7-2500-8406-2
PUC Docket No. G-008/GR-93-1090
STATE OF MINNESOTA
OFFICE OF ADMINISTRATIVE HEARINGS
FOR THE MINNESOTA PUBLIC UTILITIES COMMISSION
In the Matter of the Petition of Minnegasco, a Division of Arkla Inc., for Authority to Increase its Rates for Natural Gas Service in Minnesota
FINDINGS OF FACT,
CONCLUSIONS, AND RECOMMENDATION
EDITOR's NOTE: This Report has been edited in the interest of brevity.
The above-entitled matter came on for evidentiary hearing before Administrative Law Judge Richard C. Luis on May 17-18 and 24-26 and June 2-3 and 9-10, 1994 in St. Paul, Minnesota. The record in this matter closed on August 4, 1994.
The parties to this proceeding are: Minnegasco, a division of NorAm Energy Corp., formerly known as Arkla1, Inc. ("Minnegasco", "MGC" "the Company" or "the Utility"); Minnesota Department of Public Service ("the Department" or "DPS"); Office of the Attorney General, Hubert H. Humphrey III ("Attorney General" or "OAG"); the Minnesota Alliance for Fair Competition ("MAC"); Minnesota Energy Consumers ("MEC"); the Suburban Rate Authority ("SRA"), and the Regents of the University of Minnesota ("U of M").
Appearances were made by the following:
For Minnegasco, a Division of Arkla, Inc., Paul T. Ruxin, of the firm of Jones, Day, Reavis & Pogue, North Point, 901 Lakeside Avenue, Cleveland, Ohio 44114; and Brenda A. Bjorklund and Douglas W. Peterson, Minnegasco Law Department, 201 South Seventh Street, Minneapolis, Minnesota 55402.
For the Department of Public Service, Scott Wilensky, Assistant Attorney General, 525 Park Street, #500, St. Paul, Minnesota 55103; and Joshua Wirtschafter and Mark Chalfant, Assistant Attorneys General, 1200 NCL Tower, 445 Minnesota Street, St. Paul, Minnesota 55101-2130.
For the Office of Attorney General, Gary R. Cunningham, Assistant Attorney General, 1200 NCL Tower, 445 Minnesota Street, St. Paul, Minnesota 55101-2130.
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1. Between the time of filing and the hearing, Minnegasco's corporate parent changed its name from Arkla, Inc. to NorAm Energy Corp. The parent company will be referred to as Arkla in the balance of this Report.
For the Minnesota Alliance for Fair Competition, James D. Larson, of the firm of Wurst, Pearson, Larson, Underwood and Mertz, #1100, One Financial Plaza, 120 South 6th Street, Minneapolis, Minnesota 55402.
For Minnesota Energy Consumers, James J. Bertrand, of the firm of Leonard, Street & Deinard, 150 South Fifth Street, Suite 2300, Minneapolis, Minnesota 55402.
For the Minnesota Suburban Rate Authority, James M. Strommen, of the firm Holmes and Graven, 470 Pillsbury Center, 200 South Sixth Street, Minneapolis, Minnesota 55402.
For the Minnesota Public Utilities Commission ("the Commission" or "PUC"), Margie Hendrickson and Anu Seam, Assistant Attorneys General, 121 Seventh Place East, Suite 350, St. Paul, Minnesota 55101. Staff members participating in the hearing were Robert Harding (Case Manager), Gerald Dasinger, John Lindell and Clark Kaml.
Notice is hereby given that, pursuant to Minn. Stat. § 14.61, and the Rules of Practice of the Public Utilities Commission and the Office of Administrative Hearings, exceptions to this Report, if any, by any party adversely affected must be filed within 15 days of the mailing date hereof with the Executive Secretary, Minnesota Public Utilities Commission, Metro Square Building, Suite 350, 121 7th Place East, St. Paul, Minnesota 55101-2147. Exceptions must be specific and stated and numbered separately. Proposed Findings of Fact, Conclusions and Order should be included, and copies thereof shall be served upon all parties. Oral argument before a majority of the Commission will be permitted to all parties adversely affected by the Administrative Law Judge's recommendation who request such argument. Such request must accompany the exceptions, and an original and 13 copies of each document should be filed with the Commission.
The Minnesota Public Utilities Commission will make the final determination of the matter after the expiration of the period for filing exceptions as set forth above, or after oral argument, if such is requested and had in the matter.
Further notice is hereby given that the Commission may, at its own discretion, accept or reject the Administrative Law Judge's recommendation and that said recommendation has no legal effect unless expressly adopted by the Commission as its final order.
STATEMENT OF ISSUE
Should Minnegasco be allowed to increase its rates for gas utility service to Minnesota customers by $22,722,000 and collect revenues in accordance with the rate design proposed by Minnegasco?
Based on all the preceedings herein, the Administrative Law Judge makes the following:
FINDINGS OF FACT
Procedural Background
1. On November 5, 1993, Minnegasco filed a Petition with the Commission under Minn. Stat. § 216B.16, for an increase in gas rates of $22,722,000 (an approximately 3.6 percent increase over current rates). Minnegasco also filed a Petition for Interim Rates in the amount of $16,864,000 (a 2.7 percent increase). The Commission rejected the November 5 filing as incomplete, and the Company submitted a Supplemental Filing.
2. On January 26, 1994, the Commission accepted the filing as supplemented on December 9, 1993, and issued a Notice and Order for Hearing. The Notice and Order requested that the parties not include certain issues2 in any settlement. The Administrative Law Judge ("ALJ") held a prehearing conference on February 1, 1994, and issued a Prehearing Order on March 1, 1994.
3. On January 31, 1994, the Commission issued an Order Setting Interim Rates, authorizing Minnegasco to collect $14,600,000 in additional annual revenues in the form of a 2.3 percent surcharge to retail rate schedules as interim rates, beginning February 1, 1994. Minnegasco is collecting interim rates subject to full or partial refund if the interim rates are in excess of the final rates determined by the Commission.
4. Prior to the deadline set in the Prehearing Order, Petitions to Intervene were filed by and granted to the Department, OAG, MAC, MEC, SRA and U of M.
5. The SRA appeared at the hearings and filed Briefs but sponsored no witnesses. The U of M did not appear at the hearing nor did it file Briefs or sponsor any witnesses. Its counsel is Peter H. Grills, of the firm of O'Neill, Burke, O'Neill, Leonard and O'Brien, 800 Norwest Center, 55 East Fifth Street, St. Paul, Minnesota 55101.
6. Public hearings were conducted in Coon Rapids on April 21, 1994, in Minneapolis on April 25, 1994; in Bloomington on April 26, 1994 and in Mankato on April 28, 1994.
7. Evidentiary hearings were initially scheduled to begin May 5, 1994. Because the parties reached settlement on a number of the contested issues, the ALJ twice granted extensions of the hearing date, ultimately until May 17, 1994. The hearings concluded on June 10, 1994. By operation of Minn. Stat. § 216B.16, subd. 1a(a), the extensions granted by the Administrative Law Judge to extend the procedural schedule to permit the parties to engage in settlement discussions extended the deadline for the Commission's final decision in this matter from October 10, 1994 to October 24, 1994.
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2. Cost Allocation between regulated and non-regulated services; Capital Structure and the Cost of Capital; Recovery of the Acquisition Adjustment and, if so, from which customers; and Incentive Compensation.
Description of the Company
8. On November 29, 1990, Minnegasco became an operating division of Arkla, Inc. Prior to that time, Minnegasco had been a wholly-owned subsidiary of Diversified Energies, Inc. In April 1994, Arkla, Inc. changed its name to NorAm Energy Corp.
9. Minnegasco distributes gas to nearly 600,000 customers in Minnesota. In a transaction approved by the Commission on July 29, 1993 and closed on August 31, 1993, Minnegasco acquired the Minnesota properties of Midwest Gas in exchange for its South Dakota properties and $38 million cash. Also in 1993, Minnegasco sold its Nebraska properties.
10. The largest urban area served by Minnegasco is Minneapolis and its western suburbs. Minnegasco has a significant large volume load. The Utility's peak demand periods occur during the winter, when the cold climate increases the need for space heating. Minnegasco maintains its principal office in Minneapolis, Minnesota and has other offices throughout its service territory.
11. Minnegasco purchases gas from producers, and also some gas from interstate pipelines. It services its customers with natural gas transported by Northern Natural Gas, except for customers in the former Midwest Gas communities of Dalbo, Foreston, Milaca and Pease, whose gas is transported by Viking Gas Pipeline System.
12. The increase in Minnesota customers of approximately 100,000 since the Company's 1992-93 rate case is attributable largely to the acquisition of Midwest Gas's former service territory. The great majority of the acquired territory is in Anoka County.
Summary of Public Comments
13. Four public hearings were held to take the comments and testimony of affected ratepayers. Hearings were held at (total attendance) (number of public witnesses):
Coon Rapids, April 21 at 7:00 p.m. (19) (2)
Minneapolis, April 25 at 1:30 p.m. (22) (1)
Bloomington, April 26 at 7:00 p.m. (18) (1)
Mankato, April 28 at 7:00 p.m. (17) (3)
25. Approximately 75 written comments and notes of telephone inquiries were recorded from ratepayers and interest groups. The majority were against any rate increase because these consumers simply cannot afford additional expenses at this time. Increasing customer charges came under greater attack than any other single proposal, mostly because the residential charge stood at only $3/month before the Company's last (1993) rate case and is proposed to go to $6/month in this filing. The proposed Weather Normalization Adjustment (WNA) also drew a number of negative comments, particularly charges that implementation of a WNA would be contrary to energy conservation efforts.
26. One customer complained that the Minneapolis hearing was scheduled in day-time hours. He believed all hearings should be at night so "working people" could attend. The ALJ explained at the Coon Rapids hearing that he set one day-time hearing downtown to encourage attendance by persons reluctant or unable to go out at night and because the location was central for those depending on public transportation.
Pipefitters Union #539 supported MAC's allegation that ratepayers subsidize the Company's non-regulated operations and called for the Commission to consider ordering a severance of the Company from its unregulated appliance sales and service business.
An anonymous writer chastised the Commission for allowing Minnegasco to merge with Arkla, a company "ruled by Southern 'good old boys'", emphasizing that the parent company faces huge potential legal liability exposure (citing Arkla's 1993 Annual Report). The ALJ notes that the liability exposure involves Entex, a separate division of Arkla that distributes natural gas in Houston, eastern Texas and southwestern Louisiana, and Arkla's formerly-owned gas exploration and production subsidiary. Minnegasco Ex. 71.
Burden Of Proof
27. Minn. Stat. § 216B.16, subd. 4 (1992) places on the utility proposing a rate increase the burden of showing the reasonableness of its proposed rates. Under Minn. Stat. § 216B.03, every rate made, demanded or received by any public utility " . . . shall be just and reasonable . . . . Any doubt as to the reasonableness should be resolved in favor of the consumer."
28. The Minnesota Court of Appeals and Minnesota Supreme Court have addressed the appropriate quantum of proof needed to establish the reasonableness of a proposed rate change. In In re Northern States Power Company, 402 N.W.2d 135 (Minn. App. 1987), the Court of Appeals stated:
We find . . . that the appropriate quantum of proof needed to establish the reasonableness of a proposed rate change is the same as in any other civil case--a fair preponderance of the evidence.
On review by the Supreme Court, the determination on burden of proof by the Court of Appeals was affirmed. In re Northern States Power Company, 416 N.W.2d 719 (Minn. 1987). The Court went on to provide further explication of the fair preponderance standard as applied to fact-finding processes in utility rate cases. It noted that the weighing of evidence to be employed by the Commission differs from the weighing of evidence traditionally employed by a court (416 N.W.2d at 722):
In evaluating the validity of a rate increase application, the Commission should apply the classic burden of proof analysis employed in civil cases in determining whether the utility has established the amount of a claimed cost as a judicial fact. . . . But in the exercise of the statutorily imposed duty to determine whether the inclusion of the item generating the claimed cost is appropriate, or whether the ratepayers or shareholders should sustain the burden generated by the claimed cost, the MPUC acts both in a quasi-judicial and a partially legislative capacity.
