Northwestern Public Service Co. v. Cities of Chamberlain, Huron, Mitchell, Redfield, Webster, and Yankton

• Decision Date: 03 May 1978
• Docket Number: No. 11909,11909
• Citation: 265 N.W.2d 867
• Parties: NORTHWESTERN PUBLIC SERVICE COMPANY, a corporation, Plaintiff and Appellant, v. CITIES OF CHAMBERLAIN, HURON, MITCHELL, REDFIELD, WEBSTER, AND YANKTON, SouthDakota, and South Dakota Electric Consumers, Defendants and Respondents.
• Court: South Dakota Supreme Court

Page 867

265 N.W.2d 867

NORTHWESTERN PUBLIC SERVICE COMPANY, a corporation Plaintiff and Appellant, v. CITIES OF CHAMBERLAIN, HURON, MITCHELL, REDFIELD, WEBSTER, AND YANKTON, SouthDakota, and South Dakota

Electric Consumers, Defendants and Respondents.

No. 11909.

Supreme Court of South Dakota.

May 3, 1978.

James E. Doyle, of Doyle & Bierle, Yankton, John B. Wehde, of Benson, Beach, Wehde & Martin, Huron, Everett E. Hoyt, Merle D. Lewis, Huron, for plaintiff and appellant.

James T. Goetz, Robert W. Hirsch, of Goetz, Hirsch & Haar, Yankton, Reuben Goldberg, Arnold Fieldman, of Goldberg, Fieldman & Hjelmfelt, Washington, D. C., for defendants and respondents.

WOLLMAN, Justice.

Appellant, Northwestern Public Service Company, (the company) is an investor-owned electric and gas public utility company that in 1973 provided electric service to some 108 communities and 1,700 farms in eastern South Dakota. Although prior to July 1, 1975, authority to regulate such utilities was vested in municipalities by SDCL 9-35-1, until autumn of 1973 none of the communities served by the company had ever exercised such authority. ^* In June of 1973, the company filed a rate increase of some 15.4%. This increase went into effect on August 13, 1973, upon the lifting of the President's wage and price freeze.

In the fall of 1973, the cities of Chamberlain, Huron, Mitchell, Redfield, Webster, and Yankton (cities) formed a consortium pursuant to SDCL 1-24 known as the South Dakota Electric Consumers (SDEC) for the purpose of jointly investigating the company's rate filing. In October and November of 1973, each of the cities passed a "vehicle" ordinance specifying the type of information the company would be required to submit to the cities at a subsequent rate hearing. See State ex rel. South Dakota Electric Consumers v. Northwestern Public Service Co., S.D., 232 N.W.2d 854. A rate hearing was conducted by the cities on March 18-20, 1974, and in May, 1974, each of the cities passed an identical ordinance incorporating their findings and conclusions on the evidence introduced by the company and SDEC at the rate hearing. These ordinances declared the company's 15.4% rate increase to be unreasonable and fixed rates that would provide the company a revenue increase of approximately 8.5%.

The company commenced this action in circuit court for a declaration that the rates established by the cities' ordinances were unreasonable and confiscatory and that the cities had acted arbitrarily and unreasonably and thereby deprived it of its property without due process of law, all in contravention of the United States and South Dakota Constitutions. The company moved the court to admit evidence of data of its actual costs experienced subsequent to the rate hearing to show the accuracy of its estimates and the inaccuracy of SDEC's estimates presented at the rate hearing. Following a hearing on the motion, the court ruled that its review of the rate ordinances would be limited to the record made before the cities. From a judgment based on findings of fact and conclusions of law affirming the cities' actions and ordinances in all respects, the company has appealed. We reverse and remand.

The cities employed the cost of service method of testing the reasonableness of the company's rate increase. Under this orthodox method, the rate analysis is broken down into four subsidiary determinations: (1) what gross revenues would the rates produce; (2) what operating expenses would the utility experience under the rates; (3) what is the rate base, that is, the dollar amount of the property used and useful in providing the service for which the rates are to be charged; and (4) what rate of return should be deemed reasonable. The starting point of the inquiry was the company's books and a test year ending June 30, 1973. Since the company is a combination gas and electric utility, the initial step in obtaining meaningful figures was the separation of all accounts by department. From the test year data the actual or book values for the four items could then be determined. To these figures, pro forma adjustments to reflect known and measurable changes which would occur within a reasonable time were made. The various sets of figures were then allocated between the cities and others receiving service. There was little, if any, dispute between the parties concerning the accuracy of the book values presented by the company. Rather, the differences between the parties and the issues presented in this appeal arise primarily from different theories of how certain items and adjustments should have been treated to properly reflect an accurate model of anticipated performance and from conflicting judgments of what was reasonable.

