In re Citizens Utilities Co.

• Decision Date: 15 December 2000
• Docket Number: No. 97-436,97-436
• Citation: 769 A.2d 19,171 Vt. 447
• Court: Vermont Supreme Court
• Parties: In re Citizens Utilities Company

171 Vt. 447

769 A.2d 19

In re Citizens Utilities Company

No. 97-436

Vermont Supreme Court

December 15, 2000

Present: Amestoy, C.J., Dooley, Morse and Skoglund, JJ., and Gibson, J. (Ret.), Specially Assigned

Martin K. Miller and Victoria J. Brown of Miller, Eggleston & Cramer, Ltd., Burlington, for Appellant Citizens Utilities Company.

Geoffrey Commons, Montpelier, for Appellee Vermont Department of Public Service.

Dooley, J. Citizens Utilities Company appeals from an order of the Public Service Board imposing various penalties in response to the utility's pervasive and longstanding management and operational transgressions. Specifically, Citizens challenges the Board's significant reduction in the company's allowed rate of return on equity, claiming that (1) the Board exceeded its authority by imposing the return-on-equity penalty in addition to separate statutory fines for the same offenses; (2) the evidence does not support the penalty; and (3) the return on equity and rate of return imposed by the Board results in an unconstitutional regulatory taking. We reject each of these arguments and thus affirm the Board's decision.

The Board's 309-page order resolved two distinct but interrelated dockets, the first addressing substantial allegations of misconduct and mismanagement by Citizens, and the second investigating the company's overall rates. Following forty-one days of hearings and two separate public hearings, the Board found that Citizens' rates were excessive and that the company had engaged in a decades-long course of egregious and unprecedented misconduct characterized by (1) numerous willful violations of statutes, Board orders, and its own agreements; (2) imprudent mismanagement of its Vermont Electric Division (VED); (3) imprudent failure to maintain accurate records to ensure that only appropriate costs were included in rates; (4) willful failure to provide service to its Vermont customers through least-cost options; and (5) persistent refusal to cooperate with regulatory investigations.

The Board cited examples of Citizens' misconduct too numerous to set forth in any detañ. Suffice it to say that the Board's decision is replete with examples of inadequate and misleading accounting practices on the part of Citizens that obscured the true nature of the company's expenditures and activities. Citizens failed to implement procedures designed to promote compliance with demand-side-management (DSM) obligations, and, in some instances, claimed savings for DSM programs that appeared never to have been implemented. The company also failed to abide by its agreement to implement least-cost planning for transmission and distribution facilities, and further failed to conduct required least-cost analysis before undertaking major investments. Moreover, Citizens repeatedly failed to obtain prior Board approval, as required by statute, before engaging in significant projects, including the conversion of distribution lines to transmission lines, the relocation or modification of substations, and the construction of new lines and substations. Citizens compounded its misconduct by resisting the Department's efforts to obtain information from the company. In short, over a period of many years, Citizens engaged in a pattern of behavior aimed at thwarting the Department's and the Board's regulatory oversight.

Based on these findings, the Board concluded that Citizens' operation of VED was imprudent and failed to promote the general good of the State of Vermont. In the Board's view, Citizens' pattern of misconduct, its failure to comply with statutory law and regulatory directives, and its disdain for accepted principles of utility accounting and management justified imposition of the harshest penalty available — revocation of the utility's certificate of public good.

The Board determined, however, that immediate revocation of Citizens' franchise would not be the most effective or expedient method to achieve the ultimate goal of providing Citizens' Vermont ratepayers with the most reliable, reasonably priced energy services available. Citing the transaction costs and unintended consequences that would follow a revocation decision, and noting Citizens' professed desire to reform its operations, the Board decided against the recommendation of the Department of Public Service to revoke Citizens' franchise, and instead elected to impose a variety of other penalties aimed at ensuring that the company would follow through on its commitment to reform. The Board ordered an immediate reduction of Citizens' rates, fined Citizens $60,000 for specific statutory violations, imposed a five-year probationary period on the company, and reduced Citizens' authorized rate of return on equity 525 basis points from 10.50 percent to 5.25 percent.

