Opinion
No. CV 09 4021664S
January 6, 2010
MEMORANDUM OF DECISION
This is an administrative appeal brought by the plaintiff, Connecticut Natural Gas Corporation (CNG) from a June 30, 2009 final decision of the defendant Department of Public Utility Control (DPUC). CNG has also named as a defendant the office of consumer counsel (OCC) as the OCC participated fully before the DPUC. The final decision concerned a rate case filed on January 16, 2009, and also consisted of a review by DPUC of a prior "over-earnings" decision pursuant to § 16-19(g). See DPUC decision, Docket No. 08-06-10, and Connecticut Natural Gas Corp. v. Dept. of Public Utility Control, 51 Conn.Sup. 307 (2009).
The background to the appeal is as follows. On January 16, 2009, CNG filed its application. Public hearings were held during March and April 2009. On June 15, 2009, a draft decision was issued. The parties were afforded an opportunity to file exceptions and to present oral argument on the draft. The final decision was rendered on June 30, 2009. In the final decision, the DPUC allowed revenues of $374,630,135. The DPUC summarized its position as follows:
"The Department allows the Company an allowed rate base of $332,868,826. The Department approves an allowed return on equity of 9.31% for a weighted cost of capital of 7.92%. This cost of capital is based on an allowed capital structure containing a 52.52% common equity component and a 47.48% debt capitalization component. The revenue requirement adjustments as authorized herein, will be sufficient to enable the Company to operate successfully, maintain its financial integrity, attract capital, compensate its investors for the use of their money and the risks assumed, and maintain high quality service . . . Thousands of bills issued to CI customers failed to include demand charges which resulted in the Company not collecting the proper amount of revenues. Consistent with Conn. Gen. Stat. § 16-19e(a)(5), the Department reduced the Company's ROE [return on equity] by 10 basis points to reflect imprudent management associated with the administration of the appropriate tariffs. New rates will become effective for usage on and after July 31, 2009. At that time, a surcharge $0.0048 per ccf will be applied to firm customer bills until the Department determines that it is no longer necessary."
(Return of Record, ROR, DPUC Decision, pp. 169-70).
This appeal followed, accompanied by a motion to stay by CNG. Per a stipulation of August 6, 2009, the parties agreed to a conditional partial stay of the DPUC final decision.
CNG is aggrieved for the purposes of General Statutes § 4-183(a). See Connecticut Natural Gas, supra, 51 Conn.Sup. 315.
Initially, CNG claims that the rate set by the DPUC amounts to a practical confiscation of CNG's property. CNG cannot support its contention, however. CNG must demonstrate that either "(1) application of the [rate] amounted to a practical confiscation because the property cannot be used for any reasonable purpose; or (2) under a balancing test, the [rate's] application impermissibly has infringed upon the owner's reasonable investment-backed expectations of use and enjoyment of the property so as to constitute a taking." Rural Water Co. v. Zoning Board of Appeals, 287 Conn. 282, 299, 947 A.2d 944 (2008). CNG points to nothing in the record that meets either of these tests. While it contends in both its brief and reply brief that the DPUC improperly set the rate in its orders, CNG did not produce evidence that it would not be able to remain in business or that it would lose investment income so that it would be unable to operate at all. See also Cedar Island Improvement Assn. v. Clinton Electric Light Power Co., 142 Conn. 359, 374, 114 A.2d 535 (1955) (lack of proof of confiscation of company's property).
The DPUC and OCC at oral argument contested whether CNG had properly preserved this argument. It is not alleged in the complaint and only receives a paragraph on pages 7-8 of CNG's brief. Since there is a reference in the CNG brief and a short reply in the DPUC brief at page 14, discussing Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 603, 64 S.Ct. 281, 88 L.Ed. 333 (1944), the court will consider this contention.
