SPIRE MISSOURI, INC., F/K/A LACLEDE GAS COMPANY, Appellant, v. PUBLIC SERVICE COMMISSION OF THE STATE OF MISSOURI, Respondent, and OFFICE OF PUBLIC COUNSEL, Intervenor.
No. SC97834
SUPREME COURT OF MISSOURI en banc
February 9, 2021
Spire Missouri, Inc. (“Spire“), formerly known as Laclede Gas Co., is an investor-owned public utility regulated by the Public Service Commission (“PSC“). In April 2017, Spire filed tariffs to increase its general rates for gas services in its Spire Missouri East and Spire Missouri West territories.1 The PSC suspended Spire‘s new tariffs until March 2018 and established a test year. The cases were consolidated, and several parties were granted intervention. The PSC issued its Amended Report and Order in March 2018. Among the PSC‘s conclusions, the Amended Report and Order disallowed a portion of Spire‘s rate case expenses, included some of the proceeds from the 2014 sale of a facility in setting Spire‘s new rates, and determined Spire East‘s prepaid pension asset was $131.4 million (or approximately $28.8 million less than Spire contended). Spire appeals. This Court has jurisdiction pursuant to
Background
In April 2017, Spire filed tariffs with the PSC that would implement general rate increases in its Spire East and Spire West service areas. The tariffs would have increased annual gas revenue for Spire East by approximately $58.1 million. Because approximately $29.5 million of this already was being recovered through Spire‘s infrastructure system replacement surcharge (“ISRS“), the net increase in revenue for Spire East would be $28.5 million. The tariffs would have increased annual gas revenue for Spire West by approximately $50.4 million. Because approximately $13.4 million of this already was being recovered through Spire West‘s ISRS, the net increase in revenue for Spire West would be $37 million.
The PSC suspended Spire‘s general rate increase tariffs until March 2018 and established a test year for the 12-month period ending December 31, 2016, to be updated for known and measurable changes through June 30, 2017. Several parties, including the Office of Public Counsel, were granted intervention,2 and the cases were consolidated for hearing purposes. The PSC held local public hearings. The PSC then held evidentiary hearings and true-up hearings followed by briefing. Several issues were resolved by stipulations unopposed by any of the non-signatory parties, and the PSC approved those stipulations. The PSC then issued its consolidated Amended Report and Order
Among the many issues before it, the PSC considered what portion of Spire‘s rate case expenses ought to be included in Spire‘s new base rates (and, therefore, paid for by Spire‘s customers rather than its investors). The PSC concluded that, because it is required under
The PSC also considered whether some of the proceeds of Spire‘s sale of one of its service centers should be used to offset Spire‘s purchase of a more expensive service center and, therefore, inure to the benefit of ratepayers. Spire East owned and operated three district service centers providing leak detection, leak repair, construction, maintenance, and marking services. One of the service centers was located near Forest Park in the city of St. Louis (“the Forest Park property“). In 2013, Spire acquired two properties adjacent to the Forest Park property for additional leverage in negotiations. Then, in 2014, as part of a restructuring of Spire following the acquisition of Spire West, Spire sold the Forest Park property (and the two adjacent properties) to the Cortex Innovation Community in St. Louis, which purchased the properties for construction of an IKEA retail store. The sale price for the Forest Park property included a gain of approximately $7.6 million, excluding the $1.8 million undepreciated book value of recent capital improvements to the facilities, and an allowance of $5.7 million for relocation expenses. Of the relocation expense allowance, Spire used $1.95 million to purchase furniture and fixtures for its new offices at 700 and 800 Market Street in the city of St. Louis and $200,000 to lease a temporary space during the move. The evidence did not show how much (if any) of the remaining relocation expenses were necessitated by the move from the Forest Park property to the new Manchester center. Spire contributed $1.5 million from the gain as a civic contribution to further downtown St. Louis rehabilitation.
Finally, the PSC considered the amount of Spire‘s pension contributions to include in base rates. Spire makes contributions to its pension plan pursuant to a collective bargaining agreement with its union employees. A prepaid pension asset is a regulatory asset representing the amount Spire has contributed to its pension plan but has not yet recovered from ratepayers. A pension liability is the opposite; it arises when Spire collects more from ratepayers than it has contributed to its pension plan. It is undisputed that Spire West has a pension liability of $28.4 million, but the amount of Spire East‘s pension asset (or liability) was in dispute. Staff and Spire agree that at least $131.4 million has accumulated in Spire East‘s pension asset since 1996, but they disagree as to what amount (if any) accumulated prior to that time. Spire argued the pension asset includes an additional $28.8 million, which accumulated between 1990 and 1996, during which time Spire East filed rate cases in 1990 (i.e., rates for 1990-1992), 1992 (i.e., rates for 1992-1994), and 1994 (i.e., rates for 1994-1996).
