Bryant v. Arkansas Pub. Serv. Comm'n
Annotate this Case
Winston BRYANT, Attorney General v. ARKANSAS
PUBLIC SERVICE COMMISSION
CA 95-448 ___ S.W.2d ___
Court of Appeals of Arkansas
En Banc
Opinion delivered June 26, 1996
1. Public Service Commission -- standard of appellate review. --
The appellate court's review of appeals from the Public
Service Commission is limited by the provisions of Ark. Code
Ann. 23-2-423(c)(3), (4), and (5) (Supp. 1995), which
defines the standard of judicial review as determining whether
the Commission's findings of fact are supported by substantial
evidence, whether the Commission has regularly pursued its
authority, and whether the order under review violated any
right of the appellant under the laws or the Constitutions of
the State of Arkansas or the United States.
2. Public Service Commission -- broad discretion. -- The Arkansas
Public Service Commission has broad discretion in exercising
its regulatory authority, and courts may not pass upon the
wisdom of the Commission's actions or say whether the
Commission has appropriately exercised its discretion.
3. Public Service Commission -- when Commission's decision must
be affirmed. -- If an order of the Public Service Commission
is supported by substantial evidence and is neither unjust,
arbitrary, unreasonable, unlawful, or discriminatory, then the
appellate court must affirm the Commission's actions.
4. Public Service Commission -- courts determine arbitrary abuse
of discretion. -- It is for the courts to say whether there
has been an arbitrary or unwarranted abuse of discretion, even
though considerable judicial restraint should be observed in
finding such an abuse.
5. Public Service Commission -- when action may be regarded as
arbitrary and capricious. -- Administrative action may be
regarded as arbitrary and capricious only where it is not
supportable on any rational basis; something more than mere
error is necessary to meet the test.
6. Public Service Commission -- appellant's burden to prove
action was willful and unreasoning. -- To set aside the Public
Service Commission's action as arbitrary and capricious, the
appellant must prove that the action was a willful and
unreasoning action, made without consideration, and with a
disregard of the facts or circumstances of the case.
7. Public Service Commission -- finding that disallowed expenses
were exceeded by increased depreciation expenses supported by
substantial evidence. -- The appellate court held that
substantial evidence supported the Public Service Commission's
finding that $8.8 million in expenses disallowed by Staff in
an audit report were exceeded by the telephone company's
increased depreciation expenses of $13.5 million.
8. Public Service Commission -- rate regulation -- method of
valuation. -- The Public Service Commission is free, within
the strictures of its statutory authority, to make the
pragmatic adjustments that may be called for by particular
circumstances; no public utility has an absolute right to any
method of valuation or rate of return, and the Commission has
wide discretion in its approach to rate regulation; the
appellate court is generally not concerned with the method
used by the Commission in calculating rates as long as the
Commission's action is based on substantial evidence; it is
the result reached, and not the method used, that primarily
controls; if the Commission's decision is supported by
substantial evidence, and the total effect of the rate order
is not unjust, unreasonable, unlawful, or discriminatory,
judicial inquiry terminates.
9. Administrative law & procedure -- scope of review. -- The
question on review of an administrative board's decision is
not whether the evidence would have supported a contrary
finding but whether it supports the finding that was made.
10. Public Service Commission -- incumbent upon Commission to use
entire results of audit and revenue-requirement impact on
telephone company. -- The appellate court, in assessing the
revenue excess, held that it was incumbent upon the Public
Service Commission to use the entire results of the audit and
the revenue-requirement impact on the telephone company of its
orders in the Stipulation docket.
11. Public Service Commission -- comparison of figures for revenue
excess in Audit and Stipulation dockets approved. -- The
appellate court approved the Public Service Commission's
comparison of figures for revenue excess in the Audit and
Stipulation dockets, noting that comparing the $33 million
revenue excess to the $28 million revenue excess was comparing
the same bottom-line figure with appropriate adjustments.
