Case Title: Southwest Gas Corp. v. Public Utilities Commission of Nevada

Citation: 138 Nev. Adv. Op. No. 5

Docket Number: 

State: nevada

Court: Nevada Supreme Court

Date: 2022-02-17T00:00:00Z

Document:
es

138 Nev., Advance Opinion 5
IN THE SUPREME COURT OF THE STATE OF NEVADA

   
  
  

SOUTHWEST GAS CORPORATION, No. 80911
Appellant,

vs.

PUBLIC UTILITIES COMMISSION OF FILED
NEVADA; AND STATE OF NEVADA, :

BUREAU OF CONSUMER FEB 17 2022
PROTECTION, Sze poy
Respondents. ee ee nee

 
   
 

a

Appeal from a district court order denying a petition for judicial
review in a public utilities general rate case. Eighth Judicial District Court,
Clark County; William D. Kephart, Judge.

Affirmed.

 

 

Lewis Roca Rothgerber Christie LLP and Daniel F. Polsenberg, Joel D.
Henriod, and Abraham G. Smith, Las Vegas,
for Appellant Southwest Gas Corporation.

Aaron D. Ford, Attorney General, and Whitney F. Digesti, Ernest D.
Figueroa, Mark J. Krueger, and Michelle C. Newman, Deputy Attorneys
General, Carson City,

for Respondent State of Nevada, Bureau of Consumer Protection.

Public Utilities Commission of Nevada and Matthew S. Fox and Garrett C.
Weir, Carson City,
for Respondent Public Utilities Commission of Nevada,

Holland & Hart LLP and Laura K. Granier and Erica K. Nannini, Reno,
for Amicus Curiae Nevada Resort Association.

 
BEFORE THE SUPREME COURT, EN BANC.

OPINION
By the Court, STIGLICH, J.

Private entities operate Nevada's public utilities, but a public
commission sets the maximum rates they can charge for their retail
services, subject to judicial review. Here, a utility provider attempted to
recover its expenses and sought an increased rate of return on equity (ROE),
but the commission questioned several seemingly inappropriate charges for
which the utility requested compensation. The commission determined that
the utility did not justify the expenses it sought to recover, and as a result,
the commission denied the utility's request for reimbursement and set a
return on equity lower than what the utility had requested. The utility
challenges the commission's determination and rate setting, contending
that it enjoys a presumption of prudence with the expenses it submits to the
commission and that the commission’s rate setting did not adhere to due
process requirements

In this appeal, we hold that utilities do not enjoy a presumption

of prudence with respect to the expenses they incur; rather, the util

 

ity must
show that the expenses were prudently incurred. Next, we decline to adopt
the constitutional-fact doctrine, which would require this court to review
agency decisions de novo when a regulated party's constitutional rights are
implicated. Thereafter, we determine that the commission's rate-setting
procedures met due process requirements and that the ROE the PUC
selected was not a confiscatory taking. Finally, we conclude that the
‘commission's decision to disallow the utility to recover certain project

expenses and additional pension expenses is supported by substantial

 

 
 

evidence in the record. Since we hold that the commission's decision was
neither clearly erroneous nor constitutionally infirm, we affirm the district
court order denying judicial review.
BACKGROUND
Southwest Gas Corporation (SWG) provides natural gas to

 

customers in Nevada. It is regulated by the Public Utilities Commission of
Nevada (PUC). In May 2018, SWG filed a general rate application with the
PUG, seeking to increase the service rates it charges to customers. In its
application, SWG sought a rate that would allow it to recover, among other
things, the costs of five software upgrade projects, adjusted pension
expenses, and a 10.30% ROE.

With respect to the projects, the PUC Regulatory Operations
Staff found numerous issues. Staff determined SWG’s documentation

  

demonstrated a lack of proper financial oversight. Among the many
questionable expenses SWG submitted were items and services including:
tens of thousands of dollars in consultant costs, airfare, lodging, car rentals,
non-travel meals and entertainment, seminar fees, vouchers for biweekly
massages, bartender costs, Apple Mac computers and multiple Apple iPads,
‘a golf course membership, a home theater system, a digital piano,
headphones, dozens of polo shirts, and a gas grill—all of which Staff
determined were not adequately explained by SWG. Staff asserted that the
audit led them to “question the reasonableness of all of the costs” associated
with the projects, and as a result, Staff recommended that the PUC disallow
50% of the total project costs.

