Title: MONTANA-DAKOTA UTILITIES v BOLLING
Citation: N/A
Docket Number: 80-346
State: Montana
Issuer: Montana Supreme Court
Date: August 5, 1981

No. 80-346 IN THE SUPREME COURT OF THE STATE OF MONTANA 1981 MONTANA-DAKOTA UTILITIES CO., Plaintiff and Appellant, GORDON E . BOLLINGER, CLYDE JARVIS, et al., Defendants and Respondents. Appeal from: District Court of the Seventh Judicial District, In and for the County of Dawson. Hon. Nat Allen, Judge presiding. Counsel of Record: For Appellant: Crowley, Haughey, Hanson, Toole & Dietrich, Billings, Montana George Dalthorp argued, Billings, Montana Joseph R. Maichel argued, Bismark, North Dakota For Respondents: Eileen E. Shore argued, Helena, Montana James Paine argued, Helena, Montana John Allen, Helena, Montana Submitted: June 8, 1981 Decided: AU6 5- 1 M t Filed: 5- Mr. J u s t i c e Gene B. Daly d e l i v e r e d t h e Opinion of t h e Court. Montana-Dakota U t i l i t i e s Company (MDU) a p p e a l s from a judgment e n t e r e d i n t h e Dawson County D i s t r i c t C o u r t , t h e Honorable Nat A l l e n p r e s i d i n g , a f f i r m i n g an o r d e r of t h e P u b l i c S e r v i c e Commission (PSC) which set a l l o w a b l e e l e c t r i c and n a t u r a l g a s r a t e s . I n March 1978 MDU f i l e d an a p p l i c a t i o n w i t h t h e PSC r e q u e s t i n g , among o t h e r items, an i n c r e a s e of its e l e c t r i c u t i l i t y r a t e s . I n its r e q u e s t MDU asked t h e PSC t o a c c e p t , a s p a r t of t h e r a t e b a s e , money expended by t h e company i n o b t a i n i n g c o a l from Knife River Coal Company ( K n i f e River ) . Knife River is MDU ' s wholly-owned s u b s i d i a r y and s u p p l i e s 1 0 0 p e r c e n t o f t h e c o a l needed f o r M D U ' s c o a l - f i r e d g e n e r a t o r s under long-term c o n t r a c t s . Approximately 34 p e r c e n t of Knife R i v e r ' s t o t a l s a l e s a r e made t o MDU w i t h t h e remaining 66 p e r c e n t of s a l e s being made t o o t h e r u t i l i t i e s and manufacturing concerns. During a h e a r i n g on t h e r a t e i n c r e a s e r e q u e s t , t h e PSC heard testimony on two d i f f e r e n t methods f o r monitoring t h e r e a s o n a b l e n e s s of t h e p r i c e MDU pays f o r its c o a l . MDU suggested t h e use of a "market p r i c e " method: an examination of t h e p r i c e charged i n t h e marketplace f o r s i m i l a r s a l e s i n comparison t o t h o s e p r i c e s being charged by t h e s u b s i d i a r y t o t h e p a r e n t ; i f a f a v o r a b l e comparison is found, t h e p r i c e is deemed r e a s o n a b l e and no adjustment is n e c e s s a r y . A " r a t e of r e t u r n " method was o f f e r e d by t h e Montana Consumer Counsel which c a l l e d f o r an examination of t h e r e t u r n being earned by t h e s u b s i d i a r y on its s a l e s t o t h e p a r e n t ; an e x c e s s i v e r a t e of r e t u r n r e q u i r e s an adjustment. I n a s s e r t i n g t h e a p p l i c a t i o n of its method, t h e Con- sumer Counsel's expert witness, Dr. John W. Wilson, testi- fied that: the return on the total net investment for Knife River for 1977 was approximately 33 percent. (This rate of return was based on Knife River's capitalization of $15,899,519. ) Dr. ~ i l s o n was of the opinion that the per- centage was in excess of a reasonable rate of return and recommended that MDU's coal expense be reduced by 2.6 million dollars. This adjustment would represent the reduction of all Knife River profits to a level equal to the profit (rate of return) MDU is allowed to earn on its equity investment (12.124 percent). MDU resisted the Consumer Counsel's recommendation, claiming that its coal purchases from Knife River were reasonable and fair having been made in a competitive environment. In issuing its order the PSC deemed the claimed coal expense excessive and chose to make use of the rate of return method in monitoring its reasonableness. In applying this method, the PSC used the following formula: A. Knife River's capitalization is determined by the Consumer Counsel's witness, Wilson, in the amount of $15,899,519. B. MDU's rate of return on equity is applied to the capitalization to produce a revenue amount: 12.124 percent x $15,899,519 = $1,927.658. C. This amount is subtracted from the return actually earned by Knife River: $4,475,885 - $1,927,658 = $2,548,227. D. MDU's direct and indirect purchases of coal from Knife River are determined by Consumer Counsel's witnesses to be 33.91 percent of Knife River's total sales. E. D i r e c t and i n d i r e c t s a l e s from K n i f e River t o MDU a r e t h e n determined: $2,548,227 x 32.8272% = $836,512. F. Montana's p o r t i o n of t h e claimed e x c e s s i v e c o a l c o s t s is t h e n determined by m u l t i p l y i n g by t h e p r o p o r t i o n of Montana's kwh s a l e s t o t o t a l i n t e r c o n n e c t e d system kwh s a l e s : $836,512 x 33.91% - $283,661. (Consumer C o u n s e l ' s p o s i t i o n t h a t t h e r e d u c t i o n be based on a l l Knife River