Title: Montana Dakota Utilities Co. v. Public Service Com'n of Wyoming,

State: wyoming

Issuer: Wyoming Supreme Court

Document:

Montana Dakota Utilities Co. v. Public Service Com'n of Wyoming,1993 WY 23847 P.2d 978Case Number: 92-61Decided: 02/19/1993Supreme Court of Wyoming

MONTANA DAKOTA UTILITIES 
CO., a Division of MDU Resources Group, Inc.,

Petitioner,

v.

The 
PUBLIC SERVICE COMMISSION OF WYOMING, Bil Tucker, Chairman, John R. Smyth, and 
Stephen N. Ellenbecker,
   
            
Commissioners, Respondents

Appeal from 
District 
Court 
of 
Laramie 
County     , 
Edward L. Grant, J.

Bruce S. Asay, 
Cheyenne, Douglas W. Schulz, 
Bismarck, ND, for petitioner.

Joseph B. Meyer, 
Atty. Gen., Michael L. Hubbard, Sr. Asst. Atty. Gen., Kristin H. Lee, Asst. 
Atty. Gen., Cheyenne, for 
respondents.

Before MACY, C.J., and THOMAS, CARDINE, URBIGKIT and 
GOLDEN, JJ.

GOLDEN, 
Justice.

[¶1]      In this appeal, on 
certification from the district court pursuant to Wyo.R.App.P. 12.09, we are 
asked to answer the principal questions whether in a pass-on rate increase 
procedure the Wyoming Public Service Commission (PSC) may adjust a gas utility's 
proposed apportionment of a refund ordered by the Federal Energy Regulatory 
Commission (FERC) and a non-gas component of the retail rate sought to be 
recovered by the gas utility from its customers. Underlying issues include 
whether PSC's adjustment actions violate the so-called filed rate doctrine, 
whether PSC's refund apportionment action is based on substantial evidence, 
whether Section 249(b) of the Rules of the Public Service Commission authorizes 
PSC's non-gas component adjustment action, and whether PSC's notice of the 
pass-on rate increase hearing was adequate under WYO. 
STAT. § 16-3-107(b) (1990).

[¶2]      We hold that in a 
pass-on rate increase procedure PSC may adjust the apportionment among 
utility-service customers of a FERC-ordered refund and may adjust a non-gas 
component of the retail rate to be charged utility-served customers. We hold 
that PSC's refund apportionment action is supported by substantial evidence, and 
we further hold that PSC's general statutory authority, but not Section 249(b), 
authorizes PSC's non-gas component adjustment action. However, in this 
particular instance, we hold that PSC's notice of the pass-on rate increase 
hearing was inadequate in regard to PSC's non-gas component adjustment action. 
Accordingly, we affirm in part, reverse in part, and remand for further 
proceedings consistent with this opinion.

ISSUES

[¶3]      Appellant 
Montana-Dakota Utilities Co. (MDU) states the issues:

1. 
Did the Wyoming Public Service Commission err as a matter of Law in reducing 
natural gas rates to Montana-Dakota Utilities Co.

A. 
Commission regulations must yield if contrary to Federal Law.

B. 
It is not permissible for the Commission to do indirectly what it cannot do 
directly.

2. 
Is it permissible for the Wyoming Public Service Commission to reduce natural 
gas rates absent an investigation as required by Statute.

3. 
Is the allocation of natural gas rates as ordered by the Wyoming Public Service 
Commission supported by substantial evidence.

4. 
Did the Commission unduly restrict the Petitioner's presentation.

[¶4]      Appellee PSC's 
statement of the issues is:

1. 
Did the Public Service Commission act in accordance with the filed rate 
doctrine?

2. 
Did the Public Service Commission act in accordance with Wyoming 
law?

A) 
Did the Public Service Commission act in accordance with its statutory 
authority?

B) 
Did the Public Service Commission hold an investigation in accordance with 
Wyoming 
law?

C) 
Did the Public Service Commission violate Wyoming law 
when it reduced MDU's rates in a pass-on hearing and not a general rate 
case?

3. 
Are the rates set by the Public Service Commission just and 
reasonable?

A) 
Was the Commission's determination of the Williston 
Basin 
refund based on substantial evidence? 

B) 
Was the Commission's determination of the overearnings issue based on 
substantial evidence?

4. 
Is MDU precluded from raising the issue that it had been unduly restricted from 
presenting its case in its entirety?

FACTS

[¶5]      FERC has exclusive 
jurisdiction over interstate wholesale natural gas rates. 16 U.S.C. § 824(b). 
See Nantahala Power and Light Co. v. Thornburg, 476 U.S. 953, 106 S. Ct. 2349, 90 L. Ed. 2d 943 (1986). PSC has jurisdiction over intrastate 
retail natural gas rates. PSC exercises statutory powers to regulate and 
supervise public utilities in the State of Wyoming. 
WYO. 
STAT. § 37-2-112 (1977). Appellant MDU is authorized by PSC to provide natural 
gas service to residential, commercial, and industrial customers in specified 
certificated areas in Wyoming. 
MDU also serves customers in North Dakota, 
South Dakota, 
and Montana. 
MDU receives approximately seventy percent of its total system gas supply from 
Williston Basin Interstate Pipeline Company (WBI), a wholesale 
supplier.

[¶6]      FERC set the wheels 
of this controversy in motion by two separate actions. In the first action, FERC 
ordered WBI to refund to its customers $18,901,593.50. In its order, FERC did 
not specify the manner in which the refund was to be apportioned among the 
customers. In turn, WBI did not specify a refund apportionment method. Thus, MDU 
was left to decide in what manner it would apportion the refund among its 
multi-state customers. In the second action, FERC authorized WBI to increase the 
cost of the wholesale gas it supplied to distributors like MDU. In response to 
this FERC-authorized increase in the cost of gas it purchases from WBI, MDU 
submitted on July 26, 1991, to 
PSC an application to increase its retail rates pursuant to PSC's rules 
governing the pass-on procedure. These rules are Sections 249 and 250 and MDU's 
commodity pass-on Rate 88, which is PSC-authorized balancing account tariff. The 
gas balancing account system may be described in this way:

[¶7]      [It] is a rate 
adjustment mechanism which allows gas distributors to obtain expedited rate 
changes based solely on fluctuations in the commodity cost of gas purchased by 
the utility. The advantage of the system is that it avoids the regulatory lag 
which accompanies general rate proceedings and thereby contributes to the 
financial stability of utilities. The Commission describes the operation of the 
balancing account system in the following terms:

[The] system accounts for both over and underrecoveries of 
gas costs in future gas commodity rate applications. The actual cost of gas 
experienced and the recovery of those costs in rates for the past gas balancing 
account period are compared with the prior estimates for that period to 
determine whether there should be an upward or downward adjustment to the 
current balancing account application. In this way a dollar for dollar recovery 
of gas costs is assured for the utility and consumers are not 
overcharged.

