annulled a final rate,14 and the commission therefore held entirely new ratemaking proceedings, considering each aspect of revenue and expenses anew. General’s case involved an additional factor; as we set forth in the margin, the commission considered appropriate ratemaking treatment of tax expenses for General in two separate proceedings, once in a limited rehearing of a rate case contemporaneous with the annulled Pacific decision,15 and once in *690hearings held pursuant to a new rate increase request by General.16 Because all three of these proceedings reached substantially identical treatments of the tax expenses in question by a substantially identical procedural route, we shall describe them as a single proceeding, noting divergences only when necessary.17
The commission focused most of its attention on a staff proposal somewhat awkwardly styled “pro forma normalization.” Stated briefly, this proposal involves an accounting adjustment which takes account of the fact that the deferred tax reserve (an asset) is much lower at the start of the ratemaking period than it will be after the effects of accelerated depreciation accumulate.18 The staff plan called for a reduction in the rate base (on which return is calculated) to reflect what is, in effect, an additional source of revenue for the utilities.19 The commission, however, rejected pro forma normalization on the grounds that it would violate the provisions of the Internal Revenue Code and of a Treasury Regulation interpreting it.20
With its attention thus concentrated on the primary staff proposal and Pacific’s and General’s vigorous objections to it, the commission gave *691only cursory consideration to another proposal, known as “annual adjustment.”21 The record indicates that the hearing examiner suggested to the parties that the feasibility of a system of yearly automatic rate adjustment be investigated. The staff witness accordingly prepared exhibits and testified at some length concerning this rate setting system.22
While technical in its application, the concept of an annual adjustment is essentially simple: the rate established by the commission includes a formula which, when applied each year to figures in the utilities’ accounts, produces appropriate adjustments in rates to keep them in step with the company’s changing financial situation.23 In the case of annual adjustment to reflect the growing deferred tax reserves, the actual amount of the reserve accumulated by the utility would be compared with the amount used in the test year on the basis of which the commission set rates.24 As the reserve grew, the formula would effect a corresponding reduction in the rate base to take account of this new source of investment capital.
The effect of annual adjustment in some respects resembles that which would occur if the commission each year conducted a new rate proceeding in which all factors except that of tax reserve held constant. *692In such a case the commission would look to the tax reserve as the sole relevant variable and reduce the rate base to compensate for tax reserve accumulations. As long as the commission’s policy towards the tax reserve accumulations remained unchanged, however, such yearly proceedings would reduce themselves to substantially ministerial steps.25 In similar circumstances the commission has concluded that the promulgation and periodic application of an adjustment formula more efficiently implements its policy.
The commission thus employs adjustment clauses when it encounters an item of expense or revenue which tends to vary abnormally in comparison to the utility’s other financial data; fuel cost adjustment clauses, which the commission presently inserts in the tariffs of power companies, constitute a prominent current use of such clauses. The commission’s staff experts testified that the rapidly accumulating tax reserves presented an anomalous factor in the telephone companies’ financial profile similar to that posed by the fuel costs of the power companies.26
The commission accepted this analysis, explaining that: “One consequence of the use of accelerated depreciation by Pacific is to create a rapidly growing reserve for deferred taxes that is totally out of consonance with the roughly harmonious relationship between revenues, expenses, and rate base.” (Re Pacific Telephone (1974) — Cal.P.U.C.— Decision No. 83162, slip opn. 63); accord, Re General Telephone Company of California (1974) — Cal.P.U.C. — (Decision No. 83778, slip opn., p. 24).)
In spite of the applicability of the usual justifications for annual adjustment clauses to the instant cases, however, the commission without *693consideration rejected its staff’s recommendation that such clauses be made a part of the tariff in the event flow-through and pro forma normalization were rejected.27 The commission explained its refusal to consider annual adjustment clauses in the following terms: “Nor will we consider further the automatic adjustment clause. This method was proposed with the understanding that the commission would consider it only if Pacific consented to its imposition; Pacific has not consented.” (Re Pacific Telephone and Telegraph Company (1974) — Cal.P.U.C. — (Decision No. 81362, slip opn. p. 59).)
