### No. 14310 IN THE SUPREME COURT OF THE STATE OF MONTANA 1978

IN THE MATTER OF THE PETITION OF THE MONTANA POWER COMPANY FOR INCREASED RATES AND CHARGES IN GAS AND ELECTRIC SERVICES; IN DOCKET 6348, ORDER No. 4220C, DEPARTMENT OF PUBLIC SERVICE REGULATION, MONTANA PUBLIC SERVICE COMMISSION.

Appeal from: District Court of the Second Judicial District, Honorable Jack L. Green, Judge presiding. Counsel of Record: For Appellant: Geoffrey Brazier argued, Helena, Montana James Paine argued, Helena, Montana For Respondent: Corette, Smith, Dean & 

### Pohlman, Butte, Montana Kendrick Smith argued, Butte, Montana Church, Harris, Johnson and Williams, Great Falls,

Montana

Submitted: December 20, 1978 Decided:

# FE 2

# :Mr. ~ustice Gene B. Daly delivered the Opinion of the Court. he Montana Power Company (Montana Power or MPC) filed several petitions for rate adjustments before the Public Service Commission (Commission or PSC) designated as Docket Nos. 6279 and 6327. By final amended petition Montana Power requested Commission approval of rates for electricutility servicedesigned toproduce an increase in annual operating

revenues of $15,650,601 and approval of rates for natural gas servicedesigned toproduce an increase inannual gross operating revenues of approximately $28,800,000. Atapproximately the 

### same time the Montana Consumer Counsel (Consumer Counsel) filed a petition for an electricratedecrease, Docket No. 6336. These matters were consolidated for hearing purposes into Docket No. 6348. The Commission conducted public hearings in Helena in this docket from October 20 toNovember 6, 1975; from January 12toJanuary 23, 1976; and from February 2 to February 13, 1976. Individual commissioners also conducted public hearings invarious cities throughout the state during November and December, 1975. Atthe hearings conducted inHelena, the Commission heard the testimony of 54 witnesses and accepted 93 exhibits during the course of direct and cross-examination by the Commission, the Commission staff, Montana Power, the Consumer Counsel and intervenors Anaconda Company, Great ~alls Gas Company, Hoerner Waldorf, Ideal Cement Company and the executive agencies of the United States government. On July 26, 1976, Montana Power filed a petition to present additional testimony. This petition was subsequently denied on the ground that the testimony to be presented would have been irrelevant and prejudicial as it would have dealtwith post-test year data.Montana Power also filed a motion on July 26, 1976, for immediate temporary rate increases for its gas and electric services. This motion was argued before the Commission on August 12, 1976. On January 6, 1977, the Commission issued Order No. 4220B inwhich 

### it granted MPC a temporary increase in its natural gas rate, refused to grant a temporary rate increase for electric service and denied the Consumer Counsel's petition for an electricrate decrease. The casewas submitted for decision to the Commission

on December 13, 1976. By Order No. 4220C, dated February 23, 1977, thePSC granted Montana Power an electricrate increase of $2,069,000, much less than the $15,650,601 sought by MPC, and a gas rate increase of $26,862,000. No party has appealed any portion of the Commission's gas rate decision. Montana Power appealed tothe District Court two Commission "ratebase" (theinvestment on which returns are allowed) determinations: the PSC's exclusion of $5.7 

### million from ratebase asexceeding the original cost of the property toMontana Power, and the PCS's use of an averageyear ratebase, computed by dividing by two the sum of MPC's totalplant investment atthe beginning of the year and total plant investment atthe end of the year. Montana Power also appealed from a portion of the Commission order inwhich the PSC stated that it now found "questionable" an additional $15.7 million in ratebase which, in 1944, the Commission had characterized as "original cost." Although the PSC did not exclude the questionable amount from ratebase, it did order MPC to retain an independent accounting firm acceptable to the commission to undertake a determination of the original cost of theprop-erties inquestion. Montana Power also appealed from the order directing it toretain this accounting firm. The District Court of the Second Judicial District, the Honorable Jack L. Green presiding, issued findings and conclusions on February 6, 1978, and judgment on February 22, 1978. The District Court affirmed the Commission as to itsratebase determinations eliminating the $5.7 million and using an average-year ratebase. From thisportion of the District Court's judgment, Montana Power appeals further. As tothe portion of the Commission's order finding $15.7 million of Montana Power's ratebase questionable, the District Court reversed the PSC on the ground that the Commission's 1944 finding that this amount was original cost could not now be questioned. The District Court further concluded that the order requiring Montana Power toretain an independent accounting firmwas beyond the authority of the Commission and constituted a confiscation of Montana Power's property. The Commission and the Consumer Counsel have appealed from these portions of the District Court's judgment

