No. 85-488 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1986 

MONTANA-DAKOTA UTILITIES CO., 

a Delaware corporation, 

Plaintiff and Appellant, 

MONTANA DEPARTMENT OF PUBLIC SERVICE 

REGULATION, MONTANA PUBLIC SERVICE 

COMMISSION, MONTANA CONSUMER COUNSEL, 

Defendants and Respondents. 

APPEAL FROK: District Court of the First Judicial District, 

In and for the County of Lewis & Clark, 

The Honorable Gordon Bennett, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

Hughes, Kellner, Sullivan & Alke; John Alke argued, 

Helena, Montana 

For Respondent: 

James C. Paine argued, Montana Consumer Counsel, 

Helena, Montana 

Robert A. Nelson argued, Public Service Cornmission, 

Helena, Montana 

Submitted: July 22, 1986 

Decided: September 11, 1986 

Filed: SEP I i. 1986 

6k.L *,u 0 

Clerk 
Mr. Justice John C. Sheehy delivered the Opinion of the 

Court. 

I. 

On August 24, 1983, Montana-Dakota Utilities Co. (MDU) 

filed an application with the Montana Department of Public 

Service Regulation and Montana Public Service Commission 

(PSC) for rate increases in its revenue for gas service in 

the State of Montana of $7,917,936. The Montana Consumer 

Counsel (Counsel) intervened as a party and has participated 

at all times since in the case. 

After extensive hearings and submission of briefs, PSC 

issued on May 28, 2984, order no. 5020b approving increased 

rates for MDU. These increased rates were expected to 

produce additional revenues of $5,701,374. 

On June 8, 1984, MDU filed a motion before PSC for 

reconsideration of PSC findings relating to the treatment of 

gain on reacquired debt and cost of equity capital as well as 

its findings on other issues. On June 26, 1984, PSC issued 

its order no. 5020c, which granted reconsideration of an 

unrelated issue, but denied reconsideration of the treatment 

of the gain on reacquired debt, or cost of equity capital. 

MDU subsequently filed its petition for judicial review 

in the District Court, First Judicial District, Lewis and 

Clark County. For the purposes of the District Court, the 

parties stipulated to an abbreviated administrative record. 

That record, together with the District Court's opinion and 

order, constitute the record before this Court in this 

appeal. 

The judicial review in the District Court culminated in 

that court's final opinion and order of June 24, 1985. Two 
principal issues in that opinion and order give rise to the 

appeals now before us. The District Court held that PSC 

erred in requiring that the unamortized gain realized from 

reacquisition of a long term debt be deducted from the MDU 

rate base. The District Court also determined that PSC acted 

correctly in authorizing MDU a return on equity capital of 

13.35%. 

PSC and Counsel appealed to this Court the decision of 

the District Court that it is improper to require MDU to 

deduct the unamortized gain on reacquired debt from its rate 

base. On this point of appeal, we reverse the District 

Court. 

MDU appeals from the determination by the District Court 

that PSC properly assigned a percentage rate of 13.35% as 

return on equity capital for MDU. On this point of appeal we 

affirm the District Court. 

11. 

We first discuss the standard and scope of judicial 

review both in this Court and in the District Court of an 

order promulgated by PSC, and the issue of cost of equity 

capital. 

MDU contends that the District Court did not properly 

review PSCts decision on rate of return for equity capital in 

that (a) the District Court refused to review whether PSC's 

actions were arbitrary and capricious; (b) the District 

Court improperly assumed the role of PSC and made findings 

and conclusions where PSC failed to make necessary findings 

and conclusions; and (c) the District Court misapplied the 

clearly erroneous standard in its review of PSCts decision on 

rate of return. 
MDU points to the decision of PSC, nearly 

contemporaneously, in the Montana Power Company rate increase 

case, where PSC granted Montana Power Company a rate of 

return on equity capital of 14.25%. MDU contends that PSC 

granted the disparate rates without explanation. In the 

Montana Power Company case, PSC considered updated evidence 

on such cost of capital from capital markets through the 

first quarter of 1984. However, PSC refused to consider, on 

MDU's request for reconsideration, evidence of the cost of 

such capital after December 31, 1983. MDU claims that PSC 

has played favorites thereby, and that the error is more 

egregious because in each case PSC relied on the same witness 

to approve the different percentages of return. 