12. Public Service Commission -- Stipulation not conditioned on
approval of new depreciation rates -- no merit in argument
that Commission's orders were inconsistent. -- The appellate
court rejected the view that, by the agreement of the parties,
the value of the Stipulation automatically decreased by the
amount of increased depreciation rates ordered, thereby
effectively canceling the benefit of the increased
depreciation expenses; the Stipulation was not conditioned on
the approval of the new depreciation rates; the parties and
the Commission acknowledged in setting the monitoring-report
procedure that the telephone company was entitled to credit
for the accelerated depreciation expense; the appellate court
found no merit in appellant's arguments that the orders in the
Audit docket constituted an impermissible attack on the
earlier orders in the Stipulation docket and that the orders
were inconsistent.
13. Public Service Commission -- Commission's analysis in Audit
docket was appropriate. -- The appellate court concluded that
the Public Service Commission's analysis in the Audit docket
was appropriate where the Commission determined that the
telephone company's excess earnings were increased by the $8.8
million disallowed expense but decreased by the $13.5 million
in depreciation expense, resulting in excess earnings of $28.3
million, or approximately $5 million less than the approved
excess earnings in the Stipulation docket; giving due
deference to the expertise of the Commission in rate matters,
the appellate court held that the Commission did not err in
its treatment of the depreciation expense and the disallowed
expense.
14. Public Service Commission -- Commission decides credibility of
witnesses and weight to be given evidence -- Commission did
not err in not adopting approach of appellant's witness to
depreciation expenses. -- It is within the province of the
Public Service Commission, as the trier of fact in rate cases,
to decide on the credibility of the witnesses, the reliability
of their opinions, and the weight to be given their evidence;
the Commission is never compelled to accept the opinion of any
witness on any issue before it, nor is the Commission bound to
accept one or the other of any conflicting views, opinions, or
methodologies; the appellate court found no merit in
appellant's argument that the Commission erred in not adopting
the approach of appellant's witness, an economist, to
accounting for the depreciation expenses.
15. Appeal & error -- issue not argued below not addressed on
appeal. -- Where appellant failed to argue below that the
Public Service Commission should have fully merged or layered
the two dockets and amended the relevant orders of the
Stipulation docket to account for the disallowed expenses, the
appellate court did not address the issues; moreover,
appellant failed to satisfy Ark. Code Ann. 23-2-422(b)
(1987), which requires that the application for rehearing set
forth specifically the grounds upon which the application is
based; appellant's argument was not presented in the
application.
16. Public Service Commission -- appellant failed to show orders
were subject to collateral attack. -- Where appellant
contended that the telephone company's $28 million excess
earnings in the Audit docket were unreasonable and prohibited
by Ark. Code Ann. 23-4-103 (1987), which provides that all
rates must be just and reasonable, yet remained silent while
the record containing the Stipulation-docket orders was
closed, the appellate court found no merit in the argument,
noting that appellant had failed to demonstrate that the
orders were subject to collateral attack.
17. Public Service Commission -- appellant failed to appeal orders
entered in Stipulation docket. -- Where appellant argued that
the Public Service Commission abandoned the intent of the
deferred account by giving the telephone company credit for
all components of the Stipulation without further study of the
monitoring reports, which were not in evidence in the Audit
docket, contending that the Commission failed to determine if
the ratepayers were receiving the appropriate value from the
Stipulation docket, the appellate court did not consider the
argument because appellant failed to appeal the orders entered
in the Stipulation docket that established the deferred-
account monitoring process; failed to present the argument to
the Commission in the Audit docket prior to the Commission's
final order; failed to introduce evidence or testimony
regarding the reports; failed to make arguments regarding the
reports; failed to seek an accounting from the Commission; and
failed to make the argument in his application for rehearing.
18. Public Service Commission -- Commission's findings satisfied
requirements of Ark. Code Ann. 23-2-421(a). -- Arkansas Code
Annotated 23-2-421(a) (1987) provides that "[t]he Arkansas
Public Service Commission's decision shall be in sufficient
detail to enable any court in which any action of the
commission is involved to determine the controverted question
presented by the proceeding"; regarding Order No. 14, which
approved the audit report's recommendation of no change in the
telephone company's rates and the proposed agreement, the
appellate court held that the Commission's findings satisfied
the requirements of section 23-2-421(a) and case law; it was
clear from the findings that the Commission relied on all
aspects of the test-year data in determining the telephone
company's financial standing and that the Commission
considered all components of the Stipulation.
