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 electric utility 

service designed to produce an increase in annual operating 

revenues of $15,650,601 and approval of rates for natural 

gas service designed to produce an increase in annual gross 

operating revenues of approximately $28,800,000. At approximately the same time the Montana Consumer Counsel (Consumer 

Counsel) filed a petition for an electric rate decrease, 

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 to November 6, 1975; from 

January 12 to January 23, 1976; and from February 2 to 

February 13, 1976. Individual commissioners also conducted 

public hearings in various cities throughout the state 

during November and December, 1975. 

At the hearings conducted in Helena, 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 dealt with 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 in which 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 electric rate decrease. 

The case was submitted for decision to the Commission 

on December 13, 1976. By Order No. 4220C, dated February 

23, 1977, the PSC granted Montana Power an electric rate 

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 to the District Court two Commission "rate base" (the investment on which returns are 

allowed) determinations: the PSC's exclusion of $5.7 million from rate base as exceeding the original cost of the 

property to Montana Power, and the PCS's use of an averageyear rate base, computed by dividing by two the sum of MPC's 

total plant investment at the beginning of the year and 

total plant investment at the end of the year. 

Montana Power also appealed from a portion of the 

Commission order in which the PSC stated that it now found 

"questionable" an additional $15.7 million in rate base 

which, in 1944, the Commission had characterized as "original cost." Although the PSC did not exclude the questionable amount from rate base, it did order MPC to retain an 

independent accounting firm acceptable to the commission to 

undertake a determination of the original cost of the prop- 
erties in question. Montana Power also appealed from the 

order directing it to retain 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 

its rate base determinations eliminating the $5.7 million 

and using an average-year rate base. From this portion of 

the District Court's judgment, Montana Power appeals further. 

As to the portion of the Commission's order finding 

$15.7 million of Montana Power's rate base 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 to retain 

an independent accounting firm was 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 

j udgment . 

Additional facts are presented as they become relevant 

to the 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 electric rate base as being in excess of original 

cost. 

2. Whether the District Court correctly held that the 

Commission had no authority to consider further an item of 

$15.7 million in rate base which had been defined as an 

original cost by the PSC in a 1944 decision and therefore 
correctly held that the PSC had erroneously ordered a confiscatory accounting to determine 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 

(Colstrip Unit I), rather than a year-end rate base. 

Before proceeding to a discussion of the specific 

issues raised by this appeal, we find it helpful to make 

some prefatory remarks regarding the relative roles and 

functions of the Montana Public Service Commission, the 

District Court and this Court in utility rate cases. 

In Chapter 1, Title 70, Revised Codes of Montana 1947, 

now Chapters 1-3, Title 69 MCA, the legislature created the 

Public Service Commission of Montana and delegated to it 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 

the property 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 this power that forms the basis of each of the 

issues in this appeal. 

A utility dissatisfied with an order of the Commission 

has two statutory routes of appeal for judicial 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 limits the 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 in a contested case may generally be reviewed. Only if review of the final decision 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 

statute further limits the scope of review. Under that 

subsection a District Court is not allowed to substitute its 

judgment for that of the agency as to the weight of evidence 

on questions of fact. The court may reverse or modify the 

administrative decision only if substantial rights of the 

aggrieved party have been prejudiced by virtue of enumerated 

agency violations or errors. 

In Vita-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 statute and 

stated three basic principles in determining what the scope 

of review should be: 

"First. The Court recognizes 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. A de novo review encourages 

the participants to save their evidence until 

it really counts and present it first to the 

reviewing court rather than to the agency which 

has the knowledge and experience in the field 

it regulates. The result is that the agency 

which has the knowledge and experience in its 

substantive field does not hear all the evidence, 

making it difficult to make a proper decision. 

It also results in the decision being made by a 

reviewing court which 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 in constitutional 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 in the substantive matter 

that the legislature delegated to it to regulate. 

"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 in which all parties have confidence, a limited 

judicial inquiry to see (a) that a fair procedure 

was used, (b) that questions of law were properly 

decided and, (c) that the decision is supported 

by substantial evidence, is necessary." 170 Mont. 

at 343-45, 553 P. 2d at 982-83. 

