NO. 82-175 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1983 

THE MONTANA POWER COMPANY, 

Plaintiff and Appellant, 

vs. 

DEPARTMENT OF PUBLIC SERVICE 

. REGULATION, MONTANA PUBLIC SERVICE 

COMMISSION et al., 

Defendants and Respondents. 

Appeal from: District Court of the Second Judicial District, 

In and for the County of Silver Bow 

Honorable Mark Sullivan, Judge presiding. 

Counsel of Record: 

For Appellant: 

Crowley, Haughey, Hanson, Toole and Dietrich, 

Billings, Montana 

George C. Dalthorp argued, Billings, Montana 

Corette, Smith, Pohlman and Allen, Butte, Montana 

Hjort, Lopach and Tippy, Helena, Montana 

For Respondents: 

James C. Paine argued, Helena, Montana 

Eileen E-Shore argued, Helena, Montana 

Submitted: March 1, 1983 

Decided: May 31, 1983 

Filed: MAY 31 1983 
Honorable James B. Wheelis, District Judge, delivered the 

Opinion of the Court. 

Montana Power Company (MPC) appeals from a judgment 

entered in the Silver Bow County District Court, the Honorable Mark P. Sullivan presiding, affirming an order of the 

Public Service Commission (PSC) which set allowable electric 

rates. 

In April 1980 MPC filed an application for electric 

rate increases with the PSC. In its request MPC asked the 

PSC to accept, as a part of the rate base, money expended by 

the company in obtaining coal from Western Energy Company 

(Western Energy). Western Energy is MPC's wholly-owned 

subsidiary and supplies 100 percent of the coal need for 

MPC's coal-fired generators in Colstrip and Billings. MPC 

accounts for approximately 15 percent of Western Energy's 

annual coal sales with the remaining 85 percent of sales 

being made to other utilities and manufacturing concerns. 

During the hearing on the rate increase request, the 

PSC heard testimony on two different methods for monitoring 

the reasonableness of the price MPC pays for its coal. 

First, MPC suggested the use of the "market price" method: 

an examination of the price charged in the marketplace for 

similar sales in comparison to those being charged by the 

subsidiary to the parent; if a favorable comparison is 

found, the price is deemed reasonable and no adjustment is 

necessary. Second, the Montana Consumer Counsel suggested 

the "rate of return" method, which called for an examination 

of the return being earned by the subsidiary on its sales to 

the parent; an excessive rate of return requires an 

adjustment. 

In support of the "market price" method, MPC submitted 
a study prepared by Arthur D. Little, Inc., a firm of 

national prominence in the field of coal supply contracts. 

MPC requested Arthur D. Little, Inc., to solicit and evaluate bids from coal suppliers. After receiving bids from 

nine companies, Arthur D. Little, Inc., found that Western 

Energy's price was the lowest price available to MPC's 

Billings plant. The Colstrip plants were not included in 

the study because the existing contracts had not expired. 

In support of the "rate of return" method, the 

Consumer Counsel's expert witness, John W. Wilson, presented 

evidence that compared Western Energy's profits with those 

of other coal companies. Wilson's approach characterized 

Western Energy's profitability of more than 20 percent on 

equity capital as excessive when computed to the 13.5 

percent average for the other coal companies used in his 

comparison. 

In December 1980, after analyzing the evidence 

presented, the PSC chose to rely on the "rate of return" 

method suggested by the Consumer Counsel and rejected the 

"market price'' method suggested by MPC. The PSC found 13.5 

percent to be a reasonable rate of return on coal sold by 

Western Energy to MPC and ordered $900,730 of MPC's request 

be disallowed. 

An appeal of the PSC order was taken to the District 

Court by MPC. After review, the court held that: (1) the 

evidence presented to the PSC showed that the rate of return 

established by the PSC compares closely to other coal 

companies; (2) MPC offered no substitute for what it thought 

the return figure should be, nor did it offer any evidence 

to support a higher rate of return; (3) MPC, in its rebuttal 
of Consumer Counsel's witness Wilson, offered no evidence 

that Wilson's comparable coal industry earnings exhibit was 

faulty; and, (4) MPC did not sustain its burden of proof as 

to the order of the PSC being unlawful or unreasonable. 

