Gulf States Utilities Co. v. Louisiana Public Service Com'n

Decision Date05 April 1991
Docket NumberNos. 88,s. 88
Citation578 So.2d 71
PartiesUtil. L. Rep. P 26,061 GULF STATES UTILITIES COMPANY v. LOUISIANA PUBLIC SERVICE COMMISSION. CA 0709, 90 CA 0445.
CourtLouisiana Supreme Court

James Leeper Ellis, Tom F. Phillips, Frederick R. Tulley, Taylor, Porter, Brooks & Phillips, Richard Lorenzo, New York City, Henry Macnicholas, Harrisburg, Pa., Lee Charles Kantrow, Kantrow, Spaht, Weaver & Blitzer, APLC, Baton Rouge, for Gulf States Utilities Co., appellant.

Robert Lewis Rieger, Jr., Theodore Lutrell Jones, Elizabeth F. Amos, Jones & Amos, Baton Rouge, Noel Joseph Darce, Michael R. Fontham, Paul Lewis Zimmering, Stone, Pigman, Walther, Wittman & Hutchinson, New Orleans, La., for La. Public Service Com'n, appellant.

Richard M. Troy Jr., New Orleans, J. David McNeill III, La. Dept. of Justice, La. State Office, Baton Rouge, for appellant.

James M. Field, Gary, Field, Landry & Dornier, Baton Rouge, for La. Food Stores, appellant.

CALOGERO, Chief Justice.

These are consolidated appeals from two district court decisions arising out of a rate case filed on July 25, 1986 with the Louisiana Public Service Commission by Gulf States Utilities Co. Gulf States sought to obtain rate support for River Bend 1, a $4.4 billion, 940 megawatt nuclear plant completed in 1986. 1 Gulf States owns 70 per cent of the plant, reflecting an investment of $3 billion; the remaining 30 per cent is owned by Cajun Electric Power Cooperative. On December 15, 1987, after lengthy hearings, the Commission issued Order No. U-17282-C, in which it disallowed $1.4 billion of the company's investment in River Bend 2 upon a finding of imprudence, granted Gulf States a first year rate increase of $63 million, which represented a 12% return on equity, and adopted the framework of a phase-in plan for the remainder of the prudent portion of the investment. Gulf States sought to enjoin the part of the order limiting it to a first year return on equity of 12%. On February 18, 1988, Judge Brown of the 19th judicial district issued a preliminary injunction granting the company a first year rate increase of $92 million, reflecting a rate of return on equity of 14%. From that decision the Commission and the State through the Attorney General have perfected appeals. Gulf States also appealed the Commission's imprudence disallowance. On October 11, 1989, after six weeks of hearings, Judge Landry, sitting as Judge Ad Hoc of the 19th judicial district court, rendered a decision upholding the Commission's finding of imprudence, but also ordering the implementation of a "rate base exclusion plan" that would allow Gulf States to obtain revenue support for the imprudent part of its investment. From that decision, the Commission, the State, and the utility have appealed.

As will be evident from the lengthy discussion which follows, the issues presented for our determination in these appeals include: (1) whether Gulf States' due process rights were violated by the manner in which the Commission conducted the hearing in this case, and the appropriate standard of review to be applied to Public Service Commission Order No. U-17282-C; (2) whether the Commission was unreasonable or arbitrary in finding that Gulf States' 1979 decision to restart River Bend was imprudent; (3) whether the district court's decision on the merits which ordered the implementation of a "rate base exclusion plan" was a proper exercise of that court's judicial authority; (4) and whether, in the injunction proceeding, the district court acted within its discretion in increasing Gulf States' first year rate of return on equity from 12% to 14%.

As will also be evident from the following discussion, we find that Gulf States' due process rights were not violated, and the appropriate standard of review in this case to be that articulated by this Court in numerous previous rate cases: Commission orders will be upheld unless they are arbitrary, capricious, or not reasonably supported by the evidence. We further find the Commission's disallowance of $1.4 billion of Gulf States' investment in River Bend as imprudent to be reasonably supported by the extensive record compiled in this case. Regarding the district court's implementation of a rate base exclusion plan, we find that order to be a preemption of the Commission's primary authority to set fair and reasonable rates. Once it had affirmed the Commission's finding of imprudence, it was not within the court's discretionary powers to ameliorate the effect of that determination. Finally, we find an injunction action in a rate increase case to be an improper proceeding in which to increase the rate of return on equity granted by the Commission, when the court has not found the lower rate to be confiscatory.