# . Additional facts arepresented as they become relevant tothe discussion of each issue. This appeal presents for review the following issues: 1. Whether the District Court correctly affirmed the Commission's elimination of $5.7 million from Montana Power's electricratebase asbeing in excess of original cost.2. Whether the District Court correctly held that the Commission had no authority toconsider further an item of $15.7 million inratebase which had been defined as an original costby the PSC in a 1944decision and thereforecorrectly held that the PSC had erroneously ordered a confiscatory accounting todetermine original cost of this property. 3. Whether the District Court correctly affirmed the Commission's use of an average-year 

### rate base and related property taxes, adjusted to include a major new facility (ColstripUnit I),rather than a year-end rate base. Before proceeding toa discussion of the specific issues raised by this appeal, we find it helpful tomake

some prefatory remarks regarding the relative roles and functions of theMontana Public Service Commission, the DistrictCourt and this Court inutility rate cases. In Chapter 1, Title70, Revised Codes of Montana 1947,

now Chapters 1-3, Title 69 MCA, the legislature created the Public Service Commission of Montana and delegated toit the "duty 

# .

# .. to supervise and regulate the operations of the public utilities." Section 70-101, R.C.M. 1947, now section 69-1-102 MCA. As part of these duties, the Commission is given the power to "investigate and ascertain the value of theproperty of every public utility actually used and useful for the convenience of the public." Section 70-106, R.C.M. 1947, now section 69-3-109 MCA. It is the proper exercise of thispower that forms the basis of each of the issues in this appeal. A utility dissatisfiedwith an order of the Commission has two statutory routes of appeal forjudicial review: Section 70-128, R.C.M. 1947, now section 69-3-402 MCA, and section 82-4216, R.C.M. 1947, now sections 2-4-701 through -704 MCA, of the Montana Administrative Procedures Act. Montana Power has chosen the latter of these routes.This statute strictly 

### limitsthe scope of judicial review of an administrative agency decision. Under section 82-4216(1)(a),now sections 2-4-701, -702 MCA, only final agency decisions ina contested case may generally be reviewed. Only if review of the finaldecision would not provide an adequate remedy is a preliminary or intermediate agency action or ruling immediately reviewable. Subsection (7), now section 2-4-704 MCA, of the same statutefurther 

### limitsthe scope of review. Under that subsection a District Court is not allowed to substitute its judgment for that of the agency as tothe weight of evidence

on questions of fact. The courtmay reverse ormodify the administrative decision only if substantialrights of the aggrieved party have been prejudiced by virtue of enumerated agency violations or errors. InVita-Rich Dairy, Inc. v. Department of Business Regulation (1976), 170 Mont. 341, 553 P.2d 980, we examined the underlying rationale of this limited review statuteand stated three basic principles indetermining what the scope of review should be: "First. The Court recognizes that limited judicialreview strengthens the administrative process. Limited review encourages the fulland complete presentation of evidence to the agency by theparticipants inthe administrative process by penalizing those who attempt to add new evidence ornew lines of argument atthe judicialreview level. A de novo review encourages the participants to save their evidence until it really counts and present it firsttothe reviewing court rather than to the agency which has the knowledge and experience inthe field it regulates. The result is that the agency which has the knowledge and experience inits substantive field does not hear allthe evidence, making it difficult tomake a proper decision. It also results inthe decision being made by a reviewing courtwhich does not have the specialized knowledge or experience in the area."Second. Judicial economy requires that the various functions involved in the administrative process must be divided on the basis of comparative abilities and qualifications of each body. Courts are specialists inconstitutional issues, statutory interpretation, the requirements of a fair hearing, and the determination that a finding 