‘SWG filed the direct testimony of SWG Regulatory Professional
Randi Cunningham in support of these projects, which included an exhibit
that provided a brief summary of each work order and its total cost, but did
not break down the costs within each work order. SWG also presented

3

 
rebuttal testimony of SWG Vice President of Information Services Ngoni
Murandu. He testified that, while Staff accurately identified a small
number of costs that should not have been included in the application, those
errors did not rise to the level of an “extreme lack of oversight” that would
justify disallowing half the costs of the projects. Mr. Murandu noted that
the improper expenditures were removed and that SWG was no longer
seeking recovery for them. He testified that the overall budget was
reasonable based on independent estimates from PricewaterhouseCoopers
(SWG's external accountant), a survey of industry peers, and responses to
the company’s Request for Proposals. Mr. Murandu contended that Staff's
goal of “sendfing) a clear directive to SWG senior management” by
recommending that the PUC disallow 50% of the project costs was
inappropriately punitive.

As to pension expenses, SWG proposed a pension tracker to
address the volatility in pension costs. A pension tracker is a ratemaking
tool that tracks the gap between projected pension expenses included in
rates and the expenses actually incurred by a utility provider. Christy
Berger, an SWG Regulatory Professional, testified that pension costs had
fluctuated substantially throughout the years based, in large part, on
changes in the discount rate. The Bureau of Consumer Protection (BCP)
raised concerns that a pension tracker would not incentivize SWG to control
pension costs. Staff proposed a five-year normalization, or averaging of
pension expenses, to address volatility.

'SWG also proposed reducing the discount rate used to calculate
‘the amount that it must now set aside to fund its future pension obligations
from 4.50% to 3.75%. Between 2011 and 2017, SWG never used a discount

rate lower than 4.25%. At the hearing, Ms. Berger was unable to explain

 

 
how SWG justified the decreased discount rate and stated that SWG could
not produce any other witnesses who had such knowledge.

Additionally, regarding the ROE, or the percentage that
ies are permitted to earn on equity investments, SWG sought 10.30%,

 

ul
presenting two financial analysts to provide direct testimony in support of
its proposition. Staff, on the other hand, presented an economist who
recommended a lower ROE of 9.40%. BCP recommended an ROE of 9.30%.
Overall, SWG recommended establishing an ROE within the range of
10.00% to 10.50%, Staff recommended a range of 9.10% to 9.70%, and BCP
recommended a range of 9.00% to 9.50%.

‘The PUC made several determinations regarding SWG’s
application. First, the PUC ruled that SWG does not enjoy a presumption
of prudence with respect to its expenditures. The PUC explained that under
NAC 703.2331, the utility bears the burden of proof in demonstrating that
its proposed rate changes are just and reasonable. It further explained that
“{a] rate cannot be just or reasonable if it is established for the purpose of
allowing the utility to recover costs that were not prudently incurred.”
Ultimately, the PUC found that SWG inadequately supported the prudence
of its project expenses by failing to present capable witnesses in its
affirmative case-in-chief, and thus the PUC disallowed 100% of the costs
SWG submitted. The PUC stated that the only evidence supporting SWG's
project expenses on direct testimony was testimony from Ms. Cunningham,
who admitted that she had “no personal knowledge to support the
underlying cost data.”

Next, the PUC rejected SWG's proposed change in the pension

discount rate, directing SWG to recalculate its pension costs consistent with
the previous discount rate of 4.50%. The PUC further rejected SWG's

 

 
od

 

request to establish a tracking mechanism to address volatility, instead
‘opting for the expense normalization procedure proposed by Staff, albeit
with a three-year period instead of the recommended five-year period.
Lastly, the PUC adopted the Staff recommendation of a zone of
reasonableness for the ROE from 9.10% to 9.70%, settling on a rate of 9.25%.

‘SWG sought reconsideration of the ruling on the presumption
of prudence and the findings regarding the project expenses, the pension
expenses, and the ROE. The PUC affirmed its decisions, rejecting SWG’s
claim that it did not receive due process with respect to the pension
expenses, since SWG had the opportunity to provide testimony from a
capable witness on the pension costs and did not do so.

SWG thereafter petitioned the district court for judicial review.
Its petition presented two overarching issues: (1) whether the presumption
of prudence applies to utilities in rate cases and should be used to determine
its recovery of project and pension expenses, and (2) whether the PUC
denied SWG procedural due process by depriving it of notice and the
opportunity to present evidence in opposition to the normalization of its
pension expenses, by sua sponte asking questions about the discount rate,
and by choosing an ROE lower than Staff or the BCP requested. SWG's
Petition stated that the district court should apply NRS 703.373(11)s
clearly erroneous standard of review. The district court affirmed the PUC’s
order. This appeal followed.