19. Public Service Commission -- appellant failed to meet burden
of showing that fair-minded persons could not reach
Commission's conclusion. -- To establish an absence of
substantial evidence to support the Public Service
Commission's order, appellant had the burden of showing that
the proof before the Commission was so nearly undisputed that
fair-minded persons could not reach its conclusion; appellant
failed to meet that burden; the appellate court held that the
Commission's decision was supported by substantial evidence
and that the total effect of the order was not unjust,
unreasonable, unlawful, or discriminatory.
20. Public Service Commission -- decision not to disallow $13
million in expenses supported by sufficient evidence. -- The
appellate held that there was sufficient evidence to support
the Public Service Commission's decision not to disallow the
$13 million in expenses charged to the telephone company by
its general headquarters; both the audit report and the
testimony of the audit supervisor for the Staff electric
section supported a finding that Staff had successfully traced
a selected sample of individual transactions from the special
reports provided by the telephone company to the prorate audit
trail report and then to the original source documentation
necessary to determine whether the costs were appropriate for
providing utility service, and where the telephone company's
district manager for financial accounting and reporting
testified that the approach adopted by Staff was an accepted
auditing method.
21. Public Service Commission -- findings sufficient to inform
parties and court of basis for orders. -- The appellate court
held that the Public Service Commission gave a considered and
adequate response to the evidence presented and the arguments
advanced; the findings made by the Commission were sufficient
to inform the parties and the appellate court of the basis for
the Commission's orders and indicated the reasoning by which
the Commission reached its decision.
22. Public Service Commission -- appellant preserved issues for
review. -- Where appellant's petition for rehearing raised the
issue of the Public Service Commission's failure to allow
discovery, the appellate court held that appellant had
appropriately preserved for appellate review the discovery and
impeachment issues comprising his final argument.
23. Public Service Commission -- no merit to appellant's assertion
that Commission did not follow its own discovery rule. -- The
appellate court found no merit to appellant's assertion that
the Public Service Commission did not follow its own
procedural rule pertaining to discovery; the Commission simply
delayed discovery until the audit report was filed and the
scope of the docket was set; appellant, who was allowed to
pursue discovery after the filing of the audit report and had
the same opportunity to conduct discovery as any other party
to the docket, exercised his right to discovery and obviously
did not find it necessary to seek additional time to complete
discovery; in addition, appellant failed to demonstrate that
he suffered prejudice as a result of the Commission's delay of
discovery.
24. Public Service Commission -- Commission properly exercised its
authority and discretion in defining scope of docket. -- The
Public Service Commission has authority to conduct audits of
jurisdictional utilities in accordance with Ark. Code Ann.
23-2-310 (1987); it was the Commission's decision to define
the parameters of the docket by what Staff included in its
audit report; the appellate court held that the Commission
properly exercised its authority and discretion in defining
the scope of the docket.
25. Public Service Commission -- no abuse of discretion in
excluding draft audit report and memorandum -- issues not
preserved for appeal. -- The appellate court held that the
Public Service Commission did not abuse its discretion in
excluding a Staff draft audit report addressing a 1991 test
year and a Staff memorandum related to the draft audit report
and that appellant's due process rights were not violated
because he was unable to use the excluded evidence for
impeachment purposes; the testimony clearly showed that the
audit report addressed a test year not in issue in the
proceedings; that certain accounting changes had occurred
since the report; that the report was a draft report and was
never adopted by Staff as its position; and that the
memorandum addressing the report simply was one Staff member's
opinion of the draft report; furthermore, appellant never
presented the burden-of-proof issue to the Commission, nor did
he attempt to impeach the witnesses with the material; these
issues and arguments were not timely made and were not
preserved for appeal.