Elaborating on this somewhat cryptic statement28 in its opinion on denial of rehearing, the commission indicated'that its refusal to consider annual adjustment stemmed from its belief that “Any order which would have the effect of automatically reducing the rates of any utility without hearing and without the opportunity for hearing would be inconsistent with the Public Utilities Code unless the consent of the utility was first obtained. Our rejection of the automatic reduction method stems not from any undue consideration for Pacific but from a due regard for statutory limitations.”29 (Re Pacific Telephone and Telegraph Company (1974) — Cal.P.U.C. — (Decision No. 83540, slip opn. p. 10).) We must therefore examine the legal bases of the commission’s refusal to entertain the system proffered by its staff.
2. The Public Utilities Commission failed regularly to pursue its authority in refusing to consider annual adjustment as an alternative rate setting system.
The commission in these cases operated under a dual obligation to weigh and explain its actions in regard to the treatment of accelerated *694depreciation. First, it acted, as always under the statutory obligations of insuring that all utility rates are just and reasonable (Pub. Util. Code, § 451), that no utility raises its rates unless the commission finds the increase justified (Pub. Util. Code, § 454), and that its decision “contain[s], separately stated, findings of fact and conclusions of law . . . on all issues material to the order or decision” (Pub. Util. Code, § 1705).30
In addition to these continuing statutory duties, the commission in the instant case was also bound by our order in City and County of San Francisco v. Public Utilities Com., supra, 6 Cal.3d 119, in which we annulled a tariff for the commission’s “failure to consider lawful alternatives in calculation of federal income tax expense” (id., at p. 130), and in which we indicated.that the commission should consider available alternatives. Thus the commission labored under a two-fold obligation thoroughly to deliberate upon methods of dealing with a problem it had perceived.
In spite of these statutory and judicial obligations, however, the commission failed to consider an annual adjustment provision, a plan suggested by its hearing examiner, testified to by its staff, concerning which full cross-examination had occurred, and which, on the face of the record, appeared capable, of relatively easy implementation. Speaking of a similar failure to consider relevant aspects of a decision, we recently explained “[t]he Commission may and should consider sua sponte eveiy element of public interest affected by . . . [utility proposals] which it is called upon to approve. It should not be necessary for any private party to rouse the Commission to perform its duty .... Thus, we conclude that the Commission failed to give adequate consideration to the ... issues ... and that its decision must be annulled.” (Northern California Power Agency v. Public Util. Com. (1971) 5 Cal.3d 370, 380 [96 Cal.Rptr. 18, 486 P.2d 1218]; accord, City and County of San Francisco v. Public Utilities Com., supra, 6 Cal.3d 119; City of Los Angeles v. Public Utilities Commission, supra, 7 Cal.3d 331.) If, as we have shown, unjustified failure to deliberate constitutes error, we must consider the grounds *695which the commission has proffered as justification of its refusal to consider annual adjustment.
In explaining its action the commission indicated that discussion of an annual adjustment clause would serve' no purpose because Public Utilities Code section 728, which requires a “hearing” before the promulgation of rates, placed beyond its power a tariff which would automatically reduce rates without such a hearing.31
(a) The Public Utilities Code permits the use of annual adjustment clauses.
Section 728 of the Public Utilities Code simply provides that the commission “after a hearing” may adjust improper “rates, classifications, rules, practices, or contracts”; on its face, then, nothing in the statute is inconsistent with the use of an annual adjustment clause.
The commission and the utilities, however, impliedly assert that the terms “rates” and “hearing” in section 728 have extremely restrictive meanings which bar adjustment clauses. Their position depends upon the conception that a “rate” is a single set of unvarying fixed charges, and that a “hearing” must occur before each variation in those charges. Neither contention withstands scrutiny.
In the first place, longstanding commission practice in other areas refutes its position in these cases. As testimony in the instant proceedings revealed, the commission has for a number of years included fuel adjustment clauses in the tariffs of power companies on the grounds that the variation in their fuel costs is disproportionate to the variation in their other costs.32 Thus the commission itself has long recognized adjustment clauses do not exceed its authority.
