Petition of Montana Power Company

No. 14310
IN THE SUPREME COURT OF THE STATE OF MONTANA
1978
IN THE MATTER OF THE PETITION OF THE
MONTANA POWER COMPANY FOR INCREASED
RATES AND CHARGES IN GAS AND ELECTRIC
SERVICES; IN DOCKET 6348, ORDER No. 4220C,
DEPARTMENT OF PUBLIC SERVICE REGULATION,
MONTANA PUBLIC SERVICE COMMISSION.
Appeal from: District Court of the Second Judicial District,
Honorable Jack L. Green, Judge presiding.
Counsel of Record:
For Appellant:
Geoffrey Brazier argued, Helena, Montana
James Paine argued, Helena, Montana
For Respondent:
Corette, Smith, Dean & Pohlman, Butte, Montana
Kendrick Smith argued, Butte, Montana
Church, Harris, Johnson and Williams, Great Falls,
Montana
Submitted: December 20, 1978
Decided : FE 2:
Mr. ~ustice
Gene B. Daly d e l i v e r e d t h e Opinion of t h e Court.
he Montana Power Company (Montana Power o r MPC) f i l e d
s e v e r a l p e t i t i o n s f o r r a t e adjustments before t h e Public
S e r v i c e Commission (Commission o r PSC) d e s i g n a t e d a s Docket
Nos. 6279 and 6327. B y f i n a l amended p e t i t i o n Montana Power
r e q u e s t e d Commission a p p r o v a l of r a t e s f o r e l e c t r i c u t i l i t y
s e r v i c e designed t o produce an i n c r e a s e i n a n n u a l o p e r a t i n g
revenues of $15,650,601 and approval of r a t e s f o r n a t u r a l
g a s s e r v i c e designed t o produce an i n c r e a s e i n a n n u a l g r o s s
o p e r a t i n g revenues of approximately $28,800,000. A t approxi-
mately t h e same time t h e Montana Consumer Counsel (Consumer
Counsel) f i l e d a p e t i t i o n f o r an e l e c t r i c r a t e d e c r e a s e ,
Docket No. 6336. These m a t t e r s were c o n s o l i d a t e d f o r
h e a r i n g purposes i n t o Docket No. 6348.
The Commission conducted p u b l i c h e a r i n g s i n Helena i n
t h i s d o c k e t from October 20 t o November 6, 1975; from
January 1 2 t o J a n u a r y 23, 1976; and from February 2 t o
February 1 3 , 1976. I n d i v i d u a l commissioners a l s o conducted
p u b l i c h e a r i n g s i n v a r i o u s c i t i e s throughout t h e s t a t e
d u r i n g November and December, 1975.
A t t h e h e a r i n g s conducted i n Helena, t h e Commission
heard t h e testimony of 54 w i t n e s s e s and a c c e p t e d 93 e x h i b i t s
d u r i n g t h e c o u r s e of d i r e c t and cross-examination by t h e
Commission, t h e Commission s t a f f , Montana Power, t h e Con-
sumer Counsel and i n t e r v e n o r s Anaconda Company, G r e a t ~ a l l s
Gas Company, Hoerner Waldorf, I d e a l Cement Company and t h e
e x e c u t i v e a g e n c i e s of t h e United S t a t e s government.
O J u l y 26, 1976, Montana Power f i l e d a p e t i t i o n t o
n
p r e s e n t a d d i t i o n a l testimony. T h i s p e t i t i o n was subse-
q u e n t l y denied on t h e ground t h a t t h e testimony t o be p r e -
s e n t e d would have been i r r e l e v a n t and p r e j u d i c i a l a s it
would have d e a l t w i t h p o s t - t e s t y e a r d a t a .
Montana Power a l s o f i l e d a motion on J u l y 2 6 , 1976, f o r
immediate temporary r a t e i n c r e a s e s f o r i t s g a s and e l e c t r i c
services. This motion was argued b e f o r e t h e Commission on
August 1 2 , 1976. On January 6 , 1977, t h e Commission i s s u e d
Order No. 4220B i n which i t g r a n t e d MPC a temporary i n c r e a s e
i n i t s n a t u r a l g a s r a t e , r e f u s e d t o g r a n t a temporary r a t e
i n c r e a s e f o r e l e c t r i c s e r v i c e and denied t h e Consumer Coun-
s e l ' s p e t i t i o n f o r an e l e c t r i c r a t e decrease.
The c a s e was submitted f o r d e c i s i o n t o t h e Commission
on December 13, 1976. By Order No. 4220C, d a t e d February
23, 1977, t h e PSC g r a n t e d Montana Power an e l e c t r i c r a t e
i n c r e a s e of $2,069,000, much l e s s t h a n t h e $15,650,601
s o u g h t by MPC, and a g a s r a t e i n c r e a s e of $26,862,000. No
p a r t y h a s appealed any p o r t i o n of t h e Commission's g a s r a t e
decision.
Montana Power appealed t o t h e D i s t r i c t Court two Com-
m i s s i o n " r a t e base" ( t h e investment on which r e t u r n s a r e
allowed) d e t e r m i n a t i o n s : t h e PSC's e x c l u s i o n of $5.7 m i l -
l i o n from r a t e b a s e a s exceeding t h e o r i g i n a l c o s t of t h e
p r o p e r t y t o Montana Power, and t h e PCS's u s e of an average-
y e a r r a t e b a s e , computed by d i v i d i n g by two t h e sum of MPC's
t o t a l p l a n t investment a t t h e beginning of t h e y e a r and
t o t a l p l a n t investment a t t h e end of t h e y e a r .
Montana Power a l s o appealed from a p o r t i o n of t h e
Commission o r d e r i n which t h e PSC s t a t e d t h a t it now found
" q u e s t i o n a b l e " an a d d i t i o n a l $ 1 5 . 7 m i l l i o n i n r a t e b a s e
which, i n 1944, t h e Commission had c h a r a c t e r i z e d a s " o r i g i -
n a l cost." Although t h e PSC d i d n o t exclude t h e q u e s t i o n -
a b l e amount from r a t e b a s e , i t d i d o r d e r MPC t o r e t a i n a n
independent a c c o u n t i n g f i r m a c c e p t a b l e t o t h e commission t o
u n d e r t a k e a d e t e r m i n a t i o n of t h e o r i g i n a l c o s t of t h e prop-
e r t i e s i n question. Montana Power a l s o appealed from t h e
order d i r e c t i n g it t o r e t a i n t h i s accounting firm.
The D i s t r i c t Court of t h e Second J u d i c i a l D i s t r i c t , t h e
Honorable J a c k L. Green p r e s i d i n g , i s s u e d f i n d i n g s and
c o n c l u s i o n s on February 6 , 1978, and judgment on February
22, 1978. The D i s t r i c t Court a f f i r m e d t h e Commission a s t o
i t s r a t e b a s e d e t e r m i n a t i o n s e l i m i n a t i n g t h e $5.7 m i l l i o n
and u s i n g an average-year r a t e base. From t h i s p o r t i o n of
t h e D i s t r i c t C o u r t ' s judgment, Montana Power a p p e a l s f u r t h e r .
A s t o t h e p o r t i o n of t h e Commission's o r d e r f i n d i n g
$15.7 m i l l i o n of Montana Power's r a t e b a s e q u e s t i o n a b l e , t h e
D i s t r i c t Court r e v e r s e d t h e PSC on t h e ground t h a t t h e
Commission's 1944 f i n d i n g t h a t t h i s amount was o r i g i n a l c o s t
could n o t now be q u e s t i o n e d . The D i s t r i c t Court f u r t h e r
concluded t h a t t h e o r d e r r e q u i r i n g Montana Power t o r e t a i n
an independent a c c o u n t i n g f i r m was beyond t h e a u t h o r i t y of
t h e Commission and c o n s t i t u t e d a c o n f i s c a t i o n of Montana
Power's p r o p e r t y . The Commission and t h e Consumer Counsel
have appealed from t h e s e p o r t i o n s of t h e D i s t r i c t C o u r t ' s
j udgment .
