Petition of Northern States Power Co.

• Decision Date: 11 December 1987
• Docket Number: No. C7-86-1482,C7-86-1482
• Citation: 416 N.W.2d 719
• Parties: In the Matter of the Petition of NORTHERN STATES POWER COMPANY for Authority to Change its Schedule of Rates for Electric Service in Minnesota.
• Court: Minnesota Supreme Court

Page 719

416 N.W.2d 719

In the Matter of the Petition of NORTHERN STATES POWER COMPANY for Authority to Change its Schedule of Rates for Electric Service in Minnesota.

No. C7-86-1482.

Supreme Court of Minnesota.

Dec. 11, 1987.

Syllabus by the Court

1. The fair preponderance of the evidence burden in ratemaking substantially differs from the similarly named burden in civil court cases.

2. In appellate review of ratemaking decisions of the Minnesota Public Utility Commission (MPUC) application of the substantial evidence analysis requires that the court determine whether the agency has adequately explained how it arrived at its conclusion and whether the conclusion is reasonable on the basis of the record.

3. The MPUC's decision to reject a utility's proposed capital structure in a rate application and to substitute in its stead a hypothetical capital structure is based on the record and in compliance with statutes governing ratemaking.

4. The MPUC did not err in rejecting a utility's proposed rate of return on common equity, and substituting its own.

5. The MPUC properly rejected a utility's proposed allocation of its rate base, expenses and revenues among the three states it serves when the proposed allocation would place an unfair burden on Minnesota ratepayers.

6. The MPUC properly excluded a utility's proposed "delay in payment" recoupment from its rate base.

7. The MPUC appropriately exercised its judgment in excluding from the proposed rate base carrying charges on the cost of public utility conservation programs in the year in which the ratepayers pay those costs.

Samuel L. Hanson, John P. Van de North, Jr., St. Paul, Gene R. Sommers, David A. Lawrence, David M. Sparby, Minneapolis, for NSP.

Hubert H. Humphrey, III, Atty. Gen., Craig P. Anderson, Sp. Asst. Atty. Gen., St. Paul, for Minnesota Dept. of Public Service.

Hubert H. Humphrey, III, Atty. Gen. pro se.

Dennis D. Ahlers, Sp. Asst., Michael J. Bradley, Asst. Atty. Gen., St. Paul, for Atty. Gen.

Glenn E. Purdue, William P. Jordan, Minneapolis, for Suburban Rate Authority.

Hubert H. Humphrey, III, Atty. Gen., Karl Sonneman, Sp. Asst., St. Paul, for Minnesota Public Utilities Com'n.

Heard, considered and decided by the court en banc.

OPINION

KELLEY, Justice.

In orders following the 1985 rate increase application made by Northern States Power Company (NSP), the Minnesota Public Utilities Commission (MPUC or Commission), while declining to specifically apply a preponderance standard to the evidence produced by NSP in support of application, nevertheless concluded that even had such a standard been applicable, substantial evidence in the record justified its denial of NSP's position on five specific revenue issues. Before the court of appeals NSP contended the MPUC had erred by holding it to a stricter, but undefined, standard of proof, and that the MPUC's findings on five revenue issues were unsupported by substantial evidence. The court of appeals agreed with NSP that the applicable standard of proof in this type of proceeding is the preponderance of evidence standard. However, it likewise agreed with the MPUC that in this case, at least, "the standard of proof employed was not critical to the outcome." Accordingly, it affirmed the MPUC's findings on four of the contested revenue issues but remanded on the "capital structure" issue ordering a recalculation of the rate of return using NSP's cost of equity percentage figure. ¹ The petitions of both parties for further review were granted. ² We reverse the holding of the court of appeals on the capital structure issue. We affirm on all other issues.

The court of appeals held the quantum of proof in a proceeding before the MPUC following a utilities' application for a rate increase is the "fair preponderance of the evidence" standard. By the failure of the MPUC to contest that holding on this appeal, the holding becomes the law of the case. Additionally, by brief filed in this court the MPUC has indicated that in the future it will follow the ruling of the court of appeals that the "fair preponderance" test should be utilized in ratemaking. Therefore, that issue, insofar as this case is concerned, might appear to be moot, and, as a result, the case should be remanded to MPUC for further proceedings applying that quantum of proof standard. The conclusion does not follow. Because of a misunderstanding of what the fair preponderance of evidence standard means in a ratemaking proceeding, as the court of appeals recognized, application of that standard in the context of the factfinding process in a utility rate case needs further explication.

