State ex rel. Empire Dist. Elec. Co. v. Public Service Com'n

• Decision Date: 28 May 1986
• Docket Number: No. 13696,13696
• Citation: 714 S.W.2d 623
• Parties: STATE ex rel. EMPIRE DISTRICT ELECTRIC COMPANY, Plaintiff-Respondent. v. PUBLIC SERVICE COMMISSION of the State of Missouri, Respondent-Appellant.
• Court: Missouri Court of Appeals

Page 623

714 S.W.2d 623

STATE ex rel. EMPIRE DISTRICT ELECTRIC COMPANY, Plaintiff-Respondent. v. PUBLIC SERVICE COMMISSION of the State of Missouri,

Respondent-Appellant.

No. 13696.

Missouri Court of Appeals,

Southern District,

Division Two.

May 28, 1986.

Motion for Rehearing or Transfer

Denied June 18, 1986.

Application to Transfer Denied Sept. 16, 1986.

Edward J. Cadieux, Deputy Gen. Counsel, Public Service Com'n of Missouri, Jefferson City, for respondent-appellant.

W.R. England, III, Vicki J. Goldammer, Hawkins, Brydon & Swearengen, Jefferson City, for plaintiff-respondent.

HOGAN, Presiding Judge.

In this ratemaking case, the Empire District Electric Company (Empire or the Company), a privately-owned utility, sought an add-back of $4,091,895 to its jurisdictional rate base. The sum which Empire sought to add back represents, according to Empire, accumulated deferred taxes created primarily by the use of accelerated depreciation as first authorized by the Revenue Act of 1954, Pub.L.No. 83-591 § 167, 68A Stat 51 (1954), and in lesser part by the Investment (Job Development) Tax Credit deduction first authorized by the Revenue Act of 1962, Pub.L.No. 87-834 (1962). The Commission received testimony and numerous exhibits. Upon the recommendation of its Staff auditors, the Commission treated the deferred tax reserves related to accelerated depreciation for the period 1954 through 1973 as a deduction from rate base and the deferred taxes related to ITC for the period 1963 through 1970 as a deduction from the rate base, except that part of the reserves attributable to the period February 1958 through June 1963. By its Report and Order dated June 17, 1983, the Commission found the Company's jurisdictional rate base to be $151,963,087 for electric operations, found that Empire's net operating income requirement was $16,336,032, and found that the fair value rate of return which would produce this revenue requirement was 10.75 percent, which the Commission found to be fair and reasonable.

Empire timely filed an application for rehearing, the substance of which was that the Commission had ignored its own decision in Re The Empire District Electric Company, Case No. 13,723, 22 PUR 3d 399 (Mo. 1958), wherein the Commission fixed the Company's elements of cost of service, and that the Commission was, by the force of § 386.490, RSMo 1978, required to regard that case as controlling so far as the add-back is concerned. Empire further contended that the Commission acted contrary to the overwhelming weight of the record evidence, arbitrarily excluded certain evidence, that it would be inimical to public policy not to allow the add-back to its rate base, and the rate of return allowed on the reduced rate base is confiscatory. On July 6, 1983, the Commission denied the application for rehearing.

The Company thereafter filed a petition for review, as authorized by § 386.510, RSMo 1978, in the Circuit Court of Jasper County. The circuit court affirmed that part of the Commission's order which excluded accumulated deferred taxes associated with accelerated depreciation during the period 1954 through 1958, and ITC accumulated from July 1, 1963, through December 31, 1970. It reversed that part of the Commission's order refusing to deduct accumulated taxes allocable to the period July 1, 1963, through December 31, 1973, and remanded the cause to the Commission "for further action not inconsistent herewith." In effect, the trial court ordered the Commission to add back $3,817,780 to Empire's rate base at the same rate of return as the other items which make up the capitalized rate base. The Commission thereafter timely appealed to this court. Having carefully reviewed the record at length, we conclude the Commission's order should be reinstated without modification. The primary principle upon which our decision is based is that a utility's accounting procedures cannot dictate ratemaking policies. Alabama-Tennessee Natural Gas Company v. Federal Power Commission, 359 F.2d 318, 336 (5th Cir.1966), cert. denied, 385 U.S. 847, 87 S.Ct. 69, 17 L.Ed.2d 78 (1966), reh. denied, 385 U.S. 964, 87 S.Ct. 390, 17 L.Ed.2d 310 (1966). This principle is subject to at least one important exception, which we will note in the course of the opinion.

