Gearhart v. Public Utility Commission of Oregon

• Decision Date: 06 February 2013
• Docket Number: 08487,A140317.,09093
• Citation: 255 Or.App. 58,299 P.3d 533
• Parties: Frank GEARHART; Patricia Morgan; Kafoury Brothers, Inc.; and Utility Reform Project, Petitioners, v. PUBLIC UTILITY COMMISSION OF OREGON and Portland General Electric Company, Respondents. Frank Gearhart; Patricia Morgan; Kafoury Brothers, Inc.; and Utility Reform Project, Petitioners, v. Public Utility Commission Of Oregon and Portland General Electric Company, Respondents.
• Court: Oregon Court of Appeals

255 Or.App. 58

299 P.3d 533

Frank GEARHART; Patricia Morgan; Kafoury Brothers, Inc.; and Utility Reform Project, Petitioners,

v.PUBLIC UTILITY COMMISSION OF OREGON and Portland General Electric Company, Respondents.

Frank Gearhart; Patricia Morgan; Kafoury Brothers, Inc.; and Utility Reform Project, Petitioners,

v.Public Utility Commission Of Oregon and Portland General Electric Company, Respondents.

08487, 09093; A140317.

Court of Appeals of Oregon.

Argued and Submitted Feb. 3, 2012.

Decided Feb. 6, 2013.

Linda K. Williams, Portland, argued the cause and filed the briefs for petitioners Frank Gearhart, Patricia Morgan, and Kafoury Brothers, Inc.

Daniel W. Meek, Portland, argued the cause and filed the briefs for petitioner Utility Reform Project.

James N. Westwood, Portland, argued the cause for respondent Portland General Electric Company. With him on the brief were Dina M. Dubson and Stoel Rives LLP.

Denise G. Fjordbeck, Attorney–in–Charge, Civil/Administrative Appeals, argued the cause for respondent Public Utility Commission of Oregon. With her on the brief were John R. Kroger, Attorney General, and Mary H. Williams, Solicitor General.

Raymond W. Myers filed the brief amicus curiae for Citizens' Utility Board of Oregon.

Lisa Rackner filed the brief amicus curiae for Avista Corporation, Idaho Power Company, Northwest Natural Gas Company, and PacifiCorp.

Before SCHUMAN, Presiding Judge, and WOLLHEIM, Judge, and NAKAMOTO, Judge.

NAKAMOTO, J.

As a result of one Supreme Court opinion, Dreyer v. PGE, 341 Or. 262, 278–79, 142 P.3d 1010 (2006), and two Court of Appeals opinions, Citizens' Utility Board v. PUC, 154 Or.App. 702, 962 P.2d 744 (1998), rev. dismissed,335 Or. 91, 58 P.3d 822 (2002) (Trojan I ), and Utility Reform Project v. PUC, 215 Or.App. 360, 170 P.3d 1074 (2007) (Trojan II ), the Oregon Public Utilities Commission (the PUC) was directed to reconsider the rates that the PUC had approved and that intervenor Portland General Electric (PGE) had charged customers for the sale of electricity and related services for two separate periods, from April 1995 through September 2000, and after October 1, 2000. Petitioners Gearhart et al. (class action plaintiffs or CAPs) and Utility Reform Project (URP) seek judicial review of PUC Order No. 08–487, the PUC's order on remand.¹SeeORS 756.610(1) (allowing judicial review of the PUC's orders in contested cases under the provisions of ORS 183.480 to 183.497). They assert that the PUC misunderstood the scope of its reconsideration on remand and, as a result, failed to apply the correct legal standards in its reevaluation. We review the PUC's order to determine whether the PUC correctly applied the applicable law, whether there is substantial evidence to support its findings, and whether it acted within the scope of its discretion, ORS 183.482(8), and affirm.

I. UTILITY RATEMAKING

We begin with a brief overview of utility ratemaking, which is at the heart of this dispute. The following basic principles concerning the PUC and ratemaking provide needed context for an understanding of the history of this dispute, and, as we later discuss, they, in part, ground our holding in this case.

Because public utilities are natural monopolies, the rates that they charge for their services are regulated. The PUC is the state agency charged with establishing “fair and reasonable” rates for the provision of services by public utilities in Oregon. ORS 756.040. Ratemaking involves the PUC's exercise of considerable discretion to balance the interests of utility investors and customers and the public in general, ORS 756.040(1), and the power to prescribe prospective rates is considered a legislative function. Valley & Siletz R.R. Co. v. Flagg, 195 Or. 683, 715, 247 P.2d 639 (1952).