prof its was - n o t adopted. ) An appeal of t h e PSC o r d e r was t a k e n t o t h e D i s t r i c t Court by MDU. A f t e r review, t h e c o u r t h e l d t h a t t h e r e was s u b s t a n t i a l evidence i n t h e r e c o r d t o s u s t a i n t h e PSC's d e c i s i o n t o use t h e r a t e of r e t u r n method a s w e l l a s t h e a p p l i c a t i o n of t h a t method. MDU now a p p e a l s t o t h i s Court claiming: (1) t h a t t h e PSC is o p e r a t i n g under a m i s t a k e of law i n concluding t h a t under t h e c i r c u m s t a n c e s it could a p p l y a r a t e of r e t u r n on n e t f i x e d a s s e t s method a s a means of determining whether t h e p r i c e p a i d f o r Knife River c o a l was r e a s o n a b l e ; ( 2 ) t h a t t h e PSC h a s r e g u l a t e d Knife River which is beyond t h e i r s t a t u t o r y power; and ( 3 ) t h a t t h e o r d e r is an u n c o n s t i t u - t i o n a l d e p r i v a t i o n of p r o p e r t y w i t h o u t due p r o c e s s of law. The i s s u e p r e s e n t e d t o t h i s Court f o r review is framed a s follows: Did t h e PSC abuse its a u t h o r i t y i n its u t i l i z a t i o n and t h e n its p a r t i c u l a r a p p l i c a t i o n of t h e r a t e of r e t u r n method i n a s c e r t a i n i n g t h e r e a s o n a b l e n e s s of M D U ' s c o a l expense from a wholly-owned s u b s i d i a r y c o r p o r a t i o n ? A p p e l l a n t , Montana-Dakota U t i l i t i e s , g e n e r a l l y contends t h a t t h e c e n t r a l i s s u e is whether t h e p r i c e of c o a l s o l d t o MDU by Knife River is e x c e s s i v e ; i f it is n o t , t h e f u l l c o s t should be allowed a s a r a t e p a y e r expense. I n making t h i s d e t e r m i n a t i o n an examination should have been made of t h e going p r i c e f o r c o a l i n t h e a p p l i c a b l e competi- t i v e marketplace. Nere, t h e r e is s u b s t a n t i a l evidence t h a t a c o m p e t i t i v e marketplace e x i s t s and t h a t t h e p r i c e p a i d was e q u a l t o o r less t h a n t h e going p r i c e . A s a consequence, t h e c o s t s claimed by MDU should n o t have been deemed exces- s i v e , and t h e r a t e of r e t u r n method should n o t have been a p p l i e d . A p p e l l a n t f u r t h e r contends t h a t even i f t h e r e is n o t a c o m p e t i t i v e marketplace by which t o e v a l u a t e t h e reason- a b l e n e s s of t h e p r i c e charged MDU, it does n o t f o l l o w t h a t t h e p r i c e was e x c e s s i v e . I f t h e p r o f i t s r e c e i v e d by Knife River on t h e s a l e of c o a l t o MDU a r e c o n s i d e r e d i n r e l a t i o n t o t h e f a i r market v a l u e of t h e a s s e t s of t h e company ($118,000,000), its r a t e of r e t u r n is merely 1 . 6 p e r c e n t . C e r t a i n l y such a margin of p r o f i t a b i l i t y is n o t e x c e s s i v e and, t h u s , is r e a s o n a b l e even i n absence of a c o m p e t i t i v e marketplace . A p p e l l a n t a r g u e s f u r t h e r t h a t use of t h e r a t e of r e t u r n method is u n f a i r and i n a p p r o p r i a t e i n t h i s i n s t a n c e . K n i f e R i v e r is e n g a g e d i n a n o n r e g u l a t e d c o m p e t i t i v e i n d u s t r y . The method, a s a p p l i e d , is t h u s tantamount t o t h e c o n f i s c a t i o n of Knife R i v e r ' s a s s e t s . I t h a s t h e e f f e c t of u t i l i z i n g a d e p l e t a b l e a s s e t of Knife River t o a r t i f i c i a l l y d e p r e s s e l e c t r i c u t i l i t y r a t e s below t h e proper and reason- a b l e l e v e l mandated by our c u r r e n t i n f l a t i o n a r y economy. The o n l y proper means of d e t e r m i n i n g t h e r e a s o n a b l e n e s s of t h e p r i c e p a i d by MDU i n t h i s i n s t a n c e is i n a p p l y i n g a " f a i r market" method. Respondent c l a i m s t h a t both methods p r e s e n t e d t o t h e PSC have been recognized a s a c c e p t a b l e monitoring d e v i c e s t o t e s t t h e r e a s o n a b l e n e s s of c o a l s a l e s . A fundamental pre- r e q u i s i t e of t h e c o m p e t i t i v e p r i c e method, however, is t h a t an independent c o m p e t i t i v e market be p r e s e n t i n which com- p a r a b l e p r i c e s can be drawn. Here, t h e r e is no c o m p e t i t i v e environment a s i n d i c a t e d by t h e f o l l o w i n g f a c t o r s : (1) 100 p e r c e n t of M D U ' s c o a l requirement is s u p p l i e d by Knife River under long-term c o n t r a c t ; ( 2 ) b o i l e r d e s i g n s r e q u i r e c o a l of a c e r t a i n grade o r t y p e , and MDU f a i l e d t o show whether any o t h e r "competitor" could s u p p l y t h e needed q u a l i t y ; ( 3 ) M D U ' s g e n e r a t i n g p l a n t s a r e l o c a t e d i n proximity t o Knife R i v e r ' s m i n e s g i v i n g it a n i n s u r m o u n t a b l e c o m p e t i t i v e advantage when t r a n s p o r t a t i o n c o s t s a r e f i g u r e d i n t o c o a l c o s t s . Respondent f u r t h e r a r g