Madison Gas and Elec. Co. v. Public Service Com'n of Wisconsin

• Decision Date: 02 November 1982
• Docket Number: No. 80-2098,80-2098
• Citation: 109 Wis.2d 127,325 N.W.2d 339
• Parties: MADISON GAS AND ELECTRIC COMPANY, Petitioner-Respondent, v. PUBLIC SERVICE COMMISSION OF WISCONSIN, Appellant-Petitioner.
• Court: Wisconsin Supreme Court

Page 339

325 N.W.2d 339

109 Wis.2d 127

MADISON GAS AND ELECTRIC COMPANY, Petitioner-Respondent, v. PUBLIC SERVICE COMMISSION OF WISCONSIN, Appellant-Petitioner.

No. 80-2098.

Supreme Court of Wisconsin.

Argued Oct. 4, 1982.

Decided Nov. 2, 1982.

Barry M. Levenson, Asst. Chief Counsel, Madison (argued), for appellant-petitioner; Steven M. Schur, Chief Counsel, Madison, on brief.

John A. Hansen, Madison (argued), for petitioner-respondent; Richard K. Nordeng, Kristine A. Euclide and Stafford, Rosenbaum, Rieser & Hansen, Madison, on brief.

DAY, Justice.

This is a review of a decision of the court of appeals published at 105 Wis.2d 385, 313 N.W.2d 847 (Ct.App.1981) affirming a judgment of the Circuit Court for Dane County, the Honorable Howard W. Latton, Circuit Judge of Columbia County presiding, in a Chapter 227 judicial review proceeding, which set aside a portion of a Public Service Commission (hereinafter PSC) order setting electric service rates for Madison Gas and Electric Company (hereinafter MG & E). ¹

There are two issues raised on review. The first is whether the PSC rate order which made a $1,274,000 "adjustment" in the amount it estimated MG & E could realize from the sale of the utility's "excess" capacity to other utilities was supported by substantial evidence in the record. The second issue is whether the PSC can, absent a determination that a utility's excess generating capacity was imprudently acquired or not used or useful to ratepayers, shift all or part of the cost of maintaining the excess from ratepayers to utility shareholders.

We conclude the PSC action was not supported by substantial evidence in the record. We also conclude that for the PSC to shift all or part of the cost of excess capacity to shareholders, the PSC must determine that the excess was improvidently acquired or not used or useful to ratepayers. Accordingly, we affirm the decision of the court of appeals.

On May 31, 1979, MG & E filed an application with the PSC for authority to increase its rates for electricity and natural gas. The PSC made a determination that MG & E's existing rates for electric utility service were too low because the revenue produced by them was "inadequate." Based upon that determination, the PSC proceeded to first determine the rate base ² on which MG & E was entitled to earn a reasonable return. MG & E's rate base was calculated at $185,916,000. This amount included all of MG & E electric generating capacity.

The PSC then determined that 11.42 percent would constitute a reasonable and just return on MG & E's rate base. Multiplying the return times the rate base, plus operating expenses and taxes, equals the revenue requirement.

MG & E obtains its revenue from two sources: sales of electricity to retail customers and sales of either electricity or electric generating capacity to other utilities (wholesale sales). It is the PSC's estimate of the amount of revenue realizeable from the latter source that is at issue in this case. The PSC's staff witness projected that MG & E would receive wholesale revenue of $16,341,000. This projection differed from MG & E's own predictions which had been made prior to the application for a rate increase. ³ At the hearing, however, no one contested the staff projection nor offered any evidence to support a different projection. Thus, the only evidence in front of the PSC concerning MG & E's likely revenue from wholesale sales projected such revenues at $16,341,000.

Although unchallenged PSC staff estimates placed MG & E wholesale sales revenue at $16,341,000, the PSC in its rate order determined that an additional $1,274,000 should be added to this estimate. The effect of this addition was to reduce by that amount the revenue MG & E would need to collect from its retail customers. The PSC's express purpose in making this addition was "to adjust for [MG & E's] cost of excess generating capacity ...." ⁴

MG & E operates a physical plant which is capable of generating a maximum of 602 megawatts (MW). ⁵ The highest peak demand ⁶ ever experienced by MG & E was 370 MW in the summer of 1978. The peak demand for 1979 was 349. MG & E projected its peak demand for 1979 at 403 MW. Using the 370 MW figure for peak demand, it is apparent that MG & E had 233 MW of capacity over that which would be demanded by its retail customers. From this amount, a reserve margin ⁷ of fifteen percent (.15 X 370) or 55.5 MW must be subtracted leaving an excess of 177.5 MW. This represents 29.5 percent of MG & E's total generating capacity. Of this amount, MG & E sells part to other utilities.