NSP argues that in a rate application proceeding the MPUC should weigh the evidence under the "fair preponderance" standard in the same manner traditionally employed by courts in a civil case, and that since, in this case, the MPUC failed to do so there should be a remand for further findings. We disagree. While a "fair preponderance" standard may be applicable in a ratemaking proceeding, the "weighing" to be employed by the utility commission substantially differs from the type of "weighing" traditionally employed by a court in a civil case.

The "weighing" by court in a civil case applying the "fair preponderance" standard involves a determination by the court whether the proponent of the conclusion has produced sufficient credible evidence to sustain that conclusion. In contrast, the task of the MPUC is not so much concerned with the sufficiency and credibility of the evidence, as it is concerned with whether the evidence submitted, even if true, justifies the conclusion sought by the petitioning utility when considered together with the Commission's statutory responsibility to enforce the state's public policy that retail consumers of utility services shall be furnished such services at reasonable rates. See, e.g., Minn.Stat. § 216B.01 (1986). The burden of proof rests with public utility seeking the change to demonstrate that the rate change is just and reasonable. Minn.Stat. § 216B.16, subd. 4 (1986). In evaluating the validity of a rate increase application, the Commission should apply the classic burden of proof analysis employed in civil cases in determining whether the utility has established the amount of a claimed cost as a judicial fact. Ordinarily, as in this case, the amount of the alleged cost is essentially uncontested. But in the exercise of the statutorily imposed duty to determine whether the inclusion of the item generating the claimed cost is appropriate, or whether the ratepayers or the shareholders should sustain the burden generated by the claimed cost, the MPUC acts in both a quasi-judicial and a partially legislative capacity. To state it differently, in evaluating the disputes in the typical rate case the accent is more on the inferences and conclusions to be drawn from the basic facts (i.e., amount of claimed costs) rather than on the reliability of the facts themselves. Thus, by merely showing that it has incurred, or may hypothetically incur, expenses, the utility does not necessarily meet its burden of demonstrating that it is just and reasonable that the ratepayers bear the costs of those expenses. As in the typical case, in the present NSP application the basic facts, such as costs and expenses, were essentially undisputed; rather the focus of the dispute was on whether the ratepayers or the shareholders should bear those costs. In such case the MPUC may draw its own inferences and arrive at its own conclusions from the undisputed basic facts. See, e.g., City of Moorhead v. Minnesota Pub. Utils. Comm'n, 343 N.W.2d 843, 846 (Minn.1984); Minn.Stat. § 14.61 (1986). Moreover, in ratemaking, as contrasted to civil litigation, evidence in the hearing record consists mostly of economic facts and the opinions of experts who have analyzed those facts rather than reports of sensorily perceived phenomena. Thus, it becomes apparent that the logic and relevance of the facts to the ultimate determination of whether the rate request is reasonable is of substantially more importance than the quantum of proof needed. Accordingly, we conclude, as did the court of appeals, no matter what standard of proof was employed, it was not crucial to the outcome of this case. ³

Before commencing our analysis of MPUC's revenue findings, a further note is in order to reiterate the scope of our appellate review. NSP claims here that MPUC's disputed revenue findings are "unsupported by substantial evidence in view of the entire record as submitted." Cf. Minn.Stat. § 14.69 (1986). As an administrative agency, the MPUC may exercise two different functions: a quasi-judicial function and a legislative function. See Minn.Stat. § 216A.05, subd. 1 (1986). When the MPUC engages in a quasi-judicial function, a reviewing court applies the "substantial evidence" test. Hibbing Taconite Co. v. Minnesota Pub. Serv. Comm'n, 302 N.W.2d 5, 9 (Minn.1980). ⁴ But when the MPUC is engaged in a legislative function, on review the decision will be upheld if the agency acted within its statutory authority, and the result was not unjust, unreasonable, or discriminatory, as shown by clear and convincing evidence. St. Paul Area Chamber of Commerce v. Minnesota Pub. Serv. Comm'n, 312 Minn. 250, 262, 251 N.W.2d 350, 358 (1977). NSP argues that the revenue issues in this appeal come within the scope of MPUC's quasi-judicial function, and that consequently before those findings can be sustained, the record must contain substantial evidence to support them. In opposing that position, MPUC contends that its finding on the disputed revenue issues involve both the exercise of its quasi-judicial and legislative function, and, therefore, application of both standards of appellate review should be employed by the reviewing court. ⁵

Just as the traditional "fair preponderance" quantum of proof analysis employed in a civil case differs in some respects from the "fair...