Lead Opinion
Appellant ALLETE, Inc. d/b/a Minnesota Power (“Minnesota Power”) challenges the decision of the Minnesota Public Utilities Commission (“Commission”) setting interim rates. Minnesota Power argues that the Commission exceeded its statutory authority and, in the alternative, that the record does not support the Commission’s decision. Because we conclude that the Commission did not exceed its authority and that the record otherwise supports the Commission’s decision, we affirm.
Minnesota statutes provide the Commission with authority to regulate public utilities in Minnesota, including regulation of the service rates that public utilities charge. See Minn.Stat. §§ 216B.08, 216B.16 (2012). Under this statutory scheme, a public utility cannot change service rates except by filing notice of such rate change with the Commission. Minn.Stat. § 216B.16, subd. 1. On November 2, 2009, Minnesota Power filed a notice with the Commission indicating Minnesota Power’s intent to change its service rates. Minnesota Power sought an increase in rates of $80,885,213 annually, or approximately 18.9 percent. As part of its submission to the Commission, Minnesota Power also filed a petition for an increase in interim rates. Minnesota Power requested an interim rate increase of $73,296,560, or 17.1 percent annually.
Minnesota Power’s petition to increase its rates was resolved through a contested case proceeding. After that process, the Commission set Minnesota Power’s final rate increase at approximately $53.5 million. Minnesota Power does not challenge that decision. Rather, the challenge here is to the Commission’s decision to set the interim rate increase at approximately $48.5 million. Interim rates, which are designed to “protect utilities from the potentially confiscatory effect of regulatory delay,” Henry v. Minn. Pub. Utils. Comm'n,
Even though the question of an interim rate increase is an ex parte proceeding, respondents Large Power Intervenors, Boise Inc., and the Residential and Small Business Utilities Division of the Office of the Attorney General (“Attorney General”) submitted comments to the Commission generally opposing the amount of Minnesota Power’s proposed rate increase. The Attorney General asserted that “no interim rate increase is ‘just and reasonable’ at this time.” The Attorney General based this argument on the “near-record unemployment rates affecting the Minnesota
Along with this outside input, the Commission also had information provided by Commission staff. With respect to the interim rate, the Commission staff included information on Minnesota Power’s three prior rate case filings, discussed the cost and non-cost factors that could influence the interim rate determination, and considered the comments filed with the Commission. The staff also analyzed whether there was a basis to find exigent circumstances based on the statutory framework and the Commission’s prior practices. In analyzing whether exigent circumstances existed, the staff considered the timing of the rate increase, including the fact that customers were about to get a refund based on overpayment of interim rates during the previous rate case. Additionally, the staff considered the state оf the economy and the cost of projects required to maintain reliable service. The staff made no recommendation on whether the Commission should conclude that exigent circumstances under Minn.Stat. § 216B.16, subd. 3(b), were present.
With respect to the amount of the interim rate increase, the staff noted that historically “requests for final rate increases filed by utilities are considerably larger than the final amount approved.” Specifically, the staff noted that in Minnesota Power’s previous two cases, filed in 2008 and 1994, the final rate increases approved were 45 percent and 56 percent respectively of the requested rates. In a 1987 rate case, however, the final rate approved was approximately double what Minnesota Power had requested. The staff also considered a 2008 rate case filed by Xcel Energy in which the final rate awarded was 58 percent of the requested rate. Based on these figures, the staff noted that there could be a “basis to find exigent circumstances based on the actual experience with [Minnesota Power] rate filings, coupled with the state of the economy.” The staff then suggested that the Commission could “limit the interim rate increase to approximately 60% of [Minnesota Power’s] $81 million request for final rate increase,” resulting in an interim rate increase of approximately $48 million, or 11.3 percent more than the previously established rate. Ultimately, however, the staff made no recommendation regarding the amount of the interim rate increase.
The Commission issued an order on December 30, 2009, rejecting Minnesota Power’s request for a $73,296,560 interim rate increase, and instead setting the interim rate increase at $48,531,128, or approximately 60 percent of Minnesota Power’s final rate request. The Cоmmission noted Minnesota Power’s right to recover its cost of service and earn a fair rate of return. The Commission also discussed the statutory refund provision that allows utility customers to receive refunds of interim rates paid where the final rate is lower
The Commission found, therefore, that the economic conditions combined with the magnitude of the rate increase and the proximity to the previous year’s rate increase constituted “exigent circumstances.” Consequently, the Commission concluded that “the most reasonable and equitable course of action” was to reduce Minnesota Power’s “interim rate increase to $48,531,128.”
In response to the Commission’s order, Minnesota Power filed a letter with the Commission objecting to the Commission’s finding of exigent circumstances and reduction in the requested interim rate. Minnesota Power argued that in reducing the interim rate, the Commission violated due process by prejudging the merits of Minnesota Power’s rate request before conducting an evidentiary hearing. Minnesota Power further contended that the Commission had arbitrarily considered only certain past rate cases, relied on factors outside the proposed test year cost-based statutory formula, and violated environmental policy directives by denying Minnesota Power the means to fully recover mandatory expenditures. Minnеsota Power asked the Commission to immediately reconsider its interim rate decision and grant the full interim rate request. The Commission did not reconsider its interim rate decision.
Approximately 11 months later, on November 2, 2010, the Commission issued its final order on Minnesota Power’s application, ultimately setting the final rate increase at $53,530,424 annually. The final rate was approximately $27.3 million less than Minnesota Power requested but approximately $5 million more than the interim rate approved by the Commission. In response, Minnesota Power filed a petition for reconsideration requesting, among other items, “reconsideration of the Commission’s decision that exigent circumstances warranted a reduction in [Minnesota Power’s] right to interim rate recovery.” The Commission denied the petition for reconsideration.
