CF Industries v. Tennessee Public Service Commission

• Decision Date: 19 May 1980
• Citation: 599 S.W.2d 536
• Court: Tennessee Supreme Court
• Parties: CF INDUSTRIES, Appellee, v. TENNESSEE PUBLIC SERVICE COMMISSION et al., Appellants.

Page 536

599 S.W.2d 536

CF INDUSTRIES, Appellee, v. TENNESSEE PUBLIC SERVICE COMMISSION et al., Appellants.

Supreme Court of Tennessee.

May 19, 1980.

Eugene W. Ward, Gen. Counsel, Mack H. Cherry, Asst. Gen. Counsel, for appellant Public Service Commission.

Eugene N. Collins, City Atty., Gary D. Lander, Sp. Counsel, Chattanooga, for City of Chattanooga.

Jack M. Irion, Bomar, Shofner, Bomar & Irion, Shelbyville, W. D. Spears, Spears, Moore, Rebman & Williams, W. L. Taylor, Jr., Chattanooga, for Chattanooga Gas Co.

James Clarence Evans, Nashville, Anthony E. Cascino, Jr., Longrove, Ill., for appellee.

OPINION

HENRY, Justice.

This is a utility rate case.

I.

A. Pleadings and Proceedings before the Public Service Commission

On May 31, 1977, Chattanooga Gas Company, a division of Jupiter Industries, filed its application before the Tennessee Public Service Commission seeking to place into effect a revised natural gas tariff and to amend a special contract with CF Industries, Inc. Chattanooga Gas is a natural gas distribution company serving franchises in Chattanooga, Cleveland and environs in Hamilton and Bradley County. CFI is its largest consumer, using approximately 30% of the petitioner's total gas supply.

The proposed rate increase applied to large industrial and commercial customers but did not affect small commercial users nor residential customers. The basic premise of the application is that a declining gas supply has prohibited the pursuit of practices designed to increase sales volumes to offset heavy increases in operational costs, resulting in an inadequate rate of return. Thus, Chattanooga Gas urges upon the Commission a need to redesign its rates.

It is the theory and philosophy of Chattanooga Gas that there has been a regulatory shift from the traditionally accepted criteria for valuing utility service from "cost of service" to an "intrinsic value" rationale and that this operates to protect residential consumers from absorbing more than their fair share of rates. Chattanooga Gas insists that volume discounts resulting in price advantages to industrial users tend to encourage over-consumption at a time when conservation is a national priority.

CF Industries protested the petition, taking the position that it is the largest customer of Chattanooga Gas, using the gas as a raw product ingredient in the production of fertilizer, and that this unique use justifies a separate rate classification and a continuation of its contract with Chattanooga Gas. ¹ Its unique use can best be summarized by noting that it is the only customer of Chattanooga Gas which utilizes gas as a raw material; all others use it only as a fuel. CFI can use no other fuel because of the design of its nitrogen complex. It is CFI's further position that its proposed share of the rate increase is disproportionate and discriminatory. CFI insists on the cost of service vis-a-vis the intrinsic value approach.

The Town of Lookout Mountain, Tennessee, intervened in opposition to the increase. The City of Chattanooga intervened for the purpose of preserving its contracts with Chattanooga Gas and protecting the interests of its citizens and rate payers.

To put the entire controversy into focus, we point out that essentially the contending parties are the Chattanooga Gas Company and CF Industries. Under the scheme proposed by Chattanooga Gas the Commission was asked to approve a two-step approach. First, the special rate to CFI would be eliminated and the Gas Company's industrial rate schedule would be made applicable to CFI. Secondly, a general rate increase would be applied to all industrial users, including CFI. The first step would increase CFI's rates by approximately $562,867 annually; the general rate increase would add approximately $157,133. The result would be a total increase of approximately $720,000, with CFI assuming the same proportionate burden as all other industrial consumers.

B. Findings and Order of the Commission

On November 30, 1977, the Public Service Commission entered its findings and order. The Commission approved the increase in net operating income in the amount of $910,226. It ordered that CFI be charged at its "existing I-1 rate tariff," with the result that approximately $394,866 or 43.4% of the total increase was assessed against CFI with approximately 56.6% being assessed against the remaining 742 industrial consumers. The 25,000 residential users were not affected. The result was that other industrial users were raised and CFI continued to pay at a lower rate. After discussing the testimony relating to the cost of service versus intrinsic value approach, the Commission noted that "CFI is receiving gas at bargain prices under the special contract at a time when natural gas is a scarce commodity."

