Ag Processing v. Public Service Com'n

• Decision Date: 28 October 2003
• Docket Number: No. SC 85352.,SC 85352.
• Citation: 120 S.W.3d 732
• Parties: STATE ex rel. AG PROCESSING, INC., Appellant, v. PUBLIC SERVICE COMMISSION OF THE STATE of Missouri and Aquila, Inc., f/k/a/ UtiliCorp United, Inc., Respondents.
• Court: Missouri Supreme Court

120 S.W.3d 732

STATE ex rel. AG PROCESSING, INC., Appellant, v. PUBLIC SERVICE COMMISSION OF THE STATE of Missouri and Aquila, Inc., f/k/a/ UtiliCorp United, Inc., Respondents.

No. SC 85352.

Supreme Court of Missouri, En Banc.

October 28, 2003.

Stuart W. Conrad, Jeremiah D. Finnegan, Kansas City, for Appellant.

Steven Dottheim, Dana K. Joyce, Paul A. Boudreau, Sondra B. Morgan, Jefferson City, for Respondents.

RONNIE L. WHITE, Chief Justice.

I.

AG Processing, Inc. ("AGP"), appeals the judgment of the circuit court affirming the decision of the Missouri Public Service Commission ("PSC" or "Commission") approving the merger of UtiliCorp United, Inc. ("UtiliCorp," now renamed Aquila, Inc.) and St. Joseph Light & Power Company ("SJLP").¹ Reversed and remanded.

UtiliCorp and SJLP (collectively "Applicants") entered into a merger agreement and, with shareholder consent, filed a joint application with the PSC seeking approval.² The Applicants submitted a five-year regulatory plan providing, inter alia, a five-year rate moratorium on rate increases, barring catastrophic circumstances, in return for which the PSC would order no rate decreases during the same five years. The plan also addressed recovery of the $92,000,000 acquisition premium associated with the merger.

The PSC conducted an evidentiary hearing on the proposed merger and regulatory plan. AGP intervened seeking disapproval of the merger or conditional approval assuring that the ratepayers of SJLP would be shielded from any possible detriment and would receive the full benefit of the merger's resulting savings as opposed to having those benefits retained by the surviving corporate entity during the rate moratorium.³

In addition to the evidence offered by AGP at the hearing, PSC staff testified that they opposed the merger and recommended its rejection as being against the public interest. Staff members testified that the proposed recovery of the acquisition adjustment would require customers to inappropriately pay for costs properly assignable to the shareholders and that the ratepayers would receive an insignificant portion of total merger savings with the majority of the savings being retained by UtiliCorp.

Other objections raised by the PSC staff and the intervenors included claims that the merger would result in UtiliCorp acquiring an undue and anti-competitive concentration of market power detrimental to ratepayers. It was also asserted that the credit rating of the surviving entity would be the lower triple-B rating of UtiliCorp as opposed to the A rating of SJLP, resulting in higher interest rates on the debt held by the merging corporations, a financial risk for SJLP ratepayers. A further objection concerned Applicants' Exhibit 503, a worksheet prepared by the Applicants in response to a data request from AGP, pursuant to 4 CSR 240-2.090(2), asking that UtiliCorp provide a description of the method used for the allocation of the acquisition premium. Exhibit 503's allocation of costs and premiums from the merger projected an annual detriment of $34,000 to SJLP's steam customers and $35,000 to its natural gas customers.

PSC approved the merger, but rejected Utilicorp's proposed regulatory plan. On appeal, the circuit court affirmed, finding the PSC's approval order to be both lawful and reasonable. Transfer was granted after opinion by the Court of Appeals, Western District, Mo. Const. art. V, section 10.⁴

II.