*696“Consistent administrative construction of a statute over many years, particularly when it originated with those charged with putting the statutory machinery into effect, is entitled to great weight.and will not be overturned unless clearly erroneous. (Federal Trade Com. v. Mandel Brothers [1959] 359 U.S. 385, 391 ...; United States v. American Trucking Assns. [1940] 310 U.S. 534, 549 ...; United States v. Leslie Salt Co. [1956] 350 U.S. 383, 396 ...; Great Northern Ry. Co. v. United States [1942] 315 U.S. 262, 275-276 ...; Norwegian Nitrogen Co. v. United States [1933] 288 U.S. 294, 315 ...; Mazer v. Stein [1954] 347 U.S. 201, 213 ...; see 1 Davis, Administrative Law Treatise, § 5.06, p. 324.)” (DiGiorgio Fruit Corp. v. Dept. of Employment (1961) 56 Cal.2d 54, 61-62 [13 Cal.Rptr. 663, 362 P.2d 487].) Moreover, in the instant case no party presents any valid reason for holding this longstanding administrative interpretation unlawful.
In the face of this authority, the commission and the real parties in interest simply argue that the fuel adjustment clauses which it employs as a standard practice supply no precedent for the use of annual adjustment clauses for tax reserves. They urge that such clauses characteristically raise utilities’ rates (as they have during the recent inflationary period) and therefore supply no authority for a clause which is expected to reduce rates.33 In our opinion the objection is specious; the statutory language simply does not differentiate between the rate changes which increase rates and those which decrease rates.
Moreover, such consistent administrative practice accords with the conclusions of a sister court which, some 20 years ago, faced a question very similar to that which we now consider. In Norfolk v. Virginia Electric etc. Co. (1955) 197 Va. 505, 516-518 [90 S.E.2d 140], the Virginia Supreme Court addressed the contention that an annual adjustment clause could not be inserted in the tariff of a utility because the new rate would take effect without the 30-day notice to the public required by the relevant statute.
*697Rejecting this contention, the unanimous court wrote: “[T]he power of the Commission is not limited to the mere change of a particular rate that the public must pay for the service rendered by a public utility, but it has the power to change . . . any part of a filed schedule, rate, rule or regulation that in any manner affects the rates charged or to be charged. . . . ‘[R]ate schedules consist not merely of lists of rates in dollars and cents, but . . . they customarily include provisions that will in various ways affect the rates charged at the time of filing or to be charged thereafter.’ [¶] The proposed escalator clause is nothing more or less than a fixed rule under which future rates to be charged the public are determined. It is simply an addition of a mathematical formula to the filed schedules of the company.... [I]t is clear that notice is not required on each occasion there is a change in the ratepayers’ bills, but that notice is required for every change in the filed schedules which are the underlying bases for the computation of those bills.”
Finally, in addition to longstanding administrative interpretation and the judicial authority described above, the purpose behind the hearing requirement of section 728 demonstrates the permissibility of the annual adjustment scheme here at issue. The purpose of the hearing is to air the policy considerations behind various rate proposals and to establish controverted facts; as the commission’s experience with fuel clauses has shown, a hearing serves no purpose when the only business at hand is the application of a mathematical formula to a figure definitively established by reference to the utilities’ books. The legislative purpose behind section 728 is better served by a plenary consideration of the advantages and disadvantages of an annual adjustment clause than by a yearly charade attendant to its application.
{b) The Constitution does not forbid the use of annual adjustment clauses.
As noted, the commission and the real parties in interest additionally argue that because a tariff containing an automatic adjustment clause could result in a decreased rate which would take effect without a prior hearing attendant to a full rate proceeding, the resulting rate decrease would constitute a taking without due process, in violation of the Fourteenth Amendment of the United States Constitution. As we explain, however, this argument ignores the elaborate safeguards attending both the establishment of the accounting procedures which the utilities must use to produce the relevant figures and the full hearing which would accompany the establishment of the tariff containing the *698adjustment clause. As we shall show, under the governing authorities, these safeguards render the use of annual adjustment clauses entirely constitutional.
Before discussing the specific objections to the adjustment clause, we review the constitutional standards which the United States Supreme Court has set forth for such rate proceedings. The court has long made it clear that within the regulatory context due.process is a flexible concept, permitting expert administrative agencies broad latitude in adapting the specific regulatory needs of their jurisdictions.
