Public Advocate v. Public Utilities Com'n

• Decision Date: 28 September 1998
• Citation: 718 A.2d 201
• Parties: PUBLIC ADVOCATE v. PUBLIC UTILITIES COMMISSION et al.
• Court: Maine Supreme Court

Page 201

718 A.2d 201

1998 ME 218

PUBLIC ADVOCATE v. PUBLIC UTILITIES COMMISSION et al.

Supreme Judicial Court of Maine.

Argued Jan. 6, 1998.

Decided Sept. 28, 1998.

Wayne R. Jortner (orally), Stephen G. Ward, Public Advocate Office, Augusta, for appellant.

Peter G. Ballou (orally), Gilbert W. Brewer, Joanne B. Steneck, Public Utilities Commission, Augusta, for appellees.

Gerald M. Amero (orally), William D. Hewitt, Pierce Atwood, Portland, and Donald W. Boecke, New England Tel. & Tel. Co., Boston, MA, for Bell Atlantic.

Before WATHEN, C.J., CLIFFORD, RUDMAN, LIPEZ ^* and SAUFLEY, JJ., and ROBERTS, A.R.J. ^**

CLIFFORD, Justice.

¶1 The Public Advocate appeals an order entered by the Public Utilities Commission, and the denial of a motion to reconsider that order, allowing New England Telephone and Telegraph Company (NET) ¹ to recover, through a surcharge in rates, costs related to an expansion of basic service calling areas mandated by the Commission. The Public Advocate contends that the Commission's order allowing the surcharges is beyond the Commission's statutory authority and constitutes impermissible retroactive ratemaking. We disagree that the surcharge is retroactive ratemaking and conclude that the order implementing the Commission's mandate was a legitimate deferral of collection of unusual costs to a time when those costs were known, pursuant to 35-A M.R.S.A. § 502(1) (1988). Accordingly, we affirm.

¶2 At issue in this appeal is M.P.U.C. Reg. 65-407, Chapter 204, the Basic Service Calling Area (BSCA) rule. In 1994 the Commission implemented the BSCA rule to expand basic service calling areas (within which calls are local and not subject to a long distance toll charge) of the telephone companies.

¶3 The BSCA rule was certain to affect telephone company revenues. The nature of that effect, however, was difficult to predict. Rather than attempt to determine that effect in advance and authorize rate changes, surcharges or refunds, before the effective date of the changes in the basic service calling areas, (rate changes that were almost certain not to accurately reflect the true cost), the Commission adopted a deferred accounting mechanism so that the cost of the BSCA rule could be accurately determined before changes in the rates necessary to cover the cost of those changes were approved. Chapter 204 required each local exchange carrier (LEC) ² to establish a "tracking account" to record the revenue effects of the BSCA plan for the first twelve months after the plans are implemented. The rule then required the LEC to file a report with the Commission:

If the tracking account has a positive balance, the LEC must file a proposal to return the excess to customers and to lower prospective rates with its report. If the tracking account has a negative balance, the LEC may file proposed rates for Commission review and approval to recover the shortfall that occurred during the 12-month deferral period and the period following the 12-month deferral period but prior to the effective date of the newly proposed rates, and to adjust prospective rates to avoid a similar revenue shortfall in the future.

Chapter 204(VII)(A)(3). Chapter 204 further stipulated that any proposed rate increase based on the BSCA rule would be "revenue neutral," i.e., the utility is prohibited from taking in more revenue than the documented cost of the expanded service required by the rule. The rate of return of the utility would not be affected.

¶4 NET added new exchanges pursuant to the BSCA rule in March of 1995 several months prior to the conclusion of a NET rate case. That rate case, however, did not consider the revenue effect of the BSCA rule. NET filed its tracking report on December 6, 1996. The tracking report reflected that the implementation of the additional basic service calling areas resulted in one time implementation costs of $501,655 and a revenue shortfall of about $3 million per year. NET filed to recover the shortfalls incurred as a result of compliance with Chapter 204, as authorized by the rule. The Commission approved the recovery in an order dated April 15, 1997 for: (1) one-time implementation costs of $501,655; (2) the revenue shortfall of $6 million that occurred over the two years between implementation of additional calling areas and the date of the order (March 1, 1995 to April 15, 1997); and (3) an ongoing projected annual revenue shortfall of $2,987,484. After the Commission denied a motion by the Advocate to modify the order allowing the surcharges, ³ the Public Advocate brought this appeal pursuant to 35-A M.R.S.A. § 1320, challenging, as prohibited retroactive ratemaking, the approval of NET's request for recovery of $6 million in past revenue shortfall and $501,655 in one-time implementation costs. The Public Advocate does not challenge the portion of the order allowing recovery, through an increase in basic telephone rates, of the ongoing projected $3,000,000 shortfall in revenue caused by the BSCA implementation, that order having no retroactive aspects.

