NO. 82-175
I N THE SUPREME COURT OF THE STATE OF MONTANA
1983
THE MONTANA POWER COMPANY,
Plaintiff and A p p e l l a n t ,
vs.
DEPARTMENT OF PUBLIC SERVICE
. REGULATION, MONTANA PUBLIC SERVICE
COMMISSION e t a l . ,
Defendants and Respondents.
Appeal from: D i s t r i c t C o u r t o f t h e Second J u d i c i a l D i s t r i c t ,
I n a n d f o r t h e C o u n t y o f S i l v e r Bow
H o n o r a b l e Mark S u l l i v a n , J u d g e p r e s i d i n g .
Counsel of Record:
For Appellant:
Crowley, Haughey, Hanson, T o o l e and D i e t r i c h ,
B i l l i n g s , Montana
George C . D a l t h o r p a r g u e d , B i l l i n g s , Montana
C o r e t t e , S m i t h , Pohlman a n d A l l e n , B u t t e , Montana
H j o r t , Lopach and T i p p y , H e l e n a , Montana
For Respondents:
James C. Paine argued, Helena, Montana
Eileen E-Shore argued, Helena, Montana
Submitted: March 1, 1 9 8 3
Decided: May 3 1 , 1 9 8 3
Filed: MAY 3 1 1983
H o n o r a b l e James B. W h e e l i s , D i s t r i c t Judge, delivered the
O p i n i o n of t h e C o u r t .
Montana Power Company (MPC) a p p e a l s from a judgment
e n t e r e d i n t h e S i l v e r Bow County D i s t r i c t C o u r t , t h e Honor-
a b l e Mark P. Sullivan presiding, a f f i r m i n g an o r d e r of the
P u b l i c S e r v i c e Commission (PSC) which s e t a l l o w a b l e e l e c t r i c
rates.
In April 1980 MPC f i l e d a n a p p l i c a t i o n for electric
r a t e i n c r e a s e s w i t h t h e PSC. I n i t s r e q u e s t MC asked t h e
P
PSC t o a c c e p t , a s a p a r t o f t h e r a t e b a s e , money e x p e n d e d by
t h e company i n o b t a i n i n g c o a l f r o m W e s t e r n Energy Company
(Western Energy). Western Energy is MPC's wholly-owned
s u b s i d i a r y and s u p p l i e s 100 p e r c e n t of t h e c o a l need for
MPC's c o a l - f i r e d g e n e r a t o r s i n C o l s t r i p and B i l l i n g s . MC
P
accounts for a p p r o x i m a t e l y 1 5 p e r c e n t of Western Energy's
annual coal s a l e s with the remaining 85 p e r c e n t of sales
b e i n g made t o o t h e r u t i l i t i e s and m a n u f a c t u r i n g c o n c e r n s .
D u r i n g t h e h e a r i n g on t h e r a t e i n c r e a s e r e q u e s t , the
PSC h e a r d t e s t i m o n y on two d i f f e r e n t m e t h o d s f o r m o n i t o r i n g
the reasonableness of the price MC
P pays for its coal.
F i r s t , MPC s u g g e s t e d t h e u s e o f t h e " m a r k e t p r i c e " method:
a n ex a m i n a t i o n of t h e p r i c e charged i n t h e m a r k e t p l a c e f o r
s i m i l a r s a l e s i n c o m p a r i s o n t o t h o s e b e i n g c h a r g e d by t h e
subsidiary to the parent; if a favorable comparison is
found, t h e p r i c e i s deemed r e a s o n a b l e a n d no a d j u s t m e n t i s
necessary. S e c o n d , t h e Montana Consumer C o u n s e l s u g g e s t e d
t h e " r a t e o f r e t u r n " m e t h o d , which c a l l e d f o r a n e x a m i n a t i o n
o f t h e r e t u r n b e i n g e a r n e d by t h e s u b s i d i a r y on i t s s a l e s t o
the parent; an excessive rate of return requires an
adjustment.
