Central Louisiana Elec. Co. v. Louisiana Public Service Com'n

• Decision Date: 22 June 1987
• Docket Number: No. 86-CA-1781,86-CA-1781
• Citation: 508 So.2d 1361
• Parties: CENTRAL LOUISIANA ELECTRIC CO. v. LOUISIANA PUBLIC SERVICE COMMISSION.
• Court: Louisiana Supreme Court

Page 1361

508 So.2d 1361

CENTRAL LOUISIANA ELECTRIC CO. v. LOUISIANA PUBLIC SERVICE COMMISSION.

No. 86-CA-1781.

Supreme Court of Louisiana.

June 22, 1987.

Marshall B. Brinkley, Baton Rouge, Michael Fontham, Noel J. Darce, Stone, Pigman Walther, Wittmann & Hutchinson, New Orleans, for applicant.

William O. Bonin, Landry, Watkins & Bonin, New Iberia, for respondent.

COLE, Justice.

The basic issue in this public utility case is whether or not the Louisiana Public Service Commission acted arbitrarily in denying Central Louisiana Electric Company, Inc. an increase in intrastate retail rates. On appeal to the Nineteenth Judicial District Court, pursuant to La.R.S. 45:1192, the order of the Commission was annulled, reversed and set aside. The district court found the Commission's order to be arbitrary, unreasonable and confiscatory. It awarded Central Louisiana Electric Company, Inc. (CLECO) an increase in retail electrical rates sufficient to yield additional annual revenues of $51.7 million, effective August 1, 1986. The Commission appeals to this Court pursuant to Article 4, Section 21 of the Louisiana Constitution of 1974. We affirm.

FACTS

On May 13, 1985, CLECO applied to the Commission seeking its authorization to charge increased intrastate retail rates in order to yield additional revenues of $85,370,000. ¹ The primary purpose of requesting this increase was to allow CLECO to immediately begin recouping the cost of its one-half interest in Dolet Hills, ² a 640 megawatt lignite fired generating plant then under construction. This requested rate increase was not to go into effect until Dolet Hills was placed in service.

Although CLECO's application was based on a test year ending June 30, 1985, Dolet Hills was not placed into service until April 25, 1986. The actual test year data, therefore, did not include Dolet Hills. In calculating its request, CLECO projected its share of the costs of Dolet Hills to be $281 million. After projecting the operating costs of Dolet Hills, it estimated a need for an additional $72.2 million in annual revenues. Also, it estimated a fuel costs savings of $49 million to be effected when Dolet Hills was placed in service. This would result from the use of lignite coal for boiler fuel, as opposed to the use of natural gas.

The Commission hired Dr. Richard J. Lurito and his associate Kenneth F. Gallagher as consultants to review CLECO's application. Based on independent calculations, they both recommended a rate increase of $51.7 million. In arriving at this figure, an average rate base of $685 million was used. This rate base included $281 million, the costs of Dolet Hills, and $403 million, the total costs of CLECO's other property ("Other Rate Base Property.") ³ An overall rate of return of 11.07%, including a 13.5% return on common equity, was applied to this $685 million average rate base. ⁴ Using these calculations, Dolet Hills' total revenue requirement was found to be $61.7 million. As there was an excess return on Other Rate Base Property of $7.3 million, this amount was deducted in arriving at the recommended increase. Furthermore, another $2.7 million was deducted for negative attrition ⁵ expected to occur during the first year of the rate increase. Thus, after these two deductions the recommended rate increase was $51.7 million, that is, $61.7-$7.3-$2.7.

Unwilling to rely on these estimates, the Commission proposed to CLECO that it be permitted to defer ruling. As the Commission is constitutionally subject to a one-year time limitation in ruling, ⁶ it could not defer ruling without CLECO's consent. The Commission proposed freezing CLECO's automatic fuel adjustment clause thereby allowing CLECO to retain $34 million predicted by its consultants to be the fuel savings associated with Dolet Hills. In return, CLECO was to consent to a six month extension of time for a final decision. CLECO's application would be re-examined in six months when actual operating data from Dolet Hills would be available. When CLECO rejected this proposal, ⁷ the Commission declined their rate request in its entirety.