The Board stated three independent grounds for its decision to cut Citizens' return on equity in half. First, the Board decided that it was appropriate to split the overall cost of equity capital evenly between the ratepayers, who will continue to benefit from Citizens' operations, and the company's investors, who are ultimately responsible for Citizens' inadequacies. Second, the Board found it just and reasonable that Citizens' shareholders receive a return roughly equivalent to the returns earned by ordinary ratepayers on passbook savings or certificates of deposit accounts. Third, the Board reasoned that Citizens' history of violations demonstrated that a very significant equity reduction in Vermont would be necessary to focus the company's attention on its management problems and to provide the necessary incentive for the company to permanently alter its unacceptable pattern of misconduct.

The Board emphasized that the return-on-equity penalty it was imposing was "just and absolutely necessary" to prevent a recurrence of the type of conduct Citizens had engaged in. The Board found it apparent that a less harsh penalty would not have the desired effect. Noting that the evidence supported revocation of Citizens' franchise, the Board made it clear that it was willing to give Citizens another opportunity to improve its performance only under circumstances that reflect the seriousness of the company's past violations. The Board ordered the return-on-equity penalty to remain in effect until Citizens demonstrated that it had corrected the problems that led to the violations, and that it was delivering energy-efficient services to its clients. Finally, the Board stressed that the 525-basis-point reduction in return on equity would not materially affect the financial security of Citizens as a corporate entity. According to the Board, the penalty would not impact the ability of Citizens to raise the capital necessary to continue the level of service required of it in Vermont or elsewhere.

On appeal, Citizens challenges only the return-on-equity penalty, contending that the Board exceeded its authority in imposing that penalty in addition to the statutory fines, and further that the penalty is unsupported by the evidence and is so excessive that it is unconstitutionally confiscatory.

I. The Standard of Review

We apply a deferential standard of review in appeals from the Public Service Board. In re Green Mountain Power Corp., 162 Vt. 378, 380, 648 A.2d 374, 376 (1994). As long as the Board's decisions are directed at proper regulatory objectives, they "enjoy a strong presumption of validity" and "'are subject to great deference in this Court.'" Id. at 380, 648 A.2d at 376 (quoting In re Green Mountain Power Corp., 142 Vt. 373, 380, 455 A.2d 823, 825 (1983)). We accept the Board's findings and conclusions unless the appealing party demonstrates that they are clearly erroneous, and, in reviewing those findings and conclusions, we defer to the Board's particular expertise and informed judgment. Id.; In re East Georgia Cogeneration Ltd. P'ship, 158 Vt. 525, 531-32, 614 A.2d 799, 803 (1992).

II. The Board's Authority

Citizens first argues that the Board exceeded its authority by imposing a return-on-equity penalty for the same conduct upon which its statutory fines were based. Citizens asserts that, where the Legislature has specifically prescribed penalties for statutory violations, the Board may not increase the specified fines by imposing an additional monetary penalty in the form of a reduction in return on equity. In its reply brief, Citizens concedes that some part of the Board's return-on-equity penalty was imposed for management deficiencies not subject to specified statutory fines, and further that the Board has the authority to adjust a utility's return on equity to take into account management deficiencies; however, according to Citizens, the Board may not go beyond the limited penalty set by the Legislature for specific violations by adding a return-on-equity penalty for the same conduct.

Section 30 of Title 30 authorizes the Board to impose specified monetary fines on utilities for certain misconduct, including (1) refusing to open their books or provide lawfully required documents to the Board or the Department, (2) failing to obey a Board order, or (3) willfully hindering, obstructing or delaying the fulfillment of the duties imposed upon them by the Board. At the time that Citizens began to engage in the conduct for which it was penalized, the maximum fine under § 30 for each particular violation was $5000.^* In this case, the Board cited twelve separate violations of regulatory requirements — most of which concerned Citizens' willful failure to comply with Board orders or obtain necessary permits for its activities — and imposed a $5000 fine for each of those violations.

The Board indicated that the total civil fine of $60,000 was small in light of Citizens' pattern of willful transgressions, but declined to impose specific fines for each of the many more acts identified in the proceeding that may have constituted separate statutory violations. Instead, the Board elected to impose a...