Stewart v. Utah Public Service Com'n

Decision Date29 July 1994
Docket NumberNo. 910405,910405
Citation885 P.2d 759
PartiesJustin C. STEWART, George L. Gigi, A. Earl Cox, Barbara Toomer, Ronald Turpin, and Pat Coryell, Petitioners, v. UTAH PUBLIC SERVICE COMMISSION and U.S. West Communications, Inc., Respondents. Division of Public Utilities and Committee of Consumer Services, Intervenors.
CourtUtah Supreme Court

James L. Barker, John J. Flynn, Salt Lake City, for petitioners.

R. Paul Van Dam, Atty. Gen., David L. Stott, Kent Walgren, Michael L. Ginsberg, Asst. Attys. Gen., Salt Lake City, for Div. of Public Utilities, Public Service Com'n, Committee of Consumer Services.

Floyd A. Jensen, Ted D. Smith, Salt Lake City, for U.S. West Communications.

Felshaw King, Kaysville, and Fred B. Goldberg, Steven Zaleznick, Washington, DC, for amicus curiae American Ass'n of Retired Persons.

STEWART, Associate Chief Justice:

This case is here on a petition to review an order of the Utah Public Service Commission that increased U.S. West Communications, Inc.'s (USWC) authorized rate of return on equity to 12.2%, ordered central office modernizations and fiber-optic extensions to educational institutions, and adopted an incentive regulation plan that USWC vetoed pursuant to statutory authorization. The petition to review was filed by Justin C. Stewart and other telephone users and ratepayers (collectively "ratepayers") who challenge (1) the lawfulness of the 12.2% rate of return on equity and (2) the constitutionality of Utah Code Ann. § 54-4-4.1 (1990), which authorizes the Commission to approve incentive rate regulation plans and allows a utility to veto such plans. The ratepayers also contend that even if the statute authorizing such plans is constitutional, the incentive plan adopted by the Commission is unlawful. Lastly, the ratepayers seek an award of attorney fees. We hold that a 12.2% rate of return on equity is not just and reasonable, the veto provision in Utah Code Ann. § 54-4-4.1(2) is unconstitutional, the Commission's incentive regulation plan is unlawful, and the ratepayers are entitled to reasonable attorney fees.

I. BACKGROUND

USWC, a regulated public utility, operates in a number of western states. It is a wholly owned subsidiary of U.S. West, Inc., an unregulated industrial company that provides various telecommunications products and services. In this proceeding, the Commission and the Division of Public Utilities have aligned themselves with USWC. The Committee of Consumer Services intervened in the proceedings before the Commission but has taken no position on this appeal and has not appeared as a party.

These proceedings began when USWC petitioned the Public Service Commission for approval of an incentive regulation plan whereby USWC shareholders and Utah ratepayers would share company profits in excess of a specified rate of return on equity. The case was assigned docket No. 90-049-03. USWC's proposed plan provided that (1) telephone rates could not be lowered for four years, irrespective of how high USWC's rate of return was, but could be increased on a cost pass-through basis for four categories of costs; (2) USWC could not file for a rate increase unless its profits for one year amounted to less than a 10.5% return on equity (presumably a nonconfiscatory rate of return); and (3) USWC would retain all earnings up to a 14% return on equity, and USWC shareholders and Utah ratepayers would share equally in earnings from 14% to 17%. The plan did not indicate what a fair and just rate of return on USWC's investment would be.

After USWC filed its proposal, the Division of Public Utilities filed a petition to investigate USWC's earnings. That petition, assigned docket No. 90-049-06, resulted in a general rate proceeding before the Commission. The Commission consolidated the two cases. 1 While the cases were pending, the Commission ordered two prospective interim rate reductions, $10,711,000 on June 22, 1990, and $8,238,000 on January 1, 1991. All issues concerning revenue requirements, except cost of capital and depreciation, were disposed of by stipulation between USWC, the Division, the Committee of Consumer Services, and AT & T. Even though the propriety of resolving such important issues as the revenue requirements of a public utility by private stipulation with no findings of any kind by the Commission is highly questionable, no one has challenged that procedure in this case. See Utah Dep't of Business Regulation v. Public Serv. Comm'n, 614 P.2d 1242, 1245 (Utah 1980). The Commission accepted the stipulation, but in its Report and Order noted, "The Commission could not have been presented a more penetrating example of the problematic nature of stipulations. Here, signatory parties could not agree on what their own words meant and seized this dispute as an opportunity to advance their own interests on what otherwise might have been reasonable grounds." The Commission did not otherwise comment on the far-reaching public policy and legal implications of deciding such important issues in a general rate case on the basis of a stipulation that precludes all Commission scrutiny of critical data, notwithstanding cases from this Court disapproving such an approach. See id. 2