MPC now appeals to this Court claiming that: (1) the 

PSC failed to give effect to the decision in Montana-Dakota 

Utilities Co. v. Bollinger (1981), Mont . , 632 P.2d 

1086, 38 St.Rep. 1221; (2) the PSC and the District Court 

erred by ignoring MPC's substantial evidence which demonstrated that Western Energy's coal price was the lowest 

available coal price under competitive market conditions; 

and, (3) the Montana Consumer Counsel's evidence which the 

PSC adopted in imposing a rate of return limitation on 

Western Energy's profitability is inherently flawed. 

Appellant MPC contends that the PSC should not have 

used the "rate of return" method because a competitive 

market was shown to exist and Western Energy's coal was the 

lowest priced coal available to MPC. It asserts the cost 

claimed by MPC should not have been deemed excessive. 

Respondent contends that the use of the 13.5 percent 

profitability average was not improper. The interest of the 

PSC is to see that MPC does not reap an unfair profit on its 

investment in its subsidiary by allowing the subsidiary to 

overcharge the parent for coal when the coal expense will be 

passed on to the ratepayers. 

A very similar situation was presented to this Court 

in Montana-Dakota Utilities Co. v. Bollinger (1981), 

Mont. , 632 P.2d 1086, 38 St.Rep. 1221. Montana-Dakota 

Utilities Co. (MDU) had requested an increase of its electric utility rates. In its request, MDU asked the PSC to 
accept, as part of the rate base, money expended by the 

company in obtaining coal from Knife River Coal Company 

(Knife River), a wholly-owned subsidiary of MDU. The PSC 

used a "rate of return" method to reduce the return on 

investment from approximately 33 percent to 12.124 percent 

(the rate of return allowed to MDU on its overall operation). 

Apparently, MPC has misunderstood our decision to 

remand Montana-Dakota Utilities to the PSC. MPC would 

interpret our decision to hold that, once a competitive 

marketplace is established, the "market price" method must 

be used by the PSC. We did not so hold. We remanded that 

case to the PSC, not because the PSC chose to use the "rate 

of return" method, but rather because the PSC did so without 

sufficient evidence to support its findings. Montana-Dakota 

Utilities, 632 P.2d at 1091, 38 St.Rep. at 1227. 

We did state a preference for "the PSC to use a 

marketplace cost of coal approach, if it can obtain sufficient facts for its determination, rather than using the 

rate of return method with all of its difficult theories and 

computations." Montana-Dakota Utilities, 632 P.2d at 1092, 

38 St.Rep. at 1228. It was, however, recognized that the 

PSC has the right to choose the method followed. The PSC 

should not be restricted to any single formula so long as 

the method followed and the order entered when applied to 

the facts and viewed as a whole do not produce an unjust or 

abitrary result. 632 P.2d at 1091, 38 St.Rep. at 1227. 

The PSC is vested, by statute, with the duty to supervise and regulate the operations of public utilities and to 

see that rates are just and reasonable. Section 69-3-330, 
MCA. This Court cannot substitute its judgment for that of 

the PSC. Our function is to determine whether the PSC acted 

arbitrarily and unreasonably without sufficient evidence to 

support its findings. Mountain States Telephone & Telegraph 

v. Dept. of Public Service Regulation (1981), Mon t . 

, 624 P.2d 481, 38 St.Rep. 165. 

In Montana-Dakota Utilities we remanded the case to 

the PSC with instructions to: 

". . . hold an additional hearing to 

determine the following: (1) if rate of 

return is used, a factual basis for the 

rate of return allowed Knife River considering its assets and rate of return on a 

marketplace basis comparable to other 

coal companies; or (2) in the event 

market cost of coal is used, sufficient 

facts to support the PSC determination of 

the fair market price for coal." 632 

P.2d at 1092, 38 St.Rep. at 1228. 

We did not hold that the PSC must use a "market price" 

method if a competitive marketplace can be established; the 

choice of methods is left to the PSC. 

