Mge v. Public Service Com'n

Decision Date27 December 2005
Docket NumberNo. WD 65469.,No. WD 65366.,WD 65366.,WD 65469.
Citation186 S.W.3d 376
PartiesSTATE ex rel., MISSOURI GAS ENERGY, A Division of Southern Union Company; Appellant-Respondent, State ex rel., Office of the Public Counsel, Respondent, v. PUBLIC SERVICE COMMISSION of the State of Missouri, Respondent-Appellant.
CourtMissouri Court of Appeals

James C. Swearengen, Jefferson City, MO, for appellant-respondent.

Douglas E. Micheel, Jefferson City, MO, for respondent.

Robert V. Franson, Jefferson City, MO, for respondent-appellant.



Missouri Gas Energy (MGE), claiming among other matters that it had been unable to earn its Commission-authorized rate of return under prior tariffs and could not therefore compete effectively in capital markets, sought a $44.8 million increase in the rates it charges its Missouri customers for natural gas service. After extensive hearings, the Public Service Commission (Commission) entered an order that gave the public utility a $22.5 million rate increase. The key issue on appeal is whether the Commission's decision results in a confiscatory and unreasonable return on equity. The Cole County Circuit Court found that the Commission's order was unlawful and unreasonable and remanded the case for further proceedings. We disagree and hereby affirm the Commission's order.


MGE distributes natural gas in Missouri as an operating division of Southern Union Company (Southern Union). It has no separate corporate existence; thus, MGE has no capital structure of its own, and it has no investors in its own right. Southern Union, which owns gas-distribution companies like MGE in a number of states, was characterized during Commission proceedings as a company with an aggressive growth strategy that has for some years operated under a capital structure which includes significantly more debt than equity. Unlike many publicly-traded companies, Southern Union does not pay dividends to its investors. Panhandle Eastern Pipeline Company (Panhandle) is an interstate pipeline company that is a separate Southern Union subsidiary. In 2003 the Commission approved a Stipulation and Agreement relating to Southern Union's Panhandle acquisition. Under the terms of that agreement, Panhandle's debt is non-recourse as to MGE and Southern Union, i.e., MGE and its customers are supposed to be insulated financially in all respects from Panhandle debt.1

In November 2003, MGE filed tariff sheets with the Commission designed to implement a general rate increase of 9.8%, or $44,875,635. The Commission suspended the tariff until October 2, 2004, and granted a number of petitions to intervene. In December 2003, the Commission established the test year as the 12-month period ending June 30, 2003, updated for known and measurable changes through December 31. A further true-up period through April 30, 2004, to update certain cost components, was established by the Commission in June 2004. Four local public hearings were held on the proposed tariffs, and evidentiary hearings were held in late June and early July 2004. A true-up hearing took place thereafter, and the Commission, voting 3-2, issued its Report and Order on October 1. Both MGE and the Office of Public Counsel filed applications for rehearing, which were denied, and both filed petitions for writ of review with the Cole County Circuit Court.

The circuit court determined that the Commission's authorization of a return on equity of 10.5% was arbitrary, capricious, and unlawful, and not based on competent or substantial evidence. While the court found all of the expert witnesses to be at least minimally qualified, it expressed its concern about the credibility of testimony on which the Commission relied. In this regard, the circuit court stated that when the Commission referred in its Report and Order to "whatever other credibility questions may be raised against the positions offered by Staff and Public Counsel," it was recognizing "shortcomings in the testimony and recommendations" of these witnesses. (emphasis in original) The court further found that imposing a return on equity below the 11.1% national average, "coupled with the imposition of a `more risky' 29.99% equity-based capital structure" was unlawful, unreasonable, arbitrary, capricious, and not based on competent or substantial evidence. This appeal followed.

MGE claims on appeal that the Commission's decisions as to capital structure and return on equity result in a rate of return that is unconstitutionally confiscatory, unreasonable, arbitrary, and capricious, and not supported by the evidence. MGE further contends that the Commission erred in including the Panhandle debt in MGE's capital structure, thus lowering its equity ratio. MGE also challenges the qualifications of the expert witnesses for Commission Staff and the Office of Public Counsel on whom the Commission relied in making its determination. Finally, MGE claims that the Commission's return-on-equity determination was based on unwarranted speculation and not on competent and substantial evidence, and that the Commission's inadequate adjustment to MGE's return on equity to account for the increased risk of its capital structure was not based on competent and substantial evidence.