PSC and Counsel respond to MDU's contention as 

follows: The record in MDU's case was closed at the end of 

the hearings in January, 1984; the Montana Power Company 

record was not closed when Dr. Smith testified in May, 1984; 

MDU made no effort to enlarge the record either under 5 

38.2.4805 ARM, before PSC, or S 69-3-404, MCA, before the 

District Court, and it is improper to base a claim of 

arbitrariness and caprice on matters outside the record of 

the instant case. The PSC and Counsel further argue that in 

any event, the new information which MDU supplied as a part 

of its motion for consideration consisted of a bond report 

from a single brokerage house which showed that for the 

twelve months ending June, 1984, for A-rated utilities, the 

high yield for long term bonds was 15.13% and the low yield 

was 11.50%. Such a range, PSC concluded, showed the 

volatility of the market at the time. Moreover, PSC points 

out that 5 69-3-302, MCA, requires that a final decision on 

rate cases be made by PSC within 9 months of the date of 
application which in the MDU docket meant a deadline of May 

24, 1984. In the Montana Power Company case, the parties had 

waived the deadline because of the more complicated record 

and the number of intervenors in that case. 

We determine that PSC did not act arbitrarily or 

capriciously on the basis that it found a certain percentage 

figure for return on cost of equity in the Montana Power 

Company case and a lesser percentage figure for return on 

cost of equity in the MDU case. The District Court did not 

discuss this argument of MDU in its findings and conclusions, 

but then the District Court was required by law to confine 

its review to the record. Section 2-4-704; 5 69-3-404, MCA. 

MDU had the right, which it did not use, to open the record 

at the District Court level for additional material evidence 

if good reasons existed for failure to present the evidence 

in the proceeding before the agency. Section 69-3-404 (3) , 

MCA. Of course, the record before the District Court and 

before us, includes the motion for reconsideration made by 

MDU after the final order of May 18, 1984. With the motion 

for reconsideration MDU had presented to PSC a bond chart 

from a brokerage company. As PSC found, the bond chart was 

insufficient to require an increase in the percentage of the 

cost of equity because it mostly showed the volatility of 

such percentage rates at the time. Moreover, as the Court 

said in Washington Gas Light Company v. Public Service 

Commission of the District of Columbia (D.C. App. 1982), 450 

A.2d 1187, while it may be an abuse of discretion for an 

agency to ignore the most recent data in the record of a 

proceeding, the same cannot be said as easily for evidence 

submitted after the record has been closed and a final 

opinion issued. 
The platitude that one cannot compare apples to oranges 

is worn thin, but it applies here. The two different 

percentage figures do not spring from the same record; they 

are not comparable. As MDU contends, the District Court 

acted properly in not considering whether the PSC decision 

was arbitrary and capricious because it approved two 

different percentage figures for return on cost of equity. 

In the second phase of this issue, MDU contends that the 

District Court improperly assumed the role of PSC and made 

findings and conclusions in areas where the PSC itself failed 

to make necessary findings and conclusions. 

The source of MDU's contention is that the District 

Court discussed two economic theories of Dr. Smith in her 

assessment of a proper rate of return on equity capital, 

whereas PSC in its final order did not discuss those 

theories. Thus, MDU contends, the District Court made 

findings and conclusions outside the record not made by the 

PSC and so acted out of the scope of its power of judicial 

review. 

It is, of course, the duty of PSC to make explicit 

findings on material issues raised in the administrative 

proceedings. Northern Plains Resource Council v. Board of 

Natural Resources (1979), 181 Mont. 500, 522-23, 594 P.2d 

297, 310. The findings must be sufficient to permit thorough 

judicial review, State ex rel. Olsen v. Public Service 

Commission (1957), 131 Mont. 104, 113, 308 P.2d 633, 638, and 

the findings on material issues should be sufficient to 

permit a reviewing court to follow the reasoning process of 

the agency and determine whether that process conforms to 

law. Northern Plains Resource Council, supra; Public Service 

Commission of Montana v. District Court (1973), 162 Mont. 
225, 511 P.2d 334. Upon judicial review, the validity of the 

decision must be judged on the grounds and reasons set forth 

in the order, and no other grounds should be considered. 