In the instant case, the PSC chose to apply a "rate of 

return" method in an effort to determine the reasonableness 

of the price paid by MPC for Western Energy coal. Our 

inquiry is limited to determining whether substantial evidence was presented to support the PSC's decision or if the 

decision was unjust or arbitrary. 

On appeal, MPC contends the PSC's reliance upon the 

testimony of Montana Consumer Counsel witness John W. Wilson 

is erroneous. MPC claims Wilson's study is not an accurate 

study of the entire industry. Wilson found Western Energy 

earned a 20 percent return on equity capital every year 

since 1974. Wilson testified that the industry average 

equals 13.5 percent. MPC now claims Wilson collected arbi- 
trary data which does not accurately reflect the coal 

industry. In its rebuttal testimony at the PSC hearing, 

however, MPC did not challenge the accuracy or probative 

value of that testimony. MPC, in rebuttal, merely reasserted its original position that the PSC should rely on 

MPC's testimony. No foundation objections were made by MPC 

concerning the exhibits used by Wilson. 

MPC is essentially challenging Wilson's testimony for 

the first time on appeal. The MPC is offering this Court an 

invitation to judge the credibility and weight of factual 

evidence which is not part of the record which MPC itself 

ignored, overlooked, or misinterpreted at the administrative 

level--the PSC hearing. This we will not do. This Court 

has previously recognized that limited judicial review 

strengthens the administrative process. "Limited review 

encourages the full and complete presentation of evidence to 

the agency by the participants in the administrative process 

by penalizing those who attempt to add new evidence or new 

lines of argument at the judicial review level." Vita-Rich 

Dairy, Inc. v. Dept. of Business Regulation (1976), 170 

Mont. 341, 343-344, 553 p.2d 980, 982. 

It is an axiom of utility law that a utility seeking 

increased rates has the burden of showing its claims are 

reasonable. The MPC did not object to the foundation of the 

Consumer Counsel's witness's exhibit. The PSC was entitled 

to believe and accept the evidence as presented by the Consumer Counsel's witness and to reject the evidence presented 

by MPC. So long as the record supports the decision, that 

judgment must stand. It is not required that a person be 

knocked down by a gale before he knows which way the wind is 
blowing. All that is required is that the evidence is 

capable of being believed. In the instant case, unlike 

Montana-Dakota Utilities Co. v. Bollinger, supra, the record 

supports the decision made by the PSC. There was ample evidence presented by Consumer Counsel's witness John W. Wilson 

that Western Energy profitability (20 percent) was above 

that of the average for the industry (13.5 percent). The 

PSC chose to make the necessary adjustments in the amount 

that MPC was allowed to pass on to the ratepayers. 

MPC cannot wait until appeal to challenge the evidence 

and testimony of the Consumer Counsel. MPC did not sustain 

its burden of proof as to the order of the PSC being 

unlawful or unreasonable. 

We hold that the PSC's decision is supported by 

substantial evidence and fully meets the standards and 

guidelines established in Montana-Dakota Utilities Co. v. 

Bollinger, supra. 

Af f irmed. 

\&bisiYa, Hon rable James B. Wheelis, 

Dist ict Judge, sitting in 

pa of Mr. Justice Daniel 

J. S ea 

We concur: 

Chief Justice \ 
Justices 

in place 
Mr. Justice John Conway Harrison dissenting. 

I dissent. 

I have tried in vain to reason with my colleagues not to 

make what I view to be a further confusion in the law of utility 

regulation in the State of Montana. The result of the majority 

holding will, in my opinion, not only increase the cost of 

electricity to the consumers of Montana, but, in addition, 

increase the cost of coal to purchasers of Western energy -- 

which will in turn be passed on to the consumers. The economic 

result of the majority holding will force Montana Power to 

purchase its coal from more expensive sources and sell the 15 

percent it contracted for with Western Energy to a better market. 

To so hold does not, in my opinion, make economic sense. 