The court thus turns to the "primary thrust" (CNG brief at 8) of this appeal — that the DPUC reached an improper conclusion in its rate orders. The parties have disputed over the standard of review to be employed by the court in DPUC rate proceedings. Several decisions of our Supreme Court have considered this court's function when a utility appeals from a rate or similar order. In Wheelabrator Lisbon, Inc. v. Dept of Public Utility Control, 283 Conn. 672, 690-92, 931 A.2d 159 (2007), the Supreme Court stated: "[J]udicial review of the [department's] action is governed by the Uniform Administrative Procedure Act . . . and the scope of that review is very restricted . . . [R]eview of an administrative agency decision requires a court to determine whether there is substantial evidence in the administrative record to support the agency's findings of basic fact and whether the conclusions drawn from those facts are reasonable . . . Neither this court nor the trial court may retry the case or substitute its own judgment for that of the administrative agency on the weight of the evidence or questions of fact . . . Our ultimate duty is to determine, in view of all of the evidence, whether the agency, in issuing its order, acted unreasonably, arbitrarily, illegally or in abuse of its discretion . . .
"Because this is a question of statutory interpretation that previously has not been subject to judicial scrutiny, our review ordinarily would be plenary. Nevertheless, in light of the extremely complex and technical regulatory and policy considerations implicated by this issue, we are not persuaded that we may substitute our judgment for that of the department. Rather, this is precisely the type of situation that calls for agency expertise . . . [C]f. Office of Consumer Counsel v. Dept of Public Utility Control, 279 Conn. 584, 593, 905 A.2d 1 (2006) (`In the specialized context of a rate case, the court may not substitute its own balance of the regulatory considerations for that of the agency, and must assure itself that the [department] has given reasoned consideration to the factors expressed in § 16-19e[a] . . . This broad grant of regulatory authority carries with it the necessary equally broad discretion, to be exercised within legal limits . . .') (Citations omitted; internal quotation marks omitted.)."
The Supreme Court in Connecticut Light Power Co. v. Dept of Public Utility Control, 266 Conn. 108, 125, 830 A.2d 1121 (2003) has also stated: "The reviewing court must take into account [that there is] contradictory evidence in the record . . . but the possibility of drawing two inconsistent conclusions from the evidence does not prevent an administrative agency's finding from being supported by substantial evidence." (Citations omitted). See also Connecticut Natural Gas Corp. v. Public Utilities Control Authority, 183 Conn. 128, 133-34, 439 A.2d 282 (1981), approving this standard in a rate order involving CNG.
CNG contends that the standard of review is controlled by Connecticut Light Power Co. v. Dept of Public Utility Control, 216 Conn. 627, 583 A.2d 906 (1990). The court has reviewed the specific pages that concern review under the UAPA, supra, 216 Conn. 636-37, and does not find that this case differs in any way from the standard set forth in the cases quoted above.
In Connecticut Light Power, supra, 216 Conn. 627, the Superior Court had employed a "just and reasonable" standard of review of a rate order, as well as reviewing the record evidence to see if the order was "generally supported." Id., 636. The Supreme Court stated, however, that the appropriate standard is found in § 4-183(j). "[C]ourts must undertake a case-by-case analysis to determine the merits of the challenged rate order and the prejudice, if any, to the regulated company." Id. The Supreme Court then states that the trial court may not reverse or modify an agency's decision unless one of the six subsections of § 4-183(j) has been "contravened" by the agency's "findings, inferences, conclusions, or decisions." Id., 637. The court may not substitute its judgment for that of the agency. "In its review of administrative rate regulation, the court must, accordingly, ensure that the agency's decisionmaking process was conducted pursuant to the appropriate procedures and that the outcome of the process reflects reasoned decisionmaking — a reasonable application of relevant statutory provisions and standards to the substantial evidence on the administrative record." Id.
This section at the time of the opinion was 4-183(g); it has since been amended to § 4-183(j).
The case of Connecticut Light Power Co. v. Dept. of Public Utility Control, 219 Conn. 51, 591 A.2d 1231 (1991), followed Connecticut Light Power v. Dept of Public Utility Control, supra, 216 Conn. 627. Section 4-183(j), in rate order appeals, incorporates the federal Hope test of "just and reasonable." It "requires the trial court to conduct a statutorily circumscribed inquiry, based on the administrative record, into the merits of the administrative decision . . . The court may not substitute its own balance of regulatory considerations for that of the agency . . . Its function is independently [to] assure itself that the DPUC has given reasoned consideration to each of the guiding factors expressed in § 16-19e(a)(4) . . .