On June 19, 1991, the Commission entered its Report and Order in both dockets. The Commission ordered USWC to further "reduce its revenues [prospectively] by $19,799,000," thereby ordering a total future revenue reduction of $38,748,000 during the course of the case. The Commission also authorized an increased rate of return on equity of 12.2% and rejected USWC's incentive plan.

With respect to incentive regulation plans generally, the Commission found:

We are being asked to make a significant departure from the current scheme of regulation in the state of Utah.... [T]raditional regulation is performing relatively well in this jurisdiction. Ratepayers have received a series of rate reductions over the past four years, the Company continues to earn in excess of its authorized rate of return and the telephone network appears to have met the basic needs of its customers. In addition, telephone subscribership in this state is at an all time high level (96.5 percent as of March, 1990) and is well above the national average of 93.3 percent. No one argues that the system is perfect, but concrete evidence that it is failing in any major respect is absent from this record. On the other hand, the record in this case shows that the promised benefits of the incentive regulation proposals before the Commission are speculative and the possibility exists that unless a specific incentive regulation plan is carefully crafted, there is risk of harm to the ratepayers. That could occur in the form of higher rates than ratepayers would have otherwise paid, or a windfall to shareholders in the form of higher earnings than their investment risk would otherwise justify, as will be discussed in more detail later.

... The evidence on the record does not substantially corroborate the assertions made by proponents of incentive regulation either in their attacks on traditional regulation or in support of the benefits of incentive regulation.

In rejecting USWC's incentive plan, the Commission made a number of specific findings that support its ruling rejecting USWC's plan but that are also inconsistent in general with the incentive plan the Commission itself ultimately promulgated and, in addition, with its ruling on the rate of return. For that reason, we set out an extensive portion of the Commission's findings in support of its rejection:

One of the major witnesses sponsored by the Company in this proceeding was Professor Davidson who spoke in favor of incentive regulation as a means of addressing the emergence of competition on the national and international scene. Yet other Company witnesses testified that the Company's incentive regulation plan was not designed to meet the concerns of competition.

The Company could not produce an analysis of the impacts upon the ratepayers of incentive regulation. Company witnesses testified that it is impossible to quantitatively demonstrate that rates under an incentive plan will be equal to or lower than rates under traditional regulation. There was, however, testimony by the Company that adoption of an incentive regulation plan would increase the cost of capital to the Company due to higher risks. In addition, Company witnesses testified that one of the advantages of incentive regulation is that it encourages "risk taking" by the Company but that ratepayers would be exposed to the risk of Company failure since investment made during the course of the incentive plan will be in rate base at the end of the plan.

....

The Commission finds that the record does not fully support the arguments by proponents of incentive regulation that the Company lacks incentives to be efficient under current regulation. It further finds that the record is deficient in evidence that the incentive regulation plans proposed in this proceeding will create the incentives for efficiency promised. There is also an absence of evidence to fully support the contention that ratepayers will benefit from the adoption of the Company's or the Division's proposed incentive regulation plans.

2. [The argument] that traditional regulation retards the rate of technological innovation which will be corrected under an incentive regulation plan ... flies in the face of a long-established principle, that if the Company is allowed the opportunity to earn the allowed rate of return (market cost of capital) on its utility investment, and with rates linked to that investment in the form of rate base, the utility has an incentive to increase investment in order to increase the absolute level of its profits.

The Company offered no concrete evidence to counter this widely accepted view. The Company did not offer any example of investments not made, technologies withheld...

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