29. Intervenors in this case recommended adjustments which, if adopted, would lower Minnegasco's revenue deficiency. At this stage of the proceeding, the Administrative Law Judge is acting in a quasi-judicial capacity. He interprets the above-noted rulings of the Court of Appeals and Supreme Court to imply that the Judge's fact-finding function in a utility rate case is to determine whether a proponent of a given position has established sufficient facts to support the reasonableness of that position by a fair preponderance of the evidence. The question of whether the evidence thus established on the record results in "just and reasonable" rates is left to the judgment of the Commission after the Judge makes his recommendations.
While it is true that the Company has the burden of proof to establish any change in rates by a preponderance of the evidence, it is likewise true that any party challenging one of Minnegasco's proposals which is supported by substantial evidence must establish its position on the issue with evidence of equal probative value to that of Minnegasco's. Absent such a showing, the Company meets the "preponderance of the evidence" standard on every change it supports with substantial evidence.
Issues Addressed in the Offer of Partial Settlement and Stipulation of Facts
30. During the course of their preparation for the contested case, the parties held numerous settlement meetings. On May 27, 1994, Minnegasco, the Department of Public Service and the Office of Attorney General entered into an Offer of Partial Settlement and Stipulation of Facts (the "Offer") which settled a number of revenue requirement and rate design issues and also set forth a Stipulation of Facts and Recommended Decision on certain revenue requirement issues that the Minnesota Public Utilities Commission had requested not be in a settlement. The Offer was admitted to the record as Joint Ex. 94. At the Judge's request, Minnegasco subsequently separated the Offer into two documents, the Offer of Partial Settlement (MGC Ex. 128) and the Stipulation of Facts and Recommended Decision (MGC Ex. 129).
31. The distinction between the settled issues (MGC Ex. 128) and stipulated issues (MGC Ex. 129) is both significant and substantive. The agreement on the settled issues is expressly conditioned upon its acceptance by the Commission in its entirety without modification, except as revenue requirement or rate design effects may be changed as a result of the Commission's resolution of the stipulated or disputed issues. Pursuant to Minn. Stat. § 216B.16, subd. 1(a), if the Commission otherwise modifies this Settlement in a final Order or Order After Reconsideration, the parties shall have ten (10) days in which to reject this modification. If any party rejects the modification, the parties have agreed that the Settlement shall be null and void and shall not constitute any part of the record in this proceeding. In such event, the parties have agreed that hearings should go forward promptly upon all settlement matters raised in the testimony of the parties to the proceeding and that all parties be permitted to argue their positions with respect to such issues to the Commission in post-hearing briefs and, if requested or permitted by the Commission, oral argument. Joint Ex. 94, p. 37.
32. The parties to the Offer honored the
Commission's request and did not settle four issues listed specifically in the
Commission's January 26, 1994 Order.
Those issues are: the
Acquisition Adjustment; revised Cost
Allocations; Cost of Capital and Rate of Return; and Incentive
Compensation. On these issues, the
parties to the Offer stipulated as to the facts and recommended a
decision. A Commission
modification to the result stipulated on these issues would not require further
evidentiary hearings. Joint Ex. 94,
pp. 33-35.
33. Through the structuring of the Offer in the manner described above, the Administrative Law Judge finds that the parties to the Offer complied with the Commission's request not to settle certain issues specified in its January 26, 1994 Order.
34. The impact of the Offer as filed (including both the settled issues and stipulated issues) reduces Minnegasco's requested revenue requirement increase from $22,722,000 to $10,972,000, based on an overall rate of return of 9.67 percent. Joint Ex. 94, p. 23. The overall percentage increase over revenues generated by the current rate structure is 1.74 percent, compared to the 3.6 percent represented by a $22,722,000 increase, as originally requested by the Company.
35. The parties to the Offer agreed that the Commission's decision on the stipulated and the disputed issues will not affect the reasonableness of the results of the Settlement. The parties recognized that the Commission's resolution of these issues may have an impact on the level of additional revenues intended to be produced by the Settlement. Joint Ex. 94, pp. 3-4.
36. The parties to the Offer agreed that there is sufficient evidentiary support for the Offer in the pre-filed testimony schedules and additional material attached to and made a part of the Offer. In addition, the parties made their witnesses available to the Commission staff and the Administrative Law Judge at the evidentiary hearings, and introduced various exhibits to address issues contained within their testimony and the Offer itself for purposes of further supplementing the record. Joint Ex. 94, p. 4.
37. No other party to this case contests the issues settled or stipulated to in the Offer by the parties to the Offer, except that MAC disputes the allocation of gas leak calls assumed in the Stipulation. In its Briefs, the SRA put in issue the Company's proposed customer charges, which the parties to the Offer listed as a "Non-Disputed" issue (not settled or stipulated to specifically). If MEC's Cost Allocation and Rate Design proposals are adopted, the Revenue Apportionment agreed to by the parties to the Offer could change.
38. The Settlement and Stipulation will result in just and reasonable rates consistent with the public interest.
39. Specific findings on each issue addressed in the Offer are set forth in Findings 40-160.
Cost of Capital/Rate of Return
108.The Company's original filing reflected the use of a capital structure of 50.2% long-term debt and 49.8% common equity, with cost rates of 8.53% and 12% respectively. Joint Ex. 94, p. 22.
109.The Department proposed to use the capital structure components of 50.2% long-term debt at 8.53% and 49.8% common equity at 10.75%. The OAG proposed to use the capital structure components of 47.8% long-term debt at 8.53%; 4.8% short-term debt at 4.0% and 47.4% common equity at 10.5%. Joint Ex. 94, p. 22.
110.Specifically, rate of return was addressed by three witnesses in this case--Bruce Fairchild on behalf of Minnegasco, Luther Thompson on behalf of the Department of Public Service, and Garth Morrisette on behalf of the Office of Attorney General. The parties agree, and it is found specifically, that there is evidence in the record to support the capital structure, the cost of long-term debt, the cost of short-term debt and a return on common equity of 11.0 percent. The Offer indicates that the parties agree that the Settlement and Stipulation have no precedential value and cannot be used as evidence in future proceedings. The parties have agreed, and it is reasonable that the rationale provided in DPS Ex. 126 (Rationale for Stipulated Capital Structure and Rate of Return), as detailed in the balance of this Finding, will have no precedential value and cannot be used as evidence in any future proceeding. DPS Ex. 126.
The OAG did not join in the offer of DPS Ex. 126. Ex. 126 reads, in pertinent parts:
Capital Structure
Dr. Fairchild recommended a capital structure comprised of 50.2 percent long-term debt and 49.8 percent equity, based on Minnegasco's average capitalization during the test year. Dr. Thompson concurred with these capital structure ratios because they were generally consistent with those maintained by other LDCs. Mr. Morrisette proposed to modify the capital structure recommended by Dr. Fairchild and Dr. Thompson to include Minnegasco's average short-term debt during the test year.
Dr. Fairchild disagreed with the inclusion of short-term debt because the short-term debt used by Minnegasco is temporary, not permanent, financing. He further observed that Minnegasco had no short-term debt outstanding during much of 1993, and that many LDCs do not use short-term debt, even on a temporary basis. Nonetheless, Dr. Fairchild acknowledged that when short-term debt is regularly used to finance working capital and plant investment, it may be regarded as a permanent source of capital and properly included in the capital structure for ratemaking purposes. Minnegasco's original projections reflect short-term debt outstanding during each month of the test year. However, its actual operations reflect the use of short-term debt in January of 1994, none in February through May of 1994, and its projected use later in the year. See Attachment 1. Therefore, it was agreed, for purposes of this Stipulation, that one-half of the average originally estimated short-term debt balance would be included in Minnegasco's capital structure reflecting test year experience, as permanent financing. This resulted in the agreed-upon capitalization consisting of 49.0 percent long-term debt, 2.4 percent short-term debt, and 48.6 percent common equity.
Cost of Long-Term Debt
The parties agreed that Minnegasco's cost of long-term debt is 8.53 percent, as shown on original Schedule D-2(a), Information Requirement, attached as Attachment 2.
Cost of Short-Term Debt
The parties agreed that the 6 percent rate used reflects both actual and anticipated costs during the test year, as shown on original Schedule D-2(d), Information Requirement, attached as Attachment 3. Updated 1994 test year data is shown on Attachment 1.
Rate of Return on Equity
The parties did not agree on a particular method of determining the reasonableness of the ROE. The Department and Minnegasco rationales follow:
1. Flotation Cost Adjustment
The 11.0 percent is supported by the DCF analysis performed by DPS witness Dr. Thompson plus a flotation adjustment of approximately 25 basis points. Dr. Thompson's DCF recommendation of 10.75 percent is based upon a dividend yield of 5.25 percent, and a growth rate of 5.50 percent. There is evidence that Minnegasco's parent Arkla (now NorAm) plans to issue $100 million of common equity during the test year. Dr. Fairchild recommended a flotation cost adjustment of approximately 25 basis points. Dr. Thompson presented evidence that, if allowed, a flotation cost adjustment of 3 to 4 percent would increase his recommended return on equity by 16 to 22 basis points. Based on a flotation cost estimate of 4 percent, the cost of equity would increase by roughly 22 basis points, rounded to 11.0 percent. The flotation cost is consistent with prior Commission precedent in that the issuance is of a magnitude that has been recognized as significant and because the issuance will occur during the test year. As such, the adoption of Dr. Thompson's recommended return on equity of 10.75 percent plus a flotation cost adjustment results in a cost of equity of 11.0 percent which is reasonable and consistent with prior Commission precedent.
2. Change in Market Conditions.
In his direct testimony Dr. Thompson determined a current dividend yield of 5.25 percent based on a range of 5.0 percent to 5.5 percent. (Thompson Direct, p. 33.) In his rebuttal testimony, Dr. Fairchild noted that interest rates have risen in response to the Federal Reserve Board's efforts to control the economy's growth and inflation. He estimated a spot dividend yield of 5.75 percent for Dr. Thompson's comparable group. Attachment 4 is an update of dividend yield data which shows a continuation of this trend. Based on these changes in market conditions, it is reasonable to utilize the higher end of Dr. Thompson's dividend yield range or 5.50 percent. If this is combined with Dr. Thompson's growth rate of 5.50 percent, the resulting return on common equity is 11.0 percent.
111.In order to calculate a total revenue requirement, it is necessary to assume a specific capital structure and its component costs. Therefore, only for purposes of calculating a revenue requirement, the parties stipulated to a capital structure of 49.00% long-term debt at 8.53%; 2.40% short-term debt at 6%; and 48.60% common equity at 11%, for an overall rate of return on rate base of 9.67%. Joint Ex. 94, p. 22.
112.It is found that the stipulation on Capital Structure and Cost of Capital reduces the Company's revenue requirement by $3,450,000 from the original filing. This result is reasonable, is supported by substantial evidence in the record and results in just and reasonable rates. Joint Ex. 94, p. 22; DPS Ex. 126.
Impact of Settled and Stipulated Issues on Revenue Requirements
115.The foregoing adjustments to the revenue requirements reduce the original filed deficiency of $22,722,000 by $11,750,000, resulting in a revenue deficiency of $10,972,000. Joint Ex. 94, p. 23.
116.The development of a revenue deficiency required resolution or assumptions about all elements of revenue and expense. The previous findings reflect the resolution of certain issues which the Commission, in its Order of January 26, 1994 in this matter, requested not to be made a part of any settlement package agreed upon, so that such issues would be presented to the Commission for resolution. Joint Ex. 94, p. 23.
117.The $10,972,000 revenue deficiency is subject to further modification based on resolution of the "good will" issue discussed subsequently. Joint Ex. 94, p. 23.
Interim Rates Refund
118.Minnegasco established, and it is found that the present value of its unamortized deferred rate case expenses is approximately $790,000. Joint Ex. 94, Schedule 21.
