STATE OF MINNESOTA
IN COURT OF APPEALS
In the Matter of the Application of
to extend its Assigned Service Area into
the Area Presently
Filed May 29, 2007
Minnesota Public Utilities Commission
Agency File No. E-243; 106/SA 03-896
Andrew J. Shea, Kathleen M. Brennan, McGrann, Shea, Anderson, Carnival, Straughn & Lamb, Chartered, 800 Nicollet Mall, Suite 2600, Minneapolis, MN 55402 (for relator Grand Rapids Public Utilities Commission)
Lori Swanson, Attorney General, Kari Valley Zipko, Assistant Attorney General, 1100 Bremer Tower, 445 Minnesota Street, St. Paul, MN 55101 (for respondent Public Utilities Commission)
Harold P. LeVander, Jr., Felhaber, Larson, Fenlon & Vogt, P.A., 444 Cedar Street, Suite 2100, St. Paul, MN 55101-2136 (for respondent Lake Country Power)
Considered and decided by Dietzen, Presiding Judge; Hudson, Judge; and Collins, Judge.*
S Y L L A B U S
The “net-revenue-loss” formula is an appropriate method for the Minnesota Public Utilities Commission to calculate a displaced utility’s lost revenues under Minn. Stat. § 216B.44.
O P I N I O N
In this certiorari proceeding, relator challenges the amount of a compensation award ordered by the Minnesota Public Utilities Commission (Commission) pursuant to Minn. Stat. § 216B (2006) to compensate an electric utility for territory it annexed as provided by law. Relator argues that the Commission’s order (1) was arbitrary and capricious and not supported by substantial evidence; and (2) was unconstitutional. We affirm.
In June 2003, the City
filed a petition with the Minnesota Public Utilities Commission (Commission)
under Minn. Stat. § 216B.44 (2002), exercising its right to extend its
assigned service area to include two areas recently annexed to the city but
located within the assigned service area of Lake Country. The petition asked the Commission to adjust
the City’s service-area boundaries to include these areas and to schedule a
contested-case proceeding to determine appropriate compensation to
law judge (ALJ) assigned to the case conducted a two-day evidentiary hearing in
June 2004. Witnesses, including experts,
were presented by the City and
the hearing, the ALJ issued findings, conclusions, and a recommendation for a
compensation award to Lake Country for lost revenue of $233,820 (unadjusted for
present value), or 15.5 mills/kWh. In
reaching the recommendation the ALJ adopted the City’s proposed calculation
method and rejected
The “net-revenue-loss” formula was developed by the Commission in 1990, with several refinements and clarifications in subsequent cases. The formula (1) determines gross revenues for each year of the compensation period, which the Commission has set at ten years, to reflect the intermediate planning period of most utilities; (2) determines avoided costs that the utility would no longer be required to incur because it is no longer serving the area (such costs would include the purchase of power to be sold within the area); (3) subtracts the avoided cost from the gross revenues, which results in yearly net-revenue loss for each year in the ten-year compensation period; and (4) reduces net revenue losses to present value. Due to the uncertainty of future events, the lump-sum amount calculated under this method is often converted into a kilowatt-per-hour rate, or mill rate, and payment is made at this mill rate over the compensation period.
found that the primary difference between the parties in the calculations of
lost revenue was how the parties calculated “avoided costs,” or the costs that
1. Was the Commission’s compensation award
2. Was the Commission’s compensation award
The City argues
that the Commission’s order was arbitrary and capricious and not supported by
substantial evidence. When reviewing
agency decisions, we adhere to the fundamental concept that decisions of
administrative agencies enjoy a presumption of correctness and that deference
should therefore be shown by courts to the agency’s expertise and its special
knowledge in the field. Reserve Mining Co. v. Herbst, 256 N.W.2d
808, 824 (
A. ALJ Report
the City argues that the Commission erred by rejecting the ALJ’s report. The decision of the ALJ is entitled to some
weight. In re Denial of Eller Media Co.’s Application for Outdoor Adver.