Thus, in sustaining the actions of a federal regulatory agency against the complaint of a utility that commission procedures in setting rates had deprived it of a hearing, the court set forth the relevant due process criteria: “The Constitution does not bind rate-making bodies to the service of any single formula or combination of formulas. Agencies to whom this legislative power has been delegated are free, within the ambit of their statutory authority, to make the pragmatic adjustments which may be called for by particular circumstances. Once a fair hearing has been given, proper findings made and other statutory requirements satisfied, the courts cannot intervene in the absence of a clear showing that the limits of due process have been overstepped. If the Commission’s order, as applied to the facts before it and viewed in its entirety, produces no arbitrary result, our inquiry is at an end.” (Power Comm’n v. Pipeline Co. (1942) 315 U.S. 575, 586 [86 L.Ed. 1037, 1049-1050, 62 S.Ct. 736]; accord, R. R. Comm’n. v. Pacific Gas Co. (1938) 302 U.S. 388 [82 L.Ed. 319, 58 S.Ct. 334]; West Ohio Gas Co. v. Public Utilities Com’n. [No. 1] (1935) 294 U.S. 63, 70 [79 L.Ed. 761, 768-769, 55 S.Ct. 316]; Market Street R. Co. v. Comm’n. (1945) 324 U.S. 548, 562 [89 L.Ed. 1171, 1182, 65 S.Ct. 770]; see Norwegian Nitrogen Co. v. United States (1933) 288 U.S. 294, 317, 319 [77 L.Ed. 796, 808, 809, 53 S.Ct. 350].)
With these precepts in mind, we consider the utilities’ contention that the use of an annual adjustment formula exceeds constitutional bounds because it fails to provide the utilities with a prior hearing before each annual adjustment of rates occurs. As we explain, however, contrary to the utilities’ assertions, procedural safeguards mark every stage of the adoption of the annual adjustment formula.
As we have already shown, the commission must hold a full hearing before the promulgation of a general rate tariff. (Pub. Util. Code, § 728.) At such a hearing, the company has the opportunity through testimony, *699briefs, exhibits, and oral argument to inspect and challenge any formula proposed. (Pub. Util. Code, § 1705; Cal. Admin. Code, tit. 20, §§ 52, 59-61, 64, 68-70, 75-76.) The utility may at that hearing raise its objections either to the general concept of an adjustment clause or to the particular one proposed. It can point to states of fact on which the formula might yield an unjust or undesirable result and suggest corrective modifications. Indeed Pacific, at whose hearing annual adjustment was most fully developed, in fact took advantage of most of the procedural rights just enumerated. Under the circumstances, the promulgation of an annual adjustment formula as part of a general utility tariff obviously comports with due process; it remains therefore only to consider if the periodic application of the formula to the figures in the utility’s bobks entails any denial of due process.
The adjustment clause would operate upon figures which the utilities had placed in their account books in accordance with the system of accounts as to which the companies had received another, prior hearing. (Pub. Util. Code, §§ 792, 794.)34 The utility, of course, would have made the entries with the full knowledge that the commission would employ them in connection with the annual adjustment clause.35 Having thus obtained the appropriate figures from the utilities’ accounts (cf. Pub. Util. Code, § 791), the commission would proceed to apply them to the formula as to which the utility would have enjoyed ample opportunity to make its objections known at a full hearing. (Pub. Util. Code, § 728; Cal. Admin. Code, tit. 20, §§ 51-88.) The insertion of numbers derived36 from *700an accounting system adopted at one hearing, into a formula approved at another hearing does not deny due process; the Fourteenth Amendment to the United States Constitution does not prohibit arithmetic.
Our holding accords with the authorities. Most closely in point is the decision of the Virginia Supreme Court, which faced, in addition to the statutory issues discussed above, a claim by ratepayers that a fuel adjustment clause would deprive them of due process because it did not afford them notice and hearing as to each of its applications; the court rejected the claim.37 (Norfolk v. Virginia Electric, etc. Co., supra, 197 Va. 505.)
In so holding, the Virginia court spoke to the issue before us; after pointing to the widespread adoption of such clauses and their survival of legal challenges, it succinctly refuted the claim that their application constituted a denial of due process: “The City next contends that the escalator clause results in a denial of procedural due process of law to the consumers because there is no public notice and hearing on each occasion when the actual rate is increased. ... In the instant case there was sufficient notice to the public that the Commission would hold a formal hearing on the application of the Company to determine whether it was just and reasonable to insert the escalator clause into its filed schedules. The City appeared and participated in the proceedings and after an investigation by the Commission and a full hearing, the Commission found as a fact that the proposed escalator clause was ‘just and reasonable’, a finding which the record does not warrant us in reversing. Consequently, the requirements of procedural due process have been fulfilled in this case. See, e.g., Railroad Commission of State of California v. Pacific Gas & Elec. Co. [1938] 302 U.S. 388 ...; Ohio Bell Telephone Co. v. Public Utilities Comm. [1937] 301 U.S. 292 ...” (Norfolk v. Virginia Electric, etc. Co., supra, 197 Va. 505, 516-518.)
