(dissenting). The majority today reverses the Public Service Commission's (PSC's) order on the ground that it violates the rule against retroactive ratemaking. The test of the soundness of the majority's decision is the extent to which it serves the purposes underlying utility regulation and the rule against retroactive ratemaking. I conclude that it fails this test. Accordingly, I dissent.
The state regulates public utilities to achieve the benefits of economies of scale and to protect consumers from monopoly control of a public good.1 Indeed, "the primary purpose of the public utility laws in this state is the protection of the consuming public." Wis. Environmental Decade v. Public Service Comm., 81 Wis. 2d 344, 351, 260 N.W.2d 712 (1978) (citing Wisconsin Power & Light Co. v. Public Service Commn, 45 Wis. 2d 253, 259, 172 N.W.2d 639 (1969). See also GTE North Inc. v. Public Service Commn, 176 Wis. 2d 559, 568, 500 N.W.2d 284 (1993); Calumet Service Co. v. Chilton, 148 Wis. 334, 358-359, 135 N.W. 131 (1912).
*402The rule against retroactive ratemaking is designed to achieve the same goals. The rule rewards the utility's efficiency and protects the consumer from surprise surcharges allocable to the utility's losses in prior years. Further, the rule ensures fairness, stability and certainty by preventing a regulatory agency from reversing prior approved rates. Wisconsin Environmental Decade v. Public Service Commn, 98 Wis. 2d 682, 699, 298 N.W.2d 205 (1980); Narragansett Electric Co. v. Burke, 415 A.2d 177, 178 (R.1.1980). "Were it not so, a premium would be placed upon inefficiency, waste and negligence in management. It is better policy to encourage thriftiness, saving and frugality on the part of a utility management. Such incentive inures eventually to the benefit of the consumers." Indiana Gas v. Utility Consumer Counselor, 575 N.E.2d 1044, 1052 (Ind. App. 1991) (citation omitted).
If the rule against retroactive ratemaking is to remain a useful principle of regulatory law, it must be understood and applied in a manner that does not undermine its purpose. Southern California Edison Co. v. Public Utilities Commission, 576 P.2d 945 (Calif. 1978). The traditional rule against retroactive ratemaking is riddled with exceptions and contradictory applications.2 Instead of exploring the premises of *403the rule and its applicability to this fact situation, the court mechanically applies the rule against retroactive ratemaking in this case.3
The majority's homage to the rule against retroactive ratemaking in this case is flawed. First, to state the obvious, the majority presupposes that the PSC was engaged in traditional ratemaking within the meaning of the rule against retroactive ratemaking during the automatic fuel adjustment clause period (1974-84). Fuel adjustment clauses are, however, "unique animals that are not easily assimilated to classical ratemaking principles." Maine Public Service Co. v. Federal Power Commission, 579 F.2d 659, 668 (1st Cir. 1978); Daily Advertiser v. Trans-LA, 612 So.2d 7, 24 (La. 1993); Niagara Mohawk Power v. P.S.C. of New York, 507 N.E.2d 287, 293 (N.Y. 1987); Richter v. Florida Power Corp., 366 So.2d 798, 800 (Fla. App. 1979).
Second, the majority's very reliance on the PSC's power to oversee the fuel contract during the fuel adjustment clause period, and to audit the fuel costs, implies that the PSC could have assessed some penalty or refund against WP&L after the PSC discovered WP&L's improper administration of the fuel contract. The PSC would have learned of WP&L's errors in administering the coal contract only after they occurred. Thus the majority seems to concede either *404that the PSC could have imposed a retroactive penalty or refund on account of improper administration of the fuel adjustment clause (and thus the opinion is internally inconsistent) or that the PSC was powerless to remedy problems identified through audits of fuel costs (in which case audits are worthless for purposes of ensuring a utility's compliance with the fuel adjustment clause). See, e.g., Daily Advertiser v. Trans LA, 612 So.2d 7, 25 (La. 1993).4
An automatic fuel adjustment clause was a PSC-approved formula rate. It assured the utility that it would recover fuel costs dollar for dollar from its customers without going through the audit and test year process that other expenses receive and without complying with otherwise applicable notice and hearing requirements when its fuel costs changed. Wisconsin Environmental Decade v. Public Service Commn, 81 Wis. 2d 344, 346, n.l, 260 N.W.2d 712 (1978). In other words, the operation of the PSC-approved formula rate made it possible for the utility to pass on all fuel price adjustments to its ratepayers automatically. The practical effect of adjustment clauses was to decrease the volume of rate hearings, thereby conserving the time of the PSC and simultaneously reducing public scrutiny *405of rate changes. Id. at 349.5 This combination of factors had unfortunate results. As the majority notes, the PSC found that between 1974 and 1987 WP&L had overcharged its customers $13 million to $52 million because of errors in the administration of its coal contract with Western Energy Coal Company (WECO).