"Within this context, judicial review of [the utility's] action is governed by the UAPA . . . and the scope of that review, the `substantial evidence' rule, is restricted . . . The court's ultimate duty is only to decide whether, in light of the evidence, the [agency] has acted unreasonably, arbitrarily, illegally, or in abuse of its discretion." Id., 56-58. (Citations omitted; internal quotation marks omitted.)
The first issue raised by CNG relates to the order issued by the DPUC pursuant to § 16-19(g), which provides in part: "The department shall hold . . . a special public hearing . . . on the need for an interim rate decrease . . . when a public service company has, for six consecutive months, earned a return on equity which exceeds the return authorized by the department by at least one percentage point . . . At the completion of the proceeding, the department may order an interim rate decrease if it finds that such return on equity or rates exceeds a reasonable rate of return . . . Any such interim rate decrease shall be subject to a customer surcharge if the interim rates collected by the company are less than the rates finally approved by the department." (Emphasis added.)
As set forth in the interim rate decision, Connecticut Natural Gas Corp., supra, 51 Conn.Sup. 307, 312, CNG was ordered no later than January 1, 2009, to "file a full rate case with the [d]epartment under the uniform system of accounts. This filing shall include proposed [pro forma] adjustments for two rate [years, one] beginning [August 6, 2008, and] one subsequent to the anticipated completion of the rate case." CNG complied with this order by submitting two "pro formas," one showing the effect on the ROE from August 6, 2008 and the other from January 1, 2009 to the close of the hearing on the full rate case.
In the final decision, issued on June 30, 2009, the DPUC set a new rate effective July 1, 2009 with a surcharge that commenced after October 1, 2009. The surcharge was smaller than that requested by CNG. CNG argues that the DPUC should have interpreted the phrase "rates finally approved" in § 16-19(g) to mean that a larger surcharge, calculated on the original 10.1% ROE, should have been allowed for the period from August 6, 2008 to June 30, 2009.
The DPUC and OCC reply that the "rates" were finally approved on June 30, 2009 in the final decision. These rates, including a surcharge, were properly placed to reflect corrected earnings from August 6, 2008. There is no justification for the DPUC to place a different surcharge from August 2008 to July 2009 based on the 10.1% ROE. In addition, the setting of two rates would be time consuming and costly. While the DPUC asked for two pro formas, this was unnecessary and the first pro forma should be disregarded.
The court concludes that the DPUC construction of the statute is preferable. It takes into account both the wording of the statute and practical matters of enforcement. Under Wheelabrator Lisbon, Inc. v. Dept. of Public Utility Control, supra, 283 Conn. 692, some deference is due to the DPUC on its "own balance of the regulatory considerations." See also MacDermid, Inc. v. Dept. of Environmental Protection, 257 Conn. 128, 139, 778 A.2d 7 (2001) (favoring "a construction given a statute by the agency charged with its enforcement"). In addition, Office of Consumer Counsel v. Dept. of Public Utility Control, 252 Conn. 115, 118, n. 3, the only appellate case to consider § 16-19(g), notes that when additional over-earning came to light, it was to be resolved in the "full rate case." In addition, the decision notes that "an interim rate hearing results in only temporary rate making until more information is available at a subsequent full rate case hearing." Id., 194.
Thus, on the final determination of the earnings in the full rate case, there would be one surcharge commencing after the date of the final rate order. As the DPUC stated in its final decision (Return of Record [ROR], final decision, p. 143): "Nothing in the interim rate increase section requires the Department to guarantee a specific ROE, nor to construct a distinct revenue requirement for an ERP period, as the company insists must be done for the interim rate decrease." See also Southern New England Telephone Co. v. Dept of Public Utility Control, 274 Conn 119, 125, 874 A.2d 776 (2005) ("A regulatory commission is powerless to `guarantee' a specified rate of return.")
The court does not agree with the contention made in CNG's reply brief, p. 4, that the DPUC must set carved-up rates, so that each rate takes into account costs separately during an "over-earnings" period and a "final rates" period.