A d d i t i o n a l f a c t s a r e p r e s e n t e d a s t h e y become r e l e v a n t
t o t h e d i s c u s s i o n of each i s s u e .
T h i s a p p e a l p r e s e n t s f o r review t h e f o l l o w i n g i s s u e s :
1. Whether t h e D i s t r i c t Court c o r r e c t l y a f f i r m e d t h e
Commission's e l i m i n a t i o n of $5.7 m i l l i o n from Montana
Power's e l e c t r i c r a t e b a s e a s being i n e x c e s s of o r i g i n a l
cost.
2. Whether t h e D i s t r i c t Court c o r r e c t l y h e l d t h a t t h e
Commission had no a u t h o r i t y t o c o n s i d e r f u r t h e r an i t e m of
$15.7 m i l l i o n i n r a t e b a s e which had been d e f i n e d a s an
o r i g i n a l c o s t by t h e PSC i n a 1 9 4 4 d e c i s i o n and t h e r e f o r e
c o r r e c t l y h e l d t h a t t h e PSC had e r r o n e o u s l y o r d e r e d a con-
f i s c a t o r y a c c o u n t i n g t o d e t e r m i n e o r i g i n a l c o s t of t h i s
property.
3. Whether t h e D i s t r i c t C o u r t c o r r e c t l y a f f i r m e d t h e
Commission's u s e of a n a v e r a g e - y e a r r a t e b a s e and r e l a t e d
p r o p e r t y t a x e s , a d j u s t e d t o i n c l u d e a major new f a c i l i t y
( C o l s t r i p U n i t I ) , r a t h e r t h a n a year-end r a t e b a s e .
B e f o r e p r o c e e d i n g t o a d i s c u s s i o n of t h e s p e c i f i c
i s s u e s r a i s e d by t h i s a p p e a l , w e f i n d i t h e l p f u l t o make
some p r e f a t o r y remarks r e g a r d i n g t h e r e l a t i v e r o l e s and
f u n c t i o n s o f t h e Montana P u b l i c S e r v i c e Commission, t h e
D i s t r i c t C o u r t and t h i s C o u r t i n u t i l i t y r a t e c a s e s .
I n C h a p t e r 1, T i t l e 70, Revised Codes of Montana 1947,
now C h a p t e r s 1-3, T i t l e 69 MCA, t h e l e g i s l a t u r e c r e a t e d t h e
P u b l i c S e r v i c e Commission of Montana and d e l e g a t e d t o i t t h e
"duty . . . to s u p e r v i s e and r e g u l a t e t h e o p e r a t i o n s of t h e
public u t i l i t i e s . " S e c t i o n 70-101, R.C.M. 1947, now s e c t i o n
69-1-102 MCA. A s p a r t of these duties, t h e Commission i s
g i v e n t h e power t o " i n v e s t i g a t e and a s c e r t a i n t h e v a l u e of
t h e p r o p e r t y of e v e r y p u b l i c u t i l i t y a c t u a l l y used and
u s e f u l f o r t h e c o n v e n i e n c e of t h e p u b l i c . " S e c t i o n 70-106,
R.C.M. 1947, now s e c t i o n 69-3-109 MCA. I t i s t h e proper
e x e r c i s e of t h i s power t h a t forms t h e b a s i s o f e a c h of t h e
i s s u e s i n t h i s appeal.
A u t i l i t y d i s s a t i s f i e d w i t h a n o r d e r of t h e Commission
h a s two s t a t u t o r y r o u t e s of a p p e a l f o r j u d i c i a l review:
S e c t i o n 70-128, R.C.M. 1947, now s e c t i o n 69-3-402 MCA, and
s e c t i o n 82-4216, R.C.M. 1947, now s e c t i o n s 2-4-701 through
-704 MCA, o f t h e Montana A d m i n i s t r a t i v e P r o c e d u r e s Act.
Montana Power h a s chosen t h e l a t t e r of t h e s e r o u t e s .
T h i s s t a t u t e s t r i c t l y l i m i t s t h e scope of j u d i c i a l
review of an a d m i n i s t r a t i v e agency d e c i s i o n . Under s e c t i o n
82-4216(1) ( a ) , now s e c t i o n s 2-4-701, -702 MCA, o n l y f i n a l
agency d e c i s i o n s i n a c o n t e s t e d c a s e may g e n e r a l l y be r e -
viewed. Only i f review of t h e f i n a l d e c i s i o n would n o t
p r o v i d e an a d e q u a t e remedy i s a p r e l i m i n a r y o r i n t e r m e d i a t e
agency a c t i o n o r r u l i n g immediately r e v i e w a b l e .
S u b s e c t i o n ( 7 ) , now s e c t i o n 2-4-704 MCA, of t h e same
s t a t u t e f u r t h e r l i m i t s t h e scope of review. Under t h a t
s u b s e c t i o n a D i s t r i c t C o u r t i s n o t allowed t o s u b s t i t u t e i t s
judgment f o r t h a t of t h e agency a s t o t h e weight of evidence
on q u e s t i o n s of f a c t . The c o u r t may r e v e r s e o r modify t h e
a d m i n i s t r a t i v e d e c i s i o n o n l y i f s u b s t a n t i a l r i g h t s of t h e
a g g r i e v e d p a r t y have been p r e j u d i c e d by v i r t u e of enumerated
agency v i o l a t i o n s o r e r r o r s .
I n Vita-Rich D a i r y , I n c . v. Department of Business
R e g u l a t i o n ( 1 9 7 6 ) , 170 Mont. 341, 553 P.2d 980, we examined
t h e u n d e r l y i n g r a t i o n a l e of t h i s l i m i t e d review s t a t u t e and
s t a t e d t h r e e b a s i c p r i n c i p l e s i n d e t e r m i n i n g what t h e scope
of review should be:
" F i r s t . The C o u r t r e c o g n i z e s t h a t l i m i t e d j u d i -
c i a l review s t r e n g t h e n s t h e a d m i n i s t r a t i v e pro-
c e s s . Limited review encourages t h e f u l l and
complete p r e s e n t a t i o n of evidence t o t h e agency
by t h e p a r t i c i p a n t s i n t h e a d m i n i s t r a t i v e pro-
c e s s by p e n a l i z i n g t h o s e who a t t e m p t t o add new
evidence o r new l i n e s of argument a t t h e judi-
c i a l review l e v e l . A d e novo review encourages
t h e p a r t i c i p a n t s t o s a v e t h e i r evidence u n t i l
i t r e a l l y c o u n t s and p r e s e n t i t f i r s t t o t h e
reviewing c o u r t r a t h e r t h a n t o t h e agency which
h a s t h e knowledge and e x p e r i e n c e i n t h e f i e l d
it regulates. The r e s u l t i s t h a t t h e agency
which h a s t h e knowledge and e x p e r i e n c e i n i t s
s u b s t a n t i v e f i e l d does n o t h e a r a l l t h e e v i d e n c e ,
making i t d i f f i c u l t t o make a p r o p e r d e c i s i o n .
I t a l s o r e s u l t s i n t h e d e c i s i o n being made by a
reviewing c o u r t which does n o t have t h e spe-
c i a l i z e d knowledge o r e x p e r i e n c e i n t h e a r e a .
"Second. J u d i c i a l economy r e q u i r e s t h a t t h e
v a r i o u s f u n c t i o n s involved i n t h e a d m i n i s t r a t i v e
p r o c e s s must be d i v i d e d on t h e b a s i s of compara-
t i v e a b i l i t i e s and q u a l i f i c a t i o n s of each body.
Courts a r e s p e c i a l i s t s i n c o n s t i t u t i o n a l i s s u e s ,
s t a t u t o r y i n t e r p r e t a t i o n , t h e r e q u i r e m e n t s of a
f a i r h e a r i n g , and t h e d e t e r m i n a t i o n t h a t a f i n d -
i n g i s supported by s u b s t a n t i a l evidence. The
agency i s a s p e c i a l i s t i n t h e s u b s t a n t i v e m a t t e r
t h a t t h e l e g i s l a t u r e d e l e g a t e d t o it t o r e g u l a t e .