119.The parties agreed, and it is found reasonable that the interim rates refund calculated based on the final rates allowed in this case shall be reduced by (1) $325,000, which is less than one-half of the present value of the balance of the prior rate case expense on the Company's books at February 1, 1994, and (2) the unrecovered Conservation Improvement Program ("CIP") tracker balance on the Company's books at the time the final rates are ordered. Joint Ex. 94, pp. 23-24.
Discussion
It is important to
note the difference in legal significance between the matters settled and those
stipulated to. The Settlement (issues
encompassed in Ex. 128) is an "all-in-one package" in the sense that,
should any part of it be modified or rejected by the Commission, the parties
may withdraw the entire Settlement and proceed to litigation of all the issues
encompassed in
the agreement. As to the matters
stipulated (Exs. 94 and 129), the Commission is free to modify or reject each
and every part of the Stipulation, based on the balance of the record, and the
parties agree that the Commission's decision on each and every such item is
final and that they cannot litigate those issues further.
In stipulating on the issues the Commission requested they not settle, the parties simply acknowledge that they have no differences (except those noted and litigated separately) in those areas and agree that the Commission can reach a different result, based on the record. In approving this approach, the Administrative Law Judge is persuaded that the record is complete and sufficiently extensive, based on pre-filed testimony and crossexamination at the hearing, on each stipulated issue to support the positions agreed to by the parties, and he has found the results stipulated to on these issues to be reasonable and substantially in accord with Findings he would have made independent of the Stipulation.
It must be remembered that to stipulate on the issues proscribed from settlement does not violate the spirit and intent of the request not to settle. It simply means the parties have no dispute in these areas. Arriving at that end does not mean the parties did not "litigate" the issues. The pre-filed testimony on the issues is extensive--it simply so happens that the parties did not disagree fundamentally on the issues involved and have proposed the same results in the end. The PUC is free to reject those results and adopt any resolution supported in the record on these issues.
It is noted finally the Commission recently approved addition of a flotation cost adjustment to the approved yield and growth rates in deriving a Return on Equity in the most recent Northern States Power gas and electric rate cases. The Minnesota Court of Appeals affirmed the Commission in Petition of Northern States Power, Slip Opinion, 8/2/94, Appeals No. C5-94-201 and C7-94-202, Finance and Commerce 8/5/94.
Minnegasco's Gas Purchasing Incentive Plan
161.Minnegasco paid a price for the Minnesota distribution properties of Midwest Gas which included a premium over the net book cost of those properties (after reflecting the net book cost of Minnegasco's South Dakota properties which were transferred to Midwest Gas in exchange). Minnegasco originally proposed to recover this premium or acquisition adjustment in its base rates. Both the Department and the OAG questioned whether the acquisition resulted in net benefits to ratepayers and opposed Minnegasco's recovery of the acquisition adjustment. To address these objections, Minnegasco proposed the Gas Purchasing Incentive ("GPI") plan as an alternative method of demonstrating the savings resulting from the Midwest acquisition. MGC Ex. 45, p. 31.
162.There is no direct operating connection or inherent "nexus" between the GPI and recovery of the acquisition adjustment. That portion of the achieved savings retained by Minnegasco could be used to offset the costs associated with the acquisition adjustment. Tr. Vol. 7, pp. 555-556, 562.
163.The GPI mechanism calculates the difference
between Minnegasco's average cost of gas and a proxy for Midwest-Minnesota's
average cost of gas.
To the extent that Minnegasco's average cost of gas is lower than the proxy for
the Midwest-Minnesota average cost of gas, the
GPI will allow Minnegasco to recover a portion of the savings through
its annual Gas Cost Reconciliation factor.
MGC Ex. 44, p. 31.
164.Minnegasco proposes the following GPI mechanism: the Company would take 75 percent of the difference between the costs of its actual gas purchases and a proxy for Midwest's Minnesota gas purchases. MGC Exh. 45 at pp. 31-33. This benchmark is calculated by beginning with Midwest's ongoing cost of gas for its Iowa customers and adding $0.2857 per dekatherm, which Minnegasco claims is the average historic difference between Midwest's cost of gas for its Iowa and Minnesota customers. Id. Minnegasco's former Midwest customers would be allowed to keep 25 percent of the "savings" computed in this fashion. Id. Minnegasco would charge the former Midwest customers for this incentive through the Purchased Gas Adjustment ("PGA"). Tr. Vol. 5 at pp. 448-449 (Hammond). If no savings are achieved, Minnegasco gets nothing.
165.The GPI provides the Company with an opportunity to use the savings, if any, to defray the cost of the acquisition of Midwest Gas in a manner which eliminates any dispute over the measurement of the benefits resulting from the exchange. MGC Ex. 44, p. 31.
166.Because the Company introduced the GPI in Rebuttal Testimony, entities which have not intervened as parties to this proceeding were denied an opportunity to comment on the proposal. The Company filed Direct Testimony on November 5, 1993. The deadline for intervention passed on March 14, 1994. PREHEARING ORDER, March 1, 1994, at p. 2. Intervenors had to file Direct Testimony by March 29, 1994, and the Company filed Rebuttal on April 22, 1994. Id. Any person or entity that may have been interested in commenting on such a GPI proposal would not have seen one in the Company's Direct Testimony, would have allowed the Intervention Deadline to pass, and may not have even examined the Rebuttal Testimony proposing the GPI. To consider the GPI now would be to deny such potential intervenors the right to participate in the consideration of this important issue.
167.The Department has shown strong interest in studying the theories of various incentive rate-making structures with an eye towards possibly applying those theories to Minnesota gas utilities. DPS Exh. 83 at 18. The Commission addressed the subject of gas incentive regulation in the generic gas Docket No. G999/CI-93-895 and set up a workgroup of the Commission Staff, gas utilities, DPS, OAG, and other interested parties to discuss incentive theories and options pertinent to the gas industry and to formulate proposals for the Commission's consideration. Id. at pp. 18-19. The Commission also informally encouraged gas utilities to propose incentives. Id.
168.The Department anticipates taking an active role in these processes and it welcomes serious proposals for gas purchasing incentives by gas utilities. The Department believes that such proposals could be useful and important as study models for the workgroup. However, Minnegasco first proposed the GPI in Rebuttal Testimony with no accompanying documentation or substantiation. Consequently, procedural barriers prevent the kind of public participation and thorough analysis that such an important proposal deserves.
169.Even the parties who have intervened in this proceeding have not had a meaningful opportunity to analyze and respond to the GPI proposal. Surrebuttal Testimony was due only ten days after Rebuttal was filed, PREHEARING ORDER at p. 2. Thus, there was inadequate time to send information requests concerning the GPI, receive responses, and write testimony. The opportunity to make a supplemental filing provided only an additional five days. Consequently, it was impossible for intervenors to explore such crucial issues as the historical data comparing Midwest's purchases of gas for Minnesota and Iowa or possible benchmarks other than Midwest's gas costs for Iowa. The Department did not have time to determine the potential effects of the GPI, because it lacked a complete model and accurate data. DPS Exh. 83 at pp. 20-21. Indeed, key elements of the Company's proposal were not clarified until the hearing in this case. For example, during the hearing, Mr. Hammond testified for the first time:
- that Minnegasco would charge its customers for this incentive through the Purchased Gas Adjustment ("PGA"), Tr. Vol. 5 at pp. 448-449;
- that there would be no cap on how much Minnegasco could earn through this mechanism, Tr. Vol. 5 at p. 442; and
- that Minnegasco would charge its share of the incentive only to the former Midwest customers served off the Northern Natural pipeline. Tr. Vol. 5 at p. 446 (But see Minnegasco Exh. 45 at p. 33, ln. 18).
170.It is unclear whether the GPI proposal is permissible under Minnesota Statutes and Commission PGA rules. It goes beyond what the Commission has previously determined to be a direct cost of gas. During the hearing, Hammond explained that the Company plans to charge its customers for the incentive in the PGA. Tr. Vol. 5 at pp. 448-449. The only costs which can be charged through the PGA are the "direct costs of natural gas delivered." Minn. Stat. § 216B.16, subd. 7; Minn. R. 7825.2400, subp. 6d. The essence of Minnegasco's proposal is that some customers will be charged more than the direct cost of gas. Specifically, the former Midwest customers would be charged the direct cost of gas plus 75 percent of the difference Minnegasco calculates between its cost of gas and a proxy for what Midwest Gas would have charged its Minnesota customers.
The legal question of whether a utility may recover an incentive in rates should be one of the issues studied by the incentive work group to formulate recommendations to the Commission and perhaps to the legislature, the Department maintains.
171.The OAG maintains it is necessary in this case to establish criteria or standards upon which an incentive plan may be designed and evaluated. The OAG developed a set of criteria for analysis of the Minnegasco Gas Purchasing Incentive mechanism. The following criteria are standards proposed by the OAG for evaluating a Gas Purchasing Incentive Plan (GPI):
(1) The GPI would produce lower cost gas supplies for all customers compared with what is achievable under regulation;
(2) The GPI must be consistent with development of the gas industry market structure;
(3) The GPI must lead to actions by the utility which would not have occurred but for GPI program incentives;
(4) The GPI must be susceptible of evaluation;
(5) Quality of service must be maintained or improved during a GPI;
(6) An optimally designed GPI rewards good utility performance and penalizes poor utility performance.
172.The OAG maintains further that any benchmark established in a GPI must be observable by regulators and other interested parties and, ideally, should represent the reasonable current lowest cost of acquiring gas supplies. Id. In addition, it is important that the benchmark be prospective, reflecting foreseeable market conditions during the measurement time period. See Southern California Gas Co., 150 PUR 4th, 271, 272 (benchmark based on prevailing market prices). A benchmark based solely on historical data may fail to capture current or near-term market conditions. OAG Exh. 31, p.4.
173.Minnegasco's GPI Plan does not meet the above criteria for evaluation.
174.Since Minnegasco has already acquired Midwest Gas' Minnesota operations, Minnegasco has already achieved the Midwest Gas savings under traditional regulation. Therefore, the OAG argues that Minnegasco has made no showing that the Incentive Plan represents an improvement over current regulation.
175.The proposed GPI may not be compatible with the dynamics of the evolving gas industry. With recent restructuring of the natural gas pipeline industry through FERC Order 636, many regulatory issues remain unresolved at the state level. For example, if unbundling of the local distribution system becomes a reality, gas purchasing incentives would have to be viewed in a totally different light, because customers could buy their gas from more than one supplier. OAG Exh. 31, p.8. Because of the changes occurring in the industry, the question of gas incentive purchasing programs are not yet ripe and, at the minimum, require further study.
176.A well designed incentive should be accompanied by a clear explanation of why the company would not or could not otherwise achieve the same results in the future absent the incentive. Minnegasco has not provided such prospective explanation of the need for the GPI. The OAG maintains that since the GPI mechanism rewards the Company for actions already taken, it is not, strictly speaking, an incentive mechanism.
177.The Minnegasco benchmark is based on the assumption that the historic difference between Midwest and Minnegasco gas costs will remain constant in the future. Minnegasco has not supported this assumption. OAG Exh. 31, pp.9-10; DPS Exh. 82, p.20:10-12. The Minnegasco benchmark assumes that Midwest's gas costs would have remained at their high level absent the merger. However, Midwest was on notice from the Commission to lower its gas costs even before the merger occurred. See Gas Purchasing Practices of Midwest Gas, Docket No. G-010/CI-92-1147 (January 25, 1994) at page 2.
178.The ALJ finds it appropriate to reject the proposed GPI.
Discussion
The Company's decision to withdraw the acquisition adjustment proposal obviates the need to decide whether rate recovery of an acquisition adjustment would have been appropriate. As clarified by the Company in its Reply Brief, the Gas Purchasing Incentive (GPI) is proposed for adoption on its own merits alone, and there is no "nexus" to the earlier acquisition adjustment proposal. Minnegasco proposed the GPI, which, if adopted, will provide a source of revenue that mitigates, all or in part, the proposed revenue given up when it withdrew the acquisition adjustment. However, the Department and OAG are misplaced in attacking the merits of the acquisition adjustment proposal, a proposal that has been withdrawn, as a means of defeating the GPI. The merits of the acquisition adjustment are now immaterial--the GPI must stand or fall on its own.
