Timberon Water Co., Inc., Application of, 4

Citation836 P.2d 73,114 N.M. 154,1992 NMSC 47
Decision Date05 August 1992
Docket NumberNo. 20109,No. 4,4,20109
Parties, 135 P.U.R.4th 176 In the Matter of the Application of TIMBERON WATER COMPANY, INC. for a Water Rate Increase Pursuant to Advice NoticeDaniel J. BEHLES, as Trustee in Bankruptcy for the Timberon Water Co., Inc., Appellant, v. NEW MEXICO PUBLIC SERVICE COMMISSION, Appellee.
CourtSupreme Court of New Mexico
OPINION

FROST, Justice.

Daniel J. Behles (Behles), as Trustee in bankruptcy for the Timberon Water Company (Timberon), appeals the final order of the New Mexico Public Service Commission (Commission) in case no. 2355, dated August 26, 1991, that denied his requested rate increase for Timberon. Behles contends 1) that the Commission's exclusion of Contributions in Aid of Construction (CIAC) was unreasonable and unlawful and unsupported by substantial evidence, 2) that federal bankruptcy law preempts the Commission's use of the CIAC doctrine, 3) that he is a bona fide purchaser under Sec. 544 of the Bankruptcy Code, able to void the CIAC designation, 4) that the lower-than-requested rate increase amounts to a confiscation of property without due process of law, and 5) that First National Bank in AlamogordoBA would be prohibited by federal law from operating the water company if it bids its interest in Timberon at a foreclosure sale. We disagree with Behles' contentions and affirm the Commission's final order.

I.

North American Land Development (NALD) sold lots for vacation homes near Cloudcroft, New Mexico. As part of the development, NALD built a water system, which Timberon, a wholly owned subsidiary of NALD, was operating by 1971. NALD, later known as North American Development (NAD), is now succeeded in interest by Republic Financial Group (Republic).

In 1983, in Commission case no. 1746, the Commission granted Timberon a Certificate of Public Convenience and Necessity and authorized Timberon to charge rates for water. In the years previous to this order, Timberon had not charged its customers for water.

In 1986, Johnny Mobley, president of NAD and Timberon executed a promissory note in favor of FNBA for $1,750,000. FNBA secured the promissory note with a mortgage on the land, water rights, and distribution system of Timberon.

In 1988, FNBA filed a foreclosure action against NAD, Timberon, and Mobley in state district court on the 1986 mortgage. Subsequently, Timberon and Republic filed under Chapter 11 of the U.S. Bankruptcy Code. The foreclosure action was removed to the Bankruptcy Court. FNBA and Behles reached an agreement as to the foreclosure action, and the Bankruptcy Court approved the settlement.

In March of 1990, the Commission staff petitioned the Commission to investigate Timberon's quality of service and the propriety of the promissory note and mortgage. The Commission docketed the investigation as case no. 2319.

In September of 1990, Timberon, managed by Behles, filed a petition for a rate increase. The Commission consolidated the investigation case and the rate case into case no. 2355, the case now on appeal. Behles sought an increase in excess of 100% from $106,289 to $224,753 in revenue to allow for a profit of $51,870. In August of 1991, the Commission granted a rate increase that provided for an 11.34% rate of return, increasing revenue to $119,795 and allowing for a $2,526 profit. To determine the 11.34% rate of return, the Commission excluded $2,245,186 from the rate base as CIAC.

II.

Behles attacks several findings made by the Commission, all of which we will review according to the same following standard. The burden is on the party appealing, in this case Behles, to show that the Commission order is unreasonable or unlawful. NMSA 1978, Sec. 62-11-4 (Repl.Pamp.1984); Maestas v. New Mexico Public Serv. Comm'n, 85 N.M. 571, 574, 514 P.2d 847, 850 (1973). This Court's review of Commission decisions is limited to: "the question of whether the Commission acted fraudulently, arbitrarily or capriciously, whether the decision is supported by substantial evidence, and, generally, whether the actions of the Commission are within the scope of its authority." Attorney General of N.M. v. New Mexico Public Serv. Comm'n, 101 N.M. 549, 553, 685 P.2d 957, 961 (1984). Substantial evidence means such relevant evidence as a reasonable mind might accept as adequate to support a conclusion. Id. For administrative agencies, arbitrary and capricious action has been defined " 'as willful and unreasonable action, without consideration and in disregard of facts or circumstances.' " McDaniel v. New Mexico Bd. of Medical Examiners, 86 N.M. 447, 449, 525 P.2d 374, 376 (1974) (quoting Smith v. Hollenbeck, 48 Wash.2d 461, 294 P.2d 921 (1956)).