The PUC has broad discretion in its legislative function of setting rates, subject only to statutory and constitutional constraints. American Can v. Lobdell, 55 Or.App. 451, 462–63, 638 P.2d 1152,rev. den.,293 Or. 190, 648 P.2d 851 (1982). Rates are prohibited and unlawful in three circumstances: (1) the rates are unjust and unreasonable, id.; see alsoORS 756.040(1) (requiring the PUC to establish “fair and reasonable rates”); (2) the rates are unjustly discriminatory, American Can, 55 Or.App. at 462–63, 638 P.2d 1152;see alsoORS 757.310(2) (prohibiting utilities from charging discriminatory rates); or (3) the rates are confiscatory, see, e.g., Pacific Tel. & Tel. Co. v. Wallace, 158 Or. 210, 297, 75 P.2d 942 (1938) (holding that rate order imposed rates that were unconstitutionally confiscatory); see alsoORS 756.040(1). The legislature has given the PUC the broadest grant of authority—“commensurate with that of the legislature itself”—to carry out ratemaking and other regulatory functions. Pacific N.W. Bell v. Sabin, 21 Or.App. 200, 214, 534 P.2d 984, rev. den. (1975).

In conjunction with its consideration of the interests of customers and the public, the PUC sets rates so as to provide a utility with an opportunity to recover its revenue requirement, which is the amount of money the utility must collect to cover its reasonable operating expenses incurred in providing services, as well as a reasonable return on investments made to provide that service. SeeORS 756.040(1). The rate of return on the utility's investment is intended to ensure the financial integrity of the business, thereby allowing it to continue to provide a service. SeeORS 756.040(1)(b). For that reason, the rate of return on the investment should be commensurate with that of other enterprises of similar risk. SeeORS 756.040(1)(a); Duquesne Light Co. v. Barasch, 488 U.S. 299, 314, 109 S.Ct. 609, 617, 102 L.Ed.2d 646 (1989).

Generally speaking, the utility's revenue requirement is determined prospectively, by examining a future test period to determine: (1) the utility's allowable operating expenses, including taxes, maintenance, and depreciation; to which is added (2) the utility's investment in property used to provide utility services less depreciation, representing the utility's “rate base” upon which a return may be earned; and (3) a rate of return that should be applied to the rate base to establish the return to which the utility's investors are reasonably entitled. A.J. Gustin Priest, 1 Principles of Public Utility Regulation: Theory and Application Principles of Public Utility Regulation, 45 (1969). The rate of return is inherently a judgment call. Id. The factors that go into consideration of the rate of return include capital costs and the requirement that the return to investors be commensurate with returns on other investments subject to similar risk and sufficient to ensure the financial viability of the business. Id. The rate base is multiplied by the rate of return to allow the utility the opportunity to earn a return on its investment, id. (emphasis added); a utility cannot be guaranteed a particular return on investment.

Oregon law is consistent with this general description. SeeORS 756.040; see also Northwest Public Communications Council v. PUC, 196 Or.App. 94, 96, 100 P.3d 776 (2004) (describing the traditional procedure for the PUC's review of a regulated utility's rate schedule, including an examination of the proper rate of return on the utility's rate base and adjustment to rates to allow the utility an opportunity to earn the intended rate of return); Pacific Tel. & Tel. Co. v. Hill, 229 Or. 437, 444, 365 P.2d 1021,on reh'g,229 Or. 437, 367 P.2d 790 (1961) (describing a “rate base” in the field of public utility regulation as representing “the invested capital upon which the utility is entitled to earn a return”). As the PUC explains in the order in this case,

“[t]he Commission's ultimate goal is to set rates that provide the utility the opportunity to collect enough revenue to recover reasonable operating expenses and to earn a reasonable return on investments it has made to provide service. To determine how much revenue a utility should be allowed to receive, the Commission uses a standard ratemaking formula generally expressed as R = E + (V-d)r. ‘R’ represents revenue requirement, ‘E’ represents allowable operating expenses, ‘V’ represents rate base, ‘d’ represents accumulated depreciation, and V represents the rate of return allowed on the rate base.”

PUC Order No. 08–487 at 7.

The ratemaking process allows the PUC to set just and reasonable rates based on its forecast of the utility's revenue needs and consideration of the interests of customers and the public. But ratemaking is not the product of a fixed formula that creates a fixed result. The PUC “is not obligated to employ any single formula or combination of formulas to determine what are in each case ‘just and reasonable rates.’ ” Pacific N.W. Bell, 21 Or.App. at 224, 534 P.2d 984. And, because rates are set prospectively, they necessarily involve estimates as to the amount of revenue that will be raised, which may be more or less than estimated. As the Supreme Court noted in Hammond Lbr. Co. v. Public Service Com., 96 Or. 595, 609, 189 P. 639 (1920), the factors involved in ratemaking are “so many and so variable that it is impossible to fix rates that will be mathematically correct or exactly applicable to all the new conditions that may arise even in the immediate future.” Thus, “utilities bear the risk of unforeseen costs but also receive the benefit when revenues are higher than predicted.” Industrial Customers of Northwest Utilities v. PUC, 196 Or.App. 46, 49, 100 P.3d 1072 (2004).

Moreover, the validity of a particular determined rate is measured, not on the individual theories or methodologies used by the PUC, but on the “end result” and whether it is just and reasonable. The Supreme Court has explained that it is “the end result of an order of a regulatory authority which determines the question as to its validity and not the processes by which the authority reached the result.” Valley and Siletz R.R. Co., 195 Or. at 699, 247 P.2d 639....