Title: Spence v. Smyth

State: wyoming

Issuer: Wyoming Supreme Court

Document:

Spence v. Smyth1984 WY 95686 P.2d 597Case Number: 83-205Decided: 08/29/1984G.L. SPENCE AND L.P. SPENCE, APPELLANTS (PLAINTIFFS), 

v. 

JOHN R. SMYTH, G. KEITH OSBORN, AND C.E. JOHNSON, AS COMMISSIONERS OF THE PUBLIC SERVICE COMMISSION OF THE STATE OF WYOMING, AND THE PUBLIC SERVICE COMMISSION OF WYOMING, APPELLEES (DEFENDANTS).
Supreme Court of Wyoming
G.L. SPENCE AND L.P. 
SPENCE, APPELLANTS (PLAINTIFFS), 

v. 

JOHN R. SMYTH, G. KEITH 
OSBORN, AND C.E. JOHNSON, AS COMMISSIONERS OF THE PUBLIC SERVICE COMMISSION OF 
THE STATE OF WYOMING, AND THE PUBLIC SERVICE COMMISSION OF WYOMING, APPELLEES 
(DEFENDANTS).

 
 
Appeal from the Public 
Service Commission.

 
 
G.L. Spence and 
Bradley L. Booke, of Spence, Moriarity & Schuster, Jackson, for appellants.

A.G. McClintock, 
Atty. Gen., Lawrence J. Wolfe, and Steven R. Shanahan, Sr. Asst. Attys. Gen., for appellees.

Before ROONEY, C.J., and 
THOMAS, ROSE, BROWN and CARDINE, JJ.

ROONEY, Chief 
Justice.

[¶1.]     Effective October 1, 
1982, the Federal Energy Regulatory Commission (FERC) (successor to the Federal 
Power Commission) approved an increase in the wholesale electric rates of the 
Bonneville Power Administration (BPA). BPA is a federal power marketing agency 
which produces and markets electricity in the Northwest. 16 U.S.C. § 832 et seq. 
BPA supplies power to, among others, Lower Valley Power & Light Company 
(LV), which is a rural electric distribution cooperative serving Lincoln, 
Sublette and Teton Counties in Wyoming and two Idaho counties. LV purchases approximately 
96.5 percent of its power from BPA. After BPA's wholesale electric rates were 
raised, LV 
applied to the Public Service Commission (PSC) to pass-through this rate 
increase to its consumers.

[¶2.]     The application for the 
pass-through rate increase was challenged by appellants, who are customers of 
LV. After notice 
and a hearing, the PSC granted the increase. Appellants appealed the PSC order 
to the district court, and that court certified the matter to the supreme court 
pursuant to Rule 12.09, W.R.A.P.

[¶3.]     The parties raise 
several issues and arguments on appeal, but we believe the determinative issue 
to be whether or not the pass-through rate increase allowed by the PSC is just 
and reasonable under the circumstances. A distinction must be recognized between 
the regulation of BPA and its wholesale rate increase and the regulation of 
LV's retail rate 
increase. Appellants acknowledge the distinction but indicate the increase in 
LV's retail rate 
should not have been allowed.

[¶4.]     Section 37-2-101, W.S. 
1977, creates the PSC. It is granted the general and exclusive power to regulate 
and supervise every public utility in the state of Wyoming, § 37-2-112, W.S. 
1977. Section 37-1-101(a)(vi)(H), W.S. 1977, provides:

"None of the provisions 
of this chapter shall apply to interstate commerce except when a regulatory 
field has not been preempted by the United States government. * * 
*"

[¶5.]     On the other side of 
the coin, the federal statutes create the Bonneville project to be completed, 
maintained and operated, subject to the powers and duties of the BPA respecting 
the transmission and sale of electric energy generated at the project. 16 U.S.C. 
§ 832.

"Subject to the 
provisions of this chapter [16 U.S.C. § 832 et seq.] and to such rate schedules 
as the Federal Power Commission may approve, as provided in this chapter, the 
administrator [of the BPA] shall negotiate and enter into contracts for the sale 
at wholesale of electric energy, either for resale or direct consumption, to 
public bodies and co-operatives and to private agencies and persons and for the 
disposition of electric energy to Federal agencies. * * *" 16 U.S.C. § 832d(a), 
p. 10.