MGTC, Inc. v. Pub. Serv. Comm'n of Wyoming, 735 P.2d 103, 104 
(Wyo. 
1987).

[¶8]      In preparing its 
pass-on rate increase application MDU factored in FERC-ordered refund, the 
effect of which was to decrease the overall amount of the retail rate increase 
sought. When factoring in the refund, MDU apportioned the refund amount based on 
total sales volume in each state during the refund period. Under this method, 
all of MDU's customers, including industrial customers, received the benefit of 
the refund. Thus, in MDU's original application dated July 
26, 1991, 
MDU requested PSC's approval of a rate increase of $0.363 per dekatherm. The 
rate sought consisted of these factors:

1. 
Wholesale natural gas rate .......................... $3.854/dk 

2. 
Wyoming 
balancing account surcharge ..... $0.335/dk 

3. 
FERC-ordered WBI refund .........................($0.690/dk) 

4. 
PSC-approved non-gas component .......... $0.802/dk

                                                                        
_________ 

Total resulting authorized rate                     
$4.301/dk

[¶9]      After filing this 
original application, MDU determined it had erred in its refund apportionment. 
MDU concluded that no refund had been received for gas purchased from MDU under 
the particular rate schedule under which MDU purchased gas for resale to 
industrial customers in its multi-state service area. MDU reasoned that the 
error, therefore, gave industrial customers a refund when they actually were not 
entitled to one. To correct the perceived error, MDU filed a revised application 
on August 13, 1991, in 
which MDU excluded industrial customers from the refund, resulting in a larger 
net increase in residential gas rates of $0.438 per dekatherm. The following 
components comprised the revised rate sought:

1. 
Wholesale natural gas rate .............................. $3.854/dk

 2. Wyoming 
balancing account surcharge. $0.335/dk 

3. 
FERC-ordered WBI refund .............................($0.615/dk) 

4. 
PSC-approved non-gas component .. $0.802/dk 

_________ 

Total resulting authorized rate                                 
$4.376/dk

[¶10]   On August 28, 1991, 
PSC issued its order granting MDU interim rate relief subject to a final order. 
In this interim order, PSC authorized MDU to increase its Wyoming natural gas 
rates by $0.363 per dekatherm subject to possible refund and hearing as 
established in a final order. Thus, instead of authorizing the amount sought in 
MDU's revised application, PSC's interim order authorized the amount requested 
by MDU in its original application. PSC wanted to take a closer look at the 
refund apportionment matter.

[¶11]   On August 29, 1991, 
PSC issued its notice and order setting MDU's pass-on application for public 
hearing on October 29, 1991. In 
its notice and order, PSC asked MDU to address its pass-on application and the 
matter of the refund apportionment. Noticeably absent, from the notice listing 
the issues to be addressed, was the issue of an adjustment in the non-gas 
component of the authorized rate.

[¶12]   By letter dated September 4, 1991, 
PSC Secretary Alex Eliopulos informed MDU that PSC was concerned that MDU's 
annual report showed its gas operations had earned an 18.69 percent rate of 
return in 1990, thus exceeding the last authorized rate of return of 11.05 
percent. PSC had authorized the rate of return at 11.05 percent in 1984 in a 
general rate case which included a full cost of service analysis which used 1982 
as the test year. In this September 4 letter, Secretary Eliopulos informed MDU 
that PSC wanted MDU to provide to PSC staff detailed information regarding the 
over-earnings issue, viz., how each program has increased earning; an 
explanation of cost-savings programs, including employee information; an 
explanation of the impact on gas operations of the Tax Reform Act of 1986; 
transportation data; and information concerning new customers and loads on line 
in 1991 and anticipated for the next two years. MDU was also requested to 
provide similar explanations and information concerning its electric operations, 
as PSC staff perceived an over-earnings issue there as well. In the letter, PSC 
Secretary Eliopulos reminded MDU of that part of Section 249(b) of PSC rules 
which reads "if the rate-of-return is in excess of that authorized, the pass-on 
amount will be reduced accordingly." Absent from this letter, however, was any 
notice that PSC was going to treat the pass-on filing as a general rate 
filing.

[¶13]   PSC allowed the Consumer Representative 
Staff to intervene before the hearing date. Later, at the October 29 hearing, 
PSC received evidence from witnesses on behalf of both MDU and the Consumer 
Representative Staff.

[¶14]   After the hearing and submission of 
briefs, PSC entered its final order on February 12, 1992. In 
that order PSC rejected the refund apportionment contained in MDU's revised 
application but approved the refund apportionment contained in MDU's original 
application. In addition, PSC adjusted, allegedly in accordance with Section 
249(b), the non-gas component of the rate from $0.802 per dekatherm to $0.705 
per dekatherm, a reduction of $0.0972, to correct for MDU's over-earnings. MDU 
requested a rehearing, but PSC denied the request. MDU then filed its petition 
for review with the district court, and that court certified the matter to 
us.

STANDARD OF REVIEW

[¶15]   Our standard of review for 
administrative action is well-known. We have said: 

[¶16]   When a case is certified to this court 
pursuant to Rule 12.09, W.R.A.P., we examine the decision of the administrative 
agency as if we were the reviewing court of the first instance. The authority 
vested in a reviewing court is set forth in § 16-3-114(c)(ii), W.S. 1977 (July 
1990 Repl.), as follows:

"(ii) [The reviewing court may [h]old unlawful and set 
aside agency action, findings and conclusions found to be:

"(A) 
Arbitrary, capricious, an abuse of discretion or otherwise not in accordance 
with law;

"(B) 
Contrary to constitutional right, power, privilege or immunity;

"(C) 
In excess of statutory jurisdiction, authority or limitations or lacking 
statutory right;

"(D) 
Without observance of procedure required by law; or

"(E) 
Unsupported by substantial evidence in a case reviewed on the record of an 
agency hearing provided by statute."