Following the denial of its petition for reconsideration, Minnesota Power sought certiorari review with the Minnesota Court of Appeals. The court of appeals affirmed. In re Minn. Power,
(a) in violation of constitutional provisions; or
(b) in excess of the statutory authority or jurisdiction of the agency; or
(c) made upon unlawful procedure; or
(d) affected by other error of law; or
(e) unsupported by substantial evidence in view of the entire record as submitted; or
(f) arbitrary or capricious.
Minn.Stat. § 14.69 (2012).
I.
We turn first to Minnesota Power’s argument that the Commission exceeded its authority under Minn.Stat. § 216B.16, subd. 3(b). We may “reverse an agency decision if the decision was affected by an error of law.” N. States Power Co. v. Minn. Pub. Utils. Comm’n,
Under Minn.Stat. § 216B.16, subd. 3(b), [Ujnless the commission finds that exigent circumstances exist, the interim rate schedule shall be calculated using the proposed test year cost of capital, rate base, and expenses, except that it shall include: (1) a rate of return on common equity for the utility equal to that authorized by the commission in the utility’s most recent rate proceeding; (2) rate base or expense items the same in nature and kind as those allowed by a currently effective order of the сommission in the utility’s most recent rate proceeding; and (3) no change in the existing rate design.
Minnesota Power argues that the Commission exceeded its statutory authority when the Commission concluded that “exigent circumstances” existed.
The Commission found an exigency based on three factors: the timing of the rate increase, the size of the proposed rate increase, and the state of the economy. Minnesota Power argues that the statute does not permit the Commission to consid
For its part, the Commission argues that because the statute places no limits on the circumstances the Commission may consider in determining whether exigent circumstances exist, the Commission is free to consider economic conditions as well as the timing and size of the rate increase. Additionally, the Commission argues that the statute is structured such that exigent circumstances are an exception to the otherwise mandatory statutory formula and consequently the formula is not relevant to the determination of whether exigent circumstances exist. We conclude that the plain language of the statute supports the Commission’s interpretation.
We are to construe the statute “as a whole and the words and sentences therein ‘are to be understood ... in the light of their context.’ ” In re Schmidt v. Coons,
The grammatical structure of Minn.Stat. § 216B.16, subd. 3(b), indicates that the initial phrase, “[u]nless the commission finds that exigent circumstances exist,” modifies, and therefore is an exception to, the remainder of the sentence, which contains the cost-based statutory formula for an interim rate. The statutory formula for calculating the interim rate, but not the exigent circumstances provision, is modified by the cost factors — rate of return, rate base, and rate design. Minn.Stat. § 216B.16, subd. 3(b). When we interpret subdivision 3(b) as a whole and in context, it is clear that the cost factors, which operate when exigent circumstances do not exist, do not control the Commission’s determination of whether exigent circumstances exist. Minnesota Power’s alternate interpretation, which limits the determination of whether exigent circumstances exist to the factors enumerated in the statute, would mean that the exception for exigent circumstances would overlap with the determination of an interim rate because the same cost-based factors based on the same data would be determinative in all cases. The Legislature has directed, however, that we are to give effect to all provisions in the statute — provisions that control when exigent circumstances exist and provisions that control when an exigency is not present. See Minn.Stat. § 645.16 (2012).
Moreover, that Minnesota law permits Minnesota Power to request an increase of the size at issue here, and further permits Minnesota Power to submit the request just 1 day after the last increase went into effect, does not preclude the Commission from considering these factors when assessing whеther exigent circumstances exist under the statute. Nor, as indicated above, is the Commission limited to considering only factors relevant to the utility’s cost of service. If the Leg
In addition to the language and structure of the statute, our precedent confirms the conclusion that the exigent circumstances provision operates outside of the framework of the statutory formula. We previously indicated that “Minn.Stat. § 216B.16, subd. 3 (1984), does permit departure from the statutory formula when there are exigent circumstances.” In re Peoples Natural Gas Co.,
But, Minnesota Power argues, the constitutional due process requirement that rates be sufficient to recover the cost of service must inform the Commission’s discretion in determining whether “exigent circumstances” exist. Minnesota Power cites Bluefield Water Works & Improvement Co. v. Public Service Commission of West Virginia,
Finally, Minnesota Power argues that if we conclude that the Commission can consider factors unrelated to the utility’s cost of service in determining that exigent circumstances exist, then the scope of the Commission’s authority would be enlarged considerably beyond what the Legislature contemplated. Specifically, Minnesota Power argues that if the statutory formula in section 216B.16, subdivision 3(b), does not cabin the Commission’s interim rate decision-making, then the Commission’s authority to set interim rates is boundless. We disagree.
Although the Commission is not bound by the statutory formula in determining whether exigent circumstances exist, general principles in chapter 216B constrain the Commission’s discretion. The statute requires that “[ejvery rate made, demanded, or received by any public utility ... shall be just and reasonable.” Minn.Stat. § 216B.03 (2012). Further, the statute requires that the Commission give “due consideration to the public need for adequate, efficient, and reasonable service and to the need of the public utility for revenue sufficient to enable it to meet the cost of furnishing the service ... and to earn a
In sum, when we construe the term “exigent circumstances” in Minn.Stat. § 216B.16, subd. 3(b), in context, we conclude that the statutory formula in section 216B.16, subdivision 3(b), does not apply when the Commission determines that exigent circumstances exist. We further hold that the Commission did not exceed its statutory authority by considering factors outside those listed in Minn.Stat. § 216B.16, subd. 3(b), in determining whether exigent circumstances were present in this case.