" T h i r d . The a g e n c y ' s a c t i o n s need a b a l a n c i n g
check. I n t h e absence of a body w i t h i n t h e
agency which i s s e p a r a t e d from t h e a c t u a l d e c i s i o n
and i n which a l l p a r t i e s have c o n f i d e n c e , a l i m i t e d
j u d i c i a l i n q u i r y t o s e e ( a ) t h a t a f a i r procedure
was used, ( b ) t h a t q u e s t i o n s of law were p r o p e r l y
decided and, ( c ) t h a t t h e d e c i s i o n i s supported
by s u b s t a n t i a l e v i d e n c e , i s n e c e s s a r y . " 170 Mont.
a t 343-45, 553 P. 2d a t 982-83.
Returning t o o u r d i s c u s s i o n of t h e r o l e s of each p a r t i -
c i p a t i n g governmental e n t i t y , we n o t e t h a t f u r t h e r review of
a n agency d e c i s i o n and D i s t r i c t Court f i n a l judgment may be
had on a p p e a l t o t h i s Court. S e c t i o n 82-4217, R.C.M. 1947,
now s e c t i o n 2-4-711 MCA. While t h a t s e c t i o n does n o t s p e l l
o u t o u r scope of review of an a d m i n i s t r a t i v e agency a c t i o n ,
t h a t m a t t e r i s f u l l y s e t t l e d by o u r c a s e s :
" T h i s c o u r t h a s recognized t h a t t h e r e g u l a t o r y
commissions of t h i s s t a t e a r e i n v e s t e d w i t h
broad powers w i t h i n t h e i r s p h e r e of adminis-
t r a t i o n a u t h o r i z e d by t h e l e g i s l a t u r e . Tobacco
River Power Co. v . Pub. S e r v i c e Comm'n, 109
Mont. 521, 98 P.2d 886. Even i n q u a s i - j u d i c i a l
proceedings t h e i r informed and e x p e r t judgment
r e c e i v e s p r o p e r c o n s i d e r a t i o n by t h e c o u r t s
of t h i s s t a t e when such judgment h a s been reached
w i t h due c o n s i d e r a t i o n of c o n s t i t u t i o n a l r e -
s t r a i n t s . Baker S a l e s Barn, I n c . v . Montana
L i v e s t o c k Comm'n, 1 4 0 Mont. 1, 367 P.2d 775. Much
t h a t i s done by t h e s e a d m i n i s t r a t i v e a g e n c i e s of
t h e s t a t e , w i t h i n t h e realm of a d m i n i s t r a t i v e
d i s c r e t i o n , i s exempt by t h e l e g i s l a t u r e from
s u p e r v i s i o n by t h e c o u r t s i f t h o s e r e s t r a i n t s a r e
obeyed.
". . . t h i s c o u r t i s always c o n f r o n t e d i n r a t e -
making c a s e s w i t h t h e q u e s t i o n of how f a r t h e
c o u r t can go i n i n t e r f e r i n g w i t h , o r d i r e c t i n g
t h e e x e r c i s e of power, by an e q u a l department of
t h e government. W e have r e p e a t e d l y h e l d t h a t
t h e r e w i l l be no i n t e r f e r e n c e w i t h t h e o r d e r s of
t h e Commission u n l e s s :
" (1) t h e y go beyond t h e power c o n s t i t u t i o n a l l y
given; u r ,
" ( 2 ) beyond t h e i r s t a t u t o r y power; o r
" ( 3 ) t h e y a r e based upon a m i s t a k e of law."
Cascade County Consumers Ass'n v. P u b l i c S e r v i c e
Comm'n ( 1 9 6 4 ) , 1 4 4 Mont. 169, 185-86, 192, 394
P.2d 856, 865, 868.
and
"Even i f we were s o d i s p o s e d by o u r p e r s o n a l
views, we c a n n o t s u b s t i t u t e o u r d i s c r e t i o n f o r
t h a t of t h e board u n l e s s we can s a y c l e a r l y t h a t
t h e o r d e r i s unreasonable." Chicago, M . , S t . P.
& P. R. Co. v. Board of R a i l r o a d Commissioners
( 1 9 5 3 ) , 126 Mont. 568, 575, 255 P.2d 346, 351.
W t o o a r e c o n s t r a i n e d i n o u r review of agency a c t i o n s by
e
t h e p r i n c i p l e s e n u n c i a t e d i n Vita-Rich D a i r y , I n c .
I n a d d i t i o n , t h e f i n d i n g s of a D i s t r i c t Court come t o
u s w i t h a presumption of c o r r e c t n e s s :
II 1
... W have c o n s i s t e n t l y h e l d under such
e
c i r c u m s t a n c e s t h a t t h i s Court c a n n o t s u b s t i t u t e
i t s weighing of t h e evidence f o r t h a t of t h e
t r i a l c o u r t . When t h e r e i s a c o n f l i c t i n t h e
evidence, t h e f i n d i n g s of t h e t r i a l c o u r t a r e
presumed t o be c o r r e c t i f supported by s u b s t a n -
t i a l evidence.' Sedlacek v . Ahrens ( 1 9 7 4 ) , 165
Mont. 479, 485, 530 P.2d 4 2 4 .
"We have a l s o h e l d t h a t t h e f i n d i n g s of t h e
t r i a l c o u r t , i n a nonjury t r i a l , w i l l n o t be
r e v e r s e d on a p p e a l , u n l e s s t h e r e i s a c l e a r pre-
ponderance of evidence a g a i n s t t h e f i n d i n g s . "
Montana Farm S e r v i c e Co. v. Marquart ( 1 9 7 8 ) ,
- Mont. , 578 P.2d 315, 316, 35 St.Rep.
631, 633.
With t h e s e p r i n c i p l e s i n mind, we now proceed t o an
a n a l y s i s of each s p e c i f i c i s s u e .
of $5.7 m i l l i o n ---
The e l i m i n a t i o n - - from r a t e base. The
Commission e l i m i n a t e d from Montana Power's r a t e b a s e $5.939
m i l l i o n on t h e ground t h a t t h e amount, by d e f i n i t i o n of t h e
a c c o u n t s , r e p r e s e n t e d an investment i n e x c e s s of o r i g i n a l
cost. The Commission d i d a l l o w Montana Power t o r e c o v e r
t h i s amount i t s e l f , w i t h o u t any r e t u r n , through a m o r t i z a t i o n
o v e r a twenty-year p e r i o d .
The e x c l u d e d $5.939 m i l l i o n i n c l u d e s $5.787 m i l l i o n f o r
p l a n t a c q u i s i t i o n a d j u s t m e n t s t h a t exceed t h e o r i g i n a l c o s t
of t h e p r o p e r t i e s . The $5.787 m i l l i o n was t h e r e m a i n d e r i n
a n a c c o u n t i n e l e c t r i c r a t e b a s e approved by t h e Commission
i n 1944 w i t h t h e s p e c i f i c r u l i n g t h a t t h i s amount s h o u l d
remain i n t h e a c c o u n t " f o r as l o n g as t h e l a n d r i g h t s i n -
v o l v e d a r e u s e d by t h e company and c o n t i n u e t o have v a l u e . "
R e The Montana Power Company ( 1 9 4 4 ) , 56 P.U.R. (N.S.) 193,
228-29. T h i s r u l i n g w a s e x p r e s s l y approved by t h e Commis-
s i o n i n 1958 a s c o n s t i t u t i n g a p a r t o f t h e r a t e b a s e f o r t h e
p u r p o s e of d e t e r m i n i n g r a t e s , I n r e The Montana Power Com-
pany ( 1 9 5 8 ) , 2 4 P.U.R.3d 321, and w a s n o t q u e s t i o n e d u n t i l
t h e Commission and t h e Consumer Counsel responded t o t h e
p e t i t i o n of t h e Montana Power Company i n 1975.