The disagreement between Staff and Spire centers on whether Spire East used the cash or accrual method of accounting to account for the pension asset in its 1990, 1992, and 1994 rate cases. FAS 87 and FAS 88 are Financial Accounting Standards articulating generally accepted accounting principles in accounting for the accrual of a pension asset. These are used routinely in reporting but less regularly in ratemaking. Staff argued Spire East did not begin to use both FAS 87 and FAS 88 to calculate its pension asset in rate cases until the 1996 rate case in that it used neither standard in the 1990 and 1992 cases and only FAS 87 (but not FAS 88) in the 1994 rate case. Spire concedes there is evidence suggesting its pension expense was calculated on a cash basis in the 1992 rate case but argues it had been using FAS 87 for financial reporting purposes since 1987 and, therefore, FAS 87 and FAS 88 would had to have been (and were) used in the 1990, 1992, and 1994 rate cases. With respect to the 1994 rate case, Spire contends the explicit references to FAS 87 necessarily included reference to FAS 88 because the two are inseparably intertwined and the former would not have been used without the latter. The amount in dispute from 1990 through 1994 is $19.8 million, and the amount in dispute between 1994 and 1996 is $9 million.
In its Amended Report and Order, the PSC rejected Spire‘s position and adopted, instead, the testimony of Staff witness Young. Among his lengthy and complex
Discussion
I. General principles governing the PSC and judicial review
Before proceeding to the merits of this case and analyzing Spire‘s points on appeal, three principles fundamental to the law governing public utility regulation warrant emphasis.
A PSC decision is presumed valid and the burden is on the party challenging it to demonstrate the decision is unlawful or unreasonable. Mo. Pub. Serv. Comm‘n v. Union Elec. Co., 552 S.W.3d 532, 538-39 (Mo. banc 2018). See also
This two-step analysis of lawfulness and reasonableness is required by, and instituted in furtherance of,
A court must examine the whole record to determine if it contains sufficient competent and substantial evidence to support the award, i.e., whether the award is contrary to the overwhelming weight of the evidence. Whether the award is supported by competent and substantial evidence is judged by examining the evidence in the context of the whole record. An award that is contrary to the overwhelming weight of the evidence is, in context, not supported by competent and substantial evidence.
Id. at 222-23 (citations and footnotes omitted). This approach gives weight to the administrative agency‘s role as the finder of fact without abdicating the requirement in
Second, a public utility is entitled to recover from ratepayers all its costs (plus a reasonable return on its investments) by way of rates that are “just and reasonable.” Office of Pub. Counsel v. Mo. Pub. Serv. Comm‘n, 409 S.W.3d 371, 376 (Mo. banc 2013). Accord Mo. Pub. Serv. Comm‘n, 552 S.W.3d at 534 (“As a general matter, utilities ... recover their costs (plus a reasonable return on their investments) through the sale of [gas] at the rates set by the [PSC].“);
Finally, the PSC is prohibited from engaging in retroactive ratemaking. This is one of the bedrock principles long governing the PSC‘s role in setting rates. As this Court has explained:
The [PSC] has the authority to determine the rate [t]o be charged. In so determining it may consider past excess recovery insofar as this is relevant to its determination of what rate is necessary to provide a just and reasonable return in the future, and so avoid further excess recovery. It may not, however, redetermine rates already established and paid without depriving the utility (or the consumer if the rates were originally too low) of his property without due process .... The utilities take the risk that rates filed by them will be inadequate, or excessive, each time they seek rate approval. To permit them to collect additional amounts simply because they had additional past expenses not covered by either clause is retroactive rate making, i. e., the setting of rates which permit a utility to recover past losses or which require it to refund past excess profits collected under a rate that did not perfectly match expenses plus rate-of-return with the rate actually established. Past expenses are used as a basis for determining what rate is reasonable to be charged in the future in order to avoid further excess profits or future losses, but under the prospective language of the statutes, they cannot be used to set future rates to recover for past losses due to imperfect matching of rates with expenses.