II.
We turn next to Minnesota Power’s alternative argument that the Commission erred in finding that exigent circumstances exist in this case. We have recognized that decisions of administrative agencies “enjoy a presumption of correctness, and deference should be shown by courts to the agencies’ expertise and their special knowledge in the field of their technical training, education, and experience.” Reserve Mining Co. v. Herbst,
The Commission determined that “[t]hree extraordinary circumstances combine to create exigent circumstances.” The Commission relied on “the unprecedented size of the proposed rate increase ... the extremely short window (one day) between the effective date of [Minnesota Power’s] last rate increase and this rate increase request; and the worst economic downturn in the past 60 years.” When these factors were considered together, the Commission found that “these factors clearly carry serious potential for rate shock — and even outright hardship — for [Minnesota Power’s] customers.”
Minnesota Power argues that the facts of this case are not so extraordinary as to constitute exigent circumstances under Minn.Stat. § 216B.16, subd. 3(b). Although “exigent” is not defined or expressly limited in Minn.Stat. § 216B.16, the Legislature has instructed that “words and phrases” are to be construed “according to rules of grammar and according to their common and approved usage.” Minn.Stat. § 645.08 (2012); see also S.M. Hentges & Sons, Inc. v. Mensing,
As these definitions indicate, the question of whether exigent circumstances exist is primarily a factual determination. The Legislature has committed the question of exigency to the Commission as part of the Commission’s interim rate making function. See Minn.Stat. § 216B.16, subd. 3(b) (delegating to the Commission the authority to “find[] that exigent circumstances exist”); see also Minn.Stat. § 216B.03 (requiring the Commission to set rates that are “just and reasonable” and “sufficient, equitable, and consistent in application to a class of consumers”); Minn.Stat. § 216B.08 (“The commission is hereby vested with the powers, rights, functions, and jurisdiction to regulate ... every public utility.... The exercise of such powers, rights, functions, and jurisdiction is prescribed as a duty of the commission.”). Whether exigent circumstances exist within the context of utility interim rate setting therefore “necessarily requires application of the [Commission’s] technical knowledge and expertise to the facts presented.” Minn. Ctr. for Envtl. Advocacy v. Minn. Pollution Control Agency,
The dissent contends that the determination of whether exigent circumstances exist is not a question requiring apрlication of the Commission’s technical knowledge because it is merely a question of basic arithmetic. The dissent’s conclusion is misguided. Minnesota Statutes § 216B.09, subd. 1, requiring the Commission to fix just and reasonable rates, and Minn.Stat. § 216B.16, subd. 3(b), requiring the Commission to determine whether exigent circumstances exist, mandate not only that the Commission identify the factors that impact the setting of rates and the question of exigency, but also that the Commission determine how those factors impact utility companies and ratepayers and, consequently, how those factors affect the decision on what is a just and reasonable rate. The Commission is also required to balance Minnesota Power’s right to recoup its cost of service and earn a fair rate of return with the public interest in affordable utilities. It is determining the impact of the factors and balancing the competing interests of the utility and the public that require application of the Commission’s experience and technical knowledge of the utility industry, not merely the identification of the factors themselves as suggested by the dissent. See In re Review of 2005 Annual Automatic Adjustment of Charges for All Elec. & Gas Utils.,
Because the question of exigency in this context calls for application of the Commission’s expertise to a primarily factual determination, we accord judicial deference to the Commission’s determination of whether the statutory exigency standard has been met. This deference is well supported by our case law. See, e.g., In re Review of 2005 Annual Automatic Adjustment of Charges for All Elec. & Gas Utils.,
The Commission discussed three “extraordinary circumstances” that combined “to create exigent circumstances”— the unprecedented size of Minnesota Power’s proposed increase; the fact that Minnesota Power requested the proposed increase only 1 day after the increase in Minnesota Power’s “last rate case went into effect”; and the fact that Minnesota Power’s service territory is “in the grip of a severe economic downturn.” There is no dispute that there is factual support in the record for each of the circumstances that the Commission identified. And while it is possible that the factors cited by the Commission, if considered alone, would not constitute exigent circumstances, the Commission’s determination that these circumstances, when considered together, created an urgent situation satisfies the substantial evidence standard. The Commission adequately explained its determination that еxigent circumstances existed and that determination is reasonable based on an examination of the record as a whole. See Minn. Power & Light Co.,
III.