Returning to our discussion of the roles of each participating governmental entity, we note that further review of 

an agency decision and District Court final judgment 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, 

that matter is fully settled by our cases: 

"This court has recognized that the regulatory 

commissions of this state are 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 in quasi-judicial 

proceedings their informed and expert judgment 

receives proper consideration by the courts 

of this state when such judgment has been reached 

with due consideration of constitutional restraints. Baker Sales Barn, Inc. v. Montana 

Livestock Comm'n, 140 Mont. 1, 367 P.2d 775. Much 

that is done 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 in ratemaking cases with the question of how far the 

court can go in interfering with, or directing 

the exercise of power, by an equal department of 

the government. We have repeatedly held that 

there will be 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 are based upon a mistake of law." 

Cascade County Consumers Ass'n v. Public Service 

Comm'n (1964), 144 Mont. 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 is unreasonable." Chicago, M., St. P. 

& P. R. Co. v. Board of Railroad Commissioners 

(1953), 126 Mont. 568, 575, 255 P.2d 346, 351. 

We too are constrained in our review of agency actions by 

the principles enunciated in Vita-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 in the 

evidence, the findings of the trial court are 

presumed to be correct if supported by substantial evidence.' Sedlacek v. Ahrens (1974), 165 

Mont. 479, 485, 530 P.2d 424. 

"We have also held that the findings of the 

trial court, in a nonjury trial, will not 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 in mind, we now proceed to an 

analysis of each specific issue. 

The elimination -- of $5.7 million --- from rate base. The 

Commission eliminated from Montana Power's rate base $5.939 

million on the ground that the amount, by definition of the 

accounts, represented an investment in excess 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 in electric rate base approved by the Commission 

in 1944 with the specific ruling that this amount should 

remain in the account "for as long as the land rights involved are used by the company and continue to have 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 as constituting a part of the rate base 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 to the 

petition of the Montana Power Company in 1975. 

The balance of the $5.939 million is a $151,889 fee 

paid to an affiliate which 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 District Court agreed 

with the Commission that this amount should be eliminated 

from the rate base. In the words of the District Court: 

"This amount is properly eliminated from rate base because 

by definition of the accounts [in which this item was recorded] this amount represents an investment which exceeds 

'original cost. ' " 

In its reply brief to this 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 as to the $5.7 million issue, that 

was an instance where the determination was 

one of acquisition adjustment, meaning an 

amount in addition to or exceeding original 

cost." 
Section 70-106, R.C.M. 1947, now section 69-3-109 MCA, 

empowers the Commission to value the properties of utilities. 

This statute was amended in 1975 and now reads as follows 

with the amendment emphasized: 

"The commission may, in its discretion, investigate and ascertain the value of the property 

of every public utility actually used and-use; 

ful for the convenience of the public. - The 

commission -- is not bound to accept -- or use any 

articular value in determining rates, provided 

!hat -- if valueTs -- used, - such value mx not 

exceed the original --- cost of the property. 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 the various branches of 

the state government, or any other information 

obtainable, and the commission may at any time 

of its own initiative make a revaluation of 

such property. " 

This statute is dispositive of this issue. Under it, 

the Commission is obligated to eliminate from rate base all 

utility costs in excess of original cost. The $5.7 million 

was found long ago to be in excess of original cost and is 

therefore properly eliminated. 

Montana Power's arguments against elimination of this 

item on the basis of res judicata and collateral estoppel 

are inapposite where an intervening statutory amendment 

completely changes the basis on which valuation of utility 

property is to be made. See, e.g., State ex rel. Lockwood 

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

Pomeroy (1915), 51 Mont. 119, 151 P. 333; State Farm 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 that res judicata is no 

defense where between the time of the first judgment and the 

second there has been an intervening decision or a change in 

the law creating an altered situation." Further, the 
Commission has always had the power to make 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 - to retain - an independent accounting firm. On 

this issue the District Court and the Commission disagreed. 

