*1 Appel MONTANA-DAKOTA CO., UTILITIES Plaintiff lant, v. BOLLINGER, GORDON E. al., JARVIS, CLYDE et Respondents. Defendants No. 80-346.
Submitted 1981. June Aug. Decided 1981.
MR. DALY delivered the opinion of the Court. JUSTICE Montana-Dakota (MDU) Utilities Company appeals judg- ment entered in the Court, Dawson District the County Honorable Nat Allen presiding, an affirming order of the Public Service (PSC) Commission which set allowable electric and gas natural rates.
In March 1978 MDU filed an request- with the PSC application items, an ing, other of its electric rates. In its among increase base, request MDU asked of the rate accept, part money by coal from Knife expended obtaining (Knife River). Knife River Coal River is MDU’s Company wholly- owned percent 100 the coal needed subsidiary supplies MDU’s coal-fired contracts. generators long-term Approxi- under 34 of Knife total sales are made MDU mately River’s with the 66 made to other utilities and remaining percent being concerns. manufacturing on the rate increase heard tes-
During hearing request, the PSC on two timony different methods for the reasonableness monitoring for its coal. MDU use of a pays suggested “market method: an examination of the charged price”
510 to those prices being sales in comparison for similar
marketplace if a favorable comparison to the subsidiary parent; charged by found, and no adjustment reasonable is deemed the Montana was offered by “rate of return” method A necessary. of the return called for an examination Consumer Counsel sales on its parent; earned being of return requires adjustment. excessive rate method, of its the Consumer In asserting application witness, Wilson, testified that the Dr. W. Counsel’s expert John return on the total net investment for Knife River (This was based on rate of return approximately percent. $15,899, 519.) Dr. Wilson was of the River’s capitalization was in excess of a reasonable opinion percentage and recommended that MDU’s coal redúced expense would the reduction adjustment represent 2.6 million dollars. This (rate a level of all Knife River equal profit (12.124 return) investment *3 is allowed to earn on its equity MDU recommendation, MDU resisted the Consumer Counsel’s percent). River were reasonable that its coal Knife claiming purchases and fair been made in a environment. competitive having deemed the claimed coal expense
In its order PSC issuing of return method in excessive and chose to make use of the rate method, this the PSC its reasonableness. In monitoring applying used formula: following
A. Knife River’s determined Consumer capitalization by witness, Wilson, $15,899,519. Counsel’s in the amount of applied capitaliza- MDU’s rate of return on equity B. $15,899,519 x percent tion to a revenue amount: 12.124 produce = $1,927,658. earned actually by is subtracted from the This amount
C. - = $1,927,658 $2,548,227. $4,475,885 Knife River: of coal from Knife direct and indirect purchases D. MDU’s to be 33.91 witnesses are determined Consumer Counsel’s River total of River’s sales. Knife River to are then E. Direct and indirect sales from Knife = $836,512. $2,548,227 x 32.8272% determined: F. portion Montana’s of claimed excessive coal costs is then determined of by multiplying by Montana’s proportion kwh $836,512 sales to total interconnected kwh x system sales: - $283,661. (Consumer 33.91% Counsel’s position that the reduc- on tion be based all Knife River adopted.) An of order was appeal taken the District Court by review, MDU. After the court held that there was substantial evidence in the record to sustain the PSC’s decision to use the rate of return as method well as the of that application method. (1)
MDU now appeals this Court that the claiming: under law in operating mistake of that under the cir- concluding could cumstances it rate of on net fixed assets apply method as a means whether the Knife paid reasonable; (2) River coal was that the PSC has regulated (3) which is beyond their statutory order power; is an unconstitutional without due deprivation property process of law.
