Application of Montana-Dakota Utilities Co. for Authority to Establish Increased Rates for Elec. Service, MONTANA-DAKOTA

• Decision Date: 26 April 1979
• Docket Number: No. 12490,F-3126,MONTANA-DAKOTA,12490
• Citation: 278 N.W.2d 189
• Parties: APPLICATION OFUTILITIES COMPANY FOR AUTHORITY TO ESTABLISH INCREASED RATES FOR ELECTRIC SERVICE ().
• Court: South Dakota Supreme Court

Page 189

278 N.W.2d 189

APPLICATION OF MONTANA-DAKOTA UTILITIES COMPANY FOR

AUTHORITY TO ESTABLISH INCREASED RATES FOR

ELECTRIC SERVICE (F-3126).

No. 12490.

Supreme Court of South Dakota.

Argued Feb. 22, 1979.

Decided April 26, 1979.

Alan J. Roth, of Spiegel & McDiarmid, Washington, D. C., for appellant South Dakota Public Utilities Commission; Ben Stead, Asst. Atty. Gen., Pierre, on the brief.

Warren W. May, of May, Adam, Gerdes & Thompson, Pierre, Joseph R. Maichel, Bismarck, N. D., for respondent Montana-Dakota Utilities Co.

DUNN, Justice.

This is an appeal from the judgment of the Circuit Court, Sixth Judicial Circuit, which reversed the decision and order of the South Dakota Public Utilities Commission (Commission). As part of its determination of increased rates for electric service, the Commission decision and order reduced the revenue requirements of Montana-Dakota Utilities Company (MDU) by $128,500, which represented alleged unreasonable profits on the sale of coal to MDU by its wholly-owned subsidiary, Knife River Coal Company (Knife River). The Commission appeals from the circuit court reversal. We reverse the circuit court's judgment and remand with instructions.

On July 26, 1976, MDU filed an application with the Commission to increase retail electric rates charged to its South Dakota customers. Commencing on January 17, 1977, the Commission held a three-day hearing on the matter. Subsequent to the filing of briefs regarding the numerous issues raised in the matter, the Commission rendered its decision and order on April 22, 1977. MDU appealed from the Commission's decision and order as to three of the eight issues decided. On September 15, 1977, the circuit court held a hearing on the appeal. The circuit court entered its memorandum decision on January 27, 1978, and rendered judgment on March 13, 1978. The circuit court reversed the Commission's action which reduced MDU's revenue requirements by $128,500 representing alleged unreasonable profits from the sale of coal by Knife River to MDU. The Commission has appealed from this portion of the circuit court judgment, and the sole matter for our consideration is the issue of reasonable profits.

Appeals from the Commission's decisions and orders are governed by the South Dakota Administrative Procedures Act embodied in SDCL 1-26. SDCL 49-34A-62. We have jurisdiction to review the judgment of the circuit court pursuant to SDCL 1-26-37. The parties have raised the question of the standard of review that we are to use in this appeal. The circuit court reviewed the Commission's decision pursuant to SDCL 1-26-36(5) which, at the time of the circuit court's review, authorized the circuit court to reverse the Commission if substantial rights were prejudiced because the decision was unsupported by substantial evidence on the record. After the circuit court's review and prior to our review, the standard of review in SDCL 1-26-36(5) was changed to "clearly erroneous in light of the entire evidence in the record." In selecting the appropriate standard of review, we adhere to our statement in Piper v. Neighborhood Youth Corps, 1976, S.D., 241 N.W.2d 868, 869, as follows:

" * * * in reviewing the circuit court's judgment under the APA this court must make the same review of the administrative tribunal's action as does the circuit court under SDCL 1-26-37."

Therefore, we will utilize the substantial evidence standard of review in this appeal. We recognize that the standard to be applied is not whether there is substantial evidence contrary to the Commission's findings, but, rather, whether there is substantial evidence to support the Commission's findings. State, Dept. of Soc. Serv. v. Rodvik, 1978, S.D., 264 N.W.2d 898; Application of Ed Phillips & Sons Company, 1972, 86 S.D. 326, 195 N.W.2d 400. Substantial evidence is defined as "such relevant and competent evidence as a reasonable mind might accept as being sufficiently adequate to support a conclusion." SDCL 1-26-1(8). We further recognize that we must make our decision as to whether the Commission's decision and order can be sustained without the aid of the presumption that the circuit court's decision and judgment are correct. Piper v. Neighborhood Youth Corps, Supra.

The issue before us is whether the Commission's findings, inferences, conclusions, and decision are supported by substantial evidence on the record.

In its application for increased rates for retail electric service, MDU included the cost of coal as a part of its revenue requirements. MDU purchases all of the coal it uses to generate the electricity it sells from its wholly-owned subsidiary, Knife River. MDU purchases of coal constitute 33% Of Knife River's total tonnage with the remaining 67% Being sold to other purchasers. Although the coal industry is not a regulated utility subject to control by the Commission, the Commission has statutory authority pursuant to SDCL 49-34A-19.2 to analyze the reasonableness of profits paid to supplier subsidiaries in its determination of the revenue requirements allowable to a regulated utility and to disallow such profit which is unreasonable. SDCL 49-34A-19.2 reads as follows:

"The commission, in determining the allowance for materials or services to be included in costs of operations for rate-making purposes, may disallow any unreasonable profit made in the sale of materials to or service supplied for any public utility by any firm or corporation owned or controlled directly or indirectly by such utility or any affiliate, subsidiary, parent company, associate or any corporation whose controlling stockholders are also controlling stockholders of such utility. The burden of proof shall be on the public utility to prove that no unreasonable profit is involved."

This embodies the concept to which we have adhered for decades, that is, prices and profits paid to affiliates and subsidiaries must be reasonable. In Re Northwestern Bell Telephone Co., 1950, 73 S.D. 370, 43 N.W.2d 553. In determining reasonableness, the Commission is not restricted to any single formula in arriving at the rates fixed for MDU "so long as the method followed and the order entered when applied to the facts and viewed as a whole do not produce an unjust or arbitrary result." N. W. Pub. Serv. v. Cities of Chamberlain, etc., 1978, S.D., 265 N.W.2d 867, 872. We are more concerned with the result which is reached than with the method employed. Application of Northwestern Bell Telephone Co., 1959, 78 S.D. 15, 98 N.W.2d 170.

As quoted above, SDCL 49-34A-19.2 places the burden on MDU to prove that no unreasonable profits are involved in Knife River coal sales to MDU. MDU attempted to meet this burden by establishing that it paid no more for the coal purchased from Knife River than other purchasers and that, in fact, MDU paid less for coal from Knife River than other purchasers. The price that MDU paid Knife River was determined in two ways. First, MDU would not pay more for its coal than other Knife River customers paid for their purchases from Knife River and, second, MDU would monitor the prices of other coal producers and purchase coal from those producers if their prices were lower than Knife River's prices. MDU contended that these "independent yardsticks" kept the prices it paid for coal very competitive and reasonable. MDU further contended that the profits Knife River derived from those prices were also reasonable when measured against the fair market value of Knife River coal reserves and operating equipment, i. e., approximately 3%. MDU offered expert testimony stating that the return earned on the fair market value of a competitive company's assets is a governing principle in economics for competitive enterprises, especially to companies involved in the extraction and sale of exhaustible capital assets such as coal. MDU contends that reasonable profits for Knife River must be defined in the context of an unregulated natural resource company operating in the free market, rather than a regulated utility.

The Commission concluded that MDU did not meet its burden of proving the reasonableness of Knife River...