Petition of Village of Hardwick Elec. Dept.

• Decision Date: 21 September 1983
• Docket Number: No. 82-407,82-407
• Citation: 466 A.2d 1180,143 Vt. 437
• Parties: Petition of VILLAGE OF HARDWICK ELECTRIC DEPARTMENT.
• Court: Vermont Supreme Court

Page 1180

466 A.2d 1180

143 Vt. 437

Petition of VILLAGE OF HARDWICK ELECTRIC DEPARTMENT.

No. 82-407.

Supreme Court of Vermont.

Sept. 21, 1983.

Reargument Denied Oct. 13, 1983.

Ralph W. Howe III of Paterson, Walke & Pratt, P.C., Montpelier, for plaintiff-appellant.

Gerald R. Tarrant, Jon T. Anderson and Michael Marks, Montpelier, for defendant-appellee.

Before BILLINGS, C.J., and HILL, UNDERWOOD, PECK and GIBSON, JJ.

GIBSON, Justice.

The Village of Hardwick Electric Department (petitioner) appeals a Public Service Board order deciding two rate cases. In its appeal, petitioner contends (1) that the Board misconstrued 30 V.S.A. § 2923 when it established the rate of return allowed to petitioner, (2) that the Board failed to make adequate findings of fact, and (3) that the Board erred in ordering refunds to be made prior to the termination of all proceedings, including appeal. For the reasons stated herein, we affirm the decision of the Board.

I.

The statute that is the primary focus of this appeal, 30 V.S.A. § 2923, provides as follows:

(a) In determining rates charged by a municipal plant the public service board shall allow, in addition to all other factors, a reasonable rate of return on capital investments. The return shall be commensurate with that permitted private utilities having corresponding risks and equivalent to that necessary for private utilities to assure confidence in the financial integrity of the enterprise so as to maintain its credit and attract new capital.

(b) Revenue received as a return on capital investment shall be retained by the municipal utility and held in a contingent fund for use by it in that or any subsequent fiscal year.

Petitioner contends that under § 2923 a municipal utility is entitled to earn a return equal to that of a private utility. Petitioner points to rates of return as high as 15% on equity for private utilities in Vermont and New England, and it seeks a 12% return on the nondebt portion of its capital investment, known as retained earnings.

Although § 2923 requires that municipals be allowed a return commensurate with "private utilities having corresponding risks," neither the petitioner nor the Board could point to a private utility having risks corresponding to those of petitioner. One reason offered was that petitioner is smaller than most private utilities. However, a more cogent reason, as found by the Board, is that the risks faced by private and municipal utilities are "so different that only the most general sorts of conclusions can ordinarily be drawn by comparing the one to the other." Although the two types of utilities face comparable business risks in seeking to provide adequate service to their customers, their financial risks are quite different, a fact previously noted by this Court. See Hastings v. Village of Stowe, 125 Vt. 227, 233, 214 A.2d 56, 61 (1965). A private utility must obtain a portion of its capital through the sale of stock, and it must be able to pay to its stockholders an adequate rate of return that will also be sufficient to attract new shareholder capital when needed. A municipal utility, having no stockholders, does not have to pay stock dividends or compete on the market for equity capital.

The difference in financial risk was acknowledged by petitioner's expert on rates of return. He was unable to compare petitioner to a private utility because standard formulas for measuring financial risk for a private utility are designed to show the level of return on equity required to induce investors to buy a firm's stock. To overcome this difficulty, petitioner's expert attempted to compare it to an electric cooperative; however, this analogy was rejected by the Board as pertaining to an "entirely different" kind of enterprise. Since an electric cooperative obtains a portion of its capital from its ratepayers but must return that capital to the ratepayers in a rotation cycle that may vary between ten and thirty years, we agree with the Board's conclusion and defer to its expertise. 30 V.S.A. § 11(b); In re Central Vermont Public Service Corp., 141 Vt. 284, 288, 449 A.2d 904, 907 (1982).