The issue presented to this Court for review framed follows: Did the abuse its authority its utilization and then its particular return method in application ascertaining coal reasonableness MDU’s from a expense wholly-owned subsidiary corporation? Utilities,
Appellant, Montana-Dakota contends generally central issue is whether the sold to MDU Knife excessive; not, River is if it is the full should allowed as a cost ratepayer expense. making determination an examination should have been made of the for coal going in the applicable *4 competitive Here there is substantial that marketplace. evidence a competitive marketplace exists price paid equal or less than the a going As the costs claimed price. consequence, excessive, MDU should not have been deemed and the rate of should not method have been applied. further contends that even if is not a Appellant there competitive which to evaluate the reasonableness of the marketplace by MDU, it does not follow that the was excessive.If the charged received by Knife River on the sale of coal to MDU are con- sidered in relation to the fair market value of the assets ($118,000,000), its rate of return is merely percent. and, thus is a not excessive such Certainly profitability margin even in absence of a reasonable competitive marketplace. further that use of the rate of argues return method is Appellant unfair and in this instance. Knife inappropriate engaged methods, a The as nonregulated competitive industry. applied, thus tantamount to the confiscation of assets. It has Knife River’s the effect of asset of River to utilizing Knife depletable artificially electric rates below the and reasonable level depress proper mandated our current The inflationary economy. only proper means of the reasonableness of the MDU price paid by in this instance is in “fair market” method. applying have methods presented claims both Respondent devices to test monitoring been recognized acceptable of the reasonableness of coal sales. A prerequisite fundamental method, however, is that an independent competitive price can be in which comparable prices market be competitive present Here, as indicated by drawn. there is no environment competitive (1) requirement factors: of MDU’s coal following contract; (2) boiler River under long-term Knife supplied by and MDU failed coal of certain designs require grade type, the needed other could supply show whether any “competitor” (3) proximity are located quality; generating plants it an insurmountable competitive mines giving Knife River’s into coal costs. costs are figured when advantage transportation of the rate of return further argues application Respondent Knife impermissible regulation method does not constitute order is to limit the coal expenses effect River. only in its rate base. It to its Montana customers MDU can pass along River, nor pays not in limit the way does
513 does it limit the River’s profits sales to MDU any other customer. then concludes that
Respondent use Knife River’s capitaliza- a base tion as are against measured was not The interest of the is to that improper. see MDU does not reap an unfair on its investment in profit its the subsidiary by allowing for coal when the overcharge parent coal expense will be on to the passed ratepayers. capitalization figure repre- sents MDU’s investment in Knife River. In the rate on ascertaining investment, must be capitalization figure used. PSC, and duty supervise fulfilling function of
A to see that utility, an electric of MDU operations regulate 69-3-330, Section nondiscriminatory. and rates are just it follows that with this obligation, In complying MCA. of MDU expenses review operating scrutinize and must on being passed costs from operating unreasonable prevent is caused by submitted MDU of the expenses When one customer. by applied subsidiary company, scrutiny with a transactions by Priest, Principles the more intense. See must be all the PSC 1, 80; Co. Vol. p. Telephone General Utility Regulation, Public (1966), 271 N.Y.S.2d 17 N.Y.2d Lundy New York v. Upstate N.E.2d 274. MDU, in an to establish the reasonableness attempt of the coal from the expense of coal from its resulting purchase subsidiary, submits that the should be monitored in the context of natural resource in the free operating marketplace, not in the context of a In this regulated public utility. MDU regard, (1) submitted evidence which showed: that the price MDU charged Knife River is lower than available from source; (2) alternative that Knife charges River the same MDU customers; (3) it charges its other Knife River’s reasonable when fair profits are measured market value against (fair $118,000,000 its assets market value of with a rate of at 1.6 percent). as a as submitted Use the fair marketplace monitoring device MDU obviously dependent upon competitive environment. environment, Without such an no frame of adequate reference exists in which the fairness of can be Knife River’s price instance, determined. In this heard that Knife testimony are the same as those to other cus- charged *6 tomers, of necessarily not because the inherent fairness price, but River is with the Robinson merely complying because Knife of of like kind and requires Patman Act which sales coal quantity be at the same to all customers. to offered
Evidence was also presented that the of MDU’s proximity gener- ating to Knife River plants Knife River a gives advan- competitive tage insurmountable current when competitors one considers that This, costs transportation often exceed coal costs. taken with the fact that Knife River 100 of supplies percent contracts, coal requirements under long-term leads to the PSC’s conclusion that anti-competitive factors were and that present evi- dence of a competitive environment needed to a market apply method was inconclusive. aAs consequence, the PSC refused to examine market or price market value as the sole factors to be
considered in reasonableness of MDU’s coal expense.