DISCUSSION

‘Standard of review
On appeal from an order denying a petition for judicial review,

this court will uphold the PUC’s decision if it is supported by substantial
evidence in the record and is not clearly erroneous, and we review pure legal
issues de novo. NRS 703.373(11); Nev. Power Co. v. Pub. Utils. Comm'n,

6

 
one

 

122 Nev. 821, 834, 138 P.3d 486, 495 (2006). We do not “reweigh the
evidence or substitute our judgment for that of the [PUC] on factual
questions.” Nev. Power Co., 122 Nev. at 834, 138 P.3d at 495; see also NRS
703.373(11). When an agency's conclusions of law are “closely related to the
agency's view of the facts, [they] are entitled to deference, and will not be
disturbed if they are supported by substantial evidence.” Assoc. Risk
Mgmt., Inc, v. Ibanez, 136 Nev., Adv. Op. 91, 478 P.3d 372, 374 (2020); see
also Father & Sons & A Daughter Too v. Transp. Servs. Auth. of Nev., 124
Nev. 254, 259, 182 P.3d 100, 104 (2008). “The burden of proof is on the
petitioner to show that the final decision is invalid pursuant to [NRS
703.373(11)].” NRS 703.373(9).
Nevada does not recognize the constitutional-fact doctrine

To ensure that the PUC’s established rate is not
unconstitutionally confiseatory, SWG asks this court to apply the
constitutional-fact doctrine and review the PUC’s factual determinations
underlying its rate decision de novo. In Ohio Valley Water Co. v. Borough
of Ben Avon, the United States Supreme Court held that a judicial tribunal
must make its determination “upon its own independent judgment as to
both law and facts” when a public utility claims a potential confiscation of
its property through a regulatory agency's overly low property valuation,
leading to an unreasonably small return. 253 U.S. 287, 289 (1920). The
Court in Ben Avon ruled that de novo judicial review was required to
comport with the Due Process Clause of the Fourteenth Amendment in such
instances. Id.

While the Supreme Court has not expressly overruled Ben
Avon, Ben Avon deviated from the Supreme Court practice at the time. E.g.,
S. Pac. Co. v. Campbell, 230 U.S. 537, 552 (1913) (providing that a reviewing

court should not “substitute its judgment for that of the commission, or

 
determine the matters which properly [fall] within the province of that
body”). Similarly, since it decided Ben Avon, the Court has frequently
deviated from the constitutional-fact doctrine and has deferred to agency
determinations. See, e.g., Ala. Pub. Serv. Comm'n v. 8. Ry. Co., 341 U.S.
341, 348 (1951) (“It is now settled that a utility has no right to relitigate
factual questions on the grounds that constitutional rights are involved.”);
RR. Comm'n of Tex. v. Rowan & Nichols Oil Co., 311 U.S. 570, 576 (1941)
(“IT]he Due Process Clause does not require the feel of the expert to be

 

supplanted by an independent view of judges on the conflicting testimony
and prophecies and impressions of expert witnesses.”). The Court clarified
that “there is a strong presumption in favor of the conclusions reached by
an experienced administrative body after a full hearing.” St. Joseph Stock
Yards Co. v. United States, 298 U.S. 38, 53 (1936) (quoting Darnell v.
Edwards, 244 U.S. 564, 569 (1917). Indeed, the constitutional-fact
doctrine has “provoked much criticism, and it has largely faded from federal
administrative litigation.” 33 Charles Alan Wright et al., Federal Practice
& Procedure § 8439 (2d ed. 2018) (footnote omitted); see also Adam Hoffman,
Corralling Constitutional Fact: De Novo Fact Review in the Federal
Appellate Courts, 50 Duke L.J. 1427, 1449 (2001) (“lJJurisdictional fact
review (has] disappeared from American administrative law.”). Other state
courts have declined to apply Ben Avon to prevent their courts from being
“overburdened with parallel determination of disputes already decided by
agencies of tested proficiency in the administrative field.” N.Y. Tel. Co. v.

4St. Joseph Stock Yards noted, however, that this presumption runs
aground and the reviewing court may exercise independent review where
the “evidence clearly establishes that the findings are wrong.” 298 U.S. at
52.

 

 
Pub. Serv. Comm'n, 320 N.Y.S.2d 280, 286 (App. Div. 1971); accord Haynes
Pines Water Co. v. Idaho Pub. Utils. Comm'n, 834 P.2d 873, 876 (Idaho
1992); Pub. Serv. Comm'n v. Gen. Tel. Co. of the Se., 555 S.W.2d 395, 402
(Tenn. 1977).

