BROOM, PRESIDING JUSTICE, FOR THE COURT: *fn1
Electric power rate increases pursuant to Mississippi Code Annotated 77-3-37, -39 (1972) were sought by Mississippi Power Company (MPC) before the Public Service Commission (PSC) which, by order dated April 16, 1981, in part denied the increases. MPC had filed a refunding bond pursuant to 77-3-39, supra, thereby placing the rates in effect. MPC appealed to the Chancery Court of the First Judicial District of Hinds County, the Honorable Joe Moss, Chancellor. From the March 19, 1982, chancellor's decree largely favorable to MPC, direct appeal to this Court was taken by PSC, and cross-appeal was taken by MPC. Pertinent facts will be stated in this opinion as appropriate to the issues argued.
MPC, in seeking the proposed rate increase, contended that its total rate base to be utilized in determining the net operating income requirements was approximately $554,000,000. Included in MPC's calculation of the rate base was over $40,000,000 attributable to contract adjustments between MPC and Gulf Power Company with respect to the acquisition of 1/2 interest by each Company in the Jackson County steam generation
plant (Plant Daniel), and for the purchase of certain railroad cars to be used in transporting coal to Plant Daniel.
PSC determined that, of this approximately $40,000,000 which MPC had included in the rate base, $19,000,000 associated with Plant Daniel adjustment payments to Gulf Power Company, and over $1,000,000 associated with coal car payments to Gulf Power Company, were not to be included in MPC's rate base because the transaction between MPC and Gulf Power had resulted in no additional electric generating capacity for the benefit of MPC's customers.
PART I, BY DAN LEE, J., FOR THE MAJORITY:
THE PLANT DANIEL TRANSACTION
Mississippi Code Annotated section 77-3-39 (1972) authorizes the PSC to establish rates that are just and reasonable to the taxpayers and which will yield a fair rate of return to the utility for its services. Because public utilities are monopolies engaged in the business of furnishing necessary services to the public, the PSC is, in effect, the counterpart of the marketplace by which other businesses are measured. The intent of the legislature in creating the PSC was an effort to impose an authoritative body between the ratepayers of the utility and the investors in the utility so that their respective interests, necessarily antagonistic, might be equitably served.
The PSC's rate-making decisions are never final due to the fluctuation of prices, inflation, business movement and other factors affecting their operations. Such variables necessitate applications for rate adjustments by the utilities for their very existence which necessarily impinge upon the pocketbooks of the utilities' ratepayers. To preserve a balance of the equities and lend stability to this ever present factor between investors and consumers, the legislature has established a standard of just return to the utility and reasonable rates to the consumer. Accord State of Mississippi, et al v. Mississippi Public Service Comm'n., No. 53,709, decided March 9, 1983, not yet reported.
In Southern Bell Tel. & Tel. Co. v. Mississippi Public Service Comm'n., 237 Miss. 157, 113 So. 2d 622 (1959), this well-established principle was construed:
The reasonableness or unreasonableness of the rates charged, or to be charged, by a public utility for its service or produce is not to be determined by any definite rule or legal formula, and is not measurable with any great degree of exactness, but is a question of fact calling for the exercise of
sound discretion, good sense, and a fair, enlightened, and independent judgment. In determining whether a rate is reasonable, each case must rest on its special facts. 73 C.J.S., 1032, Public Utilities, par. 25 a, and cases cited.
What appellant in this case is entitled to is" just and reasonable "rates which will yield" a fair rate of return "to the appellant upon the reasonable value of the property used or useful in furnishing service. A fair return is one which, under prudent and economical management, is just and reasonable to both the public and the utility. From the standpoint of the Company it is important that there be enough revenue not only for operating expenses but also for the capital cost of the business, which includes service on the debt and dividends on the stock. By that standard the return to the equity owner should be commensurate with returns on investments and other enterprises having corresponding risks and sufficient to assure confidence in the financial integrity of the business. What the public is entitled to demand is that no more be exacted from the rate payers than the services are reasonably worth. (237 Miss. at 238, 241, 113 So. 2d at 654, 656) (emphasis ours).
The legal principles relating to the PSC's authority in establishing rates are well settled and have not been subject to any substantial change. They are:
1. The burden of proof rests on the public utility to establish the reasonableness of new rates. Southern Bell T. & T. Co. v. Mississippi Pub. Serv. Com'n., 237 Miss. 157, 113 So. 2d 622 (1959).