### is supported by substantial evidence. The agency is a specialist inthe substantivematter that the legislaturedelegated to it toregulate. "Third. The agency's actions need a balancing check. In the absence of a body within the agency which is separated from the actual decision and inwhich allparties have confidence, a limited judicial inquiry to see (a) that a fairprocedure was used, (b) thatquestions of law were properly decided and, (c) that the decision 

### is supported by substantial evidence, is necessary." 170 Mont. at343-45, 553 P.2d at982-83. Returning toour discussion of the roles of each participating governmental entity, we note that further review of

an agency decision and District Court finaljudgment may be had on appeal to this Court. Section 82-4217, R.C.M. 1947,

now section 2-4-711 MCA. While that section does not spell out our scope of review of an administrative agency action, thatmatter is fully settledby our cases: "This court has recognized that the regulatory commissions of this stateare invested with broad powers within their sphere of administration authorized by the legislature. Tobacco River Power Co. v. Pub. Service Comm'n, 109 Mont. 521, 98 P.2d 886. Even inquasi-judicial proceedings their informed and expert judgment receives proper consideration by the courts of this statewhen such judgment has been reached with due consideration of constitutional restraints. Baker Sales Barn, Inc. v. Montana Livestock Comm'n, 140Mont. 1, 367 P.2d 775. Much that isdone by these administrative agencies of the state, within the realm of administrative discretion, is exempt by the legislature from supervision by the courts if those restraints are obeyed. 

# ".

.. this court is always confronted inratemaking cases with the question of how far the court can go ininterferingwith, or directing the exercise of power, by an equal department of the government. Wehave repeatedly held that there

### willbe no interference with the orders of the Commission unless:

### "(1)they go beyond the power constitutionally given; ur, 

### "(2) beyond their statutory power; or 

### "(3) they arebased upon a mistake of law." Cascade County Consumers Ass'n v. Public Service Comm'n (1964), 144Mont. 169, 185-86, 192, 394 P.2d 856, 865, 868. and "Even if we were so disposed by our personal views, we cannot substitute our discretion for that of the board unless we can say clearly that the order isunreasonable." Chicago, M., St. P. & P. R. Co. v. Board of Railroad Commissioners (1953), 126Mont. 568, 575, 255 P.2d 346, 351. We too areconstrained inour review of agency actions by the principles enunciated inVita-Rich Dairy, Inc. In addition, the findings of a District Court come to

us with a presumption of correctness:

II 1

# .. .We have consistently held under such circumstances that this Court cannot substitute its weighing of the evidence for that of the trial court. When there is a conflict inthe evidence, the findings of the trial court are presumed tobe correct if supported by substantial evidence.' Sedlacek v. Ahrens (1974), 165 Mont. 479, 485, 530 P.2d 424. "We have alsoheld that the findings of the trial court, in a nonjury trial, 

### willnot be reversed on appeal, unless there is a clear preponderance of evidence against the findings." Montana Farm Service Co. v. Marquart (1978), Mont. 

## , 578 P.2d 315, 316, 35 St.Rep. - 631, 633. With these principles inmind, we now proceed to an analysis of each specific issue. The elimination of -- $5.7 million 

### --- from ratebase. The Commission eliminated from Montana Power's ratebase $5.939 million on the ground that the amount, by definition of the accounts, represented an investment inexcess of original cost. The Commission did allow Montana Power to recover this amount itself, without any return, through amortization

over a twenty-year period.The excluded $5.939 million includes $5.787 million for plant acquisition adjustments that exceed the original cost of the properties. The $5.787 million was the remainder in

an account inelectric

### rate base approved by the Commission in 1944 with the specificruling that this amount should remain inthe account "for as long as the land rights involved areused by the company and continue tohave value." Re The Montana Power Company (1944), 56 P.U.R. (N.S.) 193, 228-29. This ruling

### was expressly approved by the Commission in 1958 asconstituting a part of the ratebase for the purpose of determining rates, In 

