Frost-Benco Elec. Ass'n v. Minnesota Public Utilities Com'n, FROST-BENCO

Decision Date30 November 1984
Docket NumberFROST-BENCO,No. CX-83-1591,CX-83-1591
Citation358 N.W.2d 639
PartiesELECTRIC ASSOCIATION, Respondent, v. MINNESOTA PUBLIC UTILITIES COMMISSION, Petitioner, Minnesota Department of Public Service, intervenor, Petitioner.
CourtMinnesota Supreme Court

Syllabus by the Court

The Minnesota Public Utilities Commission lacks jurisdiction and authority to retrospectively regulate rates an unregulated cooperative electric utility charged its customers during a period it was not subject to Minnesota Public Utilities Commission regulations under Minn.Stat. 216B, et seq.

Hubert H. Humphrey, III, Atty. Gen., Craig R. Anderson, Asst. Atty. Gen., St. Paul, for Dept. of Public Service.

Karl W. Sonneman, Asst. Atty. Gen., St. Paul, for Minn. Public Utilities Com'n.

John C. Hottinger, M. John Gustavson, Mankato, for Frost-Benco Elec. Ass'n.

Harold LeVander, Jr., So. St. Paul, for amicus curiae Rural Elec. Ass'n.

Clayton L. LeFevere, Minneapolis, for amicus curiae Co-op. Power Ass'n.

Heard, considered and decided by the court en banc.

KELLEY, Justice.

Appellant Frost-Benco Electric Association (Frost-Benco), an electric cooperative, made application to the Minnesota Public Utilities Commission (MPUC) for approval of increased electrical rates. Following evidentiary hearings a hearing examiner issued his report. 1 The MPUC subsequently issued its order which required, inter alia, that Frost-Benco refund to its membership the difference between purchased power revenues collected by Frost-Benco during the test year (July 1, 1980 through June 30, 1981), at which time Frost-Benco was not subject to MPUC regulation, and the actual purchased power expenses paid by Frost-Benco to its power suppliers during the same period. On appeal to the Blue Earth County District Court, the MPUC's order was affirmed. The basic issue on this appeal is whether the MPUC has jurisdiction to regulate a utility by ordering refunds of amounts collected by a utility during the period of non-regulation. We hold that it does not and reverse.

Frost-Benco is a cooperative electric association organized under the provisions of Minn.Stat. ch. 308 (1982). The cooperative provides retail electrical service to approximately 8,000 customers in south-central Minnesota. The company was formed on January 1, 1980 through a consolidation of the Blue Earth-Nicollet Cooperative Electric Association and the Faribault County Electric Association.

Frost-Benco generates no electricity of its own. Instead, it purchases all of its energy requirements at wholesale from Cooperative Power Association, a generation and transmission cooperative owned collectively by 18 cooperative associations including Frost-Benco. Thus, Frost-Benco operates solely to distribute electricity.

As a cooperative, Frost-Benco does not engage in the traditional method of raising capital through public offerings of common stock. Rather, Frost-Benco raises a small portion of its equity capital through a nominal, one-time membership charge to each member-ratepayer. The majority of Frost-Benco's equity capital is raised through the retention of monies paid for electricity by members in excess of the cost of providing such electricity. These excess "margins" are rotated, or returned to the members in a fixed cycle of 15 years.

Like most retail cooperatives, Frost-Benco accounts separately for the cost of energy it must purchase. These wholesale power costs are further broken down into a base component and a fluctuating adjustment known as a power cost adjustment (PCA). The latter adjustment, which is directly involved in this case, represents the degree to which energy costs have changed since the base component was originally set. During the evidentiary hearing in this case a witness described the purpose of the PCA as follows:

[T]he function of the PCA is to match the cost of purchased power with the revenue from consumers so the changes in the cost of purchased power are adequately and promptly reflected in the rates. The function of the PCA is not to adjust margin based on previous losses or even target margins.

The original intention for use of a PCA was to allow utilities to pass on to consumers additional power costs without having to file a general rate case.