Burlington Truck Lines, Inc. v. U.S. (1962), 371 U.S. 156, 

169, 83 S.Ct. 239, 246, 9 L.Ed.2d 207, 216. 

MDU contends that the District Court assumed the role of 

PSC and analyzed Dr. Smith's theories that "investors 

discount outliers" and her theory of a "negative risk 

premium. " The District Court, argues MDU, approved the 

acceptance of these theories by PSC, but PSC did not accept 

them nor acknowledge their existence in its final order. 

In determining the rate of return of 13.35% for equity 

capital, PSC relied on a combination of factors. It 

determined the current dividend yield for MDU at 9.2%. On 

that determination there appears to be no issue between the 

parties. It is the expected growth of that yield as 

perceived by prospective investors that is controversial. 

MDU had a compound growth rate of 12% in its dividends for 

the past 5 years. Dr. Smith, in her analysis, calculated 

expected growth according to three formulae: Single best 

growth rate, most important growth rates (growth in book 

value and growth in earnings); and all growth rates. For 

these she calculated 2.27%, 2.92% and 5.39% respectively. 

PSC rejected the "single best growth rate," as an extreme low 

based on a single growth factor, and adopted the other two 

growth rates because of "the strong statistical correlation 

of the two growth rates to dividend yields." The said growth 

rates averaged 4.15, which added to the established dividend 

rate of 9.2, gave PSC a proper cost of common equity at 

13.35%. 
In explaining why investors in MDU equity did not 

include in their expectations a continued growth in dividends 

of 12%, Dr. Smith stated, "investors discount outliers." An 

"outlier," it might be explained, in the case of MDU, is a 

company that is outstripping other companies in the gas 

utility business in the annual growth of its dividends. Dr. 

Smith's testimony also included this statement: 

That investors do not rely upon historical dividend 

growth as an important proxy for future dividend 

growth is reasonable on their part, as dividend 

growth has been greater than both earnings or book 

value growth over much of the past decade. If 

dividend growth were to remain in excess of 

earnings growth, payout ratios would reach and 

remain greater than unity and utilities would 

eventually pay out all previously-retained earnings 

as dividends. As previously-retained earnings are 

paid out, book value growth will turn negative and 

the earnings base for future dividend payments will 

be diminished further. In fact, the observed 

decline in utility book value growth is 

attributable, in part, to higher payout ratios. 

The District Court concluded that the "outlier" theory 

and the "negative risk premium" theory were not clearly 

wrong, and PSC was free to embrace them. 

In the hearing before PSC, MDU brought Ian B. Davidson, 

chairman of a brokerage house in Great Falls, to refute Dr. 

Smith's comment about outliers. He testified that her 

opinion about expected growth of dividends for MDU had little 

relation to what investors were in fact expecting. He 

contended that investors would in fact look at the growth of 

dividends experienced by MDU and that they would expect MDU 

to gross significantly above the industry average of 5% to 6% 

and probably in the range of 8% to 10% growth. 

In its findings, PSC agreed with Dr. Smith's analysis of 

MDU versus industry risk, and further stated that it agreed 

with Dr. Smith's risk analysis as an accurate representation 

of MDU's risk in relation to that of the utility industry as 
a whole. With respect to the expected future dividend growth 

rate, PSC concluded that "maintaining such a level in the 

long run seems unrealistic, especially considering 

[counsel's] cross examination of Mr. Da.vidson concerning 

earned return five years in the future while experiencing 

high levels of compound growth." 

While PSC did not expressly refer in its final order of 

May 18, 1984 to "outliers" or to "negative risk premium" it 

is patent from its findings and conclusions that it had in 

mind the whole of Dr. Smith's testimony in adopting her 

evaluation of a perception of investor's risk for MDU in the 

future. We find no substance therefore in MDU's contention 

that the District Court usurped the role of PSC in commenting 

upon the explanations utilized by Dr. Smith in determining 

the expected dividend growth of MDU equity capital. 

