Montana-Dakota Utilities, Co. v. Wyoming Public Service Commission

IN THE SUPREME COURT, STATE OF WYOMING

2014 WY 106

APRIL TERM, A.D. 2014

August 19, 2014

MONTANA-DAKOTA UTILITIES, CO.,

Appellant
(Petitioner),

v. No. S-13-0218

WYOMING PUBLIC SERVICE COMMISSION,

Appellee
(Respondent).

Appeal from the District Court of Laramie County
The Honorable Thomas T.C. Campbell, Judge

Representing Appellant:
Bruce Asay, Associated Legal Group, LLC, Cheyenne, Wyoming.

Representing Appellee:
Peter K. Michael, Attorney General; Martin L. Hardsocg, Deputy Attorney
General; Michael M. Robinson, Senior Assistant Attorney General; Ryan T.
Schelhaas, Senior Assistant Attorney General. Argument by Mr. Robinson.

Before BURKE, C.J., and HILL, KITE*, DAVIS, and FOX, JJ.

*Chief Justice at time of oral argument.

NOTICE: This opinion is subject to formal revision before publication in Pacific Reporter Third. Readers
are requested to notify the Clerk of the Supreme Court, Supreme Court Building, Cheyenne, Wyoming
82002, of any typographical or other formal errors so that correction may be made before final publication in
the permanent volume.
BURKE, Chief Justice.

[¶1] Montana-Dakota Utilities Company appeals the district court’s affirmation of a
decision of the Wyoming Public Service Commission. MDU contends that the
Commission lacked authority to order MDU to make refunds to its customers. We will
affirm the district court’s decision.

ISSUES

[¶2] MDU presents a list of issues:

1. Does the Commission’s order constitute retroactive
ratemaking, which is contrary to the law?

2. Does the Commission’s refund order requiring
retroactive rates violate the filed rate doctrine?

3. If the refund is allowed, does the statute of limitations
for contracts limit the refund period?

4. As the Commission approved the rates over time, is it
equitably estopped from ordering a refund?

5. Is the action of the agency arbitrary, capricious and an
abuse of discretion and should it be held unlawful and set
aside?

The Commission articulates the issue this way:

Did the Commission correctly conclude that MDU is required
to refund all overcharges arising out of the improper
calculations and adjustments to its commodity balancing
account?

FACTS

[¶3] MDU provides natural gas to customers in Wyoming. As a regulated public
utility, it must obtain the Commission’s approval of the rates it charges customers. In
June of 2009, MDU filed an application to adjust the rates it was charging its customers
in order to reflect the higher costs MDU was paying for gas.

[¶4] The Commission staff, after reviewing MDU’s application, reported to the

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Commission that it had questions about certain calculations MDU used to support its
application. The Commission approved MDU’s June, 2009, application, but on an
interim basis only, subject to further consideration of the questions raised by the staff.
The Commission directed MDU “to work with Staff” to help resolve these questions.

[¶5] MDU continued its usual practice of filing monthly applications to adjust its rates
in response to fluctuating gas prices. In the course of reviewing these applications, the
staff identified additional questions relating to MDU’s calculations. The Commission
continued approving the applications, but each time, subject to further review and
consideration of the staff’s accumulating questions.

[¶6] All of the staff’s questions were brought before the Commission, pursuant to
notice, at a regularly scheduled meeting held on January 13, 2011. The Commission’s
order following this meeting indicates that many of the staff’s questions had already been
“addressed or resolved.” The two issues remaining for consideration concerned the
“interest calculation on over-collected commodity balancing account (CBA) balances,”
and “the Company’s practice of grossing up the return on cycle storage, prepaid demand
and prepaid commodity balances for federal income taxes and the Uniform Utility
Assessment.” MDU acknowledged that some of the questioned calculations were
incorrect, but maintained that others were appropriate and consistent with the way such
calculations had been performed for many years. While MDU did not agree with all of
the changes recommended by the Commission staff, it did not object to making the
recommended changes on a prospective basis.