When Frost-Benco was formed, it prepared rate schedules for electric sales including base rates designed to recover the current cost of purchased power. In spite of a wholesale rate increase from Cooperative Power in January 1980, Frost-Benco did not add a PCA to the base rates just established. Thus, Frost-Benco absorbed the January increase as well as a second increase in May 1980. Frost-Benco did not add a PCA to its base rates until July 1, 1980. On that date, Frost-Benco implemented an annual PCA increase of 1.47 cents per kwh. Frost-Benco determined this figure would recoup the costs absorbed and would recover the cost of power for the next 6 months. Accordingly, Frost-Benco designed the new PCA with the aim of breaking even by the end of the year.

Figured into the projected costs was an anticipated wholesale cost increase due to Cooperative Power's contemplated start-up of a new power plant known as Coal Creek Unit No. 2. Notices of the new PCA stated that, "[t]he reason for this increase is that we must begin paying for Unit No. 2 of the Coal Creek generating station." Coal Creek Unit No. 2, however, did not begin generating electricity until July 1981. Despite this fact, Frost-Benco's PCA still collected $50,000 less than the actual cost of purchased power for the calendar year 1980.

Frost-Benco continued, in 1981, to charge its members the 1.47 PCA, even though the company recognized that that figure was too high. Frost-Benco's management decided that the current figure was justified because Cooperative Power was due to change its wholesale rates in May 1981. Moreover, neither Frost-Benco nor its members desired electric bills that fluctuated widely from month to month.

The PCA remained in force until June 1, 1981. On June 1, 1981, Frost-Benco became subject to MPUC regulation following an election pursuant to Minn.Stat. Sec. 216B.02, subd. 4 (1982). 2 Upon becoming regulated, Frost-Benco reduced its PCA to 0.5 cents per kwh in conformance with the 2-month moving average formula required by the MPUC's rules. As a result of the earlier PCA miscalculation, however, Frost-Benco's revenue collections for the period July 1, 1980 through June 30, 1981 exceeded its wholesale power costs by approximately $478,791.

Shortly after becoming regulated, Frost-Benco realized that it needed a general rate increase to provide adequate margins. For purposes of MPUC review of Frost-Benco's future revenue requirements, Frost-Benco personnel selected the period of July 1, 1980 to June 30, 1981 as a test year. Both the MPUC and Frost-Benco agreed that a fair rate of return was 8.12%. A discrepancy arose, however, as to how to handle the erroneous PCA computation. Frost-Benco argued that because of the change to a statutory method of computing the PCA, its $497,260 revenue decrease in the test year data was appropriate. MPUC and MDPS proposed that the MPUC either direct Frost-Benco to refund the PCA "overcharges" or reinstate these "overcharges" in the test year data.

The hearing examiner agreed conceptually with the MPUC/MDPS position. Using his own method of computation, the examiner recommended an upward adjustment in Frost-Benco's test year revenues of approximately $300,842.

On October 22, 1982, the MPUC modified the examiner's recommendation. The MPUC agreed with Frost-Benco that the revenue base to be employed in setting Frost-Benco's permanent rates should reflect Frost-Benco's adjustment. The MPUC found, however, that a one-time refund of the "erroneous PCA collections" during the test year was necessary. Subject to other minor rate differences, the MPUC approved Frost-Benco's request for an 8.12% rate increase. 3

On appeal from the MPUC this court may reverse the decision of the agency on, among other grounds, its decision is "in excess of the statutory authority or jurisdiction of the agency" see Minn.Stat. Sec. 14.69(b) (1982). Inasmuch as the major issue on this appeal is whether the MPUC has authority and jurisdiction over an unregulated cooperative utility, the resolution of the issue concerns legal rather than factual considerations. Thus, the court is not bound by the decision of the MPUC and need not defer to "agency expertise". No Power Line, Inc. v. Minnesota Environmental Quality Council, 262 N.W.2d 312, 320 (Minn.1977). Moreover, an appellate court need not give deference to a trial court's decision on a legal issue. Reserve Mining Co. v. Herbst, 256 N.W.2d 808, 822 (Minn.1977).

By ordering Frost-Benco to refund rates collected while it was an unregulated cooperative, the MPUC, unless it has statutory authority to do so, conferred upon itself a broad retroactive jurisdiction. The extent of jurisdiction or authority bestowed upon an administrative agency is measured by the statute from which it...

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