26. Evidence -- no error in striking portion of witness's
testimony dealing with excluded evidence. -- The appellate
court rejected appellant's argument that the Public Service
Commission erred in striking the portion of testimony by
appellant's witness pertaining to the excluded Staff draft
audit report and Staff memorandum because the court had
sustained the Commission's finding that the documents were not
relevant to the issue in the proceedings; in addition,
appellant failed to demonstrate that a draft audit report
based on a different test year and an internal Staff
memorandum were, in the language of A.R.E. Rule 703, "of a
type reasonably relied upon by experts in the particular field
in forming opinions or references upon the subject," and
appellant failed to qualify his witness, an economist, as an
expert on the sufficiency of audit trails.
Appeal from the Arkansas Public Service Commission; affirmed.
Winston Bryant, Att'y Gen., by: Shirley E. Guntharp, Deputy
Att'y Gen., and Shawn McMurray, Ass't Att'y Gen., and Virginia H.
Castleberry, Ass't Att'y Gen., for appellant.
Paul J. Ward, for appellee.
Ann E. Meuleman, Garry S. Wann, and Ivester, Skinner & Camp,
P.A., by: H. Edward Skinner, for Southwestern Bell Telephone
Company.
James R. Cooper, Judge. *ADVREP*CA2* EN BANC
CA 95-448
June 26, 1996
WINSTON BRYANT, ATTORNEY GENERAL
APPELLANT
AN APPEAL FROM THE ARKANSAS
VS. PUBLIC SERVICE COMMISSION
ARKANSAS PUBLIC SERVICE
COMMISSION AFFIRMED
APPELLEE
James R. Cooper, Judge.
The Attorney General appeals from orders issued by the
Arkansas Public Service Commission (Commission) pursuant to an
audit of costs allocated to Southwestern Bell Telephone Company
(SWBT) by SWBT's parent corporation and affiliates.
To clearly understand the issues presented, we must first
discuss findings made by the Commission in a prior docket. In
September 1992, Commission Docket No. 92-260-U was initiated by the
Commission Staff (Staff) to investigate SWBT's earnings level.
Staff filed traditional rate case testimony in the docket based on
a test year of December 31, 1991. Staff concluded from its
analysis that SWBT's rates produced earnings in excess of a
reasonable revenue requirement. On May 3, 1993, a Stipulation and
Agreement (Stipulation) agreed to by Staff, SWBT, AT&T Communica-
tions, Sprint Communications Company L.P., GTE Southwest Incorpo-
rated, GTE Arkansas Incorporated, and sixteen rural local exchange
companies was filed in Docket No. 92-260-U to resolve the issues
raised by the investigation. The Stipulation provided that, in
lieu of proposed reductions to its rates, SWBT would make an
incremental investment of $231 million over a three-year period to
upgrade its infrastructure in Arkansas. The Stipulation provided:
The basic aspects of the [Stipulation] can be
summarized as consisting of a significant network
modernization plan, conversion to single party service in
all exchanges served by SWBT, service to two previously
unallocated territories, and recognition of certain
financial accounting changes .... This Stipulation and
Agreement also contains a redefinition of basic local
service for SWBT ... to include single party service with
touch-tone and provides for a reduction in the current
rates for touch-tone service. It incorporates the
elimination of mileage charges for rural customers with
the conversion of those exchanges to single party service
and implements a reduction of special connection charges
for the extension of facilities to rural areas.
The Stipulation also provided for the additional investment to be
treated as a part of SWBT's rate base. It further stated:
The Parties agree that the estimated value of these
improvements is $231 million, and the annual revenue
requirement effect based on the additional investment and
associated costs is approximately $19.3 million. The
Parties agree that the $19.3 million annual revenue
requirement effect from investment and expenses is
offered in lieu of potential reductions to SWBT's
existing rates.
In the Stipulation, the parties estimated that the touch-tone rate
reduction would reduce SWBT's revenues by $6.1 million annually and
that the elimination of Outside the Base Rate Area (OBRA) mileage
charges would reduce SWBT's revenues by $8.2 million annually. The
parties agreed that Staff's ongoing audit of costs allocated to
SWBT's Arkansas division by its parent company and affiliates (the
St. Louis audit) would continue until Staff deemed it completed.
