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In re Application of Minnesota Power

Supreme Court of Minnesota

September 18, 2013

In the Matter of the Application of Minnesota Power for Authority to Increase Rates for Electric Service in Minnesota.

Court of Appeals Office of Appellate Courts

Christopher D. Anderson, Duluth, Minnesota; and Sam Hanson, Thomas Erik Bailey, Elizabeth M. Brama, Briggs and Morgan, P.A., Minneapolis, Minnesota, for appellant ALLETE, Inc. d/b/a Minnesota Power.

Lori Swanson, Attorney General, Karen D. Olson, Deputy Attorney General, Ronald M. Giteck, Ian Dobson, Assistant Attorneys General, Saint Paul, Minnesota, for respondent Residential and Small Business Utilities Division of the Office of the Attorney General.

Jeanne M. Cochran, Assistant Attorney General, Saint Paul, Minnesota, for respondent Minnesota Public Utilities Commission.

Andrew P. Moratzka, Stoel Rives LLP, Minneapolis, Minnesota; and Robert S. Lee, Mackall, Crounse & Moore, PLC, Minneapolis, Minnesota, for respondent Large Power Intervenors.

Richard J. Johnson, Valerie M. Means, Jeff Y. Lin, Moss & Barnett, Minneapolis, Minnesota, for amici curiae Northern States Power Company, Otter Tail Power Company, and Interstate Power and Light Company.

SYLLABUS

1. The Minnesota Public Utilities Commission ("Commission") did not exceed its statutory authority by considering factors other than those listed in Minn. Stat. § 216B.16, subd. 3(b) (2012), to determine whether exigent circumstances were present in this case.

2. Because the factors the Commission identified are supported in the record and, when considered together, created an urgent situation for ratepayers, the Commission did not err in finding that exigent circumstances were present.

3. The Commission's determination of interim rates was supported by substantial evidence.

Affirmed.

OPINION

GILDEA, C.J.

Appellant ALLETE, Inc. d/b/a Minnesota Power ("Minnesota Power") challenges the decision of the Minnesota Public Utilities Commission ("Commission") setting interim rates. Minnesota Power argues that the Commission exceeded its statutory authority and, in the alternative, that the record does not support the Commission's decision. Because we conclude that the Commission did not exceed its authority and that the record otherwise supports the Commission's decision, we affirm.

Minnesota statutes provide the Commission with authority to regulate public utilities in Minnesota, including regulation of the service rates that public utilities charge. See Minn. Stat. §§ 216B.08, 216B.16 (2012). Under this statutory scheme, a public utility cannot change service rates except by filing notice of such rate change with the Commission. Minn. Stat. § 216B.16, subd. 1. On November 2, 2009, Minnesota Power filed a notice with the Commission indicating Minnesota Power's intent to change its service rates. Minnesota Power sought an increase in rates of $80, 885, 213 annually, or approximately 18.9 percent. As part of its submission to the Commission, Minnesota Power also filed a petition for an increase in interim rates. Minnesota Power requested an interim rate increase of $73, 296, 560, or 17.1 percent annually.

Minnesota Power's petition to increase its rates was resolved through a contested case proceeding. After that process, the Commission set Minnesota Power's final rate increase at approximately $53.5 million. Minnesota Power does not challenge that decision. Rather, the challenge here is to the Commission's decision to set the interim rate increase at approximately $48.5 million. Interim rates, which are designed to "protect utilities from the potentially confiscatory effect of regulatory delay, " Henry v. Minn. Pub. Utils. Comm'n, 392 N.W.2d 209, 213 (Minn. 1986), are determined by the Commission in an ex parte proceeding and are effective during the contested case process until the new final rates go into effect. Minn. Stat. § 216B.16, subd. 3. Under Minn. Stat. § 216B.16, subd. 3(b), the interim rate "shall be calculated" using the formula set forth in the statute "[u]nless the commission finds that exigent circumstances exist."[1]

Even though the question of an interim rate increase is an ex parte proceeding, respondents Large Power Intervenors, Boise Inc., and the Residential and Small Business Utilities Division of the Office of the Attorney General ("Attorney General") submitted comments to the Commission generally opposing the amount of Minnesota Power's proposed rate increase. The Attorney General asserted that "no interim rate increase is 'just and reasonable' at this time." The Attorney General based this argument on the "near-record unemployment rates affecting the Minnesota Power service territory" and the fact that Minnesota Power's customers were "entering into the winter electric heating season, combined with the recent imposition of higher rates and the threat of interim rates on top of that."[2]

Along with this outside input, the Commission also had information provided by Commission staff. With respect to the interim rate, the Commission staff included information on Minnesota Power's three prior rate case filings, discussed the cost and non-cost factors that could influence the interim rate determination, and considered the comments filed with the Commission. The staff also analyzed whether there was a basis to find exigent circumstances based on the statutory framework and the Commission's prior practices. In analyzing whether exigent circumstances existed, the staff considered the timing of the rate increase, including the fact that customers were about to get a refund based on overpayment of interim rates during the previous rate case. Additionally, the staff considered the state of the economy and the cost of projects required to maintain reliable service. The staff made no recommendation on whether the Commission should conclude that exigent circumstances under Minn. Stat. § 216B.16, subd. 3(b), were present.