[¶7] MDU did object, however, to the Commission ordering it to make refunds of the
amounts it had overcharged its customers in the past because of the calculation errors.
Specifically, it argued that the rule against retroactive ratemaking precluded the
Commission from ordering MDU to make these refunds. In its written order, the
Commission rejected MDU’s legal arguments and ordered MDU to remedy past errors in
the calculations of certain adjustments by the refunding of monies improperly collected.
The written order detailed the various calculation errors, found the time periods during
which each erroneous calculation had been used by MDU, and quantified the amount by
which MDU had overcharged its customers due to each error. Some of the errors dated
back to 1993. The Commission ordered MDU to make refunds to its customers covering
the entire time the various calculation errors had occurred. In all, MDU was ordered to
refund $346,664 to its customers.

[¶8] MDU filed a petition for review in the district court. It did not challenge the
Commission’s decision that the calculations should be corrected. It did not dispute the
amounts of the refunds ordered. It challenged only the legal authority of the Commission
to order refunds. After briefing and oral argument, the district court issued an order
affirming the Commission’s decision. MDU filed this timely appeal.

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 STANDARD OF REVIEW

[¶9] In an appeal from a district court’s review of an administrative agency’s decision,
we “review the case as if it had come directly to us from the administrative agency.”
Dutcher v. State ex rel. Wyoming Workers’ Safety & Comp. Div., 2010 WY 10, ¶ 9, 223
P.3d 559, 561 (Wyo. 2010). Our review is governed by Wyo. Stat. Ann. § 16-3-114(c)
(LexisNexis 2013):

(c) To the extent necessary to make a decision and when
presented, the reviewing court shall decide all relevant
questions of law, interpret constitutional and statutory
provisions, and determine the meaning or applicability of the
terms of an agency action. In making the following
determinations, the court shall review the whole record or
those parts of it cited by a party and due account shall be
taken of the rule of prejudicial error. The reviewing court
shall:

(i) Compel agency action unlawfully withheld or
unreasonably delayed; and

(ii) Hold unlawful and set aside agency action,
findings and conclusions found to be:

(A) Arbitrary, capricious, an abuse of discretion
or otherwise not in accordance with law;

(B) Contrary to constitutional right, power,
privilege or immunity;

(C) In excess of statutory jurisdiction, authority
or limitations or lacking statutory right;

(D) Without observance of procedure required
by law; or

(E) Unsupported by substantial evidence in a
case reviewed on the record of an agency
hearing provided by statute.

Although MDU raises several issues, the basic question facing us is whether the

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Commission’s decision is “not in accordance with law” or “[i]n excess of statutory
jurisdiction, authority or limitations.” We review questions of law de novo. US West
Communications v. Wyoming Public Service Comm’n, 992 P.2d 1092, 1094 (Wyo. 1999).
“If the agency action is in accordance with law, it is affirmed; if not, it is corrected.” Id.
(citing Parker Land and Cattle Co. v. Wyoming Game and Fish Comm’n, 845 P.2d 1040,
1042 (Wyo. 1993)).

DISCUSSION

[¶10] Applications to the Commission for rate changes are of two basic types: a general
rate application and a pass-on rate application. Montana Dakota Utilities Co. v. Public
Service Comm’n, 847 P.2d 978, 988 (Wyo. 1993). “The general rate . . . application
traditionally covers all facets of a utility’s operations, finances, rate design, and rate of
return.” Id. “In sharp contrast, the pass-on application is narrow in nature and scope, is
not as costly, and has as its chief purpose the expeditious passing through of . . .
wholesale gas costs.” Id. at 989. When wholesale costs increase, a utility may submit a
pass-on rate application to increase its rates, and conversely, when wholesale costs
decrease, a utility may submit a pass-on rate application to reduce its rates.

[¶11] In 1993, MDU filed a general rate application which the Commission approved. It
covered all facets of MDU’s operations, and its broad elements such as finances, rate
design, and rate of return, have remained essentially unchanged since that time. 1 In
contrast, MDU has filed pass-on rate applications on a nearly monthly basis since 1997.
Upon approval by the Commission, these pass-on rate applications have allowed MDU to
make rapid adjustments to the rates it charges customers, responding to the variable costs
MDU pays to purchase gas.

[¶12] The case before us now began when the Commission staff raised questions about
MDU’s calculations in connection with MDU’s pass-on rate application filed in June of
2009. The Commission determined that some of MDU’s calculations were incorrect. It
ordered MDU to change those calculations and to make refunds to its customers to
reimburse them for past overcharges caused by the erroneous calculations. MDU
challenges the Commission’s refund order in this appeal.