Prior to the hearings held to address the Stipulation and the
Attorney General's objections to it, the Commission ordered Staff
and SWBT to respond by testimony to specific questions about the
earnings review and the Stipulation. In addition, the Commission
ordered an update of the test-year financial information based on
a test year ending May 31, 1993. Forty-seven witnesses testified
at the hearings which began on September 14, 1993.
On January 27, 1994, the Commission entered Order No. 38,
finding that the Stipulation was in the public interest and
approving it with some modifications. In its thirty-seven-page
order, the Commission presented a detailed examination and discus-
sion of the testimony and exhibits presented in the docket and
concluded:
The evidence is substantial that the Stipulation as
a whole is in the public interest and will serve the
needs of the people of Arkansas for a modern telecommuni-
cations system capable of carrying the state into the
future. The Stipulation is an obvious departure from the
normal course of a show cause proceeding to reduce a
utilities rates when there is an allegation of over-
earning. The Stipulation does provide for some reduc-
tions in rates but it is novel as a proposal to invest
for the future. The customers of SWBT will have access
to a modern and more efficient telecommunications system
in only three years without having to face increased
rates to cover the costs. People in two areas of the
state will have telephone service with the ability to
call and be called for business, health or personal
reasons where no telephone service has been available in
the past. Schools and health care facilities will be
able to provide more classroom choices, remote services
and better quality services with the Distance Learning
and Rural Health Care Networks. The state will be more
attractive to high-tech industries with the development
of fiber parks and a better educated work force through
distance learning. For all these benefits to the people
of this state, the Stipulation is a reasonable and
advantageous resolution of the issues in this docket and
is hereby approved.
The Commission also determined that "[t]he public will reap greater
long term advantages from infrastructure upgrades than possible
from a minor rate adjustment." The Commission noted that the $19.3
million annual revenue requirement effect from the investment and
expenses in the Stipulation was offered in lieu of potential
reductions of existing rates but also recognized that the Stipula-
tion proposed the elimination and reduction of certain charges.
The Commission conditioned its approval of the Stipulation on
SWBT's agreement not to request a general change in rates on or
before December 31, 1996.
The accounting procedure ordered by the Commission directed
SWBT to treat the annual revenue excess of approximately $33
million as a deferred credit accruing interest until the occurrence
of a general rate change. At that time, the balance in the
deferred account was to be used to reduce any revenue deficiency or
increase any revenue excess.
Apart from the Stipulation, the Commission also approved
Staff's recommended change in depreciation rates for analog
switching. The Commission noted that, pursuant to the Stipulation,
SWBT would be 100 percent digital by the end of 1996, and found
that the depreciation expense should be increased to avoid an
accumulated depreciation reserve shortfall.
SWBT subsequently filed a motion to clarify the procedure for
developing the investment-monitoring report, stating that the
monitoring and accounting formula should recognize the touch-tone
and OBRA mileage revenue reductions and the additional expense
resulting from the increased analog switch depreciation rates.
Order No. 40 approved SWBT's proposed report with some modifica-
tions. The resulting report provided that, on the first day of
each month, one-twelfth of the revenue surplus (1/12 of
$33,002,130.00) would be credited to the account. In addition, the
report provided for the following monthly debits to the account:
one-twelfth of the annual revenue requirement associated with the
plant placed in service under the plan; the additional depreciation
expense associated with the analog switch investment; and the
revenue reductions resulting from the touch-tone and OBRA provi-
sions. The report also provided that the revenue generated as a
result of the investment would be credited monthly to the account
and that interest would be credited or debited to the account based
on the balance at that point. The docket remained open for the
filing and review of the quarterly reports.
Neither the Attorney General nor any other party appealed from
Order Nos. 38 and 40.