I n s u p p o r t of t h e " m a r k e t p r i c e " m e t h o d , M C s u b m i t t e d
P
a study prepared by Arthur D. Little, Inc., a firm of
n a t i o n a l prominence i n t h e f i e l d of c o a l s u p p l y c o n t r a c t s .
MPC r e q u e s t e d A r t h u r D. Little, Inc., t o s o l i c i t and e v a l u -
a t e bids from c o a l s u p p l i e r s . After r e c e i v i n g b i d s from
n i n e c o m p a n i e s , A r t h u r D. Little, Inc., found t h a t Western
Energy's price was the lowest price available to MPC's
Billings plant. The C o l s t r i p p l a n t s were n o t i n c l u d e d i n
t h e s t u d y b e c a u s e t h e e x i s t i n g c o n t r a c t s had n o t e x p i r e d .
In support of the "rate of return" method, the
Consumer C o u n s e l ' s e x p e r t w i t n e s s , J o h n W. W i l s o n , p r e s e n t e d
e v i d e n c e t h a t compared W e s t e r n E n e r g y ' s p r o f i t s w i t h t h o s e
of other c o a l companies. Wilson's approach c h a r a c t e r i z e d
W e s t e r n E n e r g y ' s p r o f i t a b i l i t y o f more t h a n 20 p e r c e n t on
equity capital as excessive when computed to the 13.5
percent average f o r the other c o a l companies used in his
comparison.
In December 1980, after analyzing the evidence
presented, t h e PSC c h o s e t o r e l y o n t h e " r a t e o f return"
method s u g g e s t e d by t h e Consumer Counsel and r e j e c t e d the
" m a r k e t p r i c e ' ' method s u g g e s t e d by MPC. The PSC f o u n d 1 3 . 5
p e r c e n t t o be a r e a s o n a b l e r a t e of r e t u r n o n c o a l s o l d by
W e s t e r n E n e r g y t o MPC and o r d e r e d $ 9 0 0 , 7 3 0 o f MPC's r e q u e s t
be disallowed.
An a p p e a l o f t h e PSC o r d e r was t a k e n t o t h e D i s t r i c t
C o u r t by MPC. A f t e r review, the court held that: (1) t h e
e v i d e n c e p r e s e n t e d t o t h e PSC showed t h a t t h e r a t e o f r e t u r n
established by the PSC compares closely to other coal
c o m p a n i e s ; ( 2 ) MPC o f f e r e d no s u b s t i t u t e f o r w h a t i t t h o u g h t
t h e r e t u r n f i g u r e should be, nor d i d it o f f e r any e v i d e n c e
t o support a higher r a t e of return; ( 3 ) MPC, i n i t s r e b u t t a l
of Consumer C o u n s e l ' s w i t n e s s W i l s o n , o f f e r e d no evidence
t h a t W i l s o n ' s c o m p a r a b l e c o a l i n d u s t r y e a r n i n g s e x h i b i t was
f a u l t y ; a n d , ( 4 ) MPC d i d n o t s u s t a i n i t s b u r d e n o f p r o o f a s
t o t h e o r d e r o f t h e PSC b e i n g u n l a w f u l o r u n r e a s o n a b l e .
MPC now a p p e a l s t o t h i s C o u r t c l a i m i n g t h a t : (1) t h e
PSC f a i l e d t o g i v e e f f e c t t o t h e d e c i s i o n i n Montana-Dakota
U t i l i t i e s Co. v . B o l l i n g e r ( 1 9 8 1 ) , Mont . , 632 P.2d
1086, 38 S t . R e p . 1221; ( 2 ) t h e PSC and t h e D i s t r i c t C o u r t
e r r e d by i g n o r i n g MPC's substantial e v i d e n c e which demon-
strated that Western Energy's coal price was the lowest
available coal price under competitive market conditions;
and, ( 3 ) t h e Montana Consumer C o u n s e l ' s e v i d e n c e w h i c h t h e
PSC adopted in imposing a rate of return limitation on
Western E n e r g y ' s p r o f i t a b i l i t y is i n h e r e n t l y flawed.