The b a l a n c e of t h e $5.939 m i l l i o n i s a $151,889 f e e
p a i d t o a n a f f i l i a t e which had been found u n j u s t i f i e d l o n g
ago by b o t h t h e PSC and FPC. Montana Power a p p e a l s o n l y t h e
e x c l u s i o n of t h e $5.7 m i l l i o n .
On t h e t r e a t m e n t of t h i s i t e m t h e D i s t r i c t C o u r t a g r e e d
w i t h t h e Commission t h a t t h i s amount s h o u l d b e e l i m i n a t e d
from t h e r a t e b a s e . I n t h e words o f t h e D i s t r i c t C o u r t :
" T h i s amount i s p r o p e r l y e l i m i n a t e d from r a t e b a s e b e c a u s e
by d e f i n i t i o n o f t h e a c c o u n t s [ i n which t h i s i t e m w a s re-
c o r d e d ] t h i s amount r e p r e s e n t s a n i n v e s t m e n t which e x c e e d s
'original cost. '"
I n i t s r e p l y b r i e f t o t h i s C o u r t , Montana Power con-
c e d e s t h a t i n 1944 t h e Commission d e t e r m i n e d t h a t t h e
amounts w e r e i n e x c e s s o f o r i g i n a l c o s t s and d o e s n o t now
c o n t e s t t h a t determination:
"While we do n o t a g r e e w i t h J u d g e G r e e n ' s
d e c i s i o n a s t o t h e $5.7 m i l l i o n i s s u e , t h a t
was a n i n s t a n c e where t h e d e t e r m i n a t i o n was
o n e o f a c q u i s i t i o n a d j u s t m e n t , meaning a n
amount i n a d d i t i o n t o o r e x c e e d i n g o r i g i n a l
cost."
S e c t i o n 70-106, R.C.M. 1947, now s e c t i o n 69-3-109 MCA,
empowers t h e Commission t o v a l u e t h e p r o p e r t i e s of u t i l i t i e s .
T h i s s t a t u t e was amended i n 1975 and now r e a d s a s f o l l o w s
w i t h t h e amendment emphasized:
"The commission may, i n i t s d i s c r e t i o n , i n v e s -
t i g a t e and a s c e r t a i n t h e v a l u e of t h e p r o p e r t y
o f e v e r y p u b l i c u t i l i t y a c t u a l l y used and-use;
f u l f o r t h e c o n v e n i e n c e of t h e p u b l i c . - The
commission - - i s n o t bound t o a c c e p t - -e any
o r us
a r t i c u l a r v a l u e i n determining rates, provided
!hat -i f
- v a l u e T s -e d , -v a l u e m x n o t
- us such
exceed t h e o r i g i n a l -s t of t h e p r o p e r t y .
co -- In
making s u c h i n v e s t i g a t i o n t h e commission may
a v a i l i t s e l f of a l l i n f o r m a t i o n c o n t a i n e d i n
t h e a s s e s s m e n t r o l l s o f v a r i o u s c o u n t i e s , and
t h e p u b l i c r e c o r d s o f t h e v a r i o u s b r a n c h e s of
t h e s t a t e government, o r any o t h e r i n f o r m a t i o n
o b t a i n a b l e , and t h e commission may a t any t i m e
o f i t s own i n i t i a t i v e make a r e v a l u a t i o n of
such property. "
This s t a t u t e i s d i s p o s i t i v e of t h i s i s s u e . Under i t ,
t h e Commission i s o b l i g a t e d t o e l i m i n a t e from r a t e b a s e a l l
u t i l i t y c o s t s i n excess of o r i g i n a l c o s t . The $5.7 m i l l i o n
was found l o n g ago t o b e i n e x c e s s of o r i g i n a l c o s t and i s
therefore properly eliminated.
Montana Power's arguments a g a i n s t e l i m i n a t i o n o f t h i s
i t e m on t h e b a s i s o f res j u d i c a t a and c o l l a t e r a l e s t o p p e l
a r e i n a p p o s i t e where a n i n t e r v e n i n g s t a t u t o r y amendment
c o m p l e t e l y changes t h e b a s i s on which v a l u a t i o n of u t i l i t y
p r o p e r t y i s t o b e made. See, e.g., S t a t e e x r e l . Lockwood
v . T y l e r (19221, 64 Mont. 1 2 4 , 142, 208 P . 1081, 1088; I n re
Pomeroy ( 1 9 1 5 ) , 51 Mont. 119, 1 5 1 P. 333; S t a t e Farm Mutual
Automobile I n s u r a n c e Co. v . Duel ( 1 9 4 5 ) , 324 U.S. 154, 162,
6 5 S. Ct. 573, 577, 89 L.ed. 812, 819, c i t i n g Pomeroy and
o t h e r c a s e s f o r t h e " g e n e r a l r u l e t h a t r e s j u d i c a t a i s no
d e f e n s e where between t h e t i m e of t h e f i r s t judgment and t h e
second t h e r e h a s been a n i n t e r v e n i n g d e c i s i o n o r a change i n
t h e law c r e a t i n g a n a l t e r e d s i t u a t i o n . " Further, the
Commission h a s always had t h e power t o make a r e v a l u a t i o n of
such p r o p e r t y . S e c t i o n 70-106, R.C.M. 1947, now s e c t i o n 69-
3-109 MCA.
The judgment of t h e D i s t r i c t Court on t h i s i s s u e i s
affirmed.
The c o n s i d e r a t i o n - -e g u e s t i o n a b l e $15.7 m i l l i o n and
of t h
t h e o r d e r - r e t a i n - independent a c c o u n t i n g f i r m .
to an On
t h i s i s s u e t h e D i s t r i c t Court and t h e Commission d i s a g r e e d .
T h i s disagreement a s w e l l a s a summary of t h e r e l e v a n t f a c t s
i s recorded i n P o i n t No. 2 of t h e ~ i s t r i c C o u r t ' s f i n d i n g s
t
of f a c t :
"On t h i s P o i n t No. 2 t h e Court f i n d s , con-
c l u d e s , o r d e r s and adjudges a s f o l l o w s :
"For convenience 'Finding of F a c t 43' of
Order No. 4220C i s hereby quoted i n i t s e n t i r e t y :
" ' 4 3 . Witness Hess urged t h e Commission
t o e l i m i n a t e a n a d d i t i o n a l $15,722,000 of
e l e c t r i c r a t e b a s e ( T r . 2751-2752) . After
t h e e l i m i n a t i o n of a c q u i s i t i o n a d j u s t m e n t s
d i s c u s s e d i n Finding No. 42, t h i s i s t h e
amount by which A p p l i c a n t ' s e l e c t r i c r a t e
b a s e s t i l l exceeds t h e o r i g i n a l c o s t d e t e r -
m i n a t i o n of t h e F e d e r a l Power Commission i n
- -e Montana Power Co., 4 F.P.C. 213, 57
Re t h
P.U.R. ( n . s . ) 143 (1945). Because of t h e
q u e s t i o n a b l e n a t u r e of t h e a d o p t i o n by t h e
Montana Commission i n i t s 1944 o p i n i o n of
t h e c o n c e p t "commercial v a l u e " ( T r . 2751) ,
i n c l u s i o n of t h i s amount i n an o r i g i n a l c o s t
d e p r e c i a t e d r a t e b a s e remains a m a t t e r of
c o n t i n u i n g concern. However, because t h e
r e c o r d i n t h i s d o c k e t i s v e r y l i m i t e d on
t h i s p o i n t , t h e Commission d e c l i n e s t o
e l i m i n a t e t h e d i f f e r e n c e . To d e a l w i t h t h e
problem i n f u t u r e proceedings, t h e Commis-
s i o n d i r e c t s Applicant t o take t h e a c t i o n
c o n t a i n e d i n Order paragraph 4 . '
"And Order No. 4 of t h e PSC i s hereby quoted i n
its entirety:
" ' 4 . A p p l i c a n t i s o r d e r e d t o immediately
t a k e s t e p s t o r e t a i n an independent a c c o u n t i n g
f i r m a c c e p t a b l e t o t h i s Commission f o r t h e
purpose of u n d e r t a k i n g a d e t e r m i n a t i o n of
t h e o r i g i n a l c o s t of A p p l i c a n t ' s hydroelec-
t r i c p r o p e r t i e s when f i r s t devoted t o p u b l i c
use. '
"The C o u r t f i n d s t h a t t h e r e was no b a s i s i n
t h e f a c t s b e f o r e t h e PSC t o j u s t i f y t h e s a i d 'Find-
i n g o f F a c t 43' of Order No. 4220C.