The second issue raised by CNG requires consideration of the return of equity (ROE) calculation. The DPUC stated in its final decision that it used two methodologies to determine the ROE — CAPM (capital asset pricing model) and DCF (discounted cash flow). Based on these methodologies, the DPUC set an ROE of 9.41. CNG contests the over-all CAPM calculation. One of the elements of this calculation is the Rm figure (representing "return on the perfectly diversified portfolio"). CNG argues that the DPUC found the Rm figure by merely examining two surveys prepared by OCC's expert Dr. Woodridge, referring to JRW 11 (ROR, Sec. II, No. 2, direct testimony of Dr. J. Randall Woodridge). On the contrary, on pages 136-138 of the final decision, the DPUC explains that it made use of both to CNG's Makholm study and the Woodridge data in reaching the Rm figure. The discussion of this issue by the DPUC in its final decision justifies the court's approval under the Wheelabrator standard of review. See also Woodbury Water Co. v. Public Utilities Commission, 174 Conn. 258, 263, 386 A.2d 232 (1978) (court's task is "to determine on the record whether there was a logical and rational basis for the decision of the commission . . ."); Connecticut Water Co. v. Public Utilities Commission, Superior Court, judicial district of Hartford at New Britain, Docket No. 368832 (April 24, 1991, Maloney, J.) ("The court is not persuaded that any of the DPUC's assumptions was so unfounded as to produce an unreasonable result.")
The DPUC penalty for MDQ error led the actual number to be 9.31%.
The record does not support CNG's argument that the DPUC, having been alerted to an error in its CAPM calculation in the draft decision, was barred from recalculating the CAPM figures as it did in the final decision. The court will not presume an ulterior motive in the agency's attempt to arrive at correct figures. There is sufficient evidence in the record to support the revised result.
CNG also argues that "it is arbitrary and capricious for the DPUC to rely on any analysis that yields a cost of equity that is lower than CNG's own cost of long-term debt." (CNG Brief, p. 21.) The court agrees, however, with the analysis in the DPUC brief, p. 36, that CNG's cost of long term debt is best viewed in the medium term notes approved on January 8, 2009. These were coupons issued in the amount of 6.25 %. Thus, the cost of long term debt is less than the ROE of 9.41% (prior to penalty) allowed here.
CNG's next contention is that the DCF methodology employed by the DPUC was faulty, because it did not use an external growth factor. On the contrary, as pointed out in the DPUC brief, p. 42, the final decision relies in part on the testimony of Dr. Woodridge, whose approach did include an external growth rate. (ROR, PFT, March 2, 2008, pp. 34-35; OCC's response to CNG interrogatory 27.) In addition, the DPUC correctly was permitted to disregard spot yield figures in the DCF calculation; instead, as indicated at pages 135-136 of the final decision, comparable company dividends from November 2008 to April 2009 were reviewed. The court does not find the DCF calculation in error merely because in the wholly different CAPM approach (ROR, final decision, p. 137) the DPUC relied on an "up to date risk free rate" in the Beta input.
The next contention of CNG is that while the DPUC (ROR, final decision, pp. 133-34) identified rates of return for nine "proxy companies," it did not make use of these rates of return in a "comparable earnings" analysis. The rates of return from the nine companies, according to CNG, had a mean ROE of 11.6%. CNG argues that the DPUC erred in not following the comparable earnings approach in setting the rate of return in the final decision. On the other hand, the DPUC was legally permitted to decide not to make use of the comparable earnings approach. See Greenwich v. Dept. of Public Utility Control, 219 Conn. 121, 126, 592 A.2d 372 (1991) ("the legislature, however, has not imposed upon the DPUC any specific formula or policy to use in setting rates"); Power Commission v. Pipeline Co., 315 U.S. 575, 586, 62 S.Ct. 736, 86 L.Ed. 1037 (1942) ("[R]ate-making bodies [are not bound] to the service of any single formula or combination of formulas. Agencies to whom this legislative power has been delegated are free, within the ambit of their statutory authority, to make the pragmatic adjustments which may be called for by particular circumstances.")
It was permissible for the DPUC to develop the list of comparable companies to obtain a basic range of rates of return and to use these proxy companies in its DCF and CAPM analysis. The figures in the companies' rates of return were not based on the record developed in this rate case, however, and were not binding on the DPUC in preparing its final decision.