[¶6.]     16 U.S.C. § 839e(i)(6) 
(Supp. Pamphlet 1975 to 1983), p. 47, Pacific Northwest Electric Power Planning 
and Conservation Act of 1980, provides in part:

"The final decision of 
the Administrator [of BPA] shall become effective on confirmation and approval 
of such rates by the Federal Energy Regulatory Commission pursuant to subsection 
(a)(2) of this section. The Commission shall have the authority * * * to approve 
the final rate submitted by the Administrator on an interim basis, pending the 
Commission's final decision in accordance with such subsection. * * 
*"

[¶7.]     Thus, pursuant to the 
United States Code, the FERC clearly has the authority to regulate the rates of 
BPA. The question thus becomes where is the line to be drawn between that which 
the FERC regulates and that which is within the province of the 
PSC.

[¶8.]     The United States 
Supreme Court has considered the issue of federal versus state regulation of 
wholesale electric rates for years. In 1927, that Court decided that state 
regulation of wholesale electric rates in interstate transactions was precluded 
because otherwise the individual states would be placing a burden on interstate 
commerce. Public Utilities Commission of 
Rhode Island v. Attleboro Steam & Electric Co., 273 U.S. 83, 47 S. Ct. 294, 71 L. Ed. 549 (1927). However, since Congress had not at that time enacted 
statutes to regulate this area, there was a void in the regulation of interstate 
wholesale electric rates. This void was known as the "Attleboro gap." Northern States Power Company v. Hagen, 
N.D., 314 N.W.2d 32, 36 
(1981).

[¶9.]     Congress moved to fill 
this "gap" with the Federal Power Act in 1935 and the Natural Gas Act in 1938. 
Northern States Power Company v. 
Hagen, 
supra. In 1964, the Supreme Court said:

"* * * In short, our 
decisions have squarely rejected the view of the Court of Appeals that the scope 
of FPC [FERC] jurisdiction over interstate sales of gas or electricity at 
wholesale is to be determined by a case-by-case analysis of the impact of state 
regulation upon national interest. Rather, Congress meant to draw a bright line 
easily ascertained, between state and federal jurisdiction, making unnecessary 
such case-by-case analysis. This was done in the Power Act by making FPC [FERC] 
jurisdiction plenary and extending it to all wholesale sales in interstate 
commerce except those which Congress has made explicitly subject to regulation 
by the States. * * *" Federal Power 
Commission v. Southern California Edison Company, 376 U.S. 205, 84 S. Ct. 644, 651, 11 L. Ed. 2d 638 (1964).

[¶10.]  Appellants acknowledge that it is clearly 
impermissible for the PSC to set rates for BPA, but they contend that the PSC 
would not be doing so by refusing to allow LV to pay such rate to 
BPA.

[¶11.]  The issue in the Northern States Power Company v. Hagen 
case, supra, was similar to this case except that the North Dakota PSC was 
arguing what appellants here argue. We agree with that court in its concluding 
analysis, where it said:

"The PSC has no direct 
jurisdiction over interstate wholesale rates and we believe it would undermine 
the supremacy clause and the preemption doctrine for the PSC to indirectly 
assert jurisdiction over the wholesale rates by investigating the reasonableness 
of underlying costs in a proceeding involving retail rates. Furthermore, we 
believe it would frustrate the purpose of Congress in establishing reasonable 
wholesale rates if the reasonableness of these rates as an operating expense 
were inquired into by and made subject to the North Dakota PSC in establishing 
reasonable retail rates. If this were permitted the efforts of FERC would be 
reviewable by the PSC, which was not contemplated by the congressional Act." Northern States Power Company v. Hagen, supra, 314 N.W.2d  at 38.

[¶12.]  The North 
Dakota court went on to conclude that "for purposes of fixing 
intrastate rates, the Public Service Commission must treat [Northern States Power Company's] filed 
interstate wholesale rates as a reasonable operating expense." Id. at 38. That court 
determined, as do we, that the proper place to question the reasonableness and 
prudence of a wholesale utility rate is in the proceeding before the FERC. The 
PSC is preempted by the federal government from reviewing the reasonableness of 
the components of the BPA 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 
ratemaking 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.