In that regard, the Administrative Law Judge believes the GPI should not be adopted. To their credit, the DPS and OAG have not relied solely on reasons to reject the acquisition adjustment in their arguments against the GPI. They have argued against the GPI on its own merits, and the ALJ has been persuaded by those arguments sufficiently to conclude that adoption of the proposed GPI is inappropriate in this case.
Minnegasco presented the GPI in this case too late for participation by other potential intervenors and too late and with too little explanation for meaningful analysis by the Department and OAG. The Department recommends that, in the future, the Company develop an incentive proposal intended to lower all of its customers' costs of gas (rather than increasing costs for some and decreasing it for others), with underlying documentation, and submit it in Docket No. G-999/CI-93-895. The Department argues that the subject of incentive regulation is too all-encompassing and fundamental to allow individual programs to be approved without analyzing the study and input from all interested parties. It notes that any program adopted must be wellfounded in study to ensure it meets the needs of ratepayers, utilities and regulators. The ALJ supports this recommendation.
One problem with Minnegasco's current proposal is that the incentive payments to the Company would come only from customers in the territory acquired from Midwest. As a result, the cost of gas that the former Midwest customers would pay is actually greater than the cost of gas being incurred by Minnegasco, which involves a possible violation of the Commission's Purchased Gas Adjustment (PGA) rules.
The ALJ agrees with the Office of Attorney General's argument that an incentive program is appropriate only if it results in actions which would not be taken in its absence. That argument notes that if the incentive program rewards conduct which would have occurred anyway, the Company's shareholders would simply reap the incentive reward as an unearned windfall. The GPI proposal contains that potential hazard.
In addition,
Minnegasco has failed to quantify administrative costs for the program. For example, it has not identified metering
expenses associated
with determining sales volumes for former Midwest Gas customers. It is necessary to give this proposal more
study, more input and more notice.
Therefore, the Judge concludes it is inappropriate to adopt the proposed
GPI in this case.
Good Will Related to Minnegasco's Name, Image and Reputation,
Value Of Good Will
179.The "good will" issue had its genesis in a complaint against Minnegasco filed by MAC, Docket No. G-008/C-91-942 (the "MAC Docket"). In that case MAC argued, among other things, that Minnegasco's unregulated appliance sales and service operations should pay a license fee to the regulated operations for the use of the Minnegasco name.
180.The Commission issued its ORDER APPROVING COST ALLOCATION METHODS AND LEAK SURVEY PLAN WITH MODIFICATIONS, REQUIRING REPORT, FINDING VALUE IN GOOD WILL, AND DEFERRING VALUATION TO RATE CASE in Docket G-008/C-91-942, the "MAC Complaint Case", on March 24, 1994. In that Order, the Commission determined that there is value to Minnegasco's name, image and reputation, or good will, as used by its nonregulated sales and service operations. The Commission believed that the actual quantification of this value should be based upon a more complete record and sent to hearing within the context of the rate case the issue of the quantification of the good will value. Order at pp. 14-15.
181.Minnegasco submitted evidence that the value of good will was negative. This was based upon a study in which the Company's expert witness, Peter Slocum, determined that good will should be defined as an economic benefit and that such a benefit can only be determined by examining operating income or profit. MGC Exh. 6 at p. 3. Mr. Slocum testified that good will can be present yet have no economic value. Id.
182.Department of Public Service witness Sundra Bender concluded that good will, if it exists, will influence the level of business or sales that a company is able to generate and, thus, good will will impact its gross sales revenues. DPS Exh. 89 at p. 3. Ms. Bender concluded that positive good will exists and valued this at one percent of the appliance sales and service gross revenues. Id.
183.MAC witness Steven Fietek also concluded that positive good will exists and valued this at five percent of the appliance sales and service gross revenues. MAC Exh. 51 at p. 13.
184.Minnegasco witness Slocum determined that there is negative good will value to the appliance sales and service businesses from the use of Minnegasco's name, image and reputation. Mr. Slocum conducted a market valuation of the appliance sales and service businesses and compared their net operating income to a comparable group of similar businesses. MGC Exh. 6 at pp. 2-4.
185.The underlying premise supporting Mr. Slocum's
analysis is that the appliance sales and service operation's relationship with
the regulated utility must be viewed as a whole; that is, because operations
are integrated,
appliance sales and service revenues cannot be viewed separately from their
expenses, including expenses allocated to nonregulated operations. This is the standard Mr. Slocum would use to
determine the valuation of a company.
186.The analysis performed by Mr. Slocum showed the value of Minnegasco's good will to be a negative number. That is, Minnegasco's appliance business produces poorer financial results than the unaffiliated industry proxy (which had a positive discounted future income stream). Slocum maintains that the only explanatory variable is the good will and the costs (resulting from the application of the CAM) attendant on using it. MGC Ex. 6, p. 17; Tr. Vol. 3, pp. 238-239.
187.Thus, this study demonstrates that while the Minnegasco name itself may provide benefit, these benefits are exceeded by the mandatory associated costs of the application of the CAM. Tr. Vol. 3, pp. 254-255. Minnegasco's appliance business does not get to use the Minnegasco name, reputation and image at no cost. The price it must pay is high and is determined by the FCC cost allocation system. That system allocates costs to Minnegasco's appliance business which unaffiliated appliance sales and service dealers do not incur. MGC Ex. 1, p. 14.
188.In response to the Commission's suggestion that the parties address the use of a percentage of the unaffiliated businesses' revenues as a measure of the value of the good will, Mr. Slocum testified that it would be inappropriate to use revenue as a measure of value. The primary reason for this is that value is derived from operating income and not from revenues. It is possible for a company with higher revenues to have lower operating income and vice versa. Operating income is a more appropriate barometer of value. MGC Ex. 6, p. 18.
189.Additionally, Slocum argues that it is impossible to draw any conclusion regarding good will, or to quantify the value of good will, by examining the level of a company's gross revenues for two reasons. First, there is no generally accepted valuation method for intangible assets such as good will that advocates using only gross revenues as a basis for valuation. Second, even if revenues were an appropriate basis, good will cannot be determined by looking at revenues in isolation. Good will only has value if it generates an economic benefit.
190.The Company's argument fails to address the issue which the Commission asked to be addressed. Specifically, the Commission wanted to know the value of good will associated with the Minnegasco name, image and reputation. The Commission is not concerned with the valuation of the appliance sales and service businesses in and of themselves. If use of Minnegasco's name, image and reputation increases sales for these nonregulated operations, then, for purposes of this regulatory analysis, there is positive good will value.
191.Company witness Hagen agreed that Minnegasco is "the gas company" in its service territory. Tr. Vol. 10 at p. 780. This type of recognition and the good will associated with quality customer service, is clearly of value in increasing sales of the Company's nonregulated operations.
192.MAC provided additional evidence of the
positive good will value associated with Minnegasco's name, image and
reputation even when one goes
beyond its service territory. In an
East Metro "Brand" Marketing Test, the Company selected two names to
do a trial in the east metro area: True
Blue and Minnegasco. The response to
the Minnegasco name was three times as great as the response to True Blue. MAC Exh. 51 at p. 8.
193.Mr. Hammond also noted that statistical deficiencies prevented reaching any definite conclusions from the study. Minnegasco Exh. 47 at pp. 2-3. While these statistical deficiencies may make this evidence less probative of a specific estimate of good will value, it is not unreasonable to conclude that there was a reason for using different names and that the reason is related to the response rate. No other explanation was proffered and there is no other reasonable explanation. The qualitative data indicates that the use of the Minnegasco name will result in increased business or sales. Thus, the marketing study is useful in determining that there is positive good will value associated with Minnegasco's name, image and reputation.
194.As a result of Minnegasco's name, image and reputation, the Company's appliance sales and services businesses generate more sales. The value of the good will should be based on a percentage of gross revenue as recommended by Ms. Bender or Mr. Fietek.
195.Both the Department and MAC relied on other state commission decisions in estimating value. The values identified in these cases ranged from two percent to five percent. Tr. Vol. 9 at p. 735. Absent a market study that would focus on the potential for increased sales, and because the non-regulated appliance operation has the capability of generating goodwill on its own, Department witness Bender chose a conservative value of one percent. DPS Exh. 89 at p. 4; Tr. Vol. 9 at p. 735.
196.It is appropriate to utilize a conservative estimate of value absent an exhaustive market study. In the absence of an appropriate study, it is reasonable to estimate the good will value associated with Minnegasco's name, image and reputation at one percent of the appliance sales and service gross revenues.
Appropriate Regulatory Treatment of the Good Will Value
197.Although a utility may have good will, it does not exist as a regulatory or ratepayer asset and no cost associated with it is reflected in rates for regulated services unless the regulators have included amounts for the development or acquisition of intangible assets as costs of service. MGC Ex. 1, p. 9.
198.Minnegasco ratepayers do not provide any financial contribution for the creation of good will. For example, advertising costs for promotional and image purposes and similar expenditures are not charged to utility customers under Minnesota law. MGC Ex. 46, p. 2. See also Minn. Stat. § 216B.16 (8) (1992) which specifically prohibits the recovery of expenses for advertisements that are "designed primarily to promote good will for the public utility. . . ." Significant advertising expenditures have been borne exclusively by the unregulated business. Since 1982, when such sums were excluded from rates, shareholders have funded additional advertising totalling nearly $2.5 million. MGC Ex. 1, pp. 7-8. Finally, intangibles are not recorded as assets on Minnegasco's books and are not included in rate base. MGC Ex. 6,p. 2.
199.Just as ratepayers have not paid any costs contributing to the establishment of good will, they have also not paid for the acquisition of good will through the purchase of Minnegasco. When Diversified Energies, Inc. ("DEI") and Minnegasco, Inc. were merged with Arkla, Inc. in 1990, Minnegasco's rates were not increased to reflect an acquisition adjustment. MGC Ex. 46, p. 2. The premium Arkla paid for Minnegasco was absorbed by Arkla's shareholders since a utility is only allowed to earn on the depreciated book value of assets included in rate base. Because Minnegasco's rates for natural gas in Minnesota did not reflect any premium for good will associated with the purchase, or with any possible value placed on the name "Minnegasco," this good will is the property of Minnegasco's shareholders, not its ratepayers. MGC Ex. 46, p. 2.
200.Ratepayers do not have even an "equitable interest" in the value of good will and this very notion has been rejected by the United States Supreme Court. MGC Ex. 1, p. 9. In Board of Public Utility Commissioners v. New York Telephone Co., 271 U.S. 23, 32 (1926), the United States Supreme Court held that "customers pay for service, not for the property used to render it.... By paying bills for service they do not acquire any interest, legal or equitable in the property." MGC Ex. 1, p. 9. See also Pacific Gas & Elec. v. California P.U.C., 475 U.S. 1 (1986), in which the Supreme Court determined that the California Public Utilities Commission could not require a utility to allow a consumer group to use the "extra space" in the utility's bills, thereby rejecting the State of California's argument that the inclusion of postage and other billing costs in the utility's cost of service demonstrated that these items "belong" to ratepayers.
201.In summary, Minnegasco's good will is an intangible shareholder asset. Since utility ratepayers have not paid for the acquisition or creation of Minnegasco's good will, and have not paid a return on such intangible assets, they are not entitled to be compensated for the use of those assets by the unregulated operations. MGC Ex. 46, p. 1. Just as the development and acquisition of good will has not cost the ratepayers anything, neither does its use by the unregulated operations impose a cost on ratepayers. Good will is not an asset that is diminished or "used up" simply because it may be providing a benefit to the unregulated operations.
202.The Department recommended no adjustment to the revenue deficiency based on the non-regulated entity's use of Minnegasco's name, image and reputation. The Department's reason for not making any adjustment is that there is no detriment to ratepayers resulting from the use of Minnegasco's good will. DPS Exh. 89 at p. 4.