With respect to the amount of the interim rate increase, the staff noted that historically "requests for final rate increases filed by utilities are considerably larger than the final amount approved." Specifically, the staff noted that in Minnesota Power's previous two cases, filed in 2008 and 1994, the final rate increases approved were 45 percent and 56 percent respectively of the requested rates. In a 1987 rate case, however, the final rate approved was approximately double what Minnesota Power had requested. The staff also considered a 2008 rate case filed by Xcel Energy in which the final rate awarded was 58 percent of the requested rate. Based on these figures, the staff noted that there could be a "basis to find exigent circumstances based on the actual experience with [Minnesota Power] rate filings, coupled with the state of the economy." The staff then suggested that the Commission could "limit the interim rate increase to approximately 60% of [Minnesota Power's] $81 million request for final rate increase, " resulting in an interim rate increase of approximately $48 million, or 11.3 percent more than the previously established rate. Ultimately, however, the staff made no recommendation regarding the amount of the interim rate increase.

The Commission issued an order on December 30, 2009, rejecting Minnesota Power's request for a $73, 296, 560 interim rate increase, and instead setting the interim rate increase at $48, 531, 128, or approximately 60 percent of Minnesota Power's final rate request. The Commission noted Minnesota Power's right to recover its cost of service and earn a fair rate of return. The Commission also discussed the statutory refund provision that allows utility customers to receive refunds of interim rates paid where the final rate is lower than the interim rate. See Minn. Stat. § 216B.16, subd. 3(c). Ultimately, however, the Commission determined that the statutory refund "may not make some ratepayers whole" because "[h]ouseholds and businesses struggling under the current adverse economic conditions—especially given the magnitude of this rate increase and its nearness in time to the last rate increase—may face economic deprivations, business losses, and even disconnections that an eventual refund would not redress."

The Commission found, therefore, that the economic conditions combined with the magnitude of the rate increase and the proximity to the previous year's rate increase consituted "exigent circumstances." Consequently, the Commission concluded that "the most reasonable and equitable course of action" was to reduce Minnesota Power's "interim rate increase to $48, 531, 128."

In response to the Commission's order, Minnesota Power filed a letter with the Commission objecting to the Commission's finding of exigent circumstances and reduction in the requested interim rate. Minnesota Power argued that in reducing the interim rate, the Commission violated due process by prejudging the merits of Minnesota Power's rate request before conducting an evidentiary hearing. Minnesota Power further contended that the Commission had arbitrarily considered only certain past rate cases, relied on factors outside the proposed test year cost-based statutory formula, and violated environmental policy directives by denying Minnesota Power the means to fully recover mandatory expenditures. Minnesota Power asked the Commission to immediately reconsider its interim rate decision and grant the full interim rate request. The Commission did not reconsider its interim rate decision.

Approximately 11 months later, on November 2, 2010, the Commission issued its final order on Minnesota Power's application, ultimately setting the final rate increase at $53, 530, 424 annually. The final rate was approximately $27.3 million less than Minnesota Power requested but approximately $5 million more than the interim rate approved by the Commission. In response, Minnesota Power filed a petition for reconsideration requesting, among other items, "reconsideration of the Commission's decision that exigent circumstances warranted a reduction in [Minnesota Power's] right to interim rate recovery." The Commission denied the petition for reconsideration.

Following the denial of its petition for reconsideration, Minnesota Power sought certiorari review with the Minnesota Court of Appeals. The court of appeals affirmed. In re Minn. Power, 807 N.W.2d 484, 490-91 (Minn.App. 2011). The court ruled that "the commission did not err in finding exigent circumstances" and "properly exercised its discretion to set interim rates." Id. The court held that under the plain language of Minn. Stat. § 216B.16, subd. 3, the statutory formula does not apply when the Commission finds that exigent circumstances exist because the statute creates an exigent circumstances exception to the statutory formula. Minn. Power, 807 N.W.2d at 489. The court further concluded that neither the statute nor Minnesota case law specifically defines "exigent" and that, therefore, the Commission may exercise its discretion to find exigent circumstances unrelated to the statutory formula. Id. at 490. Finally, the court concluded that the Commission "did not err in finding exigent circumstances, and then properly exercised its discretion to set interim rates." Id. at 490-91. We granted Minnesota Power's petition for review.

When considering decisions of administrative agencies made in contested cases, we "may reverse or modify" an agency's decision "if the substantial rights of the petitioners may have been prejudiced because the administrative" determination was:

(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.

Minn. Stat. § 14.69 (2012).[3] Minnesota Power generally argues that the Commission's determination of exigency must be reversed because the Commission exceeded its statutory authority under Minn. Stat. § 216B.16, subd. 3(b), when it considered non-cost factors in determining that exigent circumstances exist. Minnesota Power also argues, in the alternative, that even if Minn. Stat. § 216B.16, subd. 3(b), permits the Commission to examine non-cost factors, the Commission's conclusion that exigency existed was erroneous. We consider each argument in turn.

I.

We turn first to Minnesota Power's argument that the Commission exceeded its authority under Minn. Stat. § 216B.16, subd. 3(b). We may "reverse an agency decision if the decision was affected by an error of law." N. States Power Co. v. Minn. Pub. Utils. Comm'n, 344 N.W.2d 374, 377 (Minn. 1984). We apply the de novo standard of review to the question of whether the Commission has exceeded its statutory authority. In re Qwest's Wholesale Serv. Quality Standards, 702 N.W.2d 246, 259 (Minn. 2005); Minnegasco v. Minn. Pub. Utils. Comm'n, 549 N.W.2d 904, 907 (Minn. 1996). We "resolve any doubt about the existence of an agency's authority against the exercise of such authority." In re Qwest's, 702 N.W.2d at 259.

Under Minn. Stat. § 216B.16, subd. 3(b),

[U]nless the commission finds that exigent circumstances exist, the interim rate schedule shall be calculated using the proposed test year cost of capital, rate base, and expenses, except that it shall include: (1) a rate of return on common equity for the utility equal to that authorized by the commission in the utility's most recent rate proceeding; (2) rate base or expense items the same in nature and kind as those allowed by a currently effective ...

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