Finally, we turn to Minnesota Power’s argument that the Commission erred in setting the interim rate increase at 60 percent of the final rate increase Minnesota Power requested. Specifically, Minnesota Power argues that the Commission’s decision must be reversed because the Commission set interim rates by prejudging the company’s final rate request. The Commission concluded that the “most reasonable and equitable course of action” in this case was to reduce Minnesota Power’s interim rate increase from $73,296,560 to $48,531,128, or approximately 60 percent of its requested final rate increase. When the Commission establishes a reasonable rate of return, it is engaging in a quasi-judicial function that we review under the substantial evidence standard. Henry,
In determining what factors are properly considered by the Commission, we defer to the “analytical approach” chosen by the agency as “a matter for the agency’s expertise.” Minn. Power & Light Co.,
We recognize Minnesota Power’s arguments that the Commission prejudged Minnesota Power’s final rate request and ignored its cost of service in awarding Minnesota Power a lower interim rate than it requested. We disagree with Minnesota Power, however, because there is no evidence that the Commission failed to undertake a full and fair review as required by Minn.Stat. § 216B.16 in determining Minnesota Power’s final rates. Further, Minnesota Power does not challenge the Commission’s final rate determination in this case. Additionally, the evidence shows that the Commission did not ignore Minnesota Power’s cost of service. Although ultimately in this case the interim rate appears to have fallen short of covering Minnesota Power’s cost of service, based on the evidence considered and the process observed, the Commission’s decision is not reversible error under our def
We are not unsympathetic to the statutory asymmetry in Minn.Stat. § 216B.16, subd. 3(c). The statute requires “the utility to refund the excess amount collected under the interim rate schedule, including interest” when “the commission finds that the interim rates are in excess of the rates in the final determination.” Minn.Stat. § 216B.16, subd. 3(c). Under the statute, however, there is no way for a utility to recoup its costs if the interim rate is properly set, but ultimately determined to be lower than the final rate. The question of available remediеs under the statute, however, is a matter for the- Legislature.
Based on this record, we hold that substantial evidence supported the Commission’s decision to set Minnesota Power’s interim rate increase at $48,531,128.
Affirmed.
Notes
. The statutory formula requires that
the interim rate schedule shall be calculated using the proposed test year cost of capital, rate base, and expenses, except that it shall include: (1) a rate of return on common equity for the utility equal to that authorized by the commission in the utility's most recent rate proceeding; (2) rate base or expense items the same in nature and kind as those allowed by a currently effective order of the commission in the utility's most recent rate proceeding; and (3) no change in the existing rate design.
Minn.Stat. § 216B.16, subd. 3(b). The “proposed test year” used to calculate a utility’s interim rate in Minn.Stat. § 216B.16, subd. 3(b), is based on “the 12-month period selected by the utility for the purpose of expressing its need for a change in rates.” Minn. R. 7825.3100, subp. 17 (2011).
. Minnesota Power objected to the comments. Minnesota Power argued that under Minn. Stat. § 216B.16, subd. 3, the Commission must order interim rates "ex parte without a public hearing” and that under Commission precedent, the Commission "may not consider other parties' comments when setting interim rates.” Before us, Minnesota Power does not argue that the Commission improperly considered the comments because the interim rate decision was to have been made on an ex parte basis. Rather, Minnesota Power argues that the Commission erred in relying on the comments because the comments related to matters that may not be considered under Minn.Stat. § 216B.16, subd. 3(b), when setting interim rates.
. The Commission did not make the decision under review here in a contested case proceeding. See Minn.Stat. § 14.02, subd. 3 (2012) (defining "contested case”). But we have previously applied the standard in Minn. Stat. § 14.69 even though there was not á contested case when the decision under review "involv[ed] application of an agency’s expertise, technical training, and experience” and the parties advocate for the application of section 14.69. Minn. Ctr. for Envtl. Advocacy v. Minn. Pollution Control Agency,
. The dissent criticizes our distinction of Hib-bing Taconite and St. Paul Area Chamber from the present case on procedural grounds, stating that the “distinction cannot vitiate constitutional requirements.’’ But for purposes of procedural due process, there are critical differences between interim and final rates, as evidenced in the distinction between the interim and final rate processes, the methods for determining interim and final rates, and the purpose for which interim and final rates were created by the Legislature. The interim rate process as described in Minn.Stat. § 216B.16, subd. 3, and Inter-City Gas Corp. is "ex parte" and occurs "without a public hearing," while the final rate "is the object of the entire ratemaking process, a process which fully comports with notions of due process” and may include notice, discovery, and a public hearing. Inter-City Gas Corp.,
The dissent also contends that the Commission failed to operate within the constitutional framework of the Fifth and Fourteenth Amendments in setting the interim rate. The dissent relies on principles applied within the context of final rates. Even if the constitutional framework on which the dissent relies were applicable here, Minnesоta Power confirmed at oral argument that it is not claiming that an unconstitutional taking occurred during the 10-month interim rate period. Specifically, counsel for Minnesota Power conceded that Minnesota Power is "not really arguing [that] a constitutional taking” occurred during the 10-month interim rate period at issue in this case. Counsel also con
. The dissent does not contest our conclusion that the question of exigency is primarily one of fact. Yet, the dissent suggests that the judiciary is equally well-suited to make the exigency determination as the Commissiоn. We disagree. Our precedent recognizes that proper respect for separation of powers principles prevents the judiciary from substituting our judgment for that of the Commission. See In re Excess Surplus Status of Blue Cross & Blue Shield of Minn.,
. Minnesota Power and the dissent argue that the Commission's decision was arbitrary and capricious. But in reviewing quasi-judicial decisions of the Commission in setting a just and reasonable rate of return we have applied the substantial evidence standard and reserved the arbitrary and capricious standard for review of rate design determinations. Henry,
The dissent also argues that we should take a more assertive role or conduct a more vigorous examination of the Commission's decision. Apparently, in order to conduct that more rigorous examination, the dissent would adopt the federal hard look doctrine as defined in Motor Vehicle Manufacturers Ass’n of the United States v. State Farm Mutual Automobile Insurance Co.,
. The dissent asserts that the record is inadequate to support the Commission’s consider
. The dissent nevertheless contends that the Commission's adoption of an interim rate at 60 percent of Minnesota Power's final rate request should be set aside as arbitrary and capricious. The Commission explаined that its decision to set the rate at 60 percent, "an amount slightly in excess of any final revenue requirement found in previous Company rate cases in the last 22 years,” was based on its "balanc[ing] the potential burdens faced by the Company and its ratepayers in light of [the] exigent circumstances, the Company's 22+ years of rate case history, this Commission’s regulatory expertise, and the public interest.” The dissent apparently faults the
. Minnesota Power also argues that by reducing the interim rate to 60 percent of Minnesota Power’s final rate request, the Commission violated its right to procedural due process. Additionally, Minnesota Power contends that the interim rate set by the Commission did not prevent the confiscatory effect of regulatory delay. To the extent that Minnesota Power makes constitutional arguments separate from the statute-based arguments addressed above, such arguments were not preserved on appeal because they were not raised before the court of appeals or in Minnesota Power’s petition for review. We therefore decline to reach these issues. See State v. Koppi,
. Because we conclude that the Commission did not err in setting the interim rate, the Commission's order was neither invalid nor unlawful. Minnesota Power is therefore not entitled to recoup the difference between the interim rate and the final rate during the period between when the interim rate became effective and the final rate order. See Qwest’s Wholesale,
Concurrence Opinion
(concurring).