This disagreement as well as a summary of the relevant facts 

is recorded in Point No. 2 of the ~istrict Court's findings 

of fact: 

"On this Point No. 2 the Court finds, concludes, orders and adjudges as follows: 

"For convenience 'Finding of Fact 43' of 

Order No. 4220C is hereby quoted in its entirety: 

"'43. Witness Hess urged the Commission 

to eliminate an additional $15,722,000 of 

electric rate base (Tr. 2751-2752) . After 

the elimination of acquisition adjustments 

discussed in Finding No. 42, this is the 

amount by which Applicant's electric rate 

base still exceeds the original cost determination of the Federal Power Commission in 

-- Re the Montana 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 in an original cost 

depreciated rate base remains a matter of 

continuing concern. However, because the 

record in this docket is very limited on 

this point, the Commission declines to 

eliminate the difference. To deal with the 

problem in future proceedings, the Commission directs Applicant to take the action 

contained in Order paragraph 4.' 

"And Order No. 4 of the PSC is hereby quoted in 

its entirety: 

"'4. Applicant is ordered to immediately 

take steps to retain an independent accounting 

firm acceptable to this Commission for the 

purpose of undertaking a determination of 

the original cost of Applicant's hydroelectric properties when first devoted to public 

use. ' 
"The Court finds that there was no basis in 

the facts before the PSC to justify 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 in fact for any consideration of the original cost determination 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 all a part of original 

cost and were placed into plant account, being 

Account No. 100.1, Electric Plant in Service. - 

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 

law or in fact for the PSC in said 'Finding of 

Fact 43' to consider, 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 item of $15.7 

million of electric rate base. 

"The Court finds that there was no basis in 

fact or law which would justify the PSC in adopting 

said Order No. 4; and the Court finds that this 

Order No. 4 was capricious and would impose upon 

Montana Power an estimated cost at a minimum of 

over $300r000 and any determination by an independent accountant would not be binding upon anyone. " 

The District Court concluded: 

"4. The Court concludes that there were no 

facts upon which the PSC could challenge or consider questionable this $15.722 million in electric rate base. 

"The Court concludes that the requirements 

in Order No. 4 are beyond the jurisdiction of the 

PSC and would constitute a clear confiscation of 

$300,000 or more of the property of Montana Power." 

As the matter developed in the earlier proceedings, 

this issue was found to contain two subissues which were 

handled separately by the District Court: (a) the statement 

by the Commission of its "continuing concern" over this 

$15.7 million, and (b) the order by the Commission that MPC 

had to retain an independent accounting firm acceptable to 
the Commission to determine the original cost of the property in question. For convenience, we also will consider 

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 audit were improper and unlawful and 

therefore, no real issue as to these matters exist on this 

appeal. We disagree. 

The motion by Consumer Counsel would have altered the 

District Court judgment to read (with the alterations emphasized) : 

"Based upon - the facts before -- the PSC, the Court 

finds that the PSC was required to and did decline to eliminate this item of $15.7 million 

of electric rate base. 

"Based upon -- the foregoing, the Court finds that 

there was -- no basis -- in fact which would justify 

--- the PSC in adopting said Order No. 4. Thus, -- 

said Order No. --- 4 is arbitrary - and capricious. 

"'4.' of - Conclusions of -- Law - to read: 

"'4. - The Court concludes that there were -- no 

facts upon which -- the PSC could challenge or -- consider questionable this $15.722 million - in -- 

electric rate -- base. 

"'On account of ----- the lack of a factual basis, - the 

Court concludes that the requirements - in Order 

No. 4 were unlawful.'" --- 

This motion was not granted, therefore Consumer Counsel's position was not adopted by the District Court. More 

important to our conclusion is the reason stated by Consumer 

Counsel for advancing this motion: 

"Consumer Counsel advances this Motion so that the 

above-mentioned Findings and Conclusions will not 

be given an interpretation which conflicts with 

the clear language in the remainder of the Court's 

Findings, Conclusions and Judgement provisions." 
Thus, the motion was not designed so much to concede the 

impropriety of that part of the District Court's judgment 

concerning the questionable $15.7 million as it was intended 

to strengthen that part of the District Court judgment 

relating to the exclusion of the $5.7 million by removing 

any possibility of an inconsistent interpretation of the 

judgment as a whole. When the motion was denied, Consumer 

Counsel was free to attempt the alternative means of removing what it perceived to be an apparent inconsistency in 

this order by obtaining a complete reversal of the part of 

the judgment relating to consideration of the $15.7 million. 