2. The commission, with its expertise, is the trier of facts and within this province it has the right to determine the weight of the evidence, the reliability of estimates and the credibility of witnesses. Capital Electric Power Ass'n v. Mississippi Power & Light Co., 216 So. 2d 428 (Miss. 1968); and Southern Bell T. & T. Co. v. Mississippi Pub. Serv. Com'n., 237 Miss. 157, 113 So. 2d 622 (1959).
3. The order of the commission is presumptively valid. Loden v. Mississippi Pub. Serv. Com'n., 279 So. 2d 636 (Miss. 1973).
4. The reasonableness of rates charged, or to be charged, by a public utility is not determined by definite rule or legal formula, but is a fact question requiring the exercise of sound discretion and independent judgment in each case. Southern Bell T. & T. Co. v. Mississippi Pub. Serv. Com'n, 237 Miss. 157, 113 So. 2d 622 (1959).
5a. The chancery court's authority on review is limited by Mississippi Code Annotated section 77-3-67 (4) (1972) to: The order shall not be set aside in whole or part except for errors of law, unless the court finds it is not supported by substantial evidence, is contrary to the manifest weight of the evidence, is in excess of statutory authority or violates constitutional rights.
5b. The authority of 5a has been construed at times as follows: The sole question presented for decision is whether or not the action of the commission was arbitrary, not supported by substantial evidence, or was manifestly against the evidence. Tri-State Transit Co. of La. v. Dixie Greyhound Lines, 197 Miss. 37, 19 So. 2d 441 (1944). *fn2
With these principles in mind, we turn to the facts presented in the instant case.
MPC is a corporate public utility as defined in the Public Utility Act of 1956 as amended. It is incorporated under the laws of the State of Mississippi. All of MPC's common stock is owned by the Southern Company, an investor-owned public utility company, organized and existing by and through the laws of the State of Delaware. The Southern Company also owns the common stock of Georgia Power Company, Alabama Power Company and Gulf Power Company. These four operating companies of the Southern Company system are interconnected by a transmission grid and the generating facilities of the operating companies are operated as a fully integrated power system, which MPC contends has many advantages.
MPC is engaged in the generation, transmission, distribution and sale of electric energy to the public in 23 counties in southeast Mississippi. It serves 52 municipalities and 70 nonincorporated communities. MPC serves at wholesale all of the requirements above that are supplied by the Southern Company system, including one REA distributing cooperative and part of the requirements of two other such rural electric cooperatives.
In Mississippi Power Co. v. Mississippi Public Service Comm'n., 291 So. 2d 541 (Miss. 1974), we said:
The Court also cited with approval Federal Power Commission v. Hope Natural Gas Company, 320 U.S. 591, 64 S. Ct. 281, 88 L.Ed. 333 (1944), and quoted from it as follows:
" The rate-making process under the Act, i.e., the fixing of `just and reasonable' rates, involves a balancing of the investor and the consumer interests. Thus we stated in the Natural Gas Pipeline Co. case [Federal Power Commission v. Natural Gas Pipeline Co.] that `regulation does not insure that the business shall produce net revenues.' 315 U.S. 575 p. 590, 62 S. Ct. 736, 86 L.Ed. 1037. . . . (291 So. 2d at 556) (emphasis ours).
On October 20, 1980, MPC filed with the PSC a notice of change in rates to become effective on November 20, 1980. The proposed rate increase was designed to produce $39,306,000 additional revenue. On November 10, 1980, MPC filed a refunding bond as provided by law, said bond was approved by the order of the commission, and the rates were placed into effect subject to refund on November 20, 1980. After hearings were held from time to time, they were finally concluded on April 16, 1981, and consisted of 16 volumes encompassing 2470 pages. The PSC made an extensive 30-page finding of facts and order that granted MPC a rate increase of $10,877,000 even though it had allowed a rate increase to MPC on March 7, 1980, in the approximate amount of $17,000,000. In so doing, the PSC made some nine adjustments to the company's rate base, two adjustments to the company's estimated expenses shown on the operating statement and allowed a rate of return of 9.76%.
