Union Elec. v. Public Service Com'n

• Decision Date: 08 June 2004
• Docket Number: No. WD 61610.,WD 61610.
• Citation: Union Elec. v. Public Service Com'n, 136 S.W.3d 146 (Mo. App. 2004)
• Parties: UNION ELECTRIC COMPANY d/b/a Ameren UE, Appellant, v. PUBLIC SERVICE COMMISSION OF The STATE of Missouri, Office of the Public Counsel and State of Missouri by the Office of the Attorney General, Respondents.
• Court: Missouri Court of Appeals

136 S.W.3d 146

UNION ELECTRIC COMPANY d/b/a Ameren UE, Appellant, v. PUBLIC SERVICE COMMISSION OF The STATE of Missouri, Office of the Public Counsel and State of Missouri by the Office of the Attorney General, Respondents.

No. WD 61610.

Missouri Court of Appeals, Western District.

June 8, 2004.

James B. Lowery, Columbia, MO, James J. Cook, Steven R. Sullivan and Thomas M. Byrne, St. Louis, MO, Robert J. Cynkar and Victor J. Wolski, Washington, DC, for Appellant.

Dana K. Joyce, General Counsel, and Steven Dottheim, Chief Deputy General Counsel Jefferson City, MO, for Respondent Ameren UE.

John B. Coffman, Acting Public Counsel, Jefferson City, MO, for Intervenor-Respondent Office of the Public Counsel.

Jeremiah W. (Jay) Nixon, Atty. Gen., and Ronald Molteni, Assistant Attorney General, Jefferson City, MO, for Intervenor-Respondent State of Missouri.

Before HOWARD, P.J., and LOWENSTEIN and HARDWICK, JJ.

VICTOR C. HOWARD, Presiding Judge.

Union Electric Company ("UE") appeals from Reports and Orders of the Public Service Commission (the "Commission") interpreting and adjudicating the terms of an experimental alternative regulation plan ("EARP") used to calculate credits by which UE's customers shared in UE's earnings. For the reasons set forth below, we affirm the Reports and Orders of the Commission.

Background

Two EARPs were created by Stipulations and Agreements signed by UE, the Office of Public Counsel ("OPC"), the Staff of the Commission ("Staff"), and representatives of the major industrial customers of UE. The EARPs were alternative regulation plans designed to reduce the need for formal regulatory proceedings and streamline the process of dealing with excessive earnings and rate issues.

The EARPs were the result of negotiations among the parties to resolve issues raised by a Staff audit indicating UE's revenues and rates required a reduction in order to accurately reflect its cost of service. To avoid a contested rate case, an agreement was reached, which, among other things, provided UE's Missouri retail electric customers with a one-time credit of $30 million and a $30 million annual rate reduction. The agreement also established the first EARP.

Each EARP ran for a period of three years, with each year constituting a "sharing period." The Commission approved the first EARP by an order on July 21, 1995, and it ran from August 1, 1995, through June 30, 1998. The second EARP was approved on February 21, 1997, and encompassed the period from July 1, 1998, through June 30, 2001. The Commission opened a case to monitor each EARP and resolve disputes that might arise in their operation. Upon the expiration of the second EARP, UE reverted to traditional utility regulation on July 1, 2001.

Among other things, the EARPs established a method to provide for annual "sharing credits" to enable UE's electric customers to share in company earnings. These credits were to be based upon a calculation of UE's earnings after each twelve-month "sharing period." UE's earnings were to be analyzed, in part, pursuant to certain agreements regarding the cost of service and a rate of return "sharing grid."

Under the three-level sharing grid, UE would keep 100 percent of its earnings up to a 12.61 percent return on equity ("ROE"). If the ROE exceeded 12.61 percent, the earnings in excess of this amount were split equally between UE and its customers, up to a 14 percent ROE. UE's customers were entitled to 100 percent of UE's earnings above a 14 percent ROE. A "reconciliation procedure" was used to produce an annual report reflecting UE's calculation of its ROE and the sharing credits for the period.

Proceedings Before the Commission and Circuit Court

During the sharing periods of both EARPs, differences arose regarding the correct quantification of sharing credits owed to customers. The disagreements about the first two sharing periods of the first EARP and all three sharing periods of the second EARP were resolved by Stipulations and Agreements, which were approved by orders of the Commission. However, the parties were unable to resolve all of the disputes regarding the third period of the first EARP.

