Central Maine Power Co. v. Public Utilities Com'n

• Decision Date: 14 January 1983
• Parties: CENTRAL MAINE POWER COMPANY v. PUBLIC UTILITIES COMMISSION.
• Court: Maine Supreme Court

Page 34

455 A.2d 34

CENTRAL MAINE POWER COMPANY v. PUBLIC UTILITIES COMMISSION.

Supreme Judicial Court of Maine.

Argued Sept. 17, 1982.

Decided Jan. 14, 1983.

Pierce, Atwood, Scribner, Allen, Smith & Lancaster, Gerald M. Amero (orally), William J. Kayatta, Jr., Peter H. Jacobs, Portland, for plaintiff.

Stephen A. Johnson (orally), Joseph G. Donahue, Kimball L. Kenway, Augusta, for Public Utilities Com'n.

Chadbourne, Parke, Whiteside & Wolff, Linwood A. Morrell, New York City, for Intern. Paper Co.

Michael N. Westcott, Asst. Atty. Gen. (orally), Augusta, for intervenor Atty. Gen., State of Me.

Before GODFREY, NICHOLS, ROBERTS, CARTER, VIOLETTE and WATHEN, JJ., and DUFRESNE, A.R.J.

WATHEN, Justice.

On June 29, 1981, Central Maine Power Company ("CMP", "Company") filed with the Commission proposed new rate schedules pursuant to 35 M.R.S.A. § 64 (Supp.1982-83). The proposed rates were designed to produce a net increase in annual operating revenues equal to 15.3%, or $55,000,000, based upon a 1981 test year.

After extensive public hearings, the Commission entered its Decision and Order on March 27, 1982. That Order disallowed and rejected the schedule of proposed rates filed by CMP and authorized the Company to file a substitute rate schedule designed "to increase test year gross revenues on an across-the-board basis by no more than $31,895,000." Pursuant to the Commission's Decision and Order, CMP filed substitute rate schedules, and these schedules were approved by Supplemental Order No. 1, dated April 9, 1982.

CMP, pursuant to 35 M.R.S.A. § 303 (1975), has appealed from both the Commission's Decision and Order and Supplemental Order No. 1. In addition, CMP filed a Complaint with this Court pursuant to 35 M.R.S.A. § 305 (1977).

On appeal, the Company challenges the Decision and Order, together with the Supplemental Order, and contends that the Commission erred in determining the cost of equity, the allowance for attrition, working capital requirements and in refusing to allow the inclusion of certain advertising expense for ratemaking purposes. We sustain the Commission's order in all respects.

I. Cost of Equity.

In the present case in calculating the rate of return, the Commission found that CMP's cost of equity fell within a range of 15.4% to 15.6%, and assigned a cost of 15.4% to the Company's common equity. The Company, while not disputing the reasonableness of that range, argues that 15.4% is arbitrary, unreasonable, unlawful and confiscatory of its property in violation of the United States and Maine Constitutions. It asserts that the Commission, in essence, imposed a $500,000 "penalty" on CMP, by setting its cost of equity at the low end, rather than the middle, of the established range of reasonableness, and that it did so on the basis of alleged deficiencies in the Company's policies and management practices with respect to cogeneration and conservation. ¹ CMP argues that the record does not support the finding of a deficiency in Company policy and that in any event the imposition of a "penalty" constitutes error as a matter of law.

The determination of an appropriate rate of return is an essential function of the Commission in the ratemaking process. The rate of return is designed to provide sufficient revenue to cover the Company's total cost of service. Such costs include both the operating expenses of the utility and an adequate "return" on the investment in property and equipment serving the public. See New England Telephone & Telegraph Company v. Public Utilities Commission, Me., 448 A.2d 272, 284 (1982), (hereinafter "1982 NET Case").

In determining what constitutes a just and reasonable rate, this Court has relied upon two leading decisions by the United States Supreme Court:

A public utility is entitled to such rates as would 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.

Bluefield Water Works & Improvement Company v. Public Service Commission, 262 U.S. 679, 692-3, 43 S.Ct. 675, 678-679, 67 L.Ed. 1176 (1923) quoted in New England Telephone and Telegraph Company v. Public Utilities Commission, Me., 390 A.2d 8, 31 (1978) (hereinafter "1978 NET Case").