[¶13] In its first issue, MDU claims that the Commission’s refund order violates the rule
against retroactive ratemaking. This rule is “a generally accepted principle of public
utility law which recognizes the prospective nature of utility ratemaking and prohibits
regulatory commissions from rolling back rates which have already been approved and
have become final.” MGTC, Inc. v. Public Service Comm’n of Wyoming, 735 P.2d 103,

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The record indicates that two minor adjustments were made in 1997.

4
107 (Wyo. 1987). “Put simply, the rule against retroactive ratemaking prohibits the
Commission from setting future rates to allow a utility to recoup past losses or to refund
to consumers excess utility profits.” PacifiCorp v. Public Service Comm’n, 2004 WY
164, ¶ 35, 103 P.3d 862, 874-75 (Wyo. 2004). MDU argues that the Commission’s order
requiring it to refund overcharged amounts is, in effect, an order setting future rates so as
to refund past excess payments back to its customers. This, MDU contends, is prohibited
by the rule against retroactive ratemaking.

[¶14] The Commission contends that the rule against retroactive ratemaking does not
apply in this case because it is a pass-on rate application case. It relies on our statement
in MGTC, 735 P.2d at 107, that the rule against retroactive ratemaking “is limited to
general ratemaking proceedings, however, and should not be invoked to prevent
adjustments in rates pursuant to automatic rate adjustment mechanisms such as a gas
balancing account.” (Emphasis in original.) Because this is not a general ratemaking
proceeding, the Commission asserts that the rule does not prohibit it from ordering MDU
to make refunds to its customers.

[¶15] The Commission has correctly quoted our statement in MGTC, but that statement
must be considered in context. We explained further that “The balancing account system,
by its very nature, requires a retrospective analysis to identify past over- and under-
recoveries.” Id. Retrospective analysis is necessary because of the way pass-on rate
cases operate. First, the utility estimates what its commodity cost will be for an
upcoming period of time, and with Commission approval, sets its rates based on that
estimate. Then, at the end of that period of time,

[t]he actual cost of gas experienced and the recovery of those
costs in rates for the past gas balancing account period are
compared with the prior estimates for that period to determine
whether there should be an upward or downward adjustment
to the current balancing account application. In this way a
dollar for dollar recovery of gas costs is assured for the utility
and consumers are not overcharged.

Id. at 104. In a pass-on rate case, rates are adjusted for the future based on what the
utility paid for commodities in the past. To do that, retrospective analysis is required.

[¶16] That does not mean, however, that application of the rule against retroactive
ratemaking depends on the label attached to the proceeding. The Commission can, and
does, consider factors other than commodity costs in pass-on rate application

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proceedings. In Montana Dakota, 847 P.2d at 993, we held that the “PSC may adjust a
non-gas component in a pass-on rate increase hearing, provided that PSC adequately
notifies the utility of the nature and scope of the hearing.”2 If the Commission can
consider factors other than commodity costs in a pass-on rate case, and if the rule against
retroactive ratemaking never applies in pass-on rate cases, then the Commission could
altogether avoid the rule by raising whatever issue it chooses in a pass-on rate
proceeding. The “exception would ‘swallow’ the rule against retroactive ratemaking. If
the PSC had this authority, no utility earnings would be safe from PSC ordered refunds
and no utility rate order would ever become final.” Wisconsin Power & Light v. Public
Service Commission of Wisconsin, 511 N.W.2d 291, 295 (Wisc. 1994).

[¶17] MDU’s claim that the rule against retroactive ratemaking always prohibits the
Commission from ordering refunds reflects an overly rigid application of the rule. The
Commission’s claim that the rule never applies in a pass-on rate case would render the
rule ineffectual. As we have previously observed, “[t]he specter of retroactive
ratemaking must not be viewed as a talismanic inhibition against the application of
principles based upon equity and common sense.” MGTC, 735 P.2d at 107.

