State Ex Rel. Dept. of Public Service Regulation v. Montana Irrigators, Inc.

No. 83-367
IN THE SUPREME COURT OF THE STATE OF MONTANA
1984

STATE OF MONTANA, ex rel., DEPT. OF
PUBLIC SERVICE REGULATION, et al.,

Appellants,

MONTANA IRRIGATORS, INC .,
Respondents,
and
CHANPION INTERNATIONAL CORP. , A corp. ,
CO"LJOC0, INC., a corp.; ANACONDA MINERALS
COMPANY, A Corp.; and the MONTANA POWER
COMPANY
Intervenors.

APPEAL FROM: District Court of the Fifth Judicial District,
In and for the County of Jefferson,
The Honorable W. W. Lessley, Judge presiding

COUNSEL OF RECORD:

For Appellants:

Eileen E. Shore argued for PSC, Eelena, Montana

For Respondents:
John Doubek argued; (Montana Irrigators) Small,
Hatch, Doubek & Pyfer, Helena, Montana
C. W. Leaphart, Jr. argued; Leaphart Law Firm
(Champion International and Conoco, Inc.), Helena,
Montana
Lindwood A. Morrell argued, Mew York, New York
(Champion International and Conoco, Inc.)
James A. Robischon; (Anaconda Minerals) , Butte,
Dennis Lopach, Helena, Montana

Submitted: March 5, 1954

Decided: May 1, 1984

Filed: MAY 1 1984-_
0
Mr. Justice Frank B. Morrison, Jr. delivered the Opinion of
the Court.
The Department of Public Service Regulation, the Montana
Public Service Commission (PSC) and the individual
commissioners appeal an order of the Jefferson County
District Court which "reversed" a decision of the Commission.
The Commission ruled on the question of type of rate
structure to be used by Montana Power Company in collecting
the company's authorized revenue increase. Commercial users
adversely affected by the Commission's ruling, Montana
Irrigators, Inc., filed for judicial review in Jefferson
County District Court. Champion International, Conoco, Inc.,
and Anaconda Minerals Co., appeared as intervenors
(plaintiffs) and users of electric service and energy
supplied by Montana Power Company. We reverse the District
Court and reinstate the PSC order.
Montana Power Company filed a rate increase request with
the Public Service Commission. PSC divided the request into
two phases: Phase I is the revenue requirements question;
Phase I1 is the rate structure, or how the increased rates
were to be allocated to residential, business, irrigation and
industrial users. Phase I is not an issue in this case.
Diverse interests were represented in the proceedings.
The Montana Consumer Counsel and the Human Resources Counsel
advocated a marginal cost approach to distribution of the
rate increases. Under this theory, cost of service is
arrived at by exa-mining costs incurred to provide energy in
addition to what is now being produced. Theoretically, rates
would proportionally reflect the per unit cost of the
additional service, and would therefore establish class and
customer "price signals" such that the consumer faces the
economic consequences of consumption.
 Industrial users advocated use of an imbedded cost
approach. This method establishes rates by referring to
historical accounting costs invested by the utility. This
method results in a "clean" allocation of the revenue pie.
But historical costs may be misleading to the extent they
reflect costs in a cheap energy era.
The Montana Power Compa.ny presented both methods of
determining cost of service but advocated the imbedded cost
approach.
The Montana Irrigators also advocated the imbedded cost
approach. Their major points of contention, however, were
directed at misrepresentation of the cost of service burden
of the irrigators due to (1) misinterpretation and
misapplication of load survey data, (2) lack of reliable and
informative load data, (3) unsupported and arbitrary cost