The docket that is the subject matter of this appeal is
Commission Docket No. 94-169-U (the Audit docket), opened by the
Commission on May 24, 1994, in response to Staff's audit of costs
allocated or charged to SWBT's Arkansas Division (SWBTA) by South-
western Bell Corporation. In Order No. 1, the Commission directed
Staff to complete the St. Louis audit using a test year compatible
with the test year utilized in the Stipulation docket, and estab-
lished a procedural schedule for filing and reviewing the audit
report. The Attorney General also participated in this docket.
The St. Louis audit report was filed by Staff on September 20,
1994. The report recommended that $8,810,114.00 in expenses that
had been improperly allocated to SWBTA be disallowed. The report
also stated that the audit trail necessary to trace CDP (Cost
Distribution Process for Information Services) charged to SWBTA's
cost of service by SWB General Headquarters (GHQ) was inadequate;
however, that the alternative steps taken were adequate to assess
the appropriateness of these expenses for ratemaking purposes. The
audit report also included an entry that adjusted accumulated
depreciation to recognize the impact of the new analog switch
depreciation rate, approved in Order No. 38 of the Stipulation
docket. The report stated that the depreciation adjustment, the
disallowance of $8,810,114.00 in improperly allocated expenses, and
other appropriate adjustments to the test year resulted in a gross
revenue excess of $27,768,136.00, and that this revenue excess
represented a decrease of $5,233,995.00 from the $33,002,130.00
revenue excess in the Stipulation Docket. The report recommended
no change in rates for SWBTA at that time.
On November 3, 1994, Staff and SWBT entered into an Agreement
to address Staff's general concerns about allocations and the lack
of an audit trail. The Agreement was designed to complete the
audit and resolve all issues in the docket and provided that a
consultant would be retained to develop an action plan to address
Staff's concerns. The Attorney General objected to Staff's failure
to recommend a change in SWBT's rates pursuant to the disallowed
expenses and objected to the Agreement that was proposed to address
Staff's general concerns about the audit process.
In Order No. 14, the Commission responded to the Attorney
General's argument and approved the audit report's recommendation
of no change in SWBT's rates and approved the proposed Agreement.
Order No. 15 denied the Attorney General's application for
rehearing. The Attorney General then filed his Notice of Appeal
from Order Nos. 14 and 15, raising three general issues: (I) that
the Commission's use of the Stipulation docket to avoid reducing
SWBT's rates after Staff disallowed $8.8 million in expenses was an
abuse of discretion; (II) that the Commission failed to abide by
its statutory obligations when it refused to disallow $13.5 million
in CDP costs, after it was determined that these costs could not be
traced because of an inadequate audit trail; and (III) the
Commission erred in refusing to allow the Attorney General to
pursue relevant discovery and introduce relevant information.
Our review of appeals from the Commission is limited by the
provisions of Arkansas Code Annotated 23-2-423(c)(3), (4), and
(5) (Supp. 1995), which defines the standard of judicial review as
determining whether the Commission's findings of fact are supported
by substantial evidence, whether the Commission has regularly
pursued its authority, and whether the order under review violated
any right of the appellant under the laws or the Constitutions of
the State of Arkansas or the United States. Bryant v. Arkansas
Pub. Serv. Comm'n, 46 Ark. App. 88, 102, 877 S.W.2d 594 (1994). In
AT&T Communications of the Southwest, Inc. v. Arkansas Public
Service Commission, 40 Ark. App. 126, 843 S.W.2d 855 (1992), this
Court stated:
The Arkansas Public Service Commission has broad
discretion in exercising its regulatory authority,
Associated Natural Gas Co. v. Arkansas Pub. Serv. Comm'n,
25 Ark. App. 115, 118, 752 S.W.2d 766, 767 (1988), and
courts may not pass upon the wisdom of the Commission's
actions or say whether the Commission has appropriately
exercised its discretion. Russellville Water Co. v.
Arkansas Public Serv. Comm'n, 270 Ark. 584, 588, 606 S.W.2d 552, 554 (1980). It has often been said that, if
an order of the Commission is supported by substantial
evidence and is neither unjust, arbitrary, unreasonable,
unlawful, or discriminatory, then this court must affirm
the Commission's actions. Arkansas Elec. Energy Consum-
ers v. Arkansas Pub. Serv. Comm'n, 35 Ark. App. 47, 76,
813 S.W.2d 263, 279 (1991). Nevertheless, it is for the
courts to say whether there has been an arbitrary or
unwarranted abuse of discretion, even though considerable
judicial restraint should be observed in finding such an
abuse. Russellville Water Co. v. Arkansas Pub. Serv.