A p p e l l a n t M C c o n t e n d s t h a t t h e PSC s h o u l d n o t h a v e
P
used the "rate of return" method because a competitive
m a r k e t was shown t o e x i s t and W e s t e r n E n e r g y ' s c o a l was t h e
l o w e s t p r i c e d c o a l a v a i l a b l e t o MPC. It asserts the cost
c l a i m e d by M C s h o u l d n o t h a v e b e e n deemed e x c e s s i v e .
P
Respondent contends t h a t t h e use of t h e 13.5 p e r c e n t
p r o f i t a b i l i t y a v e r a g e was n o t i m p r o p e r . The i n t e r e s t o f t h e
PSC i s t o see t h a t MPC d o e s n o t r e a p a n u n f a i r p r o f i t o n i t s
i n v e s t m e n t i n i t s s u b s i d i a r y by a l l o w i n g t h e s u b s i d i a r y t o
o v e r c h a r g e t h e p a r e n t f o r c o a l when t h e c o a l e x p e n s e w i l l b e
passed on t o t h e r a t e p a y e r s .
A very s i m i l a r s i t u a t i o n w a s presented t o t h i s Court
i n Montana-Dakota U t i l i t i e s Co. v. Bollinger (1981),
Mont. , 632 P.2d 1 0 8 6 , 38 S t . R e p . 1221. Montana-Dakota
U t i l i t i e s Co. (MDU) had r e q u e s t e d a n i n c r e a s e o f i t s e l e c -
tric utility rates. I n i t s r e q u e s t , MDU a s k e d t h e PSC t o
accept, as part of the r a t e base, money expended by the
company in obtaining coal from Knife River Coal Company
(Knife River), a wholly-owned s u b s i d i a r y o f MDU. The PSC
used a "rate of return" method to reduce the return on
i n v e s t m e n t f r o m a p p r o x i m a t e l y 33 p e r c e n t t o 12.124 percent
(the rate of return allowed t o MDU o n its o v e r a l l opera-
tion).
Apparently, MC
P has misunderstood our decision to
remand Montana-Dakota U t i l i t i e s to the PSC. MPC would
interpret our decision to hold that, once a competitive
marketplace is e s t a b l i s h e d , t h e " m a r k e t p r i c e " method m u s t
b e u s e d by t h e PSC. W d i d not s o hold.
e W e remanded t h a t
case t o t h e PSC, n o t b e c a u s e t h e PSC c h o s e t o u s e t h e " r a t e
o f r e t u r n " m e t h o d , b u t r a t h e r b e c a u s e t h e PSC d i d s o w i t h o u t
s u f f i c i e n t evidence t o support its findings. Montana-Dakota
U t i l i t i e s , 632 P.2d a t 1 0 9 1 , 38 S t . R e p . a t 1227.
We did state a preference for "the PSC to use a
marketplace c o s t of c o a l approach, if it can o b t a i n s u f f i -
cient facts for its determination, rather than using the
r a t e o f r e t u r n method w i t h a l l o f i t s d i f f i c u l t t h e o r i e s a n d
computations." Montana-Dakota U t i l i t i e s , 632 P.2d a t 1092,
38 S t . R e p . a t 1228. I t was, however, recognized that the
PSC h a s the r i g h t t o c h o o s e t h e method followed. The PSC
s h o u l d n o t be r e s t r i c t e d t o any s i n g l e formula s o long as
t h e method f o l l o w e d and t h e o r d e r e n t e r e d when a p p l i e d to
t h e f a c t s and viewed a s a whole d o n o t produce a n u n j u s t o r
abitrary result. 632 P.2d a t 1 0 9 1 , 38 S t . R e p . a t 1227.