The Commission's Order relied heavily on Re Rochester Telephone Corp. 145 PUR 4th 419 (New York Public Service Commission, 1993). That case was based upon a dissipation in the good will value of the utility. Here, use of the Minnegasco name does not result in any dissipation of value or detriment. As Department witness Bender testified, a detriment could exist either if there is a cost to ratepayers or if a benefit which exists is removed. Tr. Vol. 9 at pp. 714-715. The Department reasons that since neither situation exists with respect to the appliance sales and service operations use of Minnegasco's name, image or reputation, it is unnecessary to impute revenues based on the facts of this proceeding.
The Administrative Law Judge agrees with the Department's position on this issue. For that reason, and for reasons noted in the subsequent Discussion, it is found that while Minnegasco's "good will" (name, image and reputation) is of value to the Company's unregulated appliance sales and service businesses, and while it is appropriate to set that value at one percent of the gross revenues of appliance sales and service operations, it is inappropriate to recognize that value in setting rates by way of an imputation of income to or imposition of a royalty against the regulated Utility.
Discussion
The Commission referred to this case, as a result of its Order in the MAC Complaint matter, the determination of the value of the Company's "good will", as used by the unregulated appliance sales and service businesses maintained by Minnegasco. The PUC defined "good will" in this context to be the Company's "name, image and reputation". Since this is a general rate increase application case, it follows that the Commission, given the value determination, can then decide to utilize that value to set rates--i.e. to impute the annual amount of good will utilized by Minnegasco's unregulated appliance businesses as income to the regulated business, which reduces the Company's revenue deficiency accordingly. The Administrative Law Judge concludes, therefore, that implicit in the direct charge of setting of value for the "good will" as defined is a request for a recommendation as to how that value should be applied, if at all, in setting rates in this case.
Accordingly, the ALJ requested the parties to litigate and brief these questions - (1) What is the value of "good will", defined as Minnegasco's name, image and reputation, to the unregulated appliance sales and service businesses of Minnegasco? (2) Does the Commission have the authority to recognize that value in the rates set for the regulated Utility? (3) Is it appropriate for the Commission to Order that recognition, and if so, in what fashion? The Judge believes the record developed in this proceeding is sufficient to answer all these questions, as reflected in the preceding Findings. He believes it is appropriate to value to the good will at 1% of the gross revenues for the Company's unregulated appliance sales and service businesses and that the PUC has the authority (both constitutional and legal) to recognize that value in Test Year rates by way of an imputation of income in the amount of that value. However, he believes also that such recognition is inappropriate.
The ALJ believes the economic analysis performed by Minnegasco witness Peter Slocum, which analysis showed the Company's "good will" as used by its appliance business to be a negative value, should be rejected. He concludes that Slocum's underlying premise that the appliance sales and service operation's relationship with the regulated Utility is such that revenues cannot be separated from their expenses, including expenses allocated to nonregulated operations in the MAC Complaint case, leads to a valuation that fails to address the question asked by the PUC. The Commission's quantitative question, put simply, is by what amount does the use of the Company's name, image and reputation increase sales for the unregulated appliance businesses? If any sales increase results from such use, then good will, for purposes of this case, has a positive value.
As noted by the dissenting Commissioners of the California Public Utilities Commission, at p. 68 of the Matter of the "Spin-Off" Proposal of Pacific Telesis Group (Decision 93-11-011, 11/2/93), 1993 Cal. PUC LEXIS 850:
It was long ago recognized by Judge Benjamin Cardozo that in a business setting "good will" captured the human tendency of a satisfied customer to return to the same source for the same goods or service. Though intangible in nature, such tendencies are widely recognized in the business community and highly valued. Depending on tax considerations, good will may or may not be explicitly valued in the course of an arm's length sale. See, In the Matter of Brown, 242 N.Y.1, 6, 150 N.E. 581, 582 (1926).
It defies common sense and logic, as well as the threefold greater response observed to the "Minnegasco" name versus "True Blue" in the Company's own survey noted in the preceding Findings, to conclude that Minnegasco's "name, image and reputation", in and of itself, impacts negatively on the revenues of the Company's unregulated appliance sales and service businesses. Substantial evidence in this record makes it clear that there is a positive value to the portion of the Company's good will utilized by the Company's unregulated businesses.
The fallacy of the Company's approach is made clear by the testimony of its own witness. Minnegasco witness Mr. Hammond testified that the Company is currently reviewing the option of not maintaining integrated operations. Ex. 46, p. 4; Tr. Vol. 5, p. 430. Minnegasco could structure its unregulated operations in a manner in which they would extensively use Minnegasco's name but not share costs due to integrated operations.
Good will associated with Minnegasco's name, image and reputation will not disappear if there is complete structural separation of the regulated and nonregulated operations. Thus, the Company's analysis of good will value is not relevant for the purposes set forth by the Commission.
As to the level of good will's value herein, the ALJ concludes that the level of one percent of revenues of the unregulated businesses, as recommended by the DPS, is supported by substantial evidence and should be adopted. Minnegasco's analysis does not arrive at an actual figure for good will's value to the unregulated side. Rather, it measures the total value of the businesses, finds them to be negative, and concludes therefrom that the Company's "good will" is a negative number. On Brief and through argument of counsel at the hearing, the Company clarified that the Minnegasco name, image and reputation has a value, but that the value is of no meaning for setting rates when the economic value of the unregulated businesses, carrying along the applications of the Cost Allocation Manual (CAM) mandated by the PUC and the MAC Complaint case, is negative.
The Company urges a conclusion not that good will does not exist, but that the value of good will is exceeded by the costs that are associated with its use, by virtue of the imposition of the FCC cost allocation method. Tr. Vol. 3, p. 239. In other words, there is no net economic benefit generated by the use of the good will. MGC Ex. 6, p. 3. Unless consumers are willing to spend more money because of a company's good will, or unless the good will enables the company to achieve lower costs, it is not reasonable to attribute any economic value to good will, the Company maintains. Ex. 6, p. 3.
The Company emphasizes its conclusion is not that good will does not exist, but that the value of the good will is exceeded by the costs associated with its use by virtue of the imposition of FCC cost allocation methodology. Tr. Vol. 3, p. 239. In other words, there is no net economic benefit generated by the use of the good will. Unless customers are willing to spend more money because of the Company's good will, or unless the good will enables a company to achieve lower costs, Mr. Slocum argues it is not reasonable to attribute any economic value to good will. MGC Ex. 6, p. 3.
Minnegasco's argument misses the point--the Commission seeks to know the value of "good will" as defined, standing alone, and is not concerned herein with the fact that the businesses' use of the name "Minnegasco" brings with it other financial consequences (for example, cost allocations mandated in the MAC Complaint case that may diminish the overall value of the nonregulated appliance operations).
MAC witness Fietek advocates setting the good will value herein at 5% of the unregulated gross revenues. He views 5% as an appropriate figure, given a range in other jurisdictions (New York, Oklahoma, Florida) of 2% to 5% "payments" for use of a utility's good will by unregulated subsidiaries or affiliates, because the Company has "admitted" good will is either 3.65% of total revenues or 11.07% of non-gas revenues and because the Minnesota Court of Appeals upheld the Commission's imposition of a "good will" value amounting to 5.24% of the nonregulated directory revenues transferred by Northwestern Bell in In the Matter of the Application of Northwestern Bell Telephone Company, 367 N.W.2d 655 (Minn. App. 1985). These arguments are misplaced.
As to decisions from other jurisdictions, the ALJ agrees with the Company that they do not measure the value of Minnegasco's name, image and reputation, which ideally should be measured separately. The measurements used in the cases cited by MAC apply to other operations using the name of other utilities and are immaterial here. It is noted MAC chose the highest such value, 5%, and called it reasonable because of the 5.24% "approved" in the Northwestern Bell case and the 3.65% to 11.07% "admissions" by the Company as to the value of good will in other contexts.
The materiality of the 5.24% of revenues of the directory business transferred to a U.S. West subsidiary imputed as income to the telephone utility in Northwestern Bell has not been demonstrated. While the case stands for the proposition that the PUC can impute revenues to arrive at just and reasonable rates, discussed in more detail below, the case does not establish precedent for setting a "good will" value. Indeed, what was measured in Northwestern Bell had nothing to do with good will--it related to projected lost income during the period rates would be in effect for transferred former utility operations to which ratepayers had furnished the expenses and investment (directories, including Yellow Pages), and for which the telephone utility sought rate recovery even after the transfer. The fact that the Commission sought to impute in rates a figure amounting to 5.24% of the projected revenues of the business transferred says nothing about the appropriate level of good will value in this case because the assets evaluated to arrive at the figure were unrelated to the name, image and reputation of Northwestern Bell, which, in turn, is unrelated to the name, image and reputation of Minnegasco.
Reliance by MAC on the alleged "admissions" of level of percentage value resulting from the Company's property exchange with Midwest Gas is likewise misplaced. The Company has not admitted that the value of good will is 3.65% of total revenues because it requested initially an acquisition adjustment. MGC Ex. 47, p. 5. The costs Minnegasco requested the Commission to allow in rates for an acquisition premium relate to its purchase of Midwest Gas's Minnesota properties, and have nothing to do with "good will" as defined in this case. Minnegasco abandoned the name, image and reputation of Midwest Gas when it acquired that company's properties in Minnesota and took no write-off of the acquisition adjustment. This establishes that there is no connection between the value of good will and the Midwest acquisition adjustment. MGC Ex. 67, pp. 6-7; Tr. Vol. 10, p. 790.
Likewise, Minnegasco has not admitted that the value of good will is 11.07% of former Midwest Gas revenues, as alleged by MAC. MGC Ex. 47, p. 5. Again, this figure has no relevance to the issue at hand. Mr. Fietek's exclusion of cost of gas from revenues in his calculation of the 11.07% because "it is a significant non-representative pass through cost" is also improper. MGC Ex. 47, p. 6. The fact that such a cost may be a pass through is not relevant; the monthly bill is a major point of contact between Minnegasco and the customer, and the major element in the contact is clearly part of the natural gas service value delivered to the customer.
The Company argues that Mr. Fietek admitted the immateriality of evidence of what other commissions do:
"Q. You believe that the percentage paid by some other utility affiliate measures the value to Minnegasco's affiliate of using the Minnegasco name?
A. Not to Minnegasco."
Tr. Vol. 7, p. 497.
The Company contends that such "negative logic" is not transformed into a positive quantification of value by arguing, as MAC does, that a proposed $2.6 million acquisition adjustment related to Midwest Gas (classified as "good will" for accounting purposes on Minnegasco's books) represents 3.65% of Midwest Gas revenues or 11.07% of Midwest Gas non-gas revenues. The Company maintains that the acquisition adjustment "good will" associated with the Midwest acquisition has nothing to do with the "name, image and reputation" good will which is the subject matter here. The Administrative Law Judge agrees with this analysis and recommends that MAC's argument that the Company has admitted certain values for the level of the "good will" sought in this case based on the acquisition adjustment paid to Midwest Gas be rejected.
Given the conclusion that setting the value of using Minnegasco's name, image and reputation to the unregulated operations at 5% of their revenues is inappropriate, the question is whether the one percent advanced by the DPS is an appropriate value. The ALJ concludes that it is. The Additional Direct Testimony of Department witness Bender, at pp. 3-4 of Ex. 89, serves as the evidentiary basis for this result:
"I would recommend one percent of Minnegasco's appliance sales and service gross revenues. Absent an arms-length transaction or an exhaustive marketing study, quantification of the value is subjective. Yet, I agree with the Commission that good will has significant value. However, I believe the nonregulated operation itself also has the ability to generate valuable good will. Therefore, I recommend one percent to reflect that good will has significant value, but that it is difficult to quantify that value or the portion of it generated by utility operations which benefits the nonutility."
In arriving at a one percent quantification, Ms. Bender testified she proceeded from the 2% to 5% ranges used by other jurisdictions, and "In the absence of doing an actual marketing test I used one percent as a conservative measure of what I believe to be the value of the good will generated by the Utility. In other words, it would be net, one percent of the amount that is used that I think they generate, the appliance sales and service generates themselves".
