OFFICE оf the PUBLIC ADVOCATE et al. v. PUBLIC UTILITIES COMMISSION et al.
Docket No. PUC-14-414.
Supreme Judicial Court of Maine.
Aug. 13, 2015.
2015 ME 113
Argued: June 18, 2015.
Todd J. Griset, Esq., and Andrew Landry, Esq., Preti Flaherty Beliveau & Pachios LLP, Augusta, and Linda M. Glover, Esq., Winstead PC, Houston, TX, for appellant Bucksport Mill, LLC.
Alan G. Stone, Esq. (orally), and Benjamin J. Smith, Esq., Skelton, Taintor & Abbott, Auburn, for appellee Bangor Gas Company, LLC.
Panel: SAUFLEY, C.J., and MEAD, GORMAN, JABAR, and HJELM, JJ.
JABAR, J.
[¶1] The Maine Office of the Public Advocate (OPA) and Bucksport Mill, LLC, appeal from an order of the Maine Public Utilities Commission approving an alternative rate plan (ARP) for Bangor Gas Company, LLC. They argue that the Commission erred by (1) calculating the ARP initial rate base by utilizing an unimpaired, “original cost” valuation of Bangor Gas‘s assets rather than the impaired “acquisition cost” incurred by Bangor Gas‘s parent company; and (2) including in its calculation of Bangor Gas‘s revenue requirement a portion of the utility‘s regulatory proceeding expenses amortized over five years. We affirm the Commission‘s order.
I. BACKGROUND
[¶2] The following facts were found by the Commission and are supported by the record. Bangor Gas is a wholly-owned subsidiary of Penobscot Natural Gas Company, Inc. (Penobscot), which in turn is currently owned by Energy West, Inc. Bangor Gas provides residential, commercial, and industrial gas service to approximately 4,000 customers in Bangor, Brewer, Old Town, Veazie, Bucksport, Herman, and Orono. It is also the sole natural gas
[¶3] Bangor Gas was first authorized to provide service to the greater Bangor area as a start-up gas utility in 1998. At that time, Bangor Gas and its parent company, Penobscot, were owned by Sempra Energy, LLC (Sempra). Recognizing that the utility was a start-up with large front-end expenses and entering a highly competitive market, the Commission approved Bangor Gas‘s original alternative rate plan (ARP) for a term of ten years. The utility‘s rates were established by reference to the cost of alternative fuels at the time and to other utilities’ rates. The rate plan included an earnings-sharing mechanism, which required Bangor Gas to return to ratepayers fifty percent of any earnings in excess of fifteen percent of the utility‘s cumulative return on equity. The earnings-sharing mechanism was imposed to ensure that Bangor Gas would not realize excessive earnings over the course of the ten-year rate plan.
[¶4] Much of Bangor Gas‘s service infrastructure, including its gas transmission and distribution system, was installed before 2007, when Sempra owned the utility. Sempra made substantial capital investments in Bangor Gas‘s plant through the end of 2006. However, Bangor Gas was not profitable and, after it lost one of its largest customers, Sempra sought to sell it.
[¶5] In December 2006, Energy West offered to acquire Penobscot and Bangor Gas from Sempra by purchasing Penobscot‘s stock for approximately $500,000. The pending sale, as well as Bangor Gas‘s lack of profitability, triggered an internal “impairment analysis” of Bangor Gas‘s assets.2 Pursuant to generally accepted accounting principles, Bangor Gas considered Energy West‘s $500,000 offer to represent thе fair value of Bangor Gas‘s assets. This analysis resulted in Bangor Gas “writing down” the book value of its assets to zero in December 2006 and recording, for accounting purposes, an impairment loss3 of approximately $38 million.
[¶6] Sempra formally accepted Energy West‘s offer in January 2007. The Commission approved the sale and reorganization by order dated November 21, 2007. At the same time, the Commission extended Bangor Gas‘s ARP for three years, but increased the earnings-sharing trigger to a thirty percent cumulative rate of return, to be calculated from the date of sale so that any losses or profits under Sempra‘s ownership would be ignored.
[¶7] At the time of Energy West‘s acquisition of Bangor Gas, several sections of the utility‘s pipelines had not yet been connected to supply sources, and thus were not in service supplying natural gаs to customers. After Energy West‘s acquisition, Bangor Gas put those sections into
[¶8] On December 26, 2012, Bangor Gas filed a petition to renew its ARP for a period of ten years.4 OPA and Bucksport Mill filed petitions to intervene, which the Commission granted.5 Over the course of several months, the Commission held numerous technical conferences and hearings, and the parties filed data disclosures and direct and rebuttal testimony. Bangor Gas presented evidence that its then-current rates were among the lowest gas utility rates in Maine, and that with those rates and its retained earnings, the company could not grow or attract new capital. It also presented evidence that it has “significant growth potential if [it] continue[s] to be positioned as a start-up ... operating under an [ARP].”