Union Tel. Co. v. Pub. Serv. Comm'n, 821 P.2d 550, 556 (Wyo. 
1991) (citations omitted).

[¶17]   In conducting our review to see if the 
agency action is supported by substantial evidence,

[w]e 
are charged by statute with an examination of the whole record to determine if 
there is substantial evidence to support the findings of the agency. If the 
agency's decision is found to be supported by substantial evidence, we cannot 
substitute our judgment for that of the agency, but are required to uphold its 
findings upon appeal.

Mountain Fuel Supply Co. v. Wyoming 
Pub. Serv. Comm'n, 662 P.2d 878, 882 (Wyo. 
1983) (citations omitted).

[¶18]   Our working definition of substantial 
evidence is

"such relevant evidence as a reasonable mind might accept 
as adequate to support a conclusion." Such evidence may be less than the weight 
of the evidence, but cannot be clearly contrary to the overwhelming weight of 
the evidence. It is more than a mere scintilla of evidence or suspicion of a 
fact to be established.

Mountain Fuel, at 882 (citations omitted).

[¶19]   The party appealing the agency's 
determination bears the burden of proving a lack of substantial evidence. 
Mountain Fuel, 662 P.2d  at 883. And,

[i]f 
there is present substantial evidence to support a finding of the agency, the 
ultimate weight to be given that evidence before the PSC, as the trier of fact, 
is to be determined by the PSC in light of its expertise and the experience of 
its members in such matters.

Mountain Fuel, at 883.

We 
have recognized that PSC,

in 
exercising its statutory powers to regulate and supervise public utilities in 
the State of Wyoming, as provided in § 37-2-112, W.S. 1977, is required to give 
paramount consideration to the public interest, the desires of the utility being 
secondary. This court cannot usurp the legislative function delegated to the PSC 
in setting appropriate rates, but will defer to the agency discretion so long as 
the results are fair, reasonable, uniform and not unduly 
discriminatory.

Mountain Fuel, at 883 (citations omitted).

[¶20]   Although this court cannot usurp the 
legislative function delegated to PSC, when we review that agency's exercise of 
its statutory powers we must keep in mind that as a regulatory agency 
PSC

has 
no inherent or common-law powers. Stated in another manner, an administrative 
body has only the power and authority granted by the constitution or statutes 
creating the same. Such statutes must be strictly construed or "any reasonable 
doubt of existence of any power must be resolved against the exercise thereof. A 
doubtful power does not exist."

Tri-County Elec. Ass'n v. City of Gillette, 525 P.2d 3, 8-9 
(Wyo. 
1974) (citations omitted).

[¶21]   Since we strictly construe the statutes 
under which PSC exercises its regulatory power, it logically follows that we 
also must strictly construe the rules promulgated and adopted by PSC pursuant to 
those statutes. International Ass'n of Fire Fighters, Local No. 279 v. Civil 
Serv. Comm'n, 702 P.2d 1294, 1297 
(Wyo. 
1985). "The reasoning used in interpretation of statutes is applicable to the 
interpretation of rules made pursuant to the statute * * *." Id. 
With this comprehensive statement of our standard of review in mind, we now turn 
to the issues presented.

The 
Filed Rate Doctrine Issue

[¶22]   MDU's initial position is that in a 
pass-on hearing PSC may neither revise the refund apportionment submitted by a 
utility nor reduce the non-gas component of the rate. Either action by PSC, MDU 
claims, would violate the so-called filed rate doctrine. We 
disagree.

[¶23]   In pertinent part, the filed rate 
doctrine "holds that interstate power rates filed with FERC or fixed by FERC 
must be given binding effect by state utility commissions determining intrastate 
rates." Nantahala, 476 U.S.  at 
962, 106 S. Ct.  at 2354, 90 L. Ed. 2d  at 951. As explained in Nantahala, the 
doctrine originated in Montana-Dakota Utilities Co. v. 
Northwestern Pub. Serv. Co., 341 U.S. 246, 251-52, 71 S. Ct. 692, 695, 95 L. Ed. 912, 918-19 (1951), in which a federal 
court had been asked to review a rate which FERC's predecessor, the Federal 
Power Commission, had determined as reasonable. In dismissing the claim the 
Court held that the complaining utility "can claim no rate as a legal right that 
is other than the filed rate, whether fixed or merely accepted by the [Federal 
Power] Commission, and not even a court can authorize commerce in the commodity 
on other terms." Montana-Dakota Utilities, 341 U.S.  at 
251-52, 71 S. Ct.  at 695, 95 L. Ed.  at 919. The doctrine applies to federal and 
state courts alike. Nantahala, 476 U.S.  at 
963, 106 S. Ct.  at 2355, 90 L. Ed. 2d  at 952. As explained in 
Nantahala,

[i]n 
this application, the doctrine is not a rule of administrative law designed to 
ensure that federal courts respect the decisions of federal administrative 
agencies, but a matter of enforcing the Supremacy Clause.

Id. See 
e.g., Arkansas Louisiana Gas Co. v. Hall, 453 U.S. 571, 101 S. Ct. 2925, 69 L. Ed. 2d 856 (1981). Even before Nantahala, the Wyoming 
Supreme Court recognized the principle supporting the doctrine. We 
said:

The 
PSC is preempted by the federal government from reviewing the reasonableness of 
the components of the [commodity marketing agency] wholesale electric rate 
increase. The result must be that the PSC can accept the federally approved 
wholesale rate as given and decline to require Wyoming distribution utilities to 
prove that such wholesale rates are just and reasonable under Wyoming rate 
making law and standards. Once the FERC proceedings are complete, the PSC is 
required to accept those rates as reasonable, and the PSC can do nothing but 
accept those rates as given.

Spence v. Smyth, 686 P.2d 597, 600 
(Wyo. 
1984).

[¶24]   MDU contends that PSC's actions violate 
the doctrine because they, in end-result, reduced the amount of MDU's request. 
Instead of receiving the requested increase of $0.438 per dekatherm, MDU 
received an increase of only $0.266 per dekatherm. MDU argues that the effect of 
PSC's order is to "trap" costs or not compensate MDU for certain federally 
mandated expenses which will never be recovered.