[¶18] Our decision in MGTC provides guidance for the appropriate application of the
rule against retroactive ratemaking. In that case, the Commission “became aware that
MGTC may have been improperly computing [a] surcharge adjustment [rate].” MGTC,
735 P.2d at 105. Accordingly, a “contested case hearing was held to determine whether
MGTC’s method of computing the surcharge was consistent with the provisions
contained in its . . . tariff.” Id. The Commission found that MGTC had not followed the
dictates of its tariff and, as a result, it had overcharged its customers. The Commission
ordered the utility to make refunds to its customers. Id.

[¶19] On appeal, the utility asserted that “the Commission exceeded its statutory

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However, we also discouraged the practice of considering other factors in a pass-on proceeding, stating
that:

adjusting non-gas cost factors is incompatible with the nature and
purpose of the pass-on procedure. Injecting base rate or non-gas
component investigation, presentation, and analysis into the relatively
simple and intentionally abbreviated pass-on case runs the serious risk of
defeating the chief purpose of the procedure, viz., a prompt adjustment so
that the utility is not faced with large costs that threaten its very financial
survival.

Montana Dakota, 847 P.2d at 992.

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authority and engaged in retroactive ratemaking when it ordered the company to refund
the excess charges to its customers.” Id. at 106. We rejected that assertion. Id. at 107.
We held that the Commission had the authority to order the utility to make refunds
because the utility had charged rates different from those approved by the Commission.
The Commission in MGTC was not engaging in prohibited retroactive ratemaking, but
rather, properly enforcing the rates it had previously approved. We reach a similar result
in this case.

[¶20] The first of the two issues involved in this case concerns “the interest calculation
on over-collected commodity balancing account (CBA) balances.” MDU used an income
tax rate in its calculations that represented a composite of the federal income tax rate and
the income tax rates of North Dakota, South Dakota, Montana, and Wyoming. Wyoming
has no state income tax. MDU conceded that the use of the composite rate in Wyoming
was erroneous. In addition, contrary to a 2003 ruling by the Internal Revenue Service,
MDU continued to treat the over-recovery in its balancing account as taxable income.
The result of these errors accrued to the benefit of MDU, and it was ordered to refund
$21,539.

[¶21] During the Commission’s meeting on January 13, 2011, MDU admitted that it was
responsible for the calculation errors. It characterized them as “past errors that were not
in accordance with what we should have been calculating.” The errors were contrary to
MDU’s approved tariff. Accordingly, the rule against retroactive ratemaking does not
preclude the Commission from ordering this refund.

[¶22] The second issue involved “the Company’s practice of grossing up the return on
cycle storage, prepaid demand and prepaid commodity balances for federal income taxes
and the Uniform Utility Assessment.” MDU’s calculations erroneously incorporated a
company ownership structure of 100% equity, when in fact the structure was
approximately 57% equity and 43% debt. Again, the result of this error was to MDU’s
benefit. MDU employed this calculation from 1993 to 2009. The Commission ordered
MDU to refund $325,125.

[¶23] MDU does not dispute that its use of the 100% equity ratio in the calculation was
incorrect. Further, it concedes that its customers were overcharged $325,125 (including
interest) as a result of the error. It seeks to avoid repayment of those overcharges by
contending that the erroneous calculation was incorporated into the tariff. MDU’s
position regarding the error is set forth in an exchange between MDU representative, Rita
Mulkern and the Commission Chairman:

MS. MULKERN: We also supported the calculation –
filed the calculation saying this is how we’re going to
calculate the return on storage and prepaid demand charges.

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 The Commission reviewed the tariffs, they reviewed
the calculations and they approved the tariff, and as part, in
our support, we showed this is how we’re going to calculate
that, and that is how we continued to calculate the return from
1993 until 2009.

CHAIRMAN MINIER: And did the calculation show
– the detail of the calculation show that a hundred percent
equity was being used?

MS. MULKERN: The detail did not, but since this
was the first time that we had done something like that, we
provided to staff. Staff would have called and discussed it
and asked any questions and answered any questions. That’s
generally what they do when we give something new to them,
when we file something that’s new and it has calculations.

CHAIRMAN MINIER: Staff would have. I mean –

MS. MULKERN: I can only assume.

