Opinion ID: 2391090
Heading Depth: 1
Heading Rank: 6

Heading: Authority for Fuel Adjustment Clause

Text: Respondents argue application of the FAC to its residential rate structure is authorized because the commission carefully reviewed the legal basis for authorizing these rates, and because the commission and other states in the past permitted such rates. This information, of course, does not aid our inquiry into whether such rates are authorized. Of no greater help is the summary statement that chapter 393, RSMo 1969, gives the PSC full authority over rates. The only substantial support cited for the PSC's authority to permit an FAC is Hotel Continental v. Burton, 334 S.W.2d 75 (Mo.1960). In that case, this court affirmed an order of the circuit court affirming the commission's power in a rate case to permit the Kansas City Power & Light Co. to include in its rate schedule a tax adjustment clause (TAC) which permitted the company to state separately on each customer's bill a charge equal to any part of a license, occupation, or other similar fee or tax applicable to service by the utility to that customer and imposed by local taxing authorities on the basis of gross receipts. This court concluded that the TAC was a rule or practice relating to a rate, pursuant to § 393.150, RSMo, and that it could become a part of a rate schedule approved by the commission pursuant to the latter's power to set just and reasonable rates, inasmuch as that power included the power to treat one item of operating expense differently than another. It also permitted the amount of gross receipts tax imposed to be increased or decreased. Respondents assert that the same reasoning which supported the commission's authority to allow a TAC would support its authority under the statutes to permit a fuel adjustment clause. We cannot agree. The court was very careful in Hotel Continental to limit its holding to the specific type of clause before it, a TAC. In describing the power of the commission to carry out its duty to set just and reasonable rates, we concluded, as respondents note, that the commission has the power to treat one item of operating expense differently than another, and, further, that it can determine which items should be included in operating expenses and which items should not be included. [4] There is no doubt that this is a valid statement, insofar as the commission does not breach other facets of the relevant statutes in exercising this general power in a particular case. It is to this latter point, the particular exercise of this power, that the court addressed itself in the rest of the opinion. It continued: Appellants say further that the commission's order is unlawful because its approval of the tax adjustment clause is contrary to statutory mandate in that it permits the company to increase or decrease its rates without filing new rate schedules and thereby denies interested parties an opportunity to be heard as to the propriety of the changed rates. Id. at 80. The court then went on to discuss whether, under the powers of the commission outlined above, it had the authority to permit a separate statement of the gross receipts tax charge on each bill, as it existed and was approved at the time of the hearing, and secondly, whether an automatic adjustment of that charge was permissible. The first question was answered in the affirmative, for the commission had determined in the course of the ratemaking proceeding below that the amount of the charge was proper, and pursuant to its authority to prescribe rules relating to rates it could of course authorize statement of the charge separately on the bill. In considering the automatic adjustment of the tax clause itself, however, the court did not speak as broadly. It noted that the amount of the tax was a valid expense item which no one questioned the utility had a right to collect; that the amount of an expense item represented by the amount of a valid tax is not affected by economy of operation in other respects or by greater volume of sales or by variations in the amounts of any other expense items, id. at 82, and that the sole purpose of the TAC was to recover the exact amount of an increase or decrease in the gross receipts tax. It concluded that: The commission does not lose supervisory control over company's operation because of the automatic tax adjustment clause contained in the present order. The company's rates are still subject to the commission's supervision. Those rates, however, are not and cannot be affected one iota by the amount of, or any change in the amount of, the money company must collect with which to pay its gross receipts tax, except in the exact amount by which that tax is increased or decreased. Id. (emphasis added). That is to say the tax was a direct charge, exactly proportioned to the customer's bill, the amount of which was directly determined by the amount of that bill. Effectively, the tax was imposed on the amount of the customer's bill, and hence its amount was governed by the other amounts charged the customer. Any change in other cost factors could not change this direct relationship, and thus any change in the tax rate could properly be taken into consideration under the TAC without regard to changes in other costs and without disturbing the statutory scheme that changes in rates of return not occur without considering all cost factors and without public awareness and understanding of