Norfolk thus stands for the proposition that due process requires adequate hearings at the significant point of the adoption of the adjustment clause, rather than at the relatively unimportant occasions of its application. Measured by this standard, the system of annual adjustments proposed by the hearing examiner and the commission staff would offend no tenet of due process.
*701This conclusion finds additional support in cases which have addressed the question whether due process requires that agencies afford regulated entities a hearing before acting on the basis of figures or data supplied to the agency by the utility itself. The question is relevant to the instant case, because the annual adjustment clause would operate upon figures entered by the utilities upon its own books. The utilities claim that due process entitles them to a hearing prior to the use of such figures; the authorities do not support this contention.
In a leading case a unanimous United States Supreme Court rejected the contentions of a California utility that the commission had denied it due process by using, as its rate base, the figure for which the utility had offered to sell itself to the city in which it was located. (Market Street R. Co. v. Comm’n., supra, 324 U.S. 548.) The railway argued that the use of this figure, which had found its way into evidence incidentally, and which the commission had not indicated it would use to fix the utility’s value, denied it due process absent an opportunity to present argument concerning the accuracy and interpretation of the figure. The Supreme Court found the argument without merit; Justice Jackson, writing for the court, noted that the figure in question had been admitted into evidence without limitation as to use: “Doubtless the decision and the grounds of decision were unexpected. But surprise is not necessarily want of due process.” (Id., at p. 558 [89 L.Ed. at p. 1180].)
Nothing in the operation of the annual adjustment clause as here proposed even approaches the procedure which generated the utility’s complaint in Market Street Railway; unlike the railway, the telephone companies would at all times know the use to which the commission intended to put the tax reserve figures and would have an ample opportunity to make known their views of such proposed use.38 (See American Toll Bridge Co. v. Railroad Com. (1938) 12 Cal.2d 184, 203-204 [83 P.2d 1].)
As further demonstration of the annual adjustment clause’s impregnability to constitutional attack, we briefly contrast its operation with *702regulatory procedures which have failed to survive judicial scrutiny under the due process clause. The utilities insist that these cases pose an insuperable constitutional barrier to the use of an annual adjustment clause; we shall show, however, that they are in fact entirely distinguishable. In Ohio Bell Tel. Co. v. Comm’n., supra, 301 U.S. 292, the commission had, without informing the utility of its intention to do so, taken judicial notice of a general decline in the prices of property and then adjusted downward the values of particular utility properties, all without telling the utility of the method by which it arrived at its figures or permitting it to challenge them; the court held this procedure unconstitutional.
Without belaboring the obvious differences between the unconstitutional procedure in Ohio Bell and that proposed in the case of annual adjustment, we simply note that in the latter instance the operative assumptions of the commission would at all times be known to the parties. (Accord, Moore-McCormack Lines, Inc. v. United States (1969) 413 F.2d 568, 585 [188 Ct. Cl. 644].)
In striking down the procedure in Ohio Bell the court made reference to an earlier case upon which the utilities before us rely; West Ohio Gas Co. v. Comm’n. [No. 2], 294 U.S. 79 [79 L.Ed. 773, 55 S.Ct. 324], epitomized the defects also found in Ohio Bell. In West Ohio the regulatory agency had, in setting a rate in 1933, chosen to rely exclusively on data from 1929, ignoring available revenue and expense data from 1930 and 1931; the court held this procedure unconstitutional.
In examining the flaws in West Ohio one is struck by the contrast they present to the proposed annual adjustment clause in question, in spite of the utilities’ assertion to the contrary. The defect in the West Ohio case lay in the commission’s refusal to consider the latest available data as to costs and revenue; yet annual adjustment entails precisely the substitution of actual figures for guesses and estimates of tax expense and deferred reserves. Rather than taking a single year as the measure of tax reserves, the commission staff proposed to make period adjustments in the figures in the light of actual experience, precisely the course approved by the court in West Ohio. The utilities, of course, complain that the commission would make such adjustments only in the tax deferral figures, and not in the other revenues and expenses of the company; but, as we have already shown, the distinctive treatment of tax expenses and reserves finds its warrant in the circumstance that under accelerated depreciation they will vary abnormally with respect to the *703other components of the utilities’ finances. Simply to recognize this fact is not to deny due process.