The next issue raised by CNG is that the DPUC (ROR, final decision, pp. 112-13) ordered $30 million in short-term debt to be included it CNG's capital structure. CNG argues that the DPUC used out of date data from February 2009 in its final decision; short term debt is used to finance gas purchases and the cost of gas had dropped at the time of the final decision. The DPUC, however, correctly credited Dr. Woodridge's testimony that CNG regularly includes short-term debt in its capital structure. Gas prices are volatile (ROR, Exhibit GMP-6) and CNG should have the back-up resource that short-term debt provides. While Dr. Makholm testified otherwise, the DPUC had the authority to credit Dr. Woodridge's approach over Dr. Makholm's.
CNG next argues that the DPUC "erroneously reduced CNG's common equity by $7,811,928, which reflects accumulated amortized goodwill (or acquisition premium) that has already been paid for by shareholders. This additional reduction in common equity lacks any evidentiary basis . . . Thus exclusion of this amortized goodwill reflects a double-charge to shareholders." (CNG brief, p. 30.)
CNG's position succeeds only if the DPUC is required by law, which it is not, to adopt CNG's actual capital structure. The DPUC did not make such an adoption in its final decision, but has modified it (as seen above, it included $30 million in short term debt). CNG claims that a federal filing through FERC demonstrates that it had previously deducted amortized good will. However, the FERC form was never presented to the DPUC as an exhibit, and only referenced with CNG's exceptions to the draft decision. CNG had the burden to move to re-argue after the final decision, pursuant to § 4-181a(a), if it wanted the DPUC to review the FERC form and consider its effect. In addition the DPUC cannot be criticized for allowing good will to be reflected in common equity in previous rate cases. Each rate case must be considered separately.
Finally, even if the DPUC erred in disallowing good will, the common equity amount would only change from 52.52% as found by the DPUC to 53.48%. The testimony of Dr. Woodridge (ROR, Sec. II, No. 2, referencing Exhibit JRW-5), to which the DPUC gave weight, indicating a capital structure of 50%. CNG therefore cannot show prejudice in the figure (52.52%) allowed by the DPUC, even if amortized good will should not have been excluded.
In the next issue, under § 16-19e(a)(5), the DPUC is allowed to take into account "that the level and structure of rates charged customers . . . reflect prudent and efficient management of the franchise operation." In the case of MDQ (maximum daily quantity) billings for certain CNG customers, the DPUC penalized CNG 10 basis points for "imprudent management." CNG had not properly billed these MDQ customers on a quarterly basis, but only yearly. This led some customers to be billed too low and others too high. (ROR, final decision, pp. 93-93.) CNG first objects because it terms this penalty "retroactive rate-making." It is incorrect in this contention, as the rate was not set retroactively, but only prospectively. See Office of Consumer Counsel v. Dept. of Public Utility Control, supra, 279 Conn. 603 (2006).
CNG also contends that the penalty was not warranted because it was unclear why its procedures were inadequate. The record shows, however, that CNG had been advised as many as eight years ago on how the MDQ bills were to be rendered. A witness was surprised that CNG management had not corrected the problem over these years. (ROR, Transcript, March 24, 2009, p. 1368.) CNG failed to bill correctly in the amount of $434,336 during the test year. (ROR, Sec. V, No. 114, CNG Response to Interrogatory GA-521.) The DPUC thus correctly found that a penalty was warranted.
In the next issue, the DPUC disallowed (ROR, final decision, p. 23) CNG's 15.17 days that were added to working capital for a service lag related to the purchase gas adjustment clause (PGA) of § 16-19b(b). The DPUC found as to the PGA that under its operation the service lag was "zero." CNG first argues that the DPUC has in prior rate orders allowed for a service lag under PGA and that the present ruling is inconsistent. As the court has previously stated in this opinion, however, the DPUC is not bound in ruling on a rate application to follow past rulings. See Connecticut Natural Gas Co. v. Dept of Public Utility Control, supra, 183 Conn. 128, 135 (discussing lag time and prior orders of DPUC).
