Mountain Water Co. v. Montana Department of Public Service Regulation

NO. 91-446

IN THE SUPREME COURT OF THE STATE OF MONTANA
1992

MOUNTAIN WATER COMPANY,
a Montana corporation,
Plaintiff and Respondent,
-vs-
MONTANA DEPARTMENT OF PUBLIC SERVICE
REGULATION, MONTANA PUBLIC SERVICE
P-
COMMISSION, and MONTANA CONSUMER COUNSEL, ~

Defendants and Appellants.

APPEAL FROM: District Court of the First Judicial District,
In and for the County of Lewis and Clark,
The Honorable Thomas C. Honzel, Judge presiding.

COUNSEL OF RECORD:
For Appellant:
Robin A. McHugh, Special Assistant Attorney General,
Public Service Commission, Helena, Montana
Mary Wright, Staff Attorney, Special Assistant
Attorney General, Montana Consumer Counsel, Helena,
Montana
For Respondent:
John Alke, Hughes, Kellner, Sullivan, a i Alke,
rd
Helena, Montana

Submitted on Briefs: May 7, 1992

Filed:

-
Clerk
Justice R. C. McDonough delivered the Opinion of the Court.

Montana Department of Public service Regulation, Montana
Public Service Commission, and Montana Consumer Counsel appeal from
an order of the First Judicial District, Lewis and Clark County, in
favor of Mountain Water Company. We reverse.
We frame the following issue for appeal:
Whether the Public Service omm mission's refusal to authorize
recovery through prospective rate setting of past period 5 69-4-

511, MCA, expenses did not justly compensate Mountain Water
Company, in violation of the Fifth and Fourteenth Amendments to the
United States Constitution, and of Article IT, Section 29 of the
Montana Constitution?
In 1987, the Montana Legislature passed, and the Governor
signed into law, Senate Bill No. 28. The law became effective on
October 1, 1987, and was codified under § 69-4-511, MCA. The bill
mandated that the private water service provider be responsible for
the cost of maintaining water service pipelines from the main to
the owner's property line. Under the statute, the property owner
is responsible for the cost of the pipe and other supplies used in
the service line. Prior to 1987, the property owner bore the
entire cost of the pipe and of maintaining the fine.
On October 1, 1987, the day the law went into effect, Mountain
Water Company (MWC) filed a complaint against the Montana Public
Service Commission (PSC) in United States District Court, seeking
to have § 69-4-511, MCA, declared unconstitutional. The United
States District Court held that 5 69-4-511, MCA, was not
unconstitutional. Specifically, it held § 69-4-511, MCA, did not
constitute a prohibited taking.
On appeal, the Ninth Circuit held that the statute did not
violate the Fifth Amendment and that any taking of MWC9s private
property by the statute is for a public use. Further, the court
stated that MWC may seek just compensation for its property taken
through rate setting before the PSC. Mountain Water v. Montana
Dept. of Public Serv. Reg. (9th Cir. 1990), 919 F.2d 593, 601.
on June 29, 1989, MWC filed an application with the PSC to
increase its rates, in part to recover previous expenditures it had
been compelled to provide for its customers under 5 69-4-511, MCA.
MWC proposed to capitalize § 69-4-511, MCA, expenses incurred
between January 1, 1988 and June 30, 1989. Recovery was sought
through a two-year amortization. The PSC denied MWC recovery for
the previous expenditures. However, with respect to ongoing g 69-
4-511, MCA, expenses, the PSC authorized recovery through rates of
annual § 69-4-511, MCA, expenses. MWC appealed the PSC9s order.
The District Court held that the PSC9srefusal to allow recovery of
back expenses incurred during 1988 and 1989 failed to justly
compensate MWC for the taking. This appeal followed.
The issue before us is a question of law. In reviewing
conclusions of law, our standard of review will be merely to
determine if the District Court's interpretation of the law is
correct. Steer, Inc. v. Department of Revenue (1990), 245 Mont.
470, 474, 803 P.2d 601, 603.

I
The Ninth Circuit held that 5 69-4-511, MCA, expenses were a
taking for public use requiring just compensation, which could be
sought through rate-making. We must determine whether PSC1sdenial
of recovery for previous expenditures denied MWC just compensation.
The PSC is an administrative agency charged, through powers
granted by the Montana Legislature, with regulating public
utilities pursuant to the provisions of 5 5 69-3-101, MCA et seq.
The rates set by the PSC through its rate-making policies must be
at a level that allows a just compensation for any regulations
imposed which impair the property interests ofthe utility company.
West Ohio Gas Co. v. Public Utilities Commission of Ohio (1935),
294 U.S. 63, 55 S.Ct. 316, 79 L.Ed. 761. MWC argues that the PSC
is bound by judicial estoppel. The PSC admitted during the course
of the federal litigation that 5 69-4-511, MCA, was a taking and
that MWC would be compensated through rate-making.
However, in making that admission the PSC did not waive
application of the policies involved in rate-making. In Montana,
public utility rates are set to match utility costs during the
period that rates are in effect. The utility, the Montana Consumer
Counsel, the PSC, or other persons with standing may seek a rate
change when the financial information indicates a mismatch. See 5
69-3-301, MCA et seq. MWC was aware that the Montana Legislature
passed 5 69-4-511, MCA. Prior to the law taking effect on October
1, 1987, MWC could have applied to the PSC to cover the utility

costs for 1988 and 1989 under 5 69-4-511, MCA.
The PSC argues that its refusal to authorize recovery in rates
of prior period expenses is in line with public utility law and
utility regulation in Montana. Rate-making is a legislative
activity and is therefore prospective only in its effect. State
ex rel. Billings v. Billings Gas Co. (1918), 55 Mont. 102, 110, 173
P. 799, 801; Billings Utility Co. v. Public Service Commission
(1921), 62 Mont. 21, 33, 203 P. 366, . Historically, utility
companies do not receive retroactive rate increases.
MWC cites City of Helena v. Montana Dept. of PSR (1981), 194
Mont. 173, 182-183, 634 P.2d 192, 198, as support for its position.
We stated "It is clearly the law that utilities may not set their
rates so as to amortize past deficits." Galveston Elec. Co. v.
Galveston (1922), 258 U.S. 388, 395, 42 S.Ct. 351, 354, 66 L.Ed.
678, 683, was cited as the foundation for the rule. The city of
Helena had sought to distinguish Galveston and its progeny because
the cases involved private utilities, not municipal utilities. We
held that the PSC was not required to treat the two differently in
considering past losses suffered even though in dicta we said a
municipality's improvements can be funded differently. This rule
against retroactive rate-making clearly applies to MWC, a private
company.
 The District Court agreed that "utilities may not set their
rates so as to amortize past deficits" but held that a prohibition
against allowing recovery of unanticipated expenses was not
absolute. Montana Consumer Counsel v. PSC and MPC (1975) , 168
Mont. 180, 541 P.2d 770. In Montana Consumer Counsel we upheld
the PSC's decision authorizing Montana Power Company to increase
its charges for natural gas services due to an increase in the cost
of natural gas. However, the rate order in question encompassed
present and prospective rate changes. Montana Consumer Counsel at
188, 541 P.2d at 774. The rate charges were not retroactive.
For the reasons set forth above, we conclude that the District
Court erred in concluding MWC was not justly compensated by PSC's
denial to retroactively allow recovery of 5 69-4-511, MCA expenses.
We reverse.

We Concur: