Narragansett Elec. Co. v. Burke

• Decision Date: 30 December 1977
• Docket Number: No. 76-442-M,76-442-M
• Citation: 119 R.I. 559,381 A.2d 1358
• Parties: , 23 P.U.R.4th 509 The NARRAGANSETT ELECTRIC COMPANY v. Edward F. BURKE et al. P.
• Court: Rhode Island Supreme Court

Page 1358

381 A.2d 1358

119 R.I. 559, 23 P.U.R.4th 509

The NARRAGANSETT ELECTRIC COMPANY v. Edward F. BURKE et al.

No. 76-442-M.P.

Supreme Court of Rhode Island.

Dec. 30, 1977.

[119 R.I. 571] Edwards & Angell, Edward F. Hindle, Deming E. Sherman, Providence, for petitioner.

Julius C. Michaelson, Atty. Gen., R. Daniel Prentiss, Special Asst. Atty. Gen., Roberts & Willey Inc., Dennis J. Roberts II, Bruce G. Tucker, Providence (on behalf of Rhode Island Consumers' Council), for respondents.

OPINION

BEVILACQUA, Chief Justice.

This case is before us on a petition for a writ of certiorari filed by The Narragansett Electric Company (Narragansett) pursuant to G.L. 1956 (1969 Reenactment) § 39-5-1 to review the December 1, 1976 decision and order of the Public Utilities Commission (PUC).

Narragansett, whose retail rates are regulated by PUC, is a retail distribution electric utility company serving approximately 250,000 customers in Rhode Island. It is a wholly owned subsidiary of the New England Electric System (NEES), a public utility holding company incorporated in Massachusetts and registered under the Public Utility Holding Company Act of 1935, 15 U.S.C. § 79 et seq. (1970). Narragansett purchases electrical power from the New England Power Company (NEPCO), a Massachusetts corporation also wholly owned by NEES. Because NEPCO is an interstate wholesale supplier of electricity, its rates are subject to regulation by the Federal Power Commission (FPC) under the Federal Power Act. 16 U.S.C. § 824 et seq. (1970).

In November 1975, NEPCO filed a rate increase request (designated Rate R-10) with the FPC. On December 1, 1975, Narragansett filed with the PUC a notice of price adjustment (Narragansett Rate PP CA No. 5) pursuant to the purchased power cost adjustment provisions (R.I. PUC No. 407) enacted by the PUC. ¹ Narragansett requested that PUC allow increased rates, subject to possible refund, to cover the increased cost of obtaining power which resulted from the R-10 rate filed by NEPCO with the FPC. Both the NEPCO and Narragansett filings requested an effective date of January 1, 1976. On December 30, 1975, the PUC entered an order suspending the January 1976 effective date to permit investigation and a hearing. On December 31, 1975, the FPC issued an order which accepted the R-10 rate for filing, suspended it for 2 months, and allowed it to become effective, subject to refund and before investigation of its reasonableness, on March 1, 1976. The FPC order noted that "the proposed increases in rates have not been shown to be just and reasonable and may be unjust, unreasonable or otherwise unlawful." In a series of suspension orders, the PUC suspended Narragansett Rate PP CA No. 5 for the full 9-month statutory suspension period from the March 1, 1976 effective date of the R-10 rate.

During this 9-month period, the PUC conducted public hearings. Narragansett presented testimony and exhibits outlining the effect of NEPCO's R-10 rate on Narragansett's financial structure. Thereafter, the PUC requested legal memoranda from the parties on the issue of whether the PUC had the authority under § 39-3-30 ² to investigate the reasonableness of the R-10 contract rate. After consideration, the PUC decided that it did have such authority, and hearings on this issue were held between August and November of 1976.

On December 1, 1976, the PUC issued its final decision and order. The PUC first acknowledged that it was without jurisdiction to set the rate at which NEPCO sells electric power to Narragansett. The PUC ruled that it could, nevertheless, investigate the reasonableness of the costs underlying the R-10 rate and could prevent Narragansett from passing through to its retail customers any portions of those costs which were "strikingly" or "glaringly" unreasonable.

The PUC considered four specific cost issues underlying NEPCO's R-10 rate: (1) NEPCO's cost of common equity (2) NEPCO's capital structure (3) NEPCO's cash working capital requirements, and (4) the proper rate-making treatment of losses incurred by NEPCO when it abandoned construction of a generating station. Based on its evaluation of the reasonableness of NEPCO's costs in these four areas, the PUC ruled that Narragansett should recover approximately $5,300,000 of the $9,300,000 annual increase in the cost of power occasioned by the R-10 rate. The PUC ordered Narragansett to effectuate rates reflecting the allowable amount for electricity consumed on or after December 1, 1976, such rates being subject to refund upon completion of FPC proceedings. The present petition for certiorari followed. Narragansett contends that the PUC lacks jurisdiction to inquire into the reasonableness of NEPCO's wholesale rate to Narragansett because the Federal Power Act preempted the authority of state commissions to investigate interstate prices. We agree.

I

The doctrine of preemption is based upon the supremacy clause. U.S.Const. art. VI. When Congress legislates in an area within the federal domain, it may, if it chooses, take for itself all regulatory authority over the subject, share the task with the states, or adopt as federal policy the state scheme of regulation. Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230, 67 S.Ct. 1146, 1152, 91 L.Ed. 1447, 1459 (1947). The question in each case is the intent of Congress. Id.

The Federal Power Act extended federal regulatory power to the "sale of electric energy at wholesale in interstate commerce * * *." 16 U.S.C. § 824(b) (1970). The Supreme Court has noted that the legislative history of the Federal Power Act evidences a "constant purpose to protect rather than to supervise authority of the states." Connecticut Light & Power Co. v. FPC, 324 U.S. 515, 525, 65 S.Ct. 749, 754, 89 L.Ed. 1150, 1158 (1945). However, the Court has determined that Congress, in enacting the Federal Power Act, intended to vest exclusive jurisdiction in the FPC to regulate interstate wholesale utility rates. FPC v. Southern California Edison Co., 376 U.S. 205, 216, 84 S.Ct. 644, 651, 11 L.Ed.2d 638, 646 (1964).

"What Congress did was to adopt the test developed in the Attleboro (Public Utilities Com'n of Rhode Island v. Attleboro Steam & Elec. Co., 273 U.S 83, 47 S.Ct. 294, 71 L.Ed. 549) line which denied state power to regulate a sale 'at wholesale to local distributing companies' and allowed state regulation of a sale at 'local retail rates to ultimate consumers'." Id. at 214, 84 S.Ct. at 650-51, 11 L.Ed.2d at 646, quoting Illinois Natural Gas Co. v. Central Illinois Pub. Serv. Co., 314 U.S. 498, 504, 62 S.Ct. 384, 386, 86 L.Ed. 371, 375 (1942).

The result is a blend of state-federal regulation, each with exclusive authority in its respective field. We conclude, therefore, that jurisdiction to determine the reasonableness of the wholesale rate charged by NEPCO to Narragansett rests exclusively with the FPC.

II

The PUC is the administrative agency charged with the duty of regulating the intrastate rates of public utilities within the State of Rhode Island. Narragansett Elec. Co. v. Harsch, 117 R.I. 395, 401-02, 368 A.2d 1194, 1199 (1977). Under § 39-3-11, the PUC is authorized to conduct hearings to investigate the propriety of proposed rate changes and to make such orders with regard to a proposed rate as may be just. In fixing just rates, the PUC must protect both the right of the public utility company and its investors to an opportunity to earn a return reasonably sufficient to maintain the utility's financial integrity, Rhode Island Consumers' Council v. Smith, 111 R.I. 271, 293, 302 A.2d 757, 770 (1973), and the consumer's right to pay a rate which accurately reflects the cost of service rendered plus a reasonable profit. Narragansett Elec. Co. v. Harsch, supra at 429, 368 A.2d at 1213.

Among the essential factual findings which the PUC must make in carrying out this duty is a determination of the operating expenses of the utility. Rhode Island Consumers' Council v. Smith, supra 111 R.I. at 281, 302 A.2d at 764; 1 Priest, Principles of Public Utility Regulation 45 (1969). As the Court of Appeals for the District of Columbia stated in Mississippi River Fuel Corp. v. FPC, 82 U.S.App.D.C. 208, 163 F.2d 433, 437 (1947):

"Expenses (using that term in its broad sense to include not only operating expenses but depreciation and taxes) are facts. They are to be ascertained, not created, by the regulatory authorities. If properly incurred, they must be allowed as part of the composition of the rates. Otherwise, the so-called allowance of a return upon the investment, being an amount over and above expenses, would be a farce."

When the operating expense being investigated by the PUC is one incurred through a contract of the utility company with an affiliate, the burden is on the utility to establish the reasonableness of that expense. Section 39-3-30. If unpersuaded, the PUC may disallow all or part of the requested rate change.

However, the Supreme Court has said that a reasonable rate is that rate filed with or fixed by the FPC. Montana-Dakota Util. Co. v. Northwestern Pub. Serv. Co., 341 U.S. 246, 251, 71 S.Ct. 692, 695, 95 L.Ed. 912, 919 (1951). "(N)ot even a court can authorize commerce in the commodity on other terms." Id. at 251, 71 S.Ct. at 695, 95 L.Ed. at 919 (1951). Thus the rate increase in the cost of electricity to Narragansett, filed and bonded by NEPCO, constitutes an actual operating expense and must be so viewed by the PUC. See City of Chicago v. Illinois Commerce Comm'n, 13 Ill.2d 607, 616, 150 N.E.2d 776, 781 (1958); United Gas Corp. v. Mississippi Pub. Serv. Comm'n, 240 Miss. 405, 442, 127 So.2d 404, 420 (1961); Citizen Gas Users Ass'n v. Public Util. Comm'n, 165 Ohio St. 536, 538, 138 N.E.2d 383, 384 (1956).

In a case presenting the precise issue which we now decide, the Mississippi Supreme Court reversed the state regulatory commission's disallowance of a portion of an interstate wholesale supplier's rate filed...