Comm'n, 270 Ark. at 588, 606 S.W.2d 554. Administrative
action may be regarded as arbitrary and capricious only
where it is not supportable on any rational basis, and
something more than mere error is necessary to meet the
test. Woodyard v. Arkansas Diversified Ins. Co., 268
Ark. 94, 97, 594 S.W.2d 13, 15 (1980). To set aside the
Commission's action as arbitrary and capricious, the
appellant must prove that the action was a willful and
unreasoning action, made without consideration and with
a disregard of the facts or circumstances of the case.
Partlow v. Arkansas State Police Comm'n, 271 Ark. 351,
353, 609 S.W.2d 23, 25 (1980). See also Beverly Enters.-
Ark., Inc. v. Arkansas Health Servs. Comm'n, 308 Ark.
221, 230, 824 S.W.2d 363, 367 (1992).
40 Ark. App. at 129-30.
I.
The Attorney General's first argument for reversal relates to
the Commission's refusal to lower SWBT's rates pursuant to the
finding of a disallowance of $8.8 million in the Audit docket. The
underlying premise of his argument is that the Commission erred in
its treatment of the accelerated depreciation rates for SWBT's
analog switches. Specifically, the Attorney General complains that
the Commission erred in comparing SWBT's excess earnings in the
Audit docket with SWBT's excess earnings that it approved in the
Stipulation docket because the effect of the new depreciation rates
was considered in the Audit docket but was not considered in the
Stipulation docket. He asserts that the disparate treatment of the
rates resulted in ratepayers being denied the benefit of an $8.5
million reduction in SWBT rates.
At the hearing in the Audit docket, the Attorney General pre-
sented the testimony of Basil L. Copeland, Jr., an economist
specializing in energy and utility economics. Copeland testified
that the revenue requirement exhibits from Docket No. 92-260-U (the
Stipulation docket) had to be adjusted to recognize the deprecia-
tion rate change before considering the St. Louis audit adjust-
ments. He stated in his prepared testimony: "Only then do we have
a true and accurate picture of how the proposed [St. Louis audit]
adjustments impact the level of revenue requirement that has
already been determined to be just and reasonable." (Emphasis in
original.) Copeland testified that the parties to the Stipulation
agreed that the proposed investment and expenses had a value of
$19.3 million (the $33 million in excess revenues when adjusted for
the depreciation change). He contended that the $19.3 million
should be compared to the $28 million excess supported by Staff in
the Audit docket, which would demonstrate a revenue excess of over
$8 million and require a decrease in SWBT's rates.
In rebuttal, Keith R. Mittledorf, a consultant who had
recently retired as chief accountant for the Arkansas division of
SWBT, testified for SWBT that his calculations showed a reduction
in SWBT's annual excess earnings from approximately $33 million to
$28 million. Mittledorf stated that the reduction demonstrated
that Arkansas customers would benefit by more than $5 million
annually for the three years covered by the Stipulation because
those customers were receiving more in revenue reductions and
modernization improvements than a pure cost of service determina-
tion would provide.
John Stode, Staff telecommunications manager, denied that the
parties agreed that the value of the Stipulation was $19.3 million,
contending that Copeland's calculations ignored the rate reduc-
tions, including $6.1 million in touch-tone reductions and $8.2
million in eliminated mileage charges, and non-priced benefits such
as service to two previously unallocated, unserved areas of the
state. Stode testified that the Commission's approval of the
change in depreciation rates was separate from the approval of the
Stipulation and that there was no mention of the change in rates in
the Stipulation. He stated that the recommendation of a change in
rates was conditioned on the approval of the Stipulation.