For this disputed period, UE filed an earning and sharing report proposing that its customers were entitled to a credit of $26,085,000. However, the Staff and OPC proposed six specific adjustments to the calculation that would have raised the sharing credits to $41,128,000. These contested adjustments were litigated before the Commission, and on December 23, 1999, the Commission issued a Report and Order that adopted and approved four of the Staff's recommended adjustments and decided in UE's favor on the other two. The Report and Order (clarified by the Commission's February 29, 2000, Orders) required UE to make the four adjustments and directed UE to issue sharing credits to its customers in the amount of $28,375,000, to implement a rate reduction totaling $16,321,000 to begin April 1, 2000, and to issue rate reduction credits to its customers for the excess amount billed from September 1, 1998, to the effective date of the rate reduction, April 1, 2000.

UE sought relief in circuit court by filing two Petitions for Review that addressed the various Commission Orders it disputed. UE claimed that the credit ordered by the Commission exceeded the lawful amount by $2,290,000. It claimed the rate reduction ordered was excessive by $370,000 and the rate reduction credit ordered was excessive by $479,305. The circuit court partially stayed the Commission's Order and directed UE to place the disputed amounts in an interest-bearing account pending judicial resolution of the matter. On May 17, 2002, the court issued its Findings of Fact, Conclusions of Law and Judgment affirming the Commission's Order and subsequently, pursuant to Section 386.540.3, suspended its Judgment.

Issues on Appeal

UE contends that the Commission misapplied and/or misinterpreted the 1995 Stipulation and Agreement that created the first EARP and, as a result, unlawfully ordered four adjustments to UE's accounting for various expenses, thereby improperly increasing the sharing credit. The four contested adjustments are:

1. COMPUTER SOFTWARE MAINTENANCE EXPENSES ("Y2K Costs"): UE claims the Commission improperly adjusted its expenses for these costs. UE included expenses in the third sharing period for software work performed to modify its computers for the Y2K problem. UE characterized these costs as a subset of the type of computer software maintenance expenses it has incurred since its first computer was installed and not as a new category of costs never previously included in any ratemaking proceeding. UE contended it could take the costs as an immediate expense because the software was not improved beyond its original state, but was merely restored to its normal working state. The Commission determined that UE's Y2K costs were a category of costs that had never been included in a prior ratemaking proceeding and, therefore, could be considered according to the terms of the EARP. It further held that Y2K costs should not be expensed because of the unusual and nonrecurring nature of these costs. The Commission ordered the costs deferred until the project was completed and all facts regarding the reasonableness and prudence of the expenses were available and an appropriate method of recovery could be determined.

2. DECOMMISSIONING TRUST FUND DEPOSITS: UE is required to periodically estimate the cost of decommissioning the Callaway nuclear power plant and make quarterly payments into a trust fund to defray those costs. UE's 1997 trust fund deposits were delayed in order to obtain an IRS ruling that would enable the trust fund contributions to be tax-deductible. Due to the unusual delay of the 1997 payments, the Commission found that, because UE collected decommissioning costs through utility rates but did not pay out the costs until 1998, it received access to a cost-free source of capital. The Commission ordered UE to apply an interest rate to the funds and increase its revenue by the resulting amount. This increase in revenue would then be factored into the sharing grid to benefit ratepayers. The Commission contends that the EARP authorized these adjustments because it was a category of costs not previously a part of a ratemaking proceeding and because it was an unresolved issue relating to the operation or implementation of the EARP. UE claims the Commission's treatment of the deposits improperly added to its revenues.

3. TERRITORIAL AGREEMENTS: Electric utilities may enter into territorial agreements among each other to exchange territories and customers if, after a hearing, the agreement is approved by the Commission as "not detrimental to the public interest." § 394.312.4 RSMo 2000. Two such UE agreements, one with Black River Electric Cooperative and one with Macon Electric Cooperative, were approved, but the Commission made no ratemaking determinations, leaving those issues open for later proceedings. During the approval process, the Staff reserved the right to address in future proceedings the effect of the agreements on UE's earnings and future sharing credit calculations. Subsequently, the Commission found that, as a result of the territorial agreements, UE's income declined, which constituted a detriment to the public interest. The Commission reversed these losses, thereby adjusting the sharing credits calculation to prevent any detrimental effect of the agreements from flowing to the ratepayers. The Commission claimed the right to make these adjustments because the territorial agreements' effect on earnings had not been the subject of a previous ratemaking proceeding and because the disputed issue was related to the operation or implementation of the EARP. UE claims its revenues were artificially increased by the way the Commission treated the territorial agreements.

4. MERGER AND ACQUISITION COSTS: This issue is different...