The PSC i s v e s t e d , by s t a t u t e , w i t h t h e d u t y t o s u p e r -
v i s e and r e g u l a t e t h e o p e r a t i o n s o f p u b l i c u t i l i t i e s and t o
s e e t h a t r a t e s a r e j u s t and r e a s o n a b l e . S e c t i o n 69-3-330,
MCA. T h i s C o u r t c a n n o t s u b s t i t u t e i t s judgment f o r t h a t o f
t h e PSC. Our f u n c t i o n i s t o d e t e r m i n e w h e t h e r t h e PSC a c t e d
a r b i t r a r i l y and u n r e a s o n a b l y w i t h o u t s u f f i c i e n t e v i d e n c e t o
support its findings. Mountain S t a t e s Telephone & Telegraph
v. Dept. of Public Service Regulation (1981), Mon t .
, 624 P.2d 4 8 1 , 38 S t . R e p . 165.
I n Montana-Dakota Utilities we remanded the case to
t h e PSC w i t h i n s t r u c t i o n s t o :
". . . hold an a d d i t i o n a l h e a r i n g t o
d e t e r m i n e t h e f o l l o w i n g : (1) i f r a t e o f
r e t u r n is u s e d , a f a c t u a l b a s i s f o r t h e
r a t e of r e t u r n a l l o w e d K n i f e R i v e r c o n s i -
d e r i n g i t s a s s e t s and r a t e o f r e t u r n on a
marketplace b a s i s comparable t o o t h e r
c o a l companies; o r ( 2 ) i n t h e event
m a r k e t c o s t o f c o a l is u s e d , s u f f i c i e n t
f a c t s t o s u p p o r t t h e PSC d e t e r m i n a t i o n o f
the f a i r market p r i c e f o r coal." 632
P.2d a t 1 0 9 2 , 38 S t . R e p . a t 1 2 2 8 .
W did
e not hold that the PSC m u s t u s e a "market price"
method i f a c o m p e t i t i v e m a r k e t p l a c e c a n b e e s t a b l i s h e d ; t h e
c h o i c e o f m e t h o d s is l e f t t o t h e PSC.
I n t h e i n s t a n t c a s e , t h e PSC c h o s e t o a p p l y a " r a t e o f
r e t u r n " method i n a n e f f o r t t o d e t e r m i n e t h e r e a s o n a b l e n e s s
of the p r i c e paid by MPC for Western Energy coal. Our
i n q u i r y is l i m i t e d t o determining whether substantial evi-
d e n c e was p r e s e n t e d t o s u p p o r t t h e P S C ' s d e c i s i o n o r i f t h e
d e c i s i o n was u n j u s t o r a r b i t r a r y .
On a p p e a l , MPC c o n t e n d s t h e P S C ' s r e l i a n c e upon t h e
t e s t i m o n y o f Montana Consumer C o u n s e l w i t n e s s J o h n W. W i l s o n
is erroneous. MPC c l a i m s W i l s o n ' s s t u d y is n o t a n a c c u r a t e
s t u d y of the e n t i r e industry. Wilson found Western Energy
earned a 20 p e r c e n t return on equity capital every year
since 1974. Wilson testified that the industry average
e q u a l s 13.5 p e r c e n t . MPC now claims W i l s o n c o l l e c t e d a r b i -
trary data which does not accurately reflect the coal
industry. In its rebuttal testimony a t t h e PSC h e a r i n g ,
however, MC did
P not challenge the accuracy or probative
value of that testimony. MPC, in rebuttal, merely reas-
serted its o r i g i n a l position that t h e PSC s h o u l d r e l y on
MPC's t e s t i m o n y . No f o u n d a t i o n o b j e c t i o n s were made by MPC
c o n c e r n i n g t h e e x h i b i t s u s e d by W i l s o n .