Tr. Vol. 9, p. 735.
The Judge believes the position taken by the DPS is reasonable. Further support for this approach is found in the decision relied on by the Commission for its determination that the Company's good will, as defined, has a value-- the decision of the New York Public Service Commission in Re Rochester Telephone Corporation, 145 PUR 4th 419. In that case, the commission found it appropriate to value the intangible assets in question at 2% of the unregulated revenues even though the evidence before it did not allow for the "proper amount" to be "objectively fixed". At 145 PUR 4th 442, the Commission stated:
" . . . which implies, in turn, that the proper amount of the royalty cannot be objectively fixed.
That inability, of course, does not mean the concept of the royalty should be rejected. To do so would be to hold, in effect, that the proper amount of the royalty is zero, and there is no basis for that figure. Indeed, there is compelling proof that zero is the wrong result, given the clear need, described above, for a remedy along the lines of a royalty.
In situations such as this, where some adjustment is clearly needed but its amount cannot be precisely set, the Commission has applied its discretion to come up with a reasonable, albeit imprecise, amount. We regularly do so, for example, in applying a one percent offset to allow labor costs, in recognition of unspecified yet reasonably anticipated productivity improvements. Similarly, allowances for certain types of advertising are set at a percentage of a utility's revenues, given the difficulty, if not the impossibility, of establishing the 'correct allowance'.
That procedure can reasonably be used here. . . . Though a
precise figure cannot be computed, a reasonable overall imputation, designed to
remedy all the concerns here found warranted while not being so
great as to amount to a penalty, is 2%, and that figure will be adopted. The figure will be subject to prospective
adjustment in future proceedings, depending on the evidence that may be
submitted by Rochester or other parties.
This approach was upheld on appeal by the New York Supreme Court in Rochester Telephone v. Public Service Commission (Slip Opinion, 6/30/94, Case No. 69820). At p. 6 of the Slip Opinion, the Court says, in part:
"Turning to the PSC's use of a 2% royalty as the means of accomplishing the adjustment intended . . . we conclude that the PSC exercised its judgment in a technical area of public utility regulation that lies within the PSC's special competence and expertise (Citations omitted). Having determined that the record does not support a finding of no value . . . the PSC sought a measurement that would reflect an adequate value without creating a penalty. The PSC noted that it has used similar formulae in the past to deal with intangible concerns, and there is evidence in the record to support the quantification theory adopted by the PSC. The PSC relied upon several prior settlements as some evidence that the 2% of the capitalization of RTC's unregulated operations was reasonable, . . ."
In this case, it is appropriate to value at 1% of the unregulated revenues the "good will" (the Utility's name, image and reputation) used by unregulated operations. Given the fact that the unregulated operations can generate their own good will, and since the MAC Complaint case has already separated the operating costs of the regulated and unregulated sides of Minnegasco, a conservative valuation, one percent of unregulated revenues, is found appropriate.
The next concern is whether the value found should be imputed as income to the Company for purposes of setting rates. This question requires the threshold resolution of whether the PUC has the authority to effect such a result. The Administrative Law Judge concludes that while the Commission has such authority, it is inappropriate in this case to Order the imputation of revenues.
Minn. Stat. §§ 216B.03, 216B.16, subd. 6 and 216B.48, subd. 3, taken together, allow the PUC to set "just and reasonable rates" and authorize it to approve any "arrangement" providing for the furnishing of "management, supervisory . . . accounting, legal, financial or similar services . . . between a public utility and any affiliated interest." "Affiliated interests" with a public utility include "Every part of a corporation in which an operating division is a public utility". Minn. Stat. § 216B.48, subd. 1(i). Given this authority, the Administrative Law Judge concludes that the Commission can examine the Company's relationship to its unregulated appliance sales and service operations and set just and reasonable rates accordingly.
The Company argues
that because its good will is not included in rate base, imputation of any
portion of that asset as income to the utility amounts to regulation of the use
of unregulated shareholder assets, which is beyond the jurisdiction of the
Commission and confiscatory under the Minnesota and
U.S. Constitutions. It is noted also
that Minn. Stat. § 216B.16, subd. 8 prohibits recovery in rates for advertising
"designed primarily to promote good will for the public utility or improve
the utility's public image."
However, the ALJ is unable to conclude that imputation of income and
setting rates to recognize the value of good will used by unregulated
operations is illegal or unconstitutional.
Whether there is authority to make revenue imputation in the present context or whether such regulation constitutes a compensable taking depends on the regulation's economic effect, the extent to which it interferes with distinct, investment-backed expectations, and the character of the governmental action. Specifically, a reasonable test involves whether the royalty imputation would meet all these criteria for a taking, in that it would cause the regulated utility to earn less than its allowed return (assuming the imputed revenues were not actually paid by the affiliate; if they were, the reduction in the affiliate's profit would itself be confiscatory); whether it would interfere with the shareholder investment-backed expectations that they, and not ratepayers, own the corporation's good will and should reap its benefits; and whether it would be intrusive in that it would not merely adjust the burdens and benefits of economic life to promote the common good but instead amount to an improper appropriation of a shareholder asset, good will, under a guise of "public use". See, Rochester Telephone, 145 PUR 4th at 428. The ALJ has attempted to utilize this test in an examination of whether imputation of revenues is a compensable taking.
The Administrative Law Judge concludes that the authority that makes such imputations permissible in the present context flows from the Commission's obligation to protect ratepayers from improper transactions between a utility and its affiliates. One argument for imputation is that because ratepayers funded the salaries, training, advertising and other activities that generate good will, they are entitled to recognition of revenue received by the Utility in exchange for the use of that asset by an affiliate or otherwise. Where the asset is used and no revenues are received in exchange, an imputation may well be warranted.
That good will does not appear as a discrete rate base item has no bearing on this argument, which assumes it is a utility asset funded by rates, and the courts have long sustained the authority of a commission to recognize in rates revenues from the sale or lease of utility assets. A utility in an arms-length transaction could be expected to receive revenues for allowing the use of its employees or good will, and a statutory obligation to set just and reasonable rates permits a commission impute such revenues, even where they are not in fact received.
The constitutional objections raised by Minnegasco lack basis. One can argue at length over whether ratepayers have rights, equitable or otherwise, in a utility's assets; but the real issues are whether rates should reflect revenues that a non-regulated entity would clearly demand in return for the use of its assets and whether recognition (or imputation) of such revenues would violate the rights of investors. The answers to those questions emerge from the application of familiar principles.
Utility investors contemplate being allowed a reasonable opportunity to earn a fair return on their investment and that just and reasonable rates will be set in order to give them that opportunity. No one method exists for setting those rates, so long as the overall result is reasonable. A commission acts within its authority in imputing revenues or disallowing expenditures in connection with improper transactions when it decides to recognize in rates economic effects resulting from relationships between a utility and its affiliates. Rates set on such bases do not defeat investment-backed expectations, even if decisions by the utility (or unforeseen developments) result in actual revenues below the allowed level and a correspondingly reduced return. In fact, as long as imputations are not excessive, their economic effect is modest (though they can, as noted, result in a failure to earn otherwise-allowed returns). Imputations do not appropriate utility property, and a qualitative difference exists between ordering or barring a transaction and simply recognizing it for the purpose of setting rates. Therefore, a reasonably calculated revenue imputation survives all the prongs of the unlawful-taking test outlined above. Rochester Telephone, op cit, at 428, 431-432.
A recently-issued Recommended Order of an Administrative Law Judge in Docket No. G-002/M-93-773 (OAH Docket No. 2-2500-8575-2) urges that in the situation where a utility (NSP, in that case) seeks recovery of an acquisition premium, an argument against such recovery based on a "used and useful" standard and the premium's not being a regulatory asset should be rejected. On that issue, ALJ Campbell concluded that the PUC has discretion to amortize a nonjurisdictional acquisition adjustment which is directly beneficial to Minnesota ratepayers and to include a reasonable proportion of that amortization in jurisdictional expenses. This ALJ agrees with that analysis. It follows that if the PUC has the authority to compensate a utility for a nonjurisdictional acquisition adjustment that benefits ratepayers, it has the authority to recognize in rates the diminution of a nonjurisdictional asset which, in an arms-length transaction, the Utility would sell, and arguably, have to share proceeds for with ratepayers whose funds may have contributed to the development of the value of the asset.
The decision to impute a portion of the revenues of the Company's nonregulated entities as income for setting rates is within the Commission's discretion and involves a policy choice. The Administrative Law Judge recognizes that policy decisions are outside his authority, but he recommends no imputation of revenues in this case because the Commission has already, in the MAC Complaint docket, allocated all utility operations separately from nonutility operations through approval and implementation of a new Cost Allocation Manual using a fully-distributed cost methodology, and because he is persuaded that jurisdictions that have decided similar questions against imputation of revenues or imposition of royalties or license fees are correct. These decisions basically rely on principles holding that a utility's assets do not belong to its ratepayers, and that intangible assets not recognized in rate base, such as good will, exist only for the benefit of shareholders. See, Pacific Gas and Electric v. California PUC, 475 U.S. 1 (1986); Ameritech Operating Companies, FCC Docket No. AAD 7-1668 (1988); In Re Southern California Edison Company, 90 PUC 4th 45 (1988), and In Re Illinois Power Company, 147 PUR 4th 225 (1993). In response to Minnegasco's evidence that no royalty fees should be imputed as a matter of law and policy, MAC cited instances in which other state commissions have approved such payments, including a Florida Supreme Court opinion (cited below) and recommended imputation of a royalty fee.
The Commission can, and has (in its March 24 and July 28, 1994 Orders in the MAC Complaint case) relied on decisions that support its authority to amortize in rates the use of good will by unregulated operations. See, In Re Southwestern Bell Telephone Company, 137 PUR 4th 63, 153 (Okla. C.C. 1992) and United Telephone Long Distance v. Nichols, 546 So.2d 717, 719 (Fla. 1989), as well as the above-discussed Rochester Telephone and Northwestern Bell cases.
The Administrative Law Judge is persuaded also by the Department's argument that no revenue should be imputed because Minnegasco's ratepayers suffer no detriment by the use of the Company's name, image and reputation in its nonregulated appliance sales and service operations. The Department argues further that not only is there no such detriment, but that ratepayers may even benefit from the integration of the Company's utility and appliance sales and service operations. Ex. 89, pp. 4-5. The Department notes that In Re Rochester Telephone Corp., op. cit., involved the New York Commission's taking action in a situation where it found a dissipation in the value of the utility's good will. No such situation exists in this case. There is no cost to ratepayers for the use made of the company's name, image and reputation by the appliance businesses and no existing benefit has been removed. Given this, the Department believes it is unnecessary to impute revenues. The Administrative Law Judge agrees with this reasoning.
In recommending that the Commission not impute revenues to the regulated side, the ALJ has been influenced by the testimony of Minnegasco witness Branko Terzic, a former Wisconsin PSC commissioner and former member of the Federal Energy Regulatory Commission (FERC). Mr. Terzic argues persuasively that imputation of revenues to recognize an unregulated business's use of corporate good will is improper without recognizing also the expenses that contributed to the development of that asset. In the case of the Company's appliance sales and service businesses, a large amount of annual advertising expense goes for that very development, and imputation of revenues without recognizing advertising and other appropriate expenses would be improper, urges Terzic. He notes also that the Corporation has spent $2.5 million since 1982 on additional advertising (presumably, to promote its good will and image), which cannot be recovered under Minnesota law.
It is noted that Mr. Slocum's testimony shows in greater detail the exact level of costs, from the Company's view point, of using the name, image and reputation of the Company. The problem with Mr. Slocum's testimony was that it did not identify the discrete value associated with that name, image and reputation alone.
