Hibbing Taconite Co. v. MINN. PSC, 50513

• Decision Date: 17 February 1981
• Docket Number: 51103 and 50500.,No. 50513,50513
• Citation: 302 NW 2d 5
• Court: Minnesota Supreme Court
• Parties: HIBBING TACONITE CO., a joint venture, Appellant, v. MINNESOTA PUBLIC SERVICE COMMISSION, Respondent, and MINNESOTA POWER & LIGHT COMPANY, Respondent, v. MINNESOTA PUBLIC SERVICE COMMISSION, Appellant.

302 N.W.2d 5 (1980)

HIBBING TACONITE CO., a joint venture, Appellant, v. MINNESOTA PUBLIC SERVICE COMMISSION, Respondent, and MINNESOTA POWER & LIGHT COMPANY, Respondent, v. MINNESOTA PUBLIC SERVICE COMMISSION, Appellant.

Nos. 50513, 51103 and 50500.

Supreme Court of Minnesota.

December 12, 1980.

Rehearing Denied February 17, 1981.

Mackall, Crounse & Moore and Robert S. Lee, Minneapolis, Squire, Sanders & Dempsey and Alan P. Buchmann, Cleveland, Ohio, for Hibbing Taconite Co.

Frank Hartman, Atty., Pickands Mather & Co., Cleveland, Ohio, for Erie Mining Co.

Warren Spannaus, Atty. Gen., Jerome L. Getz, Deputy Atty. Gen., Rodney A. Wilson, Sp. Asst. Atty. Gen., and Jean Heilman, Asst. Atty. Gen., Peter H. Grills, Sp. Asst. Atty. Gen., St. Paul, for Minnesota Public Service Commission.

Briggs & Morgan, Samuel L. Hanson and R. Scott Davies, Minneapolis, James R. Habicht, Duluth, for Minnesota Power & Light Co.

John Huges, Senior Citizens Coalition of N.E. Minn., Duluth, William E. Ojala, Senior Citizens Coalition of Duluth, Gilbert, for respondents.

Robert W. Johnson, St. Paul, amicus curiae.

Heard, considered, and decided by the court en banc.

TODD, Justice.

Minnesota Power & Light Company (MPL) filed a notice of rate change with the Minnesota Public Service Commission (PSC) on April 5, 1977. Following statutory procedure, the rate increase was suspended, then reinstated, subject to refund, and hearings commenced August 15, 1977, before a hearing officer. The report of the hearing officer was accepted in part and rejected in part by the PSC, and its order allowing rate increases was filed on February 3, 1978. Supplemental orders were filed on June 19, 1978, and July 10, 1978. Hibbing Taconite Co. (Hibbing), one of the intervenors in the proceeding, and MPL appealed to the district court. The trial court affirmed the PSC's rate allocation determination, but reversed and remanded to the PSC its determination of MPL's rate of return on common equity. We affirm with modification.

MPL, a public utility, services about 91,000 customers in the State of Minnesota. Its customers can be classified as: (1) Residential, (2) general service, (3) large light and power, (4) large power, (5) municipal, and (6) lighting. The large power class purchases 58 percent of MPL's entire system power. The taconite industry accounts for approximately 84.5 percent of MPL's total operating revenues within the large power class. Moreover, during the mid-1970's, MPL began a construction program to accommodate the local taconite industry's projected expansion. MPL's growth in plant investment represented the largest percentage increase of any United States utility. During 1976-1977, 96 percent of MPL's growth in output resulted from large power class sales, while only 0.4 percent of the growth was attributable to the residential class. Hibbing, a large power customer of MPL, purchases approximately 10 percent of all power generated by MPL.

The hearing officer conducted extensive rate case proceedings and issued recommendations to the PSC which provided, in part, that:

1. MPL's appropriate rate base is $359,986,237.

2. MPL should be authorized to partially discontinue capitalization of "allowance for funds used during construction" (AFDC).

3. The appropriate rate of return on common equity is 12.75 percent with partial discontinuance of capitalization of AFDC.

4. MPL's appropriate overall rate of return is 9.73 percent.

5. A rate design should be adopted allocating MPL's increased revenues and expenses among the various classes of customers on the basis of the recent past and projected future demands of the respective classes.

6. The rate base should exclude costs of the Floodwood-Fine Lakes utility project.

7. The rate base should include "construction work in progress" (CWIP) for the Coyote generating plant.

8. MPL is entitled to an annual revenue increase of $29,278,651.

9. MPL's proposed amount of charitable donations should be allowed as legitimate rate case expenses.

The PSC upon receipt of the hearing officer's report conducted further proceedings and concluded, in part, that:

1. MPL's appropriate rate base is $358,244,783.

2. Full capitalization of AFDC is required since MPL's circumstances did not warrant partial discontinuance of capitalization of AFDC.