MPC i s e s s e n t i a l l y c h a l l e n g i n g W i l s o n ' s t e s t i m o n y f o r
t h e f i r s t time on a p p e a l . The M C i s o f f e r i n g t h i s C o u r t a n
P
i n v i t a t i o n t o judge t h e c r e d i b i l i t y and w e i g h t o f factual
e v i d e n c e w h i c h is n o t p a r t of t h e r e c o r d which MPC i t s e l f
ignored, overlooked, or misinterpreted a t the administrative
level--the PSC h e a r i n g . T h i s w e w i l l n o t do. This Court
has previously recognized that limited judicial review
strengthens the administrative process. "Limited review
e n c o u r a g e s t h e f u l l and c o m p l e t e p r e s e n t a t i o n of e v i d e n c e t o
t h e a g e n c y by t h e p a r t i c i p a n t s i n t h e a d m i n i s t r a t i v e p r o c e s s
by p e n a l i z i n g t h o s e who a t t e m p t t o add new e v i d e n c e o r new
l i n e s of argument a t t h e j u d i c i a l review l e v e l . " Vita-Rich
Dairy, Inc. v. Dept. of Business Regulation (1976), 170
Mont. 3 4 1 , 343-344, 553 p.2d 9 8 0 , 982.
It is a n axiom of u t i l i t y l a w t h a t a u t i l i t y s e e k i n g
increased r a t e s h a s t h e burden of showing its claims are
reasonable. The MPC d i d n o t o b j e c t t o t h e f o u n d a t i o n o f t h e
Consumer C o u n s e l ' s witness's exhibit. The PSC was e n t i t l e d
t o b e l i e v e and a c c e p t t h e e v i d e n c e a s p r e s e n t e d by t h e Con-
sumer C o u n s e l ' s w i t n e s s and t o r e j e c t t h e e v i d e n c e p r e s e n t e d
by MPC. So l o n g a s t h e r e c o r d s u p p o r t s t h e d e c i s i o n , t h a t
judgment must s t a n d . I t is n o t r e q u i r e d t h a t a person be
knocked down by a g a l e b e f o r e h e knows w h i c h way t h e wind i s
blowing. All that is required is that the evidence is
capable of being believed. In the instant case, unlike
Montana-Dakota U t i l i t i e s Co. v . B o l l i n g e r , s u p r a , t h e r e c o r d
s u p p o r t s t h e d e c i s i o n made by t h e PSC. T h e r e was ample e v i -
d e n c e p r e s e n t e d by Consumer C o u n s e l ' s w i t n e s s J o h n W. W i l s o n
that Western Energy profitability (20 percent) was above
t h a t of the average f o r t h e industry (13.5 p e r c e n t ) . The
PSC c h o s e t o make t h e n e c e s s a r y a d j u s t m e n t s i n t h e amount
t h a t M C was a l l o w e d t o p a s s on t o t h e r a t e p a y e r s .
P
MC cannot w a i t u n t i l appeal t o challenge t h e evidence
P
and t e s t i m o n y of t h e Consumer C o u n s e l . MC did not s u s t a i n
P
its burden of proof as to the order of the PSC being
unlawful or unreasonable.
We hold that the PSC's decision is supported by
substantial evidence and fully meets the standards and
guidelines established i n Montana-Dakota Utilities Co. v.
Bollinger, supra.
Af f i r m e d .
\&bisiYa,
Hon r a b l e J a m e s B. W h e e l i s ,
D i s t i c t Judge, s i t t i n g i n
p a o f Mr. J u s t i c e D a n i e l
J. S e a
W e concur:
Chief J u s t i c e \
Justices
i n place
Mr. Justice John Conway Harrison dissenting.
I dissent.
I have tried in vain to reason with my colleagues not to
make what I view to be a further confusion in the law of utility
regulation in the State of Montana. The result of the majority
holding will, in my opinion, not only increase the cost of
electricity to the consumers of Montana, but, in addition,
increase the cost of coal to purchasers of Western energy --
which will in turn be passed on to the consumers. The economic
result of the majority holding will force Montana Power to
purchase its coal from more expensive sources and sell the 15
percent it contracted for with Western Energy to a better market.
To so hold does not, in my opinion, make economic sense.