CNG also argues that the DPUC erroneously concluded that the service lag under PGA was "zero." The DPUC should have focused not only on the "differences between the estimated and actual price of purchased gas," but also the service lag when CNG "renders service or reads a customer's meter." (CNG's reply brief, p. 9.) However, the court defers to the expertise of the DPUC. See Connecticut Light Power Co. v. Dept of Public Utilities Control, supra, 216 Conn. 644. The DPUC concluded that the PGA methodology "effectively aligns meter reads with service rendered and eliminates the service lag." (ROR, final decision, p. 23.) This conclusion was also reached by the DPUC with a retained consultant in Docket No. 07-04-01 which reviewed the PGA and found no service lag.
The DPUC position is also confirmed by the transcript references at pages 50-51 of its brief, which demonstrated that the CNG witness, Mr. Shambaugh, had not analyzed the PGA in terms of service lag.
In addition to disallowing the PGA charge, the DPUC also made other adjustments to CNG's working capital. CNG raises the issue that "working capital adjustments" as found in the final decision, pages 21-25, total about $10.7 million, not the $14,169,597 set in the final decision on page 25. It asks the court to direct the DPUC to add back $3.4 million.
The DPUC properly handled the working capital calculation. After setting forth in section 4, adjustments totaling the 10.7 figure, it stated in section 4.e: "In addition to adjustments to the lag and/or lead days of some expense categories, the Department also made adjustments to the amount of expenses or income allowed for ratemaking purposes. These adjustments are detailed throughout this Decision and impact the cash working capital the Company needs. The Department adjusted the expense and income levels used to calculate the cash working capital needs of the Company to mirror the expense and income levels and categories allowed by this Decision. Tr. 3/25/09, pp. 1478 and 1479." (ROR, final decision, p. 25.) Contrary to CNG's position, the DPUC has pointed to substantial evidence in the record to support its conclusions.
CNG next argues that while the DPUC allowed amortization of accumulated deferred income taxes (at CNG's urging) in this final decision, it did not allow this treatment in another rate case involving Southern Connecticut Gas Company (SCG), a separate, pending administrative appeal. CNG argues that the outcome in each appeal should be linked, so both utilities either should be permitted to amortize or not amortize. In other words, if SCG were to prevail in its appeal, CNG would keep its right to amortize and SCG would have that right as well, but if SCG loses its appeal, then CNG would also lose its rights to amortize too. As indicated above, the court rejects CNG's position that the court must rigidly adapt one DPUC decision to another. The court thus will not interfere with the final decision in CNG's appeal approving its right to amortize, a request that was made to the DPUC in this docket and approved by the agency.
CNG's next contention is based on its request to be allowed to claim an expense of 2.14% for non-hardship write-offs (essentially customers that do not pay their bill for reasons other than poverty or illness). CNG relied for the 2.14% figure on a four-year average of net write-offs. The DPUC (ROR, final decision, p. 35) concluded that the use of the four-year average data was inappropriate. It used the test year figure of 1.79%, which it compared to the actual year of 2008 figure of 1.58%. The DPUC certainly might make use of the test year figure, which it found more reliable than CNG's four year average approach. See Connecticut Natural Gas Corporation v. Public Utilities Commission, 29 Conn.Sup. 379, 389, 289 A.2d 711 (1971). In addition, the DPUC approved CNG's expenses for automatic reading devices, outbound dialing, and third party outreach and hardship programs. The DPUC could conclude that these programs will lower the rate of non-hardship defaults.
The final issue raised by CNG relates to its projected expenses and regulatory asset treatment for non-qualified retirement plans (essentially for officers and directors). The DPUC (ROR, final decision, pp. 50-51) denied the expenses and regulatory asset treatment on the ground that these expenses gave the ratepayers no current benefit and were inappropriate in these challenging economic times.
CNG argues that there is no question that it will have to pay the pension benefits and that the benefits are essential to attract higher level employees. The DPUC has allowed these expenses in past rate orders and the pension expense is undeniably prudent. The DPUC, however, has warned CNG in the past that it would not allow such expenses in a poor economy. Docket No. 95-02-07, October 13, 1995, Application of CNG for Rate Increase. Moreover, the decision to deny the retirement fund expenses was merely part of the balancing of varying factors in which the DPUC engaged in setting the rates in the final decision. See Connecticut Light Power v. Dept of Public Utility Control, supra, 219 Conn. 64.
The court has reviewed the arguments made by CNG and finds them without merit. Therefore the appeal is dismissed.