City of Moorhead v. Minnesota Public Utilities Com'n, s. C5-82-1584

• Decision Date: 27 January 1984
• Docket Number: Nos. C5-82-1584,C2-82-1607 and C3-83-7,s. C5-82-1584
• Citation: 343 N.W.2d 843
• Parties: CITY OF MOORHEAD, Appellant (C5-82-1584, C2-82-1607), Konrad Olson, Peter Joseph Miller and FM Apartment Association, Appellants (C3-83-7), v. MINNESOTA PUBLIC UTILITIES COMMISSION, Minnesota Department of Public Service, Northern States Power Company, City of St. Paul and St. Paul Area Chamber of Commerce, Respondents.
• Court: Minnesota Supreme Court

Page 843

343 N.W.2d 843

CITY OF MOORHEAD, Appellant (C5-82-1584, C2-82-1607) Konrad Olson, Peter Joseph Miller and FM Apartment Association, Appellants (C3-83-7), v. MINNESOTA PUBLIC UTILITIES COMMISSION, Minnesota Department of Public Service, Northern States Power Company City of St. Paul and St. Paul Area Chamber of Commerce Respondents.

Nos. C5-82-1584, C2-82-1607 and C3-83-7.

Supreme Court of Minnesota.

Jan. 27, 1984.

Rehearing Denied March 7, 1984.

Syllabus by the Court

1. A determination by the Minnesota Public Utilities Commission that a public utility in the business of distributing natural gas to consumers operated a non-integrated gas distribution system in the state was supported by substantial evidence.

2. In reviewing an order of the Minnesota Public Utilities Commission allocating the cost of gas purchased among classes of a non-integrated natural gas distribution system, the court will uphold the decision unless it is in excess of statutory authority, unjust, unreasonable or discriminatory.

3. Appellants have failed to demonstrate by clear and convincing evidence that an order of the Minnesota Public Utilities Commission resulted in arbitrary, unjust, unreasonable or discriminatory rates.

4. Bare allegations unsubstantiated by legal proof are insufficient to successfully establish procedural irregularity by an administrative agency in arriving at its decision.

Myer Shark, Fargo, N.D., for appellants Konrad Olson, et al.

Robert J. Schaefer, City Atty., Moorhead, for appellant City of Moorhead.

Karl Sonneman, Sp. Asst. Atty. Gen., St. Paul, for respondent Minnesota Public Utilities Com'n.

Gene R. Sommers, Leonard J. Keyes, Samuel L. Hanson, Briggs & Morgan, Minneapolis, for respondent Northern States Power Co.

Peter Kissel, O'Connor & Hannan, Minneapolis, for respondent St. Paul Chamber of Commerce.

Susan W. Rester, Sp. Asst. Atty. Gen., St. Paul, for respondent Minnesota Dept. of Public Service.

Thomas J. Stearns, St. Paul, for respondent City of St. Paul.

Heard, considered and decided by the court en banc.

KELLEY, Justice.

Appellants appeal from an order of the Ramsey County District Court affirming an order of the Minnesota Public Utilities Commission (MPUC) which held that the natural gas distribution system of Northern States Power Company (NSP) serving generally the central and southeastern portions of Minnesota and the distribution system of NSP serving generally Moorhead and other communities in northwestern Minnesota were separate systems; that the cost of gas purchased by NSP to serve each system was clearly identifiable and substantially different between the systems; that rates charged to classes of customers are to reflect the cost of providing gas service; and that, accordingly, the cost of gas purchased by NSP from two separate pipeline companies must not be averaged or "rolled-in" to determine customer rates on both systems. We affirm.

NSP is a retail distributor of natural gas in Minnesota. It purchases its natural gas from wholesale pipeline companies for resale to the customers on its distribution systems. Midwestern Gas Transmission Company (Midwestern) supplies gas which NSP distributes to approximately 5,400 customers on one system serving customers in Moorhead, East Grand Forks and Dilworth (the Midwestern system). Northern Natural Gas Company (Northern) supplies gas which NSP distributes to approximately 214,000 customers on the other system in St. Paul, St. Cloud, Winona and other communities in the southeastern part of the state (the Northern system).

At the time of this proceeding, NSP purchased gas from Midwestern, a Canadian pipeline company, for $4.67 per Mcf. This gas was used entirely in serving customers on the Midwestern system. To serve its Northern system, NSP purchased gas from Northern, a domestic pipeline company, at a cost of $2.49 per Mcf. ¹ NSP has, in the past, directly assigned the cost of gas purchased to customers serviced by that gas. In so doing, the cost of higher-priced Canadian gas was charged to customers on the Midwestern system; and the cost of the domestic gas was charged to customers on the Northern system. As a result, the rates paid by customers on the Midwestern system were significantly higher than the rates paid by NSP's customers on the Northern system.

