Opinion ID: 1872130
Heading Depth: 1
Heading Rank: 1

Heading: Retroactive Rate Making & Refund

Text: On April 27, 1988, defendant, the Louisiana Public Service Commission, on its own motion initiated a general investigation of the revenues and rate of return of the plaintiff-appellant South Central Bell Telephone Company primarily to determine whether the utility's earnings had been excessive and whether its rates should be decreased. In its Order No. U-17494 of that date the Commission announced the beginning of its investigation and placed SCB on notice that during the probe the utility would be permitted to maintain its current rates in effect, but that $32 million of the annual intrastate revenues of the company would be collected subject to refund, and a refund would be ordered if the Commission determined that the utility's rates were excessive. Extended hearings were held, and on May 25, 1989, the Commission issued its decision No. U-17949-A finding the rates to be excessive and ordering the Company to reduce its rates so as to decrease its future revenues $35,398,000 annually and reduce its rate of return from 14.75% to 12.75%. Three weeks later, on June 16, 1989 by decision No. U-17949-B the Commission also ordered the utility to refund to customers $34,981,000 collected during the pendency of the investigation in excess of the new rates prescribed by the Commission in its May 1989 order. The function of ratemaking is legislative in character whether it is exercised directly by the legislature or by a regulatory agency to which the power to fix rates has been delegated. Arizona Grocery Co. v. Atchison, Topeka & Santa Fe Ry. Co., 284 U.S. 370, 52 S.Ct. 183, 76 L.Ed. 348 (1932); Louisiana Power & Light Co. v. Louisiana Pub. Serv. Comm'n, 523 So.2d 850 (La.1988); Louisiana Power and Light Co. v. Louisiana Pub. Serv. Comm'n, 377 So.2d 1023 (La.1979). Accordingly, it is well established that the exercise by the Public Service Commission of its ratemaking authority is primarily a legislative function, which, in the absence of constitutional or statutory authority to the contrary, is limited to fixing rates to be applied prospectively. South Central Bell v. Louisiana Pub. Serv. Comm'n, 555 So.2d 1370 (La.1990); Louisiana Power & Light Co. v. Louisiana Pub. Serv. Comm'n, 523 So.2d 850 (La.1988); Public Utilities Comm'n of Ohio v. United Fuel Gas Co., 317 U.S. 456, 63 S.Ct. 369, 87 L.Ed. 396 (1942); In re Petition of Minnesota Power & Light Co., 435 N.W.2d 550 (Minn.App.1989); In re Petition of Elizabethtown Water Co., 107 N.J. 440, 527 A.2d 354 (1987). This concept is inherent in our constitutional provisions which establish in general terms the powers of the Commission to regulate all common carriers and public utilities and have such other regulatory authority as provided by law, but authorize the agency to require a utility to make refunds only when a provisional rate increase is disallowed or reduced before it becomes final. La. Const. Art. IV, § 21(B). Similarly, the legislature has authorized the Commission to exercise regulatory power for the purpose of fixing and regulating the rates charged or to be charged by public utilities, La.R.S. 45:1163, but has recognized its power to order a refund in only one special situation, viz., when a temporary or provisional rate increase is disallowed, in whole or part, before its finality. La.R.S. 45:1163.1. Generally, retroactive rate making occurs when a utility is permitted to recover an additional charge for past losses, or when a utility is required to refund revenues collected pursuant to its lawfully established rates. Louisiana Power & Light Co. v. Louisiana Pub. Serv. Comm'n, 523 So.2d 850 (La.1988); In re Petition of Elizabethtown Water Co., 107 N.J. 440, 527 A.2d 354 (1987); In re Central Vermont Pub. Serv. Corp., 144 Vt. 46, 473 A.2d 1155 (1984); Cheltenham & Abington Sewerage Co. v. Pennsylvania Pub. Util. Comm'n, 344 Pa. 366, 25 A.2d 334 (1942); Chesapeake and Potomac Tel. Co. of West Virginia v. Public Serv. Comm'n of West Virginia, 171 W.Va. 494, 300 S.E.2d 607 (1982); State ex rel. Utilities Comm'n v. Edmisten, 291 N.C. 451, 232 S.E.2d 184 (1977). A commission-made rate furnishes the applicable law for the utility and its customers until a change is made by the Commission. Michigan Bell Tel. Co. v. Michigan Pub. Serv. Comm'n, 315 Mich. 533, 24 N.W.2d 200 (1946). Therefore, the utility is entitled to rely on a final rate order until a new rate in lieu thereof is fixed by the Commission. Arizona Grocery Co. v. Atchison, Topeka & Santa Fe Ry. Co., 284 U.S. 370, 52 S.Ct. 183, 76 L.Ed. 348 (1932); Michigan Bell Tel. Co. v. Michigan Pub. Serv. Comm'n, 315 Mich. 533, 24 N.W.2d 200 (1946). Consequently, the revenues collected under the lawfully imposed rates become the property of the utility and cannot rightfully be made the subject of a refund. Michigan Bell Tel. Co. v. Michigan Pub. Serv. Comm'n, 315 Mich. 533, 24 N.W.2d 200 (1946). A utility is entitled only to the opportunity to earn a reasonable return on its investment; the law does not insure that it will in fact earn the particular rate of return authorized by the Commission or indeed