Cascade County Consumers Ass'n v. Public Service Commission

• Decision Date: 19 August 1964
• Docket Number: No. 10610,10610
• Parties: , 55 P.U.R.3d 314 CASCADE COUNTY CONSUMERS ASSOCIATION, Montana Consumers Association, Montana State Florists Association, Ralph Parker, an Individual, Arthur Smith, an Individual, and Lloyd C. Wenner, an Individual, Plaintiffs and Respondents, v. PUBLIC SERVICE COMMISSION of Montana, Paul T. Smith, Jack Holmes and Louis G. Boedecker, as members thereof and constituting said Public Service Commission of Montana, and the Montana Power Company, a Corporation, Defendants and Appellants.
• Court: Montana Supreme Court

Page 856

394 P.2d 856

144 Mont. 169, 55 P.U.R.3d 314

CASCADE COUNTY CONSUMERS ASSOCIATION, Montana Consumers

Association, Montana State Florists Association, Ralph

Parker, an Individual, Arthur Smith, an Individual, and Lloyd C. Wenner, an Individual, Plaintiffs and Respondents, v. PUBLIC SERVICE COMMISSION of Montana, Paul T. Smith, Jack

Holmes and Louis G. Boedecker, as members thereof and

constituting said Public Service Commission of Montana, and

the Montana Power Company, a Corporation, Defendants and

Appellants.

No. 10610.

Supreme Court of Montana.

Aug. 19, 1964.

Rehearing Denied Sept. 9, 1964.

William P. Mufich (argued), Helena, Sam B. Chase, Jr., J. J. Burke, Jr., and William H. Coldiron, Butte, John H. Weaver, Great Falls, Robert D. Corette, (argued), Sam B. Chase, Jr., Butte, (argued), for appellants.

Leo C. Graybill, Jr., (argued), P. J. Gilfeather, Great Falls, (argued), C. W. Leaphart, Helena, (argued), for respondents.

JOHN C. HARRISON, Justice.

This is an appeal by the defendants and appellants, the Public Service Commission of Montana, and The Montana Power Company, from a judgment of the district court of the eighth judicial district, the Honorable Paul G. Hatfield, Judge presiding, which set aside and reversed an order of the appellant Commission as being unlawful and not based on sufficient evidence.

In April 1961, the appellant Montana Power Company filed a petition with the Montana Public Service Commission for authority to increase rates and charges, with a price adjustment clause, for natural gas service within the State of Montana. The petition alleged the following:

(1) Petitioner had been a distributor of natural gas in Montana since 1931;

(2) That only one increase had been granted petitioner since 1931, and that was in 1953;

(3) That in 1954 petitioner had acquired the natural gas system of The Montana-Dakota Utilities Company in the Hi-Line area of Montana;

(4) That present rates and charges are insufficient to produce a fair, reasonable and proper return to the Company because of wage increases and benefits, increased costs of materials and supplies and equipment of all kinds, and increased taxes;

(5) Petitioner further alleges that due to the continuing and increasing demand for natural gas that large expenditures are required for replacements, property and improvements, also that additional gas reserves are required to supply present and future customers, and that in order to assure an adequate supply the Company was required to and did obtain additional reserves from the Province of Alberta;

(6) That the obligations and expense imposed on the Company for said additional natural gas will sharply increase the Company's cost of doing business in Montana;

(7) The petition further requested the Commission to approve new rates for natural gas service to the Great Falls Gas Company for an interim period to January 1, 1967; and (8) The petition requested a uniform rate for its entire system, declaring that a zoned rate was undesirable, however, it asked for special industrial and city gas rates for some large users.

To this petition of the appellant Company, a multitude of protests were filed. Included were the respondents in this action. One month after appellant filed its petition the Commission set the first of the two hearings. The first hearing was held in Helena, Montana, on May 23, 24, 1961, for the purpose of allowing appellant Montana Power Company to present its case in chief. On July 18, 1961, the hearing was reconvened in Butte, Montana, for the purpose of cross-examination of appellant Company's witnesses and for the presentation of protestants' evidence and for Montana Power's rebuttal. This portion of the hearing took from July 18 to August 2, 1961, and the major portion of the 2,900 pages of testimony were produced during this period.

The entire fiscal production, transmission and policy operations were explored by all interested parties at the Board hearings.