Many courts around the country have concluded that the use of automatic fuel adjustment clauses does not constitute ratemaking in the traditional or classical sense of that term. Fuel adjustment clauses are a means of arriving at a rate. While they are thus an integral part of the rates, they are not "commission-established" rates. Because rates calculated under the fuel adjustment clause go into effect without advance approval by the PSC, the utility cannot validly expect that charges thus collected are insulated from retroactive modification. Courts have therefore concluded that a regulator agency's authorizing the use of fuel adjustment clauses is not engaging in ratemaking subject to the rule against retroactive ratemaking. Equitable Gas Co. v. Pennsylvania Public Utility Commission, 526 A.2d 823, 830-31 (Pa. Cmwlth. 1987), appeal denied, 533 A.2d 714 (Pa. 1987); Metropolitan Edison Co. v. *406Pennsylvania Public Utility Commission, 437 A.2d 76, 79-80 (Pa. Cmwlth. 1981); Southern California Edison Co. v. Public Utilities Commission, 576 P.2d 945, 954-55 (Calif. 1978).
Courts in other states have also concluded that a regulatory agency's authority to investigate fuel cost adjustments implies the power to order corrective measures and refunds as a result of such audits. According to these courts, if the PSC is to be effective, its ongoing authority to investigate fuel costs must include the power to take corrective measures and order refunds for charges not properly incurred." [T]he power to order refunds must be implied for there is little purpose in reviewing fuel adjustment charges, and the consumer interests are ignored, if corrective action is not authorized for imprudent expenditures automatically passed through to the ratepayers." Niagara Mohawk Power v. P.S.C. of New York, 507 N.E.2d 287, 293 (N.Y. 1987). See also Public Service Commission v. Delmarva Power & Light Co., 400 A.2d 1147, 1153 (Md. 1979);6 Gulf Power Co. v. Florida Public Service Commn, 487 So.2d 1036 (Fla. 1986); Daily Advertiser v. Trans-LA, 612 *407So.2d 7, 23 (La. 1993); MGTC, Inc. v. Public Service Commission of Wyoming, 735 P.2d 103, 107 (Wyo. 1987); Ohio Power Co. v. Public Utility Commission, 376 N.E.2d 1337, 1339 (Ohio, 1978).7
The fuel adjustment clause in operation in Wisconsin during the period in question is not readily distinguishable from those at issue in these states. Had the majority examined the operation of the fuel adjustment clause more closely, it might well have concluded that it does not constitute ratemaking in the traditional sense and that the rule against retroactive ratemaking does not apply to refunds ordered because of the fuel adjustment clause.
The majority's holding relies not only on the questionable assumption that the PSC was engaging in ratemaking when it approved the fuel adjustment clause formulas, but also on the proposition that the PSC is empowered only to look forward, never backward. Looking forward and looking backward in setting rates are not so easily divorced from one another. It is well accepted that recent history is part of the ratesetting process. As WP&L and the majority concede, the past mistakes of management may be used by the PSC as a factor in setting rates for the coming year. See, e.g., Wisconsin Environmental Decade v. Public Service Commission, 98 Wis. 2d 682, 699, 298 N.W.2d 205 (Ct. App. 1980). The difficulty with that method, however, is that it enables the PSC to *408remedy only the utility's small mistakes, not its big ones.8
A rate determined according to a fuel adjustment clause cannot be declared reasonable until after it has been implemented. Thus a regulatory agency can identify overcharges only through a retrospective analysis. Business and Professional People for the Public Interest v. Illinois Commerce Commission, 525 N.E.2d 1053, 1958 (Ill. App. 1988), appeal denied, 530 N.E.2d 237 (1988). Any attempt to recoup unreasonable charges must also involve a retrospective inquiry.
The majority's mechanical application of the rule against retroactive ratemaking to the facts of this case does not, in my opinion, stand up to critical examination. Perhaps more important, however, it defeats the *409very purposes of the rule. It does not encourage efficient utility management. The interests of consumers, the intended beneficiaries of the rule, are not served by the court today.
For the reasons set forth, I dissent.