We held in Federal Power Commission v. Natural Gas Pipeline Co., [315 U.S. 575, 62 S.Ct. 736, 86 L.Ed. 1037 (1942) ], supra, that the Commission was not bound to the use of any single formula or combination of formulae in determining rates. Its ratemaking function, moreover, involves the working of "pragmatic adjustments." ... And when the Commission's order is challenged in the courts, the question is whether that order "viewed in its entirety" meets the requirements of the Act. ... Under the statutory standard of "just and reasonable" it is the result reached not the method employed which is controlling. ... It is not theory but the impact of the rate order which counts. If the total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry under the Act is at an end. The fact that the method employed to reach that result may contain infirmities is not then important. Moreover, the Commission's order does not become suspect by reason of the fact that it is challenged. It is the product of expert judgment which carries a presumption of validity. And he who would upset the rate order under the Act carries the heavy burden of making a convincing showing that it is invalid because it is unjust and unreasonable in its consequences. (citations omitted) (emphasis added)

Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 602, 64 S.Ct. 281, 287-288, 88 L.Ed. 333 (1944), quoted in 1978 NET Case, 390 A.2d at 31-32.

One facet of the method employed by regulatory agencies to determine the fair rate of return, and one which was used in this case, is an analysis of the utility's cost of equity. The cost of equity is an expression of what the utility must earn (stated in percentages) in order to secure necessary financing from equity investors. 1978 NET Case, supra, at 32. As to this task, this Court recently noted that:

Determining the cost of equity is one of the more difficult computations in the rate-making process. The Commission must concern itself with many economic variables and evaluate conflicting evidence interpreting and applying those variables. Because of the complexity of the task, the Law Court necessarily defers to the regulatory expertise of the Commission if the Commission's decision is supported by substantial evidence. We do not attempt to second-guess the Commission on matters falling within its realm of expertise. Our review is limited to determining in the light of the record whether the Commission's conclusions are unreasonable, unjust or unlawful. The utility has the burden of proving that the Commission has erred. 35 M.R.S.A. § 307 (1978).

1982 NET Case, 448 A.2d at 287-88.

Again, the Company does not challenge the inherent reasonableness of the 15.4%--15.6% range adopted by the Commission in this case with respect to its cost of equity. Rather, CMP asserts that the Commission adopted the range of reasonableness "as part of an attempt to insulate the unsupported penalty from judicial review." We have previously recognized, however, that ratemaking is an "inexact science" and, accordingly:

The concept of a "just and reasonable" rate does not signify a particular single rate as the only lawful rate but rather encompasses a range [of reasonableness] within which rates may be deemed just and reasonable both in terms of revenue level and rate design. It is within the sound discretion of the Commission to fix the exact level and design within that range.

Central Maine Power Company v. Public Utilities Commission, Me., 382 A.2d 302, 327-28 (1978). See also Central Maine Power Company v. Public Utilities Commission, Me., 405 A.2d 153, 182 (1979). Moreover, since this Court's review is limited to the "result reached and not the method employed" (Hope Natural Gas Co., supra ), it should not disturb the Commission's result so long as the cost of equity allowed is within a range of reasonableness supported by sufficient evidence.

On review, we find substantial evidence to support the Commission's position. Before adopting the range of 15.4% to 15.6%, the Commission heard extensive testimony bearing on CMP's cost of equity. The estimates given in testimony, based upon various methods, ranged from 13.43% to 18.125%.

The Company nevertheless argues that since the Commission would have assigned a 15.5% cost of capital but for its alleged infirmities with respect to conservation and cogeneration, the Commission's decision, pursuant to 35 M.R.S.A. § 51 (1975), ² to lower CMP's cost of capital to 15.4% must fail. It is not necessary to determine in this case, however, whether the Commission upon an adequate record may properly "penalize" a utility pursuant to section 51 for such reasons as the failure to effectuate the public policy expressed in independent state and federal energy legislation. ³ The Commission's determination of CMP's cost of equity in this case is independently supported by the record and falls within a range we find to be reasonable. Accordingly, we must uphold the Commission's decision as a proper exercise of discretion. 1982 NET Case, 448 A.2d at 278.

II. Attrition.

The order of the Commission includes an attrition allowance of .05% or $672,000. The Company claims that result to be erroneous. It is asserted that the evidence compels an allowance equal to .60%, or approximately $8,000,000, in order to provide a fair rate of return. The substantial discrepancy...