Taking the uncontroverted facts presented to us, it is 

evident that Montana Power Company (MPC) studied our opinion in 

Montana-Dakota Utilities Co. v. Bollinger (1981), Mont . I 

632 P.2d 1086, 38 St.Rep. 1221, and decided that in cases where 

coal is purchased from a wholly-owned subsidiary, the steps 

necessary to make the purchase would be carefully adhered to, and 

that the holding of that opinion was controlling as to the proper 

method to be used by the Public Service Commission (PSC) in 

determining the methodology to be used. I believe the PSC 

misread our holding in arguing that we held in Bollinger (supra) 

that the "marketplace price of the coal" was controlling. What 

we held was: 

"'As a matter of justice, it appears to the 

court that it might be better for the PSC to 

use the marketplace cost of coal approach, if 

it can obtain sufficient facts for its determination, rather than using the rate of return 

method with all its difficult theories and 

computations. While the PSC does have the 

right to choose the method followed, this 

court did not find a factual reason for the 

summary rejection of the marketplace cost of 

coal approach.'" (emphasis added) 

"We therefore, vacate the judgment of the 

District Court and remand the case to the PSC 

with instructions to hold additional hearings 

to determine the following: (1) if the rate 

of return is used, a factual for the rate of 
return allowed Knife River considering its assets 

and rate of return on a marketplace basis 

comparable to other coal companies; or in 

the event market cost of coal is used, sufficient 

facts to support the PSC determination of 

the fair market price for coal.'" 

While we did indicate by our language in Bollinger (supra) 

that is our opinion the "market price might be the better approach," 

we did not rule out the use of other methodology by the PSC. We 

noted that a parent's earnings in a subsidiary are improper if the 

utility earns "excessive profits" at the expense of the ratepayer. 

We further held that sales to other customers and "evidence of 

prices charged by other companies in the competitive area" are 

sufficient to establish the reasonableness of coal prices. 

Perhaps it was this latter language that caused the MPC to 

follow the market price approach in its presentation to the PSC 

believing, on the basis of Knife River case, that if such an approach 

was taken,their evidence would be so convincing the PSC would be 

found to be arbitrary if it arrived at a different holding. In 

my view, the evidence for the rate of return method was so weak 

this case should be reversed. 

It is apparent MPC believed that our holding in Knife River 

stated that it was prefera.ble to use the market price method 

because the record indicates that the company was aware that the 

PSC had expressed concern regarding the "captive coal" situation 

of Mpntana Electric Utilities. Therefore, MPC retained an independent 

firm, knowledgeable in the areas of coal supply and contracts, 

to secure for the Corette Plant at the lowest possible cost, a 

fuel supply that was available at the time when the existing contract 

was expiring. The appellant company specifically informed the 

PSC by letter of its intention to do so. Thereafter, they secured 

the services of an Arthur D. Little, Inc., who solicited some sixteen 

coal companies operating in the Montana and Wyoming area for bids 

for coal supply to the Corette Plant. An advertisement was 

placed in Coal Week, a coal industry publication, and this advertisement produced five additional requests for that information. Nine 

bids were eventually received. 
An analysis of the bid showed that the prices as of September 

1, 1979, including transportation and utilitization costs, for the 

three lowest bids were as follows: Western Energy (Rosebud Mine), 

0.753 per million BTU; Westmoreland Resources, Absarokee (Absaloka 

Mine), 0.897 per million BTU; ARC0 (Black Thunder Mine), 0.921 

per million BTU. The remaining six bids ranged from 0.993 to 

1.346 per million BTU. It is interesting to note that V7estmoreland's 

Absaloka Mine is closer to the Corette Plant than the lowest Western 

Energy's Rosebud mine. 

An additional factor considered by Montana Power was its 

desire to secure the coal supply for a ten-year period, and 

further analysis was required to determine how escalation clauses 

and increased transportation clauses would effect the contract 

prices over the ten-year period. The result of the analysis 

described by the independent reporter, Arthur Little, was that 

the cost levelized over a full contract period thus Mr. Little 

calculated a $0.40 per million BTU cost advantage for the Western 

Energy Coal. 