MPC appealed to the chancery court and the learned chancellor reversed the PSC as to the disallowance of $19,000,000 attributed to the Plant Daniel transaction, holding that nowhere in the findings did the commission set forth any explanation as to how it arrived at the $19,000,000 figure except that this
was one-half of the $38,000,000 increase as shown by MPC. The learned chancellor found that the commission's order reducing by one-half the $38,000,000 figure was an abuse of discretion by the commission and was not supported by the evidence. Portions of the 30-page order and findings of fact with reference to Plant Daniel are as follows:
The four operating companies of The Southern Company System are interconnected by a transmission grid and the generating facilities of the operating companies are operated as a fully integrate power system. The Company contends that this has many advantages.
Although this integrated system of ownership and operation of generating facilities is not a direct issue in this case, it is a matter of continuing and growing importance to this Commission as it bears directly on the Company's rate base and capital costs which must be supported by Mississippi customers. In this connection, the Commission takes note of the fact that the Jackson County Steam Plant unit no. 2 (hereinafter referred to as Plant Daniel unit no. 2) is scheduled for commercial production in 1981 and that its addition to the System contributes significantly to the Company's rate increase request in this case.
Pursuant to the Commission's Order of August 27, 1976 in Docket U-3168, the Company sold a one-half undivided interest as tenant in common in its Plant Daniel to Gulf Power, an affiliated member of The Southern Company System. This transaction was proposed due to the Company's earlier overestimate of its own generation capacity requirements and Gulf's apparent need for more capacity at a time when Plant Daniel was under construction. The Commission approved the proposed sale based on the Company's representation that it would be in the best economic interest of both the Company and its customers and that it would thus serve the public interest.
The Commission's Order in Docket U-3168 stated that after Plant Daniel unit no. 2 was completed, necessary adjustments would be made so that each party would have a 50% ownership interest in both units and the common facilities, but appropriate rate treatment with respect to the sale was not specified at that time.
In this case the Company's proposed ratemaking treatment with respect to the completion of Plant Daniel unit no. 2 reflects an exchange of ownership between the Company
and Gulf Power pursuant to the Commission's approval in 1976 under which the Company will relinquish a half interest in Plant Daniel unit no. 1 for a half interest in unit no. 2. Since unit no. 1 was completed about four years earlier than unit no. 2, unit no. 2 is more costly and the exchange results in a substantial increase in the Company's proposed rate base without any addition of capacity.
While the Company projected in 1977 that the cost of this exchange with Gulf Power would ultimately amount to $16 million, the amount actually proposed as a gross plant addition in this case is $38 million. The staff witnesses who addressed this matter recommended that the cost-overrun should be considered in arriving at the allowed rate of return in this case. In addition, the staff witnesses recommended that the Plant Daniel unit no. 2 coal stocks should be excluded from the Company's rate base in this case, and that increased rail car costs should also be excluded. On May 13, 1977 in an Order in Docket U-3245, this Commission permitted the Company to purchase 230 coal cars at a cost of $35,000 each to serve Plant Daniel. The Company's proposed rate treatment here is to, in effect, exchange half of those cars with Gulf for corresponding cars costing $44,900 each, thus producing a rate base addition of $1,138,500. The Company's rate base shall be reduced accordingly.
This Commission must, at this time, give careful consideration to this subject and its effect on the overall cost of energy to the Companys customers.
Further, the Commission takes notice of the evidence introduced by the Company regarding its generation plant investment and operating costs. For many years now the Commission has continuously monitored revenue and audited the Company's fuel costs for generation of electricity. Monthly, quarterly, and annual reports are received from the Company and independent auditors employed by the Commission. The growing concern over rising generation costs require that this Commission carefully study, investigate and give careful consideration in appropriate hearings to all plans and efforts by the Company which contribute to these costs so that the Commission is able to assure that the resulting effect will be the lowest, ultimate cost of electric energy to Mississippi customers, both now and in the future. In this regard, the Commission takes note of the fact that the Company's last rate increase was effective
October 10, 1979, pursuant to this Commission's Order of March 7, 1980 in Docket No. U-3739 and was projected to yield increased revenues of $16,805,000 annually. The filing of this case within a matter of months after that Order seeking an additional $39.3 million in annual rate increases is virtually unprecedented in this jurisdiction and serves to clearly illustrate the urgent need for particularly careful regulatory scrutiny of the Company's alleged revenue deficiency in this case.