Having no evidence with which to compare petitioner's risks with those of a private utility, the Board went on to consider the second half of the statutory directive: that the return shall be "equivalent to that necessary for private utilities to assure confidence in the financial integrity of the enterprise so as to maintain its credit and attract new capital." § 2923(a).

In seeking a 12% return on its retained earnings, petitioner contends that the retained earnings of a municipal utility are analogous to the equity of a private utility. However, as the Board so aptly points out, the retained earnings of a municipal utility's capital structure may fluctuate so widely that a rate of return that is selected without consideration of the result to be produced will lead to "anomalous and very unjust results in certain cases." By way of example, a 12% rate of return for a municipal utility that has capital investment composed of 100% debt and no retained earnings would produce no revenues beyond those needed to service the debt requirements; in terms of the statutory requirements, there would be insufficient revenues to assure its financial integrity, maintain its credit and attract new capital. Conversely, a 12% rate of return for a municipal utility having no capital debt and 100% of retained earnings (as was the case in In re Village of Stowe Electric Department, 134 Vt. 559, 367 A.2d 1056 (1976)) would produce revenues greatly in excess of those necessary to assure its continued financial health. We note that petitioner presently has retained earnings of $812,000 and debt in the amount of $306,000.

In order to prevent such highly disparate and irrational results, a consequence to be avoided in construing a statute, Noble v. Delaware & Hudson Ry., 142 Vt. 156, 159, 453 A.2d 1109, 1111 (1982); Audette v. Greer, 134 Vt. 300, 302, 360 A.2d 66, 68 (1976), it is important to consider what revenues are necessary to assure the financial integrity of petitioner. In making this analysis, one must keep in mind the basic standard the Board must follow as it performs its rate-setting function.

By statute, the Board is required to set rates that are "just and reasonable." 30 V.S.A. § 218. In addition to this long-standing guideline, § 2923(a) echoes the mandate that the rate of return on capital investments of a municipal plant shall be "reasonable." The fundamental considerations in determining just and reasonable rates were first articulated in Bluefield Water Works & Improvement Co. v. Public Service Commission, 262 U.S. 679, 692-93, 43 S.Ct. 675, 678-79, 67 L.Ed. 1176 (1923), as follows:

"A public utility is entitled to such rates as will permit it to earn a return on the value of the property which it employs for the convenience of the public equal to that generally being made at the same time and in the same general part of the country on investments in other business undertakings which are attended by corresponding risks and uncertainties; but it has no constitutional right to profits such as are realized or anticipated in highly profitable enterprises or speculative ventures. The return should be reasonably sufficient to assure confidence in the financial soundness of the utility and should be adequate, under efficient and economical management, to maintain and support its credit and enable it to raise the money necessary for the proper discharge of its public duties.

As is readily apparent, § 2923 closely tracks the concepts enunciated in Bluefield. These principles have been consistently followed in Vermont over the years. In re Green Mountain Power Corp., 131 Vt. 284 298, 305 A.2d 571, 580 (1973); Letourneau v. Citizens Utilities Co., 128 Vt. 129, 133, 259 A.2d 21, 23 (1969); In re New England Telephone & Telegraph Co., 115 Vt. 494, 512-13, 66 A.2d 135, 143 (1949).

In fixing rates that are just and reasonable, the Board must balance the interests of the consumer and of the owners of the utility. In re Central Vermont Public Service Corp., 116 Vt. 206, 216, 71 A.2d 576, 582 (1950). Rates cannot be set so low as to be confiscatory for the utility nor so high as to be excessive for the consumer. In re New England Telephone & Telegraph Co., 139 Vt. 578, 586, 433 A.2d 263, 267-68 (1981). Between these extremes lies a "zone of reasonableness" within which a regulatory commission is free to set rates without judicial intervention. Permian Basin Area Rate Cases, 390 U.S. 747, 767, 88 S.Ct. 1344, 1360, 20 L.Ed.2d 312 (1968); In re New England Telephone & Telegraph Co., supra, 139 Vt. at 586, 433 A.2d at 267-68.

In this case, the Board determined that a reasonable return for petitioner would be an amount equal to two times its interest earned ratio (TIER). Its interest expense for 1981, the most recent data...