CHAIRMAN MINIER: I mean, my question is
pointed for a reason, obviously. You’re suggesting that
because the – there was a Commission staff at the time and
something was filed that was in a sufficient level of detail that
the error – what I think is now – everybody agrees is now an
error of using 100 percent equity should have been noticed in
some respect. I think that’s what I’m hearing you [say].

MS. MULKERN: I think I’m saying – or what I am
saying is we provided the calculation to the Commission and
the Commission staff. Generally speaking, when we make a
filing with the Commission, the staff reviews the calculation.
If they have any questions, they will either issue data requests
or pick up the phone and call for clarification.

Since the Commission approved the tariffs and on the
understanding that this is how we’re going to calculate it, it’s
implicit that the staff would have reviewed the calculation. I
believe they would have.

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 CHAIRMAN MINIER: Right. But as we sit here
today, you don’t have anyone that said they talked to the staff
to call their attention to this. You don’t have any more than
the staff does, any record to show that such a conversation
actually occurred. You don’t have anything to show that at
the time anyone at the Commission at the staff level or
elsewhere was aware of what I’m going to call the error using
a hundred percent equity in the calculation.

MS. MULKERN: I would have assumed that
implicitly, the staff would have reviewed the calculation since
it was brand-new, not something that we had had before . . .
and was out of the ordinary.

CHAIRMAN MINIER: So the answer is no. You are
making an assumption.

MS. MULKERN: I’m making an assumption.

The Commission determined that the error had not been specifically approved by the
Commission and placed responsibility for the error with MDU. In its order mandating
the refund the Commission stated:

MDU thus acknowledged its calculation of the return on cycle
storage, prepaid demand charges and prepaid commodity
balances was wrongly based on a 100% equity factor, rather
than the actual equity ratio. Notwithstanding this admitted
error which continued over an extended period of time,
Mulkern argued that [i] the Commission and Staff failure to
identify and inquire into this error at the outset constitutes the
Commission’s implicit acceptance of this error, and, [ii]
therefore precludes subsequent Commission identification,
quantification or correction of the error. This argument lacks
merit. Were we to accept it, we would abrogate our primary
responsibility as a utility regulatory agency – that being to
uphold the public interest in all of our actions. An error,
whenever and by whomever discovered, must be corrected.
As noted, the Commission and its Staff’s failure to identify
this error at the outset can be attributed in part, as
acknowledged by Mulkern, to the fact that the Company’s
calculations provided with its PGA filings beginning in 1993
were not sufficiently detailed in scope to reflect that the

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 Company’s calculation of its return was based on the use of
an erroneous 100% equity factor.

Ultimately, the Commission rejected MDU’s argument that the rule against retroactive
ratemaking precluded a refund order. It made this determination based upon its
conclusion that “the rule against retroactive ratemaking is not available to the Company
in the Multiple Dockets as they are not general ratemaking applications but are, in fact,
automatic rate adjustment mechanism filings.”

[¶24] We agree with the Commission’s conclusion, but on different grounds. As we
have previously discussed, in an appropriate case, the rule against retroactive ratemaking
can preclude a refund order in a pass-on rate application proceeding. This, however, is
not such a case.

[¶25] A major purpose of the rule against retroactive ratemaking is promoting economic
efficiency.

[T]he rule against retroactive ratemaking encourages
efficiency because the utility will endeavor to increase profits
under the approved rate. If the utility knows that it can
recoup past losses retroactively or that ratepayers can obtain
refunds of excess profits, it will have little or no incentive to
operate efficiently.

Stefan H. Krieger, The Ghost of Regulation Past: Current Applications of the Rule
Against Retroactive Ratemaking in Public Utility Proceedings, 1991 U. Ill. L. Rev. 983,
1042 (footnote omitted). See also Southern California Edison Co. v. Public Utilities
Comm’n, 576 P.2d 945, 958 (Cal. 1978) (footnote omitted):

The rule against retroactive ratemaking serves to encourage
efficiency because the utility will strive to hold down costs so
as to increase profits under the established rate. Permitting
retroactive ratemaking would shift the risk of error in
estimating costs and revenues from the utility to the
consumer, reducing the utilities’ incentive for efficiency.

