Montana-Dakota Utilities Co. v. Montana Dept. of Public Service Regulation

• Decision Date: 11 September 1986
• Docket Number: MONTANA-DAKOTA,No. 85-488,85-488
• Parties: UTILITIES CO., a Delaware corporation, Plaintiff and Appellant, v. MONTANA DEPARTMENT OF PUBLIC SERVICE REGULATION, Montana Public Service Commission, Montana Consumer Counsel, Defendants and Respondents.
• Court: Montana Supreme Court

Page 548

725 P.2d 548

223 Mont. 191

MONTANA-DAKOTA UTILITIES CO., a Delaware corporation Plaintiff and Appellant, v. MONTANA DEPARTMENT OF PUBLIC SERVICE REGULATION, Montana Public Service Commission, Montana Consumer Counsel, Defendants and Respondents.

No. 85-488.

Supreme Court of Montana.

Submitted July 22, 1986.

Decided Sept. 11, 1986.

Hughes, Kellner, Sullivan & Alke, John Alke argued, Helena, for plaintiff and appellant.

James C. Paine argued, Mont. Consumer Counsel, Robert A. Nelson argued, Public Service Com'n, Helena, for defendants and respondents.

SHEEHY, Justice.

I.

On August 24, 1983, Montana-Dakota Utilities Co. (MDU) filed an application with the Montana Department of Public Service Regulation and Montana Public Service Commission (PSC) for rate increases in its revenue for gas service in the State of Montana of $7,917,936. The Montana Consumer Counsel (Counsel) intervened as a party and has participated at all times since in the case.

After extensive hearings and submission of briefs, PSC issued on May 28, 2984, order no. 5020b approving increased rates for MDU. These increased rates were expected to produce additional revenues of $5,701,374.

On June 8, 1984, MDU filed a motion before PSC for reconsideration of PSC findings relating to the treatment of gain on reacquired debt and cost of equity capital as well as its findings on other issues. On June 26, 1984, PSC issued its order no. 5020c, which granted reconsideration of an unrelated issue, but denied reconsideration of the treatment of the gain on reacquired debt, or cost of equity capital.

MDU subsequently filed its petition for judicial review in the District Court, First Judicial District, Lewis and Clark County. For the purposes of the District Court, the parties stipulated to an abbreviated administrative record. That record, together with the District Court's opinion and order, constitute the record before this Court in this appeal.

The judicial review in the District Court culminated in that court's final opinion and order of June 24, 1985. Two principal issues in that opinion and order give rise to the appeals now before us. The District Court held that PSC erred in requiring that the unamortized gain realized from reacquisition of a long term debt be deducted from the MDU rate base. The District Court also determined that PSC acted correctly in authorizing MDU a return on equity capital of 13.35%.

PSC and Counsel appealed to this Court the decision of the District Court that it is improper to require MDU to deduct the unamortized gain on reacquired debt from its rate base. On this point of appeal, we reverse the District Court.

MDU appeals from the determination by the District Court that PSC properly assigned a percentage rate of 13.35% as return on equity capital for MDU. On this point of appeal we affirm the District Court.

II.

We first discuss the standard and scope of judicial review both in this Court and in the District Court of an order promulgated by PSC, and the issue of cost of equity capital.

MDU contends that the District Court did not properly review PSC's decision on rate of return for equity capital in that (a) the District Court refused to review whether PSC's actions were arbitrary and capricious; (b) the District Court improperly assumed the role of PSC and made findings and conclusions where PSC failed to make necessary findings and conclusions; and (c) the District Court misapplied the clearly erroneous standard in its review of PSC's decision on rate of return.

MDU points to the decision of PSC, nearly contemporaneously, in the Montana Power Company rate increase case, where PSC granted Montana Power Company a rate of return on equity capital of 14.25%. MDU contends that PSC granted the disparate rates without explanation. In the Montana Power Company case, PSC considered updated evidence on such cost of capital from capital markets through the first quarter of 1984. However, PSC refused to consider, on MDU's request for reconsideration, evidence of the cost of such capital after December 31, 1983. MDU claims that PSC has played favorites thereby, and that the error is more egregious because in each case PSC relied on the same witness to approve the different percentages of return.