State ex rel. Utility Consumers’ Council of Mo., Inc. v. Pub. Serv. Comm‘n, 585 S.W.2d 41, 58-59 (Mo. banc 1979) (”UCCM“) (citations omitted), superseded on other grounds by
II. Rate Case Expenses
Spire, in its first point, argues the PSC‘s decision to exclude a portion5 of Spire‘s rate case expenses is contrary to law because the PSC did not find that any of those expenses were imprudent. In its second point, Spire argues this exclusion was unreasonable, arbitrary and capricious, unsupported by competent and substantial evidence, or an abuse of discretion. Both points are denied.
The PSC did not err by excluding a portion of Spire‘s rate case expenses when calculating Spire‘s new rates. The expenses Spire sought to recover included: (a) the procurement of a Cash Working Capital study by the consultant firm ScottMadden;
(b) unreasonably high hourly fees paid to Spire‘s expert witness Thomas J. Flaherty; and (c) various shareholder-oriented (and unlikely to succeed) ratemaking strategies such as a revenue stabilization mechanism, a 10.35-percent rate of return on equity (the highest of any large utility in Missouri), tracking mechanisms to limit shareholder risk, and earnings-based incentive compensation. In terms of their reasonableness, these expenditures were entitled to a presumption of prudence, and the prudence of the expenditures was never called into question. Nonetheless, the PSC concluded that including all of these expenditures in setting Spire‘s future rates was not just because some of the expenses were not fair to ratepayers in that they only were incurred to benefit (if anyone) Spire‘s shareholders. See Office of Pub. Counsel, 409 S.W.3d at 376. Implicit in Spire‘s argument is an assertion that it is entitled to recover all prudent expenditures in its rates. This is not so. In setting rates, the PSC has broad discretion to include or exclude expenditures to arrive at rates it deems to be “just and reasonable,” subject, of course, to judicial review that the PSC‘s conclusions are supported by competent and substantial evidence and not arbitrary, capricious, or an abuse of discretion.
Generally, ratepayers benefit from rate cases because they have an interest in ensuring the financial well-being of the utilities that serve them. Therefore, ratepayers justly and reasonably can be expected to pay a utility‘s expenses in bringing such a case. But this does not mean there cannot be limits. A utility cannot spend any amount it pleases secure in the knowledge or expectation that ratepayers will foot the bill, particularly when those expenses include items seeking to subordinate ratepayers’ interests to those of the utility‘s investors. Here, even assuming there was no basis in the evidence to reject the presumption of prudence with respect to one or more of Spire‘s rate case expenses, the PSC did not err in its decision to exclude a portion of those expenses in setting “just and reasonable” rates because they served only to benefit shareholders and minimize shareholder risk with no accompanying benefit (or potential benefit) to ratepayers. To be sure, the PSC‘s decision to exclude 50 percent of Spire‘s remaining rate case expenses (after allowing full recovery of the cost of notices and the depreciation study) was not the result of a decision to include or exclude
The PSC expressly identified those issues (and related expenses) Spire pursued that benefitted only its shareholders and not its ratepayers, and the PSC decided what proportion of the total case (and expenses) they represented.6 Nothing in the PSC‘s
authorizing statutes or this Court‘s precedents requires the PSC to conduct an item-by-item analysis when the issue is the degree to which a utility‘s case expenses should be included in calculating “just and reasonable” rates rather than rejecting a particular expense as imprudent. Accordingly, the PSC did not err in excluding a portion of Spire‘s rate case expenses, and Spire‘s Points I and II are denied.
III. Forest Park Property Sale
Spire next argues the PSC erred by ordering that nearly $3.6 million in relocation proceeds from the sale of the Forest Park property be used to reduce rates. In its second point, Spire claims this constitutes prohibited retroactive ratemaking and, alternatively, that it was arbitrary and capricious in that it was contrary to the traditional treatment of gains on the sale of utility property.7 This point is denied.
