State ex rel. Pub. Counsel v. Pub. Service, WD 69259.

Citation274 S.W.3d 569
Decision Date13 January 2009
Docket NumberNo. WD 69297.,No. WD 69259.,No. WD 69270.,WD 69259.,WD 69270.,WD 69297.
PartiesSTATE ex rel. PUBLIC COUNSEL; State ex rel. Jeremiah Nixon, State ex rel. Union Electric Company, Appellants, v. PUBLIC SERVICE COMMISSION, Respondent.
CourtCourt of Appeal of Missouri (US)

Lewis R. Mills, Jr., Robert E. Carlson, Jefferson City, MO, and James B. Lowery, Columbia, MO, for appellant.

Steven R. Dottheim, Jefferson City, MO, for respondent.


The appellants, Union Electric Company (UE),1 the State of Missouri, and the Office of Public Counsel, appeal separately the Public Service Commission's order authorizing UE, an electric utility, to increase its electricity rates. Because the three appeals raise common issues, we consolidate them.

UE initiated this case on July 7, 2006, when it filed tariff sheets seeking to implement an annual general rate increase of approximately $360 million. The commission suspended the tariff's effective date until June 4, 2007, so it could investigate the request. Numerous parties, including the State, intervened. After local hearings and the filing of witness testimony by the parties, the commission convened an evidentiary hearing on March 12, 2007. After a three-week hearing, the commission issued its decision on May 22, 2007, authorizing UE to increase its rates, but by only approximately $43 million.

On appeal, UE presents two points, the State presents four points, and Public Counsel presents eight. When possible, we address the points together.

UE complains of the commission's authorizing a rate of only $43 million on the ground that the commission based the rate on an improper 10.2 percent rate of return on UE's equity. UE asserts that, pursuant to undisputed evidence, the commission should have used an 11 percent rate of return because that was the average rate for Midwest electric utilities. The State and Public Counsel, on the other hand, assert that the evidence did not justify a rate of return above 9.8 percent.

Our review of commission decisions is limited to determining whether or not the commission exceeded its constitutional and statutory authority or otherwise acted unlawfully; whether or not competent and substantial evidence on the whole record supported its decision; whether or not its decision was based on lawful procedure or a fair trial; and whether or not the commission acted arbitrarily, capriciously, unreasonably, or abused its discretion. Section 536.140, RSMo 2000 (recognized as applicable to commission cases by State ex rel. Chicago, Rock Island & Pacific Railroad Company v. Public Service Commission, 312 S.W.2d 791, 794-95 (Mo. banc 1958)). We presume the commission's fact-finding to be correct until the appellant establishes the contrary. Coffman v. Public Service Commission, 154 S.W.3d 316, 320 (Mo.App.2004).

Section 393.270, RSMo 2000, governs the commission's authority to fix utility rates. It says:

2. After a hearing and after such investigation as shall have been made by the commission or its officers, agents, examiners or inspectors, the commission within lawful limits may, by order, fix the maximum price of gas, electricity, water or sewer service not exceeding that fixed by statute to be charged by such corporation or person, for the service to be furnished; and may order such improvement in the manufacture, distribution or supply of gas, in the manufacture, transmission or supply of electricity, in the distribution or supply of water, in the collection, carriage, treatment and disposal of sewage, or in the methods employed by such persons or corporation as will in its judgment be adequate, just and reasonable.


4. In determining the price to be charged for gas, electricity, or water the commission may consider all facts which in its judgment have any bearing upon a proper determination of the question although not set forth in the complaint and not within the allegations contained therein, with due regard, among other things, to a reasonable average return upon capital actually expended and to the necessity of making reservations out of income for surplus and contingencies.

Pursuant to § 393.270.4, the commission calculated UE's revenue requirement by adding the utility's operating expenses to its plant depreciation, taxes, and rate of return on equity and then multiplying this total by the utility's rate base. The parties concede that this was a proper calculation. They focus their appeal on the commission's calculation of UE's rate of return on equity.