"The C o u r t f i n d s t h a t t h e r e i s no b a s i s i n
law and t h e r e i s no b a s i s i n f a c t f o r any c o n s i d e r a -
t i o n o f t h e o r i g i n a l c o s t d e t e r m i n a t i o n of t h e FPC
i n 1945. The C o u r t f i n d s t h a t t h e term 'commercial
v a l u e ' was u s e d by t h e PSC i n i t s 1944 d e c i s i o n b u t
t h a t t h e PSC found t h a t t h e items, now amounting
t o $15.722 m i l l i o n , w e r e a l l a p a r t of o r i g i n a l
c o s t and w e r e p l a c e d i n t o p l a n t a c c o u n t , b e i n g
Account No. 100.1, E l e c t r i c P l a n t i n S e r v i c e . - Re
The Montana Power Company 56 P.U.R. (n.s.) 193,
200, 202, 209-211 and 238 (Account 100.1, 320)
(Mont. PSC 1 9 4 4 ) . No o n e , i n c l u d i n g t h e p r e s e n t
PSC, c a n q u e s t i o n t h e s e clear f i n d i n g s and c o n c l u -
s i o n s by t h e PSC i n 1944.
"The C o u r t f i n d s t h a t t h e r e w a s no b a s i s i n
l a w o r i n f a c t f o r t h e PSC i n s a i d ' F i n d i n g o f
F a c t 43' t o c o n s i d e r , o r f o r c o n t i n u i n g c o n c e r n
a b o u t t h i s amount of money i n a n o r i g i n a l c o s t de-
p r e c i a t e d rate base.
"The C o u r t f i n d s t h a t t h e PSC w a s r e q u i r e d
t o and d i d d e c l i n e t o e l i m i n a t e t h i s i t e m of $15.7
m i l l i o n of e l e c t r i c r a t e b a s e .
"The C o u r t f i n d s t h a t t h e r e w a s no b a s i s i n
f a c t o r law which would j u s t i f y t h e PSC i n a d o p t i n g
s a i d Order No. 4 ; and t h e C o u r t f i n d s t h a t t h i s
Order No. 4 w a s c a p r i c i o u s and would impose upon
Montana Power a n e s t i m a t e d c o s t a t a minimum of
o v e r $300r000 and any d e t e r m i n a t i o n by a n indepen-
d e n t a c c o u n t a n t would n o t b e b i n d i n g upon any-
one. "
The D i s t r i c t C o u r t concluded:
"4. The C o u r t c o n c l u d e s t h a t t h e r e w e r e no
f a c t s upon which t h e PSC c o u l d c h a l l e n g e o r con-
s i d e r q u e s t i o n a b l e t h i s $15.722 m i l l i o n i n e l e c -
t r i c rate base.
"The C o u r t c o n c l u d e s t h a t t h e r e q u i r e m e n t s
i n Order No. 4 a r e beyond t h e j u r i s d i c t i o n of t h e
PSC and would c o n s t i t u t e a c l e a r c o n f i s c a t i o n o f
$300,000 o r more of t h e p r o p e r t y of Montana Power."
A s t h e m a t t e r developed i n t h e earlier proceedings,
t h i s i s s u e was found t o c o n t a i n two s u b i s s u e s which w e r e
h a n d l e d s e p a r a t e l y by t h e D i s t r i c t C o u r t : ( a ) the statement
by t h e Commission o f i t s " c o n t i n u i n g c o n c e r n " o v e r t h i s
$15.7 m i l l i o n , and ( b ) t h e o r d e r by t h e Commission t h a t M C
P
had t o r e t a i n a n i n d e p e n d e n t a c c o u n t i n g f i r m a c c e p t a b l e t o
t h e Commission t o determine t h e o r i g i n a l c o s t of t h e prop-
e r t y i n question. For convenience, we a l s o w i l l c o n s i d e r
the i t e m s separately.
I n i t i a l l y , Montana Power a r g u e s t h a t , by v i r t u e of a
post-judgment motion by Consumer Counsel and supported by a
b r i e f by t h e Commission, t h e s e two a g e n c i e s have conceded
t h a t t h e Commission's s t a t e m e n t of c o n t i n u i n g concern and
o r d e r of a n independent a u d i t were improper and unlawful and
t h e r e f o r e , no r e a l i s s u e a s t o t h e s e m a t t e r s e x i s t on t h i s
appeal. W disagree.
e
The motion by Consumer Counsel would have a l t e r e d t h e
D i s t r i c t Court judgment t o r e a d ( w i t h t h e a l t e r a t i o n s empha-
sized) :
"Based upon - f a c t s b e f o r e - PSC, t h e Court
the the -
f i n d s t h a t t h e PSC was r e q u i r e d t o and d i d de-
c l i n e t o e l i m i n a t e t h i s i t e m of $15.7 m i l l i o n
of e l e c t r i c r a t e base.
"Based upon t h e f o r e g o i n g , the Court f i n d s t h a t
--
t h e r e was- b a s i s - -c t which would j u s t i f y
- no in fa
t h e- -i n a d o p t i n g s a i d Order No. 4 .
- PSC -- Thus,
s a i d Order No. - i s a r b i t r a r y - c a p r i c i o u s .
-- 4 and
"'4.' of Conclusions of - - t o r e a d :
- - Law
"'4. - Court concludes t h a t t h e r e were no
The --
f a c t s upon which - PSC could c h a l l e n g e o r -
the - - con-
s i d e r q u e s t i o n a b l e t h i s $15.722 m i l l i o n -
-
-
in
--
e l e c t r i c r a t e base.
"'On a c c o u n t of- t h- - a c k of a f a c t u a l b a s i s , -
- -e l the
C o u r t concludes t h a t t h e requirements - Order in
No. - were unlawful.'"
-- 4
This motion was n o t g r a n t e d , t h e r e f o r e Consumer Coun-
s e l ' s p o s i t i o n was n o t adopted by t h e D i s t r i c t Court. More
i m p o r t a n t t o o u r c o n c l u s i o n i s t h e r e a s o n s t a t e d by Consumer
Counsel f o r advancing t h i s motion:
"Consumer Counsel advances t h i s Motion s o t h a t t h e
above-mentioned F i n d i n g s and Conclusions w i l l n o t
be g i v e n an i n t e r p r e t a t i o n which c o n f l i c t s w i t h
t h e c l e a r language i n t h e remainder of t h e C o u r t ' s
F i n d i n g s , Conclusions and Judgement p r o v i s i o n s . "
Thus, t h e motion w a s n o t d e s i g n e d s o much t o concede t h e
i m p r o p r i e t y of t h a t p a r t of t h e D i s t r i c t C o u r t ' s judgment
c o n c e r n i n g t h e q u e s t i o n a b l e $15.7 m i l l i o n a s i t w a s i n t e n d e d
t o s t r e n g t h e n t h a t p a r t of t h e D i s t r i c t C o u r t judgment
r e l a t i n g t o t h e e x c l u s i o n o f t h e $5.7 m i l l i o n by removing
any p o s s i b i l i t y o f a n i n c o n s i s t e n t i n t e r p r e t a t i o n of t h e
judgment a s a whole. When t h e motion w a s d e n i e d , Consumer
Counsel was f r e e t o a t t e m p t t h e a l t e r n a t i v e means of re-
moving what i t p e r c e i v e d t o b e a n a p p a r e n t i n c o n s i s t e n c y i n
t h i s o r d e r by o b t a i n i n g a c o m p l e t e r e v e r s a l of t h e p a r t of
t h e judgment r e l a t i n g t o c o n s i d e r a t i o n of t h e $15.7 m i l l i o n .