Consistent with our jurisprudence, we, too, decline to apply the
constitutional-fact doctrine, as sought in this case. See, e.g., Nev. Power Co.,
122 Nev. at 834, 138 P.3d at 495 (applying a deferential standard of review
to factual determinations in a PUC decision); Nev. Power Co. v. Pub. Serv.
Comm'n, 91 Nev. 816, 818, 544 P.2d 428, 430 (1975) (same); Sw. Gas Corp.
v. Pub. Serv. Comm'n, 86 Nev. 662, 667, 474 P.2d 379, 382 (1970) (same).
Indeed, we have already declined to “enlarge the scope of judicial review” to
conduct de novo review of agency action where a party alleges a confiscation
of its property. Urban Renewal Agency v. Iacometti, 79 Nev. 113, 120, 379
P.2d 466, 469 (1963) (“Involvement of the power of eminent domain does
not, as respondents contend, serve to enlarge the scope of judicial review of
,

A deferential standard of review is particularly important in a

action by a governmental body . .

 

ratemaking case. Determining rates is arguably a unique decision that does
not fall neatly into traditional categories of findings of fact, conclusions of
law, or even mixed questions of law and fact. Rather, within broad
constitutional limits, “[tJhe methods used by a regulatory body in
establishing just and reasonable rates of return are generally considered to
be outside the scope of judicial inquiry.” Nev. Power Co., 91 Nev. at 826,
544 P.2d at 435; cf: Duquesne Light Co. v. Barasch, 488 U.S. 299, 313 (1989)
(stating that a utilities commission is “essentially an administrative arm of
the legislature”). And even where a court can disentangle salient facts from

the PUC’s order, it is ill-equipped to handle the complex financial analysis

 

 
 

therein. See generally Duquesne Light, 488 U.S. at 314 (“The economic
judgments required in rate proceedings are often hopelessly complex and do
not admit of a
adjudicate ratemaking cases that the judiciary—both district courts and
this court—lacks.

Therefore, we decline to disturb our well-settled standards

gle correct result.”). Put simply, the PUC has expertise to

 

‘governing judicial review of agency action to apply a doctrine that deviated
from existing Supreme Court jurisprudence when it was promulgated, has
been squarely contradicted by later cases, and has faded from use in
administrative litigation. We thus move on to review SWG’s merits
arguments.
‘The PUC’s order is valid as to its project and pension determinations

‘SWG was not entitled to a rebuttable presumption of prudence

Next, SWG argues that the PUC erred by failing to apply a
rebuttable, burden-shifting “presumption of prudence” with respect to its
project and pension expenses, pursuant to Nevada Power Co., 122 Nev. at
834-36, 138 P.3d at 495-96, and Public Service Commission v. Ely Light &
Power Co., 80 Nev. 312, 393 P.2d 305 (1964).

Nevada Power Co. concerned a deferred energy accounting case,
in which the PUC can adjust a utility's rates on the narrow basis of changes
ity pays. See id. at 824-25, 138 P.3d at 488,
In 1999, Nevada Power entered into negotiations to purchase wholesale

 

in the wholesale prices the

electricity at prices well below market rates, but the negotiations failed due
to a disagreement in price terms. Jd. at 827, 138 P.3d at 490-91. Nevada
Power's subsequent energy purchases from a different provider left it with
excess off-peak power. Id. at 829, 138 P.3d at 491. Instead of promptly
selling the excess power, Nevada Power held onto it for almost a year, at
which point the resale value had greatly decreased. Id. It later sought to

10

 
recover these costs from consumers. Id. at 826, 138 P.3d at 490. The PUC
found that Nevada Power's aforementioned decisions were imprudent and
disallowed recovery of $437 million in expenses. Id. at 826-27, 138 P.3d at
490.

 

This court reversed the PUC’s order, holding that “a utility
requesting a customer rate increase enjoys a presumption that the expenses
reflected in its deferred energy application were prudently incurred and
taken in good faith.” Id. at 834-35, 138 P.3d at 495. It explained that the
party challenging an expenditure must overcome the presumption of
prudence with evidence showing “a serious doubt” regarding the prudence
of the utility's expense. Jd, at 835, 138 P.3d at 495-96. After the
presumption has been overcome, the utility must present evidence showing
that the expenditure was prudent. Id. at 835, 138 P.3d at 496. This court
drew this framework from Re Nevada Power Co., 74 P.U-R.4th 703 (Nev.
P.S.C. 1986), an earlier PUC opinion that adopted the presumption of
prudence utilized by the Federal Energy Regulatory Commission (FERC).
Td, at 834-35, 138 P.3d at 495-96; see also Re Midwestern Gas Transmission
Co., 64 P.U-R.Ath 508, 510 (F.E.R.C. 1985); Re Minn. Power & Light Co., 11
FERC 1 61312, 61645 (F.E.RC. 1980).

