In Re the Minnesota Public Utilities Commission's Initiation of Summary Investigation

Citations: 417 N.W.2d 274; 1987 Minn. App. LEXIS 5133; 1987 WL 25454Docket: C7-87-1296, C9-87-1297

Court: Court of Appeals of Minnesota; December 29, 1987; Minnesota; State Appellate Court

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Northwestern Bell sought a $109 million annual rate increase from the Minnesota Public Utilities Commission (MPUC) in 1983, leading to hearings conducted by an administrative law judge (ALJ) in 1984. Before the ALJ's investigation concluded, intervenors, including the Minnesota Public Interest Research Group (MPIRG) and the Department of Public Service (DPS), sought to dismiss Northwestern Bell's petition due to its simultaneous restructuring plan filed with the Federal Communications Commission. The MPUC decided to investigate the financial implications of this restructuring on the rate case but ultimately voted 2 to 1 to continue considering the rate petition.

The ALJ later recommended a $36.1 million increase, but on July 27, 1984, the MPUC granted a higher increase of $57,511,000. After further hearings and a DPS recommendation to reduce the increase by $363,000, the MPUC modified the rate to $57,148,000. Intervenor Henry appealed, arguing that the MPUC's decision was untimely, that a second contested case hearing was warranted, and that Northwestern Bell failed to demonstrate the new rates were just and reasonable. The court consolidated the appeals and ruled to affirm in part and reverse in part the MPUC's decisions.

The Minnesota Supreme Court upheld the Commission's authority to order a rehearing without a contested case hearing and ruled that the summary procedure used did not violate due process. The Commission's decision on Northwestern Bell's rates was deemed supported by the record and not arbitrary. Following this, the Commission initiated an investigation (Docket 177) into alleged ex parte communications involving former Commissioners Adams and Hanson and Northwestern Bell representative Roy Weir during Docket 600. The investigation report indicated multiple meetings between Weir and the Commissioners, funded by Northwestern Bell, but concluded that these did not involve Docket 600 discussions, and there were no prohibitions on such contacts at the time. The report did not recommend reopening Docket 600. 

Subsequently, the Attorney General and MPIRG sought to reopen and dismiss Docket 600 based on the ex parte communications. The Commission invited further comments and, following a second DPS report recommending redeliberation, began reconsidering the 1984 rate order. On April 2, 1987, the Commission vacated the 1984 order and issued a new decision, reducing Northwestern Bell's rates from $57,148,000 to $45,603,000 without a new contested case hearing. Changes included the use of a hypothetical capital structure, imputed directory revenues, a mandated rate reduction due to a tax surplus, and the provision of free services for eligible handicapped customers.

Northwestern Bell has filed two appeals against the Commission's actions regarding its 1984 rate order. In appeal No. C7-87-1296, Northwestern Bell contests the Commission’s finding that Weir had improper contacts with Commissioners Adams and Hanson, impacting the original rate order. The company argues that the Commission lacked authority to reopen the 1984 order, that a prior supreme court ruling (Henry) bars this action under res judicata, that reopening violates the 10-month rule under Minn.Stat. 237.075, and that the Commission's procedures infringed on its constitutional and statutory rights. In appeal No. C9-87-1297, Northwestern Bell challenges the specific modifications made to the 1984 rate order.

Key issues raised include: the Commission's authority to investigate the 1984 order in 1987; compliance with the 10-month rule; authority to vacate the order based on alleged fraud; denial of procedural rights; failure to address issues in Northwestern Bell's reconsideration motion; errors in using 1983 financial data for rate establishment; the appropriateness of a hypothetical capital structure; improper imputation of hypothetical revenue; erroneous rate reductions due to a depleted tax surplus; and requirements for free services to handicapped customers.

The analysis reveals that Northwestern Bell's objections to the summary investigation and evidence obtained by the Department of Public Service (DPS) are unfounded, as the Commission is authorized to investigate matters it considers necessary. The Commission's decision not to order a contested case hearing indicates that it found the reasonableness of rates to be adequately resolvable without such a procedure. Additionally, Northwestern Bell's claim regarding the violation of the 10-month rule is considered, which states that if the Commission does not finalize a rate schedule within ten months of a filing, the schedule is deemed approved.

The supreme court in Henry determined that the reopening of a portion of Northwestern Bell's 1984 order by the Commission did not violate the 10-month statutory limitation. The court clarified that this limit pertains only to the suspension of rates and does not restrict the jurisdiction of the Minnesota Public Utilities Commission (MPUC). It emphasized that the provision aims to protect utilities from the adverse impacts of regulatory delays, and similar statutory time limits have been interpreted as directory rather than mandatory. Thus, the MPUC retains the authority to make decisions in rate proceedings beyond the 10-month period.