allocation between irrigation season and off season, (4)
failure to consider contribution to system peak. The
irrigators contend that this misrepresentation of the cost of
service attributable to their class results in arbitrary and
improper rates. The irrigators also challenge the failure of
the commission to consider transcribed testimony of some of
their witnesses.
The Commission adopted a marginal cost method rate
structure.
The trial court appears to have misunderstood the nature
of the petition for judicial review filed by the irrigators.
While the irrigators sought to vacate or modify the
Commission's orders for the misrepresentation explained above
as well as procedural shortcomings, the district court's
decision was directed only at the adoption of th.e marginal
cost methodology in favor of the imbedded cost approach. The
judgment of the court was explained by an accompanying
memorandum.
"It is evident the marginal cost pricing approach
is new. It is also evident it would have had great
future impact on the MPC and its customers. And it
is evident tha-t marginal cost is a change of real
proportions from the traditional 'embedded cost'
approach used in this State.
"This Judge is convinced of the wisdom and clear
necessity for a clear articulation of the PSC in
its findings and conclusions and finally its
orders. This requirement, to this Court, mea.ns a
statement or statements in easily understood
language of 'why'!
* * *
"After reading the PSC's Findings again and
checking against the record, the Court is convinced
. .. any such reason would have to be found in
paragraphs 18, 19 or 20 of Order 4714d, and no
valid reason is stated there. (That irrigation
rates have been too low -- by either marginal or
embedded cost standards -- is no basis for choosing
marginal costs) '
* * *
"The record before the Court is not single in its
thrust. "
The memorandum went on to analyze the testimony of various
expert witnesses for each side of the marginal
cost - imbedded. cost controversy.
The court "reversed" the Commission's order as follows:
"Order 4714d does not satisfy the general
requirements of a reasoned decision as required by
law that an agency must clearly articulate its
findings and give supporting reasons to allow a
reviewing Court to understand what its decision
means and therefore understand it and then rule.
"The entire record below does not contain
substantial credible evidence to support the PSC's
Orders 4714d and 4714e.
"Montana Public Service Commission's Orders 4714d
and 4714e are reversed."
PSC now appeals the district court's order claiming:
I. The court substituted its judgment as to the weight
to be accorded to the testimony of the experts regarding the
marginal cost and imbedded cost approaches.
 2. The district court should have "remanded" rather
than "reversed" if it felt the commission's decision was not
clearly articulated.
The following issues are raised on appeal:
1- . Is this appeal moot by virtue of a new rate
structure proceeding involving all parties to this
controversy?
2. Is there substantial credible evidence to support
the Commission's decision to use a marginal cost theory for
determining rate structures?
3. Is there sufficient credible evidence to support the
adopted rate structure?
4. Did the Commission adequately support its decision
with reasoned opinion, authority and findings?
Respondent Montana Irrigators, Inc. (Irrigators) contend
the controversy surrounding the PSC decision is rendered moot
by a subsequent rate structure case now in progress before
the Commission involving the same issues and parties. We
disagree. The PSC order establishes cost allocations for the
interim until a new rate structure is established. As long
as the Irrigators oppose the first decision, a justiciable
controversy exists.
The Public Service Commission contends the district
court erroneously substituted its judgment for that of the
agency on a question of complex fact and public policy. The
PSC argues that the district court failed to properly apply
the " substantial evidence" standard. Instead, the court
found the PSC decision was inadequately reasoned and thus
justified adoption of the court's own reasoning and judgment.
We find that the district court did in fact erroneously
substitute its judgment. The district court concluded that
evidence relied upon by the agency was misstated, that the
agency was wrong when it said there was no evidence that the
imbedded cost method was better, and that the agency was
wrong to conclude that cost-based price signals cannot be
established with imbedded costs. Rate structuring involves
highly specialized theories of economics. The weighing and
balancing of expert opinion pro and con is properly vested in