To step back a moment, we have, of course, been required to consider the jurisdiction of the Circuit Court of Jasper County and the jurisdiction of this court of the appeal. Section 386.510, RSMo 1978, in terms provides that "... the applicant [for review] may apply to the circuit court of the county where the hearing was held or in which the commission has its principal office for a writ of certiorari or review." (Emphasis ours.) The statute is ambiguous, in a sense, for the language thereof does not specifically address situations in which hearings have been held at more than one place. We find from the record, however, that a formal public hearing was held in Joplin, Missouri, on February 14, 1983, upon order of the Commission. Such being the case, the applicant's petition for review was properly brought in Jasper County, even though other hearings were conducted at the Commission's office in Jefferson City. The appeal is properly here. State ex rel. Utility Consumers Council v. Public Service Commission, 562 S.W.2d 688, 692 (Mo.App.1978), cert. denied, 439 U.S. 866, 99 S.Ct. 192, 58 L.Ed.2d 177 (1978), and see State ex rel. Case v. Seehorn, 283 Mo. 508, 530, 223 S.W. 664, 670-71 (banc 1920). Further, we note that we review the order entered by the Commission and no deference to the determination of the circuit court is required. State ex rel. Ashcroft v. Public Service Commission, 674 S.W.2d 660, 662 (Mo.App.1984); State ex rel Public Water Supply District No. 8 of Jefferson County v. Public Service Commission, 600 S.W.2d 147, 149 (Mo.App.1980).

Our review of the Commission's Report and Order is limited to a determination whether it is (1) lawful and (2) reasonable. State ex rel. Utility Consumers Council of Missouri, Inc. v. Public Service Commission, 585 S.W.2d 41, 47 (Mo.banc 1979); State ex rel. Gulf Transport Company v. Public Service Commission, 658 S.W.2d 448, 452 (Mo.App.1983). However, the Commission's order is considered to be prima facie correct and the complaining party carries the burden of making a convincing showing that the Commission's order is not reasonable or lawful. Section 386.430, RSMo 1978; State ex rel. Utility Consumers Council of Missouri, Inc. v. Public Service Commission, 606 S.W.2d 222, 223 (Mo.App.1980), cert. denied, 450 U.S. 1042, 101 S.Ct. 1761, 68 L.Ed.2d 240 (1981). We agree with Empire's premise that while we may not substitute our judgment for that of the Commission, we may and should decide if the Commission could reasonably have made its findings and reached its decision by consideration of all the evidence presented. State ex rel. Gulf Transport Company v. Public Service Commission, 658 S.W.2d 448, 452. As a substitute for citation of authority, and after this court ordered correction of the Commission's brief, the Commission has suggested that "The parties before the Commission were in agreement that if tax-timing differences associated with the deferred reserves were accorded tax normalization treatment for ratemaking purposes, then deduction from the rate base is proper, and, conversely, if tax-timing differences involved were treated on a flow-through basis for ratemaking purposes, then deduction of the associated deferred reserves from rate base were not warranted." We find no such "agreement" in the record at the place cited, and in any case, decisions of administrative agencies, including the Commission, based on their interpretation of the law are matters for the independent judgment of the reviewing court, and are subject to correction when they are erroneous. Daily Record Company v. James, 629 S.W.2d 348, 351 (Mo.banc 1982); State ex rel. Gulf Transportation Company v. Public Service Commission, 658 S.W.2d at 453.

A quotation from an elementary text is appropriate to put the subject matter of the appeal in perspective.

"Under the Revenue Act of 1954, business firms are permitted to adopt accelerated depreciation in calculating taxable income, thereby charging higher depreciation expenses in the early years of the service life of assets than would be allowed under straight line depreciation and lower rates in later years. The effect is to produce lower tax payments with respect to the early years which are offset by increased tax payments in the remaining years. The act [has] posed a problem for the regulatory commissions: should they include, for rate-making purposes, as operating costs the higher income taxes to which utilities would be subject were they to report taxable income on a straight line basis ('normalization' method) or should they include only the taxes actually paid ('flow-through method') by the utilities?"

C. Phillips, The Regulation of Public Utilities 267-68 (1984) [hereinafter Phillips]. To the extent it is possible to distinguish desirable or required tax accounting principles applicable to regulated utilities from those accounting principles in the context of ratemaking, we forego any discussion of particular accounting systems. Such a discussion is well beyond the scope of this opinion and probably any other opinion of conscionable length. ¹

The Western District addressed "normalization" and "flow-through" as applied to ratemaking in State ex rel. Utility Consumers Council of Missouri, Inc. v. Public Service Commission, 606 S.W.2d 222. Using an illustrative example taken from the Commission's brief, our colleagues explained, 606 S.W.2d at 224:

"By 'normalization,' which was allowed in the present case, the income tax expense item allowed to be deducted in arriving at cost of service are not the taxes actually paid, but are the amount which would have been paid had the straight line depreciation method been used...