[¶25]   Responding to MDU's contention, PSC 
asserts, of course, that its actions do not violate the doctrine. With reference 
to its refund apportionment action, PSC explains that while FERC ordered the $18 
million plus refund, it did not specify any particular apportionment among the 
utilities' customers. That apportionment decision was MDU's to make, subject to 
PSC's oversight in the interests of the public to the extent that the utility's 
decision affected customers within PSC's jurisdiction. In that regard, PSC 
contends, it has jurisdiction to review and revise any MDU apportionment 
decision if it determines customers are not being treated fairly under the 
decision made.

[¶26]   With reference to its non-gas component 
adjustment action, PSC explains that the cost increase of the wholesale natural 
gas has survived intact and is being passed on in full to MDU's customers. It is 
only the non-gas component of MDU's retail rate, which is well within PSC's 
jurisdiction, that PSC has reduced. In support of its position, PSC points to 
passages in Nantahala, Narragansett Elec. Co. v. Burke, 119 R.I. 559, 381 A.2d 1358 (1977), cert. denied, 435 U.S. 972, 98 S. Ct. 1614, 56 L. Ed. 2d 63 (1978), and Pub. Serv. Co. of 
Colorado v. 
Pub. Utilities Comm'n, 644 P.2d 933 (Colo. 
1982), which state that "an increase in FERC-approved wholesale rates need not 
lead to an increase in retail rates." Nantahala, 476 U.S.  at 
967, 106 S. Ct.  at 2357, 90 L. Ed. 2d  at 955. Thus, under the authority of these 
decisions, the retail rate need not automatically head in the same direction as 
the wholesale rate "if costs other than [the FERC-regulated wholesale gas costs] 
were to decrease." Id. Addressing those other non-gas costs, these decisions state that the 
regulatory commission may treat the wholesale gas cost increase filing, the 
"pass-on application filing," as it treats other filings for proposed rate 
increase, a "general rate filing," and investigate whether the utility has 
experienced savings in other areas which might offset the increased price for 
natural gas to customers. Nantahala, 476 U.S.  at 
967-68, 106 S. Ct.  at 2357, 90 L. Ed. 2d  at 955. The Nantahala court found 
that

[t]his qualification is perfectly sensible. If, for 
example, the FERC-approved price of wholesale power rises slightly but a 
retailer's costs of transformation and transmission significantly decline, the 
retailer's overall costs might well decrease. A decrease in its retail rates 
might therefore be appropriate even though the cost of purchasing FERC-regulated 
power had increased.

Nantahala, 476 U.S.  at 
968, 106 S. Ct.  at 2357, 90 L. Ed. 2d  at 955.

[¶27]   Having considered the parties' 
arguments, we reject MDU's contention that PSC's actions of revising the refund 
apportionment and adjusting the non-gas component of the retail rate violate the 
filed rate doctrine. We agree with PSC's explanation and the legal authority 
upon which it relies to support its position. FERC did not order a particular 
refund apportionment; it left that decision to be made by the utility. WBI, for 
whatever reason, did not make that decision. That left it for MDU to apportion 
the refund. In MDU's original application filed with PSC, MDU apportioned the 
refund in a way that benefitted all classes of its customers. In its revised 
application, it apportioned the refund in a way that excluded the industrial 
user class from the benefits of the refund. Under these circumstances, it is 
within PSC's jurisdiction to determine whether the refund apportionment treats 
Wyoming 
customers fairly.

[¶28]   PSC did not reduce the amount of the 
FERC-approved wholesale gas cost increase. Rather, it focused its attention on 
other, non-FERC regulated areas of MDU's operations under its retail rates 
jurisdiction to determine if MDU had experienced savings in one or more of those 
areas which might offset the increased price for gas. Without considering, at 
this point, whether PSC's procedures were correct or whether the appropriate 
evidentiary conditions were satisfied, as we shall do that later in this 
opinion, we hold that the filed rate doctrine does not bar PSC from treating the 
pass-on filing as a general rate filing and taking such action as is appropriate 
within its jurisdiction.

[¶29]   Having resolved MDU's threshold issue, 
we still must review the actions taken by PSC to determine whether those actions 
were lawful. With respect to the refund apportionment action, MDU claims that 
action was not based on substantial evidence. With respect to the non-gas 
component reduction action, MDU claims that action suffers from several 
deficiencies. In particular, MDU asserts that PSC's Section 249(b) does not 
expressly authorize such reduction action; that although general statutory 
authority may permit such action if proper notice is given and if evidentiary 
conditions are satisfied, in this instance neither was proper notice given nor 
evidentiary conditions satisfied. We address these issues now. 

REFUND APPORTIONMENT

[¶30]   MDU alleges PSC's refund apportionment 
action is not supported by substantial evidence. MDU bears the burden of proving 
that allegation. MDU asserts:

The 
only evidence in the record is that the allocation proposed by MDU was correct 
as Wyoming's 
and other states' industrial customers had not made overpayments as part of 
their utility purchases during the refund period. As the industrial customers 
had not made overpayments, they were not entitled to a refund. There is no 
evidence to the contrary.

[¶31]   In developing its argument with respect 
to this assertion, MDU states that in its original application it had used an 
apportionment methodology which apportioned the refund among all rate 
classifications, viz., residential, commercial, and industrial customers. In its 
revised application, it used an apportionment methodology which apportioned the 
refund among only those customers who had contributed to the overpayment 
initially. At the hearing, MDU's witness Don Ball explained the error in the 
original application in this way:

The 
error was that * * * Montana-Dakota apportioned the refund amount related to 
commodity based on total sales volumes in each state during the refund period 
when, in fact, there was no refund received for gas purchased from Williston 
Basin under rate schedule I-1 under which Montana-Dakota purchased gas for 
resale to industrial customers.

The 
error gave industrial customers a refund when they actually did not pay enough 
in the first place. This would be totally inappropriate and the error was 
corrected in the company's revised filing dated August 12, 1991.

[¶32]   Mr. Ball was questioned closely and to 
good effect by Commissioner Ellenbecker on this subject. The information 
developed from that questioning was revealing:

Q. 
Is it your position that the Wyoming 
industrial customers in the allocation methodology to calculate the refund are 
not entitled to being included in the refund calculation because they don't pay 
the costs associated with the refund dollar which led to the overcharge and then 
the resulting refund?

A. 
That is the basic position, and it's not only for Wyoming. 
It's under the circumstances a systemwide position, because the industrial 
customers during the refund period have really paid less than they should 
have.