¶5 Our review of the actions of the Commission is limited. "We defer to the Commission's choice of ratemaking methodologies or techniques." Public Advocate v. Public Utils. Comm'n, 655 A.2d 1251, 1253 (Me.1995) (citing New England Tel. & Tel. Co. v. Public Utils. Comm'n, 448 A.2d 272, 279 (Me.1982)). We review questions of law de novo, but "[o]n questions involving the interpretation and application of technical statutes or regulations, we give deference to the administrative agency unless the statutes or regulations plainly compel a contrary result." National Indus. Constructors, Inc. v. Superintendent of Ins., 655 A.2d 342, 345 (Me.1995); see also Agro v. Public Utils. Comm'n, 611 A.2d 566, 569 (Me.1992) ("a court will defer to an administrative agency's construction of a statute administered by it").

THE RATEMAKING PROCESS.

¶6 The purpose of Maine's public utilities regulatory system "is to assure safe, reasonable and adequate service at rates which are just and reasonable to customers and public utilities." 35-A M.R.S.A. § 101 (1988). In the usual proceedings for approval of schedules for prospective rate increases pursuant to 35-A M.R.S.A. §§ 301-312 (1988 & Supp.1997), the Commission has the power to approve rates which are "just and reasonable," and "[e]very unjust or unreasonable charge for public utility service is prohibited and declared unlawful." 35-A M.R.S.A. § 301(3), (4) (1988 & Supp.1997). The statute is explicit that "[i]n determining just and reasonable rates," the commission:

A. Shall provide such revenues to the utility as may be required to perform its public service and to attract necessary capital on just and reasonable terms; and ...

B. Shall, to a level within the Commission's discretion, consider whether the utility is operating as efficiently as possible and is utilizing sound management practices ....

35-A M.R.S.A. § 301(4) (1988 & Supp.1997). The just and reasonable rate is determined by the Commission "after consideration of the utility's appropriate rate of return, 'designed to provide sufficient revenue to cover the Company's total cost of service. Such costs include both the operating expenses of the utility and an adequate return on the investment in property and equipment serving the public.' " Maine Pub. Advocate v. Public Utils. Comm'n, 476 A.2d 178, 179 (Me.1984) (quoting Central Me. Power Co. v. Pub. Utils. Comm'n, 455 A.2d 34, 38 (Me.1983)); see also Camden & Rockland Water Co. v. Maine Pub. Utils. Comm'n, 432 A.2d 1284, 1286 (Me.1981).

PROHIBITIONS ON RETROACTIVE RATEMAKING

¶7 The Public Advocate contends that prior case law clearly establishes that the Commission lacks authority to adjust rates pursuant to the tracking mechanism. He relies on four of our prior cases: New England Tel. & Tel. Co. v. Public Utils. Comm'n, 354 A.2d 753 (Me.1976) (hereinafter NET I ); New England Tel. & Tel. Co. v. Public Utils. Comm'n, 362 A.2d 741 (Me.1976) (NET II ); First Hartford Corp. v. Central Me. Power Co., 425 A.2d 174 (Me.1981); Maine Pub. Advocate v. Public Utils. Comm'n, 476 A.2d 178 (Me.1984). The prohibition on retroactive ratemaking is not unique to Maine. It has been summarized as follows:

The rule prohibits a public utility commission from setting future rates to allow a utility to recoup past losses or to refund to consumers excess utility profits. Restated, the rule prohibits a utility commission from making a retrospective inquiry to determine whether a prior rate was reasonable and imposing a surcharge when rates were too low or a refund when rates were too high.

State v. Public Util. Comm'n of Texas, 883 S.W.2d 190, 199 (Tex.1994) (citation omitted).

¶8 Our cases are consistent with the rule articulated by the Texas court in that they make clear that the Commission has no authority to approve changes in rates that compensate a utility after the fact for errors in rates previously determined to be just and reasonable. See NET II, 362 A.2d at 758; see also First Hartford Corp., 425 A.2d at 181. Once rates have been set, the Commission may not adjust those rates retrospectively to make up for subsequently discovered mistakes in those rates. See NET II at 758; see also First Hartford Corp., 425 A.2d at 181. The Public Advocate argues that the language in those cases makes clear that the action of the Commission in adjusting the rates to implement the BSCA rule is impermissible retroactive ratemaking and beyond its power.

¶9 In NET I we upheld the Commission's denial of NET's request, pending the outcome of a rate case, for a temporary rate increase for the period between the temporary request and the Commission's final approval of the increase in the underlying rate case. We held that this "regulatory lag" to the detriment of the utility could only be dealt with prospectively. NET I, 354 A.2d at 764. We concluded that the statutes did not give the Commission the authority to establish "tem...