In an administrative appeal, we review the agency's findings and decisions and not the circuit court's judgment. Friendship Vill. of S. County v. Pub. Serv. Comm'n of Mo., 907 S.W.2d 339, 344 (Mo. App. W.D.1995). Our standard of review consists of two parts as we determine first, whether the Commission's order is lawful, and second, whether the order is reasonable and based on competent and substantial evidence upon the whole record. Id. We presume that the Commission order is valid; the burden of proving its invalidity is on those attacking it. Id.

In determining whether a Commission order is lawful, we "exercise unrestricted, independent judgment and correct any erroneous interpretations of law." Id. We also assess "whether the Commission had the statutory authority to act as it did." Id. As to an order's reasonableness, we determine whether (i) the order is supported by substantial and competent evidence on the whole record, (ii) the decision is arbitrary, capricious or unreasonable, or (iii) the Commission abused its discretion. Id. at 344-45. We also consider the evidence in the light most favorable to the Commission along with all reasonable supporting inferences and defer to the Commission if the evidence permits either of two opposite findings. Id. at 345. In other words, we do not weigh the evidence. State ex rel. Assoc. Nat. Gas Co. v. Pub. Serv. Comm'n, 706 S.W.2d 870, 874 (Mo. App. W.D.1985). It is only where a Commission order is clearly contrary to the overwhelming weight of the evidence that we may set it aside. Friendship Vill, 907 S.W.2d at 345. And where a decision rests on the exercise of regulatory discretion, we will not substitute our judgment for that of the Commission, particularly on issues within its area of expertise. Id.

To the extent that a party challenges the adequacy of the Commission's findings of fact, the standard we apply is whether the findings of fact are "sufficiently definite and certain under the circumstances of the particular case to enable the court of review to review the decision intelligently and ascertain if the facts afford a reasonable basis for the order without resorting to the evidence." AT & T Commc'ns of Sw., Inc. v. Pub. Serv. Comm'n, 62 S.W.3d 545, 548 (Mo. App. W.D.2001) (emphasis, internal quotations and citation omitted). It is not, however, "required for the validity of administrative findings that [the Commission] go into evidentiary detail." State ex rel. Assoc. Nat. Gas Co. v. Pub. Serv. Comm'n, 37 S.W.3d 287, 295 (Mo.App. W.D.2000) (internal quotations and citation omitted). Rather, we must be able to determine the facts on which the order was based from the Commission's Report and Order. Id.

The qualification of a witness as an expert rests within the factfinder's discretion. Emerson Elec. Co. v. Crawford & Co., 963 S.W.2d 268, 271 (Mo.App. E.D. 1997). In determining whether a witness is an expert under section 490.065.1,2 the factfinder looks to whether he or she possesses a "peculiar knowledge, wisdom or skill regarding the subject of inquiry, acquired by study, investigation, observation, practice, or experience." Id. (citation and internal quotations omitted).3 Moreover, witness credibility is a matter for the factfinder, "which is free to believe none, part, or all of the testimony. We do not substitute our judgment for that of the [factfinder] on credibility issues." Commerce Bank, N.A. v. Blasdel, 141 S.W.3d 434, 456-57 n. 19 Mo.App. W.D.2004) (citation and internal quotations omitted).

Regulatory Finance — Capital Structure and Return on Equity

As we consider the issues raised by this appeal, it is helpful to keep in mind that the cost of capital, or the amount a utility must pay to secure financing from debt and equity investors (shareholders), "is essentially the equivalent of fair rate of return." Assoc. Nat. Gas Co., 706 S.W.2d at 875. And rate of return is determined by a calculation that factors in (i) the ratio of debt and equity to total capital, and (ii) the cost and (iii) weighted cost for each of these capital components. Id. While rate of return is the result of a straightforward mathematic calculation, the inputs, particularly regarding the cost of common equity, are not a matter of "precise science," because inferences must be made about the cost of equity, which involves an estimation of...

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