u e s t h a t a p p l i c a t i o n of t h e r a t e of r e t u r n method does n o t c o n s t i t u t e an impermissible r e g u l a t i o n of Knife River. The o n l y e f f e c t of t h e PSC o r d e r is t o l i m i t t h e c o a l expenses MDU can p a s s along t o its Montana customers i n its r a t e b a s e . It does n o t i n any way l i m i t t h e p r i c e MDU pays Knife R i v e r , nor does it l i m i t Knife R i v e r ' s p r o f i t s from s a l e s t o MDU o r any o t h e r customer. Respondent t h e n concludes t h a t use of Knife R i v e r ' s c a p i t a l i z a t i o n a s a base a g a i n s t which p r o f i t s a r e measured was n o t improper. The i n t e r e s t of t h e PSC is t o s e e t h a t MDU does n o t r e a p an u n f a i r p r o f i t on its investment i n its s u b s i d i a r y by allowing t h e s u b s i d i a r y t o overcharge t h e p a r e n t f o r c o a l when t h e c o a l expense w i l l be passed on t o t h e r a t e p a y e r s . T h e c a p i t a l i z a t i o n f i g u r e r e p r e s e n t s M D U ' s investment i n Knife River. I n a s c e r t a i n i n g t h e r a t e on t h a t investment, t h e c a p i t a l i z a t i o n f i g u r e must be used. A f u n c t i o n of t h e PSC, i n f u l f i l l i n g its d u t y t o s u p e r v i s e and r e g u l a t e t h e o p e r a t i o n s of MDU a s an e l e c t r i c u t i l i t y , is t o s e e t h a t M D U ' s r a t e s a r e j u s t and nondis- c r i m i n a t o r y . S e c t i o n 69-3-330, MCA. I n complying w i t h t h i s o b l i g a t i o n , it f o l l o w s t h a t t h e PSC must s c r u t i n i z e and review t h e o p e r a t i n g expenses of MDU t o p r e v e n t unreasonable o p e r a t i n g c o s t s from being passed on t o t h e customer. When one of t h e expenses submitted by MDU is caused by t r a n s - a c t i o n s w i t h a s u b s i d i a r y company, t h e s c r u t i n y a p p l i e d by t h e PSC m u s t b e a l l t h e more i n t e n s e . S e e P r i e s t , P r i n c i p l e s - - - - - - - - o f P u b l i c U t i l i Q - R e g u l a t i o n , V o l . 1, p . 80; General Telephone Co. of U p s t a t e New York v. Lundy ( 1 9 6 6 ) , 1 7 N.Y.2d 373, 218 N.E.2d 2 7 4 . MDU, i n an a t t e m p t t o e s t a b l i s h t h e r e a s o n a b l e n e s s of t h e c o a l expense r e s u l t i n g from t h e purchase of c o a l from its s u b s i d i a r y , submits t h a t t h e p r i c e should be monitored i n t h e c o n t e x t of a n a t u r a l r e s o u r c e company o p e r a t i n g i n t h e f r e e marketplace, and n o t i n t h e c o n t e x t of a r e g u l a t e d p u b l i c u t i l i t y . I n t h i s r e g a r d , MDU submitted evidence which showed: (1) t h a t t h e p r i c e charged MDU b y Knife River is lower t h a n t h e p r i c e a v a i l a b l e from any a l t e r n a t i v e s o u r c e ; ( 2 ) t h a t Knife River c h a r g e s MDU t h e same p r i c e it c h a r g e s its o t h e r customers; and ( 3 ) t h a t Knife R i v e r ' s p r o f i t s a r e r e a s o n a b l e when measured a g a i n s t t h e f a i r market v a l u e of its a s s e t s ( f a i r market v a l u e of $118,000 w i t h a r a t e of r e t u r n a t 1.6 p e r c e n t ) . U s e of t h e f a i r marketplace a s a monitoring d e v i c e a s submitted by MDU is o b v i o u s l y dependent upon a c o m p e t i t i v e environment. Without such an environment, no adequate frame of r e f e r e n c e e x i s t s i n which t h e f a i r n e s s of Knife R i v e r ' s p r i c e can be determined. I n t h i s i n s t a n c e , t h e PSC heard testimony t h a t Knife River p r i c e s t o MDU a r e t h e same a s t h o s e charged t o o t h e r customers, n o t n e c e s s a r i l y because of t h e i n h e r e n t f a i r n e s s of t h e p r i c e , b u t because Knife River is merely complying w i t h t h e Robinson Patman A c t which r e q u i r e s s a l e s of c o a l of l i k e kind and q u a n t i t y t o be o f f e r e d a t t h e same p r i c e t o a l l customers. Evidence was a l s o p r e s e n t e d t h a t t h e p r o x i m i t y of M D U ' s g e n e r a t i n g p l a n t s t o Knife River g i v e s Knife River a c o m p e t i t i v e advantage t h a t is insurmountable by c u r r e n t c o m p e t i t o r s when one c o n s i d e r s t h a t t r a n s p o r t a t i o n c o s t s o f t e n exceed c o a l c o s t s . T h i s , t a k e n w i t h t h e f a c t t h a t Knife River s u p p l i e s 100 p e r c e n t of M D U 1 s c o a l r e q u i r e m e n t s under long-term c o n t r a c t s , l e a d s t o t h e PSC1s c o n c l u s i o n t h a t a n t i - c o m p e t i t i v e f a c t o r s were p r e s e n t and t h a t evidence of a c o m p e t i t i v e environment needed t o a p p l y a market p r i c e method was i n c o n c l u s i v e . A s a consequence, t h e PSC r e f u s e d t o examine market p r i c e o r market v a l u e a s t h e s o l e f a c t o r s t o be considered i n determining t h e r e a s o n a b l e n e s s of M D U ' s c o a l expense. The market p r i c e method n o t being a v a i l a b l e f o