Q. 
Isn't it correct that throughout the period, the Wyoming 
industrial customers in their retail rate period for every component of the 
wholesale gas charges by way of the methodology used in the state of 
Wyoming one 
single integrated unit cost of gas that includes all charges from 
Williston?

A. 
That's true in Wyoming, 
yes.

Q. 
Doesn't it follow in Wyoming 
that it might be therefore realistic to include industrial volumes which 
contributed to the payment of the refund rates from Williston might be 
appropriate volumes in Wyoming for 
the calculation of the refund since they participated in the payment of the 
dollars in Wyoming?

A. I 
don't believe so. At the time, industrial customers were still served from a 
cost perspective by buying gas under Williston's rate schedule in 
Wyoming. We 
have not reserved any demand levels to serve industrial customers. So if there 
is normal demand or contract demand reserved for a certain customer, first of 
all, I don't believe it's fair to charge them for it in the first 
place.

Q. 
But you know better than anyone in the room that they paid for the demand 
charges as a component of the unit cost of gas in their rates and now some of 
those demand charges are flowing back to the states in a methodology that 
includes volumes of use expressed as a proportion of sales or proportion of 
purchases which those industrial customers paid as part of their rates when they 
had volumes when they were on the system. Isn't that correct?

A. 
That - that is correct.

Q. 
And would you agree -

A. 
In Wyoming. 

Q. - 
that that's an exclusive situation for Wyoming?

A. 
It is a very exclusive situation applicable only in the state of 
Wyoming. 
However, the refunds that we receive from Williston are segregated by rate 
component. If we look, for example, at attachment B , we see that there is a 
commodity portion of the refund. The refunds for contract demand charges, which 
are labeled AEQ refund and MDQ refund, are separately set forth. We have over 
two million dollars of AEQ refunds.

Q. 
Now, staying with your attachment B , which of the refund components identified 
in the three columns do the Wyoming 
industrial customers not pay for in their rate?

A. 
They pay for all of them.

Q. 
They pay for all of them?

A. 
That's correct.

Q. 
And if they pay for all of them during the period that they were on system 
taking sales gas, they overpaid for those components just as did the residential 
and commercial customers in view of the fact that the FERC has now decided there 
will be a refund of those dollars; isn't that correct?

A. 
That would be true, yes.

[¶33]   From Mr. Ball's entire testimony on the 
refund apportionment issue, PSC found:

22. 
MDU's evidence shows that in its initial application, it allocated the FERC 
refund to Wyoming 
service based upon the actual usages of all its Wyoming 
customers, including those industrials on line during the period of the refund. 
This actual usage basis for the refund period is a reasonable and correct basis, 
and is further supported and justified by the substantial evidence that 
discloses that MDU's loss of industrial customers has worked to severely 
increase its remaining customers' (residential and commercial) rates, including 
because such remaining customers must pay rates to cover the cost of that part 
of MDU's facilities installed to serve the industrial customers who have since 
elected to bypass MDU's distribution service.

[¶34]   We are satisfied from our examination 
of the whole record that substantial evidence exists to support PSC's finding. 
The ultimate weight to be given that evidence was to be determined by PSC in 
light of its expertise and the experience of its members in such matters. We 
hold no error exists on this issue.

THE 
NON-GAS COMPONENT ISSUE

[¶35]   MDU advances several arguments in its 
challenge to PSC's action in a pass-on hearing adjusting the non-gas component 
of the retail rate from $0.802 per dekatherm to $0.705 per dekatherm, a 
reduction of $0.0972, to correct for MDU's alleged over-earnings as reflected in 
MDU's annual reports for 1989 and 1990. Generally and briefly stated, those 
arguments are that (1) PSC's Section 249(b), pursuant to which PSC acted, does 
not authorize such action; (2) although general statutory authority authorizes 
PSC action to determine that retail rates are just and reasonable, PSC in this 
instance failed to notify MDU that PSC was going to treat the pass-on filing as 
a general rate filing and, in that context, investigate and determine whether 
non-gas costs savings existed in MDU's operations such that a reduction in the 
non-gas component of the retail rate was justified; and (3) PSC's reduction of 
the non-gas component to correct for MDU's alleged over-earnings in 1989 and 
1990 does not satisfy quantitatively and qualitatively the necessary evidentiary 
requirements.

[¶36]   To achieve a better understanding of 
MDU's position and to place MDU's arguments in the proper perspective, we find 
it helpful and useful first to examine the nature and scope of the two types of 
rate increase applications that a utility may make before PSC.

[¶37]   Rate activity is one of the five 
general areas of public utility activity regulated by PSC.1 A public 
utility may not charge a rate different from the rate properly filed and 
authorized for that utility for a particular type of service. WYO. 
STAT. § 37-3-102 (1977). All rates must be just and reasonable. 
WYO. 
STAT. § 37-3-101 (1977). Applications to PSC for rate increase are of two basic 
types, a general rate increase and a pass-on rate increase. See, Montana-Dakota 
Utilities Co. v. Wyoming 
Pub. Serv. Comm'n, 746 P.2d 1272 (Wyo. 1987); Spence; Great W. Sugar Co. v. Johnson, 624 P.2d 1184 (Wyo. 1981); 
Thomas J. Carroll, III, State Jurisdiction Over the Regulation of Energy 
Distribution and Other Public Utility Services, 15 Land & Water L.Rev. 535, 
552 (1980).

[¶38]   The general rate increase application 
traditionally covers all facets of a utility's operations, finances, rate 
design, and rate of return. In particular, WYO. 
STAT. § 37-2-119 (1977) lists

such 
matters as the cost or value, or both, of the property and business of any 
public utility, used and useful for the convenience of the public, and all 
matters affecting or influencing such cost or value, the operating statistics * 
* * both as to revenues and expenses and as to the physical features of 
operation in such detail as the [PSC] may deem advisable; the earnings, 
investment and expenditures * * *.

Also, WYO. 
STAT. § 37-2-122 (1977) lists "depreciation of plant, obsolescence of equipment, 
expense of operation, physical and other values of the plant, system, business 
and properties of the public utility whose rates are under 
consideration."