A s t o t h e c o n c l u s i o n of t h e t h e D i s t r i c t C o u r t " t h a t
t h e r e were no f a c t s upon which t h e PSC c o u l d c h a l l e n g e o r
c o n s i d e r q u e s t i o n a b l e t h i s $15.722 m i l l i o n i n e l e c t r i c r a t e
b a s e " , w e c o n c l u d e t h a t t h i s was a n i m p r o p e r , p r e m a t u r e
i n t r u s i o n by t h e D i s t r i c t C o u r t i n t o t h e a d m i n i s t r a t i v e
p r o c e s s and t h e r e f o r e r e v e r s e .
The e x p r e s s i o n by t h e Commission of i t s c o n t i n u i n g
c o n c e r n o v e r t h i s $15.7 m i l l i o n p o s s i b l y i n e x c e s s of o r i g -
i n a l c o s t i s n o t a f i n a l d e c i s i o n by t h e Commission; n o r
d o e s i t q u a l i f y a s a p r e l i m i n a r y r u l i n g f o r which r e v i e w of
any f i n a l o r d e r would n o t b e a d e q u a t e . A t best t h i s h a s
c r e a t e d a nonissue. I f i n t h e f u t u r e , a f t e r a proper
h e a r i n g , a n a d v e r s e f i n a l o r d e r b e i s s u e d on t h e m a t t e r ,
j u d i c i a l r e v i e w would b e i n o r d e r .
Montana Power h a s s u f f e r e d no l o s s on t h i s m a t t e r and
i n f a c t may n e v e r s u f f e r any l o s s . Montana Power r e c o g n i z e d
t h i s prematurity i n i t s r e p l y b r i e f t o t h e D i s t r i c t Court:
* h p ---- relevance of -l- - e d i s c u s s i o n of
" v **- n n l v - - - - - -.--- - - a l of t h -
--
t h e $15.7 m i l l i o n - - c o n n e c t i o n w i t h t h e
is i n
r i g h t o r a u t h o r i t y - -e Commission t o o r d e r
of t h
~ o n t a n a ~ o w eo r e t a i n an independentaccoun-
t r
tant. " ( ~ m ~ h a s ii n o r i g i n a l . )
s
And i n i t s r e p l y b r i e f t o t h i s C o u r t , M C s t a t e d :
P
" I n d e c l i n i n g - - t-
t o a c now, t h e PSC h a s c l e a r l y
g i v e n an i n d i c a t i o n of what i t w i l l do i n f u t u r e
proceedings; and t o t h a t end, t h e PSC h a s o r d e r e d
MPC t o h i r e independent a c c o u n t a n t s . " (Emphasis
added. )
A s we have n o t e d , t h e P u b l i c S e r v i c e Commission i s
empowered t o " i n v e s t i g a t e and a s c e r t a i n t h e v a l u e of t h e
p r o p e r t y of every p u b l i c u t i l i t y . " S e c t i o n 70-106, R.C.M.
1 9 4 7 , now s e c t i o n 69-3-109 MCA. Under t h e same s t a t u t e , a s
i t has r e a d from t h e time of i t s f i r s t enactment i n 1913,
" t h e commission may a t any time of i t s own i n i t i a t i v e make a
r e v a l u a t i o n of such p r o p e r t y . "
I n i t s u s e of t h e t e r m " r e v a l u a t i o n " t h e l e g i s l a t u r e
c l e a r l y contemplated t h e p o s s i b i l i t y t h a t l a t e r P u b l i c
S e r v i c e Commissions, under a p p r o p r i a t e c i r c u m s t a n c e s , may
modify o r a l t e r t h e p r o p e r t y v a l u a t i o n s made by e a r l i e r
commissions.
A d m i n i s t r a t i v e p o l i c i e s change, compelled by changing
s o c i a l o r economic c o n d i t i o n s o r by changing s t a t u t o r y
guidelines. I n 1975, by i t s amendment t o s e c t i o n 70-106,
now s e c t i o n 69-3-109 MCA, t h e l e g i s l a t u r e changed one of t h e
b a s i c p r i n c i p l e s upon which u t i l i t y r a t e b a s e s had been
c a l c u l a t e d i n Montana. Before 1975 u t i l i t y r a t e b a s e s were
c a l c u l a t e d on t h e b a s i s of t h e r e p r o d u c t i o n c o s t new o r
commercial v a l u e of u t i l i t y p l a n t s , of which o r i g i n a l c o s t
was o n l y one f a c t o r t o be c o n s i d e r e d . See, e . g . , Re The
Montana Power Company, 56 P . U . R . (N.S.) a t 200, 204; S t a t e
e x r e l . Olsen v. P u b l i c S e r v i c e Commission ( 1 9 5 7 ) , 1 3 1 Mont.
272, 276-77, 309 P.2d 1035, 1038; Tobacco River Power Co.
v . P u b l i c S e r v i c e Commission ( 1 9 4 0 ) , 109 Mont. 521, 529-30;
98 P.2d 886, 890. From 1975 forward, however, t h e l e g i s -
l a t u r e transformed o r i g i n a l c o s t i n t o t h e f a c t o r t o be
c o n s i d e r e d i n r a t e b a s e c a l c u l a t i o n ; from 1975 forward,
u t i l i t y p l a n t s c o u l d n o t be valued i n e x c e s s of o r i g i n a l
cost. S e c t i o n 70-106, R.C.M. 1947, now s e c t i o n 69-3-109
MCA. The d e t e r m i n a t i o n of o r i g i n a l c o s t , t h e r e f o r e , h a s a
new importance i n t h e s e t t i n g of u t i l i t y r a t e s .
W now proceed t o t h e q u e s t i o n of t h e Commission's
e
a u t h o r i t y i n o r d e r i n g Montana Power t o r e t a i n an a c c e p t a b l e ,
independent a c c o u n t i n g f i r m t o i n v e s t i g a t e t h e o r i g i n a l
c o s t s of t h e $15.7 m i l l i o n p r o p e r t i e s . Unlike t h e s t a t e m e n t
of c o n t i n u i n g concern, t h i s i s a f i n a l o r d e r by t h e Commis-
s i o n which does impose an o b l i g a t i o n on Montana Power and i s
t h e r e f o r e reviewable under s e c t i o n 8 2 - 4 2 1 6 ( 1 ) ( a ) , now s e c -
t i o n 2-4-702 MCA. N a t i o n a l Van L i n e s , I n c . v . United S t a t e s
(7th C i r . 1 9 6 4 ) , 326 F.2d 362, 372.
The D i s t r i c t Court concluded t h a t t h e o r d e r of t h e
Commission t h a t Montana Power r e t a i n t h e a c c o u n t i n g f i r m was
"beyond t h e j u r i s d i c t i o n of t h e PSC and would c o n s t i t u t e a
c l e a r c o n f i s c a t i o n of $300,000 o r more [ a s t h e e s t i m a t e d
c o s t of t h e a c c o u n t i n g ] of t h e p r o p e r t y of Montana Power."
W a g r e e w i t h t h e D i s t r i c t Court and hold t h a t t h e Commis-
e
s i o n l a c k s t h e r e q u i s i t e s t a t u t o r y a u t h o r i t y t o compel
Montana Power t o h i r e a n independent a c c o u n t i n g f i r m a c c e p t -
a b l e t o t h e Commission f o r t h e purpose of d e t e r m i n i n g t h e
o r i g i n a l c o s t s of t h e d i s p u t e d p r o p e r t i e s . C i t y of Polson
v. P u b l i c S e r v i c e Comm'n ( 1 9 7 0 ) , 155 Mont. 464, 4 6 9 , 473
P.2d 5 0 8 , 511.