### re The Montana Power Company (1958), 24 P.U.R.3d 321, and was not questioned until the Commission and the Consumer Counsel responded tothe petition of the Montana Power Company in 1975. The balance of the $5.939 million is a $151,889 fee paid toan affiliatewhich had been found unjustified long ago by both the PSC and FPC. Montana Power appeals only the exclusion of the $5.7 million. On the treatment of this item the DistrictCourt agreed with the Commission that this amount should be eliminated from the 

### rate base. In thewords of the DistrictCourt: "This amount is properly eliminated from rate base because by definition of the accounts [inwhich this item

### was recorded] this amount represents an investmentwhich exceeds 'original cost.

### '" In itsreply brief tothis Court, Montana Power concedes that in 1944 the Commission determined that the amounts were in excess of original costs and does not now contest that determination: "While we do not agree with Judge Green's decision asto the $5.7 million issue, that was an instancewhere the determination was one of acquisition adjustment, meaning an amount in addition toor exceeding original cost."Section 70-106, R.C.M. 1947, now section 69-3-109 MCA, empowers the Commission tovalue the properties of utilities. This statutewas amended in 1975 and now reads as follows with the amendment emphasized: "The commission may, inits discretion, investigate and ascertain the value of the property of every public utility actually used and-use; fulfor the convenience of the public. The - commission isnot bound toaccept oruse

### any 

### -- -- articularvalue indetermining 

### rates, provided !hat if valueTs used, such value

### mx not 

### -- -- - exceed the original costof theproperty. In 

### --- making such investigation the commission may avail itself of 

### all information contained in the assessment 

### rolls of various counties, and the public records of thevarious branches of the stategovernment, or any other information obtainable, and the commission may atany 

### time of its own initiativemake a revaluation of such property.

### " This statute is dispositive of this issue. Under it, theCommission is obligated toeliminate from ratebase all utility costs inexcess of original cost. The $5.7 million

was found long ago tobe inexcess of original cost and is therefore properly eliminated. Montana Power's arguments against elimination of this 

### itemon thebasis of 

### res judicata and collateral estoppel



### are inappositewhere an intervening statutory amendment completely changes thebasis on which valuation of utility property is tobe made. See, e.g., State ex 

### rel. Lockwood

v. Tyler (19221, 64 Mont. 124, 142, 208 P. 1081, 1088; In 

### re Pomeroy (1915), 51Mont. 119, 151P. 333; StateFarm Mutual Automobile Insurance Co. v. Duel (1945), 324 U.S. 154, 162, 65 S.Ct. 573, 577, 89 L.ed. 812, 819, citing Pomeroy and other cases for the "general rule thatresjudicata is no defensewhere between the timeof the firstjudgment and the second there has been an intervening decision or a change in the law creating an altered situation." Further, theCommission has always had the power tomake a revaluation of such property. Section 70-106, R.C.M. 1947, now section 69- 3-109 MCA. The judgment of the District Court on this issue is affirmed. The consideration of the guestionable $15.7 million and 

### -- the order toretain an independent accounting firm. On 

### - - this issue the District Court and the Commission disagreed. This disagreement aswell as a summary of the relevant facts isrecorded inPoint No. 2 of the ~istrict Court's findings of fact: "On thisPoint No. 2 the Court finds, concludes, orders and adjudges as follows: "For convenience 'Finding of Fact 43' of Order No. 4220C ishereby quoted in its entirety: "'43. Witness Hess urged the Commission toeliminate an additional $15,722,000 of electricratebase (Tr. 2751-2752)

# . After the elimination of acquisition adjustments discussed inFinding No. 42, this 

### is the amount by which Applicant's electricrate base stillexceeds the original costdetermination of the Federal Power Commission in Re theMontana Power Co., 4 F.P.C. 213, 57 

### -- P.U.R. (n.s.) 143 (1945). Because of the questionable nature of the adoption by the Montana Commission in its 1944 opinion of the concept "commercial value" (Tr. 2751)

## , inclusion of this amount inan original cost depreciated ratebase remains a matter of continuing concern. However, because the record inthis docket 

### is very limited on thispoint, the Commission declines to eliminate the difference. To deal with the problem in futureproceedings, the Commission directsApplicant to take the action contained inOrder paragraph 4.' "And Order No. 4 of the PSC ishereby quoted in its entirety: "'4. Applicant is ordered toimmediately take steps toretain an independent accounting firm acceptable to this Commission for the purpose of undertaking a determination of the original cost of Applicant's hydroelectricproperties when firstdevoted topublic use.

