Baton Rouge Water Works Co. v. Louisiana Public Service Commission

• Decision Date: 24 January 1977
• Docket Number: No. 58307,58307
• Citation: 342 So.2d 609
• Parties: The BATON ROUGE WATER WORKS COMPANY, Plaintiff-Appellee, v. LOUISIANA PUBLIC SERVICE COMMISSION, Defendant-Appellant.
• Court: Louisiana Supreme Court

Page 609

342 So.2d 609

The BATON ROUGE WATER WORKS COMPANY, Plaintiff-Appellee, v. LOUISIANA PUBLIC SERVICE COMMISSION, Defendant-Appellant.

No. 58307.

Supreme Court of Louisiana.

Jan. 24, 1977.

Rehearing Denied March 2, 1977. ^*

Marshall B. Brinkley, Gen. Counsel, Louisiana Public Service Commission, Baton Rouge, for defendant-appellant.

F. W. Middleton, Jr., Taylor, Porter, Brooks & Phillips, Baton Rouge, for plaintiff-appellee.

TATE, Justice.

The plaintiff ('Baton Rouge Water') sought judicial review in district court of the defendant Commission's failure to authorize higher rates so as to produce a 13% Return on equity, as applied for, instead of the 10.5% Allowed by the commission. The district court found the Commission's allowance of only 10.5% Profit arbitrary, as contrary to the evidence, because allegedly the uncontradicted testimony of Baton Rouge Water's expert showed the utility to be entitled to the higher rate. The court then modified the Commission order so as to allow the higher rate of return on equity.

The Commission appeals to this court as authorized by Art. 4, Section 21, La.Const. of 1974. It contends that the trial court erroneously placed the burden on the Commission of proving the petitioner's demand to be unreasonable and that it failed to give proper weight to the Commission's expertise in arriving at the proper rate of return on the investment in a closely-held local utility which obtains its equity capital by retaining earnings instead of paying full dividends.

The central issue of this appeal concerns to what extent, if any, the Commission may disregard uncontradicted expert opinion testimony before it in determining the rate of return on equity to be allowed for rate making purposes.

Facts

Baton Rouge Water applied to the defendant Commission for authority to charge increased rates so as to produce additional gross revenues of $1,341,100, which included a 13% Return on equity. The additional revenues were necessary to permit Baton Rouge Water sufficient funds to meet increased costs and to expand operations, including the increased cost of borrowing funds, as well as allegedly to allow it a just and reasonable return on the applicant's investment.

After hearing, the Commission entered an order allowing increased revenues of $874,250, thereby allowing a return on equity of only 10.5%. Baton Rouge Water Works appealed to the district court, alleging that its uncontradicted expert testimony (based on a study of eight publicly quoted water company stocks) showed that 13% Return of equity was necessary in terms of raising and supporting equity capital. ¹ This expert witness testified that the eight water companies used by him were comparables equivalent to Baton Rouge Water. ²

The Commission introduced no opposing expert evidence. Nevertheless, in an unarticulated order which concluded that the requested increase in revenues was excessive, it authorized increased rates sufficient to produce additional revenues of $874,250 instead of the $1,341,000 prayed for (i.e., producing a return on equity of 10.5% Instead of the 13% Sought).

In reversing the Commission and in allowing the full increased revenues sought, the district court felt that the Commission was arbitrary in not accepting the uncontradicted testimony of the applicant's expert.

The Expert Opinion Testimony

The Commission concedes that its findings or conclusions may be set aside on judicial review as arbitrary, if not supported by the evidence. Louisiana Gas Service Co. v. Louisiana Public Service Commission, 256 La. 536, 237 So.2d 369 (1970); Southern Pacific Transportation Co. v. Louisiana Public Service Commission, 254 La. 23, 222 So.2d 499 (1969). However, the Commission points out, the evidence of the expert in the present record indicates on its face that Baton Rouge Water is entitled to a lesser rate of return than that to which he testified.

The general rule is that a regulatory body may use its own judgment in evaluating evidence as to a matter within its expertise; it is not bound by even uncontradicted testimony of experts which amount to mere opinions on their part. 2 Davis, Administrative Law Treatise, Section 14.13 (1958). Here, as the Commission points out, the opinion of Baton Rouge Water's expert is based upon his necessarily subjective evaluation of the implications of certain facts. We are cited to no authority which requires the Commission to accept without deviation the expert's opinion of the proper rate of return on equity to be ordered by it--at least where the factual data on which this opinion is based is reasonably susceptible to a different interpretation by the Commission, within its constitutional authority to make such fact and rate determinations based upon its own reasonable interpretation of the facts upon which the expert bases his opinion, as well as of the record as a whole.