3. MPL's appropriate overall rate of return on common equity is 13 percent with full capitalization of AFDC.

4. The appropriate overall rate of return for MPL is 9.825 percent.

5. The rate allocated to the residential class shall be less than the overall rate of return and the large power class shall make up the deficit.

6. The rate base shall exclude the expenses of the Floodwood-Fine Lakes utility project.

7. MPL's rate base shall exclude CWIP for the Coyote generating plant.

8. MPL is entitled to an annual revenue increase of $25,229,656.

9. MPL's charitable donations are not allowable rate case expenses.

Hibbing and MPL appealed the PSC's decision to the district court. The trial court remanded the case to the PSC for consideration in accordance with the trial court's holding that:

1. The appropriate range for MPL's rate of return on common equity was 13.25 to 14 percent.

2. Charitable deductions are allowable rate case expenses in accordance with a policy reversal by the PSC.

3. Substantial evidence existed supporting the exclusion of certain construction expenses from the Floodwood-Fine Lakes utility project and the Coyote generating plant.

4. The rate allocation established by the PSC must be affirmed since no abuse of discretion was found.

The PSC appeals from that part of the decision which sets aside the PSC's determination that 13 percent was a proper return on equity. Hibbing appeals from that portion of the order approving the rate allocation established by the PSC. MPL has filed a notice of review on the denial of expense allowance on the Floodwood-Fine Lakes utility project and the Coyote generating plant. Although we affirm the result reached by the trial court, its finding as to the appropriate range for MPL's rate of return on common equity is not binding on the PSC on remand.

The issues on appeal are:

1. Did the trial court err in reversing the PSC's determination of MPL's rate of return on common equity?

2. Did the trial court err in affirming the PSC's allocation of rates?

3. Did the trial court err in affirming the PSC's order to exclude certain construction expenses from the rate base?

1. A public utility is subject to a variety of state and federal controls and regulations. The state possesses the authority to regulate the rates a utility may charge to its customers. The Minnesota Legislature has adopted various statutes to accomplish this authority and has assigned responsibility for the performance of this function to the PSC. Minn.Stat. § 216A.05, subd. 1 (1978), provides that the PSC has both legislative and quasi-judicial powers. Within certain established guidelines the court has the authority to review the rate case proceedings that the PSC conducts. When reviewing the PSC's legislative and quasi-judicial functions, the court must apply two different scopes of review. In St. Paul Area Chamber of Commerce v. Minnesota Public Service Commission, 312 Minn. 250, 262, 251 N.W.2d 350, 358 (1977), this court held:

(a) When the Public Service Commission acts in a judicial capacity as a factfinder, receives evidence in order to make factual conclusions, and weighs that evidence as would a judge in a court trial, it will be held on review to the substantial evidence standard.

(b) When the Public Service Commission acts in a legislative capacity as in rate increase allocations, balancing both cost and noncost factors and making choices among public policy alternatives, its decision 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.

Although the court has set forth these general principles, when considering rate cases the court has not been precise in its use of terminology. The single term "ratemaking" has been used to describe what is really two separate functions — (1) the establishment of a rate of return, which is a quasi-judicial function, and (2) the allocation of rates among various classes of utility customers, which is a legislative function. The court's failure to be more precise when discussing the two phases of ratemaking has led to the inappropriate statement that "ratemaking is a legislative process."

The St. Paul Chamber case enunciated the PSC's two functions and the related standards of review. In applying those standards, we now hold that the establishment of a rate of return involves a factual determination which the courts will review under the substantial evidence standard. When the PSC allocates rates among classes of customers, it acts in a legislative capacity and the courts will uphold the PSC's decision unless it exceeds the PSC's statutory authority or results in unjust, unreasonable, or discriminatory rates by clear and convincing evidence. Here, the trial court correctly concluded that it should apply the substantial evidence test when reviewing the PSC's determination of MPL's rate of return.

In any rate case, when the PSC performs its first function and determines the appropriate rate of return for the regulated utility, the PSC establishes the dollar amount which the utility is allowed to earn on its investment. The PSC is bound to follow certain legal criteria in establishing a rate of return. Minn.Stat. § 216B.03 (1978) provides in pertinent part:

Every rate made, demanded, or received by any public utility * * * shall be just and reasonable. Rates shall not be unreasonably preferential, unreasonably prejudicial or discriminatory, but shall be sufficient, equitable and consistent in application to a class of consumers.

Minn.Stat. § 216B.16, subd. 6 (1978), states in part:

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