I join in the opinion of the court but write separately to address the Minnesota Public Utilities Commission’s finding that Minnesota Power’s service area had suffered “the worst economic downturn in the past 60 years” to support its conclusion of exigent circumstances. Because I conclude that the finding regarding the economic downturn is an argumentative assertion not supported in the record, I would disregard that finding in determining whether substantial evidence supports the Commission’s decision setting interim rates. But because other evidence supports the Commission’s decision, I join in the court’s decision to affirm.
Generally, we will uphold an administrative agency’s decision if the reasons given
Here, the Commission found that Minnesota Power’s service territory suffered “the worst economic downturn in the past 60 years” and relied in part on that finding to conclude that exigent circumstances existed. The only support for the Commission’s finding regarding the economic downturn in the service territory comes from the comments of the intervening parties. But without any documentation or substantiation, comments from parties are not evidence; they are merely unsupported assertions and do not possess probative value commonly accepted by reasonable, prudent persons in the conduct of their affairs. As such, the unsubstantiated statements of the intervening parties cannot provide substantial evidence to support the Commission’s conclusion of exigent circumstances.
In its order setting interim rates, the Commission noted that the fact that an economic downturn existed was “generally known and based on publicly available information.” But that does not excuse the requirement that the agency’s conclusion be supported by “evidence in the record, considered in its entirety.” Blue Cross,
Because the Commission’s finding relating to the “economic downturn” was not supported by evidence in the record, it should be disregarded. Nevertheless, the Commission’s conclusion that exigent circumstances existed was based on two other reasons and, consequently, I concur in the court’s decision to affirm the court of appeals.
While I agree with the majority that the Minnesota Public Utilities Commission (Commission) did not exceed its statutory authority when it considered factors other than those listed in Minn.Stat. § 216B.16, subd. 8(b) (2012), in determining whether exigent circumstances existed, I conclude that the interim rate assigned by the Commission was arbitrary and capricious, and thus violated Minn.Stat. § 14.69 (2012). While that conclusion, standing alone, is sufficient to require a remand for recoupment, I also conclude that the court has extended undue deference to the Commission based upon flimsy claims of technical expertise, and that the Commission’s interim rate determination failed to properly account for Minnesota Power’s constitutional right to a reasonable return on its property. For these reasons, I respectfully dissent.
I.
I begin with the question of whether the Commission’s decision on the interim rate was arbitrary or capricious, in violation of Minn.Stat. § 14.69. Because this proceeding merely set rate levels and did not involve the creation of a new rate design, the majority declines to apply the arbitrary or capricious standard. While such a distinction can indeed be found in Henry v. Minnesota Public Utilities Commission,
A.
Before I evaluate whether the Commission’s decision in this case was arbitrary or capricious, I begin my analysis by examining the principles that should govern our court’s review of agency action. The Minnesota Administrative Procedure Act, Minn.Stat. ch. 14, provides that a court “may reverse or modify the decision [of an agency] if the substantial rights of the petitioners may have been prejudiced because the administrative finding, inferences, conclusion, or decisions are ... (e) unsupported by substantial evidence in view of the entire record as submitted; or (f) arbitrary or capricious.” Minn.Stat. § 14.69. The statutory language contains no indication that courts are to refrain from reviewing a decision challenged as arbitrary or capricious in rate-setting cases — or any type of contested administrative law cases, for that matter.
Our prior decisions have recognized that, as the statutory language would suggest, arbitrary or capricious review is appropriate for any challenge to agency “finding[s], inferences, conclusion^], [and] decisions.” Minn.Stat. § 14.69. In Reserve Mining, we held that courts should review decisions of the Pollution Control Agency and Department of Natural Resources under a standard of “lawful and reasonable, a test which we equate with whether or not they are affected by errors of law; and whether or not their findings are unsupported by substantial evidence; and whether or not their conclusions are arbitrary or capricious.” Reserve Mining Co. v. Herbst,
We recently reaffirmed the broad and general applicability of arbitrary or capricious review of administrative action. In Citizens Advocating Responsible Development v. Kandiyohi County Board of Commissioners, we said that “[a]gency decisions are reversed when they reflect an error of law, the findings are arbitrary and capricious, or the findings are unsupported by substantial evidence.”
The term “hard look,” used in both Reserve Mining and Citizens Advocating Responsible Development, is a reference to the type of arbitrary or capricious review practiced by the federal courts. Although we have not explicitly adopted the federal doctrine, these references reflect our understanding that the federal courts have considerable experience implementing a very similar standard of review, and that we therefore find those federal decisions to be persuasive authority in many of our own administrative law cases.