Thirdly under this heading, MDU contends that the 

District Court misapplied the clearly erroneous standard in 

its review of PSC's decision on rate of return. 

MDU1s argument here essentially is that proper judicial 

review requires a review of the whole record, not only the 

evidence purporting to support the PSC decision, but also 

that which would tend to detract from it, and although the 

Court must not reweigh the evidence, the District Court 

cannot ignore the effect of clearly contrary evidence. So, 

P4DU points again to Dr. Smith's testimony, and contends that 

her theory that "investors discount outliers" was not 

substantiated in discovery before the hearing nor at the 

hearing, and as unsubstantiated, is entitled to little 

evidentiary weight. Montana Citizens Freight Rate 

Association v. Board of Railroad Commissioners (1954), 128 

Mont. 127, 134, 271 P.2d 1024, 1027. 
Section 69-3-402, MCA, provides that a party in interest 

dissatisfied with an order of PSC may proceed in District 

Court to vacate such order on the grounds that the order is 

unlawful and unreasonable. The burden of proof is upon the 

party attacking or resisting the order of PSC to show that 

the order is unlawful or unreasonabl-e, as the case may be. 

Section 69-3-402 (4), MCA. 

Under the Montana Administrative Procedure Act (MAPA), a 

person who has exhausted all administrative remedies 

available within the agency and is aggrieved by a final 

decision in a contested case is entitled to judicial review 

under § 2-4-702, MCA, et seq. Section 2-4-702 is careful to 

state that it does not limit utilization or judicial review 

available under other statutes. In setting the standards of 

review, § 2-4-704, MCA, provides that the District Court may 

reverse or modify the decision if substantial rights of the 

appellant have been prejudiced because the decision, among 

other reasons, is "clearly erroneous in view of the reliable, 

probative, and substantial evidence on the whole record." 

If a party contends that the order of PSC is 

unreasonable, it is creating a fact issue, and under § 

69-3-402(4), MCA, that party has the burden of proof before 

the reviewing court on the issue. If it is contending that 

the order or decision of PSC is unlawful, the appealing party 

has the burden to show PSC abused its discretion. Thus we 

stated in City of Billings v. Billings Firefighters Local No. 

521 (Mont. 1982), 651 P.2d 627, 632, 39 St.Rep. 1844, 1849: 

Pur 

of 

"c1 

.suant to that statute, [S 2-4-704, MCA] findings 

fact by an agency have been subject to a 

.early erroneous" standard of review by the 

courts. Wheatland County v. Bleeker (1978) , 175 

Mont. 478, 575 P.2d 48. Conclusions of law are 

subject to "an abuse of discretion review." These 

standards differ due to the agency's expertise 
regarding the facts involved, and the court's 

expertise in interpreting and applying the law 

. . . 

MDU argues that an agency decision is not sustainable 

just because there is some evidence in the record to support 

it. It contends that "the scintilla of evidence" standard 

has been rejected as an abdication of the court's 

responsibility to insure due process of law, citing Billings 

Utility Company v. Public Service Commission (1921), 62 Mont. 

21, 35, 203 P. 366, 368. Nevertheless, with PSC, as with 

other agencies, what we said in City - of Billings, supra, at 

632, still pertains: 

. . . the factual findings of the BPA [Board of 

Personnel Appeals] will be upheld if supported by 

substantial evidence. Section 39-31-409 (4) , MCA. 

MAPA allows factual findings to be overturned when 

they are "clearly erroneous in view of the 

reliable, probative and substantial evidence on the 

whole record. " Section 2-4-704 (2) (e) , MCA. We 

find these tests to be harmonized. If there is 

substantial credible evidence in the record, the 

findings are not "clearly erroneous." Under either 

statute the scope of judicial review is the same. 

If the record contains support for the factual 

determinations made by the agency, the courts may 

not weigh the evidence. They are bound by the 

findings of the agency. 

On this point, MDU contends that since Dr. Smith's 

opinions are unsubstantiated, and since their witness, Mr. 