I find the Arthur D. Little report to be objective and 

conclusive evidence that competition existed, and that Western 

Energy appropriately received a contract as a result of its 

favorable contract offer. I also find that the evidence is 

unchallenged and should have formed the basis for the PSC's 

determination to recognize the appellant's Western Energy Coal 

purchase expense as fully recoverable. 

The Arthur D. Little study does not include the coal supply 

for Colstrip's Units I and I1 because that contract at that time 

had expired. There was testimony on the record that the Colstrip 

contract was negotiated jointly with Western Energy by the Puget 

Sound Power and Light Company and the MPC, as partners in ~olstrip 

I and 11. The price paid for that coal was subsequently recognized 

in Puget Sound's electrical rates, and therefore, Puget Sound 

negotiated with knowledge that its fuel expenses would be scrutinized 

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by its home state, Washington, regulators. In Washington, Puget 

Sound sought a price which it could later justify. As previously 

noted, Washington approved Puget Sound's coal purchases from Western 

Energy. 

The cost of the appellant Montana Power and Puget Sound for 

Colstrip is substantially below the competitive price at the 

Corette Plant, even before transportation and other expenses 

are considered. The Colstrip cost of $7.097 per ton compares 

favorably with the $8.757 Corette cost. This comparison, made 

for the purpose of independently verifying the reasonableness 

of the Colstrip Cost level, is, in my opinion, one of the strong 

points for Montana Power's position that it's claimed level of coal 

expense is fair to the Montana Power ratepayers. In addition, the 

record indicates, through the testimony of Mr. Burke, that Montana 

Power coal expense at Colstrip I and 11, as well as at Billings, 

had been accepted by the PSC in previous hearings in 1968, 1972, 

1975, and 1978, as a result of rate proceedings in those years. 

Such facts are, in my opinion, indicative of the coal price at 

Colstrip. It is interesting to note that in those previous hearings 

regarding Pacific Power and Light, the expert of the Consumer 

Counsel, Dr. Wilson, was examined on the theory that he presented 

in this case by the consumer counsel and by the PSC, and in those 

instances the PSC did not accept his testimony. With this background, it is understandable that the appellant, IIPC, choose 

not to cross-examine him because in those four cases the PSC 

had found his testimony unreliable or at least unconvincing. 

As it is above noted, Dr. Wilson has for some time been trying to 

sell the rate-of-return methodology as an expert witness here in 

Montana, and we noted in Knife River, supra, that such a method 

could be acceptable so long as the method did not produce "an 

unjust or arbitrary result" and that the reasonableness of the 

coal purchase expenses be based on "sufficient evidence." The 

PSC argues since MPC did not challenge the testimony of J.W. 

Wilson it gave them license to adopt that testimony without even 

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superficial scrutiny. Then the PSC asserts that their "substantial 

evidence" rule applied so the court cannot substitute its judgment 

for that of the PSC. 

I do not agree with that in view of the fact that there is, 

in my opinion, an arbitrary, capricious decision made by the PSC 

in adopting the testimony of J.W. Wilson. Dr. Wilson is the only 

witness that testified concerning the issue of earnings of other 

coal companies. This testimony is as follows: 

"As shown on page one of exhibit 22, (JW-3), 

the coal industry equity profits have averaged 

about 16 percent in this decade, with the 

exception of very high earnings rates in the 

three years immediately following the OPEC 

embargo. In November of 1973, the average 

earnings rates in the coal industry have been 

under 12 percent." 

He thereafter listed eight coal companies as "comparable coal 

industry earnings from 1970-1979." Those companies were Bates 

Manufacturing, Eastern Gas a.nd Fuel, Fulcom Seaboard, Kaiser 

Resources, Kaneb Services, North American Coal, Pittstown and 

Westmoreland Coal. As previously noted, the appellant, MPC, had 

contacted twenty-one coal companies in connection with the 

Corette coal contract that there was only one of the companies 

contacted by Montana Power on both lists, that is "Westmoreland." 

Even that is not a sufficient identity for the same company is 

listed on the Arthur Little, Inc. report as "Westmoreland 

Resources, Inc." which operates a mine in Big Horn County, 

Montana. All of the sixteen companies solicited by Arthur D. 

