Title: In re Citizens Utilities Co.

State: vermont

Issuer: Vermont Supreme Court

Document:

In re Citizens Utilities Co. (97-436); 171 Vt. 447; 769 A.2d 19

[Filed 15-Dec-2000]

       NOTICE:  This opinion is subject to motions for reargument under
  V.R.A.P. 40 as well as formal  revision before publication in the Vermont
  Reports.  Readers are requested to notify the Reporter of  Decisions,
  Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
  any  errors in order that corrections may be made before this opinion goes
  to press.

                                 No. 97-436

In re Citizens Utilities Company	         Supreme Court

                                                 On Appeal from
    	                                         Public Service Board

                                                 November Term, 1999

Richard H. Cowart, Chair

Martin K. Miller and Victoria J. Brown of Miller, Eggleston & Cramer, Ltd., 
  Burlington, for Appellant Citizen Utilities Company.

Geoffrey Commons, Montpelier, for Appellee Vermont Department of Public Service.

PRESENT: Amestoy, C.J., Dooley, Morse, and Skoglund, JJ., and Gibson, J. (Ret.), 
         Specially Assigned

       DOOLEY, J.   Citizens Utilities Company appeals from an order of the
  Public Service  Board imposing various penalties in response to the
  utility's pervasive and longstanding  management and operational
  transgressions.  Specifically, Citizens challenges the Board's  significant
  reduction in the Company's allowed rate of return on equity, claiming that
  (1) the Board  exceeded its authority by imposing the return-on-equity
  penalty in addition to separate statutory  fines for the same offenses; (2)
  the evidence does not support the penalty; and (3) the return on  equity
  and rate of return imposed by the Board results in an unconstitutional
  regulatory taking.  We  reject each of these arguments and thus affirm the
  Board's decision.

 

       The Board's 309-page order resolved two distinct but interrelated
  dockets, the first  addressing substantial allegations of misconduct and
  mismanagement by Citizens, and the second  investigating the Company's
  overall rates.  Following forty-one days of hearings and two separate 
  public hearings, the Board found that Citizens' rates were excessive and
  that the Company had  engaged in a decades-long course of egregious and
  unprecedented misconduct characterized by (1)  numerous willful violations
  of statutes, Board orders, and its own agreements; (2) imprudent 
  mismanagement of its Vermont Electric Division (VED); (3) imprudent failure
  to maintain accurate  records to ensure that only appropriate costs were
  included in rates; (4) willful failure to provide  service to its Vermont
  customers through least-cost options; and (5) persistent refusal to
  cooperate  with regulatory investigations.

       The Board cited examples of Citizens' misconduct too numerous to set
  forth in any detail.   Suffice it to say that the Board's decision is
  replete with examples of inadequate and misleading  accounting practices on
  the part of Citizens that obscured the true nature of the Company's 
  expenditures and activities.  Citizens failed to implement procedures
  designed to promote  compliance with demand-side-management (DSM)
  obligations, and, in some instances, claimed  savings for DSM programs that
  appeared never to have been implemented.  The Company also  failed to abide
  by its agreement to implement least-cost planning for transmission and
  distribution  facilities, and further failed to conduct required least-cost
  analysis before undertaking major  investments.  Moreover, Citizens
  repeatedly failed to obtain prior board approval, as required by  statute,
  before engaging in significant projects, including the conversion of
  distribution lines to  transmission lines, the relocation or modification
  of substations, and the construction of new lines  and substations. 
  Citizens compounded its misconduct by resisting the Department's efforts to 

 

  obtain information from the Company.  In short, over a period of many
  years, Citizens engaged in a  pattern of behavior aimed at thwarting the
  Department's and the Board's regulatory oversight. 

       Based on these findings, the Board concluded that Citizens' operation
  of VED was  imprudent and failed to promote the general good of the State
  of Vermont.  In the Board's view,  Citizens' pattern of misconduct, its
  failure to comply with statutory law and regulatory directives,  and its
  disdain for accepted principles of utility accounting and management
  justified imposition of  the harshest penalty available - revocation of the
  utility's certificate of public good.

       The Board determined, however, that immediate revocation of Citizens'
  franchise would not  be the most effective or expedient method to achieve
  the ultimate goal of providing Citizens'  Vermont ratepayers with the most
  reliable, reasonably priced energy services available.  Citing the 
  transaction costs and unintended consequences that would follow a
  revocation decision, and noting  Citizens' professed desire to reform its
  operations, the Board decided against the recommendation of  the Department
  of Public Service to revoke Citizens' franchise, and instead elected to
  impose a  variety of other penalties aimed at ensuring that the Company
  would follow through on its  commitment to reform.  The Board ordered an
  immediate reduction of Citizens' rates, fined Citizens  $60,000 for
  specific statutory violations, imposed a five-year probationary period on
  the Company,  and reduced Citizens' authorized rate of return on equity 525
  basis points from 10.50 percent to 5.25  percent.  

       The Board  stated three independent grounds for its decision to cut
  Citizens' return on equity  in half.  First, the Board decided that it was
  appropriate to split the overall cost of equity capital  evenly between the
  ratepayers, who will continue to benefit from Citizens' operations, and the 
  Company's investors, who are ultimately responsible for Citizens'
  inadequacies.  Second, the Board 

 

  found it just and reasonable that Citizens' shareholders receive a return
  roughly equivalent to the  returns earned by ordinary ratepayers on
  passbook savings or certificates of deposit accounts.   Third, the Board
  reasoned that Citizens' history of violations demonstrated that a very
  significant  equity reduction in Vermont would be necessary to focus the
  Company's attention on its  management problems and to provide the
  necessary incentive for the Company to permanently alter  its unacceptable
  pattern of misconduct.

       The Board emphasized that the return-on-equity penalty it was imposing
  was "just and  absolutely necessary" to prevent a recurrence of the type of
  conduct Citizens had engaged in.  The  Board found it apparent that a less
  harsh penalty would not have the desired effect.  Noting that the  evidence
  supported revocation of Citizens' franchise, the Board made it clear that
  it was willing to  give Citizens another opportunity to improve its
  performance only under circumstances that reflect  the seriousness of the
  Company's past violations.  The Board ordered the return-on-equity penalty
  to  remain in effect until Citizens demonstrated that it had corrected the
  problems that led to the  violations, and that it was delivering
  energy-efficient services to its clients.  Finally, the Board  stressed
  that the 525-basis-point reduction in return on equity would not materially
  affect the  financial security of Citizens as a corporate entity. 
  According to the Board, the penalty would not  impact the ability of
  Citizens to raise the capital necessary to continue the level of service
  required  of it in Vermont or elsewhere.	

       On appeal, Citizens challenges only the return-on-equity penalty,
  contending that the Board  exceeded its authority in imposing that penalty
  in addition to the statutory fines, and further that the  penalty is
  unsupported by the evidence and is so excessive that it is
  unconstitutionally confiscatory.

 

                          I. The Standard of Review

       We apply a deferential standard of review in appeals from the Public
  Service Board.  In re  Green Mountain Power Corp., 162 Vt. 378, 380,