Davidson, who deals with thousands of investors every year, 

testified that investors do not believe as Dr. smith 

testified, the "outlier" theory should have been rejected by 

the District Court and by implication should be rejected by 

us. What is lost in this argument is that both Dr. Smith and 

Mr. Davidson were each trying to predict the future and what 

it holds for MDU. The District Court noted that the 

"outlier" theory seemed to be substantiated by its 

proponents' unchallenged statistics. The PSC, faced with the 

task of determining the future from the evidence of opinions 
before it, chose the conservative side, setting forth in its 

findings its reasons for adopting the rationale it followed. 

MDU, before the District Court, and before us, has the burden 

to show that PSC abused its discretion in this regard so as 

to have acted unlawfully or unreasonably. We find no abuse 

of discretion by PSC. Substantial credible evidence supports 

its findings, which are therefore not clearly erroneous. 

affirm the District Court this point appeal. 

MDU issues and sells to investors long-term bonds to 

finance plant. Under sinking fund provisions, MDU must 

reacquire and retire some of such bonds before maturity. If 

the reacquisition occurs at periods of higher interest rates, 

the bonds are reacquired at a discount from face value. The 

discount represents a gain to the utility. 

PSC ordered that the gain on reacquired debt be 

amortized over the remaining life of the indebtedness, the 

amortized amount to reduce interest expense to the utility. 

PSC further ordered that the unamortized amount be treated as 

a rate base reduction. 

MDU objected to the reduction of rate base by the 

unamortized gain, and the District Court agreed, holding that 

such reduction has the effect of confiscation without due 

process. The District Court held that the gain should be 

reflected in the periodic reduction of the utilities' cost of 

debt, as a "subtraction on the cost of service side of the 

ledger resulting in a saving to the consumer." 

All parties agree that since the debt represented by 

such bonds and their interest cost during the existence of 

the bonds must be paid by the rate payer, any reduction of 

the bonded debt should be passed on to the rate payer, and 
not to the shareholders. All parties agree that at the 

least, the amortized portion of the gain over the life of the 

remaining indebtedness had the bonds not been reacquired 

should be used to reduce the utilities' interest costs (the 

reference by the District Court to the "cost of service" 

undoubtedly refers to debt service). 

Of course, it would not be improper accounting to 

recognize the full amount of the gain in the year of 

acquisition. The parties point out that some regulatory 

bodies permit that for rate purposes. However, in Re 

Manufacturers Light and Heat Company (1970), 84 P.U.R.3d 511, 

the Federal Power Commission (now the Federal Energy 

Regulatory Commission) found that amortization of such gain 

over the remaining life of the indebtedness was required to 

pass the gain on to the consumers. Otherwise, recognizing 

the full gain in the year of acquisition could result in not 

passing the benefits to the consumers. The FERC subsequently 

adopted regulations for accounting which require utilities 

regulated by it to amortize such gain (or loss) equally on a 

monthly basis over the remaining life of the respective 

security issues reobtained. When amortization of the gain is 

utilized, the amortized amount is subtracted from the test 

period interest expense in determining the utility's cost of 

debt. Consolidated Gas Supply Company v. FERC (4th Cir. 

1981), 653 F.2d 129, 135. 

In a prior rate case involving MDU, stipulated as part 

of the record here, PSC accepted the testimony of Dr. Smith 

on the subject which follows: 

. . . All of the reacquired bonds are sinking fund 

bonds which must be retired on an annual basis over 

the life of the debt, according to the sinking fund 

requirements for each bond. Because of this, the 

reacquisition and retirement of the debt before its 
maturity debt is necessary. At the same time, the 

gain should be credited to customers, just like the 

interest expense on these bonds has been charged to 

them while they were outstanding. MDU has not 

credited the gain to customers.. . . The 

unamortized gain is included on the balance sheet 

as a deferred credit, just like deferred income 

taxes, and can be accounted for as a zero-cost 

capital structure item or as a rate base reduction. 

I have included it as a zero-cost capital structure 

item. 