We determine that SWG's contention that Nevada Power Co.
provides that it enjoys a presumption of prudence in this context fails.
‘Nevada Power Co. applied the presumption of prudence to a deferred energy
accounting case, as distinguished from the general rate case at issue here.

"In a deferred energy accounting case, the PUC can adjust a utility's
rates on the narrow basis of changes in the wholesale prices the utility pays,
without the detail and expense of a general rate case covering other types
of expenditures. NRS 704.185; Nev. Power Co., 122 Nev. at 824-25, 138 P.3d
at 489.

 

 
Nev. Power Co., 122 Nev. at 834-35, 138 P.3d at 495-96. Further, the
Nevada Legislature subsequently and promptly abrogated Nevada Power
Co.'s holding by statute, removing the presumption of prudence in deferred
energy accounting cases entirely. See 2007 Nev. Stat., ch. 163, § 1(3), at 551

(ABD.

 

Nor did Ely Light create or recognize such a presumption.
‘There, this court found it was improper for the PUC to substitute its
judgment for that of management as to how much should be paid in
pensions. See 80 Nev. at 323, 393 P.2d at 311 (PUC noting that “It]he plan,
as explained by the Company, is an employee retirement program which

costs approximately 15% of total wages paid. .. . (TIhis Commission feels

 

that for the Company to pay such a high cost for the plan is not in the best,
interest of the rate payers”), While Ely Light observed a “presumption of
the proper exercise of judgment by the utility in matters which are
particularly a function of management,” it did not presume that a utility's
expenses were prudently incurred. Id. at 324, 393 P.2d at 311. Rather,
because the decision to have a pension plan was within the sound judgment
of the utility, Ely Light held that the utilities commission should review the
utility’s pension expenditures to determine whether the utility abused its
discretion; whether inefficiency, improvidence, or a lack of good faith have
been shown; and whether the costs are reasonable. Id. Stated

 

ifferently,
Ely Light did not establish a presumption of prudence with respect to the
specific pension expenses the utility incurred, but rather prohibited the

PUC from second-guessing the utility's business decision to offer a pension
plan at all. Id. Accordingly, Ely Light does not show that the presumption
of prudence applies in Nevada.

 

 
In the absence of statutory authority or precedent, we decline
to adopt a presumption of prudence in this case. ‘The current regime, by
which the utility must demonstrate the prudence of the expenses it seeks to
recover, makes sense. The PUC protects Nevada ratepayers from paying
for imprudently incurred expenses. See Olivia Chap, Note, Cost-of Service
Ratemaking and Labor Costs: Expanding the “Just and Reasonable”
Standard to Close the Gender Pay Gap in the Energy Industry, 11 Geo.
Wash. J. Energy & Envtl. L. 67, 72 (2021) (“One way to prevent public

 

utilities from abusing their power and charging overpriced fees has been for

 

 

PUCs to oversee the rates util

 

charge for [the utilities’) service[s} . .
(internal footnotes omitted). Indeed, utilities are granted monopolies over
their services in exchange for this oversight. See Topaz Mut. Co. v. Marsh,
108 Nev. 845, 854, 839 P.2d 606, 611 (1992) (“Because utilities have a
monopoly on a necessary service, they are regulated to protect the
ratepayers, the public, and the parties who transact business with them.”),
Lina Khan, Note, Amazon's Antitrust Paradox, 126 Yale L.J.710, 797 (2018)
(“It was precisely because essential network industries often required scale
that unregulated private control over [public utility] sectors often led to
abuse of monopoly power.”). ‘The utility has the information necessary to
display the prudence of its expenses; the current framework merely requires
them to submit these records. Flipping the burden to intervenors or to the
PUC to raise a “serious doubt” would be impracticable. An intervenor does
not know what it cannot know, and a third party may not have the
documents necessary to raise such doubt about the utility's expenditures.
Imposing such a burden, even when an intervenor or the PUC could possibly
obtain documentation sufficient to raise a “serious doubt,” would lead to an

unnecessary delay in the PUC’s deliberations and makes little sense when

 

 
the utility could readily provide such documentation. In other words, the
utility is best positioned to prove the prudence of the expenses it incurs.
And if the PUC rejects the utility’s expenditures in an arbitrary and
capricious manner that is not supported by substantial evidence in the
record, the utility may petition the courts for review. NRS 703.373(11); Nev.
Power Co., 122 Nev. at 834, 138 P.3d at 495.4 We therefore decline to adopt
a presumption of prudence that would disturb the current regulatory
regime.
PUC's rate-setting procedures conformed to due process requirements
SWG contends that it was denied procedural due process
because it was deprived of the opportunity to submit testimony or other
evidence challenging the PUC’s decision to normalize and reduce pension
expenses. SWG also asserts that the PUC’s decision to adopt a three-year
normalization was arbitrarily designed to deprive it of recovery in a high-
cost year. It further argues that the PUC violated due process by
independently questioning SWG’s proposed discount rate at the hearing,