As to the notion of
recognizing the unregulated entities' use of good will in rates so that rates
are "just and reasonable", Terzic argues persuasively that imposition
of the FCC's fully-distributed cost methodology on Minnegasco, as Ordered by
the PUC in the MAC Complaint docket, already assures that all costs
attributable to unregulated services are excluded from the costs of regulated
services, which in itself "benefits" the ratepayers. The "benefit" comes from
allocating the appropriate proportionate share of the Company's common costs to
unregulated services--costs that otherwise would be borne by the
ratepayers. To go beyond the results of
the allocations imposed already, Terzic notes, unnecessarily and improperly
violates principles of cost-of-service ratemaking. Terzic notes further that ". . . where state commissions
have required such an allocation . . . one of the reasons cited
for the additional allocation is to compensate for any costs which may have
been inadvertently overlooked in the cost allocation process." MGC Ex. 1, p. 13. He notes that situation should not exist here, given the care
taken to design appropriately the Company's Cost Allocation Manual in the MAC Complaint
case.
At the hearing, Minnegasco objected vigorously to the introduction of Staff Exhibit 93, a Commission staff member's calculation of DEI/Arkla merger good will amortized over forty years divided by Minnegasco's consolidated operating income for 1993 to find a percent value for possible application to this case. In addition, the ALJ had requested earlier in the hearing for the Company to calculate the percentage of total corporate revenues represented by revenues from Minnegasco's appliance sales and service (Ex. 73, admitted without objection), with a view to possibly applying that percentage of the total good will of the parent company to arrive at a dollar value for recommended recognition in rates. The Administrative Law Judge reaffirms his decision to allow both inquiries and to admit Ex. 93.
At the time the inquiries were made, the ALJ had heard only the testimony of the Company's good will witness, Mr. Slocum, on this issue and, as noted above, Mr. Slocum did not address directly the question of the value of Minnegasco's good will standing alone. Since it was clear to the Judge that the Commission wanted such a figure (or percentage), he requested the Company to produce the information in Ex. 73. He perceives that same intention behind staff Ex. 93, that is a desire to get some number (or percentage figure) on the record. Minnegasco's objection includes the argument that the staff person acted as a advocate in presentation of the Exhibit and that Judge's admission to the record of Exhibit 93 was incorrect because the staff is not a party to these proceedings. The ALJ cannot sustain those objections. The PUC clearly desired a number or percentage figure to represent the value of the Company's good will as used by the unregulated operations. Mr. Slocum was the first witness on the issue, and he had produced no such number.
The Administrative Law Judge believes it was within the authority of the staff, and certainly within his own authority to initiate inquiry designed to produce, on record, a number or percentage for consideration. The staff member merely followed along the same lines. The fact that he performed the calculation himself does not impugn the evidentiary value of the document. The calculation had foundation in the record, and was admissible, to be accorded the weight it deserves.
As outlined above, the Administrative Law Judge believes the one percent of nonutility revenues figure advocated by the Department is the most appropriate value for "good will" in this proceeding. He has rejected ultimately the methodology used in Exhibits 73 and 93 because they use or would relate back to the value of the total corporate good will as a variable. The ALJ is persuaded by the record and arguments of Minnegasco's counsel that such an approach is inappropriate because "good will" on the corporate books is unrelated to "good will" as defined by the Commission for purposes of this proceeding.
Independent Management Audit
203.In its March 24, 1994 Order in the MAC docket, the Commission established a workgroup, including the Company, the Department and Commission staff, to work with Minnegasco to simplify complex allocation procedures and examine further simplifications of the Company's system as well as to determine if internal controls are adequate. Order at pp. 9-10.
204.Department witness Bender recommended that the Commission urge Minnegasco to conduct an independent management audit of its accounting and financial departments as well as record keeping procedures. DPS Exh. 85 at p. 36. Ms. Bender testified that she had concerns with the handling and presentation of of data as well as communications. For example, Ms. Bender noted that she believed there to be an unusual level of errors and that the nature of the errors was also unusual. Tr. Vol. 15 at p. 1180.
205.The Department believed that an independent outside view would help everyone, including the Company, the Commission, the Department and other intervenors in identifying specific problem areas and potential solutions. Id. at 1178.
206.The ALJ recommends that the Commission urge the Company to undertake a management audit of Minnegasco's accounting and financial departments and record keeping procedures. This could be done in conjunction with the workgroup. DPS Exh. 85, at p. 36.
207.It is important to note that the recommendation is not that the Commission order such an audit but rather that the Commission urge Minnegasco to conduct the audit. The audit should be data-directed, which means that the scope and length of engagement are determined as the problems are identified. The Department has and is willing to continue to assist in identifying problems encountered so as to assist in delineating the initial areas of review. However, the independent auditor will be in the best position to analyze how the problems identified and others found would affect the scope of the audit. Thus, the scope, length of time and details of the process would rest mainly with the independent audit firm and the Company. Because the ALJ is not recommending that the Commission order the Company to conduct this audit, he believes the Company should select and pay for the audit if indeed Minnegasco chooses to follow the Commission's advice.
RATE DESIGN
Principles of Rate Design
236.The Company bears the burden of proof that the proposed rate design is just and reasonable and not unreasonably prejudicial, preferential or discriminatory. Minn. Stat. §§ 216B.03, 216B.16, subd. 4.
237.When the Commission allocates the revenue deficiency among classes of cutomers to provide for the recovery of a revenue requirement, it acts in a quasi-legislative capacity. Hibbing Taconite Co. v. Minnesota Public Service Commission, 302 N.W.2d 5, 9 (Minn. 1980); St. Paul Area Chamber of Commerce v. Minnesota Public Service Commission, 312 Minn. 250, 262, 251 N.W.2d 350, 358 (1977).
238.The Minnesota Supreme Court has stated expressly that both cost and non-cost factors must be considered in designing rates. Reserve Mining v. Minn. Public Utilities Commission, 334 N.W.2d 389, 393 (Minn. 1983).
239.The principles of rate design governing the exercise by the Commisison of its quasi-legislative authority may be summarized as follows:
1. Rates should be designed to provide the company with a reasonable opportunity to earn its revenue requirement as determined in the proceeding;
2. Rates should provide a reasonable continuity with past and future rates to prevent inordinate and immediate impact on existing and future customers;
3. Rates should be as simple, understandable and easy to administer as is practical.
In Reserve Mining v. Minn. Public Utilities Commission, supra, the Minnesota Supreme Court listed the following relevant non-cost factors": whether the rates would be disruptive; revenue stability; affordability; the ability to pass costs on to others; and the ability to decrease the impact of a rate increase through tax deductions.
240.The Department, the Company, and the OAG have reached agreement on all issues pertaining to class cost of service studies and rate design. Joint Exh. 94 at pp. 32-33. The Settlement will lead to a just and reasonable rate design consistent with the rate design goals. However, other intervenors, the SRA and MEC, have raised issues in these areas. MEC's recommendations, set forth in the testimony of Albert D. Bartsch, principally affect the rates for Large Volume Dual Fuel (LVDF) customers and flexible rates; however, rates for other classes could be increased if revenue responsibility is shifted from the LVDF to other classes. All of MEC's recommendations, save one, are still in dispute. The SRA challenges the residential customer charges agreed to by the settling parties. SRA Initial Br. The ALJ recommends the disputed recommendations of MEC and the SRA be rejected, and that the CCOSSs, revenue apportionment, and rate design contained in the Settlement be adopted.
Revenue Apportionment
241.In addition to the disputes over the design of the CCOSSs outlined above, the parties have a dispute over the relationship between costs as determined in CCOSSs, and rates. The relationship is governed by revenue apportionment, the assignment of revenue responsibility to each class of customers.
242.Revenue apportionment is a very significant step in the rate making process. Sensitivity to all rate design goals is crucial at this stage. The Department, Minnegasco and OAG compared the costs indicated by the CCOSSs to each historic charge and rate. These parties then developed a revenue apportionment to further all rate design goals, including the goal of historic continuity. The revenue apportionment agreed to among the Department, the Company, and OAG furthers all rate design goals. In particular, it moves rates in the direction of costs, but does so with sensitivity to issues of historical continuity. DPS Exh. 34 at pp. 4-5, 31.
243.MEC proposed an alternative form of revenue apportionment. The testimony of Mr. Bartsch assumes that a rate increase of more than 15 percent is unreasonable and assigns revenue responsibility away from one class which would otherwise be given such an increase to other classes. MEC Exh. 32 (ADB-1) Schedule 2 at p. 17. Otherwise, MEC's revenue apportionment proposal strictly follows cost study results. Id.
244.MEC proposed that Minnegasco's rate design should be based solely on the results of the CCOSS. MEC Ex. 32, pp. 20-21. Based on MEC's position, the Large Volume Dual Fuel (LVDF) rate class would receive a rate reduction of approximately 12%, the residential rate class would receive an increase of approximately 9%, and all other rate classes would receive rate decreases ranging from 5% to 28%. MEC Ex. 135.
245.Minnegasco, the Department, and the OAG all disagreed with MEC, stating that several other important rate design goals should be considered. Such non-cost factors include: providing a reasonable continuity with historical rates and conditions of service; the impact of rates on revenue stability; the ability to pass rate increases onto others; and rates should be logical, understandable and easy to administer. DPS Ex. 34, p. 4; OAG Initial Brief, p. 10.
246.It is found that MEC's apportionment methodology reflects too little concern for historical continuity of rates. It is inconsistent with traditional revenue apportionment methods and ignores important rate design principles. MEC's revenue apportionment should be rejected.
247.Based on the Offer of Partial Settlement and Stipulation of Facts, the Revenue Increase of $10,972,000 leads to the following income increase (decrease) percentages: 3.2% Residential in Minnegasco's historical territory, -2.7% for Residential customers in the territory acquired from Midwest served by the Northern Pipeline and a 3.5% increase for residents in the acquired territory served by the Viking Pipeline. Other increases (decreases) are specified on Staff Exhibit 137 (Attachment A to this Report). It is found that the rate increases (decreases) resulting from the Offer (Ex. 94) are reasonable.
Staff Exhibit 137, showing the revenue apportionment and percentage changes for all major classes in the various rate territories, reflects accurately the results of the Offer.
Based upon the foregoing Findings of Fact, the Administrative Law Judge makes the following:
CONCLUSIONS
1. The Minnesota Public Utilities Commission and the Administrative Law Judge have jurisdiction over the subject matter of this hearing pursuant to Minn. Stat. §§ 216B and 14.57 - 14.62 and Minn. Rules Parts 1400.5100 - .8300.
2. Any of the above Findings of Fact more properly considered Conclusions of Law are hereby adopted as such.
3. The Minnesota Public Utilities Commission gave proper notice of the hearing in this matter, has fulfilled all relevant substantive and procedural requirements of law or rule and has the authority to take the action proposed. The Company gave proper notice of the public and evidentiary hearings in this matter and has fulfilled all relevant substantive and procedural requirements of law or rule.
4. The quantum of proof necessary to establish the facts supporting the reasonableness of the proposed rate change is proof by a preponderance of the evidence.
5. The proper test year for use in this proceeding is the twelve-
month period between January 1, 1994 and December 31, 1994.
6. Through the structuring of the Offer as both a Partial Settlement and a Stipulation of Facts and Recommended Decision, the Offer complies with the Commission's request in its January 26, 1994 Order to not settle certain issues.
7. The Settlement will produce just and reasonable rates regarding the items settled and is in the public interest. The Commission's decision on these stipulated and disputed issues will not affect the reasonableness of the results of the Settlement. Such decisions may, however, impact the additional revenues intended to be produced by the Offer.
8. There is sufficient evidentiary support for the Offer.
9. The parties' agreement that the final revenue requirement should be based on the final outcome of the Company's depreciation filing proceeding is reasonable and is appropriate for adoption.
10. The parties' stipulation that using the corrected allocation factors regarding Commercial and Industrial jobs will reduce revenue requirements by $32,000 is appropriate for adoption and will result in just and reasonable rates.
11. The parties' stipulation that, for the purpose of calculating a revenue requirement, the decision in Docket No. G-008/C-91-942 reduces the revenue requirement by $1,380,000 is appropriate for adoption and will result in just and reasonable rates.
12. Minnegasco's withdrawal of its request for an acquisition adjustment, which reduces the requested revenue increase by $2,606,000, will result in just and reasonable rates.