Taking the uncontroverted facts presented to us, it is
evident that Montana Power Company (MPC) studied our opinion in
Montana-Dakota Utilities Co. v. Bollinger (1981), Mont . I
632 P.2d 1086, 38 St.Rep. 1221, and decided that in cases where
coal is purchased from a wholly-owned subsidiary, the steps
necessary to make the purchase would be carefully adhered to, and
that the holding of that opinion was controlling as to the proper
method to be used by the Public Service Commission (PSC) in
determining the methodology to be used. I believe the PSC
misread our holding in arguing that we held in Bollinger (supra)
that the "marketplace price of the coal" was controlling. What
we held was:
"'As a matter of justice, it appears to the
court that it might be better for the PSC to
use the marketplace cost of coal approach, if
it can obtain sufficient facts for its deter-
mination, rather than using the rate of return
method with all its difficult theories and
computations. While the PSC does have the
right to choose the method followed, this
court did not find a factual reason for the
summary rejection of the marketplace cost of
coal approach.'" (emphasis added)
"We therefore, vacate the judgment of the
District Court and remand the case to the PSC
with instructions to hold additional hearings
to determine the following: (1) if the rate
of return is used, a factual for the rate of
return allowed Knife River considering its assets
and rate of return on a marketplace basis
comparable to other coal companies; or in
the event market cost of coal is used, sufficient
facts to support the PSC determination of
the fair market price for coal.'"
While we did indicate by our language in Bollinger (supra)
that is our opinion the "market price might be the better approach,"
we did not rule out the use of other methodology by the PSC. We
noted that a parent's earnings in a subsidiary are improper if the
utility earns "excessive profits" at the expense of the ratepayer.
We further held that sales to other customers and "evidence of
prices charged by other companies in the competitive area" are
sufficient to establish the reasonableness of coal prices.
Perhaps it was this latter language that caused the MPC to
follow the market price approach in its presentation to the PSC
believing, on the basis of Knife River case, that if such an approach
was taken,their evidence would be so convincing the PSC would be
found to be arbitrary if it arrived at a different holding. In
my view, the evidence for the rate of return method was so weak
this case should be reversed.
It is apparent MPC believed that our holding in Knife River
stated that it was prefera.ble to use the market price method
because the record indicates that the company was aware that the
PSC had expressed concern regarding the "captive coal" situation
of Mpntana Electric Utilities. Therefore, MPC retained an independent
firm, knowledgeable in the areas of coal supply and contracts,
to secure for the Corette Plant at the lowest possible cost, a
fuel supply that was available at the time when the existing contract
was expiring. The appellant company specifically informed the
PSC by letter of its intention to do so. Thereafter, they secured
the services of an Arthur D. Little, Inc., who solicited some sixteen
coal companies operating in the Montana and Wyoming area for bids
for coal supply to the Corette Plant. An advertisement was
placed in Coal Week, a coal industry publication, and this advertise-
ment produced five additional requests for that information. Nine
bids were eventually received.
An analysis of the bid showed that the prices as of September
1, 1979, including transportation and utilitization costs, for the
three lowest bids were as follows: Western Energy (Rosebud Mine),
0.753 per million BTU; Westmoreland Resources, Absarokee (Absaloka
Mine), 0.897 per million BTU; ARC0 (Black Thunder Mine), 0.921
per million BTU. The remaining six bids ranged from 0.993 to
1.346 per million BTU. It is interesting to note that V7estmoreland's
Absaloka Mine is closer to the Corette Plant than the lowest Western
Energy's Rosebud mine.
An additional factor considered by Montana Power was its
desire to secure the coal supply for a ten-year period, and
further analysis was required to determine how escalation clauses
and increased transportation clauses would effect the contract
prices over the ten-year period. The result of the analysis
described by the independent reporter, Arthur Little, was that
the cost levelized over a full contract period thus Mr. Little
calculated a $0.40 per million BTU cost advantage for the Western
Energy Coal.