the administrative agency in its field of expertise. No.
Plains Resource Council v. Board of National Resources and
Conservation (1979), 181 Mont. 500, 509, 594 P.2d 297, 303.
The district court may reverse the agency decision on
the weight of the evidence only if it is "clearly erroneous."
Section 2-4-704(2), MCA. This means there are grounds for
reversal only if there is no substantial credible evidence of
record to support the decision. City of Billings v. Billings
Firefighters Local No. 521 (Mont. 1982), 651 P.2d 627, 632,
39 St.Rep. 1844, 1849.
While there is considerable conflicting evidence, we
find ample and credible evidence of record supporting the
marginal cost theory:
1. Dr. Power testified that marginal costs measure the
causally imposed cost of increased consumption. If a price
system is to encourage rational economic behavior by
consumers, it must accurately inform the consumers of this
causally imposed cost. Marginal cost pricing strategies have
been widely used historically.
2. MPC witness Bruce Ambrose testified that he believed
IlC should use marginal pricing.
JP Pricing signals based on
historic costs are misleading.
3. MPC witness Robert Logan recommended rates designed
to reflect marginal costs.
All of these witnesses are recognized experts in the
field of rate-making theory.
 The district court took the position that the PSC's
adoption of marginal cost pricing "is not 'articulated' and
therefore falls within the ambit of the substantial credible
evidence rule". This amounts to a position that if the court
does not understand the decision there is no evidence to
support it. Such a position can not be sustained.
The Irrigators challenge the adopted rate structure as
based on faulty data and unfair and arbitrary assumptions.
Regardless of what costing theory is adopted, they argue the
PSC cannot base a rate structure on inaccurate data. For
example, the PSC used load survey data from Utah to
interpolate consumption by Montana Irrigators. The adopted
structure is based on non-coincident peak data and thereby
fails to fairly reflect the burden imposed by Irrigators'
contribution to system peak. Also, the adopted structure
arbitrarily allocates marginal costs on a 40-60 split between
summer season and winter season.
The Irrigators complaints are well taken. However, a
new rate structure order should not be reversed merely
because it is not perfect, especially where it is a
considerable improvement over the old structure. We believe
the Commission's order reflects some of the best evidence
ever presented in a determination of an appropriate rate
structure. The adopted structure should remain intact until
such time as better data can be considered by the Commission.
Finally, the Public Service Commission challenges the
conclusion of the district court that the rate structure
decision was not adequately reasoned and articulated. This
Court has recently outlined the basis upon which an agency's
findings and conclusions will be judged: "The conclusions
here are sufficiently supported by reasoned opinion to render
their basis reasonably ascertainable." State - -
ex rel. Mont.
Wilderness Assoc. - - - -
v. Bd. of Nat. Resources and Conservation
(Mont. 1982), 648 P.2d 734, 750, 39 St.Rep. 1238, 1256.
It is not necessary for the Commission to thoroughly
analyze and evaluate in its order all details of the complex
theoretical arguments advanced. It is the function of the
testifying experts to sort through the morass of theory and
data, and provide expert opinions. As the finder of fact,
the Commission must simply accept or reject these opinions
for sound reasons.
In this proceeding, two economic theories were
advocated. In its order, the Commission summarized the
testimony of both embedded cost proponents and margina.1 cost
proponents and then clearly identified the reasons for
adopting the latter method:
"The proper prescription is marginal costing where
the consumer faces the economic cost consequences
of consumption. All parties agree that cost
causation should be the basis in ratemking. The
Commission fails to see any analytical correlation
between the economic costs incurred to provide
service and the embedded accounting costs -- either
on an ind.ividua1customer basis or on a collective
class basis.
" [Albsent a marginal cost study there is simply no
cost basis for establishing class and customer
price signals." Order No. 4714d, Finding Nos. 20,
22.
The basis for this choice is readily ascertainable from the
findings, reasonings and conclusions in the PSC order. While
the district court may find these reasons unsound, tha.t is a
disagreement with the opinion of the experts the agency chose
to follow and is beyond the court's scope of review.

