Gearhart v. Pub. Util. Comm'n of Or.

• Decision Date: 02 October 2014
• Docket Number: SC S061517 Control, SC S061518.,CA A140317,PUC 08487, 09093
• Citation: 356 Or. 216,339 P.3d 904
• Parties: Frank GEARHART; Patricia Morgan; Kafoury Brothers, Inc., Petitioners on Review, and Utility Reform Project, Petitioner, v. PUBLIC UTILITY COMMISSION OF OREGON and Portland General Electric Company, Respondents on Review. Frank Gearhart; Patricia Morgan; Kafoury Brothers, Inc., Petitioners, and Utility Reform Project, Petitioner on Review, v. Public Utility Commission of Oregon and Portland General Electric Company, Respondents on Review.
• Court: Oregon Supreme Court

356 Or. 216

339 P.3d 904

Frank GEARHART;

Patricia Morgan;

Kafoury Brothers, Inc., Petitioners on Review

and

Utility Reform Project, Petitioner

v.PUBLIC UTILITY COMMISSION OF OREGON and Portland General Electric Company, Respondents on Review.

Frank Gearhart;

Patricia Morgan;

Kafoury Brothers, Inc., Petitioners

and

Utility Reform Project, Petitioner on Review

v.Public Utility Commission of Oregon and Portland General Electric Company, Respondents on Review.

PUC 08487, 09093

CA A140317

SC S061517 Control, SC S061518.

Supreme Court of Oregon, En Banc.

Argued and Submitted March 4, 2014.

Oct. 2, 2014.

Linda K. Williams, Portland, argued the cause and filed the briefs for petitioners on review Gearhart, Morgan, and Kafoury Brothers, Inc.

Daniel W. Meek, Portland, argued the cause and filed the brief for petitioner on review Utility Reform Project.

Michael A. Casper, Deputy Solicitor General, Salem, argued the cause and filed the brief for respondent on review Public Utility Commission of Oregon. With him on the brief were Ellen F. Rosenblum, Attorney General, and Anna M. Joyce, Solicitor General.

James N. Westwood, Stoel Rives LLP, Portland, argued the cause and filed the brief for respondent on review Portland General Electric Company. With him on the brief was Rachel C. Lee.

Scott G. Seidman, Portland, filed a brief for amicus curiae Edison Electric Institute.

Katherine McDowell, McDowell Rackner & Gibson PC, Portland, filed a brief for amici curiae Avista Corporation, Idaho Power Company, Northwest Natural Gas Company, and PacifiCorp. With her on the brief was Lisa Rackner.

G. Catriona McCracken, Portland, filed a brief for amicus curiae Citizens' Utility Board of Oregon. With her on the brief were Sommer Templet and Ray Myers.

Opinion

BALMER, C.J.

At issue in this case is an order of the Public Utility Commission (PUC) that addressed Portland General Electric's (PGE) recovery of its capital investment in the Trojan nuclear generating facility after that facility was retired from service. In that order, the PUC made three key decisions that are now before this court. First, to determine whether a legal error that the PUC had made in an earlier rate case had affected rates that the PUC had authorized PGE to charge, the PUC reexamined those earlier rates. Second, in undertaking that reexamination, the PUC determined that PGE had been required to recover its capital investment over time, and that the rates therefore should have included interest to account for the time value of money. Third, the PUC determined that, despite the legal error, the rates that it had authorized for the 1995 to 2000 time period were just and reasonable, but that to make the post–2000 rates just and reasonable, it was required to order a refund to the post–2000 ratepayers. In affirming the PUC order, the Court of Appeals concluded that the PUC had not erred in making those three determinations. We affirm the decision of the Court of Appeals and the order of the PUC.

This case dates back to 1976, when PGE began commercial operation of the Trojan nuclear generating facility. Initially, PGE was allowed to recover its investment in that facility through rates charged over a 35–year period. Problems with the facility and other considerations led PGE to retire Trojan in 1993, before the end of that 35–year period. Since that time, PGE, the Utility Reform Project (URP), and plaintiffs (the Class Action Plaintiffs, or CAPs) in two class action cases against PGE have argued before the PUC, the Court of Appeals, and this court about PGE's recovery of the remaining balance of its capital investment in Trojan and about whether and to what extent ratepayers can recover their payments of certain amounts associated with the retired Trojan facility.¹

The order at issue here, PUC Order No. 08–487, followed the Court of Appeals' remand of three prior PUC orders involving PGE's ability to recover the remaining balance of its investment in Trojan through rates. The Court of Appeals in this case affirmed the PUC's order, rejecting arguments by URP and the CAPs that the PUC had exceeded its authority on remand. Gearhart v. PUC, 255 Or.App. 58, 104–05, 299 P.3d 533 (2013). Judge Schuman dissented, arguing that the methodology used by the PUC went beyond the scope of the remands and that the case should have been remanded to the PUC for further proceedings. Id. at 105, 113, 299 P.3d 533 (Schuman, J., dissenting). For the reasons discussed below, we affirm the Court of Appeals.

