Opinion ID: 1254568
Heading Depth: 2
Heading Rank: 1

Heading: Rate Setting Method

Text: Utility argues error in the PSC's decision to employ the operating margin method [1] in setting the appropriate rate of return. Instead, it argues the PSC should have used the rate of return on rate base method. [2] The PSC employed the operating margin method in its initial 1994 order. In Heater I, we addressed the PSC's choice, while not explicitly ruling on it, simply to provide the Commission with some meaningful guidance. 324 S.C. at 64, 478 S.E.2d at 830. We first noted there was no statutory requirement that the PSC use any particular rate setting method [3] , and therefore it had wide latitude to determine an appropriate method. We continued: This does not mean, however, that a particular methodology may not be more appropriate than another under a specific set of circumstances. In fact, the use of a methodology related to the actual circumstances faced by a utility company may almost guarantee the setting of a just and reasonable rate. Therefore, although we will continue to look at whether there is substantial evidence supporting the rate of return set by Commission and will not analyze in isolation whether the decision to use a particular methodology is so supported, we caution Commission to employ a methodology tailored to the facts and circumstances of the case before it. Here, the use of the operating margin methodology seems unusual, to say the least. Typically, that methodology is appropriate where a utility's rate base has been substantially reduced by customer donations, tap fees, contributions in aid of construction, and book value in excess of investment. As the testimony in this proceeding indicates, it is less appropriate for utilities that have large rate bases and need to earn a rate of return sufficient to obtain the necessary equity and debt capital that a larger utility needs for sound operation. We caution Commission to consider the circumstances of the case before it when choosing a price-setting methodology. Id. (emphasis supplied). On remand in Order Number 97-114, the PSC again found the operating margin method was appropriate, as we have employed it with other water and sewer companies similarly situated. Supplemental Order Number 97-251 further elaborated, stating Utility was similarly situated to Carolina Water Service in size, for example, and we have used the operating margin methodology properly in the past in that company's rate cases. The PSC also stated, [D]istinguishing factors must be pointed out before the Commission may properly depart from its past methodology in similar circumstances. No such factors were pointed out here. Thus, this Commission stuck to precedent. (emphasis supplied). Utility argues the PSC's order did not follow the court's instructions in Heater I because its decision was not tailored to the factual circumstances of its case. We agree. In two separate places, we instructed the PSC to consider the facts and circumstances of the case before it in making its decision. We also strongly suggested the PSC should consider the size of Utility's rate base in choosing the appropriate method. Despite our instructions in Heater I, the PSC based its decision of the appropriate rate setting method on two things: comparison with other utilities and prior practice. Nowhere in the orders was there a reference to any characteristic of Utility making the operating margin method appropriate. We have previously addressed the impropriety of relying on precedent as the basis for factual determinations. See, e.g., Hamm, 309 S.C. at 289, 422 S.E.2d at 114 (The declaration of an existing practice may not be substituted for an evaluation of the evidence. A previously adopted policy may not furnish the sole basis for the Commission's action.). Moreover, even without the specific instructions from Heater I, the order is too vague to allow for more than cursory appellate review. For example, the order refers to Carolina Water Service, another water and sewer utility, as the comparison standard. However, there is no evidence whatsoever in the record giving any information about Carolina Water Service. Under these circumstances, it would be impossible for an appellate court to afford meaningful review to any comparison findings regarding this utility. The same reasoning applies to the PSC's generic reference to other similarly situated utilities. The findings of fact of an administrative body must be sufficiently detailed to enable the reviewing court to determine whether the findings are supported by the evidence and whether the law has been properly applied to those findings. Implicit findings of fact are not sufficient. Where material facts are in dispute, the administrative body must make specific, express findings of fact. Able Communications, Inc. v. South Carolina PSC, 290 S.C. 409, 411, 351 S.E.2d 151, 152 (1986). See also S.C.Code Ann. § 1-23-350 (1986) (A final decision shall include findings of fact and conclusions of law, separately stated. Findings of fact, if set forth in statutory language, shall be accompanied by a concise and explicit statement of the underlying facts supporting the findings.); Hamm v. Southern Bell Telephone and Telegraph Co., 302 S.C. 132, 394 S.E.2d 311 (1990). We have repeatedly emphasized the need for specificity in administrative orders. The need is particularly great when complex issues are involved, such as those generally found in utility rate setting cases. Administrative agencies are afforded wide latitude in making decisions, as shown in the deferential standard of appellate review. [4] However, the writing of orders without sufficient detail or analysis, coupled with this standard of review, can make their decisions as a practical matter unassailable on appeal. We find the PSC's order regarding the choice of rate method does not comply with the specificity requirements for administrative orders as set forth above.