[¶9] Bangor Gas did not initially file a revenue requirement calculation with the Commission, nor did it request regulatory proceeding expenses in its initial petition. It did, however, request regulatory proceeding expenses in its February 2014 rebuttal testimony, proposing that the expenses be amortized at $147,424 annually.
[¶10] The Commission conducted a cost-of-service and revenue requirement analysis pursuant to a traditional rate-setting methodology in order to evaluate the reasonableness of the ARP‘s starting point rates, see
[¶11] The Commission rejected OPA‘s argument that the rate base should reflect the impaired value of Bangor Gas‘s assets—the $500,000 for which Energy West acquired the company in 2007—finding that this impaired “book value” “would not accurately reflect the current use of the utility‘s assets.” Instead, the Commission found that Bangor Gas‘s rate base was properly calculated utilizing the asset‘s original cost of approximately $38 million.6 The Commission further found that the rate base calculation proposed by OPA and Bucksport Mill “would open the door to wide fluctuatiоns in the value of utility assets driven by market changes, with corresponding fluctuations in rates.” It determined that Bangor Gas‘s rates were just and reasonable; would “continue to contribute to [Bangor Gas‘s] success in attracting new customers“; would allow it to continue investing in its infrastructure; and would provide stable rates for natural gas customers.
[¶12] Regarding regulatory proceeding expenses, the Commission acknоwledged in its order that Bangor Gas did not comply with the filing requirements of 9 C.M.R. 65 407 850-1 to -3 §§ 1-3 (1999), but allowed “50% of Bangor Gas‘s rate case expense to be included in the revenue
[¶13] OPA and Bucksport Mill appeal from the Commission‘s order. See
II. DISCUSSION
A. Property Valuation
[¶14] OPA and Bucksport Mill contend that the Commission exceeded its statutory authority by valuing Bangor Gаs‘s assets based on Sempra‘s original investment of $38 million, rather than on Energy West‘s acquisition cost of $500,000, and that the valuation error caused it to erroneously determine that the ARP base rate was just and reasonable. See
[¶15] We review decisions of the Commission deferentially, and will disturb a decision “only when the Commission abuses the discretion entrusted to it, or fails to follow the mandate of the legislature, or to be bound by the prohibitions of the constitution.” Houlton Water Co. v. PUC, 2014 ME 38, ¶ 24, 87 A.3d 749 (quotation marks omitted); Office of the Pub. Advocate v. PUC, 2003 ME 23, ¶ 19, 816 A.2d 833 (“Although the Commission‘s interpretation of a statute that it administers is not conclusive or binding on us, such an interpretation is entitled to deference and should be upheld unless the statute plainly compels a contrary result.“) (quotation marks omitted); New England Tel. & Tel. Co. v. Pub. Utils. Comm‘n, 390 A.2d 8, 15 (Me.1978) (explaining that we defer to the Commission‘s technical expertise and do not “review the Commission‘s findings of fact and seek to determine what rates are reasonable and just,” but intervene only on questions of law).
[¶16] Pursuant to
[¶17] In establishing a utility‘s rate base, the Commission must fix a “reasonable value” upon all of the utility‘s property that “is used or required to be used in its service to the public,” in order to ensure a “fair return on that property.”
In fixing a reasonable value, the commission shall give due consideratiоn to evidence of the cost of the property when first devoted to public use and the prudent acquisition cost to the utility, less depreciation on each, and any other material and relevant factors or evidence,
but the other factors shall not include current value.
(Emphasis added.)
[¶18] In its property value determination, the Commission was statutorily required to give due consideration to the factors set out in section 303. However, the statute plainly does not mandate one valuation methodology over another. See Trask v. PUC, 1999 ME 93, ¶ 7, 731 A.2d 430 (“When we construe a statute, we give effect to the Legislature‘s intent[,] [which] is ordinarily gleaned from the plain language of the statute itself. Such plain meaning will be applied so long as it does not lead to an absurd, illogical, or inconsistent result.“) (quotation marks omitted) (citation omitted). Further, the statute gives the Commission brоad discretion to consider “any other material and relevant factors or evidence,” except current value, in setting a reasonable value for the utility‘s assets for ratemaking purposes.