Nor does due process require a hearing that serves no useful purpose. In the instant case the only relevant inquiry turns upon the figures that stand in specified places in the utilities’ books. No facts are open to serious dispute, no witnesses’ demeanor need be judged, no policy decisions on which public sentiment might prove useful are before the commission. Within such a context; the facts are those which Professor Davis terms “legislative,” and as to which a hearing serves no function.39 (1 Davis, Administrative Law Treatise (1958) pp. 429-437 (1970 Supp.) pp. 327-329; Rivera v. Division of Industrial Welfare (1968) 265 Cal.App.2d 576 [71 Cal.Rptr. 739].)
The crux of the utilities’ objections to annual adjustment lies in the possibility that under certain circumstances the annual adjustment clause might yield a rate below their authorized return, or in extreme situations, they assert, on the border of confiscation. The crucial point which they fail to discern, however, is that any rate may have such an effect, no matter how calculated.
An entirely fixed and stable rate may, if expenses rise dramatically, yield insufficient revenues to guarantee the utility a reasonable return. Yet we have never viewed this possibility as a ground for constitutionally requiring expense escalation clauses; the appropriate remedy in such instances is an application for a rate increase (Pub. Util. Code, §§ 454, 455). Conversely,.the fact that a tariff containing an annual adjustment clause keyed to the growth of a deferred tax reserve may, under imaginatively conceived circumstances, reduce the rate of return below that authorized does not render it unconstitutional.
The utilities’ objections are therefore inapposite. The due process cases they cite are, as we have shown, concerned with procedural defects not here present. Nothing in the procedures suggested to the commission will deny the utilities full hearings both on the system of accounts which will yield the figures in question and on the formula' to which the figures will be applied.
*704(c) The commission therefore erred in failing to consider annual adjustment.
Because annual adjustment comports both with the governing statutes and the Constitution, the commission failed regularly to pursue its authority in failing to consider it.40 (Pub. Util. Code, § 1757.) On remand the commission should proceed either to take further testimony on the system, or to consider its adoption on the basis of the testimony contained in the record of the instant cases.41 It should in any case weigh its desirability and set forth the reasons for the decision it ultimately reaches.42 (Pub. Util. Code, § 1705.)
*7053. The commission did not otherwise err.
In the decisions before us the commission ruled as to a number of points other than those already discussed; the petitioning cities complain of. several of these rulings. We have carefully examined both the petitioners’ contentions and the record before the commission and find no error calling for annulment other than that indicated above.43 (Pub. Util. Code, § 1757.) We dwell further on only one point which, because it relates to commission procedure, may recur.
The petitioning Cities of Los Angeles and Long Beach (in S.F. 23237) complain that the commission erred in failing to abrogate General’s entire tariff after we annulled Pacific’s tariff in City and County of San Francisco v. Public Utilities Com., supra, 6 Cal.3d 119. In order to show that the commission did not err, we briefly set forth the relevant chronology.
When we disapproved the commission’s order in City and County of San Francisco, the commission had just filed a decision incorporating a rate increase for General Telephone, based in part on the same treatment of federal tax expenses which we held erroneous in the Pacific case. (Re General Telephone Co. of Cal., 72 Cal.P.U.C. 652.) Upon learning of our decision in City and County of San Francisco the cities which had appeared before the commission in the proceeding leading to the General decision, petitioned for a rehearing which the commission granted. (Decisions Nos. 79532 and 79367.) We subsequently annulled the entire rate based on the tax decision held erroneous in City and County of San Francisco. (City of Los Angeles v. Public Utilities Commission, supra, 7 Cal.3d 331.)
In granting rehearing the commission limited the issues to the question of tax expenses and promulgated the previous tariff as an interim rate subject to refund if the commission subsequently found it erroneous. After this rehearing (at which the commission did not consider annual *706adjustment), it effectively reaffirmed the interim rates as part of the permanent tariff.