As to the conclusion of the the District Court "that 

there were no facts upon which the PSC could challenge or 

consider questionable this $15.722 million in electric rate 

base", we conclude that this was an improper, premature 

intrusion by the District Court into the administrative 

process and therefore reverse. 

The expression by the Commission of its continuing 

concern over this $15.7 million possibly in excess of original cost is not a final decision by the Commission; nor 

does it qualify as a preliminary ruling for which review of 

any final order would not be adequate. At best this has 

created a nonissue. If in the future, after a proper 

hearing, an adverse final order be issued on the matter, 

judicial review would be in order. 

Montana Power has suffered no loss on this matter and 

in fact may never suffer any loss. Montana Power recognized 

this prematurity in its reply brief to the District Court: 

"vhp * nnlv relevance of all of the discussion of **- ---- - - - - - -.-- - - ---- - 

the $15.7 million -- is in connection with -- the 

right or authority -- of the Commission to order 

~ontana~ower toretain an independentaccountant. " (~m~hasis in original. ) 
And in its reply brief to this Court, MPC stated: 

"In declining --- to act now, the PSC has clearly 

given an indication of what it will do in future 

proceedings; and to that end, the PSC has ordered 

MPC to hire independent accountants." (Emphasis 

added. ) 

As we have noted, the Public Service Commission is 

empowered to "investigate and 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 first enactment in 1913, 

"the commission may at any time of its own initiative make a 

revaluation of such property." 

In its use of the term "revaluation" the legislature 

clearly contemplated the possibility that later Public 

Service Commissions, under appropriate circumstances, may 

modify or alter the property 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 rate bases had been 

calculated in Montana. Before 1975 utility rate bases were 

calculated on the basis of the reproduction cost new or 

commercial value of utility plants, of which original cost 

was only one factor to be considered. See, e.g., Re The 

Montana Power Company, 56 P.U.R. (N.S.) at 200, 204; State 

ex rel. Olsen v. Public Service Commission (1957), 131 Mont. 

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 to be 
considered in rate base 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 in the setting of utility rates. 

We now proceed to the question of the Commission's 

authority in ordering Montana Power to retain an acceptable, 

independent accounting firm to investigate 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 

(7th Cir. 1964), 326 F.2d 362, 372. 

The District Court concluded that the order of the 

Commission that Montana Power retain the accounting firm was 

"beyond the jurisdiction of the PSC and would constitute a 

clear confiscation of $300,000 or more [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 to hire 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), 155 Mont. 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 conduct 
its 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. We do 

not read the authority granted therein so broadly. Instead, 

it is clear from the statutes that the Commission is empowered only to request desired information from a utility, 

not to direct the means by which such information is to be 

gathered. Under such authority, the Commission is clearly 

empowered to request and obtain from Montana Power accounting information on the original costs of disputed properties, 

but it is up to Montana Power to decide how to go 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. 

Yet from 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 to weigh any such information against any 

information to the 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 in Montana Power's rate base is reversed. 

The judgment of the District Court that the Commission lacks 

authority to compel an independent audit is affirmed. 
--- The Use of Average-Year -- Rate Base. On this item, the 

District Court 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 rate base for 

the test year and included only one-half the test 

year property taxes to be consistent with average 

rate base. Findings 44 and 58A. The 'rate base' 

includes a utility's unrecovered investment, upon 

which the utility is entitled to earn a return 

from its customers. (The revenue requirement 

also covers expenses such as taxes, depreciation, 

fuel, wages, etc. ) The value of the average rate 

base is that it matches the revenues and expenses 

occurring during the test year. The required 

matching of annual revenues and expenses with 

average rate base 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 that Montana Power's test-year 

rate base be calculated according to the average 

Montana Power investment in electric service facilities and related facilities during the months 

of 1975, adjusted to include the investment [in] 

the Colstrip I generating unit from the beginning 

of the year 1975 with related revenue and expense 

adjustments. He testified that the principal 

reason for using an average rate base, rather 

than a year-end rate base, is that an average 

rate base matches the revenues received and expenses incurred during the course of the test 

year (Tr. 2742-4). While other states do sometimes utilize the year-end base, Petitioner has 

failed to establish that the Commission erred in 

not using the year-end rate in this 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 in deciding that Montana Power had 

not carried its burden of proof to justify a yearend base. " 