The power of t h e Commission under s e c t i o n 70-106, now
s e c t i o n 69-3-109 MCA, t o " i n v e s t i g a t e and a s c e r t a i n " t h e
v a l u e of u t i l i t y p r o p e r t y has been d i s c u s s e d above. he
means and a u t h o r i t y by which t h e Commission i s t o conduct
its investigation is indicated i n several statutes. ~.g.,
s e c t i o n s 70-106, -107, -108, -117, R.C.M. 1947, now s e c t i o n s
69-3-109, 69-3-202, 69-3-203, 69-3-106 MCA.
The Commission a s s e r t s t h e s e s t a t u t e s g i v e i t t h e
n e c e s s a r y a u t h o r i t y t o compel a n i n d e p e n d e n t a u d i t . W e do
n o t read t h e a u t h o r i t y granted t h e r e i n s o broadly. Instead,
i t i s c l e a r from t h e s t a t u t e s t h a t t h e Commission i s em-
powered o n l y t o r e q u e s t d e s i r e d i n f o r m a t i o n from a u t i l i t y ,
n o t t o d i r e c t t h e means by which s u c h i n f o r m a t i o n i s t o be
gathered. Under s u c h a u t h o r i t y , t h e Commission i s c l e a r l y
empowered t o r e q u e s t and o b t a i n from Montana Power a c c o u n t -
i n g i n f o r m a t i o n on t h e o r i g i n a l c o s t s o f d i s p u t e d p r o p e r t i e s ,
b u t i t i s up t o Montana Power t o d e c i d e how t o go a b o u t
c o l l e c t i n g t h i s information.
The Commission a r g u e s t h a t , i f Montana Power c o n d u c t s
t h e a u d i t i t s e l f , t h e r e s u l t s "would b e t a i n t e d by s u s p i -
c i o n s of s e l f - i n t e r e s t . " T h i s argument c o u l d be a p p l i e d t o
any i n f o r m a t i o n s u p p l i e d by any u t i l i t y t o t h e i om mission.
Y e t from t h e above-noted s t a t u t e s , it i s c l e a r t h a t the
primary source of information about u t i l i t y o p e r a t i o n is t h e
utility itself. E.g., s e c t i o n s 70-107, -108, R.C.M. 1947,
now s e c t i o n s 69-3-202, -203 MCA. The Commission, of c o u r s e ,
i s always f r e e t o weigh any such i n f o r m a t i o n a g a i n s t any
i n f o r m a t i o n t o t h e c o n t r a r y p r e s e n t e d by o t h e r a g e n c i e s o r
i t s own s t a f f .
For t h e f o r e g o i n g r e a s o n s , t h e judgment o f t h e D i s t r i c t
C o u r t t h a t t h e Commission c a n n o t q u e s t i o n t h e i n c l u s i o n of
t h e $15.7 m i l l i o n i n Montana Power's r a t e b a s e i s r e v e r s e d .
The judgment of t h e D i s t r i c t C o u r t t h a t t h e Commission l a c k s
a u t h o r i t y t o compel a n i n d e p e n d e n t a u d i t i s a f f i r m e d .
- - s-of Average-Year --
The U e Rate Base. On t h i s i t e m , t h e
D i s t r i c t C o u r t and t h e Commission a g r e e d . The f i n d i n g s of
t h e D i s t r i c t Court a r e a g a i n h e l p f u l :
"The Commission c a l c u l a t e d Montana Power's
r e v e n u e s on t h e b a s i s of t h e a v e r a g e r a t e b a s e f o r
t h e t e s t y e a r and i n c l u d e d o n l y one-half t h e t e s t
y e a r p r o p e r t y t a x e s t o be c o n s i s t e n t w i t h a v e r a g e
r a t e base. F i n d i n g s 4 4 and 58A. The ' r a t e b a s e '
i n c l u d e s a u t i l i t y ' s unrecovered i n v e s t m e n t , upon
which t h e u t i l i t y i s e n t i t l e d t o e a r n a r e t u r n
from i t s customers. (The r e v e n u e r e q u i r e m e n t
a l s o c o v e r s expenses s u c h a s t a x e s , d e p r e c i a t i o n ,
f u e l , wages, e t c . ) The v a l u e of t h e a v e r a g e r a t e
b a s e i s t h a t i t matches t h e r e v e n u e s and expenses
o c c u r r i n g d u r i n g t h e t e s t y e a r . The r e q u i r e d
matching of a n n u a l revenues and expenses w i t h
a v e r a g e r a t e b a s e f o l l o w s t h e same p r i n c i p l e as
c a l c u l a t i n g a n n u a l i n t e r e s t c h a r g e s on t h e a v e r -
a g e amount of d e b t o u t s t a n d i n g d u r i n g t h e y e a r ,
n o t t h e year-end l e v e l of d e b t . The Commission's
d e c i s i o n i s s u p p o r t e d by t h e r e c o r d e v i d e n c e and
by a u t h o r i t y and i s t h e r e f o r e a f f i r m e d .
" I n t h e r e c o r d , Consumer Counsel w i t n e s s
H e s s recommended t h a t Montana Power's t e s t - y e a r
r a t e b a s e be c a l c u l a t e d a c c o r d i n g t o t h e a v e r a g e
Montana Power i n v e s t m e n t i n e l e c t r i c s e r v i c e f a c i -
l i t i e s and r e l a t e d f a c i l i t i e s d u r i n g t h e months
of 1975, a d j u s t e d t o i n c l u d e t h e i n v e s t m e n t [ i n ]
t h e C o l s t r i p I g e n e r a t i n g u n i t from t h e b e g i n n i n g
of t h e y e a r 1975 w i t h r e l a t e d r e v e n u e and expense
adjustments. H e testified t h a t the principal
reason f o r using an average r a t e base, r a t h e r
t h a n a year-end r a t e b a s e , i s t h a t an a v e r a g e
r a t e b a s e matches t h e r e v e n u e s r e c e i v e d and ex-
p e n s e s i n c u r r e d d u r i n g t h e c o u r s e of t h e t e s t
y e a r ( T r . 2742-4). While o t h e r s t a t e s do some-
t i m e s u t i l i z e t h e year-end b a s e , P e t i t i o n e r h a s
f a i l e d t o e s t a b l i s h t h a t t h e Commission e r r e d i n
n o t u s i n g t h e year-end r a t e i n t h i s c a s e .
" I n e v i t a b l y t h e r a t e s s e t by r e g u l a t o r y
commissions may p r o v e t o o low o r t o o h i g h . How-
e v e r , a commission must d e c i d e a c a s e on t h e b a s i s
of t h e r e c o r d b e f o r e it. I n t h i s c a s e , t h e Com-
m i s s i o n a c t e d w i t h i n r e a s o n and on t h e b a s i s of
t h e e v i d e n c e i n d e c i d i n g t h a t Montana Power had
n o t c a r r i e d i t s burden of proof t o j u s t i f y a y e a r -
end b a s e . "
One f u r t h e r f a c t w a r r a n t s mentioning. The average-year
r a t e b a s e adopted by t h e Commission and a d j u s t e d t o i n c l u d e
C o l s t r i p I f o r t h e e n t i r e y e a r i n c l u d e s n e a r l y 9 0 p e r c e n t of
Montana Power's i n c r e a s e d i n v e s t m e n t f o r t h e y e a r . Of
Montana Power's claimed i n c r e a s e i n p l a n t investment over
t h e y e a r of $92.5 m i l l i o n , a l l b u t $8.8 m i l l i o n was allowed
i n r a t e b a s e by t h e Commission.