From the previous discussion, it is clear that as a substantive matter the commission erred in failing to consider annual adjustment.44 The petitioning cities also complain, however, that the commission erred in repromulgating the tariff under attack as an interim rate; by analogy to our action in City of Los Angeles they argue that the commission bore the duty to annul the entire rate. Because the rates suffered from the same failure to consider alternatives, they argue, both rates must have been annulled. In this analogy between our decision and the commission action, however, lurks a fatal flaw.
The key to the distinction between the two cases lies in the difference in the commission’s power, on one hand, to reopen proceedings already final, and, on the other, to rehear a decision not yet final. In City of Los Angeles we annulled the tariff in question, in spite of the fact that the commission had reopened rate proceedings under Public Utilities Code section 1708. That section, which we set forth in the margin,45 permits the commission at any time to reopen proceedings even after a decision has become final, as the commission decision in City of Los Angeles would have been had we not annulled. (City of Los Angeles v. Public Utilities Commission, supra, 7 Cal.3d 331.)
In that case we explicitly based our annulment on the decision’s finality: “It follows that, unless the rate order now before us is annulled, it will become a lawful rate and that all funds collected pursuant to it would belong to Pacific and not be subject to refund. [¶] In other words, we must annul the rate order now before us, because otherwise the rates therein, which are based in part on the annulled tax expense decision, will become lawful rates for the future and will preclude refunds.” (Id., p. 338; italics added.)
*707In the General case, on the other hand, the time for rehearing had not expired and the rate had not become final and lawful. The difference in effect stems from the difference between Public Utilities Code section 1736,46 which provides for an order on rehearing, and section 1708 which provides for reopening. The former procedure, which must take place within the time limits specified in section 1731, and only in response to parties’ requests, contrasts with the latter, which is merely a general authority for the commission to reconsider something upon which it has previously ruled. Rehearing, unlike reopening, prevents an order previously made from becoming final. (See Sale v. Railroad Commission (1940) 15 Cal.2d 612, 616 [104 P.2d 38].) Because the commission reheard the General case, its order did not become final, and it could promulgate an interim rate subject to refund. The commission’s procedure in Decision 83778 was therefore lawful although its substantive result must be annulled for failure to consider annual adjustment,
4. Order.
Because the commission has failed regularly to pursue its authority, the rates here under review may not stand in their entirety. (Pub. Util. Code, § 1757.) Yet, because we have found error only in respect to the treatment of tax expenses, we need annul only the portion of the rate based on such error. Unlike the situation facing us in City of Los Angeles v. Public Utilities Commission, supra, 7 Cal.3d 331, in which we noted that “[n]o -basis appears to sever these matters from the increase of rates ordered by the commission, and it is not claimed that severance is possible” (id. at pp. 353-354), the commission in the instant case has gone to some lengths to “set out the dollar effect of the adjustment so that if... [it is] found wrong .. . the correct ádjustment can readily be made.” (Re Pacific Telephone and Telegraph (1974) — Cal.P.U.C. — (Decision No. 83162, slip opn. p. 64).)
Not only such passages but also the commission’s actions in these cases demonstrate the severability, of the tax related aspects of the rates before *708us. Thus upon rehearing in the General case, the commission discovered that California taxes, unlike their federal counterparts, were amenable to flow-through treatment and ordered appropriate refunds, thereby demonstrating the practicability of partial annulment. (Re General Telephone of California (1974) — Cal.P.U.C. — (Decision No. 83778, slip opn. pp. 48-49).)
In order,- therefore, not to interfere with those portions of the tariff in which we find no reversible error, we affirm the commission’s order except insofar as it depends upon the erroneous treatment of tax expenses set forth above; as to that portion of the rate we annul. The commission, on remand of this matter for further proceedings consistent with this opinion, shall expeditiously determine what position it will adopt with respect to the tax expense issue. (See City and County of San Francisco v. Public Utilities Com., supra, 6 Cal.3d 119, 130-131.) Having ascertained this position, be it annual adjustment or some other alternative, including the possibility of a commensurate adjustment in the rate of return, the commission shall provide for refunds, if appropriate, to the ratepayers of the difference between such a rate and the tariff reviewed herein.
Wright, C. J., McComb, J., Mosk, J., Clark, J., Richardson, J., and Taylor, J.,* concurred.