MG & E participates in the Wisconsin Power Pool. ⁸ "Pool" members agree to buy and sell capacity from each other depending on their needs. MG & E was a seller of capacity to the other "pool" members. The "pool" agreement does not prohibit members from selling capacity or energy to non-pool members. However, MG & E has relied exclusively upon the "pool" to sell its capacity or energy to wholesale customers. MG & E claimed that these sales were profitable or at least compensatory. A PSC staff expert disagreed claiming that capacity sales were made for less than cost. ⁹ The PSC made no express finding on this question.

MG & E did not sell all of this "excess" capacity to "pool" members. Some went unused except to the extent it provided MG & E with additional reserve capacity. Concerning the possibility of selling more capacity, a PSC staff engineer testified that even though a "buyers' market" for capacity existed, it would not be "impossible" to sell the capacity.

The PSC offers two bases for upholding the challenged portion of its rate order. The first argument advanced is that the $1,274,000 "adjustment" is supported by substantial evidence in the record and thus the court is required to refrain from substituting its judgment for that of the agency. ¹⁰

When the PSC engages in rate making, it is governed by the rules applicable to "Class 1 proceeding" contested cases. ¹¹ Judicial review of PSC rate orders is authorized by section 196.41, Stats. ¹² 1979-80. The scope of the court's review of an agency's action in a contested case is set out in section 227.20(6), Stats. 1979-80 which provides:

"227.20. Scope of review.... (6) If the agency's action depends on any fact found by the agency in a contested case proceeding, the court shall not substitute its judgment for that of the agency as to the weight of the evidence on any disputed finding fact. The court shall, however, set aside agency action or remand the case to the agency if it finds that the agency's action depends on any finding of fact that is not supported by substantial evidence in the record."

Thus, unless the agency's action is not supported by "substantial evidence in the record," it is this court's responsibility to uphold the PSC's order. In applying the substantial evidence test to this case, this court is required by section 227.20(10), Stats. 1979-80 to accord due weight to the "experience, technical competence, and special knowledge of the agency involved, as well as the discretionary authority conferred upon it."

The substantial evidence test has been variously defined. ¹³ Substantial evidence does not mean a preponderance of the evidence. Rather, the test is whether, taking into account all the evidence in the record, "reasonable minds could arrive at the same conclusion as the agency." Sanitary Transfer & Landfill, Inc. v. DNR, 85 Wis.2d 1, 15, 270 N.W.2d 144 (1978).

The PSC offers three items of evidence which it claims provides sufficient support for a finding that MG & E could earn the additional $1,274,000. First, the PSC notes that MG & E exceeded its own 1979 projection for revenue from wholesale sales. However, MG & E in effect, conceded the inaccuracy of its own projection when it left unchallenged the PSC staff estimate of wholesale sales revenue. In addition, there is no indication whatsoever that actual revenues would exceed the PSC staff estimate.

Second, the PSC points to testimony by a PSC engineer that a market for MG & E capacity sales did exist. The record shows, however, that the engineer testified that while a "buyer's market" for capacity existed, it would not be impossible to sell the capacity. Even if we accept that the engineer's testimony indicated that some capacity could be sold, there's no testimony as to how much could be sold.

Finally, the PSC claims that the fact that MG & E never tested the market on its own to determine if it could sell any of its capacity supports making the $1,274,000 "adjustment." The PSC reasons that because MG & E did not test the market on its own, this means that MG & E never made any effort to sell capacity and thus additional sales could likely be made. However, there is express testimony which showed that MG & E relied on the "pool" to make its sales of capacity to non-pool members. However, MG & E's failure to test the market says little about its ability to earn an additional $1,274,000 in revenue from capacity sales.

The items discussed above are the only ones the PSC relies on to support its conclusion that MG & E could earn an additional $1,274,000 in revenue from wholesale sales. It is questionable as to whether they provide sufficient support for making any revenue adjustment let alone one amounting to over $1.2 million. This is especially true when one considers the fact that the PSC had before it a detailed analysis which specified the amount MG & E could realistically be expected to earn from wholesale sales. Taking into account all of the items of evidence which the PSC claims support its making the $1,274,000 "adjustment," we cannot say that a reasonable mind could reach the conclusion that MG & E was capable of earning this additional revenue.

The second issue on review is whether the PSC can, absent a determination that a utility's excess generating capacity was imprudently acquired or not used or useful to ratepayers, shift...