[¶13.]  All of the foregoing is not to say that 
LV is required 
to purchase its electricity from BPA. During a full rate hearing, it may be 
shown that there is a cheaper source of supply available. Appellants refer us to 
the case of Pike County Light and Power 
Company-Electric Division v. Pennsylvania Public Utility Commission, 77 
Pa. Cmwlth. 
268, 465 A.2d 735 (1983). That case involved an electric distribution company, 
PikeCounty, which contracted for its electric supply with 
Orange and 
Rockland Utilities, of which Pike was a wholly owned subsidiary. The 
Pennsylvania PSC found evidence of management imprudence by PikeCounty in failing to take advantage of 
available cheaper sources of supply. The court said:

"* * * [T]he action by 
the PUC which is challenged here is not a regulation of wholesale rates nor a 
determination that Orange and Rockland's wholesale rates 
are unjust and unreasonable. It is urged that the PUC action is a regulation 
only of Pike's retail rates, and as such proceeded, not from an analysis of 
Orange & Rockland's cost of service data, analysis 
within the exclusive jurisdiction of the FERC, but rather from analysis of 
Pike's cost of service and comparison with alternative costs of purchased power. 
Therefore, it is argued, the PUC action does not intrude on the exclusive 
jurisdiction of the FERC. We agree.

"* * * So while the FERC 
determines whether it is against the public interest for Orange & Rockland 
to charge a particular rate in light of its costs, the PUC determines whether it 
is against the public interest for Pike to pay a particular price in light of 
its alternatives. The regulatory functions of the FERC and the PUC thus do not 
overlap, and there is nothing in the federal legislation which preempts the 
PUC's authority to determine the reasonableness of a utility company's claimed 
expenses. * * *" Id., 465 A.2d  at 
737-738.

[¶14.]  What appellants fail to notice about the 
Pike case is that it was a full rate case. The PSC periodically conducts a full 
rate hearing for all Wyoming utilities. We are here considering a 
pass-through case. 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. Appellants worry about widow Murphy, a person symbolic of 
LV's rate 
payers, sitting in her cold house with no hot water. We worry too, but were LV 
required to process a full rate case for every pass-through, widow Murphy would 
be that much colder, as she would not only have to pay for her electricity, she 
would have to pay for that much more administration and bureaucracy. We do not 
think that requiring rate hearings every other month is going to put the hot 
water back in widow Murphy's bathtub.

[¶15.]  The present PSC policy is to allow a 
utility to pass-through a wholesale commodity cost increase to its customers 
without a full rate proceeding only when:

"* * * A, the basis for 
the proposed pass-through is a valid wholesale commodity cost increase beyond 
the Commission's control.

"B, the utility's actual 
rate of return is reasonable and at or below the return authorized by the 
Commission and allowing the pass-through will not result in the utility earning 
greater than the authorized return.

"C, the pass-through is 
applied in an equal and proportionate manner to all the utility's service 
classes with consideration given to the nature and level of the wholesale 
increase." Transcript of Hearing Proceedings, January 18, 1983, p. 
55.

[¶16.]  We approve of this policy, and as all of 
the requirements were met, we hold that the pass-through was properly granted. 
The proper place to consider possible alternative sources of supply is during a 
rate hearing. This was done during LV's last rate hearing, and a discussion 
relative thereto was had during the hearing for this pass-through. Also, at 
LV's last rate hearing, the rate of return 
authorized by PSC for LV was 9.96 percent. With the pass-through here 
granted, LV's 
rate of return is 8.60 percent, which is still 1.36 percent below that 
authorized. In fact, the pass-through did not affect LV's rate of return at 
all; nothing was passed through except the FERC approved increase in the 
wholesale rate charged by BPA for electricity. If the pass-through were not 
allowed, LV 
would have been forced to operate at a loss or close its 
doors.

[¶17.]  The rate increase was just and reasonable 
under the circumstances. The order of the PSC is affirmed.

ROSE, Justice, 
dissenting.