The market
method
available
being
for use in this
instance, the PSC chose to utilize a rate of
method. This
return
method of
monitoring
reasonableness of coal
a
prices paid by
parent to its
is not new to
the field of
law. See
in the Coal
Competition
of
Industry, Report
the United States
Justice,
of
Department
Pursuant to
of
Section 8
the Federal Coal
1975;
ofAct
Leasing
Montana-Dakota
Application
Co.
Utility
of
(S.D.
to Establish
Authority
Increased Rates
Electric Service
for
1979),
189;
278 N.W.2d
River Fuel
v.
Mississippi
Federal
Corp.
(D.C.Cir.1957),
Power Commission
analyze River’s a profits computed 33 percent (relation test during year original that this The then concluded investment less depreciation). coal and restricted MDU’s expense rate of return too high River’s sales to that a rate of return Knife reasonable stating on its rate of allowed MDU equal MDU should however, note, (12.124 We percent). overall operation conclusion, PSC, on what basis it this failed to indicate in making a 12.124 why rate of return unreasonable percent deemed 33 rate is reasonable under the circumstances. percent testified that other coal witness The Consumer Counsel’s expert than Knife that were lower earned returns significantly companies made, however, indicated The actual only comparison River’s. had a 31.89 percent that an independent River’s 33.43 On return in Knife compared percent. (1973 1977), for the inde- the rate of return five-year average and for was 17.8 Knife percent percent. pendent River is but Court certainly higher, percentage whether such a small supportive finding questions sampling is excessiveor that 12.143 is a equity that 33.43 percent of return. reasonable rate *7 a limit of rate of return on imposing 12.143 Knife percent
River’s coal sales to the rationale that a should not be ratepayer forced to contribute to the of the twice. profit utility company Here, fair the a rate of return to the on its ratepayer pays utility (12.124 cost of is The consumer then asked capital percent). by MDU to for its coal which contains a 33 pay expense percent profit (investor) level to be earned MDU as the by parent company is Knife River. The end result that MDU is allowed a from its profit as allowed the then also utility operations, by regulatory body, earns an “excess” on its investment from all profit the subsidiary, at the of the expense ratepayer. on its investment in Knife River is not se earnings per excessive, It is the and unreason-
improper. only earning thereby able, at the of the which the seeks to expense ratepayer mind, the to allow With this principle willing prevent. to a return on both its and its utility operations earn so as subsidiary’s operation, the contribution to long ratepayer’s of the a earnings were limited to reasonable level of subsidiary 12.124 percent. matter,
Upon reviewing this Court agrees with principal this but we approach, question whether the limit of imposed “reasonable,” evidence, as supported not merely set. arbitrarily an not reap is to see MDU does
The interest of the sub by allowing investment in its subsidiary unfair on its profit when the coal paid for coal sidiary overcharge parent sales on the rate consequence, As a ratepayers. in total by River, to its parent as a wholly-owned company, follow, how does not automatically close It scrutiny. subject ever, as held to the same rate should be that the coal company follow that the parent only Nor does it parent public utility. the investment in its the same rate of return on allowed to.receive with as it receives on its utility property, respect coal subsidiary on and the If limitation sales between the susidiary parent. order, based is in it should be coal expense coal profits ratepayer aby rate of return established comparable on reasonable rate as established for not upon predetermined marketplace, utility. regulated level, PSC, in the rate of return was relying
Perhaps setting issue approach” in the “California upon theory prevalent at this is treated not as an approach, hand. Under but as part ratemaking independent entity utility was discussed in purposes. theory underlying position (1980), Water Power v. Idaho Public 101 Idaho Util. Washington P.2d 1248: “. . . where a and market utility enjoys integrated position dominance, it ‘should not be to break enter- permitted up the use of affiliated obtain an prise by corporations thereby for its activities.’ Thus increased rate [Citation omitted.] *8 under this of whether the are reason- approach question immaterial; able all of the are allowed the integrated parts same rate of return ...”