[¶39]   At the hearing giving rise to this 
appeal, PSC's principal rate engineer, David M. Mosier, testified concerning the 
nature and scope of a general rate application. From his testimony we learn that 
about eighty-five percent of MDU's total cost of service relates to gas costs. 
Such gas costs are within the jurisdiction of FERC, not PSC. A general rate 
application, then, is concerned with that remaining fifteen percent of MDU's 
total cost of service which is within PSC's retail rate jurisdiction. This is 
the non-gas component of the retail rate. According to Mr. Mosier, in a general 
rate application there is a "comprehensive evaluation" of all of those 
statutorily listed factors that influence that fifteen percent of total cost of 
service which is within PSC's jurisdiction. Only upon such an evaluation does 
PSC have the detailed evidence necessary to render an informed decision on any 
permanent change in rates. During that evaluation, PSC has an opportunity to 
examine rate spread relationships among classes of customers. In a general rate 
application the utility must "lay out a cost of service analysis [for its 
operations]." Included in the analysis would be "allocations of its common plant 
between jurisdictions and an analysis of rate spread within the State of 
Wyoming." 
Mr. Mosier further explained that such a general rate application gives the 
utility "the [fair] opportunity * * * if the [PSC] is going to adjust rates * * 
* to take into consideration all of the elements including known and measurable 
adjustments that go with such a rate filing."

[¶40]   On at least two occasions, this court 
has discussed those known and measurable adjustments that go with a general rate 
application, and we approved of PSC's basing future rates upon "figures derived 
from [a] historical test year which then were adjusted for known and measurable 
changes traditionally relied upon by the PSC." Mountain Fuel, 662 P.2d  at 884; 
and see, Mountain States Tel. and Tel. Co. v. Pub. Serv. Comm'n, 698 P.2d 627 
(Wyo. 
1985). We noted that "in the experience of the PSC it had found that appropriate 
adjustments for historical test-year data would adequately account for 
anticipated changes." Mountain Fuel Supply, 662 P.2d  at 885. One of PSC's 
pertinent findings there was:

33. 
The Commission, in determining the rate base elements including rate of return 
must rely on factually-based evidence as far as possible under the "used and 
useful" and "known and measurable" ratemaking concepts. The Commission has 
accepted discounted cash flow, comparable earnings, and other evaluations as a 
basis in establishing a reasonable rate of return.

Mountain Fuel, 662 P.2d  at 886.

[¶41]   We have observed that PSC's use of a 
historical test period "involves utilizing figures from the end of a 
twelve-month period of time * * * with adjustments made for known and measurable 
changes." 698 P.2d  at 631. Reviewing seven particular adjustments made in the 
test-year calculations at issue, we noted that PSC pointed out "that it is 
obligated to adjust the test-year data for known and measurable changes where 
the changes are shown to be reliable and certain." Mountain 
States, 
698 P.2d  at 635.

[¶42]   The investigation, preparation, and 
presentation of a cost of service analysis appropriate for a general rate 
application requires time and money. In the case at hand, Mr. Mosier expressed 
concern that a general rate case for MDU would not have been completed until 
after the heating season. In Spence, 686 P.2d  at 601, we pointedly referred to 
this aspect of a general rate case. Thus, the determination of "just and 
reasonable" rates in a general rate case is time-consuming and 
costly.

[¶43]   In sharp contrast, the pass-on 
application is narrow in nature and scope, is not as costly, and has as its 
chief purpose the expeditious passing through of FERC-regulated wholesale gas 
costs, an element of retail rates over which PSC has no jurisdiction. The 
pass-on application "is being used with increasing frequency because of rapid 
escalations in energy commodity costs * * *." Carroll, supra, at 552. 
"Originally, pass-on proceedings were created to quickly approve the cost 
adjustments which previously were determined, in large part, in FERC hearings. 
Spence v. Smyth, 
Wyo., 686 P.2d 597 (1984)." 
Montana-Dakota Utilities, 746 P.2d  at 1275. In Spence, 686 P.2d  at 601, we 
remarked, "To require a full rate hearing every time a pass-through is asked for 
would be unrealistic and next to impossible, as such could happen every other 
month." We recognized that in the context of an increase in the cost of 
wholesale gas, as to which FERC has exclusive jurisdiction, the "just and 
reasonable" determination is made in the FERC proceeding, not the PSC 
proceeding. Therefore, when the utility applies to PSC for a rate increase based 
solely upon a FERC-authorized wholesale gas cost increase, PSC has no decision 
to make as to whether the requested increase is "just and reasonable." "The 
result must be that the PSC can accept the federally approved wholesale rate as 
given and decline to require Wyoming 
distribution utilities to prove that such wholesale rates are just and 
reasonable." Spence, 686 P.2d  at 600.

[¶44]   At the hearing in this case, Mr. Mosier 
explained that the purpose of the pass-on application "is to enable [the 
utility] to recover [commodity costs] in a prudent manner quickly so that they 
don't have costs falling through the cracks that they have to absorb." In reply 
to the question why the utility's expeditious recovery of these wholesale gas 
costs is of paramount concern, Mr. Mosier explained, "the costs are so high and 
* * * they change very frequently. [Without swift recovery of these costs, the 
utility] would be in pretty severe financial trouble in short-order, in a matter 
of possibly months."2

[¶45]   Having briefly discussed the 
distinguishing features of the general rate application and the pass-on 
application, we now consider MDU's first contention challenging PSC's action in 
adjusting the non-gas component during the pass-on hearing in 
question.

[¶46]   MDU asserts that PSC rule at Section 
249(b), pursuant to which PSC acted, expressly does not authorize an adjustment 
of the non-gas component in a pass-on proceeding. PSC rule reads:

Section 249. Wholesale Utility Commodity Purchase Pass-on Procedure. 
Pursuant to W.S. 37-3-106 (1977) as may be amended and the rate filing 
requirements of this Chapter, a utility may file an application to pass on to 
its utility customers in their rates, prospective cost increases in the 
utility's wholesale utility commodity; and the same will be authorized subject 
to public notice, opportunity for hearing, and refund, if the evidence of record 
shows that:

a. 
The pass-on is for wholesale utility commodity cost increases not under this 
Commission's jurisdiction;

b. 
The pass-on will not increase the utility's rate-of-return, and its 
rate-of-return is at or below that last authorized by the Commission (if the 
rate-of-return is in excess of that authorized the pass-on amount will be 
reduced accordingly);

c. 
The pass-on is applied on an equal or proportionate basis to all class rates and 
the rate steps therein (excluding minimum charges);

d. 
All pass-on charges are filed as a separate cumulative rate rider or surcharge 
which will be blended into base rates at appropriate intervals in general rate 
case proceedings or as otherwise ordered by the Commission; and

e. 
There is provision for interest on overcollections to be made part of the 
refund. (Interest will include any interest received by the utility as ordered 
by the Federal Energy Regulatory Commission and, otherwise or in addition 
thereto, interest as determined by the Commission).