r use i n t h i s i n s t a n c e , t h e PSC chose t o u t i l i z e a r a t e of r e t u r n method. T h i s method of monitoring t h e r e a s o n a b l e n e s s of c o a l p r i c e s p a i d by a p a r e n t t o its s u b s i d i a r y is n o t new t o t h e f i e l d of u t i l i t y law. See Competition i n t h e Coal I n d u s t r y , Report of t h e United S t a t e s Department of J u s t i c e , P u r s u a n t t o S e c t i o n 8 of t h e F e d e r a l Coal Leasing A c t of 1 9 7 5 ; A p p l i c a t i o n o f Montana-Dakota U t i l i t y Co. f o r A u t h o r i t y t o E s t a b l i s h I n c r e a s e d R a t e s f o r E l e c t r i c S e r v i c e (S.D. 1 9 7 9 ) , 278 N.W.2d 189; M i s s i s s i p p i River Fuel Corp. v. F e d e r a l Power Commission ( D . C . C i r . 1 9 5 7 ) , 252 F.2d 619. I n applying t h i s method t h e PSC chose t o use a c o s t approach t o a n a l y z e Knife R i v e r ' s p r o f i t s and computed a 33 p e r c e n t r a t e of r e t u r n d u r i n g t h e 1977 t e s t year ( r e l a t i o n of p r o f i t s t o o r i g i n a l investment l e s s d e p r e c i a t i o n ) . The PSC t h e n concluded t h a t t h i s r a t e of r e t u r n was t o o h i g h and r e s t r i c t e d M D U ' s c o a l expense s t a t i n g t h a t a r e a s o n a b l e r a t e o f r e t u r n f o r Knife R i v e r ' s s a l e s t o MDU should be e q u a l t o t h e r a t e of r e t u r n allowed MDU on its o v e r a l l o p e r a t i o n (12.124 p e r c e n t ) . W e n o t e , however, t h a t t h e PSC, i n making t h i s c o n c l u s i o n , f a i l e d t o i n d i c a t e on what b a s i s it deemed a 33 p e r c e n t r a t e of r e t u r n unreasonable o r why a 12.124 p e r c e n t r a t e is r e a s o n a b l e under t h e c i r c u m s t a n c e s . The Consumer C o u n s e l ' s e x p e r t w i t n e s s t e s t i f i e d t h a t o t h e r c o a l companies earned r e t u r n s t h a t were s i g n i f i c a n t l y lower t h a n Knife River I s . The o n l y a c t u a l comparison made, however, i n d i c a t e d t h a t an independent c o a l company had a 31.89 p e r c e n t r a t e of r e t u r n i n 1977, a s compared t o Knife R i v e r ' s 33.43 p e r c e n t . On a five-year average (1973 t o 1 9 7 7 ) , t h e r a t e o f r e t u r n f o r t h e independent was 17.8 p e r c e n t and f o r Knife River 20.69 p e r c e n t . The p e r c e n t a g e of Knife River is c e r t a i n l y h i g h e r , b u t t h i s Court q u e s t i o n s whether such a s m a l l sampling is s u p p o r t i v e of a f i n d i n g t h a t 33.43 p e r c e n t is e x c e s s i v e o r t h a t 12.143 of e q u i t y is a r e a s o n a b l e r a t e of r e t u r n . I n imposing a l i m i t of 12.143 p e r c e n t r a t e of r e t u r n on Knife R i v e r ' s c o a l s a l e s t o MDU, t h e PSC a p p a r e n t l y was a c t i n g on t h e r a t i o n a l e t h a t a r a t e p a y e r should n o t be f o r c e d t o c o n t r i b u t e t o t h e p r o f i t o f t h e u t i l i t y company twice. Here, t h e r a t e p a y e r pays a f a i r r a . t e of r e t u r n t o t h e u t i l i t y on its c o s t of c a p i t a l (12.124 p e r c e n t ) . The consumer is t h e n asked by MDU t o pay f o r its c o a l expense which c o n t a i n s a 33 p e r c e n t p r o f i t l e v e l t o be earned by MDU a s t h e p a r e n t company ( i n v e s t o r ) of Knife River. The end r e s u l t is t h a t MDU is allowed a p r o f i t from its u t i l i t y o p e r a t i o n s , a s allowed by t h e r e g u l a t o r y body, t h e n a l s o e a r n s an "excess" p r o f i t on its investment from t h e s u b s i d - i a r y , a l l a t t h e expense o f t h e r a t e p a y e r . M D U ' s e a r n i n g s on its investment i n Knife River is n o t p e r se improper. I t is o n l y t h e e a r n i n g of e x c e s s i v e , and t h e r e b y u n r e a s o n a b l e , p r o f i t s a t t h e expense o f t h e r a t e p a y e r which t h e PSC seeks t o p r e v e n t . With t h i s p r i n - c i p l e i n mind, t h e PSC was w i l l i n g t o a l l o w MDU t o e a r n a r e t u r n on both its u t i l i t y o p e r a t i o n s and its s u b s i d i a r y ' s o p e r a t i o n , s o long a s t h e r a t e p a y e r ' s c o n t r i b u t i o n t o t h e e a r n i n g s of t h e s u b s i d i a r y were l i m i t e d t o a r e a s o n a b l e l e v e l of 12.124 p e r c e n t . Upon reviewing t h e m a t t e r , t h i s Court a g r e e s i n p r i n c i p a l w i t h t h i s approach, b u t w e q u e s t i o n whether t h e imposed l i m i t of 12.124 p e r c e n t is " r e a s o n a b l e , " a s sup- p o r t e d by t h e e v i d e n c e , and n o t merely a r b i t r a r i l y s e t . The i n t e r e s t of t h e PSC is t o see t h a t MDU d o e s n o t r e a p an u n f a i r p r o f i t on its investment i n its s u b s i d i a r y by a l l o w i n g t h e s u b s i d i a r y t o o v e r c h a r g e t h e p a r e n t f o r c o a l when t h e c o a l is p a i d f o r i n t o t a l by r a t e p a y e r s . A s a consequence, t h e r a t e of r e t u r n