517 note, however, that cases We those majority using involve the Bell and its approach Telephone System manufacturing subsidiaries. These subsidiaries all their manufac sell virtually — tured to the Bell a fact which is products parent, Telephone different from the situation where the bulk of materially present (a resource) Knife River coal natural depletable sold customers other than its Los v. Public parent. City See Utilities Angeles (1972), 313, 785; Comm. 102 497 P.2d Re New Cal.Rptr. England (Me. 65; 1976), & Co. 13 Illinois Telephone Telegraph P.U.R.4th (1973), Bell Co. v. Illinois Commerce Commission Telephone 461, 364; Note, Ill.2d 303 N.E.2d Trans Treatment of Affiliated actions in Rate Utility Western Electric and the Making: Company 558, (1976). Bell 56 Boston U.Law.Rev. an System, 568-571 Such should not be deemed in this approach instance. applicable In reasonableness, should not be restricted to any formula single “so as the method long followed and the order entered when applied facts and viewed as a whole do not produce an or unjust arbitrary result.” Northwestern Public Service Chamberlain, Commission v. Cities et al. (S.D.1978), 867, Here, 265 N.W.2d 872. PSC chose apply rate of return method in an effort to determine the reasonableness of the price paid by MDU for Knife River coal. Our is to inquiry arbitrary determine if this method produces unjust result. the method this considering Court cannot substitute its PSC, for that judgment but the Court determine whether the acted arbitrarily without suffi unreasonably cient evidence to support findings. Mountain & States Telephone (1981), 191 Co. v. Public Service Telegraph Regulation Dept. of 165, Mont. 624 P.2d 170. After analyzing St.Rep. investment, Knife River’s comparison capital the PSC labeled Knife River’s summarily return on sales to MDU as unreasonable, when in fact no substantial evidence was presented such a conclusion. support must have sufficient evi dence before it to determine if particular return is fair and for Knife River as just to other coal compared companies. Unless *9 that the rate of return of MDU there is substantial evidence to show for an is no basis is also to the coal there company, applicable as was done rate of return to of the MDU Knife application the PSC. River, is that the resource Knife It natural apparent company, MDU, with than may a of its business other doing parties majority a rate of return than would be be entitled to different significantly all if it were a or if it were of its coal selling production true be that the does not have the to expertise to MDU. It PSC the on a natural resource coal determine readily a shows that alarge to The evidence utility. compared reserves a number of acquired years Knife River’s coal were part leases at a cost to acquired at a low cost. As Knife ago example, $400,000 585,000,000 than tons of coal which River of less cover $93,000,000. manner, a In a similar the has market value of will evidence shows that the Beulah mine owned Knife River be if so that cost to Knife fully undepreciated depreciated return, for a rate of no at all would be allowed River used profit that it still on the Beulah mine. If the PSC concludes ultimately method, it take into consider- desires to use the must as these so that its action will not be arbitrary. ation such facts view of In for the should necessity again PSC rehearing, consider if is an there market which independent, competitive coal, establishes market from which the can going PSC if determine Knife River for coal is reasonable. pays While it is true that the found that PSC absolute comparability determine, if between coal prices impossible appears that the Court number other Knife paid by companies River for two-thirds of its coal of a evidence production competi- tive market the Knife River MDU. comparison price paid by addition, there was evidence of other com- prices charged by in the finds that the area. If panies competitive present PSC insufficient, it require evidence PSC appears appropriate to submit additional can evidence parties if River a which is no higher determine MDU paying than the requires. competitive marketplace that it might to this it Court justice, appears a matter of As if it of coal approach, cost a marketplace to use better for determination, using rather than for its facts can obtain sufficient and com- theories all of its difficult method with of return the rate method to choose does have right While the PSC putations. for the summary reason followed, find a factual did not this Court of coal approach. cost of the marketplace rejection Court of the District therefore, We, the judgment vacate an addi to hold with instructions case to and remand *10 is (1) rate of if following: to determine hearing tional allowed Knife rate of return used, for the basis a factual basis marketplace on a of return rate assets and its considering (2) cost market in the event companies; to other comparable of determination the PSC used, to support facts sufficient of coal coal. for market price the fair HARRISON,