[¶47]   Focusing specifically on the 
parenthetical clause in subsection (b), MDU declares that the rule authorizes 
only a reduction of the "pass-on amount" with no mention of the non-gas 
component or base rates. We have carefully read PSC's appellate brief and do not 
find that PSC has directly responded to this specific contention. The gist of 
PSC's general response seems to be that since the non-gas component of the rate 
is within PSC's jurisdiction, about which there is no disagreement, PSC has 
authority to adjust that component at any proceeding.

[¶48]   The resolution of this specific 
contention need not long detain us. PSC rules, like the statutes from which they 
emerge, are strictly construed. International Ass'n of Fire Fighters, 702 P.2d  
at 1297; Tri-County Elec., 525 P.2d  at 8-9. The language of Section 249(b) is 
plain and unambiguous. We read the words "the pass-on amount will be reduced 
accordingly" to mean what they say. We cannot read them to say "The non-gas 
component or base rate will be reduced accordingly." PSC obviously knows the 
difference between the terms "pass-on amount" and "non-gas component or base 
rate." We hold that the rule itself as written does not authorize PSC to adjust 
the non-gas component or base rate in a pass-on proceeding. All recognize that 
no relationship exists between FERC-regulated gas costs and PSC regulated 
rate-of-return. At the hearing Mr. Mosier satisfactorily explained this truth. 
Gas costs are recovered on a dollar-for-dollar basis through the balancing 
account system. That system has nothing to do with a utility's over-earnings 
situation which relates to the rate-of-return. As written, Section 249(b) 
contains a non 
sequitur. A reduction of the pass-on amount would have no effect on the 
rate-of-return. The pass-on amount and rate-of-return have no relationship. The 
former relates to FERC-regulated gas costs, the latter to PSC regulated non-gas 
cost elements. Our holding on this specific contention does not, however, answer 
the next contention which is whether, under general statutory authority, PSC 
properly acted to adjust the non-gas component or base rate in a pass-on 
proceeding. To that issue we now move.

[¶49]   MDU acknowledges, as it must, that 
general statutory authority allows PSC to determine whether retail rates under 
its jurisdiction are just and reasonable. MDU further acknowledges, as it must, 
that adjustment of the non-gas component or base rate is within PSC's authority, 
as it is a feature of the just and reasonable determination. MDU asserts, 
however, that in this particular instance, PSC failed to notify MDU of the true 
nature of the hearing and of the particular matters on which PSC might act. In 
other words, MDU argues, in effect, that PSC failed to notify it that PSC was 
going to treat the pass-on application as a general rate application. In that 
context, PSC also failed to investigate and determine properly whether non-gas 
costs savings existed in MDU's operations, such that a reduction in the non-gas 
component or base rate was warranted. 

[¶50]   As PSC is an agency as defined for 
purposes of the Wyoming Administrative Procedure Act, it is subject to that 
act's provisions. WYO. 
STAT. § 16-3-101(b)(i) (1990); Montana-Dakota Utilities. The two basic types of 
rate increase applications, a general rate case and a pass-on rate case, qualify 
as a contested case as defined in § 16-3-101(b)(ii). See also, Montana-Dakota 
Utilities. Under that act, § 106 of PSC's Rules of Practice and Procedure 
provides that "[n]otice of hearing shall conform to the Wyoming Administrative 
Procedure Act." In any contested case, the utility "shall be afforded an 
opportunity for hearing after reasonable notice." WYO. 
STAT. § 16-3-107(a). According to WYO. 
STAT. § 16-3-107(b)(i) and (iv) (1990), "[t]he notice shall include a statement 
of: The time, place and nature of the hearing; * * * [and] a short and plain 
statement of the matters asserted." (Emphasis added).

[¶51]   MDU claims, in effect, that neither 
PSC's notice dated August 29, 1991, 
nor Mr. Eliopulos's letter dated September 4, 1991, 
apprised MDU that the nature of the hearing had been or would be converted from 
a pass-on rate hearing to an "interim" general rate hearing. Indeed, there seems 
to have been confusion with two of the commissioners about the validity of the 
September 4 letter.3 Noticeably missing from the listing of the 
matters asserted in the notice and in the letter is any mention that PSC might 
consider an adjustment in the non-gas component or base rate to correct for the 
alleged overearnings as allegedly reflected in MDU's 1989 and 1990 annual 
reports.

[¶52]   PSC argues that the September 4 letter 
adequately notified MDU, in accordance with Section 294(b), that if PSC 
determined MDU was overearning, PSC would adjust the "pass-on increase." The 
letter did not refer to the "pass-on increase"; rather, it referred to the 
"pass-on amount." The subject of Section 249 is the pass-on of "prospective cost 
increases * * * in the utility's wholesale utility commodity." The term "pass-on 
amount" appearing in Section 249(b) can only be referring to that subject, viz., 
prospective cost increases in the wholesale commodity. PSC's argument is not 
persuasive.

[¶53]   In discussing the requirements of an 
adequate notice, we have said, "The important question is whether or not the 
parties had fair notice of the issues involved." Glenn v. Bd. of County Comm'rs, 
Sheridan County, 440 P.2d 1, 4 (Wyo. 1968); see also, Powell v. Bd. of Trustees of Crook County Sch. 
Dist. No. 1, 550 P.2d 1112, 1116-17 
(Wyo. 1976); Bd. of Trustees, Laramie County Sch. Dist. No. 1 v. Spiegel, 549 P.2d 1161, 1170-72 
(Wyo. 1976).

[¶54]   What is "fair notice" as applied to 
this case? If a utility is going to be required, in a pass-on proceeding - the 
purpose of which is to allow PSC to authorize the "prompt" pass-on of wholesale 
commodity cost increases - to present evidence of a kind and in a manner that 
traditionally is reserved for a general rate proceeding, then it is necessary 
that PSC specifically inform and notify it of that changed nature of the 
hearing. In doing so, the statement of the matters asserted must include fair 
apprisal that PSC may adjust the non-gas component or base rate.