## '"The Court finds that there was no basis in the factsbefore the PSC tojustify the said 'Finding of Fact 43' of Order No. 4220C. "The Court finds that there is no basis in law and there is no basis infact for any consideration of the original costdetermination of the FPC in 1945. The Court finds that the 

### term 'commercial value' was used by the PSC in

### its 1944 decision but that the PSC found that the items, now amounting to $15.722 million, were alla part of original cost and 

### were placed intoplant account, being Account No. 100.1, Electric Plant inService. Re - The Montana Power Company 56 P.U.R. (n.s.) 193, 200, 202, 209-211 and 238 (Account 100.1, 320) (Mont. PSC 1944). No one, including the present PSC, can question these clear findings and conclusions by the PSC in 1944. "The Court finds that there

### was no basis in 

### lawor infact for the PSC in said 'Finding of Fact 43' toconsider, or for continuing concern about this amount of money in an original cost depreciated 

### rate base. "The Court finds that the PSC was required to and did decline to eliminate this itemof $15.7 million of electric 

### rate base. "The Court finds that there

### was no basis in factor law which would justify the PSC inadopting said Order No. 4; and the Court finds that this Order No. 4 

### was capricious and would impose upon Montana Power an estimated cost ata minimum of over $300r000 and any determination by an independent accountant would not be binding upon anyone.

### " The DistrictCourt concluded: "4. The Court concludes that therewere no facts upon which the PSC could challenge or consider questionable this $15.722 million inelectric rate base. "The Court concludes that the requirements inOrder No. 4 

### are beyond the jurisdiction of the PSC and would constitute a clear confiscation of $300,000 ormore of the property of Montana Power." As thematter developed in the 

### earlier proceedings, this issue was found tocontain two subissues which were handled separately by the DistrictCourt: (a) the statement by the Commission of its "continuing concern" over this $15.7 million, and (b) the order by the Commission thatMPC had toretain an independent accounting firm acceptable tothe Commission todetermine the original cost of the property inquestion. For convenience, we alsowillconsider the 

### items separately. Initially, Montana Power argues that, by virtue of a post-judgment motion by Consumer Counsel and supported by a brief by the Commission, these two agencies have conceded that the Commission's statement of continuing concern and order of an independent auditwere improper and unlawful and therefore, no real issue as to thesematters existon this appeal. We disagree. The motion by Consumer Counsel would have altered the District Court judgment toread (withthe alterations emphasized): "Based upon 

## - the factsbefore 

## -- the PSC, the Court finds that the PSC was required to and did decline toeliminate this item of $15.7 million of electricratebase. "Based upon 

### -- the foregoing, 

## the Court finds that therewas 

## -- no basis 

### -- infactwhich would justify the PSC in adopting said Order No. 4. Thus, 

### --- -- said Order No. 

### --- 4 

### is arbitrary 

## - and capricious. "'4.' of 

### -Conclusions of 

### -- Law 

### - toread: "'4. 

## - The Court concludes that there were 

### -- no factsupon which 

## -- the PSC could challenge or con

## -- sider questionable this $15.722 million 

### - in

-- electricratebase. 

