Spire Mo., Inc. v. Pub. Serv. Comm'n of Mo.

• Decision Date: 09 February 2021
• Docket Number: No. SC 97834,SC 97834
• Citation: 618 S.W.3d 225
• Parties: SPIRE MISSOURI, INC., f/k/a Laclede Gas Company, Appellant, v. PUBLIC SERVICE COMMISSION of the State of Missouri, Respondent, and Office of Public Counsel, Intervenor.
• Court: Missouri Supreme Court

618 S.W.3d 225

SPIRE MISSOURI, INC., f/k/a Laclede Gas Company, Appellant,

v. PUBLIC SERVICE COMMISSION of the State of Missouri, Respondent,andOffice of Public Counsel, Intervenor.

No. SC 97834

Supreme Court of Missouri, en banc.

Opinion issued February 9, 2021

APPEAL FROM THE MISSOURI PUBLIC SERVICE COMMISSION

Paul C. Wilson, Judge

Spire Missouri, Inc. ("Spire"), formerly known as Laclede Gas Co., is an investor-owned public utility regulated by the Public Service Commission ("PSC"). In April 2017, Spire filed tariffs to increase its general rates for gas services in its Spire Missouri East and Spire Missouri West territories.¹ The PSC suspended Spire's new tariffs until March 2018 and established a test year. The cases were consolidated, and several parties were granted intervention. The PSC issued its Amended Report and Order in March 2018. Among the PSC's conclusions, the Amended Report and Order disallowed a portion of Spire's rate case expenses, included some of the proceeds from the 2014 sale of a facility in setting Spire's new rates, and determined Spire East's prepaid pension asset was $131.4 million (or approximately $28.8 million less than Spire contended). Spire appeals. This Court has jurisdiction pursuant to article V, section 10 of the Missouri Constitution. The Amended Report and Order is affirmed in part and reversed in part, and the case is remanded for further proceedings consistent with this opinion.

Background

In April 2017, Spire filed tariffs with the PSC that would implement general rate increases in its Spire East and Spire West service areas. The tariffs would have increased annual gas revenue for Spire East by approximately $58.1 million. Because approximately $29.5 million of this already was being recovered through Spire's infrastructure system replacement surcharge ("ISRS"), the net increase in revenue for Spire East would be $28.5 million. The tariffs would have increased annual gas revenue for Spire West by approximately $50.4 million. Because approximately $13.4 million of this already was being recovered through Spire West's ISRS, the net increase in revenue for Spire West would be $37 million.

The PSC suspended Spire's general rate increase tariffs until March 2018 and established a test year for the 12-month period ending December 31, 2016, to be updated for known and measurable changes through June 30, 2017. Several parties, including the Office of Public Counsel, were granted intervention,² and the cases were consolidated for hearing purposes. The PSC held local public hearings. The PSC then held evidentiary hearings and true-up hearings followed by briefing. Several issues were resolved by stipulations unopposed by any of the non-signatory parties, and the PSC approved those stipulations. The PSC then issued its consolidated Amended Report and Order on March 7, 2018, which became effective March 17, 2018.

Among the many issues before it, the PSC considered what portion of Spire's rate case expenses ought to be included in Spire's new base rates (and, therefore, paid for by Spire's customers rather than its investors). The PSC concluded that, because it is required under section 393.130.1³ to set rates that are "just and reasonable," it had the broad discretion to determine whether it was just and reasonable for Spire's shareholders to share the burden of rate case expenses with ratepayers. As of September 30, 2017, Spire's total rate case expenses were $1,393,399. The PSC's staff of technical and subject matter experts ("Staff") recommended disallowing expenses relating to the procurement of a Cash Working Capital study by the consultant firm ScottMadden. The Office of Public Counsel recommended disallowing expenses related to Spire's expert witness Thomas Flaherty because of the high hourly rate charged. The PSC determined that approximately half the litigated issues in this case were driven by Spire and among these issues were the proposed use of various shareholder-favorable ratemaking tools, including a revenue stabilization mechanism, a rate of return on equity of 10.35 percent (which would have been the highest of any large utility in Missouri), tracking mechanisms to limit shareholder risk, and earnings-based incentive compensation. The PSC further determined Spire "padded" its revenue requirement by pursing positions it did not expect to win. Accordingly, the PSC determined Spire should recover the entire cost of customer notices, totaling $436,000, and Spire's depreciation study,⁴ totaling $54,114, but only 50 percent of Spire's remaining rate case expenses. The PSC ordered these allowed rate case expenses normalized over four years.