[¶18.]  The crux of this appeal concerns the 
degree of scrutiny which the Public Service Commission of Wyoming (PSC) must 
exercise over a utility's request to increase its retail rates in order to pass 
through to consumers a federally approved increase in the cost of wholesale 
electricity. The majority hold that the PSC must accept a pass-through rate 
increase as just and reasonable since federal law preempts the state regulatory 
agency from reviewing the reasonableness of the underlying wholesale rate 
approved by the Federal Energy Regulatory Commission (FERC). This holding 
depends upon the proposition that FERC approval of the wholesale supplier's rate 
automatically confers reasonableness upon the local utility's decision to pay 
that rate and obtain reimbursement from its customers. In my judgment, the 
majority decision, which permits the PSC to assume the reasonableness of a 
pass-through rate increase, conflicts with our statutory requirement that any 
rate increase - pass-through or otherwise - be proven just and reasonable before 
approval by the PSC.

[¶19.]  Under § 37-2-120, W.S. 1977, the PSC is 
required to conduct a public hearing prior to any change in rates. Only "just 
and reasonable" rates may be approved, § 37-3-101, W.S. 1977, 1984 Cum.Supp., 
and the utility bears the burden of establishing the propriety of its proposed 
rate increase: 

"(a) At any hearing as 
provided in this act involving an increase in rates or charges sought by a 
public utility, the burden of proof to show that the increased rate or charge is 
just and reasonable shall be upon the utility." Section 37-3-106(a), W.S. 
1977.

We examined 
these statutory provisions in McCulloch 
Gas Transmission Company v. Public Service Commission of Wyoming, Wyo., 627 P.2d 173 (1981), and concluded that a natural gas utility's actual payment for 
fuel was not enough to entitle it to pass the cost on to its consumers. Rather, 
the utility "had the additional burden of establishing [before the PSC] that the 
expenditure was a just and reasonable cost of purchasing gas." 627 P.2d  at 177. 
Similarly, in the case at bar the PSC had a statutory obligation to ascertain 
whether the applicant, Lower Valley Power & Light Company (Lower Valley), 
acted reasonably in paying the increased rate for wholesale electricity, in 
light of all of the available management alternatives.

[¶20.]  The Commonwealth Court of Pennsylvania 
recently reviewed a factual situation similar to the instant case in Pike County Light and Power Company - 
Electric Division v. Pennsylvania Public Utility Commission, 77 Pa.Cmwlth. 
265, 465 A.2d 735 (1983). In that case, Pike County Light and Power sought a 
retail rate increase to cover a wholesale rate increase imposed by its federally 
regulated supplier. The Pennsylvania Public Utility Commission denied the 
increase. Pike County Light and Power argued that the commission lacked 
authority to deny the requested retail rate increase since, under federal law, 
FERC possessed exclusive jurisdiction to set the underlying wholesale interstate 
rate. In rejecting that argument, the Pennsylvania court reasoned that FERC's 
examination of the data of the interstate supplier did not include consideration 
of the local utility's cost-of-service data or the availability of alternative 
sources of wholesale energy. These latter concerns fell within the exclusive 
jurisdiction of the state commission. Since the spheres of control of the two 
regulatory agencies did not overlap, the state agency properly reviewed the 
reasonableness of Pike County Light and Power's claimed costs. The reasoning of 
the Pennsylvania court bears repeating in 
full:

"In carrying out its 
regulatory function, the FERC examines the cost of service data of Orange & Rockland [the 
wholesale supplier] to determine that its wholesale rates provide a fair return 
to the utility's stockholders without being unfair to Orange & Rockland's purchasers. The FERC does not 
analyze Pike's cost of service data or purchased power alternatives in making 
its determination. The FERC focuses on Orange 
& Rockland 
to determine whether it is just and reasonable for that company to charge a 
particular rate, but makes no determination of whether it is just and reasonable 
for Pike to incur such a rate as an expense. The PUC, on the other hand, has no 
jurisdiction to analyze Orange & Rockland's cost of service data and makes no determination 
as to the reasonableness for Orange & 
Rockland to 
charge its rates. The PUC focuses on Pike and its cost of service data to 
determine whether it is reasonable for Pike to incur such costs in light of 
available alternatives. So while the FERC determines whether it is against the 
public interest for Orange & Rockland to charge a 
particular rate in light of its cost, the PUC determines whether it is against 
the public interest for Pike to pay a particular price in light of its 
alternatives. The regulatory functions of the FERC and the PUC thus do not 
overlap, and there is nothing in the federal legislation which preempts the 
PUC's authority to determine the reasonableness of a utility company's claimed 
expenses. In fact, we read the Federal Power Act to expressly preserve that 
important state authority."1 (Emphasis omitted.) 465 A.2d  at 
738.