[¶19] In Central Me. Power Co. v. Pub. Utils. Comm‘n, 150 Me. 257, 262, 109 A.2d 512 (1954), we explained the requirement that the Commission give “due consideration” to the applicable statutory factors in determining the fair value of property for ratemaking purposes аs follows:
The requirement that the Commission give “due consideration” to evidence tending to establish any factor of fair value does not mean that the Commission is not the judge of the weight to be given to the proffered evidence. Nor does it mean that equal weight must be given to each factor proven. The Commission may not proceed with a closed mind and no disposition to be convinced by unimpeachable evidence. “Due consideration” requires at least reasonable and fair consideration, and once a factor is well proven, not only must the Commission give consideration to it, but such factor must find reflection in the finding of value.... [A]rbitrary and capricious disregard by the Commission of a factor established by legislative mandate, or of evidence tending to prove such a factor, is reversible error.
(Quotation marks omitted) (citation omitted). We held that the Commission‘s statement that it gave “very little consideration to [acquisition cost] in the rate base” did not mean that the Commission failed to give due consideration to that factor as required by the statute. Id. at 267, 109 A.2d 512. Rather, we held that the Commission exercised its discretion in giving the factor little weight in its value determination becausе it found that the acquired property had since been “substantially retired.” Id.
[¶20] Further, we explained that “original cost” is “the depreciated original cost of property now existing and devoted to the public use[,] ... taken as of the time when the property was first devoted to the public use, whether that event occurred when it was in the hands of this Company or a former owner.” Id. at 264, 109 A.2d 512 (emphasis added). “Prudent acquisition cost,” we explained, is “the difference, most often an excess, between the original cost when first devoted to public service and the amount invested upon acquisition. This factor brings into focus what the Company prudently invested in the property and takes into account that [business] property ... often demands a higher price than its original cost.” Id. at 266, 109 A.2d 512.
[¶21] Here, the Commission gave due consideration in its order both to evidence of Energy West‘s prudent acquisition costs and to evidence of the cost of Bangor Gas‘s property when Sempra first devoted the property to public use. Consistent with its statutory authority, the Commission rejected the acquisition cost
[¶22] OPA and Bucksport Mill argue that the Commission erroneously considered the “current value” of Bangor Gas‘s assets in direct contravention of sectiоn 303, citing the order‘s references to the current use and revenue producing abilities of the utility‘s assets. Contrary to the appellants’ contention, the Commission did not discuss Bangor Gas‘s facilities in order to determine their current or fair market value; rather, consistent with the statutory mandate, it set out to determine a reasonable value for Bangor Gas‘s property that would allow the utility to realize a fair return on equity in light of its current operations and service capacity. After considering all the evidence and relevant statutory factors, the Commission determined that the original cost valuation more accurately reflected the reasonable value of the property that Bangor Gas uses in providing its customers natural gas, and therefore the property on which it is entitled a fair return.7 The Commission did not abuse its discretion or exceed its statutory authority in accepting that valuation for Bangor Gas‘s property.
B. Regulatory Proceeding Expenses
[¶23] OPA also argues that the Commission abused its discretion by including in its revenue requirement calculation fifty percent of Bangor Gas‘s regulatory proceeding expenses because there was insufficient evidence supporting the expense calculation.8 However, because the Commission‘s decision to include the regulatory proceeding expenses in its revenue requirement analysis had no impact on its decision to approve the ARP, we need not address the merits of that decision.
[¶24] Although, as the Commission concedes, Bangor Gas did not strictly comply with the filing requirements for regulatory proceeding expenses, the utility‘s overall revеnue requirement was otherwise fully litigated and the Commission considered “a wide array of possible rate base calculations” as supported by each parties’ filings, rebuttal filings, and data request responses. Significantly, because the ARP that the Commission adopted for Bangor Gas did not change the utility‘s starting point rates from then-current levels, the Commission‘s decision to normalize a portion of Bangor Gas‘s regulatory proceeding expenses in its revenue requirement analysis had no impact on the ARP‘s ultimate starting point rates. In other words, because the Commission decided to maintain starting point rates at then-current levels, it did not set the rate that Bangor Gas‘s customers would pay based on the revenue requirement figures presented by either Bangor Gas or OPA. Rather, it considered
[¶25] In its order, the Commission noted that the revenue requirement figures proposed by Bangor Gas would indicate a revenue shortfall that would justify a rate increase, and the figures proposed by OPA would indicate a windfall that would require a rate decrease—the primary reason for the difference between the two approaches being the different property valuations in determining the rate base. The Commission took neither route, and instead found that Bangor Gas‘s then-existing rates were reasonаble starting point rates and did not need to be changed. It is safe to say that this dispute over an expense item representing an insignificant portion of the revenue requirements presented by each party,9 neither of which were used to set the utility‘s rates, did not affect the Commission‘s decision to adopt the ARP.
The entry is:
Judgment affirmed.