Minnesota Statutes § 14.69 is very similar to the “scope of review” section in the federal Administrative Procedure Act (APA), 5 U.S.C. § 706 (2006), which provides that a “reviewing court shall ... hold unlawful and set aside agency action, findings, and conclusions found to be — (A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with lаw; [or] ... (E) unsupported by substantial evidence.” For questions of fact, the federal APA’s arbitrary or capricious standard and substantial evidence standard are widely understood to be very similar, and perhaps identical. See Ass’n of Data Processing Serv. Orgs., Inc. v. Bd. of Governors of Fed. Reserve Sys. (ADAPSO),
Where the substantial evidence test and arbitrary or capricious test differ is in their breadth. Arbitrary or capricious review is not limited solely to questions of fact. Rather, it is a “catchall, picking up administrative misconduct not covered by the other more specific paragraphs.” Id. at 683. In other words, an agency action may be supported by substantial evidence, but still be arbitrary or capricious. Id.
This arbitrary or capricious review under the federal APA has evolved into the doctrine of “hard look.” See, e.g., Nevada v. Dep’t of Energy,
The scope of review under the arbitrary and capricious standard is narrow and a court is not to substitute its judgment for that of the agency. Nevertheless, the agency must examine the relevant data and articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice made. In reviewing that explanation, we must consider whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment. Normally, an agency rule would be arbitrary and capricious if the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.
Another common way by which agency action can be arbitrary or capricious under the hard look doctrine is if it constitutes “an abrupt and unexplained departure from agency precedent,” ADAPSO,
Given the similarity in statutory language between MinmStat. § 14.69 and 5 U.S.C. § 706, the decades of development in the doctrine at the federal level, and the need to ensure transparency, accountability, and reasoned decision making amongst the state’s various administrative agencies, I believe it may be time to adopt a version of hard look review in Minnesota. Though this would formalize, and perhaps expand, our inconsistently applied standard of arbitrary or capricious review, I believe a strong, explicit standard would prove beneficial to regulated parties, courts, and even agencies. To expect an agency to consider all of the relevant evidence and demonstrate the ability to cogently explain its reasoning is not, as some might claim, an undue burden. It is merely a prudent safeguard against administrative abuse.
Having delineated the proper scope of our review, I now turn to the Commission’s interim rate determination.
There are several issues in the present dispute with inadequate development in the record. To be sure, the Commission may be able to offer the necessary eviden-tiary support for its conclusions, but that is part of the benefit of adopting a less deferential form of review — it forces agencies to produce a more detailed record, which would allow us to better understand and evaluate administrative decisions and ensure that just outcomes are reached. For example, the present record lacks any detailed explanation for the Commission’s adoption of an interim rate that totaled 60 percent оf the increase Minnesota Power sought. Perhaps this was the proper result, reached through full, impartial consideration of all available evidence — but perhaps not. Because the Commission has failed to produce a record that would allow us to verify its conclusions, neither I nor the majority can say. Similarly, the Commission has provided no legitimate explanation for its selection of a group of prior rate cases that conveniently include determinations supporting its desired outcome — while excluding decisions that support the utility’s position.
Given these inadequacies in the record and in the agency determination here, it would be appropriate to reverse and remand to the Commission for recoupment proceedings even under our current standard. In In re Minnegasco,
The central issue in this case is whether the applicable statutes authorize the Commission, on remand, to order a recoupment remedy to compensate a public utility for lost revenue occasioned by a rate order reversed on appeal as exceeding the Commission’s statutory authority. Guided by the statutory language, our case law, and the need for a sensible and fair construction of the statutes, we hold that the Commission has implied statutory authority to order such a remedy.3
II.
The majority also defers to the Commission’s determination that exigent circumstances existed, concluding that such a determination is an exercise of the agency’s technical knowledge and expertise. I believe such deference is unwarranted. Moreover, I view the court’s uncritical acceptance of the Commission’s position as a troubling — but not atypical — demonstration of our long-standing failure to subject agency claims to appropriately vigorous examination.
The majority states that agency decisions “enjoy a presumption of correctness, and deference should be shown by courts to the agencies’ expertise and their special knowledge in the field of their technical training, education, and experience.” The critical question we face here, not directly addressed by the majority, is this: whether the Commission’s determination that exigent circumstances existed is, in fact, a situation requiring the application of the Commission’s technical knowledge and expertise. I do not believe that it is.
The three “extraordinary circumstances” the Commission cited to justify its determination of an exigency were: (1) “the unprecedented size of the proposed rate increase”; (2) “the extremely short window ... between the effective date of [Minnesota Power’s] last rate increase and this rate increase request”; and (3) “the worst economic downturn in the past 60 years.” The first two factors require no expertise or technical knowledge beyond basic arithmetic and the use of a calendar. And the third factor, the economic downturn, might call for some technical knowledge, but not of any type in which the Commission can be said to specialize.
It is, of course, true that Minnesota Power and its customers, likе other Minnesotans, have experienced significant economic challenges as a result of the post-2008 recession and the limited recovery. But the record here does not reveal what special expertise the Commission actually applied to arrive at this common-sense observation. If expert status is shown by noticing a bad economy in 2009, few Minnesotans would lack expert credentials. And although listening to the concerns of affected individuals and the regulated utility is undoubtedly important, it does not
The majority assembles a long list of cases supporting the proposition that we defer to agencies when a conclusion requires the application of technical expertise. But my argument is not that we should abandon this standard; I believe, rather, that we should enforce it. The only argument the majority musters in support of deferring in this case is this: because “[t]he Legislature has committed the question of exigency to the Commission as part of the Commission’s interim rate making function,” determining whether exigent circumstances exist “therefore necessarily requires application of the Commission’s technical knowledge and expertise to the facts presented.” Why does the question of an exigency “necessarily require” technical knowledge and expertise? The majority does not say.