PSC and Counsel respond to MDU's contention as follows: The record in MDU's case was closed at the end of the hearings in January, 1984; the Montana Power Company record was not closed when Dr. Smith testified in May, 1984; MDU made no effort to enlarge the record either under Sec. 38.2.4805 ARM, before PSC, or Sec. 69-3-404, MCA, before the District Court, and it is improper to base a claim of arbitrariness and caprice on matters outside the record of the instant case. The PSC and Counsel further argue that in any event, the new information which MDU supplied as a part of its motion for consideration consisted of a bond report from a single brokerage house which showed that for the twelve months ending June, 1984, for A-rated utilities, the high yield for long term bonds was 15.13% and the low yield was 11.50%. Such a range, PSC concluded, showed the volatility of the market at the time. Moreover, PSC points out that Sec. 69-3-302, MCA, requires that a final decision on rate cases be made by PSC within 9 months of the date of application which in the MDU docket meant a deadline of May 24, 1984. In the Montana Power Company case, the parties had waived the deadline because of the more complicated record and the number of intervenors in that case.

We determine that PSC did not act arbitrarily or capriciously on the basis that it found a certain percentage figure for return on cost of equity in the Montana Power Company case and a lesser percentage figure for return on cost of equity in the MDU case. The District Court did not discuss this argument of MDU in its findings and conclusions, but then the District Court was required by law to confine its review to the record. Section 2-4-704; Sec. 69-3-404, MCA. MDU had the right, which it did not use, to open the record at the District Court level for additional material evidence if good reasons existed for failure to present the evidence in the proceeding before the agency. Section 69-3-404(3), MCA. Of course, the record before the District Court and before us, includes the motion for reconsideration made by MDU after the final order of May 18, 1984. With the motion for reconsideration MDU had presented to PSC a bond chart from a brokerage company. As PSC found, the bond chart was insufficient to require an increase in the percentage of the cost of equity because it mostly showed the volatility of such percentage rates at the time. Moreover, as the Court said in Washington Gas Light Company v. Public Service Commission of the District of Columbia (D.C.App.1982), 450 A.2d 1187, while it may be an abuse of discretion for an agency to ignore the most recent data in the record of a proceeding, the same cannot be said as easily for evidence submitted after the record has been closed and a final opinion issued.

The platitude that one cannot compare apples to oranges is worn thin, but it applies here. The two different percentage figures do not spring from the same record; they are not comparable. As MDU contends, the District Court acted properly in not considering whether the PSC decision was arbitrary and capricious because it approved two different percentage figures for return on cost of equity.

In the second phase of this issue, MDU contends that the District Court improperly assumed the role of PSC and made findings and conclusions in areas where the PSC itself failed to make necessary findings and conclusions.

The source of MDU's contention is that the District Court discussed two economic theories of Dr. Smith in her assessment of a proper rate of return on equity capital, whereas PSC in its final order did not discuss those theories. Thus, MDU contends, the District Court made findings and conclusions outside the record not made by the PSC and so acted out of the scope of its power of judicial review.

It is, of course, the duty of PSC to make explicit findings on material issues raised in the administrative proceedings. Northern Plains Resource Council v. Board of Natural Resources (1979), 181 Mont. 500, 522-23, 594 P.2d 297, 310. The findings must be sufficient to permit thorough judicial review, State ex rel. Olsen v. Public Service Commission (1957), 131 Mont. 104, 113, 308 P.2d 633, 638, and the findings on material issues should be sufficient to permit a reviewing court to follow the reasoning process of the agency and determine whether that process conforms to law. Northern Plains Resource Council, supra; Public Service Commission of Montana v. District Court (1973), 162 Mont. 225, 511 P.2d 334. Upon judicial review, the validity of the decision must be judged on the grounds and reasons set forth in the order, and no other grounds should be considered. Burlington Truck Lines, Inc. v. U.S. (1962), 371 U.S. 156, 169, 83 S.Ct. 239, 246, 9 L.Ed.2d 207, 216.

MDU contends that the District Court assumed the role of PSC and analyzed Dr. Smith's theories that "investors discount outliers" and her theory of a "negative risk premium." The District Court, argues MDU, approved the acceptance of these theories by PSC, but PSC did not accept them nor acknowledge their existence in its final order.

In determining the rate of return of 13.35% for equity capital, PSC relied on a combination of factors. It determined the current dividend yield for MDU at 9.2%. On that determination there appears to be no issue between the parties. It is the expected growth of that yield as perceived by prospective investors that is controversial. MDU had a compound growth rate of 12% in its dividends for the past 5 years. Dr. Smith, in her analysis, calculated expected growth according to three formulae: Single best growth rate, most important growth rates (growth in book value...