on s a l e s by Knife R i v e r , a s a wholly-owned c o a l company, t o its p a r e n t is s u b j e c t t o c l o s e s c r u t i n y . I t d o e s n o t a u t o m a t i c a l l y f o l l o w , however, t h a t t h e c o a l company should be held t o t h e same r a t e a s its p a r e n t p u b l i c u t i l i t y . Nor does it f o l l o w t h a t t h e p a r e n t is o n l y allowed t o r e c e i v e t h e same r a t e of r e t u r n on t h e investment i n its c o a l s u b s i d i a r y a s it r e c e i v e s on its u t i l i t y p r o p e r t y , w i t h r e s p e c t t o s a l e s between t h e sub- s i d i a r y and t h e p a r e n t . I f any l i m i t a t i o n on c o a l p r o f i t s or r a t e p a y e r c o a l expense is i n o r d e r , it should be based on a r e a s o n a b l e r a t e of r e t u r n a s e s t a b l i s h e d by a comparable m a r k e t p l a c e , n o t upon a predetermined r a t e a s e s t a b l i s h e d f o r a r e g u l a t e d u t i l i t y . Perhaps t h e PSC, i n s e t t i n g t h e r a t e of r e t u r n l e v e l , was r e l y i n g upon t h e t h e o r y p r e v a l e n t i n t h e " C a l i f o r n i a approach" t o t h e i s s u e a t hand. Under t h i s approach, t h e s u b s i d i a r y is t r e a t e d n o t a s an independent e n t i t y b u t a s p a r t of t h e u t i l i t y f o r rate-making purposes. The t h e o r y underlying t h i s p o s i t i o n was d i s c u s s e d i n Washington Water Power v. Idaho P u b l i c U t i l . ( 1 9 8 0 ) , 101 Idaho 567, 617 P.2d ". . . where a u t i l i t y e n j o y s an i n t e g r a t e d p o s i t i o n and market dominance, it 'should n o t be p e r m i t t e d t o break up t h e u t i l i t y e n t e r - p r i s e by t h e use of a f f i l i a t e d c o r p o r a t i o n s and t h e r e b y o b t a i n an i n c r e a s e d r a t e of re- t u r n f o r its a c t i v i t e s . ' [ C i t a t i o n o m i t t e d . ] Thus under t h i s approach t h e q u e s t i o n of whether t h e p r i c e s a r e r e a s o n a b l e is immate- r i a l ; a l l i n t e g r a t e d p a r t s of t h e u t i l i t y a r e allowed t h e same r a t e of r e t u r n . . ." W e n o t e , however, t h a t t h e m a j o r i t y of t h o s e c a s e s using t h i s approach i n v o l v e t h e B e l l Telephone System and its manufacturing s u b s i d i a r i e s . These s u b s i d i a r i e s s e l l v i r t u a l l y a l l t h e i r manufactured p r o d u c t s t o t h e p a r e n t , B e l l Telephone--a f a c t which is m a t e r i a l l y d i f f e r e n t from t h e p r e s e n t s i t u a t i o n where t h e bulk of Knife River c o a l ( a d e p l e t a b l e n a t u r a l r e s o u r c e ) is s o l d t o customers o t h e r t h a n i t s p a r e n t . See C i t y o f Los Angeles v. P u b l i c U t i l i t i e s Comm. ( 1 9 7 2 ) , 102 Ca1.Rptr. 313, 497 P.2d 785; Re N e w England Telephone & Telegraph Co. (Me. 1 9 7 6 ) , 1 3 P.U.R.4th 65; I l l i n o i s B e l l T e l e p h o n e Co. v . I l l i n o i s Commerce Commission ( 1 9 7 3 ) , 55 111.2d 461, 303 N.E.2d 364; Note, Treatment o f A f f i l i a t e d T r a n s a c t i o n s i n U t i l i t y R a t e Makinq: Western E l e c t r i c Company and t h e B e l l System, 56 Boston U. Law Rev. 558, 568-571 ( 1 9 7 6 ) . Such an approach should n o t be deemed a p p l i c a b l e i n t h i s i n s t a n c e . I n d e t e r m i n i n g r e a s o n a b l e n e s s , t h e PSC should n o t be r e s t r i c t e d t o any s i n g l e formula " s o long a s t h e method followed and t h e o r d e r e n t e r e d when a p p l i e d t o t h e f a c t s and viewed a s a whole do n o t produce an u n j u s t o r a r b i t r a r y r e s u l t . " Northwestern P u b l i c S e r v i c e Commission v. C i t i e s o f Chamberlain, e t a l . (S.D. 1 9 7 8 ) , 265 N.W.2d 867, 872. Here, t h e PSC chose t o a p p l y a r a t e o f r e t u r n method i n an e f f o r t t o d e t e r m i n e t h e r e a s o n a b l e n e s s o f t h e p r i c e p a i d by MDU f o r Knife River c o a l . Our i n q u i r y is t o d e t e r m i n e i f t h i s method produces an u n j u s t o r a r b i t r a r y r e s u l t . I n c o n s i d e r i n g t h e method t h i s C o u r t cannot s u b s t i - t u t e its judgment f o r t h a t o f t h e PSC, b u t t h e Court may d e t e r m i n e whether t h e PSC a c t e d a r b i t r a r i l y and unreasonably w i t h o u t s u f f i c i e n t e v i d e n c e t o s u p p o r t its f i n d i n g s . Moun- t a i n S t a t e s Telephone & Telegraph Co. v. Dept. of P u b l i c S e r v i c e R e g u l a t i o n ( 1 9 8 1 ) , - Mont. , 624 P.2d 481, 38 St.Rep. 165, 170. A f t e r a n a l y z i n g Knife R i v e r ' s p r o f i t s i n comparison t o c a p i t a l investment, t h e PSC summarily l a b e l e d Knife R i v e r ' s r a t e of r e t u r n on s a l e s t o MDU a s unreason- a b l e , when i n f a c t no s u b s t a n t i a l e v i d e n c e was p r e s e n t e d t o s u p p o r t such a c o n c l u s i o n . The PSC must have s u f f i c i e n t evidence b e f o r e it t o determine i f a p a r t i c u l