rates proposed to be charged. In this context, the court concluded that the TAC was lawful, despite the fact that no new hearing would be held before each adjustment made pursuant to the TAC in response to a change in the gross receipts tax itself, because at the hearing below in the ratemaking case in which the TAC was approved: the commission took into consideration the circumstance that the tax might be increased or decreased and provided that the company would gain or lose revenue in an amount exactly equal to the increased or decreased amount necessary to pay the tax item. Consequently, the order operates so that the approved rate of return of necessity remains the same, provided, of course that the only substantial change in the company's operation is the gross receipts tax rate . . . id. at 81-82 (emphasis added, except in final clause). The distinction between the gross receipts tax and other items of cost to the utility was further underscored by the court in discussing the reasonableness of the commission's order, wherein it noted that the evidence showed:  That the only items of operating expense which are directly related to the company's gross revenues are the gross receipts tax and the state sales tax; that those two items fall into a separate category; that the company collects for the state the sales tax which is paid by the customers as a separate item added to the bills; that under the order proposed the gross receipts tax would be separately itemized on the bill but the amount of tax due would be a part of the customer's total cost, i. e., the customer cost is the same whether the gross receipts tax is shown as a separate item or is included in the steam rate as such ; that the gross receipts tax is an expense item which well may be dealt with as an item segregated from other expense items; that other tax items (other than sales tax) do not lend themselves to such segregated handling; that the gross receipts tax is subject to change at any time by the city council. Id. at 84. (emphasis added). The court concluded that the evidence justified the commission's order and that the TAC was lawful. It is readily apparent that Hotel Continental does not support respondents' position. While it stated, and we affirm, that as a part of its duty of setting reasonable rates, the commission has the power to treat some items of operating expense differently than others, it also recognized that such separate treatment must be effectuated in compliance with all of the statutes governing the PSC and with the purpose behind those statutes. To allow an automatic adjustment of a gross receipts tax, as this court so carefully pointed out, did not conflict with the purposes of the statute, for the tax items so separately treated were different in kind from other items of operating expense. That is, whether or not the tax charge increased or decreased could have no effect on the company's rate of return, for the charge, whatever it was, would go to the government and would not affect the company's revenue. It could not result in an excessive charge to the customer, for it was directly apportioned to his use of the utility, and its amount could be exactly determined. Further, no economies in other operations could offset the increased cost of the tax. In contrast, a fuel adjustment clause would not be of such limited scope. While it could nominally be considered a rule relating to a rate, as was the tax adjustment clause, the commission does not thereby gain power to permit its use if this would in effect initiate a new method of granting rate increases. As noted in Hotel Continental , non-tax operating costs (such as fuel) fall into a wholly separate category than does the tax cost at issue in that case. Although in their brief respondents attempt to distinguish a fuel adjustment clause from an adjustment clause for labor, supplies, construction and so forth on the basis that fuel is the largest single expense item, in oral argument they admitted that the rationale behind authorization of a fuel adjustment clause could be used to justify adjustment clauses covering these other items of operating expense. To permit all such costs to be automatically adjusted would create a third method of approval of rates not within the contemplation of the authorizing statutes. Unlike the tax adjustment clause approved in Hotel Continental , a charge under a fuel adjustment clause is not a direct charge. A tax adjustment charge is figured by determining the amount of gross receipts tax applicable to the amount of the customer's bill. The fuel adjustment charge is figured by estimating the amount of sales which will be made in a given month and allocating to each kilowatt-hour sale a percentage of the increase in fuel costs incurred during a prior month. Thus, if higher costs are incurred in January, the amount of these costs each customer will pay in March will depend in part not only on the amount of electricity he uses but on the total amount of electricity used. If fewer sales are made, his proportionate charge will be greater than if more sales are made. Additionally, the fuel adjustment charge will be affected by a utility's management decisions such as choice of fuel, choice of generating unit, the efficiency of that unit and similar operational matters. The average cost per kilowatt-hour will also be affected by overall use of energy during peak hours, when less efficient generators may