[¶55]   If the utility is not so informed 
before the hearing, there is a danger that confusion in the proper placement of 
the burden of proof may result. Although the utility bears the burden of proof 
to show its rate is just and reasonable, in a pass-on proceeding, the subject of 
which is only FERC-approved wholesale commodity cost increase, that proof burden 
has been established by FERC approval. Thus, at the pass-on hearing the utility 
in a real sense has no burden of proof to carry. See generally, 
Spence. If PSC converts the pass-on proceeding to an "interim" general rate 
proceeding, however, a burden of proof arises as to the non-gas cost factor 
placed in controversy. Here, PSC purported to place MDU's overearnings and 
consequent rate-of return in controversy as if in a general rate proceeding. 
Fairness dictates that the party on whom the burden of proof rests be fairly 
alerted to the issues at stake and the action that may be taken. As that was not 
done here, we hold that the notice was defective.

[¶56]   Before leaving this subject matter, we 
will comment briefly about the general advisability of injecting into the 
pass-on procedure issues that are meant to be resolved in a general rate 
procedure. PSC asserts that it is acceptable for it to act on rate-of-return 
issues in a pass-on case. It relies on this court's holding that PSC had the 
authority to adjust an incentive award in a pass-on case and need not wait to do 
so in a general rate case. Montana-Dakota Utilities, 746 P.2d  at 1275. The 
rationale for that holding was quite simple: as an incentive is cost-based and 
an incentive award determined primarily by the costs passed on, it makes sense 
to adjust an incentive award in the same proceeding in which the gas costs are 
passed on. Adjusting an incentive award is compatible with the purpose of the 
pass-on procedure, that is, they both can be quickly done. The nature and the 
purpose of the pass-on procedure has not been altered.

[¶57]   In sharp contrast, adjusting non-gas 
cost factors is incompatible with the nature and purpose of the pass-on 
procedure. Injecting base rate or non-gas component investigation, presentation, 
and analysis into the relatively simple and intentionally abbreviated pass-on 
case runs the serious risk of defeating the chief purpose of the procedure, 
viz., a prompt adjustment so that the utility is not faced with large costs that 
threaten its very financial survival. As Mr. Mosier, the rate engineer, 
testified, unless these increased gas costs are passed through to the consumer 
in rapid order, the utility may very soon face financial calamity. We have seen 
that a cost-of-service analysis in a general rate case is time-consuming and 
costly. By introducing features of that time-consuming and costly general rate 
case into the relatively expeditious and inexpensive pass-on case, PSC may very 
well have defeated the very reason for existence of the pass-on procedure. We do 
not perceive, however, that the wisdom of that "conversion" or "introduction" is 
within our jurisdiction to decide. The pass-on procedure is a creation of PSC in 
the exercise of its regulatory and supervisory powers. This court cannot usurp 
the regulatory and supervisory function delegated to PSC.

[¶58]   We have one final issue to treat. MDU 
contends that PSC's reduction of the non-gas component to correct for MDU's 
alleged overearnings in 1989 and 1990 does not satisfy the necessary evidentiary 
requirements.

[¶59]   Since we are remanding this case, we 
are reluctant to discuss at length MDU's contentions regarding the evidentiary 
deficiencies of PSC's non-gas component adjustment action. We merely wish to 
point out that such action must be based on substantial evidence. Appropriate 
evidence would be that which has been traditionally presented in general rate 
cases. We identified such evidence earlier in connection with our discussion of 
the nature and scope of a general rate case. Compared with that detailed 
evidence traditionally presented in a general rate case, the mere evidence of 
two years' overearnings from unadjusted annual reports, which PSC relied on 
here, hardly seems to pass muster. On remand, we are confident that the parties 
will take appropriate measures concerning the quality and quantity of 
evidence.

[¶60]   In summary, we affirm PSC's action in 
revising the refund apportionment. Substantial evidence supported that decision. 
We hold that PSC may adjust a non-gas component in a pass-on rate increase 
hearing, provided that PSC adequately notifies the utility of the nature and 
scope of the hearing - including the specific matters upon which action may be 
taken. In this instance, PSC's notice was inadequate. Therefore, we reverse 
PSC's action in adjusting the non-gas component. We remand for further 
proceedings consistent with this opinion.

Footnotes

1 
Thomas J. Carroll, III, State Jurisdiction Over the Regulation of Energy 
Distribution and Other Public Utility Services, 15 Land & Water L.Rev. 535, 
551 (1980).

2 In 
Conclusion of Law No. 9 in its final order dated February 12, 1992, the 
Commission observed that the pass-on procedure allows PSC to authorize the 
prompt pass-on of wholesale commodity cost increases "which if not allowed to be 
promptly passed on could endanger the utility's financial viability and ability 
to serve its customers as required by law."

3 
During the hearing two of the three commissioners expressed some confusion about 
the validity of Mr. Eliopulos's September 4 letter. Specifically, that confusion 
was expressed in the context of the issue of MDU's alleged overearnings in its 
electric utility operation. In the September 4 letter, Mr. Eliopulos told MDU 
that PSC requested similar information concerning overearnings on the electric 
operation as it was requesting for the gas operation. During the hearing 
examination of MDU's witness Donald Ball, Commissioner Tucker stated he was 
there "to hear the gas side of the utility" and not the electric side. 
Commissioner Smyth agreed, ruling that "any testimony or questions concerning 
the impact of electric utilities will not be recognized by the commission, will 
not be allowed." After discussion between Commissioner Smyth and the attorney 
representing the Consumer Representative Staff concerning whether the electric 
operation information was to be presented at the hearing, Commissioner Tucker 
stated it was not his understanding that PSC wanted that kind of information in 
this case. Again, agreeing that the electric operation information was not a 
proper subject of the present hearing, Commissioner Smyth stated, "And frankly, 
if that was a letter from the commission, then I was not a party to making that 
decision." As a result, although the letter had called for "detailed 
explanations regarding the electric utility overearnings similar to that 
requested for the gas utility operation," PSC opted to disregard that part of 
the letter. The referenced dialogue draws into some question whether PSC 
authorized the September 4 letter. In view of our disposition of the case, 
however, we need not explore the point further. It suffices to say that should 
an agency wish to amend its official notice of a contested case hearing, the 
preferred mode of amendment is the issuance of an amended order under the 
authority of the agency.