Time is of the essence in general rate cases. NRS 704.110(2) requires
the PUC to adjudicate a general rate application within 210 days after the
utility files its application,

“Placing the burden fully on the utility to demonstrate prudence is
also consistent with existing regulations, which require the utility to
“ensure that the material it relied upon is of such composition, scope and
format that it would serve as its complete case if the matter is set for
hearing.” NAC 703.2231; see also NAC 703.2325 (providing that
“adjustments [to the rate base) must be fully and clearly explained in the
supporting material submitted” with the application).

 

‘We decline to consider SWG’s contention that a presumption of
prudence is a constitutional requirement because it did not cogently argue
this point or support it with salient authority. See Edwards v. Emperor's
Garden Rest., 122 Nev. 317, 330 n.38, 130 P.3d 1280, 1288 n.38 (2006).

 

 
oo

 

selecting a zone of reasonableness from 9.10% to 9.70%, and choosing an
ROE lower than either SWG, BCP, or Staff requested. We review these
constitutional claims de novo. Eureka County v. Seventh Judicial Dist.
Court, 184 Nev. 275, 279, 417 P.3d 1121, 1124 (2018).

Procedural due process “requires notice and an opportunity to
be heard.” Callie v. Bowling, 123 Nev. 181, 183, 160 P.3d 878, 879 (2007)
(quoting Maiola v. State, 120 Nev. 671, 675, 99 P.3d 227, 229(2004)). Notice
must be provided at the appropriate stage so that parties can provide
“meaningful input in the adjudication of their rights.” Eureka County, 134
Nev. at 280, 417 P.3d at 1125.

‘The record is clear that SWG had n

 

and the opportunity to
present its case on the normalization issue. This issue was raised in the
prefiled direct testimony, and yet SWG did not sufficiently address it in
either direct testimony or in rebuttal at the hearing. Put differently, SWG
had notice that the PUC would consider normalization and was afforded the
opportunity to argue against it at the hearing, but it did not avail itself of
this opportunity. Nor did the PUC deprive SWG of the opportunity to
explain its reduction in the discount rate. When Ms. Berger, the SWG
Regulatory Professional, was asked at the hearing how SWG determined
the discount rate, she merely stated that this decision was made in
conjunction with an actuary, that she could not provide any further
information on the discount rate, and that SWG had no other witnesses who
could do so, Therefore, these due process claims fail because SWG was
provided both “notice and an opportunity to be heard” with respect to both
the normalization issue and the discount rate. See Callie, 123 Nev. at 183,
160 P.3d at 879.

15

 
on

 

It is also clear that the PUC’s decision to adopt a three-year

 

normalization was justified and neither arbitrary nor capricious. It makes
sense that the PUC would adopt a normalization procedure for the first time
in response to a significant fluctuation. The nature of averaging means that
SWG will be somewhat undercompensated in high-cost years but
correspondingly overcompensated in low-cost years, as long as the method
is consistent. To be sure, if the PUC were to switch back to a one-year model
in a subsequent rate case when costs are lower—thus denying recovery
entirely for the high-cost years—then under Duquesne Light, the PUC’s
conduct might be arbitrary and capricious. See 488 U.S. at 315 (“[Al State’s
decision to arbitrarily switch back and forth between methodologies in a
way which required investors to bear the risk of bad investments at some
times while denying them the benefit of good investments at others would
raise serious constitutional questions.”). But the record before us evinces
no such conduct from the PUC that would amount to a violation of SWG's
constitutional rights

Nor did the PUC err by independently inquiring about the
proposed discount rate, The PUC is not restricted to considering only the
issues presented by the parties. NRS 704.440, for example, empowers the
PUC to “investigate and ascertain the value of all property of every public
utility.” (Emphasis added.) As the Supreme Court of New Jersey has
explained, utility commissions have a “duty to go behind the figures shown
by the companies’ books and get at realities.” Petition of Pub. Serv.
Coordinated Transp. v. State, 74 A.2d 580, 591-92 (N.J. 1950). If neither
Staff's recommendation nor the utility's recommendation is supported by
the evidence, it would be error for the PUC to uncritically adopt either one.