have to be added to supply all necessary power, even though the individual consumer may in fact use electricity primarily during non-peak hours. Further, since in our mobile society customers move in and out of the territory of any particular utility as they change jobs or careers, new customers in, for example, October will be charged for an actual increase in fuel costs incurred in August when different customers were using electricity for air conditioning, etc. We do not mean to imply that the method of allocation approved by the commission is not a good or reasonable one, if authorized, but simply to state that given these factors fuel costs are not directly assignable to the fuel use of the customer and thus that they cannot be put in the same category as a gross receipts tax cost, which enters the picture only once the service relationship of the company and consumer is over, at least for that month, and is simply added as a charge to the bill in the month the bill is paid. Finally, we note that adjustment of a TAC cannot affect the rate of return of the utility, since economies of operation cannot be used to increase or decrease it directly. While fuel costs are to a large extent dependent on general market conditions and periodically fixed contract costs, the utility does exercise control over its fuel costs when it negotiates fuel contracts or chooses what fuel to buy or burn in what generating unit. [5] It also is possible to offset fuel costs with savings from efficiencies in other areas of operation, such as salaries, wages, taxes, depreciation and materials and supplies other than fuel. This, of course, does not necessarily mean that a fuel adjustment clause is not authorized by statute, but it does mean that it is not authorized as simply an extension of the reasoning in Hotel Continental . We must now determine whether it is otherwise authorized by statute. Respondents themselves have difficulty pointing to what provisions in the statutes give them authority to utilize a fuel adjustment clause. In their brief, as noted supra, they simply argue that it is clear that the statutes and case law in Missouri authorize such provisions. In oral argument, they admitted that it was hard to find specific sections authorizing an FAC, but that we should approve it on the basis of §§ 393.130, 393.140, and 393.270, and through application of the principle that where an agency is given broad supervisory authority, deference should be given to its interpretation of a statute, citing State ex rel. Jackson County, 532 S.W.2d 20, and State ex rel. Laclede Gas Co., 535 S.W.2d 561. Since FAC's have been used in regard to industrial and large commercial users for 60 years, and because other jurisdictions approve them, it is posited that we should also approve them. It is for the legislature, not the PSC, to set the extent of the latter's jurisdiction. The mere fact that the commission has approved similar clauses in the past, or that other states permit them, is irrelevant if they are not permitted under our statute, State ex rel. Philipp Transit Lines, Inc. v. Public Service Comm'n, 552 S.W.2d 696, 702 (Mo. banc 1977); State ex rel. Springfield Warehouse & Transfer Co. v. Public Service Comm'n, 240 Mo.App. 1147, 225 S.W.2d 792, 794 (1949). The sections cited by respondents in support of their position do not strengthen it. Section 393.130(4) and § 393.270(3) refer to a sliding scale rate. Although no specific reference to this term was made in respondent's brief or in oral argument, the utilities did argue before the commission that the provision for a sliding scale authorized a fuel adjustment clause, and in their briefs in this court appellants responded to such argument. The commission relied in part on this provision in its 1974 order. Since respondents did refer us to the provisions containing this term, we will discuss its applicability to the use of an FAC. Section 393.130 specifies that generally the same rate must be charged to all within the same class, but that this should not be construed to prohibit establishing a sliding scale for a fixed period for the automatic adjustment of charges for gas, electricity, . . . service rendered or to be rendered and the dividends to be paid stockholders of such . . . electrical corporation . . . § 393.130(4) (emphasis supplied). In order to permit sliding scales, § 393.270(3) excepts the case of a sliding scale from the requirement that the price fixed by the commission be the maximum price. A sliding scale was defined in Bertha A. Mining Co. v. Empire Dist. Electric Co., 210 Mo.App. 622, 235 S.W. 508 (1921) as tying automatic adjustment of charges to dividends to be paid stockholders. In that case, plaintiff sought to hold the utility to a contract which it entered into with defendant on January 23, 1915 at lower rates which were in accordance with the rates then fixed by the commission, as opposed to higher rates fixed by an order of the commission effective January 1, 1918. Plaintiff argued that the January 23, 1915 contract was excepted by § 10478, RSMo 1919, (now § 393.140) as being of the sliding scale variety, as it varied the hourly rate according to the number of hours used per month and provided for a discount which increased as the hours of use increased. The court, after noting that the only possible authorization for the contract provision was that it was a sliding scale, went on to hold that it was not a sliding scale