The order of the District Court is reversed and PSC rate
structure Orders Nos. 4714d and 4714e are reinstated.
We concur:

Justices
 Mr. Justice Fred J. Weber dissents as follows:
I respectfully dissent from the majority opinion which
concludes that the PSC rate structure order should be
reinstated. The terminology in this case is difficult to
understand, and I have been tempted to affirm the PSC because
it has the duty to analyze these complex theories and its
conclusions are entitled to respectful consideration.
However, as I again review the findings and conclusions of
the District Court, I conclude that the PSC orders are
significantly deficient.
I support the legal analysis of the majority opinion
with regard to the substantial credible evidence rule and
approval of an agency's findings and concl-usions where
sufficiently supported by a reasoned opinion. It is in the
application of these rules that I dissent.
In addition, as pointed out by the District Court,
because this is also a rule-making case, section 2-4-305 (I),
MCA (Montana Administrative Procedure Act) also applies.
That subsection states in part:
"Upon adoption of a rule, an aqency shall issue a
concise statement of the principal -reasons - -
for and
against its adoption, incorporating therein its
- - .

reasons for overrulina the considerations A
d
uraed
against its adoption." (emphasis added.)
I conclude there is a failure to meet the requirement of that
statute as well as the reasoned opinion requirement of
section 2-4-623(3), MCA. State, Etc. v. Board of Natural
Resources (Mont. 1982), 648 P.2d 734, 750, 39 St.Rep. 1238,
1256.
Finding of fact No. 6 of the District Court described
the major change in adopting marginal cost pricing:
"All parties further admit the adoption of marginal
cost pricing r e p r e s e x a m ajor depaFture from
PSC's traditional utility rate structure, which - in
the long past - - based upon 'embedded' or
has been
=rage costs; except - -is
this a . .
. - substantial
 I e .in - existing PSC policy governing the
I - the
chan
allocation of MPC's revenue requirements - -
a
and the
price - -
to be?harged for - uni.t - electric utility
-- a - of
service.
"The administrative case below was a lengthy and
complicated one. It has scores of experts with
their testimony, with direct, before and rebuttal.
It is of great volume; many ranchers testified; the
case was hotly contested and as it turned out, was
a case in which major structure changes were made
in the rate charges."
The District Court concluded that there had been a
failure to address the principle reasons for and against the
adoption as required under section 2-4-305(1), MCA and under
the statute. As a result the District Court stated:
"Order 4714d does not satisfy the general
requirements of a reasoned decision as required by
law that an agency must clearly articulate its
findings and give supporting reasons to allow a
reviewing Court to understand what its decision
means and therefore understand it and then rule."
The majority opinion concludes there has been an
adequate summary of the testimony and reasons and cites the
following quoted portion of the PSC order for that
conclusion:
"The proper prescription is marginal costing where
the consumer faces the economic cost consequences
of consumption. All parties agree that cost
causation should be the basis in ratemaking. The
Commission fails to see any analytical correlation
between the economic costs incurred to provide
service and the embedded accounting costs -- either
on an individual customer bases or on a collective
class basis.
"[Albsent a marginal cost study there is simply no
cost basis for establishing class and customer
price signals." Order No. 4714d, Finding Nos. 20,
-nCI
LL.

As I reread that explanation, it tells me very little.
It fails to give any explanation as to why the traditional
rate structure which was acceptable for so many years is no
longer adequate. It fails to address the significant
arguments against as well as in support of the marginal cost
theory. In substance, it fails to meet the requirements of
section 2 - 4 - 3 0 5 ( 1 ) , MCA in that none of the principal reasons
for and against the adoption and particular reasons for
overruling the considerations urged against adoption are
addressed in any significant manner. I am left to guess as
to the reasons which caused the PSC to rule as it did.
In her brief, the counsel for the PSC stated:
"However, if the language contained in the order
contains too much jargon to convey that conclusion
to this court, the Commission recognizes that it is
obligated to provide an explanation that is
sufficiently clear, and stands ready to do so."
I would accept this suggestion on the part of the PSC,
reverse the District Court, and return the case to the PSC
for the preparation of orders sufficient in terms to
constitute a reasoned decision, properly reviewable by this
Court. We unhesitatingly reverse the district courts for
their failure to set out sufficient reasons to allow our
review of their decisions. We should do the same here.