 

In similar 
fashion, FERC's approval of wholesale electricity rates in the present case 
included no determination that LowerValley acted in the public interest in 
paying such rates in light of available alternatives. Unlike the Pennsylvania court, however, a majority of this court 
conclude that the state agency also lacks responsibility for reviewing the 
reasonableness of LowerValley's pass-through rate increase. 
Accordingly, consumers in this state must pay for their electricity at a rate 
which has not been scrutinized by any regulatory agency for reasonableness in 
light of the utility's particular circumstances.

[¶21.]  The majority rely on Northern States Power Company v. Hagen, 
N.D., 314 N.W.2d 32 (1981), in holding that the PSC cannot inquire into the 
reasonableness of a utility's retail rate increase which stems from a federally 
approved wholesale rate hike. In that case, however, the state regulatory 
commission considered and determined the propriety of a utility's expense for 
wholesale electricity, which expense the FERC had previously allowed incident to 
its jurisdiction over the applicant/utility. That is, the state agency in 
Northern States Power Company attempted to rule on the identical question 
previously decided by the federal authority. Given that situation, the Supreme 
Court of North Dakota properly ruled that the appropriate place to determine the 
reasonableness and prudence of a particular expense as it affects wholesale 
charges is in the proceeding before the FERC. 314 N.W.2d  at 38. Conversely, in 
the case at bar, no regulatory agency has ever reviewed the reasonableness of 
LowerValley's expenditures for 
wholesale energy in light of alternative sources. Such a determination by the 
PSC would not duplicate the efforts of the FERC.

[¶22.]  The majority say that the availability to 
LowerValley of a more 
advantageous source of energy must be determined in connection with a full rate 
hearing, not a pass-through case. However, as noted above, our regulatory 
statutes do not exempt from review pass-through rate increases. Rather, any increased charge must be proven just 
and reasonable at a public hearing. Sections 37-2-120, 37-3-101, and 
37-3-106(a), supra.

[¶23.]  The PSC functions in place of the forces 
of competition to protect the consumer from unreasonable and unjust charges, 
whether they arise as a result of pass-through increases or other factors. As we 
said in McCulloch Gas Transmission 
Company v. Public Service Commission of Wyoming, 
supra,

"* * * what is just and 
reasonable is to be decided on a case-by-case basis. The public interest is to 
be given paramount consideration; desires of a utility are secondary. Big Horn Rural Electric Co. v. Pacific Power 
& Light Co., Wyo. 1964, 397 P.2d 455. The purpose of the 
PSC's authority is to protect the public from utilities affected with a public 
interest." 627 P.2d  at 179.

I conclude that 
PSC's present summary procedure for reviewing a pass-through rate increase 
violates Wyoming's regulatory scheme, with the result 
that electricity customers fail to receive that protection, authorized by the 
legislature, which minimizes the possibility of unjust and unreasonable 
rates.

[¶24.]  I would have 
reversed.

1 The Federal Power Act 
provides in pertinent part:

"(a) It is declared that 
the business of transmitting and selling electric energy for ultimate 
distribution to the public is affected with a public interest, and that Federal 
regulation of * * * that part of such business which consists of the 
transmission of electric energy in interstate commerce and the sale of such 
energy at wholesale in interstate commerce is necessary in the public interest, 
such Federal regulation, however, to extend only to those matters which are not 
subject to regulation by the States.

"(b) The provisions of 
this subchapter shall apply to the transmission of electric energy in interstate 
commerce and to the sale of electric energy at wholesale in interstate commerce, 
but shall not apply to any other sale of electric energy * * *. The Commission 
shall have jurisdiction over all facilities for such transmission or sale of 
electric energy, but shall not have jurisdiction, except as specifically 
provided in this subchapter and subchapter III of this chapter, over facilities 
used for the generation of electric energy or over facilities used in local 
distribution or only for the transmission of electric energy in intrastate 
commerce, or over facilities for the transmission of electric energy consumed 
wholly by the transmitter." 16 U.S.C. § 824(a) and (b).