South Dakota Public Utilities Commission v. Otter Tail Power Co.

Decision Date16 April 1980
Docket NumberNo. 12562,12562
Citation291 N.W.2d 291
CourtSouth Dakota Supreme Court

Frances E. Francis, Spiegel & McDiarmid, Washington, D.C., Ben Stead, Asst. Atty. Gen., Pierre, for appellant; Mark V. Meierhenry, Atty. Gen., Pierre, on brief.

Warren W. May of May, Adam, Gerdes & Thompson, Pierre, Peter A. Hoff of Arvesen, Donoho, Lundef, Hoff & Svingen, Fergus Falls, Minn., for respondent.

FOSHEIM, Justice.

This appeal stems from a rate increase applicable to the South Dakota retail electric customers of Otter Tail Power Company (OTP). We affirm in part and reverse in part and remand.

OTP is an investor-owned electric utility, providing electric service at retail in Minnesota, North Dakota and South Dakota. In 1975, OTP had a revenue deficiency and filed for a rate increase, requesting that its South Dakota customers share in correcting the loss. Its request was denied by the Public Utilities Commission (PUC), and OTP appealed. In February of 1977, the circuit court found that the findings of the PUC were deficient and remanded for further proceedings. The PUC issued a new decision in July of 1977 which purported to satisfy the remand directions. OTP again appealed from the PUC decision and the circuit court overruled the PUC. The PUC now appeals from the ensuing order of the circuit court.

From the issues before the PUC and the circuit court, five remain: (1) Transmission Plant Allocation; (2) Compensating Bank Balances; (3) Construction Work in Progress; (4) Inflation Adjustments; and (5) Power Pool Sales. We reverse as to (1), (3) and (5), and affirm as to (2) and (4).

SDCL 49-34A-62 places appeals from the PUC under the provisions of SDCL 1-26. SDCL 1-26-36 1 controls the scope of review and, at the time this case was decided, provided that the court shall not substitute its judgment for that of the administrative agency regarding the weight of the evidence on questions of fact. It allowed, however, reversal or modification of the decision of the agency if it is unsupported by substantial evidence on the whole record or is an arbitrary exercise of discretion. Matter of Certain Territorial Electric Boundaries, 281 N.W.2d 65 (S.D.1979); Dail v. South Dakota Real Estate Commission, 257 N.W.2d 709 (S.D.1977).

On appeal, this court must make the same review of the administrative tribunal's action as did the circuit court. Our determination as to whether the administrative decision can be sustained is unaided by a presumption that the circuit court's decision is correct. Application of Montana Dakota Utilities Co., 278 N.W.2d 189 (S.D.1979); Piper v. Neighborhood Youth Corps, 241 N.W.2d 868 (S.D.1976).

Accordingly, we must apply the "substantial evidence" standard even though that part of SDCL 1-26-36 has in the meantime been amended. 2 Matter of Certain Territorial Electric Boundaries, supra. The standard of review is not whether there is substantial evidence contrary to the court's finding, but whether there is substantial evidence to support the agency's finding. Application of Ed Phillips and Sons, Co., 86 S.D. 326, 195 N.W.2d 400 (1972). "Substantial evidence" means such relevant and competent evidence as a reasonable mind might accept as being sufficiently adequate to support a conclusion. SDCL 1-26-1(8).

This court has consistently recognized that rate making is a legislative process, whether performed directly by the legislature, or by an agency of its creation. Northwestern Public Service v. Cities of Chamberlain, etc., 265 N.W.2d 867 (S.D.1978) (NPS v. Chamberlain). This extends to the procedure by which a legislative determination is made and, within the broad field where that discretion is operative, legislative determinations are conclusive. NPS v. Chamberlain, supra; Application of Northwestern Bell Telephone Co., 78 S.D. 15, 98 N.W.2d 170 (1959). In re Northwestern Bell Telephone Company, 73 S.D. 370, 43 N.W.2d 553 (1950); Application of Dakota Transportation, Inc., of Sioux Falls, 67 S.D. 221, 291 N.W. 589 (1940).