I. PUBLIC UTILITY RATEMAKING

We begin with a brief overview of public utility ratemaking. Public utilities exhibit characteristics of natural monopolies. For that reason, public utilities often are granted exclusive territories within which to operate, and many aspects of public utility operation are closely regulated by public utility commissions. See Charles F. Phillips, Jr., The Regulation of Public Utilities 4 (2d ed 1988) (explaining that public utilities are unique because they operate more efficiently as monopolies, they must be regulated to ensure they contribute to the general welfare, there is a high degree of public interest in the services rendered, and administrative commissions have jurisdiction over rates and services). In Oregon, the PUC's responsibilities include “establishing fair and reasonable rates” for services provided by public utilities. ORS 756.040(1).²

The statutes direct the PUC to examine three key components in ratemaking. First, the PUC determines the utility's operating expenses, such as wages, fuel, maintenance, and taxes. See id. (fair and reasonable rates allow recovery of revenue “for operating expenses”); see also Phillips, The Regulation of Public Utilities at 169. Second, the statute provides that rates should provide adequate revenue “for capital costs of the utility.” ORS 756.040(1). That amount is represented in the PUC's calculation of rate base. Although the term “rate base” is not defined by statute, it is understood within public utility ratemaking to represent “the net or depreciated value of the tangible and intangible property, or net investment in the property,” although there are limitations on what may be included in rate base. Phillips, The Regulation of Public Utilities at 169–70. Third, the PUC must determine the appropriate rate of return on the utility's capital investment. See ORS 756.040(1) (fair and reasonable rates allow recovery of “capital costs of the utility, with a return to the equity holder * * * [c]ommensurate with the return on investments in other enterprises having corresponding risks” and “[s]ufficient to ensure confidence in the financial integrity of the utility”); see also Phillips, The Regulation of Public Utilities at 170. The rate of return should “be fair to investors so as to avoid the confiscation of their property” and “preserve the credit standing of the utility to enable it to attract new capital to maintain, improve, and expand its services.” Phillips, The Regulation of Public Utilities at 170.

Taken together, those components are represented in the following formula: R = E + (V-d)r, where “R” rep resents the revenue requirement, “E” represents allowable operating expenses, “V” represents rate base, “d” represents accumulated depreciation, and “r” represents the rate of return. In calculating those components, and in calculating “adequate revenue,” there is no single correct sum, but rather a range of reasonable rates. See Phillips, The Regulation of

Public Utilities

at 173 (“[T]he required earnings of a utility cannot be represented by a specific sum, nor determined by a precise formula.”); PUC Order No. 08–487 at 7 (noting that the Commission uses this “standard ratemaking formula” to determine how much revenue a utility should receive).

When the PUC makes those calculations and sets rates, it is performing a quasi-legislative function. Dreyer v. PGE, 341 Or. 262, 282, 142 P.3d 1010 (2006). Rate orders are prospective, Valley & Siletz R.R. Co. v. Flagg, 195 Or. 683, 715, 247 P.2d 639 (1952), but, “[i]n determining the amount of each of the terms in the ratemaking formula and in making its estimate of revenues under the proposed rates, the [PUC] looks at data for a given ‘testyear’ either in the past, present, or future.” Stefan Krieger, The Ghost of Regulation Past: Current Applications of the Rule Against Retroactive Ratemaking in Public Utility Proceedings, 1991 U Ill L Rev 983, 995 (1991) ; see PUC Order No. 08–487 at 12 (listing test year estimates of power costs for 1995 and 1996 as one factor affecting estimated revenue requirement). The use of a test year results in rates that inherently are based on estimates that may overcompensate or undercompensate utilities. See Krieger, 1991 U Ill L Rev at 995, 995 n 52 ; see also Phillips, The Regulation of Public Utilities at 188 (“[T]he actual rate of return earned by a utility may be quite different from the rate allowed by the commission.”); PUC Order No. 08–487 at 7 (“The utility absorbs the expenses if they are higher than expected and benefits if the expenses are lower, which gives the utility the incentive to manage its operations efficiently * * *.”). In sum, ratemaking is a unique enterprise that is governed by statute but largely left to the PUC's discretion. See Springfield Education Assn. v. School Dist., 290 Or. 217, 230, 621 P.2d 547 (1980) (explaining that the PUC is empowered to “make delegated policy choices of a legislative nature within the broadly stated legislative policy”).

II. FACTUAL BACKGROUND AND PROCEEDINGS BELOW

There are three separate, but related, proceedings that are relevant on review. We describe those three proceedings in detail to provide the background necessary for understanding the order at issue in this case, PUC Order No. 08–487.

A. Rate Case After Trojan's Closure: PUC Order No. 95–322 in UE 88 and Trojan I

PGE began commercial operation of the Trojan nuclear facility in 1976. At that time, the PUC allowed PGE to recover its investment in...