Permits, 664 N.W.2d 1, 6 (
The Commission gave
several reasons for rejecting the ALJ’s recommendation. First, the Commission rejected the ALJ’s conclusion
Second, the Commission rejected the ALJ’s comparison to previous awards and settlements in the past 13 years as compiled by the Department of Commerce. The Commission concluded that the comparison exhibit was of “dubious relevance and little probative value,” because each compensation decision is unique, and utility costs and net revenue vary widely due to a variety of factors which include the characteristics of the service area and its load.
Commission rejected the ALJ’s use of a gross-revenue multiplier as a valid way
to determine net-revenue loss on the ground that it did not measure all of the
factors required by statute. Fourth, the
Commission rejected the ALJ’s conclusion that comparing the City’s retail mill
Fifth, the Commission rejected the ALJ’s conclusion that avoided costs should be calculated on an allocated basis rather than incrementally. It concluded that because not all fixed costs allocated to particular customers will go away with the departing customers, fixed costs formerly borne by the departing customers must be spread incrementally over those remaining on the utility’s system. Finally, the Commission rejected the ALJ’s approach to determining future customers for the annexed areas.
The Commission’s consideration and rejection of the ALJ’s recommendation is well reasoned and based on policy considerations and value judgments. On these matters, we defer to the expertise of the agency. Reserve Mining, 256 N.W.2d at 824.
B. Commission Order
The City argues
that the Commission’s order was predicated on a number of errors that rendered
its award to
(a) in violation of constitutional provisions; or
(b) in excess of the statutory authority or jurisdiction of the agency; or
(c) made upon unlawful procedure; or
(d) affected by other error of law; or
(e) unsupported by substantial evidence in view of the entire record as submitted; or
(f) arbitrary or capricious.
Put differently, we
will not disturb an agency’s decision as long as the agency’s determination is supported
by substantial evidence. Eller Media, 664 N.W.2d at 7. The substantial-evidence test is satisfied
when there is such relevant evidence as a reasonable mind might accept as
adequate to support a conclusion. In re Request of Interstate Power Co. for
Auth. to Change its Rates for Gas Service in Minn., 574 N.W.2d 408, 415
(Minn. 1998) (citation omitted). When
applying the substantial-evidence test we determine whether the agency
adequately explained how it derived its conclusion and whether that conclusion
was reasonable. In re Petition of N. States Power Co. for Auth. to Change its Schedule
of Rates for Elec. Serv. in Minn., 416 N.W.2d 719, 724 (Minn. 1987). We retain the authority to review de novo
errors of law which arise when an agency decision is based upon the meaning of
words in a statute. Eller Media, 664 N.W.2d at 7.
1. “Reasonableness” Checks
The City argues that the Commission erred by not applying the gross-revenue-multiplier formula as a “reasonableness” check on the net-revenue-loss formula. Minn. Stat. § 216B.44(b) provides, inter alia, that the Commission determine “appropriate” compensation under the statute to the utility formerly serving the annexed area. The language of the statute does not explicitly require that the Commission apply an alternative formula to “check” the reasonableness of the compensation award. The statute does require that the Commission consider the “original cost of the [assigned utilities’] property, less depreciation, loss of revenue to the utility formerly serving the area, expenses resulting from integration of the facilities, and other appropriate factors.”
Here, the Commission rejected the gross-revenue-multiplier formula on the basis that it does not calculate the statutory factors that must be applied to determine a compensation award.
The City also argues that the Commission has previously recognized the gross-revenue-multiplier formula. We disagree. The Commission acknowledged that it mentioned the formula in a 1986 case, but noted that it did not adopt the formula and “does not endorse the use of a gross revenue multiplier for proceedings of this type.” The Commission reasoned that this formula does not comply with the requirement of the statute.
We observe that in
future cases, it may be appropriate for the Commission to consider alternative-revenue
formulas as a “reasonableness check” to its valuation determination under the
statute. See Equitable Life Assurance Soc’y of the U.S. v.
2. Future Customers
City next argues that the Commission erred in awarding loss of revenue for potential
future customers. We disagree. The Commission found that while both parties
expected low growth of future customers in the annexed areas over the ten-year
compensation period, both parties expected some growth in future customers. Specifically,
Here, the parties
projected growth of 17-20 future customers in the annexed area during the
ten-year compensation period. Thus, substantial
evidence exists in the record that supports the Commission’s order requiring
the City to compensate
3. Avoided Costs
The City argues that the Commission erred by determining that avoided costs should be calculated incrementally, which involves calculating the costs a utility will avoid if it loses particular customers in the annexed area. The City argues that avoided costs should be calculated on an allocated basis, which involves calculating the costs of supplying electricity to the utility’s general body of rate-payers and allocating those costs to different classes of customers.