The PSC in that case noted that a rate base reduction 

was the equivalent of treating the gain as a zero-cost 

capital item. It stated: 

26. The Commission agrees with Dr. Smith that the 

unamortized gain has some similarity to deferred 

taxes for rate making purposes. In previous 

decisions, the Commission has treated deferred 

taxes as a rate base reduction rather than as a 

zero-cost capital item (example: Order No. 4928a 

in Docket No. 82.4.28) . Including deferred taxes 

and capital structure as zero-cost produces about 

the same result as deducting the amount from rate 

base. 

In the case at bar, the rationale of PSC in determining 

its treatment of the unamortized gain may be found in its 

finding no. 67, where PSC stated: 

. . . In past cases, when the Commission has 

treated deferred taxes as a rate base reduction 

because it is a deferred credit and has no return 

requirement. Unamortized gain is also a deferred 

credit. The Commission finds that because of the 

reacquisition of the debt at a discount, a cash 

savings to MDU results which is accounted for as a 

gain. By deducting the unamortized portion of the 

gain from rate base, the Commission is precluding 

the Company from earning a return on the 

unamortized balance of the gain, and, therefore, 

allowing the consumer to realize full benefit from 

the transaction. The Commission finds that the 

unamortized gain is a deferred credit, similar to 

deferred taxes, for rate making purposes. The 

Commission determines, therefore, that the 

unamortized gain on reacquired debt should be 

treated as an allocated deduction from rate base in 

the amount of $218,562, using the approved 

allocation factors. 

It is important to know the reasons given by the 

District Court for holding PSC decision on unamortized gain 

confiscatory. Most obviously, the District Court was 
disturbed that the amortized portion of the gain was treated 

to reduce interest expense (cost of borrowing) while 

concurrently the unamortized gain was used to reduce rate 

base. The court noted ample authority for amortizing the 

gain as against interest costs, but noted no authority for 

concurrent rate base reductions. Moreover, the District 

Court found that the unamortized gain represented a liability 

that must be discharged over the remaining life of the 

original obligations; that reacquired bonds were probably 

replaced by new bonds; that the actual investment in plant 

was not reduced; and the District Court distinguished between 

unamortized gain and deferred income taxes, saying that on 

the one hand deferred income taxes result from monies paid in 

by consumers, but the gain on reacquired debt comes from 

investors. A gain on reacquired debt does not represent 

money actually received by the utility. The District Court 

determined that to deduct the unamortized gain (the phantom 

profit) from the rate base while at the same time applying 

the amortized gain to reduce interest expense compounded the 

reduction in consumer rates and provided an unjustified 

windfall for the rate payer at the expense of the utility's 

stockholders. MDU relies on these contentions in this 

appeal. 

The arguments of PSC and Counsel on appeal negative the 

determinations of the District Court and the contentions of 

MDU . They point to the MDU balance sheet which lists 

unamortized gain on reacquired debt under the heading of 

deferred credits. They point out, as did PSC, that deferred 

credits are routinely subtracted from the rate base. They 

contend that since all parties agree under Manufacturer's 

&-- Li ht and Heat Company, supra, the gain should be fully 
refunded to the rate payer, full compensation cannot be 

accomplished without deduction of the unamortized gain from 

the rate base. 

Counsel cites the example of a utility which reacquires 

its $1000 bond for $900. The original $1000 received from 

the investor was presumably utilized by the utility for 

plant. Counsel argues that unless some adjustment is made to 

the rate base of the unamortized portion of the gain during 

the amortization, the utility receives the benefit of a $1000 

rate base before it has paid for one. 

The question presented to us on this point of appeal 

appears to be one of first instance. Although substantial 

authority exists for the application of such gain to the cost 

of interest amortized over the remaining life of the 

reacquired debt, neither we nor counsel are able to point to 

another court wherein the question of amortizing the gain to 

interest expense has been concurrently ordered with a 

reduction of rate base by the unamortized gain. We have been 

informed in the brief of Counsel that the regulatory agency 

of North Carolina in the Matter of Application of Piedmont 

Natural Gas Company, in an order dated December 11, 1985, 

determined that the proper rate-making treatment to be 

afforded to gain from reacquired debt is to 

(1) amortize the gain from the defeasance as a 

reduction to the cost of service, over the 

remaining life of the defeased debt; (2) reduce the 

company's rate base by the unamortized gain. 