## -- "'On account of 

### ----- the lack of a factual basis, 

### - the Court concludes that the requirements - inOrder No. 4 were unlawful.'" --- This motion was not granted, therefore Consumer Counsel's positionwas not adopted by the District Court. More important toour conclusion is the reason stated by Consumer Counsel for advancing thismotion: "Consumer Counsel advances this Motion so that the above-mentioned Findings and Conclusions willnot be given an interpretation which conflictswith the clear language inthe remainder of the Court's Findings, Conclusions and Judgement provisions."Thus, themotion was not designed somuch toconcede the impropriety of that part of the DistrictCourt's judgment concerning the questionable $15.7 million as it

### was intended to strengthen thatpart of the DistrictCourt judgment relating to the exclusion of the $5.7 million by removing any possibility of an inconsistent interpretation of the judgment asa whole. When themotion 

### was denied, Consumer Counsel was freetoattempt the alternativemeans of 

### removing what itperceived tobe an apparent inconsistency in this order by obtaining a complete reversal of the part of thejudgment relating toconsideration of the $15.7 million. As to the conclusion of the the District Court "that there

### were no factsupon which the PSC could challenge or consider questionable this $15.722 million inelectric rate base", we conclude that thiswas an improper, premature intrusionby the DistrictCourt into the administrative process and therefore reverse. The expression by the Commission of its continuing

concern over this $15.7 million possibly inexcess of original cost is not a finaldecisionby the Commission; nor does it qualify as a preliminary ruling for which review of any final order would not be adequate. Atbest this has created a nonissue. If inthe future, after a proper hearing, an adverse finalorder be issued on the

### matter, judicial review would be inorder. Montana Power has suffered no loss on thismatter and infactmay never suffer any loss. Montana Power recognized thisprematurity initsreply brief to the DistrictCourt: "vhp nnlv relevance of allof the discussion of

***- 

## ---- ----- -.-- - - 

### ---- - the $15.7 million 

### -- is inconnection with 

## -- the right or authorityof 

### -- the Commission toorder ~ontana~ower toretain an independentaccountant.

### " (~m~hasis 

### inoriginal.)And in its reply brief to this Court, MPC stated: "In declining toactnow, the PSC has clearly 

## --- given an indication of what it

### willdo infuture proceedings; and to that end, the PSC has ordered MPC tohire independent accountants." (Emphasis added.) Aswe have noted, the Public Service Commission is empowered to "investigateand ascertain the value of the property of every public utility." Section 70-106, R.C.M. 1947, now section 69-3-109 MCA. Under the same statute, as it has read from the time of its firstenactment in 1913, "the commission may atany time of its own initiativemake a revaluation of such property." In itsuse of the 

### term "revaluation" the legislature clearly contemplated thepossibility that later Public Service Commissions, under appropriate circumstances, may modify or alter theproperty valuations made by earlier commissions. Administrative policies change, compelled by changing social or economic conditions or by changing statutory guidelines. In 1975, by 

### its amendment to section 70-106,

now section 69-3-109 MCA, the legislature changed one of the basic principles upon which utility ratebases had been calculated inMontana. Before 1975utility ratebases were calculated on the basis of the reproduction cost new or commercial value of utilityplants, of which original cost

was only one factor tobe considered. See, e.g., Re The Montana Power Company, 56 P.U.R. (N.S.) at200, 204; State

ex rel. Olsen v. Public Service Commission (1957), 131Mont. 272, 276-77, 309 P.2d 1035, 1038; Tobacco River Power Co.

v. Public Service Commission (1940), 109 Mont. 521, 529-30; 98 P.2d 886, 890. From 1975 forward, however, the legislature transformed original cost into the factor tobeconsidered inratebase calculation; from 1975 forward, utility plants could not be valued in excess of original cost. Section 70-106, R.C.M. 1947, now section 69-3-109 MCA. The determination of original cost, therefore, has a

new importance inthe setting of utility rates. We now proceed to the question of the Commission's authority inordering Montana Power to retain an acceptable, independent accounting firm toinvestigate the original costs of the $15.7 million properties. Unlike the statement of continuing concern, this is a final order by the Commission which does impose an obligation on Montana Power and is therefore reviewable under section 82-4216(1)(a),now section 2-4-702 MCA. National Van Lines, Inc. v. United States (7thCir. 1964), 326 F.2d 362, 372. The District Court concluded that the order of the Commission thatMontana Power retain the accounting firm was "beyond the jurisdiction of the PSC and would constitute a clear confiscation of $300,000 ormore [as the estimated cost of the accounting] of the property of Montana Power." We agree with the District Court and hold that the Commission lacks the requisite statutory authority to compel Montana Power tohire an independent accounting firm acceptable to the Commission for the purpose of determining the original costs of the disputed properties. City of Polson

