Southern Union Gas Co. v. New Mexico Public Service Commission
| Decision Date | 22 November 1972 |
| Docket Number | No. 9486,9486 |
| Parties | , 96 P.U.R.3d 510 SOUTHERN UNION GAS COMPANY, Petitioner-Appellee and Cross-Appellant, v. NEW MEXICO PUBLIC SERVICE COMMISSION, Respondent-Appellant and Cross-Appellee. |
| Court | New Mexico Supreme Court |
Southern Union Gas Company, hereinafter referred to as 'the Company,' appellee and cross-appellant, petitioned the New Mexico Public Service Commission, hereinafter referred to as 'the Commission,' appellant and cross-appellee, for a rate increase. After the Commission issued its order denying the rate increase, the Company sought a statutory review proceeding in the Santa Fe County District Court. That court entered findings of fact and conclusions of law and held the Commission's order null and void as being unreasonable and unlawful. The Company cross appealed on two issues.
The legislature has established certain goals which utility regulation and supervision are intended to achieve: reasonable and proper services should be made available to the public at fair, just and reasonable rates, and capital and investment should be encouraged and attracted for the plants and facilities which are to render that service. § 68--3--1(B), N.M.S.A.1953. Further, the legislature has allowed the Commission great flexibility in the methods to be used in achieving those goals. It is within the context of these general observations that we proceed to resolve the issues presented by this appeal. Our review will be limited to a determination of whether the Commission's order was unreasonable or unlawful as held by the district court. § 68--9--5, N.M.S.A.1953.
In general, there are five areas of the order which must be discussed: (1) the method used to trend items in the Company's general plant account to determine their reproduction cost; (2) the method used to determine how much depreciation should be applied to the reproduction cost of much of the Company's property, (3) the method used to determine what rate of return the Company should have, (4) the exclusion of $673,574 of construction work in progress from the Company's rate base, and (5) the deduction from rate base of the Company's reserve for deferred taxes. Section 68--6--7(D), N.M.S.A.1953, states that if the Commission finds the Company's proposed rates to be unjust, unreasonable or in violation of the law, the Commission shall determine the just and reasonable rates. Thus, when necessary, we will first determine whether the Commission is correct in not accepting the Company's method and, secondly, whether the method substituted by the Commission is acceptable.
The Company proposed to trend the general plant account items by using a nationally recognized index, Handy-Whitman, which was generally suited for determining reproduction costs. General plant account items are those items which cover desks, chairs, typewriters, office supplies, etc. There was a reason why the index was not accepted by the Commission. The index did not list trend factors for general plant accounts, nor did the authors of the index recommend the use of their indices for such accounts. Both the Commission and the Company agree on these facts. The Commission then inserted its own method--to simply use the untrended original cost. However, the witness who strongly supported this approach admitted that he did not know whether this would accurately establish the reproduction cost of the items. The parties agree that applicable indices did exist, but none of them were used. We believe that this area of the order was unreasonable, being unsupported by substantial evidence.
It is necessary to deduct from reproduction cost any depreciation which the Company's property has suffered. The Company attempted to establish what the depreciation was by actually examining randomly selected sections of its underground pipe and other equipment. For the following reasons the Commission may properly have rejected that evidence: the sampling technique was not verified, no metallurgical or stress tests were performed, there apparently was no disassembly of equipment, and little or no attention was given to functional depreciation. Having rejected this evidence, the Commission substituted its own indicator--the Company's book reserve for depreciation. Yet, Mr. Cardey, a staff witness, twice testified that he did not believe the depreciation reserve necessarily reflected value of property, and no other evidence established that it did. Therefore, there does not appear to be sufficient evidence to establish the reasonableness of the order in this area. The Company argues that the Commission was bound to accept its depreciation study because the District Court of Santa Fe County (in Southern Union Gas Co. v. New Mexico Public Service Commission, Cause No. 31074 (1961)) had previously held that where evidence of observed depreciation is available, the Commission may not fail to apply it. We reject this argument on two grounds. First, we do not believe such studies must be applied when other evidence impeaches them, as in this case. Secondly, § 68--5--14, N.M.S.A.1953, sets out several factors which the Commission is bound to consider when establishing the value of Company property: (1) the history and development of the property and business of the particular public utility; (2) the original cost; (3) the cost of reproduction as a going concern, and (4) other elements of value recognized by the laws of the land for rate making purposes. Rather obviously, chaining the Commission to a single factor for ascertaining depreciation is not in the spirit of a statute which grants the Commission such great flexibility. Whether observed physical depreciation or book reserve depreciation or some other indicator is used, there must be substantial evidence that it accurately aids in determining value.
The Commission ordered that 6.75% was a proper rate of return. Because the rate allowed is so directly connected with whether the goals of § 68--3--1(B), supra, will be achieved, it is important to keep those goals in mind as we proceed. Enough actual dollars must be produced that both ratepayers and investors are justly and reasonably treated.
Below, the district court held that the order was unreasonable and unlawful because it did not simply turn the cost of capital percentage (established by both parties at somewhere between 7.53% and 7.63%) directly into a rate of return. We believe that there was no evidence that such a procedure would meet the statutory goals. As a matter of fact, the Company did not seem to think so. It requested a 7.25% rate as being:
'* * * high enough, averaged out over whatever period the new rates set in this proceeding remain in effect, to let us avoid any significant...
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