We do not perceive that the order of PSC on unamortized 

gain is confiscatory in nature. All agree that the objective 

must be to return the full amount of gain to the rate payer. 

Unless a reduction is made to rate base during the period of 

amortization, the rate payer will be required to pay in that 
period a return calculated on a rate base which is in fact 

larger than the cost to the utility, because of the 

repurchase of the debt at less than face value. 

Using the example cited to us in brief, if MDU issued a 

$1000 bond, and reacquired it for $900 when it had a 

remaining life of five years, these results under PSC order 

would follow: In the first year, $20 would be deducted from 

interest expense, and $80 would be reducted from the utility 

rate base. In the second year, another $20 would be deducted 

from interest expense, and the rate base reduction would be 

$60. At the end of five years, the utility would have 

regained its rate base and the rate payer would have received 

the full benefit of the $100 gain. In the meantime, during 

the period of amortization, the rate payer would not be 

charged with the rate of return on gain not yet refunded to 

him. The shareholder is not undercompensated during the 

period of amortization because his rate of return is based on 

the actual cost of his investment. 

By analogy, our statutes command this result. Under 

S 69-3-108, MCA, the rate base for utility property can be 

valued at no more than its original cost. 

The PSC order does not mean that MDU must revise its 

rate base in its regular accounts. An item may be treated 

differently for accounting and rate-making purposes. Public 

Systems v. FERC (D.C. Cir. 1979), 606 F.2d 973. 

If the gain were recognized and used to reduce interest 

expense in the year the gain was realized, there would be no 

need, of course, for treatment of the unamortized gain. It 

is because good rate-making practice requires the gain to be 

amortized over the remaining life of the indebtedness, and 

the amortized amount subtracted from the test period interest 
expense (Consolidated Gas Supply Company v. FERC, supra), 

that it then becomes necessary to consider the proper method 

of treating the unamortized gain. 

The difference between our view and that of the District 

Court, and the intensity of positions taken by the parties in 

their briefs to this Court all indicate strong arguments that 

can be made for both sides of this issue. In such a case, it 

behooves courts to defer to the expertise of the regulatory 

commission whose duty is the fair protection of all the 

parties, the rate payers, the investors, and the shareholders 

of the utility. We remind ourselves that: 

It follows that the responsibilities of a reviewing 

court are essentially three. First it must be 

determined whether the commission's order, viewed 

in light of the relevant facts and of the 

commission's broad regulatory duties, abused or 

exceeded its authority. Second, the court must 

examine the manner in which the commission has 

employed the methods of regulation which it has 

itself selected, and must decide whether each of 

the order's essential elements is supported by 

substantial evidence. Third the court must 

determine whether the order may reasonably be 

expected to maintain financial integrity, attract 

necessary capital, and fairly compensate investors 

for the risks they have assumed, and yet provide 

appropriate protection to the relevant public 

interests, both existing and foreseeable. The 

court's responsibility is not to supplant the 

Commission's balance of these interests with one 

more nearly to its liking, but instead to assure 

itself that the Commission has given reasoned 

consideration to each of the pertinent factors. 

Judicial review of the Commission's orders will 

therefore function accurately and efficaciously 

only if the Commission indicates fully and 

carefully the methods by which, and the purposes 

for which, it has chosen to act, as well as its 

assessment of the consequences of its orders for 

the character of future development of the 

industry.. . . 

Permian Basin Area Rate Cases (19681, 390 U.S. 747, 792, 88 

We determine that PSC's order is not in fact 

confiscatory as to the utility or its shareholders and is an 
order reasonably devised to produce an equitable result for 

the rate payers. In the circumstances, therefore, we reverse 

the order of the District Court on this point of appeal. 

IV. 

A final issue raised by MDU is that this Court should 

order a refund or surcharge to make MDU whole. The issue, of 

course, depend on the success of MDU's appeal. In view of 

our holdings here, we withold any comment on the propriety of 

the issue. 

Affirmed in part and reversed in part. 

1 Q; L% s & 

Justice 

I 

Justices