The PSC also considered whether some of the proceeds of Spire's sale of one of its service centers should be used to offset Spire's purchase of a more expensive service center and, therefore, inure to the benefit of ratepayers. Spire East owned and operated three district service centers providing leak detection, leak repair, construction, maintenance, and marking services. One of the service centers was located near Forest Park in the city of St. Louis ("the Forest Park property"). In 2013, Spire acquired two properties adjacent to the Forest Park property for additional leverage in negotiations. Then, in 2014, as part of a restructuring of Spire following the acquisition of Spire West, Spire sold the Forest Park property (and the two adjacent properties) to the Cortex Innovation Community in St. Louis, which purchased the properties for construction of an IKEA retail store. The sale price for the Forest Park property included a gain of approximately $7.6 million, excluding the $1.8 million undepreciated book value of recent capital improvements to the facilities, and an allowance of $5.7 million for relocation expenses. Of the relocation expense allowance, Spire used $1.95 million to purchase furniture and fixtures for its new offices at 700 and 800 Market Street in the city of St. Louis and $200,000 to lease a temporary space during the move. The evidence did not show how much (if any) of the remaining relocation expenses were necessitated by the move from the Forest Park property to the new Manchester center. Spire contributed $1.5 million from the gain as a civic contribution to further downtown St. Louis rehabilitation.

In November 2016, Spire opened the newly constructed Manchester Avenue facility in the city of St. Louis as a partial replacement for the Forest Park property. The Manchester Avenue facility has a greater capital cost ($7.7 million base rate value), but it is more efficient to operate than the aging Forest Park facility. Pursuant to section 393.190, gas utilities must obtain authorization from the PSC to sell any part of its system that is necessary or useful in the performance of its duties to the public, but Spire did not obtain this authorization prior to selling its Forest Park property.

The PSC was required to decide whether to consider all, some, or none of the proceeds from the sale of the Forest Park property in setting Spire's new rates. Per Staff's recommendation, the PSC ordered nearly $3.6 million from the sale (the $5.7 million relocation costs, less documented relocation expenses and the cost of furniture and fixtures for the new offices) be used to offset the cost of the more expensive capital asset of the Manchester Avenue facility. The PSC ordered this amount amortized over five years.

Finally, the PSC considered the amount of Spire's pension contributions to include in base rates. Spire makes contributions to its pension plan pursuant to a collective bargaining agreement with its union employees. A prepaid pension asset is a regulatory asset representing the amount Spire has contributed to its pension plan but has not yet recovered from ratepayers. A pension liability is the opposite; it arises when Spire collects more from ratepayers than it has contributed to its pension plan. It is undisputed that Spire West has a pension liability of $28.4 million, but the amount of Spire East's pension asset (or liability) was in dispute. Staff and Spire agree that at least $131.4 million has accumulated in Spire East's pension asset since 1996, but they disagree as to what amount (if any) accumulated prior to that time. Spire argued the pension asset includes an additional $28.8 million, which accumulated between 1990 and 1996, during which time Spire East filed rate cases in 1990 (i.e., rates for 1990-1992), 1992 (i.e., rates for 1992-1994), and 1994 (i.e., rates for 1994-1996).

The disagreement between Staff and Spire centers on whether Spire East used the cash or accrual method of accounting to account for the pension asset in its 1990, 1992, and 1994 rate cases. FAS 87 and FAS 88 are Financial Accounting Standards articulating generally accepted accounting principles in accounting for the accrual of a pension asset. These are used routinely in reporting but less regularly in ratemaking. Staff argued Spire East did not begin to use both FAS 87 and FAS 88 to calculate its pension asset in rate cases until the 1996 rate case in that it used neither standard in the 1990 and 1992 cases and only FAS 87 (but not FAS 88) in the 1994 rate case. Spire concedes there is evidence suggesting its pension expense was calculated on a cash basis in the 1992 rate case but argues it had been using FAS 87 for financial reporting purposes since 1987 and, therefore, FAS 87 and FAS 88 would had to have been (and were) used in the 1990, 1992, and 1994 rate cases. With respect to the 1994 rate case, Spire contends the explicit references to FAS 87 necessarily included reference to FAS 88 because the two are inseparably intertwined and the former would not have been used without the latter. The amount in dispute from 1990 through 1994 is $19.8 million, and the amount in dispute between 1994 and 1996 is $9 million.

In its Amended Report and Order, the PSC rejected Spire's position and adopted, instead, the testimony of Staff witness...