This Court must review the whole record and "must view the evidence in the light most favorable to the decision made by the Commission." Attorney General of N.M. v. New Mexico Public Serv. Comm'n, 101 N.M. at 553, 685 P.2d at 961. In addition, we must always keep in mind that "the Commission is vested with considerable discretion in determining the justness and reasonableness of utility rates." Id. A reviewing court may not substitute its judgment for that of the Commission. Public Serv. Co. of N.M. v. New Mexico Public Serv. Comm'n, 92 N.M. 721, 722, 594 P.2d 1177, 1178 (1979).

First, Behles contends that the Commission's exclusion of $2,245,186 from the rate base as CIAC was arbitrary and unreasonable, and unsupported by substantial evidence. To the contrary, we find that substantial evidence supported the Commission's decision to exclude $2,245,186 from the rate base as CIAC.

The Commission has established a policy that CIAC, as cost-free capital to the utility, should be deducted from the rate base for rate making purposes. In re Gas Co. of N.M., 21 Pub.Util.Rep.4th (PUR) 159, 172-73 (1977); In re Public Serv. Co. of N.M., 82 Pub.Util.Rep.3d (PUR) 362, 369-70 (1970). The specific result of the application of the Commission's CIAC rule is to prohibit the allowance of depreciation on contributed property. The rationale for this policy is that depreciation is designed to permit a utility to recoup its investment in plant, but where there is no investment because the property has been contributed, there is nothing to be recovered.1 Other jurisdictions agree with this analysis. The Supreme Court of Illinois noted that "it would be unfair to require such consumers [those that have contributed CIAC] to pay rates based upon the value of a facility for which they have themselves already paid." Du Page Utility Co. v. Illinois Commerce Comm'n, 267 N.E.2d 662, 664 (Ill.) (per curiam), cert. denied, 404 U.S. 832, 92 S.Ct. 74, 30 L.Ed.2d 62 (1971). Behles concedes the wisdom in this reasoning and does not contest that its application is appropriate. Rather, he contends that the money used to build the system was not contributed at all, and that the Commission arbitrarily and unreasonably characterized the "contributions" as CIAC.

Because the Commission had taken administrative notice of case no. 1746, the testimony from that case was available to the Commission for the ratemaking purposes of this case. Based in part on that testimony, the Commission found that the funds to build the water system were contributed. In that original ratemaking case, Mobley testified that the money to build the $3.75 million water system came from the sale of real estate lots. Furthermore, Mobley testified specifically that NALD was the source of funds for the water system, and that these funds were a contribution from NAD. He said that everything was "free and clear in the water company." Mobley also agreed that the water system "definitely" improved the value of the lots for the purpose of sale. In addition, the record showed that the customers paid for the meters and their installation. Even Behles admitted that the only source of funds for the construction of the water system was NALD.

In Florida Cities Water Co. v. Board of City Commissioners, 334 So.2d 622, 625 (Fla.Dist.Ct.App.), appeal dismissed, 341 So.2d 1081 (1976), under a similar set of circumstances, the court affirmed the CIAC designation reasoning that "a reasonable inference may be drawn that the source of these monies [to fund the water system] came from the sale of the lots." The court adopted the view that the costs were most definitely passed on to the customers in the form of increased lot prices. Id. Consistent with such reasoning, the Commission in the instant case reasonably concluded that Timberon customers paid for the installation of the water system when they bought their lots and should not have to pay for the system again through rate payments. Likewise, the Commission could have reasonably concluded that Timberon should not be able to earn a rate of return on the lot purchaser's money.

In his concurring opinion in Jersey Central Power & Light Co. v. Federal Energy Regulatory Commission, 810 F.2d 1168, 1192 (D.C.Cir.1987), Circuit Judge Starr described the proper role of a reviewing court: "Our limited but vital role is to ensure that the end result of a rate order reasonably balances investor and ratepayer interests." Moreover, "[t]he economic judgments required in rate proceedings are often hopelessly complex and do not admit of a single correct result." Duquesne Light Co. v. Barasch, 488 U.S. 299, 314, 109 S.Ct. 609, 619, 102 L.Ed.2d 646 (1989). In making its decision, we believe that the Commission properly balanced the investor and ratepayer interests, thereby achieving one of several possible "correct" results. For these reasons, the Commission's decision to deduct $2,245,186 from the rate base as CIAC is reasonable and is supported...

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