MR. and CHIEF HASWELL JUSTICE JUSTICES MORRISON, LANGEN, and WEBER and LEONARD H. District Shea, in Judge sitting of Mr. concur. place Justice MR. dissenting: SHEEHY JUSTICE have tried in vain to I reason with not to take what my colleagues I view as a backward law of step developing utility regula- tion in Montana. unwarranted,
The result is a that is majority opinion useless and Unwarranted, contradictory. because it is an intrusion on the right of the Public Service Commission to determine the it methodology Useless, uses for a reasonable rate of return on it equity. because task, sets the to an PSC impossible determining market where no itself, market exists. because it with Contradictory, conflicts and because it contradicts Mountain States and Telephone Telegraph al., v. The Company Department Public Service et Regulation, of 481, 624 P.2d 165. St.Rep. Let us take the first. contradictions statute the “is By PSC rates; bound to or use value in accept any particular used, that if value is such provided, value not exceed the 69-3-109, cost of the ...” original Section property MCA. Moreover, Commission invested “with full power and control” of utilities. supervision, regulation, public Section 69-3-102, MCA. The PSC decided under its broad to follow power and treat as a “California” approach part The utility ratemaking purposes. majority opinion pays right service to determine its own pious lip River, the coal but methodology valuing purchased then contradicts itself. It is contradictory require used, determine: basis for “1. If factual the rate of return allowed Knife River and considering assets return on a basis market to other coal place comparable or, 2. In the event market cost of coal is sufficient companies; used facts to determination of the fair market support coal.” Those are out of with the requirements sync completely method: unitary question
“... under this approach Thus [California] immaterial; all integrated are reasonable whether ...” the same rate of return Wash are allowed parts (1980), Public 101 Idaho Water Power v. Idaho Util. ington added.) 1242, 1248. (Emphasis 617 P.2d also contradicts a majority opinion we took with position to American respect Telephone Telegraph Company *11 Mountain Bell. In Mountain States and Telephone Telegraph 1981, v. Company Public Service Department 624 Regulation, of 165, P.2d 38 we refused to allow St.Rep. Mountain Bell to base, a “double in its employ leverage” out of in funds arising Mountain Bell’s structure borrowed from capital its parent AT&T.
This case is the the Mountain Bell situation. inverse of Bell, that it should Mountain claiming the supra, when receive a rate of 1 on its borrowed funds return 1.25 percent for loans. We AT & T was Mountain Bell charging 9.86.percent are ‘lever- “Mountain Bell’scommon stockholders objected, saying is on its borrowed because Mountain Bell less interest aged’ paying funds than the it on the use of its borrowed funds.” return makes Here, from the in at the investment 167. St.Rep. funds, (or borrowed of the MDU shareholders retained earnings whichever) make the shareholders will because “leveraged” than reasonable their Knife River investment more from money will be the effect found That net rate of return on PSC. equity decision the case. majority in that disting- if it contradictory further opinion majority & companies, saying applica- uishes AT T and its subsidiary tion of the method to & T is because as AT unitary proper merely T is to AT & all of the manufactured enough nearly large purchase What reason its subsidiaries. economic or products regulatory exists to treat & utilities? AT T logically differently energy The fact that to than its a sell others wholly-owned is.not a require rate-pavers sufficient reason parent excessive costs. The parent pay implications majority here will when rate cases involve surely haunt us future opinion utilities or from the consortiums giant which fuel purchase power or now a utilities are joint enterprises becoming part. said
I also unwarranted. I make opinion majority conclusion because the field of utility regulation belongs public under our statutes and the exclusively methodology by it to determine a reasonable rate exclu employed a for as a This would be case us to state sively province. proper is not single rule restricted formula deter any the rate of return as as the method followed does mining long result in an result. Mont.-Dak. arbitrary unjust Application of Co., Elec Etc. to Establish Increased Rates Authority Util. (S.D.1979), a business with tric Service 278 N.W.2d 191. For market, guaranteed guaranteed a guaranteed monopoly, is not to be rate of return on equity profit, unreasonable, even in these days. snubbed arbitrary useless, it because have also said that the majority opinion I made, it has to make determinations that already requires with are rate of return. materially unitary and that inconsistent noted that it was not in event attempting The PSC carefully *12 Knife River or to its regulate regulate or to its profitabiltiy regulate rate of return. MDU did not very carefully appeal those findings commission.
