State ex rel. Associated Natural Gas Co. v. Public Service Com'n of Missouri

• Decision Date: 31 December 1985
• Docket Number: No. WD,WD
• Citation: 706 S.W.2d 870
• Parties: STATE ex rel. ASSOCIATED NATURAL GAS COMPANY, Relator-Appellant, v. PUBLIC SERVICE COMMISSION OF MISSOURI, Respondent, and Office of the Public Counsel of the State of Missouri, Intervenor-Respondent. 36576.
• Court: Missouri Court of Appeals

Page 870

706 S.W.2d 870

STATE ex rel. ASSOCIATED NATURAL GAS COMPANY, Relator-Appellant, v. PUBLIC SERVICE COMMISSION OF MISSOURI, Respondent, and Office of the Public Counsel of the State of Missouri,

Intervenor-Respondent.

No. WD 36576.

Missouri Court of Appeals,

Western District.

Dec. 31, 1985.

Motion for Rehearing and/or Transfer

to Supreme Court Overruled and

Denied March 4, 1986.

Application to Transfer Denied

April 15, 1986.

Charles G. Siebert, August L. Griesedieck, Ann E. Buckley, Schlafly, Griesediech, Toft & Virtel, St. Louis, for relator-appellant Associated Natural Gas Co.

Martin C. Rothfelder, Asst. Gen. Counsel, Missouri Public Service Com'n, Jefferson City, for respondent.

Richard W. French, First Asst. Public Counsel, Jefferson City, for intervenor-respondent Office of the Public Counsel.

Before MANFORD, P.J., and PRITCHARD and LOWENSTEIN, JJ.

LOWENSTEIN, Judge.

In December, 1982, the appellant Associated Natural Gas Company (Company), a public utility, applied with the Missouri Public Service Commission (Commission) for a rate increase for gas service provided in its Missouri service area. After hearing, the Commission issued an order permitting a rate increase which would generate gross revenues in an amount substantially less than that requested by the appellant. At the heart of this appeal is the issue whether in the ratemaking process the Commission can consider the financial structure of a corporate parent in determining the service rates of the subsidiary, a Missouri utility. This court considers the validity of the use of this concept, known as "double leveraging," for the first time. Its use by the commission under the facts of this case is strenuously attacked by the utility company.

The Company, whose home office is in Blytheville, Arkansas, is a wholly owned subsidiary of Arkansas Power and Light (APL), an electric utility doing business and regulated in Missouri. In turn, all of APL's common stock is owned by Middle South Utilities (MSU), a public utility holding company. MSU's common stock is market traded whereas the Company's and APL's is not.

The Company supplies natural gas to a total of about 45,000 customers in southeast Missouri and in the Butler and Kirksville areas. The Company applied for increases in residential rates to raise gross revenues by $1,857,323. The Commission authorized tariffs which increased gross revenues by $437,111. The circuit court affirmed the Commission.

In substance, the Company contends the Commission's use of "double leveraging" lowered the rate increase below what was just and reasonable. The Commission consolidated the capital structure of the Company and APL and MSU to arrive at a rate increase it deemed fair and permissible. Stripped of all the jargon, the Company asserts that only its financial figures should have been used in the rate determination and that the Commission's formula lowered the return to the company by 15%, resulting "in a loss of about $1,100,000."

An essential function of the Commission in the ratemaking process is to determine an appropriate rate of return. Typically, the rate of return is designed to provide sufficient revenue to cover the utility'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. Central Maine Power Co. v. Public Utilities Commission, 455 A.2d 34, 38 (Me.1983).

Two leading United States Supreme Court decisions are instructive in arriving at what constitutes a just and reasonable rate:

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.

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).