In NPS v. Chamberlain, supra, we quoted approvingly from this expression of the United States Supreme Court in Permian Basin Area Rate Cases, 390 U.S. 747, 791-2, 88 S.Ct. 1344, 1373, 20 L.Ed.2d 312, 350 (1968):

It follows that the responsibilities of a reviewing court are essentially three. First, it must determine whether the Commission's order, viewed in light of the relevant facts and of the Commission's broad regulatory duties, abused or exceeded its authority. Second, the court must examine the manner in which the Commission has employed the methods of regulation which it has itself selected, and must decide whether each of the order's essential elements is supported by substantial evidence. Third, the court must determine whether the order may reasonably be expected to maintain financial integrity, attract necessary capital, and fairly compensate investors for the risks they have assumed, and yet provide appropriate protection to the relevant public interests, both existing and foreseeable. The court's responsibility is not to supplant the Commission's balance of these interests with one more nearly to its liking, but instead to assure itself that the Commission has given reasoned consideration to each of the pertinent factors.

With these criteria in mind, we turn to the points at issue.

(1) Transmission Plant Allocation

OTP operates an integrated electric system in the states of Minnesota, North Dakota and South Dakota providing electric service facilities for generation, transmission, and distribution. These three functions are the basis upon which costs are determined for the entire system. The generation and transmission functions are referred to as the bulk power supply function, and their purpose is to generate and deliver power to the local areas where the electricity is then stepped down to lower voltages that are useable by, and distributed to, the ultimate consumer. OTP has 672 miles of electrical lines in South Dakota.

In this proceeding, the issue was the allocation of OTP's transmission costs. OTP generation costs for the system were determined and allocated on the basis of relative demand among the three sets of customers in each state.

In order to apportion rate base and expense among the three states it serves, OTP developed allocation percentages. OTP used mileage and demand as allocation factors in obtaining the percentage of the transmission plant being used in South Dakota. The percentage of the total demand on the entire system allocable to South Dakota customers and the percentage of the miles of line in this state were determined. These factors were then weighted with 40% to demand and 60% to miles of line. This resulted in about 10.3% of the total OTP transmission plant investment being allocated to South Dakota. Mr. Towers, a public utility rate consultant and PUC witness, reviewed OTP diagrams. He considered all KV (kilovolt) facilities above a certain point of KV demarcation to represent its investment in transmission facilities performing the bulk power supply function. Lower KV facilities were considered essentially local in function. In averaging the demand and line mileage factors, he gave 90.4% weight to demand and 9.6% weight to mileage. Mr. Towers calculated that approximately 8.5% of OTP transmission investment is allocable to South Dakota. The PUC adopted the 8.5% allocation, but it was rejected by the circuit court in favor of the OTP 10.3%.

As we indicated in NPS v. Chamberlain, the PUC need not follow any single formula in arriving at the rates fixed so long as the method used, when applied to the facts and viewed as a whole, does not produce an arbitrary result. Since the determination reached by the PUC rested on substantial evidence, we cannot conclude it was arbitrary and capricious. Accordingly, that part of the circuit court order directing that the higher allocation be included in the rate base is reversed.

(2) Compensating Bank Balances

The circuit court vacated the PUC's decision disallowing $246,427.00 in compensating bank balances sought by OTP on the grounds that OTP failed to meet the following three-part test: (1) The utility must show that the balances are contractually required; (2) that the balances represent the least costly method of obtaining lines of short-term credit; and (3) that the utility does, in fact, maintain these balances.

In NPS v. Chamberlain, supra, we indicated that the amount and necessity of compensating bank balances must be supported by the testimony of company and bank officials, and we quoted from the New York Public Service Commission in Niagara-Mohawk Power Corporation, 87 PUR3d 189 (N.Y.1970): "(W)e would want, for example, testimony of bank officers that such balances are required to be maintained . . . Evidence also should be submitted concerning the use which is made of the funds borrowed which result in these balances."

In this case, no bank officials who extended credit to OTP testified. We further indicated in NPS v. Chamberlain, however, that proof of the necessity of compensating balances need not rise to the level of being clear and convincing.

OTP introduced into evidence several letters from banks, most of which indicated expressly or by implication that the line of credit extended to OTP was conditioned upon the maintenance of compensating bank balances. Also entered into evidence was a copy of the prospectus covering the sale of 250,000 shares of common stock of OTP, dated May 4, 1976. This prospectus contained financial statements of OTP for the five years ending December 31, 1975, which were audited by an independent certified public accountant whose note to these statements reads, in part:

The Company maintains compensating balances at various banks in support of formal lines of credit. The balance either represents 10% of the...

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