arrangement within the statutory authorization for various reasons, one of which was that such a sliding scale must be for the automatic adjustment of the charges for electricity . . . and the dividends to be paid stockholders. Id. 235 S.W. at 510. The court quoted with approval the following from In re Boston Consolidated Gas Company, Mass. Board of Gas & Elec. Light Commissioners, 1919A P.U.R. 699: The essential characteristic of this method of regulating the price of gas is by a prearranged automatic and interdependent adjustment of the price to consumers and the rate of dividends to stockholders, whereby for every decrease or increase in the price the stockholders are permitted an increase or suffer a decrease in the rate of dividend. Id. at 511. There is nothing of this sort of arrangement in any aspect of the FAC here under consideration. The court in the Bertha Mining Company case went on to quote and adopt the explanation of sliding scale given in the 2d edition of Pond Public Utilities, § 463, reprinted in 2 Pond Public Utilities § 573 (4th ed. 1932): The fixed rate can be reduced without materially affecting the net income by improving the service and extending the field to which the service is furnished, because a reduction in the rates as well as the improvement and extension of the service will naturally result in increasing the volume of the business with the effect of increasing the net income sufficiently to permit of a reduction in the rates without actually decreasing the income, . . . Recognition of this fact is the basis of the so-called sliding scale, whereby the income which the municipal public utility is permitted to earn is increased as the rate charged for the service rendered is decreased. Bertha A. Mining Co., 235 S.W. at 510. (emphasis added). See Bonbright, Principles of Public Utility Rates, 263 n. 21 (1961). [6] The legislature has re-enacted the provision construed in Bertha A. Mining Co., and we must presume it thus concurred in the interpretation of sliding scale set out therein. State v. Crawford, 478 S.W.2d 314, 317 (Mo.1972), appeal dismissed, 409 U.S. 811, 93 S.Ct. 176, 34 L.Ed.2d 66 (1972), rehearing denied, 409 U.S. 1051, 93 S.Ct. 536, 34 L.Ed.2d 505 (1972); State ex rel. Missey v. Cabool, 441 S.W.2d 35 (Mo.1969). By permitting an exception to the fixed rate system in the case of the sliding scale, the legislature by implication intended no other exceptions exist, Giloti v. Hamm-Singer Corp., 396 S.W.2d 711 (Mo.1965); Brown v. Morris, 365 Mo. 946, 290 S.W.2d 160 (1956); Nevada v. Bastow, 328 S.W.2d 45 (Mo.App.1959). The sliding scale defined in § 393.130 is not authorization for an FAC. Respondents, however, state that the statutes as a whole do support their power to utilize a fuel adjustment clause. Section 393.130 generally sets out basic rules governing the giving of safe and adequate service by the utility, and prevents preferential rates being given one customer. Section 393.140 sets out the general powers of the commission. While this statute gives the PSC general supervisory power over electric utilities, as discussed supra, it gives the PSC broad discretion only within the circumference of the powers conferred on it by the legislature; the provision cannot in itself give the PSC authority to change the rate making scheme set up by the legislature. Section 393.270 empowers the commission to investigate matters about which complaint may be made, or to investigate to ascertain facts necessary to the exercise of its powers and to fix maximum rates after hearing and investigation upon consideration of all relevant factors. These provisions give no authority, as we read them, to establish a variable rate by use of a fuel adjustment clause, and in fact disallow such a clause, in that they establish a fixed-rate rather than a variable-rate system, § 393.270(2), (3), and prescribe the manner in which such rates are to be established. As discussed, supra, rate increases can normally be approved either by the file and suspend method, or through a full blown rate hearing. Under either method, a maximum rate must be fixed by the commission. This is in keeping with the general statutory system discussed above of fixed rates filed by the utilities to remain in effect until a new rate is approved or permitted to take effect. Although no hearing by the commission is required before a new rate goes into effect under the file and suspend method, the commission is nonetheless required, in determining whether or not to suspend the proposed rate, to consider all factors relevant to the proper maximum price to be charged. Section 393.270(4) states that the commission: may consider all facts which in its judgment have any bearing upon a proper determination of the question although not set forth in the complaint and not within the allegations contained therein, with due regard, among other things, to a reasonable average return . . . . This court has interpreted that provision, in a case addressing the method of valuation of property in determining the utility's proper rate of return: [T]he phrase `among other things' clearly denotes that `proper determination' of such charges is based upon all relevant factors, State ex rel. Missouri Water Co. v. Public Service Comm'n, 308 S.W.2d 704, 719 (Mo.1957), and that: however difficult may be the ascertainment of relevant and material factors in the establishment of just and reasonable rates, neither