I find the Arthur D. Little report to be objective and
conclusive evidence that competition existed, and that Western
Energy appropriately received a contract as a result of its
favorable contract offer. I also find that the evidence is
unchallenged and should have formed the basis for the PSC's
determination to recognize the appellant's Western Energy Coal
purchase expense as fully recoverable.
The Arthur D. Little study does not include the coal supply
for Colstrip's Units I and I1 because that contract at that time
had expired. There was testimony on the record that the Colstrip
contract was negotiated jointly with Western Energy by the Puget
Sound Power and Light Company and the MPC, as partners in ~olstrip
I and 11. The price paid for that coal was subsequently recognized
in Puget Sound's electrical rates, and therefore, Puget Sound
negotiated with knowledge that its fuel expenses would be scrutinized
-12-
by its home state, Washington, regulators. In Washington, Puget
Sound sought a price which it could later justify. As previously
noted, Washington approved Puget Sound's coal purchases from Western
Energy.
The cost of the appellant Montana Power and Puget Sound for
Colstrip is substantially below the competitive price at the
Corette Plant, even before transportation and other expenses
are considered. The Colstrip cost of $7.097 per ton compares
favorably with the $8.757 Corette cost. This comparison, made
for the purpose of independently verifying the reasonableness
of the Colstrip Cost level, is, in my opinion, one of the strong
points for Montana Power's position that it's claimed level of coal
expense is fair to the Montana Power ratepayers. In addition, the
record indicates, through the testimony of Mr. Burke, that Montana
Power coal expense at Colstrip I and 11, as well as at Billings,
had been accepted by the PSC in previous hearings in 1968, 1972,
1975, and 1978, as a result of rate proceedings in those years.
Such facts are, in my opinion, indicative of the coal price at
Colstrip. It is interesting to note that in those previous hearings
regarding Pacific Power and Light, the expert of the Consumer
Counsel, Dr. Wilson, was examined on the theory that he presented
in this case by the consumer counsel and by the PSC, and in those
instances the PSC did not accept his testimony. With this back-
ground, it is understandable that the appellant, IIPC, choose
not to cross-examine him because in those four cases the PSC
had found his testimony unreliable or at least unconvincing.
As it is above noted, Dr. Wilson has for some time been trying to
sell the rate-of-return methodology as an expert witness here in
Montana, and we noted in Knife River, supra, that such a method
could be acceptable so long as the method did not produce "an
unjust or arbitrary result" and that the reasonableness of the
coal purchase expenses be based on "sufficient evidence." The
PSC argues since MPC did not challenge the testimony of J.W.
Wilson it gave them license to adopt that testimony without even
-13-
superficial scrutiny. Then the PSC asserts that their "substantial
evidence" rule applied so the court cannot substitute its judgment
for that of the PSC.
I do not agree with that in view of the fact that there is,
in my opinion, an arbitrary, capricious decision made by the PSC
in adopting the testimony of J.W. Wilson. Dr. Wilson is the only
witness that testified concerning the issue of earnings of other
coal companies. This testimony is as follows:
"As shown on page one of exhibit 22, (JW-3),
the coal industry equity profits have averaged
about 16 percent in this decade, with the
exception of very high earnings rates in the
three years immediately following the OPEC
embargo. In November of 1973, the average
earnings rates in the coal industry have been
under 12 percent."
He thereafter listed eight coal companies as "comparable coal
industry earnings from 1970-1979." Those companies were Bates
Manufacturing, Eastern Gas a.nd Fuel, Fulcom Seaboard, Kaiser
Resources, Kaneb Services, North American Coal, Pittstown and
Westmoreland Coal. As previously noted, the appellant, MPC, had
contacted twenty-one coal companies in connection with the
Corette coal contract that there was only one of the companies
contacted by Montana Power on both lists, that is "Westmoreland."
Even that is not a sufficient identity for the same company is
listed on the Arthur Little, Inc. report as "Westmoreland
Resources, Inc." which operates a mine in Big Horn County,
Montana. All of the sixteen companies solicited by Arthur D.