that it will earn any net revenues. Southern California Edison Co. v. Public Utilities Comm'n, 20 Cal.3d 813, 144 Cal. Rptr. 905, n. 8, 576 P.2d 945, n. 8 (1978) citing Power Comm'n v. Pipeline Co., 315 U.S. 575, 590, 62 S.Ct. 736, 745, 86 L.Ed. 1037 (1942); Bluefield Co. v. Public Serv. Comm'n, 262 U.S. 679, 692-693, 43 S.Ct. 675, 678-679, 67 L.Ed. 1176; Re General Tel. Co. of Cal., 69 Cal.P.U.C. 601, 610 (1969); Oakland v. Key System Transit Lines, 52 Cal.P.U.C. 779, 786 (1953). By the same token, if the utility's profits turn out to be higher than had been forecast by the Commission in setting the rates, the law does not penalize the Company for its efficiency by requiring a divestiture of unanticipated earnings. In re Petition of Elizabethtown Water Co., 107 N.J. 440, 527 A.2d 354 (1987); Connecticut Light & Power Co. v. Department of Pub. Util. Control, 40 Conn.Sup. 520, 516 A.2d 888, 897 (1986); B & O R.R. Co. v. Pennsylvania Public Utility Commission, 136 Pa.Super. 517, 7 A.2d 488, 491 (1939). The Commission's recourse is to fix a new rate prospectively and not to change the rates retroactively. In re Petition of Elizabethtown Water Co., 107 N.J. 440, 527 A.2d 354 (1987). Applying these precepts, we conclude that the Commission exceeded its powers and engaged in retroactive rate making when it ordered the company to refund earnings derived from approved rates. The Commission had fixed the company's rates in 1984 after a comprehensive rate case and had amended them slightly on March 1, 1988 in an abbreviated proceeding. The Commission allowed these rates to become final without seeking judicial review. South Central Bell v. Louisiana Pub. Serv. Comm'n, 555 So.2d 1370, 1373, n. 3, 1375 (La.1990). Subsequently, it notified the company on April 22, 1988 of its contemplated investigation and proceeding against the utility for a rate decrease and refund because of excessive earnings. The extended proceedings that followed revealed that the company had never collected unlawful or improper rates or departed from its filed tariffs. Nevertheless, the Commission determined that the company had been earning too much, fixed its rates at a lower level and ordered it to refund earnings in excess of these rates to customers retroactively to April 22, 1988. The Commission's refund order was clearly an act of retroactive rate making because it divested the company of earnings it had properly derived from then lawful rates fixed by a final order of the Commission. Consequently, the trial court's judgment correctly set aside the refund order and should be affirmed in this respect. It is argued that the Commission's order of April 22, 1988 putting the company on notice of a possible future rate reduction and refund order had the effect of suspending either the company's rates or its revenues or both. From this it is further contended that the company's earnings after April 22, 1988 were not derived from final and valid rates and did not become company property. But the Commission's order as issued did not purport to have any of these effects. It stated, in pertinent part: Accordingly, it is ORDERED that: 1. During the pendency of this Docket $32 million of the annual revenues of South Central Bell Telephone Company produced by its Louisiana intrastate operations shall be collected subject to refund. Until the Commission considers the full record in these proceedings or issues a subsequent Order, the Company shall be permitted to maintain its current rates in effect. Refunds shall be ordered only if the Commission ultimately determines that South Central Bell's current rates are excessive.    These clear and unambiguous words state plainly that no present change in the status of the company's rates or revenues was caused by the order; that a reduction in rates and a refund would be ordered only after a full hearing and a determination that the current rates were excessive. Therefore, the order's reference to revenues of South Central Bell Telephone Company must be taken at face value as indicating that the earnings continued to be the property of the company; and the statement that $32 million of these revenues shall be collected subject to refund can logically be interpreted only as a notice to the company that it would be required to divest itself of this amount if and when a refund order had been issued after a full hearing. The Commission cites a number of cases that it contends support the proposition that a regulatory agency may suspend rates and order refunds retroactively. These cases are all distinguishable except one which is so eccentric as to have no precedential effect outside its own jurisdiction. Most are distinguishable because in them the Commission was specifically authorized to take the action in question by an express statutory provision. In Narragansett Elec. Co. v. Burke, 505 A.2d 1147 (R.I. 1986) the statutory powers of the commission expressly included the authority to order a utility to make refunds even of amounts collected under final rates. The Commission was given ... the power ... to provide remedial relief from unjust, unreasonable, or discriminatory acts, or from any matter, act or