The Commission suggests that the testimony of Baton Rouge Water's expert that the applicant is entitled to a 13% Return on equity indicates on its face reasons why the Commission need not accept it as conclusive:

In the first place, the 13% Rate proposed is founded on an average of the earnings-price ratios of eight utilities which, without supporting testimony, the expert assumed were comparable. See footnote 2. These publicly-held companies might be, but need not necessarily be (and are not shown to be), comparables insofar as the proper rate of return on equity for a closely-held corporation such as is Baton Rouge Water. ³

Further, the expert based his opinion of a proper rate of return on equity on the earnings-price ratio of these possibly dissimilar utilities. This ratio is based on the earnings per share of the eight selected utilities based on the market value of their stock on a given day. In the absence of any shown relationship of the market value of the shares to the book value of the utility's capital, for rate-making purposes the rate of earnings so reflected are not indicative of the rate of return on equity of these utilities. See Southern Bell Tel. & Tel. Co. v. Louisiana Public Service Commission, 239 La. 175, 118 So.2d 372, 386--87 (1960). ⁴

Finally, the Commission contends that the testimony of the expert on its face shows that he utilized a 'fair value' concept of equity, not the 'original cost' rule historically followed by Louisiana. Cf., Southern Bell Tel. & Tel. Co. v. Louisiana Public Service Commission, 239 La. 175, 118 So.2d 372, 386 (1970). Thus, the Commission suggests, it could disregard opinion testimony on a formula not accepted in Louisiana. Id.

Conclusion

The chief difficulty with the Commission's argument is that it is based upon contentions made in brief rather than upon express findings of the Commission to such effect.

For purposes of judicial review, and in order to assure that the Commission has acted in accordance with law, it is usually preferable that, in a contested case involving complex issues, the administrative agency makes findings as to the central disputed issues and explain the reasons for its determination. Cf.: Louisiana Power and Light Co. v. Louisiana Public Service Commission, 324 So.2d 430 (La.1975); White v. Louisiana Public Service, Commission, 259 La. 363, 250 So.2d 368, 373 (1971); Hunter v. Hussey, 90 So.2d 429 (La.App.1st Cir.1956), certiorari granted. 'It is enough if the Commission proffers findings and conclusions sufficiently detailed to permit reasoned evaluation of the purposes and implications of its order.' In re Permian Basin Area Rate Cases, 390 U.S. 747, 814, 88 S.Ct. 1344, 1384, 20 L.Ed.2d 312 (1968). See also 2 Davis, Administrative Law Treatise, Chapter 16 (1958); 2 Cooper, State Administrative Law 465--78 (1965); Schwartz, Administrative Law, Sections 140, 141 (1976).

We have not before now, however, held that such formal findings and reasons are sacrosanct to the validity of an administrative determination, unless required by statute. Nevertheless, Louisiana courts have on occasion remanded for this purpose, when unable to review the agency determination in the absence thereof. See Louisiana decisions cited in the preceding paragraph.

The general principle governing judicial review is that, where some evidence as reasonably interpreted supports the regulatory body's determination, the orders of the Commission and other regulatory bodies exercising discretionary authority are accorded great weight and will not be overturned by the courts in the absence of a clear showing that the administrative action is arbitrary and capricious. Truck Service, Inc. v. Louisiana Public Service Commission, 263 La. 588, 268 So.2d 666 (1972) and decisions therein cited.

In the present instance, the precise issue before us for review is relatively simple: Was the administrative agency arbitrary in not accepting the uncontradicted testimony of the utility's expert that it was entitled to receive a 13% Return on equity, but in instead allowing the utility only 10.5% (but almost two-thirds of the additional revenues sought)?

After reading the brief record, we are unable so to hold.

The expert's opinion testimony is that Baton Rouge Water is entitled to a 13% Return on equity. This opinion is based upon the average earnings-price ratio of eight utilities on a given day, at least two of whom have earnings-ratios below the 10.5% Return on equity ultimately allowed by the Commission. See footnote 2 above.

The earnings-price ratios of other utilities, while relevant, are only one factor along with others, in the Commission's determination of a rate of return, and one which must be used with circumspection due to the difficulty if not impossibility of true comparability of different utilities. See footnote 4 above and surrounding text.

Further, there can be no standard rate of return applicable to all utilities under all circumstances. The question of what constitutes a reasonable rate of return depends upon the peculiar situation of...