a r r a t e of r e t u r n is f a i r and j u s t f o r Knife River a s compared t o o t h e r c o a l companies. Unless t h e r e is s u b s t a n t i a l evidence t o show t h a t t h e r a t e of r e t u r n of MDU is a l s o a p p l i c a b l e t o t h e c o a l company, t h e r e is no b a s i s f o r an a p p l i c a t i o n of t h e MDU r a t e of r e t u r r n t o Knife River a s was done by t h e PSC. I t is a p p a r e n t t h a t t h e n a t u r a l r e s o u r c e company, Knife R i v e r , doing a m a j o r i t y of its b u s i n e s s w i t h p a r t i e s o t h e r t h a n MDU, may be e n t i t l e d t o a s i g n i f i c a n t l y d i f f e r e n t r a t e of r e t u r n t h a n would be t r u e i f it were a u t i l i t y o r i f it were s e l l i n g a l l of its c o a l p r o d u c t i o n t o MDU. I t may be t h a t t h e PSC does n o t have t h e e x p e r t i s e t o r e a d i l y determine t h e r a t e of r e t u r n on a n a t u r a l r e s o u r c e c o a l company a s compared t o a u t i l i t y . The evidence shows t h a t a l a r g e p a r t of Knife R i v e r ' s c o a l r e s e r v e s were a c q u i r e d a number of y e a r s ago a t a low c o s t . A s an example, l e a s e s a c q u i r e d a t a c o s t t o Knife River of less t h a n $400,000 cover 585,000,000 t o n s of c o a l which has a market v a l u e of $93,000,000. I n a s i m i l a r manner, t h e evidence shows t h a t t h e Beulah mine owned by Knife River w i l l be f u l l y depre- c i a t e d i n 1981, s o t h a t i f u n d e p r e c i a t e d c o s t t o Knife River is used f o r a r a t e of r e t u r n , no p r o f i t a t a l l would be allowed on t h e Beulah mine. I f t h e PSC u l t i m a t e l y concludes t h a t it s t i l l d e s i r e s t o use t h e r a t e of r e t u r n method, it must t a k e i n t o c o n s i d e r a t i o n such f a c t s a s t h e s e s o t h a t its a c t i o n w i l l n o t be a r b i t r a r y . I n view of t h e n e c e s s i t y f o r a r e h e a r i n g , t h e PSC should a g a i n c o n s i d e r i f t h e r e is an independent, competi- t i v e market which e s t a b l i s h e s a going market p r i c e f o r c o a l , from which t h e PSC can determine i f t h e p r i c e MDU pays Knife River f o r c o a l is r e a s o n a b l e . While it is t r u e t h a t t h e PSC found t h a t a b s o l u t e c o m p a r a b i l i t y between c o a l p r i c e s impos- s i b l e t o determine, it a p p e a r s t o t h i s Court t h a t t h e p r i c e s p a i d by a number of o t h e r companies t o Knife River f o r two- t h i r d s of its c o a l p r o d u c t i o n is evidence of a c o m p e t i t i v e market f o r comparison t o t h e Knife River p r i c e p a i d by MDU. I n a d d i t i o n , t h e r e was evidence of p r i c e s charged by o t h e r companies i n t h e c o m p e t i t i v e a r e a . I f t h e PSC f i n d s t h a t t h e p r e s e n t evidence is i n s u f f i c i e n t , it a p p e a r s a p p r o p r i a t e t h a t t h e PSC r e q u i r e t h e p a r t i e s t o submit a d d i t i o n a l evidence from which t h e PSC can determine i f MDU is paying Knife River a p r i c e which is no h i g h e r t h a n t h e c o m p e t i t i v e marketplace r e q u i r e s . A s a m a t t e r of j u s t i c e , it a p p e a r s t o t h i s Court t h a t it might be b e t t e r f o r t h e PSC t o use a marketplace c o s t of c o a l approach, i f it can o b t a i n s u f f i c i e n t f a c t s f o r its d e t e r m i n a t i o n , r a t h e r t h a n using t h e r a t e of r e t u r n method w i t h a l l of its d i f f i c u l t t h e o r i e s and computations. While t h e PSC does have t h e r i g h t t o chose t h e method followed, t h i s Court d i d n o t f i n d a f a c t u a l reason f o r t h e summary r e j e c t i o n of t h e marketplace c o s t of c o a l approach. W e , t h e r e f o r e , v a c a t e t h e judgment of t h e D i s t r i c t Court and remand t h e c a s e t o t h e PSC w i t h i n s t r u c t i o n s t o hold an a d d i t i o n a l h e a r i n g t o d e t e r m i n e t h e following: (1) i f r a t e of r e t u r n is used, a f a c t u a l b a s i s f o r t h e r a t e of r e t u r n allowed Knife River c o n s i d e r i n g its a s s e t s and r a t e of r e t u r n on a marketplace b a s i s comparable t o o t h e r c o a l companies; o r ( 2 ) i n t h e e v e n t market c o s t of c o a l is used, s u f f i c i e n t f a c t s t o s u p p o r t t h e PSC d e t e r m i n a t i o n of t h e f a i r market p r i c e f o r coal. J u s t i c e 4 W e concur: Chief J u s t i c e ~onor'able Leonard H. ~ange;, D i s t r i c t Judge, s i t t i n g i n place of M r . J u s t i c e Daniel J. Shea Mr. Justice John C. Sheehy, dissenting: I have tried in vain to reason with my colleagues not to take what I view as a backward step in the developing law of utility regulation in Montana. The result is a majority opinion that is unwarranted, useless and contradictory. Unwarranted, because it is an intrusion on the right of the Public Service Commission to determine the methodology it