The result of this Order, as hereinafter set out, is to find and order that the proposed new schedule of 1980, are unjust, unreasonable, and unlawful and shall not be allowed or approved. The proposed new rates result in an increase in revenues to the Company which is excessive and further result in an unfair and unjust burden on the Company's customers. Consistent with this result, however, the Commission is compelled to acknowledge certain current economic realities which must be considered in reaching a decision in this cause which will be supported by substantial evidence.
To ignore the evidence regarding the impact of inflation and general economic conditions on the Company's cost of providing electric service to its customers would constitute an error of law and disregard for the express terms of the Act. However much this Commission may be aware of the burden and hardship placed on the public by any increase in the cost of electric service, it cannot avoid the responsibilities placed on it by the Act and render decisions which will be upheld as consistent therewith. To do otherwise could result in consequences having greater adverse effects on the public.
The Company failed to meet the burden of proof necessary to justify the increase in revenues produced by the proposed new schedule of rates and charges; however, there remains sufficient evidence, which a court would recognize, to support the additional revenues which the company is allowed an opportunity to earn as a result of this Order.
One additional adjustment that the Commission feels is required is to eliminate the rate base effect of the excess cost of Plant Daniel unit no. 2. It is unthinkable to ask the Mississippi ratepayers to shoulder this additional burden. It seems obvious that any such cost increases should be borne by the ratepayers of Gulf
Power Company. Although it is true that this Commission relied on the Company's projections and estimates and allowed the Company to sell a one-half undivided interest in the Daniel Plant to Gulf Power Company, there was never a determination made that the proposed sale would impact Mississippi ratepayers to the extent that the Company now proposes. The Company's plant accounts will increase by an estimated $38,000,000 when Plant Daniel unit no. 2 goes into commercial operation (currently estimated at May 31, 1981). The Company has not demonstrated to the satisfaction of this Commission that the ownership of a one-half undivided interest in both Plant Daniel units as opposed to the present ownership of only unit No. 1 will be any more beneficial to Mississippi ratepayers. The Company's proposal is unsupported in the record and not in the best interest of Mississippi ratepayers. . . .
The PSC with its expertise is the trier of facts and within such province has the right to determine weight of evidence, reliability of estimates and credibility of witnesses, in passing on new rates. Mississippi Public Service Comm'n. v. Mississippi Power Co., 337 So. 2d 936 (Miss. 1976); Southern Bell Tel. & Tel. Co. v. Mississippi Public Service Comm'n., 237 Miss. 157, 113 So. 2d 622 (1959).
The standard of review of an appeal from the PSC's order is proscribed in Mississippi Code Annotated section 77-3-67 (4) (Supp. 1982) which provides as follows:
(4) The court may hear and dispose of the appeal in term time or vacation and the court may sustain or dismiss the appeal, modify or vacate the order complained of in whole or in part, as the case may be. In case the order is wholly or partly vacated the court may also, in its discretion, remand the matter to the commission for such further proceedings, not inconsistent with the court's order as, in the opinion of the court, justice may require. The order shall not be vacated or set aside either in whole or in part, except for errors of law, unless the court finds that the order of the commission is not supported by substantial evidence, is contrary to the manifest weight of the evidence, is in excess of the statutory authority or jurisdiction of the commission, or violates constitutional rights.
On appeal, such findings are presumptively valid and an appellate court cannot substitute its judgment for that of the commission provided substantial evidence exists to support its findings or its findings are not manifestly against the weight
of the evidence. Mississippi Public Service Comm'n. v. Mississippi Valley Gas Co., 327 So. 2d 296 (Miss. 1976); Loden v. Mississippi Public Service Comm'n., 279 So. 2d 636 (Miss. 1973); Citizens of Stringer v. G M & O RR, 229 Miss. 1, 90 So. 2d 25 (1956); and Cobb Bros. Constr. Co. v. Gulf, M & O R. Co., 213 Miss. 706, 57 So. 2d 570 (1952).