The rate of return is, essentially, the amount that a utility must pay to secure financing from debt and equity investors. State ex rel. Missouri Gas Energy v. Public Service Commission, 186 S.W.3d 376, 383 (Mo.App.2005). To determine the proper rate of return, the commission should factor "(i) the ratio of debt and equity to total capital, and (ii) the cost and (iii) weighted cost for each of these capital components." Id. Determining a rate of return on equity, however, is imprecise and involves balancing a utility's need to compensate investors against its need to keep prices low for consumers. Id.

In calculating UE's rate of return on equity, the commission used what it termed a zone of reasonableness test in which it presumed that any rate that was within 100 basis points of the national average was reasonable. Applying its zone of reasonableness test to UE's request, the commission found that the national average was 10.36 percent and concluded that UE's rate of return on equity should be 10.2 percent. The commission explained:

Based on its analysis of the expert testimony offered by the parties, and on its balancing of the interest of the company's ratepayers and shareholders, the Commission finds that 10.2 percent is fair and reasonable return on equity for [UE] that will allow it to compete in the capital market for the funds needed to maintain its financial health[].

UE complains that, because the commission found that it was an average electric utility, the commission was obligated to set its rate of return on equity at the 11 percent average for other similar integrated electric utilities in the region. UE contends that, because it was an "average company with an average risk," the zone of reasonableness test did not apply to its rate request. It argues that, as a matter of law, the commission's finding that it was an average electric utility ended the issue by obligating the commission to set its rate at the average.

UE does not cite any authority for this proposition, and logic does not mandate it. The average rate, although an important factor, is far from a precise indicator of a proper rate. Averages do not factor unusual circumstances and other significant situations. UE's own evidence, which it asked the commission to adopt, established that, although the average rate for 11 Midwest utilities was 11 percent, eight of those companies had rates that were lower than 11 percent and four had rates lower than 10.2 percent. Were the commission required to give UE the average rate of 11 percent simply because UE was an average electric utility, UE would have the fourth highest rate of return on equity in the Midwest.

UE alternatively argues that the commission erred in using the national, instead of the regional, average rate of return on equity as its baseline. Even had the commission used the regional rate of 11 percent, UE's claim still would fail because the commission's conclusion that UE's rate should be 10.2 percent fits within the zone of reasonableness for either 11 percent or 10.36 percent. The zone of reasonableness for 11 percent is 10-12 percent, and for 10.36 percent it is 9.36-11.36 percent. The United State's Supreme Court has instructed the judiciary not to interfere when the commission's rate is within the zone of reasonableness. See In re Permian Basin Area Rate Cases, 390 U.S. 747, 767, 88 S.Ct. 1344, 20 L.Ed.2d 312 (1968) ("courts are without authority to set aside any rate selected by the Commission [that] is within a `zone of reasonableness'"). Moreover, the commission found that UE was seeking to raise capital across the entire nation, which supported the commission's using the national average. The commission was free to make this factual finding. State ex rel. Associated Natural Gas Company v. Public Service Commission, 37 S.W.3d 287, 294 (Mo.App.2000).

UE next contends that the commission erred in applying the national average because it did not distinguish between integrated and non-integrated electric utilities. Integrated utilities, UE asserts, have different average rates of returns on equity than non-integrated utilities. The only authority on which UE relies in making this argument is the testimony of Kathleen McShane, executive vice president of a consulting firm, concerning business risk. UE points to her testimony that the "business risks of a `wire only' utility are lower th[a]n those of an integrated utility[;] thus[,] their allowed rate of return cannot be viewed as indicative of a reasonable rate of return for UE." This generic testimony regarding business risks did not support UE's contention that the commission was obligated to distinguish between integrated and non-integrated utilities. Even if it did, the commission was free to disbelieve it. Id.

The State and Public Counsel assert that the commission set UE's rate of return too high. They note that the commission accepted the testimony of Michal Gorman, an energy consultant, who opined that UE's rate of return on equity should be 9.8 percent. The State and Public Counsel assert that the commission's acceptance of Gorman's opinion obligated it to adopt the 9.8 percent rate. Gorman was among six experts who testified. Each recommended a different rate of return, ranging from 12.2 percent to 9 percent. The commission explained why it accepted Gorman's recommendation but still set UE's rate of return at 10.2 percent:

Of the witnesses who...

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