The Commission treated "cost of service" as "one of many approaches" but held that it was "not bound to a strict cost of service approach in designing rate schedules." The Commission summarized its holding:

Rate-making is an extremely complex process which involves much more than inputting cost figures into a computer and waiting for the results of the machine's mathematical functions. We must consider all aspects surrounding the determination of just and reasonable rates. In our opinion, a strict cost of service approach is not at this time of decreasing energy supplies the best approach to setting rates. . . . We, therefore, order the company to change the existing rates charged to CF Industries for firm gas to the existing I-1 rate tariff.

The Commission pointed out that "CFI will still be able to purchase gas at a lower effective rate than other industrial customers due to its high load factor." Further the Commission specificized this finding by noting that "on average the industrial customers other than CF Industries are paying $1.46 per McF under existing rates, while CFI will pay $1.35 per McF under the same rate schedule."

It should be noted that while under the Commission's holding CFI's rate was increased to that being paid by other industrial users at the time the petition was filed, it was not subjected to the general rate increase with the result that it continues to pay at a lower rate than all others in the same class.

C. Action of the Chancery Court

Pursuant to a petition for judicial review, the Chancery Court of Davidson County affirmed the Public Service Commission. Citing Allied Chemical Corp. v. Georgia Power Co., 236 Ga. 598, 224 S.E.2d 396 (1976), the Court held that the failure of the Commission to follow a cost of service approach "does not make its decision unjust and discriminatory." Further citing the requirement of Section 65-518, T.C.A., that the Commission modify any rates found to be "unjust, unreasonable, excessive, insufficient, or unjustly discriminatory or preferential," the Chancellor noted that CFI "had been obtaining gas at special contract rates lower than other industrial users." The Court held that the Commission's findings were supported by substantial and material evidence.

D. Action of the Court of Appeals

The Court of Appeals for the Middle Section reversed, disagreeing with the Commission and the Chancellor in every material particular. The Court held that (1) the Commission violated Section 4-519, T.C.A., by failing to make findings of fact; (2) that the Commission failed to require and consider cost of service data; (3) that with a general cost of service study there is a reasonable probability that the result would have been different; and (4) that there was no substantial evidence to support the action of the Commission and its action was "discriminatory" and "patently arbitrary."

The thrust of the opinion of the Court of Appeals is that the Commission increased rates to large commercial and industrial users to the exclusion of smaller commercial and residential users "without any evidence to justify the discrimination." The matter was remanded to the Public Service Commission for a "redetermination of rates of the customers of Chattanooga Gas Company," to include small commercial and residential users.

We sustain the Public Service Commission and the Chancellor and reverse the Court of Appeals.

II. Standard of Review

Section 4-5-117, T.C.A., covers judicial review under the Uniform Administrative Procedures Act. Sub-section (g) provides that review shall be "confined to the record." Sub-section (h) restricts reversal or modification of the agency's decision to those cases where the decision violates constitutional or statutory provisions, or is in excess of the statutory authority of the agency, or is made upon unlawful procedure, and to those instances where the decision is

arbitrary or capricious or characterized by abuse of discretion or clearly unwarranted exercise of discretion; or

unsupported by evidence which is both substantial and material in the light of the entire record.

Further narrowing and restricting the review in the Chancery Court is the statutory command:

In determining the substantiality of evidence, the court shall take into account whatever in the record fairly detracts from its weight, but the court shall not substitute its judgment for that of the agency as to the weight of the evidence on questions of fact. (Emphasis supplied). Section 4-5-117(h) (5), T.C.A.

Thus the UAPA requires that the trial court review factual issues upon a standard of substantial and material evidence. But this is not a broad, de novo review. It is restricted to the record and the agency finding may not be reversed or modified unless arbitrary or capricious or characterized by an abuse, or clearly unwarranted exercise, of discretion and must stand if supported by substantial and material evidence.

The same standard of review prevails on the appellate level. We cannot, as a general rule, "afford any broader or more comprehensive review to cases arising under the Act than is afforded to them by the trial court in the first instance . ....