The cities' ordinances allowed the company a 12.1% rate of return on its common stock equity and an overall rate of return of 8.79% on its electric department rate base. The cities found that the company had overstated its operation and maintenance expenses for the total electric department by $1,260,180, of which $863,709 was allocable to the cities. The ordinances determined that the company was reasonably entitled to approximately $666,822 less in annual revenues from the cities than the company would have received under its August 13, 1973, rate increase.

The company contends that the cities' rate ordinances were arbitrary, unreasonable, and confiscatory for these reasons: (1) they understated the company's rate base (a) by improperly determining the company's working capital requirements and (b) by improperly deducting the unamortized three percent investment tax credit from rate base; (2) they understated the company's operating expenses (a) by improperly calculating the anticipated cost of purchased power, (b) by failing to include anticipated increased payroll costs, (c) by including for income tax purposes a deduction for interest cost associated with construction work in progress, and (d) by amortizing the expenses of the rate hearing over a three year period; and (3) they fixed an inadequate rate of return.

Scope of Review

Before addressing these issues, we must set forth the principles governing our review of the ordinances in question.

This court has consistently recognized that ratemaking is a legislative process, whether performed directly by the legislature or by an agency of its creation.

"The legislative discretion implied in the rate making power extends to the process by which a legislative determination is made and within the broad field where that discretion is operative legislative determinations are conclusive. (citations omitted). So long as a legislative agency pursues its authority and does not transgress constitutional limitations, the courts have no power to interfere with its determinations." Application of Northwestern Bell Telephone Co., 78 S.D. 15, 23, 98 N.W.2d 170, 174.

The company argues that in determining whether a utility's property has been unconstitutionally taken by the setting of an inadequate rate, a reviewing court must make an independent review of the facts and the law. The cities, on the other hand, contend that our review of the rate ordinances is governed by the usual substantial evidence rule and that we are not to substitute our judgment for that of the cities.

It is true that in Application of Northwestern Bell Telephone Co., 69 S.D. 36, 6 N.W.2d 165, this court quoted Chief Justice Hughes' opinion in St. Joseph Stock Yards Co. v. United States, 298 U.S. 38, 56 S.Ct. 720, 80 L.Ed. 1033, for the proposition that in ratemaking cases courts are to exercise an independent review upon the facts and the law. 69 S.D. at 45, 6 N.W.2d at 170. Notwithstanding this reference to the St. Joseph Stock Yards case, the court, quoting from Application of Dakota Transportation, Inc., 67 S.D. 221, 231, 291 N.W. 589, 594, stated:

"(T)his Court holds that 'in a proceeding to review an order of the Commission, administrative or legislative in nature, judicial action cannot supplant the discretionary authority of that body. The review by the court exercising judicial functions only cannot extend beyond the questions whether the Commission has acted within its constitutional or statutory powers and whether its order or determination is supported by substantial evidence and is reasonable and not arbitrary.' " 69 S.D. at 45, 6 N.W.2d at 170.

It is true that in reviewing a decision of the Public Utilities Commission this court stated that:

"What was said in Application of Dakota Transportation, Inc., of Sioux Falls, 67 S.D. 221, 291 N.W. 589, and cases cited with respect to the scope of judicial review of orders and determinations of the Commission has no application where constitutional rights respecting rates are involved. The requirements of due process are ordinarily met by acting upon evidence and not arbitrarily. Where confiscation is claimed, due process requires judicial determination as to both law and facts." In re Northwestern Bell Telephone Co., 73 S.D. 370, 377, 43 N.W.2d 553, 557.

Some nine years later, however, this court cited both of the Northwestern Bell cases for the proposition that,

"The powers of the reviewing courts are purely judicial and the review does not extend beyond the question whether the Commission has acted within its constitutional or statutory powers and whether its order or determination is supported by substantial evidence and is reasonable and not arbitrary." Application of Northwestern Bell Telephone Co., 78 S.D. 15, 24, 98 N.W.2d 170, 175.

The court went on to state that the Public Utilities Commission need not follow any single formula in arriving at the rates fixed so long as the method followed and the order entered when applied to the facts and viewed as a whole do not produce an unjust or arbitrary result. Indeed, the court upheld the disallowance by the Commission of certain claimed expenses with the statement that,

"The Commission was not required to give...