It was contended by the appellant Company that in conformity with the generally agreed policy throughout the country that a fair rate of return is in the neighborhood of six percent. The appellant Commission agreed that six percent was what they strived for in their order. The testimony produced by the expert fiscal witness, Mr. Woy was to the effect that in 1960 they earned a return in the gas portion of the business of 3.54 percent figured on the reproduction cost less depreciation theory of figuring rates; 5.28 percent on the original cost theory; 7.30 percent on orginal cost less depreciation; but only 4.49 percent on his estimate of the fair value of the system; and that if the Commission would grant the increase, in 1962 they would earn 6.07 percent.

W. C. Gilman, a fiscal expert employed by The Montana Power Company, testified that a fair rate of return for Montana Power gas properties should be 6.75 percent.

Dr. L. S. Knappen, the fiscal expert of protestants, in his testimony criticized the 6.75 percent figure of Mr. Gilman, pointing out that it was based on 161.07 percent of book value of the common stock and would amount to a 20.79 percent of its 1960 book value, or 20.28 percent of its 1962 book value. He stated that based on Mr. Woy's figures, The Montana Power Company was earning more than 6 percent on every one of the functions, as set forth separately, i. e., production, transmission, and distribution.

Mr. John W. Kushing, the fiscal expert of the Commission, testified that he recommended 5.96 percent as a reasonable return on fair value.

Throughout the testimony some difficulty was evidenced in separating the multiple functions of the Company which break down basically to 67 percent electrical and 33 percent gas. In this respect The Montana Power Company is unique among privately owned public utilities. Both the Commission and the District Court seem to have had difficulty in properly separating the figures given and relating them to the gas rate only. Evidence of rates of return on the whole Company's gas and electricity ran from 8.3 percent up to 9.3 percent making this private utility company one of the high income utilities.

Evidence given showed that the value of the stock in The Montana Power Company increased five times in the years 1950-60.

Testimony revealed that well over $100,000 is spent yearly in advertising, raising a question of how much spent in this field by a company, with a franchise that serviced two-thirds of the State of Montana, is reasonable and beneficial to the rate payer. However, the amount did not shock the conscience of the Commission so neither the District Court nor this court has the matter on appeal.

Montana Power Company spends about 7.00 percent of their money on interest.

Prior to getting Canadian gas, the Company paid independent Montana producers 5.7 cents per cubic foot or less as against about 24 cents for the Canadian gas although the Company did say recently it had increased its offer for Montana gas.

Testimony given by the Company, and approved by the Commission, provided for a uniform rate for the entire system, as against a zone rate.

Concerning taxes paid by the Company it was shown that of the increase requested that some 54 percent of the additional revenue collected would be paid by The Montana Power Company into federal, state and local treasuries.

Certain facts concerning the gas supply and reserves were testified to during these hearings, that are of import to this case in view of the allegations made by the protestants at the Board meeting and denials by the petitioners (now appellants) as to the necessity of The Montana Power Company's securing Canadian gas.

The protestants infer that Montana, particularly the area north and northwest of Great Falls, is a great undeveloped gas area and that if The Montana Power Company would pay enough for the gas when found in sufficient quantities to make it profitable, reserves would be found. The Company denied that the price paid by them is the limiting factor, but alleges that discoveries of the quantity of gas found in Canada just have not happened in Montana in spite of considerable exploration both by Montana Power and other interested groups.

Further, that in Montana over a period of nine years, 1951-60, the records show that 11.5 dry holes occur for every producer. While in contrast Alberta has one producer for each 3.6 holes drilled, North Dakota, one producer for each 7.7 holes drilled and Wyoming 1 to 7. Too, the Company alleges that with an increase in consumption during the past ten years they were running short of reserves and that it was absolutely necessary to get into Canada when they did in order to secure adequate reserves.

The Board hearing revealed that in 1954 the Company purchased from the Montana-Dakota Utilities all of its properties north of Great Falls and as far east as Fort Belknap. This purchase included the contract to serve the Great Falls Gas Company.

In addition to the northern area, testimony revealed three other sources of supply and reserve servicing the Company; purchase from the Montana-Dakota Utilities in south central Montana of gas from Wyoming, the Dry Creek field in Montana, and the unconnected part of the system serviced by the Big Coulee field built in 1955 to service central Montana.

Prior to 1950, The Montana Power operated exclusively in the United States, but in that year they went into Alberta for the purpose of developing additional gas in the Pakowki Lake area just north of Montana. The Company contends that even with the Pakowki Lake Reserves they would have been unable to supply the annual requirements of customers beginning in 1963.

The Company testified that as a result of their going into Canada early, and being the first to import gas out of Canada, that they were allowed to join with The Pacific Gas and Electric Company in 1959 to import some thirty million feet of gas per day which amounts to...