thing done by a public utility ... [and] to order the public utility to make restitution to any party or parties, individually or as a class, injured by said prohibited or unlawful acts.... The court in that case simply construed the statute to empower the commission to retrospectively order the utility to make refunds to consumers upon finding its rates excessive. In New Rochelle Water Co. v. Public Serv. Comm'n, 31 N.Y.2d 397, 340 N.Y.S.2d 617, 292 N.E.2d 767 (1972) a statute provided that where temporary rates authorized by the commission are inadequate, the commission may by order authorize appropriate reparation to the company. The court of appeal held that the commission acted within its powers in denying the utilities' request to apply permanent rate increases retroactively to permit utilities to recoup from consumers. In Petition of Minnesota Power & Light Co., 435 N.W.2d 550 (Minn.App.1989) a statute provided that [i]f, at the time of its final determination, the commission finds that the interim rates are in excess of the rates in the final determination, the commission shall order the utility to refund that excess amount collected under the interim rate schedule. The court of appeal held that under the statute the commission had authority to order refunds which reduced interim rates below previously authorized rates. In Transcontinental & Western Air v. Civil Aeronautics Bd. 336 U.S. 601, 69 S.Ct. 756, 93 L.Ed. 911 (1949) the Civil Aeronautics Act of 1938, as amended, empowered the Board to fix and determine the fair and reasonable rates of compensation for the transportation of mail by aircraft and to make such rates effective from such date as it shall determine to be proper    . The Supreme Court held that the legislative history indicated that the make effective clause was inserted only to make clear that the rates could be made retroactive to the date of the application. In United States v. New York Central R.R. Co. 279 U.S. 73, 49 S.Ct. 260, 73 L.Ed. 619 (1929) the Supreme Court construed the Act of July 28, 1916, giving the Interstate Commerce Commission power to adjust the compensation of the railroads for carrying the mails, to authorize the Commission to make its order changing the rate of pay operative from the date of the filing of the application. Another case is distinguishable because in that case, unlike the situation in the present case, the commission did not attempt to order the refund of revenues collected under final rates but simply asserted the right to require refunds of temporary interim rates which it had granted specifically conditioned upon this right. In Pueblo Del Sol Water Co. v. Ariz. Corp. Comm'n, 160 Ariz. 285, 772 P.2d 1138 (Ariz.App.1988) the Arizona Corporation Commission approved one water company's application to take over the certificate of another and granted interim rates subject to the condition that they were subject to refund or reconciliation at a formal rate and transfer hearing to be held later. The court held that since the formal rate hearing had not yet been held, there were no final rates and therefore no retroactive rate making had occurred. A final case relied upon by the Commission is so eccentric that it cannot claim to have any precedential value outside of its own jurisdiction. In United Telephone Co. of Florida v. Mann, 403 So.2d 962 (Fla. 1981) the court held that the commission had inherent authority to order a refund of any amounts collected by the company during an interim rate decrease proceeding, in the face of a clear statutory directive proscribing retroactive rate making and uniform precedents both in and out of Florida construing precisely that legislative limitation against the commission's action in this case. Id. at 968 (England, J. dissenting). The decision is perhaps understandable, as a practical matter, because the legislature had recently chosen to confer upon the commission the very authority it claimed in the case, but because the statute was prospective only it did not govern the litigation. Also, the court had previously approved the commission's inherent authority to make interim rate increases, so that the present case could be viewed as equitably continuing the flip side of an earlier practice. For these reasons we conclude that the Commission's April 22, 1988 order did not deprive the company's rates of their finality or validity and by the same token did not deprive the company of the full ownership and use of the revenues derived therefrom. Consequently, it is clear that the Commission's subsequent refund order was an invalid attempt to engage in retroactive ratemaking by depriving the company after the fact of funds earned under rates valid at the time. In view of our conclusion in this regard it is not necessary to pass on other dubious and troublous arguments by the Commission, viz., the propositions that the Commission is empowered by the constitution not only to fix rates but also to impair or completely shut down a utility by actually suspending its rates and revenues; and that a suspension of rates or revenues does not constitute a taking of property requiring adequate notice and some kind of hearing.