The mere fact that the Legislature has authorized an agency to take some action certainly does not establish that the action is of a technical nature or requires that agency’s specialized knowledge. Such broad reasoning effectively immunizes every agency action — or, at least, every conclusion made as part of an agency action— as the product of technical knowledge and expertise. However appropriate this kind of deference might have been at the dawn of the bureaucratic era, it eviscerates the judiciary’s ability to conduct meaningful review of agency action, and thus cannot be tolerated in the modern age of ever-expanding administrative authority.
The majority argues that such broad deference to agencies reflects a proper respect for separation of powers principles. But I do not propose, as the majority contends, that we substitute the judgments of courts for those of agencies. To require an agency to demonstrate that sound reasoning underlies its conclusions does not violate separation of powers or infringe upon executive branch prerogatives; rather, it is a proper application of the judiciary’s duty, as a co-equal branch of government, to protect the rights of all parties from agency overreach, error, and abuse. See City of Arlington v. F.C.C., 569 U.S. -, -,
The Supreme Court of the United States warned us, more than half a century ago, that “unless we make the requirements for administrative action strict and demanding, expertise, the strength of modern government, can become a monster which rules with no practical limits on its discretion.” Burlington Truck Lines, Inc. v. United States,
To be sure, many cases will feature administrative conclusions that actually involve technical knowledge and expertise, and thus warrant some (limited) level of judicial deference. But when, as here, the agency bases a significant conclusion on individual determinations that do not fall within its area of special knowledge or require technical expertise, I would have us employ a more vigorous, searching review of the agency’s reasoning.
III.
Lastly, I turn to the constitutional implications of the majority opinion. The Supreme Court has said that rates that “are not sufficient to yield a reasonable return on the value of the property used at the time it is being used to render the service are unjust, unreasonable and confiscatory, and their enforcement deprives the public utility company of its property in violation of the Fourteenth Amеndment.” Bluefield Water Works & Improvement Co. v. Pub. Serv. Comm’n of W. Va.,
This constitutional requirement, which applies regardless of exigent circumstances, is the backdrop against which the Commission must set the interim rate. While the majority correctly rejects formulas and general limitations on what the Commission may consider when determining whether exigent circumstances exist, the court fails to consider whether the specific factors the Commission used to justify its decision actually did protect Minnesota Power’s constitutional right to recoup its costs of service — including costs imposed by the state itself through legislation and regulation — and earn a reasonable return. The record here suggests reasons
As discussed earlier, the three “extraordinary circumstances” the Commission cites to justify its determination of an exigency, and thus to abandon the statutory formula, were: (1) “the unprecedented size of the proposed rate increase”; (2) “the extremely short window ... between the effective date of [Minnesota Power’s] last rate increase and this rate increase request”; and (8) “the worst economic downturn in the past 60 years.” In the Commission’s view, these three factors, considered together, carried “serious potential for rate shock — and even outright hardship — for [Minnesota Power’s] customers.”
The first factor — that Minnesota Power’s proposed rate increase was especially large — is irrelevant to the question of whether the proposed rate would yield the utility sufficient revenue to satisfy the constitutional requirement. If, for example, the State enacts new environmental mandates that significantly increase the cost of providing service (as Minnesota Power argues), the State could hardly then pivot and deny utilities the rate increases necessary to bring revenues back into line with expenses. Such a governmental imposition of costs upon a private entity to create a public benefit is exactly the sort of abuse the Takings Clause prohibits.
The Commission’s second factor — that this rate increase comes swiftly on the heels of a previous increase — is also constitutionally irrelevant. The reasoning applied to the first factor would apply with as much force to the second — the enactment of costly mandates shortly after a ratemaking procedure does not somehow invalidate a utility’s constitutional right to recoup its costs. Furthermore, a utility expecting its newly established rate to provide insufficient revenue, perhaps because of new developments that occur during a proceeding, might also be justified in commencing a new ratemaking procedure as quickly as possible so as to present its case with the benefit of new data.
But the Commission clearly, if implicitly, agrees with Minnesota Power’s position. The Commission argues that “[hjouseholds and business struggling under the current adverse economic conditions ... may face economic deprivations, business losses, and even disconnections” if subjected to an unduly large rate increase. These concerns are undoubtedly excellent reasons to avoid allowing utilities to charge rates greater than Minn.Stat. § 216B.16 permits, but they do not form a valid basis to find the constitutional minimum rate to be lower than it would otherwise be. In fact, these circumstances suggest the opposite: that the economic downturn and consequent drop in demand requires that utilities be allowed a higher rate to recoup fixed capital costs incurred with the expectation— ratified by the agency but rejected in the marketplace — of greater energy consumption.
In sum, the Commission justified its decision to find exigent circumstances, and thus to set aside the statutory rate formula, by considering three factors, none of which indicates any recognition of the overriding constitutional constraints under which the agency operates and at least one of which was employed in opposition to constitutional requirements. Nor can I find any other evidence in the record that would suggest that the Commission made any effort to calculate the minimum rate of return to which Minnesota Power was entitled, regardless of exigent circumstances.