One further fact warrants mentioning. The average-year 

rate base adopted by the Commission and adjusted to include 

Colstrip I for the entire year includes nearly 90 percent of 

Montana Power's increased investment for the year. Of 
Montana Power's claimed increase in plant investment over 

the year of $92.5 million, all but $8.8 million was allowed 

in rate base 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 rate base urged by Montana Power and the 

average-year rate base adopted by the Commission may be 

correct and proper methods for valuing utility property 

under certain circumstances. The Commission itself has used 

both methods in recent years. Cf. Montana-Dakota Utilities 

Company (1959), 28 P.U.R.3d 355 (year-average, original cost 

rate base) with Montana Power Co. (1962), 42 P.U.R.3d 241 

(year-end fair value rate base.) It is interesting to note 

that in a very recent case involving Montana Power, the 

Commission adopted an average rate base. 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 

rate base in this more recent case. 

A federal administrative law judge analyzed the various 

issues in the case of Union Electric Co. (1972), 47 FPC 144, 

176, aff'd 47 FPC at 151: 

"The test year concept requires that revenues, 

expenses and investment be synchronized--that 

they relate to the same period. When revenues 

for the entire test year are used, the corresponding rate base is the average for the year. 

This is the usual practice. E.g., United Fuel 

Gas Company, 12 F.P.C. 251, 256 (1953). 

"Union wants to use the year-end rate base, 

which is larger than the test year average because of successive plant additions made over 

the year. It does not want to include as a corresponding adjustment the additional revenues 
and expenses associated with the larger investment. Union's proposal produces a distortion 

in the test year results, and is therefore obj ectionable. 

"Union's reason is that because of regulatory 

lag during the period of rising costs it needs 

extra money. If regulatory lag reduces return 

below a fair amount, this should be dealt with 

as a separate problem. Moreoever, Union shows 

no specific relationship between any inadequacy 

due to regulatory lag and the extra amount that 

would be derived from the use of a year-end 

rate base. 

"The Commission has on occasion used a year-end 

rate base where the particular facts warranted. 

Otter Tail Power Company, 8 F.P.C. 393, 401 (1949); 

United Gas Pipe Line Company, 31 F.P.C. 1180, 1194 

(1964). But Union has not shown that this technique is necessary to insure it a fair return in 

this proceeding." 

During the proceedings before the Commission, it was 

brought out that when a year-end rate base is adopted, 

proper regulatory principles requires a concomitant recalculation of revenues and expenses so as to match income and 

expenses with the increased rate base. In this case, 

Montana Power failed, or refused, to offer the necessary 

adjustments. 

Montana Power's complaints concerning inflation and 

regulatory lag as justification for a year-end rate base are 

not convincing. As noted by commissions in other states: 

"That inflation, attrition and regulatory lag may 

exist does not mandate the Commission's use of a 

terminal [period end] rate base to resolve 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 to use year-end rate bases and variations 

thereof, this commission has steadfastly continued 

to insist that the problems of inflation and attrition, such as they are, are more properly the 

concern of rate of return. Artificial and mechanical adjustments to rate base usurp the function 

of rate of return and can only be misleading to 

all concerned." Re Niagara 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 to adopt a different, albeit correct and proper, 

method of valuation but has failed to make the normal 

adjustments to revenues 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 are bound by our limited scope 

of review to affirm the District Court. This reasoning and 

conclusion applies also to the 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 rate base and properly adopted an average-year rate 

base is affirmed. The judgment of the District Court that 

the Commission could not at any time in the future consider 

or challenge an additional $15.7 million of Montana Power's 

rate base is reversed. The judgment of the District Court 

that the Commission lacks authority to order Montana Power 

to hire an acceptable, independent accounting firm to determine 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 sit in this case.