 

See id. Likewise, here, the PUC properly went beyond the parties’ briefing

16

 
and asked clarifying questions about the discount rate—a change which
‘SWG proposed but did not support with adequate witness testimony—and
when SWG was unable to support the change in the rate, the PUC denied
that change.

Similarly, SWG's claims regarding the ROE fe
zone of reasonableness between 9.10% to 9.70%, the PUC considered, inter
alia, the parties’ expert testimony and SWG’s circumstances, such as its

 

. In selecting

capital structure and risk profile. Far from being arbitrary, therefore, the
PUC's selected zone of reasonableness is supported by substantial evidence
in the record. See NRS 703.373(11\(e); see also Nev. Power Co., 122 Nev. at
834, 138 P.3d at 495 (noting that this court does not “reweigh the evidence
‘or substitute our judgment for that of the [PUC] on factual questions”).
Likewise, SWG’s claim that the PUC’s selection of an ROE was arbitrary
and capricious falls short. The PUC was free to fix any ROE within the
range of reasonableness and permissibly settled on a rate of 9.25% after
balancing the interests of ratepayers and shareholders. See Fed. Power
Comm'n v. Nat. Gas Pipeline Co. of Am., 315 U.S. 575, 585-86 (1942)
(establishing that a regulatory commission is free to fix a rate within the
zone of reasonableness). We therefore conclude that SWG has not shown a
procedural due process violation in this regard.®
The rate of return was not a confiscatory taking

We next consider SWG's contention that the PUC’s selection of

a 9.25% ROE amounted to an unconstitutional taking because the ROE was

*SWG contends that the PUC’s selected range of reasonableness and
ROE present takings claims because the PUC's decision-making was
arbitrary and capricious. Since we reject that the PUC's selections were
arbitrary and capricious here, we need not consider the same allegations
when presented as takings claims.

 

 
 

not “equal to that generally being made at the same time and in the same
general part of the country on investments in other business undertakings
that are attended by corresponding risks and uncertainties.” Cf. Bluefield
Waterworks & Imp. Co. v. Pub. Serv. Comm'n, 262 U.S. 679, 692-93 (1923).7

“The Constitution protects the utility from the net effect of the
rate order on its property” and not from procedural errors “compensated by
countervailing factors in some other aspect.” Duquesne Light, 488 US. at
314; see Nat. Gas Pipeline Co., 315 U.S. at 586. In considering the net effect,
the inquiry is “whether ‘the return to the equity owner [is] commensurate
with returns on investments in other enterprises having corresponding
risks,’ and whether the return was ‘sufficient to assure confidence in the
financial integrity of the enterprise, so as to maintain its credit and to
attract capital.” In re Permian Basin Area Rate Cases, 390 U.S. 747, 790-
91 (1968) (quoting Fed. Power Comm'n v. Hope Nat. Gas Co., 320 U.S. 591,
603 (1944)); see also Bluefield, 262 U.S. at 692 (1923) (“A public utility is
entitled to such rates... equal to that generally being made at the same
time and in the same general part of the country on investments in other
business undertakings which are attended by corresponding, risks and
uncertainties.”)

We determine that SWG’s claim lacks merit. Consistent with
the constitutional requirement that return be measured against returns on
investment earned by “other enterprises having corresponding risks,” the

parties used an agreed-upon proxy group of other utilities to compare ROEs.

"To the extent that SWG contends that the PUC’s denial of its project.
expenses was a confiscatory taking, we conclude that it did not
appropriately develop this argument and therefore decline to consider it.
Edwards, 122 Nev. at 330 n.38, 130 P.3d at 1288 n.38.

18

 
oom

 

‘See Hope Nat. Gas, 320 US. at 603; Bluefield, 262 U.S. at 6928 The PUC
determined that the evidence presented—for example, that SWG’s credit
rating had improved since its last general rate case—did not support a
finding that SWG faces higher risks than the proxy group and that an ROE
0f 9.25% is sufficient to ensure SWG’s ability to attract capital. We conclude
that the PUC’s determination is supported by substantial evidence in the
record and defer to its judgment. See NRS 703.373(11Xe); Nev. Power Co.,
122 Nev. at 834, 138 P.3d at 495. Since the PUC’s findings demonstrate
that the 9.25% ROE is commensurate with other utilities with
corresponding risks and maintains SWGs ability to attract capital, we
conclude that the ROE was not an unconstitutional taking. Cf: Permian
Basin, 390 U.S. at 790-91.