FACTS AND PROCEDURAL HISTORY

River Bend was planned in the early 1970s by Gulf States, a Texas corporation providing electrical service to both Louisiana and Texas residents, businesses, and industrial users. Until that time, the company had relied on gas-fired generators to provide an electric power supply to its customers. The company experienced a need for alternate power sources, however, as a result of a variety of factors, including severe natural gas curtailments, a load growth which had averaged approximately 11% annually for the preceding four decades, and new federal regulations. The decision to build River Bend was predicated on three extensive economic studies commissioned by Gulf States. Those studies, performed by Stone & Webster and Bechtel Corp., examined the total costs of producing energy from various types of generators over the lives of the units, and concluded that the nuclear option was economically preferable to the alternatives. That conclusion was supported by then current industry-wide data, internal studies, and publications of the Nuclear Regulatory Commission. The initial estimate of the cost of River Bend, made in 1971, was $307 million. Gulf States continued to evaluate other power sources as well, and by 1975, included both coal and nuclear fuel in its generation plans. In addition, it had begun acquiring lignite reserves in Texas and Louisiana. During this period, the company also entered into negotiations with Cajun Electric in an attempt to sell a portion of the proposed River Bend unit.

The decision to build River Bend was affected, however, by a significant drop in load growth on Gulf States' system, resulting in part from the Arab oil embargo and the national recession of 1974-1975. In addition, in January 1977, the Louisiana Public Service Commission rejected the company's application for a $23.8 million rate increase. The decrease in load growth and failure to secure rate relief led Gulf States to suspend the River Bend project in 1977. At that time, construction at the site had not begun, and the utility had invested approximately $350 million in preliminary expenditures. The suspension remained in effect for the next two years.

Gulf States' load growth rebounded, however, to 12% in 1977 and 10% in 1978. Further, in 1978, Congress passed the Fuel Use Act, which mandated that no new gas-fired or oil generating plants could be built, and prohibited the use of natural gas in existing generating plants after 1989. Faced with a need to replace its gas-fired plants and a projected 5.9% compounded growth rate in service demand, Gulf States reevaluated its options. Studies performed by the company indicated a continued advantage for nuclear generation over coal, and in June 1977, Stone & Webster, River Bend's contractor, presented an updated cost estimate for the plant of $1.3 billion.

During the spring of 1978, under a new Board Chairman, Gulf States began a program to determine the most advantageous way to accomplish fuel diversification. Management Analysis Co. completed an evaluation of Stone & Webster's River Bend construction cost estimate, concluding that there was a 90% probability that River Bend would cost $1.7 billion or less, and a 50% probability that the cost would be $1.5 billion. An in-house analysis also calculated the construction cost to be $1.5 billion. In July 1978, Gulf States produced a study concerning the financial impact of various planning alternatives over a ten year period, which indicated that building River Bend, with a concurrent sale of a portion of the unit, was the best economic alternative.

In August 1978, the Board of Directors met to make a decision on River Bend. During that meeting, the Chairman concluded that the company would not be likely to receive rate relief from either the Louisiana or Texas regulators if River Bend were cancelled, and that the shareholders could not absorb $4 million in sunk and cancellation costs, even with the benefit of a 50% tax write-off. Following a discussion of all of its options, the Board concluded that a sale of the unit was one of its best alternatives. Gulf States' management therefore embarked on a national and international marketing effort to sell River Bend, an effort which was to prove unsuccessful. In the meantime, the company decided to evaluate the possibility of changing contractors for the project, and solicited bids from four major engineering/construction firms. The bids were evaluated by company committees and by two outside firms, Management Analysis Co. and NUTECH. The NUTECH evaluation determined that construction cost estimates were in a range of $1.67 to $1.77 billion, while Management Analysis Co. concluded that there was a 90% probability that the construction cost would be in the range of $1.7 to $1.88 billion. Ultimately Stone & Webster was awarded the contract on a cost-plus basis.

On November 15, 1978, Gulf States filed testimony before the Public Service Commission and presented calculations showing River Bend to be an economical generating alternative to meet the increases in load growth expected during the next decade. The calculations were based on the company's...

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