[T]he Commission [is] not bound to the use of any single formula or combination of formulae in determining rates. Its rate-making function, moreover, involves the making of "pragmatic adjustments." And when the Commission's order is challenged in the courts, the question is whether that order "viewed in its entirety" meets the requirements of the Act. Under the statutory standard of "just and reasonable" it is the result reached not the method employed which is controlling. It is not theory but the impact of the rate order which counts. If the total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry under the Act is at an end. The fact that the method employed to reach that result may contain infirmities is not then important. Moreover, the Commission's order does not become suspect by reason of the fact that it is challenged. It is the product of expert judgment which carries a presumption of validity. And he who would upset the rate order under the Act carries the heavy burden of making a convincing showing that it is invalid because it is unjust and unreasonable in its consequences.

The rate-making process under the Act, i.e., the fixing of "just and reasonable" rates, involves a balancing of the investor and the consumer interests.... It is important that there be enough revenue not only for operating expenses but also for the capital costs of the business. These include service on the debt and dividends on the stock. By that standard the return to the equity owner should be commensurate with returns on investments in other enterprises having corresponding risks. That return, moreover, should be sufficient to assure confidence in the financial integrity of the enterprise.

Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 602-03, 64 S.Ct. 281, 287-88, 88 L.Ed. 333 (1944) (citations omitted) (emphasis added).

In other words, the ratemaking function must provide sufficient income to cover the utility's operating expenses and debt service. United States v. Federal Communications Commission, 707 F.2d 610, 612 (D.C.Cir.1983). In addition, there must be enough revenue generated as a return to the owners of the company's stock to assure confidence in the continued financial services of the business and to attract equity investors. Hope Natural Gas, supra, 320 U.S. at 603, 64 S.Ct. at 288. The rate of return should not be higher than is necessary to achieve these goals. Otherwise, utility customers will pay excessive prices, something regulation seeks to prohibit. In re Permian Basin Area Rate Cases, 390 U.S. 747, 791-92, 88 S.Ct. 1344, 1372-73, 20 L.Ed.2d 312 (1968).

As is applicable here, the ratemaking process requires the regulatory body to determine the utility's cost of capital (debt and equity costs). These calculations result in a percentage figure which is then The Company raises numerous points and subpoints on appeal whereby it contends that the trial court erred in affirming the Commission's report and order: 1) the Company primarily complains of the Commission's use of the double leverage methodology under the facts in this case in arriving at a rate of return; 2) the Commission erred in using the figures of independent, unregulated, out-state utilities which provide a different product; 3) the effect of the order was confiscatory and violative of due process; and 4) the Commission erred in following the testimony of the staff witness.

multiplied by the value of assets used in production of the utility service to ultimately arrive at a rate charge that will not be burdensome to the customer and at the same time will be just and reasonable to the Company.

The proceedings and order of the Missouri Public Service Commission are administrative by nature. Appellate review of such orders and proceedings is governed by Mo.Const. art. V, § 18: "[S]uch review shall include the determination whether the same are authorized by law, and in cases in which a hearing is required by law, whether the same are supported by competent and substantial evidence on the whole record."

On appeal, this court's role is to determine whether the Commission's report and order was lawful and reasonable. State ex rel. Utility Consumers Council of Missouri, Inc. v. Public Service Commission, 585 S.W.2d 41, 47 (Mo. banc 1979). The lawfulness of a Public Service Commission order depends on whether it issued under statutory authority. State ex rel. Gulf Transport Co. v. Public Service Commission, 658 S.W.2d 448, 452 (Mo.App.1983). In determining the statutory authorization for or lawfulness of the order, the court need not defer to the Commission. State ex rel. Utility Consumer's Council of Missouri, supra, 585 S.W.2d at 47. However, as to matters of reasonableness, the court cannot substitute its judgment for that of the Commission if it is supported by substantial and competent evidence on the record as a whole. Id.

Since the reviewing court is not authorized to weigh the evidence heard by the Commission, the Commission's findings are prima facie correct. In other words, the order is presumed valid. State ex rel. Ashcroft v. Public Service Commission, 674 S.W.2d 660, 662 (Mo.App.1984). The burden is on the party attacking the validity of the Commission's order. State ex rel. Utility Consumer's Council of Missouri, supra, 585 S.W.2d at 47. Under § 386.430, RSMo 1978 (all statutory references are to RSMo 1978 unless otherwise...