13. The parties' stipulation to disallow the demand costs in Docket Nos. G-008/M-93-866 and G-008/M-93-868 only until Minnegasco either eliminates such costs or establishes that they are necessary to render reliable and adequate gas service is appropriate for adoption and will result in just and reasonable rates.
14. The parties' stipulation that the Commission should recognize that the appropriate rate case treatment of CO checks is to allow the costs associated with such checks when they are performed in connection with utility-related (as opposed to appliance service repair related) calls is reasonable and is appropriate for adoption.
15. The parties' stipulation to a capital structure of 49.0 percent long-term debt at an interest rate of 8.53 percent; 2.4 percent short-term debt at an interest rate of 6 percent; and 48.6 percent in equity at a cost of 11 percent (calculated by adding a dividend yield of 5.25 percent, a growth rate of 5.5 percent and a flotation cost adjustment of .25 percent, as stipulated to by the Company and Department), for an overall rate of return on rate base of 9.67 percent, is supported by the record. The stipulated capital structure and rate of return, which reduces the Company's revenue requirement by $3,450,000, is appropriate for adoption and will result in just and reasonable rates.
16. The parties' agreement that the impact of the foregoing adjustments to the Company's cash working capital results in a reduction in the revenue requirement of $42,000 is reasonable and is appropriate for adoption.
17. The parties' agreement that the final revenue requirement of $10,972,000 is subject to modification based on the "good will" issue is reasonable and is appropriate for adoption.
18. The parties' agreement that the interim rates refund calculated based on the final rates allowed in this case shall be reduced by (1) $325,000, to reflect the recovery of a portion of the Company's unamortized deferred rate caseexpenses, and (2) the unrecovered CIP tracker balance on the Company's books at the time the final rates are ordered is reasonable and is appropriate for adoption.
19. The parties' stipulation that the five peak shaving plants acquired from Midwest Gas and scheduled to be closed should be closed and retired, and that the Minnegasco Mankato peak shaving plant is still used and useful and cost effective is reasonable and is appropriate for adoption.
20. The parties' stipulations that Minnegasco's total compensation program, including the incentive compensation component, is just and reasonable and that there is no need to report or track the compensation amounts actually paid are reasonable and are appropriate for adoption.
21. The parties' agreement that Minnegasco will continue its efforts to lower gas-related demand costs for the former Midwest-Northern system, and report on its efforts in its annual fuel report is reasonable and is appropriate for adoption.
22. The parties' agreement to adopt Minnegasco's revised proposal for LGS demand billing, as modified by the Department's recommendation to include recovery of non-gas demand costs in the demand charge, to also make this modification to the Large Volume Firm Transportation rate, and to delete the proposed requirement in the Large General Service tariffs regarding a one-year minimum service obligation by customers is reasonable and is appropriate for adoption.
23. The parties' agreement that Minnegasco will clarify its market-rate tariffs, as recommended by the Department, is reasonable and is appropriate for adoption.
24. The parties' agreement that Minnegasco will include a separate narrative, which complies with Minnesota Rules, on customer bills to describe monthly PGA changes and the parties' agreement to establish a collaborative "work group" to address improvements in Minnegasco's bill format are reasonable and are appropriate for adoption.
25. The parties' agreement that Minnegasco will design seasonal demand rates for informational purposes in the next rate case, and outline a plan in its next rate case, including corresponding costs, for obtaining elasticity data is reasonable and is appropriate for adoption.
26. The parties' agreement that Minnegasco will incorporate into the Small Volume Firm and Large Volume Firm Transportation tariffs provisions that will allow customers to choose to purchase firm transportation under Minnegasco's rate, or secure their own firm pipeline transportation, is reasonable and is appropriate for adoption.
27. The parties' agreement that Minnegasco will withdraw its proposed WNA is reasonable.
28. Minnegasco's test year operations and transportation sales forecast are reasonable and it is appropriate to adopt them.
29. The level of Minnegasco's test year operating revenues based on normalized sales and annualized rates as modified by Minnegasco's Supplemental Filing of December 9, 1993 are reasonable and is appropriate for adoption.
30. Minnegasco's CCOSS, as modified by the changes recommended by the Department, is reasonable and is appropriate for adoption.
31. Minnegasco's proposed revenue apportionment to major rate classes in the various rate territories, as shown on Staff Exhibit 137 (Attachment A) is reasonable and is appropriate for adoption. It is appropriate to reject MEC's proposed revenue apportionment.
32. Minnegasco's proposal to consolidate rates and PGAs for the Minnegasco-MN and former Midwest-Northern areas is reasonable and is appropriate for adoption.
33. Minnegasco's proposed customer charges, as modified by the Department, are reasonable and is appropriate for adoption.
34. The Department's recommendation to require Minnegasco to educate customers about how customer charges are designed and the overall impact of customer charges is reasonable and is appropriate for adoption.
35. Minnegasco's proposal to segment the consolidated (Minnegasco-
MN and former Midwest-Northern) Commercial and Industrial classes consistent with current Minnegasco-MN class structure is reasonable and appropriate for adoption.
36. The Department's recommendation to reject Minnegasco's proposal to segment the former Midwest-Viking Commercial and Industrial class into three sub-classes is reasonable and appropriate for adoption.
37. The Department's recommendation to segment the former Midwest-
Viking Commercial and Industrial class into two sub-classes is reasonable and appropriate for adoption.
38. The Department's and the OAG's recommendations to reject Minnegasco's proposed demand/commodity billing option for the Commercial and Industrial customers are reasonable and are appropriate for adoption.
39. Minnegasco's proposed name change for the Large Volume Commercial and Industrial customer class to Large General Service customer class is reasonable and is appropriate for adoption.
40. Minnegasco's proposal to segment the consolidated (Minnegasco-
MN and former Midwest-Northern) Small Volume Dual Fuel classes is reasonable and appropriate for adoption.
41. The Department's recommendation to reject Minnegasco's proposal to segment the former Midwest-Viking Small Volume Dual Fuel class into two subclasses is reasonable and is appropriate for adoption.
42. The Department's recommendation to segment the customer charges for Small Volume Firm Transportation classes to mirror the Commercial and Industrial sales class's structure is reasonable and appropriate for adoption.
43. The parties' agreement that Minnegasco will collect load factor and maximum daily use data for all Commercial and Industrial and Small Volume Firm Transportation customer classes is reasonable and is appropriate for adoption.
44. Minnegasco's flexible tariff practices were and are consistent with its applicable tariffs.
45. No quarterly reports on Minnegasco's market rates are necessary.
46. It is appropriate to conclude that adoption of the Offer (including both the settled issues and the stipulated issues) reduces Minnegasco's requested revenue requirement increase from $22,722,000 to $10,972,000, based on an overall rate of return of 9.67 percent.
47. The Offer is supported by record evidence, is reasonable and in the public interest, and will result in just and reasonable rates. It is appropriate to adopt the Offer in its entirety.
48. The GPI was set forth in a time and manner that prohibited meaningful comment from the intervenors or other potential intervenors.
49. The GPI is not a proper incentive mechanism.
50. It is appropriate to reject Minnegasco's GPI proposal.
51. Minnegasco's proposal to allocate CIP costs to all customer classes is reasonable and is appropriate for adoption.
52. Minnegasco's proposal to allocate demand-related costs on the average and peak method is reasonable and appropriate for adoption. MEC's proposal, supported by the Department and Minnegasco, to exclude interruptible usage from the calculation of the "peak" component is reasonable and appropriate for adoption.
53. Minnegasco's proposal to allocate peaking plant O & M costs to all customer classes is reasonable and is appropriate for adoption.
54. Minnegasco's proposed method of adjusting customer class revenue responsibility based upon the final revenue requirement determined by the Commission is reasonable and is appropriate for adoption.
55. Minnegasco's proposal regarding the determination of the LVDF flexible rate is reasonable and is appropriate for adoption. It is appropriate to reject MEC's proposal to use a Straight Fixed Variable (SFV) method to determine flexible rates.
56. Minnegasco's proposed rate to the LVDF customer class is reasonable and appropriate for adoption.
57. Minnegasco's proposed increase of the residential customer charge from $5 to $6 per month is reasonable and is appropriate for adoption.
58. The record supports adoption of the Stipulation of Facts regarding cost allocations arising out of the MAC Complaint Docket. Only the Stipulation reflects the plain meaning of the Commission's March 24 Order regarding the allocation of costs related to responding to gas leak calls.
59. It would be appropriate for the Commission to urge the Company to undertake a management audit of Minnegasco accounting and financial departments and record keeping procedures.
60. It is appropriate to conclude that as a matter of law and fact, good will does not belong to utility ratepayers; good will is the property of utility shareholders.
61. The Commission is charged with protecting the interests of ratepayers. It has previously found that those interests are well served by the continued integrated operation of Minnegasco's appliance and utility businesses. With the safeguard against cross-subsidization which results from the use of the FCC cost allocation methodology, those benefits can be preserved.
62. It is inappropriate to go beyond FCC cost allocations, which more than prevent utility cross subsidization of the unregulated appliance sales and service business, by determining that the utility can be compensated for good will and by imposing a royalty payment or a license fee.
63. It is reasonable to estimate the good will value associated with Minnegasco's name, image and reputation at one percent of the appliance sales and service gross revenues.
64. It is unnecessary to impute revenues based on the facts of this proceeding.
65. With respect to gas leak calls, it is appropriate to charge Minnegasco's non-regulated businesses only when a repair is made or a leak is fixed on internal piping or is associated with an appliance.
66. It is appropriate to adopt the Class Cost of Service Study contained in the Offer of Partial Settlement. It is appropriate to reject the Cost Study proposals of MEC, except as incorporated above at Conclusion 52.
THIS REPORT IS NOT AN ORDER AND NO AUTHORITY IS GRANTED HEREIN. THE PUBLIC UTILITIES COMMISSION WILL ISSUE THE ORDER OF AUTHORITY WHICH MAY ADOPT OR DIFFER FROM THE FOLLOWING RECOMMENDATIONS.
Based upon the foregoing Conclusions, it is the recommendation of the Administrative Law Judge that the Public Utilities Commission issue the following:
ORDER
1. Minnegasco is entitled to increase gross annual revenues by $10,972,000 for annual periods beginning January 1, 1994.
2. Within 30 days of the service date of this Order, the Company shall file with the Commission for its review and approval, and serve on all parties in this proceeding, revised schedules of rates and charges reflecting the revenue requirement for annual periods beginning January 1, 1994, and the rate design decisions contained herein. The Company shall include proposed customer notices explaining the final rates. Parties shall have 14 days to comment.
3. (If the Commission orders an Interim Rate Refund) Within 30 days of the service date of this Order, the Company shall file with the Commission for its review and approval, and service upon all parties in this proceeding, a proposed plan for refunding to all customers, with interest, the revenue collected during the Interim Rate period in excess of the amount authorized herein. Parties shall have 14 days to comment.
4. The Offer of Partial Settlement and Stipulation of Facts and Recommended Decision (Ex. 94) arrived at among the Company, the Department of Public Service and the Office of Attorney General is adopted in its entirety.
5. The Commission urges Minnegasco to conduct a management audit of its accounting and financial departments and record-keeping procedures in accordance with the recommendation of the Department of Public Service.
6. Minnegasco's good will (name, image and reputation) is of value to the Company's unregulated appliance sales and service businesses. That value is set at one percent of the annual gross revenues of those businesses.
7. The Commission will not impute income to or impose a royalty on the regulated Utility to recognize in rates the value of Utility good will to the Company's unregulated appliance sales and service businesses.
Dated this 26th day of August, 1994.
/s/ Richard C. Luis
RICHARD C. LUIS
Administrative Law Judge
NOTICE
Pursuant to Minn. Stat. § 14.62, subd. 1, the agency is required to serve its final decision upon each party and the Administrative Law Judge by first class mail.
Reported: Shaddix & Associates, Janet Shaddix and Lori Case, Court Reporters.
Transcripts prepared.