v. Public Service Comm'n (1970), 155Mont. 464, 469, 473 P.2d 508, 511. The power of the Commission under section 70-106, now section 69-3-109 MCA, to "investigate and ascertain" the value of utility property has been discussed above. he

means and authority by which the Commission is to conductits investigation is indicated in several statutes. ~.g., sections 70-106, -107, -108, -117, R.C.M. 1947, now sections 69-3-109, 69-3-202, 69-3-203, 69-3-106 MCA. The Commission asserts these statutes give it the necessary authority to compel an independent audit. Wedo not read the authority granted therein so broadly. Instead, it is clear from the statutes that the Commission 

### is empowered only torequest desired information from a utility, not todirect themeans by which such information is tobe gathered. Under such authority, the Commission is clearly empowered torequest and obtain from Montana Power accounting information on the original costs of disputed properties, but it is up toMontana Power todecide how togo about collecting this information. The Commission argues that, if Montana Power conducts the audit itself, the results "would be tainted by suspicions of self-interest." This argument could be applied to any information supplied by any utility to the i om mission. Yetfrom the above-noted statutes, it 

### is clear that the primary source of information about utility operation is the utility itself. E.g., sections 70-107, -108, R.C.M. 1947,

now sections 69-3-202, -203 MCA. The Commission, of course, is always free toweigh any such information against any information tothe contrary presented by other agencies or 

### its own staff. For the foregoing reasons, the judgment of the District Court that the Commission cannot question the inclusion of the $15.7 million inMontana Power's ratebase is reversed. The judgment of the District Court that the Commission lacks authority tocompel an independent audit is affirmed.The Useof Average-Year Rate Base. On this item, the 

### --- 

## -- DistrictCourt and the Commission agreed. The findings of the District Court are again helpful: "The Commission calculated Montana Power's revenues on the basis of the average ratebase for the test year and included only one-half the test year property taxes tobe consistent with average rate base. Findings 44 and 58A. The 'rate base' includes a utility's unrecovered investment, upon which theutility is entitled to earn a return from 

### its customers. (Therevenue requirement also covers expenses such as taxes, depreciation, fuel, wages, etc.) The value of the average rate base is that itmatches the revenues and expenses occurring during the test year. The required matching of annual revenues and expenses with average ratebase follows the same principle as calculating annual interest charges on the average amount of debt outstanding during the year, not the year-end level of debt. The Commission's decision is supported by the record evidence and by authority and is therefore affirmed. "In the record, Consumer Counsel witness Hess recommended thatMontana Power's test-year ratebase be calculated according tothe average Montana Power investment in

### electric service facilities and related facilitiesduring themonths of 1975, adjusted toinclude the investment [in] the Colstrip I generating unit from the beginning of the year 1975with related revenue and expense adjustments. Hetestified that the principal reason for using an average ratebase, rather than a year-end ratebase, is that an average ratebase matches the revenues received and expenses incurred during the course of the test year (Tr. 2742-4). While other statesdo some

### timesutilizethe year-end base, Petitioner has failed toestablish that the Commission erred in not using the year-end rate inthis case. "Inevitably the rates 

### set by regulatory commissions may prove too low or too high. However, a commission must decide a case on the basis of the record before it. In this case, the Commission acted within reason and on the basis of the evidence indeciding thatMontana Power had not carried itsburden of proof tojustify a yearend base.