In addressing allegations of fraud on the Commission, Northwestern Bell contended that ex parte communications with Commissioners were not explicitly prohibited in 1984 and pointed to existing rules that implied such interactions were expected. However, the Commission focused on whether these contacts constituted an abuse of process rather than determining their legality. Minnesota law allows for vacating a judgment due to fraud, with distinctions made between extrinsic, intrinsic, and "fraud upon the court." The latter involves actions that undermine the integrity of the court or its processes, as highlighted by case law, including Halloran v. Blue and White Liberty Cab Co. and Hazel-Atlas Glass Co. v. Hartford-Empire Co. Both cases underscore the court's inherent power to vacate judgments when misled by fraud, reflecting the serious nature of undermining judicial integrity.

Rule 60.02 and the Halloran decision pertain to "fraud on the court," but do not clarify if a similar concept exists within administrative processes. Northwestern Bell contends that the Commission lacks the authority to reopen orders based on "fraud on the Commission," as there is no explicit legislative grant of such power. The WKAT case illustrates that administrative agencies should possess the inherent authority to revisit their decisions in instances of misconduct, akin to courts' authority under the fraud doctrine. Such misconduct undermines essential principles of due process and fair play in administrative proceedings. 

Recent Minnesota appellate decisions emphasize that state agencies can only operate within the jurisdiction granted by statute, with the courts indicating that a lack of explicit statutory authority equates to a lack of jurisdiction. However, the cases of Senior Citizens Coalition and Peoples Natural Gas Co. are distinguishable because they involved agencies asserting implied powers, whereas the Commission in this context seeks to correct a prior order. Minnesota case law supports the notion that the Commission may have implied authority to reopen decisions, referencing Anchor Casualty Co. v. Bongards Co-operative Creamery Association, which recognized that while no specific statutory power was conferred to open and rehear matters, such authority is not explicitly denied, especially when correcting potentially erroneous adjudications. The power to rectify such decisions remains until jurisdiction is lost through appeal or a reasonable timeframe has elapsed.

The court emphasizes the inherent authority of administrative agencies to correct errors and revise judgments to uphold justice, as established in Handlon v. Town of Belleville. This power, essential for serving statutory policy, cannot be denied without legislative action, which is absent in this case. In State ex rel Turnbladh v. District Court, the court affirmed that administrative agencies have the right to reopen and redetermine matters post-decision, a principle supported in subsequent cases, including Stearns-Hotzfield v. Farmers Insurance Exchange. The excerpt outlines that an agency's ability to revisit decisions extends to instances of "fraud on the court," as recognized by Rule 60.02.

The Commission found that Northwestern Bell's numerous ex parte communications with Commissioners Hanson and Adams during a pending rate increase petition suggested an intent to influence the decision, constituting a fraud on the Commission. Evidence, including paid meals for the commissioners during deliberations, supported this inference. Northwestern Bell's claim that there was no proof of influence was countered by the court's acknowledgment of the appearance of impropriety undermining public confidence. The findings included the duty of individuals to disclose associations and highlighted a substantial conflict of interest. Despite an Administrative Law Judge recommending a $36.1 million rate increase, the Commission awarded Northwestern Bell $57,511,000, further indicating the taint of the ex parte communications in Docket 600.

The Commission's 1987 order was based on the record from 1984 proceedings, and Northwestern Bell was not given the chance to present oral arguments during the modification or the reconsideration of the order. Northwestern Bell contends this denial infringed upon its constitutional and statutory rights, specifically citing Minn.Stat. 14.61 (1986), which mandates a chance for parties to file exceptions and present arguments in contested cases. This statute applies to initial decisions after a contested case, not to subsequent modifications, and Northwestern Bell had no prior claim of denied oral argument in 1984. The Commission's reopening of the decision in 1987 lacked a statutory requirement for a new oral argument, and fairness principles did not support granting one due to Northwestern Bell's earlier fraudulent ex parte communications with the Commission.

Regarding the order on reconsideration, Northwestern Bell alleged that the Commission overlooked new arguments in its petition for reconsideration. However, the Commission found that no new arguments or evidence had been presented. The claim by Northwestern Bell that the Commission improperly relied on 1983 financial data for its 1987 modifications was dismissed, as the 1987 order was merely a modification of the earlier 1984 rate order, with no authority to use 1987 data due to the absence of a new contested proceeding.

Additionally, Northwestern Bell argued that the Commission lacked the authority to reassess its capital structure, given the Minnesota Supreme Court's earlier affirmation of its reasonableness in the 1984 order. However, allegations of fraud allow for exceptions to the res judicata principle, and the Commission's imposition of the burden on Northwestern Bell to demonstrate the reasonableness of its capital structure was upheld by a recent court ruling.

The enactment of Minn.Stat. 216B.16, subd. 4 (1986) requires petitioning utilities to prove that proposed rates are fair and reasonable, including a fair capital structure's debt-equity allocation. If the utility fails to demonstrate the reasonableness of its costs for a proposed rate increase, the Commission may compute a hypothetical capital structure to determine a just rate. The Commission assigned Northwestern Bell the burden to justify its proposed capital structure, which included a 56.4% equity ratio, higher than the 50.1% authorized in a prior case. Northwestern Bell argued that its previous capital structure was now inappropriate due to divestiture but provided no evidence of a change in total risk or quantification of that risk. The Commission found NWB's claim that a 50.1% equity ratio would lower its bond rating unconvincing, noting that no bond rating reduction occurred following the last rate proceeding with that same ratio. The Commission's rejection of Northwestern Bell's proposed equity ratio is supported by substantial evidence, including the prior use of a 50.1% equity ratio in a 1982 case and expert recommendations based on comparable companies' average equity ratios. The Commission's decision to adopt a 50.1% hypothetical equity ratio was deemed reasonable. Additionally, in December 1983, prior to hearings on a rate increase petition, Northwestern Bell transferred its directory publication operations to U.S. West Direct, involving asset transfers and contractual agreements with U.S. West Direct's parent company, Landmark Publishing.