The majority addresses the constitutiоnal issue only briefly, distinguishing the interim ratemaking procedure in this case from two other decisions of our court that were based on a full administrative procedure. See Hibbing Taconite Co. v. Minn. Pub. Serv. Comm’n,
The majority ends with a discussion of Bluefield,
Finally, I note that this threat of constitutional violations in the interim ratemak-ing process is not merely abstract or theoretical. The majority actually concludes here that “the interim rate appears to have fallen short of covering Minnesota Power’s cost of service.” One would think that finding itself affirming a rate that is, in its own estimation, “unjust, unreasonable, and confiscatory” because it fаils “to meét the cost of providing service,” N.S.P.,
I recognize that the Commission was confronted with sympathetic filings on behalf of businesses and individuals who would likely suffer significant hardship from the proposed rate increases. But as the Supreme Court has observed, “the enshrinement of constitutional rights necessarily takes certain policy choices off the table.” District of Columbia v. Heller,
. Additionally, before taking notice of facts outside the record in contested case hearings, agencies must notify the parties in writing of the material so noticed, and afford them an opportunity to contest the facts. Minn.Stat. § 14.60, subd. 4. The Commission did not follow these procedures in this case.
. I would note that we already employ a similar procedure when reviewing decisions by the tax court. Though we generally apply a clearly erroneous standard to its valuations, we do "not defer, however, when the tax court ... has failed to explain its reasoning.” Eden Prairie Mall, LLC v. Cnty. of Hennepin,
. The Commission adopted a 22-year framework for measuring Minnesota Power's previous rate cases, which stopped just short of including a 1987 rate case in which Minnesota Power received approximately double what it requested. To be clear, I am not arguing that the Commission was wrong to exclude the 1987 case. An agency must draw a line somewhere, and the mere fact that some cases will be excluded by a particular choice does not make the decision arbitrary or capricious. The problem is that the Commission failed to "articulate with reasonable clarity its reasons for [the] decision.” Greater Boston Television Corp. v. F.C.C.,
. The majority argues that "recoupment is not available ... if we determine! ], as we have above, that the Commission did not err.” But the relevant question is whether Minneso
Put another way, a holding that the interim rate was defectivе would not normally establish the correct rate that should have been assigned. We would therefore need to remand to the Commission with orders to conduct interim ratemaking proceedings untainted by the errors identified in its earlier effort. But when, as here, the Commission has already conducted a full final ratemaking procedure examining the same period, it would seem sensible to simply remand for recoupment consistent with the revenues that would have been generated had the final rate been assigned during the interim period. To do otherwise would require the parties to ignore the evidence presented, record developed, and conclusions drawn during a more extensive proceeding directed at the same result: a rate that protects both utilities and consumers by granting the utility a reasonable return on its property — and nothing more.
. We have specifically endorsed the D.C. Circuit's reasoning on these matters. See Reserve Mining,
. The majority contends that Minnesota Power's taking claim is waived. I am not so sure. At oral argument, I understood the utility’s counsel to be indicating that we do not need to reach the constitutional issue because we can reverse on statutory grounds, including arbitrary or capricious review. Such a sensible suggestion, see supra Part I, would seem at least as plausible as counsel choosing to forfeit a valid basis upon which his client could be granted relief. And while I concede that the claim is not presented with the specificity we would desire in Minnesota Power’s petitiоn for review, I believe the fairest reading of its argument is that the constitutional claim was included within the broader question, properly raised and preserved, of whether "the Commission’s decision [was] contrary to law.” See Pet. for Review at 3 (filed Jan. 4, 2012) ("The Commission’s exercise of this new-found discretion in this case produced the very confiscatory effect that the interim rate statute was designed to prevent”); Appellant's Br. at 24 (filed Apr. 16, 2012) ("The Commission’s decision was in excess of its statutory authority, contrary to law, and arbitrary for any one of three independent reasons: ... 3. The reduction of interim rates below Minnesota Power’s documented costs for the interim period was confiscatory.”). Certainly the reference to "confiscatory” actions by the Commission implicates the taking claim. All of that said, even if the majority's observation that it is a "reach” to consider the constitutional argument here is credited, there are sufficient other grounds to reverse the Commission. The importance of the constitutional analysis in this dispute is not so much related to the outcome here as it is to preventing, in future rate cases, interim and otherwise, an assumption from taking root that property rights are secondary to the public policy choices of the government and its agents.
. Notably, there does not appear to be another case in which the Commission has found exigent circumstances based on factors other than cost of service to the utility.
. The majority argues that I fail to appreciate “the critical differences between interim and final rates, as evidenced in the distinction between the interim and final rate processes, the methods for determining interim and final rates, and the purpose for which interim and final rates were created by the Legislature.” But the Takings Clаuse focuses on results, not process. No amount of notice, opportunity to be heard, agency consideration, legislative approval, public policy concerns, or valid countervailing interests can relieve the State of its obligation to fully compensate an owner when it takes the owner's property. Moreover, it is puzzling, at best, to suggest that the Legislature can insulate the Commission's determination of interim rates from constitutional scrutiny by providing less process. The Constitution constrains the government — the government cannot reduce the scope of Constitutional protections.
. The majority questions whether the constitutional framework of the Fifth and Fourteenth Amendments even applies in the context of interim rate making. I would not have thought it controversial to assert that constitutional protections against the taking of property without compensation are always applicable. The Supreme Court has stated that to avoid a constitutional violation, the utility must receive a "reasonable return on the value of the property used at the time it is being used.” Bluefield,