### " One further factwarrants mentioning. The average-year ratebase adopted by the Commission and adjusted toinclude Colstrip I for the entireyear includes nearly 90 percent of Montana Power's increased investment for the year. OfMontana Power's claimed increase inplant investment over the year of $92.5 million, allbut $8.8 million was allowed inratebase by the Commission. On this issue, the principles of Vita-Rich Dairy Inc. regarding agency expertise and our comments concerning the scope of review become most important. From the briefs submitted and the cases cited by both sides, it appears that both the year-end ratebase urged by Montana Power and the average-year ratebase adopted by the Commission may be correct and proper methods for valuing utility property under certain circumstances. The Commission itself has used both methods inrecent years. Cf. Montana-Dakota Utilities Company (1959), 28 P.U.R.3d 355 (year-average, original cost ratebase) with Montana Power Co. (1962), 42 P.U.R.3d 241 (year-end fairvalue ratebase.) It is interesting to note that in a very recent case involving Montana Power, the Commission adopted an average ratebase. Commission Order No. 4350D, Docket No. 6454, Service Date 4-25-78, Application of Montana Power Company. Apparently, Montana Power has not contested the Commission's employment of average ratebase inthismore recent case. A federal administrative law judge analyzed the various issues inthe case of Union Electric Co. (1972), 47 FPC 144, 176, aff'd 47 FPC at 151: "The testyear concept requires that revenues, expenses and investment be synchronized--that they relate to the same period. When revenues for the entire testyear areused, the corresponding ratebase is the average for the year. This is the usual practice. E.g., United Fuel Gas Company, 12F.P.C. 251, 256 (1953). "Union wants touse the year-end ratebase, which is larger than the testyear average because of successive plant additions made over the year. It does not want to include as a corresponding adjustment the additional revenuesand expenses associatedwith the larger investment. Union's proposal produces a distortion inthe testyear results, and is therefore objectionable. "Union's reason is thatbecause of regulatory lagduring the period of rising costs it needs extramoney. If regulatory lagreduces return below a fairamount, this should be dealtwith as a separateproblem. Moreoever, Union shows no specificrelationshipbetween any inadequacy due toregulatory lag and the extra amount that would be derived from theuse of a year-end ratebase. "The Commission has on occasion used a year-end 

### rate base where the particular factswarranted. OtterTailPower Company, 8 F.P.C. 393, 401 (1949); United Gas Pipe Line Company, 31F.P.C. 1180, 1194 (1964). But Union has not shown that this technique isnecessary toinsure it a fairreturn in thisproceeding." During the proceedings before the Commission, it was brought out thatwhen a year-end ratebase is adopted, proper regulatory principles requires a concomitant recalculation of revenues and expenses so as tomatch income and expenses with the increased ratebase. In this case, Montana Power failed, orrefused, tooffer the necessary adjustments. Montana Power's complaints concerning inflation and regulatory lag asjustification for a year-end 

### rate base are not convincing. As noted by commissions inother 

### states: "That inflation, attrition and regulatory lagmay existdoes notmandate the Commission's use of a terminal [period end] ratebase toresolve these problems." Maryland Pub. Service Commission v. Baltimore Gas 61 E. Co., (1974), 273 Md. 357, 329 A. 2d 691, 698. "While a few commissions are finding it popular today touse year-end ratebases and variations thereof, this commission has steadfastly continued to insistthat the problems of inflation and attrition, such as they are, are more properly the concern of rateof return. Artificial and mechanical adjustments toratebase usurp the function of rateof return and can only be misleading to allconcerned." ReNiagara Mohawk Power Corp., (N.Y. 1960), 35 P.U.R.3d 149, 158.What the issue boils down to is this: the Co-ission adopted an entirely correct and proper method of valuation which the District Court affirmed. Montana Power on appeal urges us toadopt a different, albeitcorrect and proper, method of valuation but has failed tomake the normal adjustments torevenues and expenses to reflect the year-end investment. In the absence of any evidence that the Commission acted unlawfully or disregarded recognized regulatory procedures and practices, we arebound by our limited scope of review to affirm the District Court. This reasoning and conclusion applies also tothe related treatment of Montana Power's taxes for 1975. In summary the judgment of the District Court that the Commission properly excluded $5.7 million from Montana Power's ratebase and properly adopted an average-year rate base is affirmed. The judgment of the District Court that the Commission could not atany time in the future consider

or challenge an additional $15.7 million of Montana Power's ratebase isreversed. The judgment of the District Court that the Commission lacks authority toorder Montana Power tohire an acceptable, independent accounting firm todetermine the original cost of certain Montana Power properties is affirmed.

*' Justice

We concur: 

# 74

/' 

## --9? Chief Justice



# . Justice Daniel J. Shea, deeming himself disqualified, did not 

### sitinthis case.