The Commission, upon discovering Northwestern Bell's transfer of directory operations, instructed the Administrative Law Judge (ALJ) to consider this transfer in rate recommendations. In its initial testimony from September 1983 regarding a rate increase, Northwestern Bell did not adjust its financial data to account for this transfer, maintaining its prior income and expenses related to directory operations. Northwestern Bell argued that no adjustments were necessary to protect ratepayers from potential negative impacts of the transfer.

The Commission sought input during evidentiary hearings on whether the sale to U.S. West Direct and the resulting change in income would affect ratepayers. Intervenors proposed either voiding the transfer or adjusting Northwestern Bell's operating income to reflect missed growth from continued directory publication. The Department of Public Service (DPS) suggested averaging growth from the previous three years and adding this to Northwestern's operating income. The ALJ recommended adopting the DPS's proposal, imputing $2,526,666 in directory revenues to Northwestern Bell.

However, in a 1984 order, the Commission voided the transfer and mandated Northwestern Bell resume directory operations, which was reversed on appeal, indicating the Commission lacked authority to do so. Following this, in a 1987 order, the Commission accepted the ALJ's recommendation to impute $2,526,666 in income from directory operations. Northwestern Bell contended this imputed income contradicted prior court language suggesting that adjustments should await a future rate case.

The court noted that while the Commission could not void the directory transfer, it retained authority to review and adjust income based on directory advertising in ratemaking. Consequently, the Commission's acceptance of the ALJ's findings to increase revenues by $2,527,000 was justified, highlighting that benefits primarily favored U.S. West's shareholders without reciprocating benefits for Minnesota ratepayers.

Northwestern Bell did not provide sufficient data on the revenue impact of the directory transfer, leading to the Commission's decision to impute $2,526,666 in income based on the figures Northwestern Bell had submitted, despite its challenge to their accuracy. The Administrative Law Judge (ALJ) determined that deficiencies in Northwestern Bell's data should not result in a lower income imputation. The burden was on Northwestern Bell to justify the reasonableness of its rate increase as per Minn.Stat. 237.075, subd. 4. The Commission's acceptance of the ALJ's findings was deemed reasonable and supported by the evidence.

In a prior rate decision from 1983, the Commission had amortized a deferred tax reserve surplus over three years due to a reduction in federal tax rates, a practice continued in its 1984 order. It was assumed that by 1987, the surplus had been fully returned to ratepayers through reduced rates. The Commission ordered Northwestern Bell to adjust rates to reflect a difference between previously allowed increases but failed to account for the expiration of the three-year amortization period, resulting in an error.

Regarding service provisions, the Commission initially set rates for Touch-Tone and Speed Call 8 services at $1 for handicapped users in 1984 but later mandated these services be provided free of charge in 1987 to promote equity among customers. This decision aimed to compensate for the challenges handicapped individuals face with standard telephone services, reflecting the Commission's legislative authority in rate design.

The court's review of the Commission's authority is constrained to upholding its actions unless they result in unjust, unreasonable, or discriminatory rates, or yield arbitrary outcomes, as established in Hibbing Taconite Co. v. Minnesota Public Utilities Commission. Although the court acknowledges the rationale behind the Commission's authority, it finds a lack of evidence supporting the Commission's decision regarding free services for handicapped individuals. Northwestern Bell failed to provide clear and convincing evidence to counter the Commission's determination, largely because it was unaware of the Commission's consideration of free services at the time of the decision in 1984. The Commission is mandated to set "just and reasonable" rates under Minn. Stat. 237.075, subd. 6. By imposing a requirement for Northwestern Bell to offer services for free without assessing the impact on its rate of return, the Commission neglected its duty to ensure reasonable rates for the company. The evidence presented indicates that the markup for Touch-Tone services is significant, and while respondents claimed that other ratepayers would compensate for the lost revenue, the record does not substantiate this assertion. Consequently, the court reverses this aspect of the Commission's order while affirming other parts. Additionally, Northwestern Bell challenges the Commission's rationale for reopening the 1984 rate order based on public distrust, referencing the Hazel-Atlas decision, which emphasizes that the process should serve the public's interest. The court also cites standards from PATCO v. Federal Labor Relations Authority regarding the impact of improper ex parte communications on agency decisions, indicating that such communications do not automatically void proceedings but can make decisions voidable depending on various factors. Lastly, a beta is defined as a measure of a stock's volatility relative to the overall stock market.