Little, Inc., were producing coal in Montana and Wyoming. None
of the companies, except Westmoreland, if that is the same
Westmoreland as the Westmoreland Resources, are listed as soli-
cited by Arthur D. Little, are within the area of Montana and
Wyoming.
In comparing the testimony of Arthur D. Little, Inc., and
Wilson, there appears to be inadequacies on the part of Dr.
Wilson that should have drawn more attention from the PSC in
evaluating his testimony. 1. According to Dr. Wilson, the
Fulcom Seaboard showed a percentage of earnings from 1974 - 1978
averaging 30.8 percent, which far exceeds Western Energy's
average for thosefiveyears by as much as 7.8 percent per year.
In addition, Fulcom Seaboard's figure for 1979 was not used by
Wilson and, therefore, it had no input into the 13.5 percent
earning figure which PSC was going to allow Western Energy.
2. Next, the company given by Wilson called "Bates Manufacturing"
was liquidated by 1979, and therefore has not had any impact
on the "average" 13.1 percent selected by Wilson with a slight
modification adopted by the Commission. 3. Wilson listed as an
"average" number at the base of each column of his exhibit.
This actually is an average of the averages of each company,
and does not take into consideration any proper variables. This
cannot be, in my opinion, a true average. Further, in distorting
the figure, he left out Fulcom Seaboard, which was an unusually
low figure and inserted. in its place Westmoreland Coal (1 percent)
and Pittstown (8.6 percent) which disotrted the so-called average
figures. Including leaving out Fulcom Seaboard, which had by far
the best earnings, Wilson failed to mention Bridger Coal which
had a 60 percent figure and the Pacific Minerals which had 37
percent, thereby leaving two companies with unreasonable low
percentage earning figures and therefore arriving at a fixed
coal company average of 13.1 percent, a figure which, in my
opinion, is distorted. Had he included Bridger Coal and Pacific
Minerals, there would have been a considerably higher change
in his "average" figure.
I find Dr. Wilson's testimony to be both arbitrary and
discriminatory in an effort to get the PSC to accept his methodo-
logy and feel that no credible evidence was submitted to the
record on rates of return on "comparable coal companies."
As previously noted, I find that the PSC's posture in this
matter is totally inconsistent with its prior actions with regard
to the Pacific Power and Light Company and the MDU where it
refused the very testimony that was given by Dr. Wilson in this
-15-
matter. In Knife River, supra, we allowed a return of 1-3.5 per-
cent which is nearly identical to the rate of return of 13.45
percent allowed Montana Power on its utility operations. After
our decision in Knife River, supra, the case was returned by the
District Court to the PSC for them to consider the testimony
on a competitive market methodology and stayed with their original
opinion supporting Dr. Wilson.
Last but not least, the PSC contends that Plontana Power had
no right at this stage of the proceedings to challenge Dr. Wilson's
comparisons for the first time. They claim that the MPC had a
burden of contradicting Dr. Wilson's stud.y of comparable coal
companies at the hearing, and, as it stands now, there is no
evidence which can sufficiently rebut the testimony of Dr. Wilson.
In pursuing the argument that Montana Power did not cross-examine
Dr. Wilson at the hearing and is not estopped from attacking
the credibility of his evidence,I would find that because the
testimony of Dr. Wilson was so weak and was rebutted by the studies
of Arthur D. Little, Inc., the evidence before the PSC lacked
credibility and their decision to adopt his findings is both
arbitrary and capricious.
While the PSC cites Vita-Rich Dairy, Inc. v. Department of
Business Regulation (1976), 170 Mont. 34L, 553 P.2d 980, for the
authority that at the time at the judicial review level, the
appellant, MPC was precluded from raising the issue for the first
time, I do not believe that holding stands for a rule that a party
cannot argue on appeal from a record that the testimony of the
key witness is without substance.
I would reverse the decision of the District Court and return
the matter to the PSC for further hearings.