Pursuant to section 386.510, the appellate standard of review of a PSC order is two-pronged: "first, the reviewing court must determine whether the PSC's order is lawful; and second, the court must determine whether the order is reasonable."⁵ The burden of proof is upon the appellant to show that the order or decision of the PSC is unlawful or unreasonable.⁶ The lawfulness of a PSC order is determined by whether statutory authority for its issuance exists, and all legal issues are reviewed de novo.⁷ An order's reasonableness depends on whether it is supported by substantial and competent evidence on the whole record, and the appellate court considers the evidence together with all reasonable supporting inferences in the light most favorable to the Commission's order.⁸ The Commission's factual findings are presumptively correct, and if substantial evidence supports either of two conflicting factual conclusions, "the Court is bound by the findings of the administrative tribunal."⁹ The procedure provided for judicial review in section 386.510 is exclusive and jurisdictional.¹⁰

III.

There is no dispute that the Applicants are regulated utilities under chapter 393.¹¹ Section 393.190.1, requiring the issuance of a merger approval order from the PSC, provides the lawful authority for the PSC's decision.¹² Having found the PSC's decision to be lawful, the Court must examine its reasonableness. Reasonableness turns on the standard used to evaluate a merger subject to approval by the PSC, which is whether or not the merger would be "detrimental to the public."¹³

AGP raises three points on appeal in its attempt to establish that the merger is a detriment to the public. AGP claims that the PSC's approval of the merger was not supported by competent and substantial evidence upon the whole record because: (1) when determining that the merger was not detrimental to the public, the PSC rejected the unrefuted and contrary evidence of its own staff and refused to consider the recoupment of the acquisition premium; (2) the PSC impermissibly shifted the burden of proof of section 393.150 from the applicants to the intervenors by failing to require the applicants to prepare and submit a market power study; and (3) the applicant's own evidence established the merger was a public detriment because UtiliCorp's Exhibit 503 demonstrated an annual increased cost allocation of $34,000 to SJLP's steam customers and $35,000 to its natural gas customers, and the merger would result in a drop in SJLP's credit rating, increasing the interest rate on the corporation's debt.

Applicants respond by arguing that the decision to approve the merger was supported by substantial evidence, that all contrary evidence presented at the hearing was refuted, and that the burden of proof did not shift as a result of not having to produce a market power survey.¹⁴ The PSC also maintains that considering recoupment of the $92,000,000 acquisition premium while considering approval of the merger amounts to prejudging a ratemaking factor outside a ratemaking case.

The fact that the acquisition premium recoupment issue could be addressed in a subsequent ratemaking case did not relieve the PSC of the duty of deciding it as a relevant and critical issue when ruling on the proposed merger. While PSC may be unable to speculate about future merger-related rate increases, it can determine whether the acquisition premium was reasonable, and it should have considered it as part of the cost analysis when evaluating whether the proposed merger would be detrimental to the public.¹⁵ The PSC's refusal to consider this issue in conjunction with the other issues raised by the PSC staff may have substantially impacted the weight of the evidence evaluated to approve the merger.¹⁶ The PSC erred when determining whether to approve the merger because it failed to consider and decide all the necessary and essential issues, primarily the issue of UtiliCorp's being allowed to recoup the acquisition premium.

With regard to AGP's second point, burden shifting in relation to producing a market power study, the burden of proof outlined in section 393.150.2 as cited by AGP pertains to ratemaking cases and not mergers. In proper context, it is AGP's burden as the appellant to show on appeal that the PSC erred by failing to order the Applicants to submit a market power study as part of their application for approval of the merger.¹⁷ In support of its claim that the Applicants were required to submit a market power study, AGP cites several prior PSC decisions in which the PSC required merger applicants to file market power studies. However, an administrative agency is not bound by stare decisis, nor are PSC decisions binding precedent on this Court.¹⁸ AGP fails in its burden to show by clear and satisfactory evidence that Applicants were required to submit a market power study.¹⁹

AGP's final allegation of public detriment from the merger involves UtiliCorp's Exhibit 503, which according to AGP establishes detrimental cost allocations to SJLP's steam and natural gas customers. Additionally, AGP claims the merger will lower SJLP's credit rating resulting in higher interest rates on debt, raising costs for the ratepayers. With regard to...