The Commission disagreed. It reasoned:
Allocating costs among classes of customers who are actually on a utility’s system, contributing to the system’s fixed costs through their monthly bills, is fundamentally different from determining what costs a utility will avoid—that is, will stop incurring—if it loses particular customers. In the first case, costs are properly allocated to ensure that active customers bear their fair share of fixed costs. In the second case, costs must be calculated incrementally, since not all the fixed costs allocated to particular customers will go away with the departing customers. Instead, the fixed costs formerly borne by the departing customers must be spread over those remaining on the utility’s system.
The Commission’s reasoning is both sound and supported by the record.
The City further
argues that the Commission ignored its own precedent. “An agency must either conform to its prior
norms and decisions or explain the reason for its departure from such
precedent.” People’s Natural Gas Co. v.
Here, the Commission referenced a prior annexation case in which it adopted the “incremental avoided costs” approach, and stated there was “nothing in this record demonstrating that this established practice should be rethought and overturned.” See People’s Natural Gas, 342 N.W.2d at 353 (requiring conformance to prior norms and decisions). Quoting the prior annexation case, the Commission stated
On this record, the Commission’s decision to calculate avoided costs incrementally instead of on an allocated basis is reasonably supported in the record and not arbitrary or capricious.
The City also
argues that the Commission erred in its determination of avoided purchased-power
presented expert testimony. The City’s
expert relied on a 2000 rate study, which identified all costs of supplying
observed that at the hearing,
Because the data
to determine the load factor did not exist, and
4. Other Avoided Costs
Commission also concluded that avoided costs should not include costs that the
cooperative is no longer incurring. The Commission
found that the 2000 rate study proposed to be used by the City includes at
least three significant costs the cooperative no longer incurs. Those costs are a one-time special assessment
of $600,000 from Great River Energy (GRE), the generation and transmission
cooperative from which
the City argues that the Commission should have included approximately $51,220
in avoided system-improvement costs associated with operation and maintenance
City argues that the Commission’s decision was unreasonable in awarding the
“largest service territory award in
Stat. § 216B.44 requires that in a contested case regarding compensation
for annexed service territory by a municipal utility, the Commission must
determine the “appropriate value” of compensation. The City claims that because a past
Commission compensation order stated that a compensation award must be
reasonable, an “unreasonable” award must violate due process. By analogy, the City argues the United States
Supreme Court decision in State Farm Mut.
Auto. Ins. Co. v. Campbell, 538 U.S. 408, 426, 123 S. Ct. 1513, 1524
(2003), holding that excessive punitive damage awards violate the Due Process
Clause of the Fourteenth Amendment, protects it against “unreasonable” compensation
awards by the Commission. But it is not
at all clear that municipal corporations, unlike individuals or private
corporations, are “persons” that have standing to assert constitutional due
process rights. See, e.g., City of Sault Ste.
Marie v. Andrus,532 F. Supp. 157, 168 (D.C. Cir. 1980)
(holding that a city is not a “person” within the meaning of the Due Process
Clause of the Fifth Amendment). Because
we hold that the Commission’s award was not arbitrary and capricious and is supported
by substantial evidence in the record, we need not reach the City’s
constitutional claim on the merits.
D E C I S I O N
Because we conclude that the decision of the Commission is supported by the record and is not arbitrary and capricious or unconstitutional, we affirm.
* Retired judge of the district court, serving as judge of the Minnesota Court of Appeals by appointment pursuant to Minn. Const. art. VI, § 10.
 The petition also requested the Commission to
transfer to the City another portion of
 The gross-revenue-multiplier formula calculates revenue loss by multiplying the annual gross revenues by a factor of two or three.
 See In re Application of the City of Buffalo,
A05-1410, 2006 WL 1229596 (
 In re Annexation of a Portion of the
 The term “load factor” expresses the relationship between the amount of electricity consumed at times of peak usage on the system and total amount used.