The PUC's decision to disallow SWG to recover its project and pension
expenses is supported by substantial evidence in the record

Having declined to adopt a presumption of prudence and having
established the constitutionality of the PUC’s rate-setting, we next consider
whether the PUC’s decision to disallow SWG to recover its project and
pension expenses is supported by substantial evidence in the record,

Here, Staff showed, and SWG conceded, that at least some of
the expenses in the challenged work orders should not have been included.
‘SWG submitted scant evidence substantiating the projects’ work order
expenses in its case-in-chief. On direct testimony, SWG presented the
testimony of Ms. Cunningham, who the PUC determined possessed no
“personal knowledge to support the underlying cost data of any of the
itemized work order projects included in her testimony.” SWG also provided

"In fact, SWG selected the proxy group, which the BCP and Staff
thereafter utilized in their models and analyses.

19

 
 

the rebuttal testimony of Mr. Murandu, which the PUC gave minimal
weight because he was not employed by SWG until after the projects were
closed.? The PUC determined that SWG presented no witnesses who were
directly involved in the execution of the projects or who could explain the
‘company’s basis for incurring costs. As noted above, the PUC was not bound
to allow for 50% of the project expenses (Staff's recommendation) or 100%
(SWG’s request), and so the PUC was within its discretion to deduct all of
the submitted project expenses. See Petition of Pub. Serv. Coordinated
Transp., 74 A.24 at 591-92,

Nor did SWG provide evidence to support its significant

 

proposed change to the discount rate. As noted above, Ms. Berger
acknowledged at the hearing that SWG had not used a discount rate lower
than 4.25% between 2012 and 2017, and that SWG reduced the rate from
4.50% to 3.75% in 2018. However, she was unable to explain how SWG
made the decision to significantly reduce the discount rate, and SWG did
not present any other witnesses who could justify such reduction.

‘We will not overturn the PUC’s factual conclusions unless they
are clearly erroneous. See NRS 703.373(11Xe); see also Nev. Power Co., 122
Nev. at 834, 138 P.3d at 495 (“[Wle will uphold a PUCN decision that
is... . based on substantial evidence.”). SWG has not shown that the PUC’s

"The PUC initially stated that they would disregard Mr. Murandu’s
testimony because of his lack of personal knowledge. However, the record
reflects that the PUC ultimately considered the testimony, although it
afforded it minimal weight. As discussed below, a utility is not limited to
providing testimony from witnesses involved in the relevant projects
because employees may obtain personal knowledge by other means. See
Wash. Cent. R.R. Co., Inc. v. Nat'l Mediation Bd., 830 F. Supp. 1343, 1353
(ED. Wash. 1993) concluding that personal knowledge can be inferred from
a witness's review of files and records).

20

 
disallowance of recovery for the project expenses and its rejection of SWG's
preferred discount rate are clearly erroneous or unsupported by substantial
evidence. See NRS 703.373(9). While a utility need not solely present the
testimony of employees involved in the projects for which it seeks
reimbursement, it must affirmatively display the prudence of its expenses

 

in its case-in-chief. The PUC’s skepticism of SWG’s expenses was
warranted in light of SWG’s earlier attempt to obtain reimbursement for a
number of questionable expenses, including biweekly massages and a home
theater system, and the utility’s lack of justification for its other expenses
in its case-in-chief. This court will not substitute its judgment for that of
the PUC on the weight of the evidence. NRS 703.373(11). Therefore, we
determine that SWG did not show that the PUC improperly denied recovery
for its project expenses or the change in the discount rate.
CONCLUSION

Utilities are granted monopolies to provide their services to
Nevadans. In return, the PUC determines the maximum rate utilities ean
charge for their services, subject to judicial review. In this case, we hold
that utilities do not enjoy a presumption of prudence with respect to the
‘expenses they submit to the PUC. Additionally, we decline to adopt the
constitutional-fact doctrine, and we apply the substantial evidence
standard when reviewing PUC decisions.

‘Next, we hold that the PUC’s rate-setting procedures comported
with procedural due process requirements. Furthermore, we conclude that
the PUC’s selected ROE was not an unconstitutional taking. Lastly, we
apply the substantial evidence standard and determine that SWG did not

demonstrate the prudence of its pension expenses or its proposed change to

 

 
the discount rate. Therefore, we affirm the district court's order denying
‘SWG’s petition for judicial review and affirming the PUC's decision.

J.
Stiglich

We concur:

cer / cl. LAB, 3.
Parraguirre Hardesty

__ Ox. 3 NEA", J

‘adish Silver

_—_ Prebariiy _4A—.,
Pickering Herndon

 

RES