impulse nor expediency can be substituted for the requirement that such rates be `authorized by law' and `supported by competent and substantial evidence upon the whole record.' Article V, § 22, Constitution of Missouri, V.A.M. S. Missouri Water Co., 308 S.W.2d at 720. Although the quoted section of the statute refers to complaints, the requirement that all relevant factors be considered is of course applicable under the file and suspend method also. Missouri Water Co. was itself an appeal by the water company from a rate fixed by the commission after hearing under the file and suspend method. As stated in May Dep't Stores Co. v. Union Electric Co., 341 Mo. 299, 107 S.W.2d 41, 50 (1937), quoted with approval in State ex rel. Jackson County, 532 S.W.2d at 28: These provisions mean that a public utility may by filing schedules suggest to the commission rates and classifications which it believes are just and reasonable, and, if the commission accepts them, they are authorized rates, but the commission alone can determine that question and make them a lawful charge. By permitting an electric utility to utilize a fuel adjustment clause, the commission permits one factor to be considered to the exclusion of all others in determining whether or not a rate is to be increased. That is, although the FAC may not itself be a rate, by approval of an FAC in a utility's rate schedule, the commission in advance approves any increase (or decrease) in rates which will automatically result through application of the FAC if the price of fuel to the utility increases or decreases. It would exalt form over substance to say that approval of an FAC is proper because the FAC is merely a rule relating to a rate and not a rate itself, where the effect of such approval is to permit increases in rates in a manner not provided by the statutes. It would also come at least dangerously close to abdication by the commission of its power to set just and reasonable rates, for the commission has determined in advance that any fuel charge made in accordance with the prescribed formula will be proper without regard to whether, in light of other cost factors, the overall charge is reasonable. The commission would, of course, retain the authority to suspend any rate filed, but effectively, if not nominally, the burden of going through numerous reports and checking fuel costs would be shifted from the utility to the commission. As once stated by the Illinois Public Service Commission, its power to set rates would thus be delegated to be sure, permissively and subject to recall, but none the less effectively, Re Rockford Electric Co., 1917F P.U.R. 196, 200 (Ill.1917). Not only would a fuel adjustment clause permit new rates to go into effect without consideration of other factors and thus without a framework in which to determine if overall rates are reasonable, it would also negate the effect of § 393.140(11), by which all rates are printed and open for public inspection. The purpose of thus providing the customer with a method of ascertaining what rates are in effect and enabling him to take the appropriate steps to challenge those rates would be destroyed with a fuel adjustment clause. Upon reference to the filed rate schedule of the utility, the consumer would be confronted with a formula and a rate filed as a result thereof. While it is debatable that representatives of large industrial or commercial customers might understand such a system, the average consumer could not be expected to do so. It is no answer to say that few understand the rates previously filed; this argument merely demonstrates the need to avoid further complication. Finally, as noted supra, the rationale behind a fuel adjustment clause could be used to justify other automatic adjustment clauses for most remaining operating expenses. Having established a toehold with our decision in Hotel Continental , we will not travel further down the slippery slope and risk a dismantling of the carefully balanced fixed rate system established by the legislature. [7] While in itself the clause looks innocuous, and while the cost of fuel may look high, to permit such a clause would lead to the erosion of the statutorily-mandated fixed rate system. If the legislature wishes to approve automatic adjustment clauses, it can of course do so by amendment of the statutes, and set up appropriate statutory checks, safeguards, and mechanisms for public participation. As of this date the only exception to the fixed rate system approved by the legislature is a sliding scale rate. We cannot imply an intent to allow a further exception where to do so would upset the fixed-rate system set up in the statutes. If the electric companies are faced with an emergency situation because of rising fuel costs, they can take advantage of the method set up by the legislature to deal with such situations and file for an interim rate increase on the basis of an abbreviated hearing, State ex rel. Laclede Gas Co., 535 S.W.2d at 566-67. Since there was no authority to permit a fuel adjustment clause, there was no authority to permit a roll-in of the amount of fuel costs previously collected under the old clause or to allow a surcharge for the amounts not collected under either clause but to which the utilities claim they are entitled. We thus reverse the judgment of the circuit court affirming the order of the commission allowing the fuel adjustment clause, the roll-in and the surcharge.