The commission found that Knife River’s of 33.43 profitability assets, on percent net fixed compared when to PSC’s allowance of rate of return on was an equity, “extreme” differ- ence. found It method of only protecting ratepayers (but from the excessive for prices coal to limit the amount paid base) for the rate that only MDU would for pay Knife River coal. After making computations, which amounted to the elim- only $283,661 income, of ination of MDU’s made the following findings: has
“MDU suggested that the transfer of coal between examined, Knife River be and if it to be appears compet- itive, no adjustments be made. The Commission sees several dis- First, advantages with the rate approach. would be payer required rate for pay going coal of the rate regardless of earned being MDU shareholders as discussed above. Second, and most importantly, absolute between comparability coal virtually due to impossible determine a multitude coal, variables in chemical mining operations, composition (for and other transportation factors example, composition some coal dictate the need for a may more boiler than expensive coals; other which would be a cost but be coal) (A. Rebuttal, reflected per ton S. Kane page 14-31). line Finally bargaining between MDU and Knife is not at arms Anytime an length. unitary entity bargains [sic] itself, with the results tend be different than the results between entities, Wilson, Rebuttal, between bargaining (j. unrelated W. 5-25). lines page to regulate intends that if Commission suggested
“MDU of its reserves fair market value of return Knife River’s rate of Commission Firstly, return. determining used has return. Rate is not Knife River’s regulating prices. excessive as a method been used merely *13 above, does not and as has been stated Commission Secondly, coal be subjected rate should feel payer were a single corporation. not exist if MDU and Knife River would Therefore, will Knife River the amount MDU pay in computing coal, River’s capital- used the amount of Knife has Commission valua- depreciated matched the cost closely original ization assets; utility method used in valuing property tion of its the same is consistent with This method of reporting subject regulation. natural of all including the financial reporting corporations, 411, 4467, at No. Par. 25-27. resource PSC Order companies.” useless,- followed, because if it is The further majority opinion the next For example, we will have to set aside the results in appeal. “if a to determine requires particular majority opinion return is fair and for Knife River other just compared is told to coal leases acquired The PSC consider companies.” $400,000 than which contain coal at a cost to Knife River of less $93 million. It reserves of 585 million tons with market value Mine, now is told to cost of the Beulah original depre disregard do. has no ciated. These are cannot It business things to determine a fair rate of return for Knife River authority Coal avoided in manner carefully any Co. The commission its opinion $93 The for coal Knife River Coal Co. million regulating figure statute, reserves is the fair market value of those reserves. By commission cannot consider such a it use figure, of the Section value in excess cost original property. 69-3-109, if It would be nice for MDU it could recover MCA. that are still in but that on unmined coal reserves the ground,
profit has in the The District Court no place rate-making process. took note of the fact that the United States Court Supreme properly assets of a natural resource the contention that rejected it is at market value because gradually should valued course of its business In operations. its assets in the depleting (1944), Co. 320 U.S. Power Com’n v. Natural Gas Hope Federal 333, 347, 591, 606, 88 L.Ed.2d Supreme 64 S.Ct. said: Court such a the utilities are made whole
“By procedure of its investment maintained. No more is required.” integrity useless because it to be Finally, opinion ought apparent all, that 33 return of in a is a indi- year profit single good cation that no in the coal market exists. competition therefore, is
The It is a majority opinion, rigamarole amphigorv. but is meaning, apparent basically meaningless. commision increase proceeding, granted oper- $5,392,283 revenues for the ating gas MDU in the sum of utility $88,447. and a decrease in its electrical deduction $286,000 which the made for excessive coal charges *14 which represents the increase. It is approximately not the money but over here are principle parties war. The utility has secured the waging this Court of rejection by unitary California subsidiaries as approach arbitrary unreasonable. This will be a prove to sorry day rate-pavers.
I would affirm uphold findings PSC and the decision of the District Court.