The distribution facilities owned and used by NSP to service its Northern system are not physically connected to the facilities used to service its Midwestern facilities. The transmission pipelines of the two wholesale suppliers, Northern and Midwestern, however, are physically interconnected at three points in Minnesota. At these points gas can be transferred between pipelines. However, the tariff which controls the purchase of gas from Northern prohibits NSP from transferring gas provided by Northern to the Midwestern pipeline with a limited exception. The tariff exception allows NSP to transfer Northern gas to the Midwestern pipeline in order to meet peak demands on its Midwestern system. Under this transfer arrangement, NSP directs Northern to transfer up to 4,000 Mcf per day of natural gas by displacement. This displacement process generally involves NSP injecting propane air volumes into its Northern system. NSP reduces the volume of gas it takes for its Northern system from Northern, and then Northern transfers that volume to the Midwestern system. Displacement transfers can only be used to the extent Northern has capability to transfer the necessary volumes to the Midwestern pipeline. These transfers are referred to as "emergency peak shaving" transfers. There is no transfer of gas from the Midwestern system to the Northern system.

Appellants contend that NSP should employ a "rolled-in" or average rate for cost of gas purchased to service all of its Minnesota customers. Under the "rolled-in" method, the purchase costs of Midwestern and Northern gas would be added together and assigned equally to all customers served by NSP in Minnesota. As a result, the rates of customers on the Northern system would be increased; conversely, the rates of customers on the Midwestern system, who historically have borne the cost of the higher-priced Canadian gas, would be decreased.

Following extensive hearings, the hearing examiner concluded that NSP's Northern and Midwestern systems were sufficiently integrated for ratemaking purposes so as to require an order directing NSP to implement "rolled-in" rates. The MPUC rejected the hearing examiner's conclusions. It held that the two distribution systems were operated as two separate systems; that the customers of each system caused NSP to incur different costs; that the cost of gas was a single cost item clearly identifiable and substantially different between the two systems; and that the cost of gas purchased from the two pipeline companies must not be averaged or "rolled-in." Northern States Power Co., Docket No. G-002/M-80-121 (Minn.P.U.C., August 20, 1981). On appeal, the district court affirmed the findings and conclusions of the MPUC.

We have held that upon appeal, "decisions of administrative agencies enjoy a presumption of correctness, and deference should be shown by courts to the agencies' expertise and their special knowledge in the field of their technical training, education and experience." Reserve Mining Co. v. Herbst, 256 N.W.2d 808, 824 (Minn.1977). ² Administrative agencies perform both legislative and judicial functions. With respect to factual findings made by the agency in its judicial capacity, if the record contains substantial evidence supporting a factual finding, the agency's decision must be affirmed. See, e.g., Urban Council on Mobility v. Minnesota Department of Natural Resources, 289 N.W.2d 729, 733 (Minn.1980). Minn.Stat. Sec. 14.69 (1982). However, when an agency acts in its legislative capacity, its decision will not be set aside unless it can be shown to be illegal by clear and convincing evidence. When the MPUC is allocating costs between utility customers and balancing various factors to achieve a fair and reasonable allocation of these costs, the MPUC operates in a legislative capacity. St. Paul Area Chamber of Commerce v. Minnesota Public Service Commission, 312 Minn. 250, 262, 251 N.W.2d 350, 358 (1977). When acting in this legislative capacity, the MPUC-approved rates are presumed to be just and reasonable and will be upheld unless shown to be in excess of statutory authority or resulting in unjust, unreasonable or discriminatory rates by clear and convincing evidence. Hibbing Taconite Co. v. Minnesota Public Service Commission, 302 N.W.2d 5, 9 (Minn.1980); see also Reserve Mining Co. v. Minnesota Public Utilities Commission, 334 N.W.2d 389, 392 (Minn.1983).

In the present case, the MPUC first considered evidence of NSP's physical layout and determined that NSP operated two separate distribution systems which justified direct assignment of cost of the gas purchased. While the determination that NSP's gas distribution system in Minnesota was not an integrated system ultimately affects cost allocation, this determination was in the nature of a factfinding. As such, it will not be disturbed unless examination of the record shows the absence of substantial evidence to support it.

The MPUC rejected a finding of the hearing examiner that NSP's distribution system was integrated, and instead found NSP had two separate systems. Appellants argue that the agency should be bound by the hearing examiner's findings unless those findings are not supported by substantial evidence. They further contend that the MPUC failed to review the hearing examiner's findings under that substantial evidence standard and, therefore, that the MPUC order should be reversed. Our reading of the record shows, contrary to appellants' contention, that the MPUC did not ignore the factfindings of the hearing examiner. Indeed, it adopted most of his findings verbatim. The MPUC disagreed with the hearing examiner...