I am authorized to state that CHIEF JUSTICE Nathan S. Heffernan joins this dissent.
Charles F. Phillips, Jr., The Regulation of Public Utilities 45-47 (1988); A.J.G. Priest, Principles of Public Utility Regulation 1-3 (1969).
See Stefan H. Krieger, The Ghost of Regulation Past: Current Applications of the Rule Against Retroactive Ratemaking, 1991 U. Ill. L. Rev. 983.
For exceptions in Wisconsin, see, eg., GTE North Inc. v. Public Service Commn, 176 Wis. 2d 559, 500 N.W.2D 284 (1993) (PSC has authority to order refund when filed tariffs violated); Wis. Environmental Decade v. PSC, 98 Wis. 2d 682, 698-99, 298 N.W.2d 205, 211—12 (Ct. App. 1980) (utility may recoup extraordinary loss from severe ice storm through future rates); Friends of the Earth v. Public Service Commission, 78 Wis. 2d *403388, 254 N.W.2d 299 (1977) (rates charged during a lengthy rate setting process could be revised and overcharges refunded in the future).
The majority accepts at face value the PSC's admission that it was engaged in retroactive ratemaking when it ordered the $9 million payment. The PSC made this point as part of its argument for the creation of a "management imprudence" exception to the rule against retroactive ratemaking.
This reasoning is similar in many respects to the argument presented by the Wisconsin Industrial Energy Group (WIEG), which intervened on the PSC's side. The WIEG labelled its version of the argument the "filed rate doctrine." See Brief of the Intervenors-Appellants-Petitioners at 12-29. For support of this position, see GTE North Inc. v. Public Service Commn, 176 Wis. 2d 559, 500 N.W.2D 284 (1993) (PSC has authority to order refund when filed tariffs violated).
I do not believe it necessary to resort to another doctrine to demonstrate the weaknesses in the majority's logic.
This court has apparently never ruled on the validity of fuel adjustment clauses. Wisconsin Environmental Decade v. PSC, 81 Wis. 2d 344, 352, n.4, 260 N.W.2d 712 (1978).
The automatic adjustment clause was eliminated by the legislature as part of 1983 Wis. Act 27, the budget bill. The law now requires a formal rate hearing process. Section 196.20(4), Stats. 1991-92.
When the fuel adjustment clause was eliminated by the legislature in 1984, the PSC was granted two fuel auditor positions and had to devise mechanisms for oversight of fuel costs. This case arises because of WP&L's first complete audit in its 1985 rate case.
"As these FRA clauses contemplate complex formulas which must be tested against mathematical calculations from designated figures each month, we conclude that implicitly, the Commission must retain jurisdiction over such charges in order to assure that the charges made are fair and reasonable to the customer as well as to the company.... We do not mean by this conclusion to suggest even remotely that the Commission is empowered to engage in retroactive rate making, but we distinguish between the ordinary rate making process and the necessarily ongoing process of verifying and adjusting fuel rate adjustment clauses so that they accurately reflect the increased and decreased costs (we hope) of the fuel necessary to operate a utility plant." Public Service Commission v. Delmarva Power and Light Co., 400 A.2d 1147, 1153 (Md. 1979).
See also Indiana Gas Co. v. Office of the Utility Consumer Counselor, 575 N.E.2d 1044, 1052-53 (Ind. App. 1991) (rule against retroactive ratemaking does not apply to fuel adjustment clauses because the policy of management efficiency is not served).
WP&L suggests that if there is imprudence, the PSC is empowered, at most, to set its future rates at the lower end of what might be considered "reasonable." Public Service Corp. v. Public Service Commission, 156 Wis. 2d 611, 620, 457 N.W.2d 502 (Ct. App. 1990). Under the reasoning of WP&L (Brief at 8-9) and intervenor Wisconsin Public Service Corporation (Brief at 15-17), which intervened on the side of WP&L, the PSC might have been able to deduct a tenth of a percentage point from WP&L's rate for the coming year, but not the two full percentage points that would have been equivalent to the $9 million penalty the PSC imposed. A two percentage point reduction would have rendered a return too low to be considered reasonable. Thus, the utilities' argument goes, the PSC is empowered to consider a utility's past conduct in setting rates for the coming year, but not very much. If a utility makes a small mistake, then consumers may be reimbursed through reductions in future rates; if a utility makes a big mistake, however, consumers have virtually no consolation. The PSC resolved this paradox by ordering WP&L to refund $9 million to its customers and co-owners as a lump sum amortized over a two year period.