In this case, the Commission is not ordering MDU to refund excess profits it derived
from holding down costs or achieving other economic efficiencies. Instead, MDU seeks
to retain the financial benefits it received, at the expense of its customers, based on errors
of its own creation. MDU has never asserted that its use of the 100% equity ratio was
correct, reasonable, or justified. It failed to show that the Commission had any notice
that MDU was relying upon an inaccurate equity ratio or that the Commission implicitly

10
sanctioned that error when it approved MDU’s tariff. MDU cannot rely on the finality of
its rates when its calculation error was not shown in its filing, and it could “only assume”
that Commission staff would have requested more detail. We have previously recognized
that “[t]he specter of retroactive ratemaking must not be viewed as a talismanic inhibition
against the application of principles based upon equity and common sense.” MGTC, 735
P.2d at 107. To apply the rule against retroactive ratemaking in these circumstances
would be contrary to the principles of “equity and common sense” with which the rule
must be applied. Id. Therefore, we hold that the refund order does not violate the rule
against retroactive ratemaking.

[¶26] In its second issue, MDU asserts that the Commission’s refund order violates the
filed rate doctrine. MDU characterizes this doctrine as providing that “once a rate is
authorized by the Commission it is the only rate that can be charged.” The Commission
asserts that the filed rate doctrine is codified in Wyo. Stat. Ann. § 37-3-102:

No public utility shall directly or indirectly, by any device
whatsoever, or in anywise, charge, demand, collect or receive
from any person a greater or less or different compensation
for any service rendered or to be rendered by such public
utility than that prescribed in the schedules of such public
utility then filed and published in the manner provided in this
act, nor shall any person receive or accept any service from a
public utility for a compensation greater, less or in any way
different from that prescribed in such schedules.

We have said that, pursuant to this statute, “a public utility may charge its rates only as
set forth in new tariffs and schedules as filed with the PSC.” Northern Utilities v. Public
Service Comm’n, 617 P.2d 1079, 1084 (Wyo. 1980). See also US West Communications
v. Wyoming Public Service Comm’n, 907 P.2d 343, 348 (Wyo. 1995).

[¶27] We have already concluded that the Commission had the authority to order these
refunds because MDU’s calculations were not in accordance with the approved tariff.
The Commission is not ordering MDU to charge unapproved rates. Rather, it is requiring
MDU to conform, belatedly, to the approved rates. That is entirely consistent with the
filed rate doctrine’s mandate that the utility can charge only the rates authorized by the
Commission. The Commission has not violated the filed rate doctrine in this case.

[¶28] In its third issue, MDU relies on Wyo. Stat. Ann. § 1-3-105(a)(i), which provides
that an action upon a written contract “can only be brought” within ten years after the
cause of action accrues. While acknowledging that there is no contract between MDU
and the Commission, it claims that a tariff is “analogous to a contract,” and asserts that
we should apply this statute of limitations to preclude the Commission from ordering

11
refunds dating back more than ten years.

[¶29] Statutes of limitation generally may not be invoked against the State. Laramie
County School Dist. No. 1 v. Muir, 808 P.2d 797, 800-01 (Wyo. 1991). A governmental
entity such as the Commission is not subject to a statute of limitations unless it is shown
that the legislature has expressly so stated, or that the statute includes the governmental
entity by necessary implication. Id. at 801. MDU has made no such showing.

[¶30] In its fourth issue, MDU contends that, because the Commission previously
approved the rates charged by MDU, it is equitably estopped from ordering a refund.
However, equitable estoppel generally does not apply against governmental entities.
Thompson v. Board of County Comm’rs, 2001 WY 108, ¶ 12, 34 P.3d 278, 281-82 (Wyo.
2001). In order to overcome this general rule, the party asserting equitable estoppel must
demonstrate that the governmental entity engaged in “authorized affirmative
misconduct.” Knori v. State ex rel. Dept. of Health, Office of Medicaid, 2005 WY 48, ¶
11, 109 P.3d 905, 909 (Wyo. 2005). MDU failed to address the question of whether the
Commission had engaged in authorized affirmative misconduct.

[¶31] As its final issue, MDU asserts that the Commission’s decision was arbitrary,
capricious, an abuse of discretion, and unlawful. MDU uses this issue mainly to reiterate
and highlight parts of its earlier arguments. We have rejected those earlier arguments,
and this issue raises no new questions for us to consider.

[¶32] Affirmed.

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