O t h i s i s s u e , t h e p r i n c i p l e s of Vita-Rich Dairy I n c .
n
r e g a r d i n g agency e x p e r t i s e and o u r comments concerning t h e
scope of review become most i m p o r t a n t . From t h e b r i e f s
submitted and t h e c a s e s c i t e d by b o t h s i d e s , i t a p p e a r s t h a t
b o t h t h e year-end r a t e base urged by Montana Power and t h e
average-year r a t e b a s e adopted by t h e Commission may be
c o r r e c t and proper methods f o r v a l u i n g u t i l i t y p r o p e r t y
under c e r t a i n circumstances. The Commission i t s e l f h a s used
b o t h methods i n r e c e n t y e a r s . Cf. Montana-Dakota Utilities
Company ( 1 9 5 9 ) , 28 P.U.R.3d 355 (year-average, o r i g i n a l c o s t
r a t e b a s e ) w i t h Montana Power Co. ( 1 9 6 2 ) , 4 2 P.U.R.3d 241
(year-end f a i r v a l u e r a t e b a s e . ) I t is i n t e r e s t i n g t o note
t h a t i n a v e r y r e c e n t c a s e i n v o l v i n g Montana Power, t h e
Commission adopted a n a v e r a g e r a t e b a s e . Commission Order
No. 4350D, Docket No. 6454, S e r v i c e Date 4-25-78, Applica-
t i o n of Montana Power Company. Apparently, Montana Power
h a s n o t c o n t e s t e d t h e Commission's employment of average
r a t e b a s e i n t h i s more r e c e n t c a s e .
A f e d e r a l a d m i n i s t r a t i v e law judge analyzed t h e v a r i o u s
i s s u e s i n t h e c a s e of Union E l e c t r i c Co. ( 1 9 7 2 ) , 47 FPC 1 4 4 ,
176, a f f ' d 47 FPC a t 151:
"The t e s t y e a r concept r e q u i r e s t h a t r e v e n u e s ,
expenses and investment be synchronized--that
t h e y r e l a t e t o t h e same p e r i o d . When revenues
f o r t h e e n t i r e t e s t year a r e used, t h e corre-
sponding r a t e b a s e i s t h e a v e r a g e f o r t h e y e a r .
This i s t h e u s u a l p r a c t i c e . E.g., United Fuel
Gas Company, 1 2 F . P . C . 251, 256 ( 1 9 5 3 ) .
"Union wants t o u s e t h e year-end r a t e b a s e ,
which i s l a r g e r t h a n t h e t e s t y e a r a v e r a g e be-
c a u s e of s u c c e s s i v e p l a n t a d d i t i o n s made over
t h e year. I t does n o t want t o i n c l u d e a s a c o r -
responding a d j u s t m e n t t h e a d d i t i o n a l revenues
and e x p e n s e s a s s o c i a t e d w i t h t h e l a r g e r i n v e s t -
ment. U n i o n ' s p r o p o s a l p r o d u c e s a d i s t o r t i o n
i n t h e t e s t y e a r r e s u l t s , and i s t h e r e f o r e ob-
j ectionable.
"Union's reason i s t h a t because of r e g u l a t o r y
l a g d u r i n g t h e p e r i o d o f r i s i n g c o s t s i t needs
e x t r a money. I f regulatory l a g reduces r e t u r n
below a f a i r amount, t h i s s h o u l d b e d e a l t w i t h
a s a s e p a r a t e problem. Moreoever, Union shows
no s p e c i f i c r e l a t i o n s h i p between any inadequacy
d u e t o r e g u l a t o r y l a g and t h e e x t r a amount t h a t
would b e d e r i v e d from t h e u s e of a year-end
r a t e base.
"The Commission h a s o n o c c a s i o n u s e d a year-end
r a t e b a s e where t h e p a r t i c u l a r f a c t s w a r r a n t e d .
O t t e r T a i l Power Company, 8 F.P.C. 393, 401 ( 1 9 4 9 ) ;
U n i t e d Gas P i p e L i n e Company, 3 1 F.P.C. 1180, 1194
( 1 9 6 4 ) . B u t Union h a s n o t shown t h a t t h i s t e c h -
nique i s necessary t o i n s u r e it a f a i r r e t u r n i n
t h i s proceeding."
During t h e p r o c e e d i n g s b e f o r e t h e Commission, it was
b r o u g h t o u t t h a t when a year-end r a t e b a s e i s a d o p t e d ,
proper r e g u l a t o r y p r i n c i p l e s r e q u i r e s a concomitant r e c a l -
c u l a t i o n of r e v e n u e s and expenses s o a s t o match income and
expenses w i t h t h e increased r a t e base. I n t h i s case,
Montana Power f a i l e d , o r r e f u s e d , t o o f f e r t h e n e c e s s a r y
adjustments.
Montana Power's c o m p l a i n t s c o n c e r n i n g i n f l a t i o n and
r e g u l a t o r y l a g a s j u s t i f i c a t i o n f o r a year-end r a t e b a s e a r e
n o t convincing. A s n o t e d by commissions i n o t h e r s t a t e s :
" T h a t i n f l a t i o n , a t t r i t i o n and r e g u l a t o r y l a g may
e x i s t d o e s n o t mandate t h e Commission's u s e of a
t e r m i n a l [ p e r i o d end] r a t e b a s e t o r e s o l v e t h e s e
problems." Maryland Pub. S e r v i c e Commission v .
B a l t i m o r e Gas 61 E . Co., ( 1 9 7 4 ) , 273 Md. 357, 329
A.2d 691, 698.
"While a few commissions a r e f i n d i n g i t p o p u l a r
t o d a y t o u s e year-end r a t e bases and v a r i a t i o n s
t h e r e o f , t h i s commission h a s s t e a d f a s t l y c o n t i n u e d
t o i n s i s t t h a t t h e problems of i n f l a t i o n and a t -
t r i t i o n , s u c h a s t h e y a r e , a r e more p r o p e r l y t h e
c o n c e r n of r a t e of r e t u r n . A r t i f i c i a l and mechan-
i c a l adjustments t o r a t e base usurp t h e function
of r a t e of r e t u r n and c a n o n l y b e m i s l e a d i n g t o
a l l concerned." R e N i a g a r a Mohawk Power Corp.,
( N . Y . 1 9 6 0 ) , 35 P.U.R.3d 149, 158.
What t h e i s s u e b o i l s down t o i s t h i s : t h e Co-ission
adopted an e n t i r e l y c o r r e c t and proper method of v a l u a t i o n
which t h e D i s t r i c t C o u r t a f f i r m e d . Montana Power on a p p e a l
u r g e s u s t o a d o p t a d i f f e r e n t , a l b e i t c o r r e c t and p r o p e r ,
method of v a l u a t i o n b u t h a s f a i l e d t o make t h e normal
a d j u s t m e n t s t o revenues and expenses t o r e f l e c t t h e year-end
investment. I n t h e absence of any evidence t h a t t h e Commis-
s i o n a c t e d u n l a w f u l l y o r d i s r e g a r d e d recognized r e g u l a t o r y
procedures and p r a c t i c e s , we a r e bound by o u r l i m i t e d scope
o f review t o a f f i r m t h e D i s t r i c t Court. T h i s r e a s o n i n g and
c o n c l u s i o n a p p l i e s a l s o t o t h e r e l a t e d t r e a t m e n t of Montana
Power's t a x e s f o r 1975.
I n summary t h e judgment of t h e D i s t r i c t Court t h a t t h e
Commission p r o p e r l y excluded $5.7 m i l l i o n from Montana
Power's r a t e base and p r o p e r l y adopted an average-year r a t e
base i s affirmed. The judgment of t h e D i s t r i c t Court t h a t
t h e Commission could n o t a t any time i n t h e f u t u r e c o n s i d e r
o r c h a l l e n g e an a d d i t i o n a l $15.7 m i l l i o n of Montana Power's
r a t e base i s reversed. The judgment of t h e D i s t r i c t Court
t h a t t h e Commission l a c k s a u t h o r i t y t o o r d e r Montana Power
t o h i r e an a c c e p t a b l e , independent a c c o u n t i n g f i r m t o d e t e r -
mine t h e o r i g i n a l c o s t of c e r t a i n Montana Power p r o p e r t i e s
i s affirmed.
*
' Justice
W e concur:
7 4 /'
Chief J u s t i c e
--9?
.J u s t i c e Daniel J . Shea, deeming himself d i s q u a l i f i e d ,
did not s i t i n t h i s case.