Little, Inc., were producing coal in Montana and Wyoming. None 

of the companies, except Westmoreland, if that is the same 

Westmoreland as the Westmoreland Resources, are listed as solicited by Arthur D. Little, are within the area of Montana and 

Wyoming. 

In comparing the testimony of Arthur D. Little, Inc., and 

Wilson, there appears to be inadequacies on the part of Dr. 

Wilson that should have drawn more attention from the PSC in 

evaluating his testimony. 1. According to Dr. Wilson, the 
Fulcom Seaboard showed a percentage of earnings from 1974 - 1978 

averaging 30.8 percent, which far exceeds Western Energy's 

average for thosefiveyears by as much as 7.8 percent per year. 

In addition, Fulcom Seaboard's figure for 1979 was not used by 

Wilson and, therefore, it had no input into the 13.5 percent 

earning figure which PSC was going to allow Western Energy. 

2. Next, the company given by Wilson called "Bates Manufacturing" 

was liquidated by 1979, and therefore has not had any impact 

on the "average" 13.1 percent selected by Wilson with a slight 

modification adopted by the Commission. 3. Wilson listed as an 

"average" number at the base of each column of his exhibit. 

This actually is an average of the averages of each company, 

and does not take into consideration any proper variables. This 

cannot be, in my opinion, a true average. Further, in distorting 

the figure, he left out Fulcom Seaboard, which was an unusually 

low figure and inserted. in its place Westmoreland Coal (1 percent) 

and Pittstown (8.6 percent) which disotrted the so-called average 

figures. Including leaving out Fulcom Seaboard, which had by far 

the best earnings, Wilson failed to mention Bridger Coal which 

had a 60 percent figure and the Pacific Minerals which had 37 

percent, thereby leaving two companies with unreasonable low 

percentage earning figures and therefore arriving at a fixed 

coal company average of 13.1 percent, a figure which, in my 

opinion, is distorted. Had he included Bridger Coal and Pacific 

Minerals, there would have been a considerably higher change 

in his "average" figure. 

I find Dr. Wilson's testimony to be both arbitrary and 

discriminatory in an effort to get the PSC to accept his methodology and feel that no credible evidence was submitted to the 

record on rates of return on "comparable coal companies." 

As previously noted, I find that the PSC's posture in this 

matter is totally inconsistent with its prior actions with regard 

to the Pacific Power and Light Company and the MDU where it 

refused the very testimony that was given by Dr. Wilson in this 

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matter. In Knife River, supra, we allowed a return of 1-3.5 percent which is nearly identical to the rate of return of 13.45 

percent allowed Montana Power on its utility operations. After 

our decision in Knife River, supra, the case was returned by the 

District Court to the PSC for them to consider the testimony 

on a competitive market methodology and stayed with their original 

opinion supporting Dr. Wilson. 

Last but not least, the PSC contends that Plontana Power had 

no right at this stage of the proceedings to challenge Dr. Wilson's 

comparisons for the first time. They claim that the MPC had a 

burden of contradicting Dr. Wilson's stud.y of comparable coal 

companies at the hearing, and, as it stands now, there is no 

evidence which can sufficiently rebut the testimony of Dr. Wilson. 

In pursuing the argument that Montana Power did not cross-examine 

Dr. Wilson at the hearing and is not estopped from attacking 

the credibility of his evidence,I would find that because the 

testimony of Dr. Wilson was so weak and was rebutted by the studies 

of Arthur D. Little, Inc., the evidence before the PSC lacked 

credibility and their decision to adopt his findings is both 

arbitrary and capricious. 

While the PSC cites Vita-Rich Dairy, Inc. v. Department of 

Business Regulation (1976), 170 Mont. 34L, 553 P.2d 980, for the 

authority that at the time at the judicial review level, the 

appellant, MPC was precluded from raising the issue for the first 

time, I do not believe that holding stands for a rule that a party 

cannot argue on appeal from a record that the testimony of the 

key witness is without substance. 

I would reverse the decision of the District Court and return 

the matter to the PSC for further hearings.