The PSC did not engage in prohibited retroactive ratemaking. Retroactive ratemaking is setting rates for the future in order to redress imprecision in setting prior rates, i.e., to allow the utility to recover prior losses or force it to disgorge excessive profits. UCCM, 585 S.W.2d at 58. This does not mean, however, that the prohibition
against retroactive ratemaking bars all reference to events occurring outside the test year. See State ex rel. GTE N., Inc. v. Mo. Pub. Serv. Comm‘n, 835 S.W.2d 356, 368 (Mo. App. 1992) (approving such reference when the “adjustment is (1) ‘known and measurable,’ (2) promotes the proper relationship of investment, revenues and expenses, and (3) is representative of the conditions anticipated during the time the rates will be in effect“). It is important that the trees do not obscure the forest. The use of the test year concept, the adjustments made to
For Spire East‘s future rates to be “just and reasonable,” the PSC determined those rates needed to reflect the impact of the sale of the Forest Park property even though that sale occurred outside the test year. Specifically, the PSC determined (among other related matters) that: a)
The Court also rejects Spire‘s contention that the PSC‘s decision regarding the sale of the Forest Park property was arbitrary and capricious because it departed from approaches taken by the PSC in prior cases. “[A]n administrative agency is not bound by stare decisis, nor are PSC decisions binding precedent on this Court.” State ex rel. AG Processing, Inc. v. Pub. Serv. Comm‘n of Mo., 120 S.W.3d 732, 736 (Mo. banc 2003). Therefore, even if the Court assumes (without deciding) that the PSC‘s approach was a departure from its prior practice, this alone does not render the PSC‘s approach so illogical or unreasonable as to justify a conclusion that it was arbitrary, capricious, or an abuse of discretion. Cf. Cox, 473 S.W.3d at 114 (An abuse of discretion occurs when decision is “clearly against the logic of the circumstances then before the court and is so unreasonable and arbitrary that it shocks the sense of justice and indicates a lack of careful, deliberate consideration.“). Because the PSC‘s decision shows a reasoned, careful approach to what may well be a new or newly increasing problem, this Court rejects Spire‘s claim that it was arbitrary, capricious, or an abuse of discretion merely because it may have departed from prior decisions on similar issues.
IV. Spire East‘s Pension Asset
In its final point, Spire argues the PSC‘s decision to eliminate $28.8 million from Spire East‘s pension asset was arbitrary, capricious, or unsupported by competent and substantial evidence because it was inconsistent with Spire‘s evidence that the pension asset was calculated using FAS 87 and FAS 88 throughout Spire‘s 1990, 1992, and 1994 rate cases. This claim is rejected in part and granted in part.
Spire concedes the pension asset was determined on a cash basis in the 1992 rate case. Nevertheless, Spire points to testimony in the 1990 rate case by Staff witness Rackers that Spire contends supports the conclusion that the pension asset in that case was calculated pursuant to FAS 87 and FAS 88 accounting standards. And, because no departure from this approach was explicitly authorized in the 1992 rate case, Spire argues this could support a finding in its favor regarding that case as well. But this argument was in stark contrast to the testimony of Staff witness Young, who testified that neither
But the evidentiary scales were not so nearly balanced with respect to how Spire‘s pension liability was accounted for in the 1994 rate case. Spire showed (and Staff clearly recognized) that Spire East began to use FAS 87 beginning with the 1994 rate case. But, because Staff argues that there was no similar showing with respect to Spire East‘s use of FAS 88, Staff claimed the cash accounting must have been used to calculate the pension asset in the 1994 rate case and the $9 million accruing between 1994 and 1996 should be excluded. But Spire‘s evidence (which was uncontroverted) showed that FAS 87 and FAS 88 are inextricably linked, that the former would not have been used without the latter, and that reference to FAS 87 was simply shorthand for reference to both FAS 87 and FAS 88. Moreover, the record in the 1994 rate case suggests the dispute was not over whether FAS 88 would be used but rather how it would be used. In light of this, the Court holds the PSC‘s decision to extend the period in which it determined Spire East used cash accounting to value its pension asset from 1994 to 1996 was not supported by competent and substantial evidence on the record as a whole. Viewed in isolation, there was evidence to support the PSC‘s decision in this respect, but this Court‘s review does not use this approach. Id.8 Instead, the PSC‘s decision must be supported by competent and substantial evidence on the whole record, including the evidence the PSC rejected. In this very close case, the Court is persuaded it was not. Accordingly, though the Court affirms the PSC‘s Amended Report and Order in all other respects, the Amended Report and Order is reversed to this extent and the matter remanded to the PSC to add the $9 million in pension assets that accrued between 1994 and 1996 to Spire East‘s $131.4 million prepaid pension asset. Because this increase in the amount of Spire East‘s
pension asset might bear on its amortization, the case is remanded for further proceedings consistent with this opinion.
CONCLUSION
For the reasons set forth above, the PSC‘s Amended Report and Order is affirmed in part and reversed in part, and the case is remanded for further proceedings consistent with this opinion.
Paul C. Wilson, Judge
All concur.