uses for a reasonable rate of return on equity. Useless, because it sets the PSC to an impossible task, determining a market where no market exists. Contradictory, because it conflicts with itself, and because it contradicts Mountain States Telephone and Telegraph Company v. The Department of Public Service Regulation, et al., Decided February 5, 1981, 38 St.Rep. 165. Let us take the contradictions first. By statute the PSC "is not bound to accept or use any particular value in determining rates; provided, that if any value is used, such value may not exceed the original cost of the property . . ." Section 69-3-109, MCA. Moreover, the Commission is invested "with full power of supervision, regulation, and control" of public utilities. Section 69-3-102, MCA. The PSC decided under its broad power to follow the "California" approach and treat MDU's subsidiary as a part of the utility for ratemaking purposes. The majority opinion pays pious lip service to the right of PSC to determine its own methodology in valuing the coal purchased from Knife River, but then contradicts itself. It is contradictory to require the PSC to determine: "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 market place 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." Those requirements are completely out of sync with the unitary method: ". . . Thus under this [California] approach the question of whether the prices are reasonable is - immaterial; all integrated parts of the utility - are allowed the same rate of return . . ." Washington Water Power v. Idaho Public Util. (1980), 101 Idaho 567, 617 P.2d 1242, 1248. (Emphasis added. ) The majority opinion also contradicts a position we took with respect to American Telephone and Telegraph Company and Mountain Bell. In Mountain States Telephone and Telegraph Company v. Department of Public Service Regulation, Decided February 5, 1981, 38 St.Rep. 165, we refused to allow Mountain Bell to employ a "double leverage" in its rate base, arising out of funds in Mountain Bell's capital structure borrowed from its parent AT & T. This case is the inverse of the Mountain Bell situation. In Mountain Bell, supra, the utility was claiming that it should receive a rate of return 11.25 percent on its borrowed funds when AT & T was charging Mountain Bell 9.86 percent for the loans. We objected, saying "Mountain Bell's common stockholders are 'leveraged' because Mountain Bell is paying less interest on its borrowed funds than the return it makes on the use of its borrowed funds." 38 St-Rep. at 167. Here, the investment in Knife River from the retained earnings of the MDU shareholders (or borrowed funds, whichever) is "leveraged" because the shareholders will make more money from their Knife River investment than the reasonable rate of return on equity found by PSC. That will be the net effect of the majority decision in this case. The majority opinion is further contradictory in that it distinguishes AT & T and its subsidiary companies, saying the application of the unitary method as to AT & T is proper merely because AT & T is large enough to purchase nearly all of the manufactured products of its subsidiaries. What economic or regulatory reason logically exists to treat AT & T differently from energy utilities? The fact that a wholly- owned subsidiary may sell to others than its parent is not a sufficient reason to require the rate-payers of the parent to pay excessive costs. The implications of the majority opinion here will surely haunt us when future rate cases involve utilities which purchase fuel or power from the giant consortiums or joint enterprises of which the utilities are now becoming a part. I also said that the majority opinion is unwarranted. I make that contention because the field of public utility regulation belongs exclusively to the PSC under our statutes and the methodology employed by it to determine a reasonable rate of return is exclusively its province. his would be a proper case for us to state as a rule that the PSC is not restricted to any single formula in determining the rate of return as long as the method followed does not result in an unjust and arbitrary result. Application of Mont.-Dak. Util. Co., Etc. for Authority to Establish Increased Rates for Electric Service (S.D. 1979), 278 N.W.2d 189, 191. For a business with a guaranteed market, a guaranteed monopoly, and a guaranteed profit, a 12.124 percent rate of return on equity is not to be snubbed as arbitrary or un- reasonable, even in these days. I have also said that the majority opinion is useless, because it requires the PSC to make determinations that it has already made, and that are materially inconsistent with the unitary rate of return. The PSC carefully noted that it was not in any event attempting to regulate Knife River or to regulate its profitability or to regulate its rate of return. MDU very carefully did not appeal from those findings of the commission. The commission found that Knife River's profitability of 33.43 percent on net fixed assets, when compared to PSC's allowance of 12.124 percent rate of return on equity, was an "extreme" difference. It found that the only method of protecting the ---payers from the excessive prices paid for coal was to limit the amount (but only for the rate base) that MDU would pay to Knife River for coal. After making its computations, which amounted only to the elimination of $283,661 of MDU's income,PSC made the following findings: "MDU has suggested that the transfer price of coal between MDU and Knife River be examined, and if it appears to be competitive, no adjustments be made. The Commission sees several disadvantages with this approach. First, the rate payer would be required to pay the going rate for coal regardless of the rate of return being earned by MDU share- holders as discussed above. Second, and most importantly, absolute comparability between coal prices is virtually impossible to determine due to a multitude of variables in mining operations, chemical composition of coal, transportation and other factors (for example, the composition of some coal may dictate the need for a more expensive boiler than other coals; which would be a cost for the utility but may not be reflected in the price per ton for coal)(A. S. Kane Rebuttal, page 28, line 14-31). Finally the bargaining between MDU and Knife River is not at arms length. Anytime an [sic] unitary entity bargains with itself, the results tend to be different than the results between bargaining between unrelated entities. (J. W. Wilson, Rebuttal, page 20, lines 5-25). "MDU suggested that if the Commission intends to regulate Knife River's rate of return that the fair market value of its reserves be used in determining that rate of return. Firstly, the Commission is not regulating Knife River's rate of return. Rate of return has merely been used as a method of determining excessive coal prices. Secondly, and as has been stated above, the Commission does not feel that MDU's rate payers should be subjected to coal prices that would not exist if MDU and Knife River were a single corporation. Therefore, in computing the amount MDU will pay Knife River for coal, the Commission has used the amount of Knife River's capitalization which closely matched the original cost depreciated valuation of its assets; the same method used in valuing utility property subject to regulation. This method of reporting is con- sistent with the financial reporting of all corporations, including natural resource companies." PSC Order No. 4467, Par. 411, at 25-27. The majority opinion is further useless, because if it is followed, we will have to set aside the results in the next appeal. For example, the majority opinion requires PSC to determine "if a particular rate of return is fair and just for Knife River as compared to other coal companies." The PSC is told to consider coal leases acquired at a cost to Knife River of less than $400,000 which contain coal reserves of 585 million tons with a market value of $93 million. It is told to disregard the original cost of the Beulah Mine, now depreciated. These are things that the PSC cannot do. It has no business or authority to determine a fair rate of return for Knife River Coal Co. The commission in its opinion carefully avoided in any manner regulating Knife River Coal Co. The $93 million figure for coal reserves is the fair market value of those reserves. By statute, the commission cannot consider such a figure, for it may not use any value in excess of the original cost of the property. Section 69-3-109, MCA. It would be nice for MDU if it could recover a profit on unmined coal reserves that are still in the ground, but that has no place in the rate-making process. The District Court properly took note of the fact that the United States Supreme Court rejected the contention that the assets of a natural resource company should be valued at market value because it is gradually depleting its assets in the course of its business operations. In Federal Power Com'n. v . Hope Natural Gas Co. (1944), 320 U.S. 591, 606, 64 S.Ct. 281, 290, 88 L.Ed.2d 333, 347, the Supreme Court said: "By such a procedure the utilities are made whole and the integrity of its investment maintained. No more is required." Finally, the opinion is useless because it ought to be apparent to al1,that a 33 percent return of profit in a single year is a good indication that no competition in the coal market exists. The majority opinion, therefore, is amphi-gory. It is a rigamarole of apparent meaning, but is basically meaningless. In this proceeding, the commission granted an increase in operating revenues for the gas utility of MDU in the sum of $5,392,283 and a decrease in its electrical utility of $88,447. The deduction which the PSC made for excessive coal charges was $286,000 which represents approximately 5.3 percent of the increase. It is not the money but the principle over which the parties here are waging war. The utility has secured the rejection by this Court of the unitary or California approach to subsidiaries as arbitrary and unreasonable. This will prove to be a sorry day for rate-payers. I would uphold the findings of the PSC and affirm the decision of the District Court.