The finding of the commission is supported in the record by the testimony of Dr. J. W. Wilson, staff witness of the Public Service Commission, a part of which is as follows:
Q. Were the financial details of the proposed transaction specified and approved in the commission's 1976 order?
A. No; the Order simply stated that after Unit 2 was completed "the necessary adjustments" would be made so that each party would have a 50% ownership interest in both units and the common facilities. No financial details as to "the necessary adjustments" were specified. It is clear however that the Commission did contemplate that the transaction, as ultimately consummated, would be economically beneficial to all concerned and would thus serve the public interest.
Q. Are the specific financial details, as proposed by MPCo for ratemaking treatment in this case, consistent with the commission's 1976 determination that the transaction be in the best economic interest of both the company and its customers?
A. That is questionable. The end result of the Company's proposed ratemaking treatment here is to substantially increase the financial burden of Mississippi consumers without giving them one more kilowatt of electricity. This result occurs because upon completion of Unit 2 at the Jackson County Steam Plant (which has been owned and financed by Gulf pursuant to the Commission's approval in 1976) MPCo will, in effect, trade Gulf a half interest in its own Unit 1 for a half interest in Unit 2. of course, since Unit 1 was completed about four years earlier than Unit 2, Unit 2 is more costly and thus the trade results in a substantial increase in the cost of MPCo's rate base without any addition of capacity.
Q. Is the excess cost of Unit 2 over Unit 1 more than was contemplated at the time the commission approved the transaction?
A. Yes. While the Company reported in 1977 that the cost to MPCo would ultimately amount to $16 million, the amount actually proposed as a rate base addition in this case is $38 million. While the Commission may determine that an appropriate rate base adjustment is warranted in this regard, I believe that, at a minimum, this cost-overrun should be considered in arriving at the allowed rate of return in this case, and that such consideration warrants a return allowance at the bottom of the applicable range.
In retrospect, the arrangement proposed with respect to Unit 2 of the Jackson County plant, appears to be a far better deal for others in The Southern Company than for MPCo. It's as if I had purchased two adjacent lots some time ago, expecting to construct a very large home; then decided to build a smaller one; sold the extra lot to a relative who, several years later, built an identical home and upon its completion pooled his interests with mine so as to share equally the costs of the two undertakings. If my home cost $40,000 and was financed at 8% but his identical home, built several years later, cost $60,000 and was financed at 12%, the redivision of costs on an equal basis leaves me worse off financially than I was before. Presuming that we had agreed in advance to pool our interests upon the completion of his home and subsequently to make "the necessary adjustments" in "the best economic interest" of us both, it would seem that my fair share of the joint costs should be less than half. This is particularly so if I originally sold the extra lot at my original cost even though building site costs had escalated since its original acquisition and if I had done all the work in obtaining building permits and zoning ordinances. Moreover, to share my original cost of common facilities such as the water main and access road, equally and without markup, would be a further gratuity to my relative, as would a charge equal to the original cost of certain necessary landscaping improvements on the second lot even though landscaping costs had subsequently skyrocketed. Clearly then, at the time we pool our assets, "the necessary adjustments" to serve our mutual best economic interest "should not be a 50/50 total cost split. Yet this is essentially the ratemaking arrangement which MPCo proposes in this case as a result of the Jackson County transaction with Gulf Power, its sister company even though the Unit 2 cost excess is more than double the amount that had been anticipate.
Q. Are there certain aspects of the Jackson County
Unit 2 arrangement where cost disallowances are clearly called for?
A. Yes. As my associate, Mr. Clark, has pointed out, the cost of Unit 2 coal stocks should be excluded from MPCo's rate base in this case. In addition, increased rail car costs should also be excluded. On May 13, 1977 in its order in Docket U-3245, this Commission permitted MPCo to purchase 230 coal cars at a cost of $35,000 each to serve the Jackson County Plant. Now the Company proposes, in effect, to exchange half of those cars with Gulf for corresponding cars costing $44,900 each. This unwarranted rate base addition of $1,138,500 should be disallowed. The computation of this disallowance is shown in Exhibit ___ (J.W.-15)."
On review of the record consisting of the testimony of many experts for both the PSC and MPC and the detailed finding of facts made in the commission's order, we find that the chancery court erred in reversing the PSC's order which reduced MPC's proposed inclusion of $19,000,000 plus $1,138,500 in the overall rate base as to the Plant Daniel transaction. In view of the foregoing, ...