DISTRICT COURT FINDINGS

In reversing, the district court noted there was a glaring inconsistency on the face of the Commission's order. On the one hand, the Commission unquestionably concluded CLECO was entitled to some rate relief as it offered to freeze the fuel adjustment clause thereby allowing the company to retain the anticipated fuel savings. Further, in its order the Commission stated it was not unwilling to allow the Company some additional revenue for Dolet Hills. Nevertheless, the Commission, in disregard of the findings of its own experts, denied CLECO any relief whatsoever. The district court found the Commission's reasons for disregarding the findings of its own experts were inadequate. Moreover, it found no reasonable basis in the record to support the Commission's rejection of the $51.7 million recommended rate increase. The district court concluded this order completely denying CLECO any relief whatsoever, coming immediately after the Commission by its own proposal had indirectly admitted that CLECO was entitled to some relief, was arbitrary.

STANDARD OF REVIEW

The standard of judicial review of rate-making determinations has been enumerated by this Court on numerous occasions. We have observed that:

While we thus have the power and it is undoubtedly our duty to set aside the rulings of the Commission where we believe them to be clearly wrong on the facts and/or the law, we nevertheless should accord great weight to the rulings of the Commission and should not overturn them in the absence of a clear showing of error. Courts should act slowly in substituting their own views and discretion for those of a body peculiarly constituted to act intelligently in such cases and primarily charged with doing so. Southern Bell Telephone & Telegraph Co. v. Louisiana Public Service Comm'n, 118 So.2d 372, 378 (La.1960).

Further, we have described our role in the following way. Initially, as the orders of the Commission are entitled to great weight, they should not be overturned absent a showing of arbitrariness, capriciousness, or abuse of authority by the Commission. Secondly, courts should be reluctant to substitute their own views for those of the expert body charged with the legislative function of rate-making. Lastly, a decision of the Commission will not be overturned absent a finding that it is clearly erroneous or that it is unsupported by the record. South Central Bell v. Louisiana Public Service Comm'n, 352 So.2d 964, 968-69 (La.1977); Gulf States Utilities Co. v. Louisiana Public Service Comm'n, 364 So.2d 1266, 1268 (La.1978), and the cases cited therein. Moreover, in Central Louisiana Electric Co. v. Louisiana Public Service Comm'n, 437 So.2d 278 (La.1983), we reiterated these principles, stating: "A reviewing court will not substitute its judgment for that of the Commission in fixing public utility rates, and the agency's rate order will be upheld unless shown to be arbitrary, capricious, abusive of its authority, clearly erroneous, or unsupported by the evidence." Id. at 279.

Pursuant to La.R.S. 45:1176, the Public Service Commission has the power to set "just and reasonable" rates to be charged by public utility companies in this state. In reviewing the rate-making process, the inquiry therefore is whether the commission acted unreasonably or arbitrarily in setting rates for the utility. South Central Bell v. Louisiana Public Service Comm'n, 352 So.2d 964, 968 (La.1971). Accordingly, the decisive issue in this case is whether or not the commission was arbitrary in denying CLECO's request for a rate increase.

RATE-MAKING METHODOLOGY

In utility rate-making, the primary objective is to allow the company sufficient revenues to meet its operating expenses, provide its shareholders with a reasonable rate of return, and attract new capital. South Central Bell Telephone Co. v. Louisiana Public Service Comm'n, 352 So.2d at 967; Jones, Judicial Determination of Public Utility Rates: A Critique, 54 B.U.L.Rev. 873, 875 (1975). At this level, the utility's revenues are said to produce a "fair rate of return." The legal standard for determining what is a fair rate of return was articulated in two seminal cases: Federal Power Comm'n v. Hope Natural Gas Co., 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333 (1944) and Bluefield Waterworks & Improvements Co. v. Public Service Comm'n, 262 U.S. 679, 43 S.Ct. 675, 67 L.Ed. 1176 (1923). In Bluefield, the Court observed:

What annual rate will constitute just compensation depends upon many circumstances, and must be determined by the exercise of a fair and enlightened judgment, having regard to all relevant facts. A public utility is entitled to such rates as will permit it to earn a return on the value of the property which it employs for the convenience of the public equal to that generally being made at the same time and in the same general part of the country on investments in other business undertakings which are attended by corresponding risks and uncertainties; but it has no constitutional right to profits such as are realized or anticipated in highly profitable enterprises or speculative ventures. The return should be reasonably sufficient to assure confidence in the financial soundness of the utility and should be adequate, under efficient and economical management, to maintain and support its credit and enable it to raise the money necessary for the proper discharge of its public duties. A rate of return may be reasonable at one time and become too high or too low by changes affecting opportunities for investment, the money market and business conditions generally. 262 U.S. at 692-93, 43 S.Ct. at 679.

In Hope, the Court reiterated these principles, stating:

Rates which enable the company to operate successfully, to maintain its financial integrity, to attract capital, and to compensate its investors for the risks...