In Order No. 14, the Commission addressed the Attorney
General's objections in part as follows:
The [Attorney General's] position that refunds or
rate reductions are required as a result of the findings
of the St. Louis audit appear to hinge on the [Attorney
General's] contention that the value of the Stipulation
approved in Docket No. 92-260-U is only $19.3 million,
and thus ratepayers have not received a value equal to
the amount of excess earnings. The figure of $19.3
million cited by the [Attorney General] is not the value
of the Stipulation, but rather is the effect on SWBT's
revenue requirement of the $231 million in investment and
expenses that SWBT agreed to undertake pursuant to the
Stipulation. To determine the value of the Stipulation,
all components of the Stipulation must be considered,
including the elimination of [OBRA] mileage charges, the
reduction in charges paid by rural SWBT customers, and
the rate reduction in touchtone charges for both residen-
tial and business customers. While the [Attorney
General] may consider approximately $14.3 million in
previous rate reductions as inconsequential to this
docket, such savings to ratepayers will not be disre-
garded by this Commission.
(Emphasis in original.)
The Commission concluded that the $8.8 million in expenses
disallowed by Staff in the audit report were exceeded by SWBT's
increased depreciation expenses of $13.5 million which was ordered
but not recognized in the revenue requirement calculation made in
the Stipulation docket. From our review, we conclude that this
Commission finding is supported by substantial evidence.
The Public Service Commission is free, within the stric-
tures of its statutory authority, to make the pragmatic
adjustments which may be called for by particular circum-
stances. No public utility has an absolute right to any
method of valuation or rate of return, and the PSC has
wide discretion in its approach to rate regulation. This
court is generally not concerned with the method used by
the Commission in calculating rates as long as the
Commission's action is based on substantial evidence. It
is the result reached, and not the method used, which
primarily controls. If the Commission's decision is sup-
ported by substantial evidence and the total effect of
the rate order is not unjust, unreasonable, unlawful or
discriminatory, judicial inquiry terminates. Southwest-
ern Bell, 19 Ark. App. at 327, 720 S.W.2d at 927;
Southwestern Bell Tel. Co. v. Arkansas Pub. Serv. Comm'n,
18 Ark. App. 260, 715 S.W.2d 451 (1986); Walnut Hill
Tel., 17 Ark. App. at 265, 709 S.W.2d at 99.
Southwestern Bell Tel. Co. v. Arkansas Pub. Serv. Comm'n, 24 Ark.
App. 142, 144, 751 S.W.2d 8 (1988). The question on review of an
administrative board's decision is not whether the evidence would
have supported a contrary finding but whether it supports the
finding that was made. Bryant v. Arkansas Pub. Serv. Comm'n, 50
Ark. App. 213, 234, 907 S.W.2d 140 (1995).
In connection with his first point, the Attorney General
argues that the Commission refused to reduce SWBT's rates "by
arbitrarily and capriciously `layering' some aspects of [the
Stipulation docket] upon the [Audit docket] while not `layering'
other aspects...." The Commission addressed the "layering"
argument in Order No. 14 as follows:
The Commission directed Staff to complete the St. Louis
audit using the May 31, 1993 test year adopted in [the
Stipulation docket], so that a more accurate and final
determination of SWBT's test year earnings could be made.
The "layering" of these two dockets that the [Attorney
General] so strenuously objects to is precisely the
purpose of using the same test year. Without the results
of all aspects of Staff's review of SWBT's May 31, 1993
test year earnings and expenses, it is not possible to
obtain an accurate, complete analysis of SWBT's financial
standing.
We agree with SWBT's response that the Audit docket was not a
separate and distinct earnings investigation "but merely the
concluding and final part" of the investigation begun in the
Stipulation docket. In both dockets, the Commission was reviewing
evidence of twelve months of historical data from SWBT's books and
records for a test year ending May 31, 1993, with adjustments for
reasonably known and measurable changes occurring in the pro forma
year in accordance with Arkansas Code Annotated 23-4-406 (1987).
Order No. 14 of the Audit docket calculated four adjustments to the
financial exhibits adopted in the Stipulation docket: $8.8 million
in disallowed expenses, $13.5 million in additional depreciation
expense, a change in SWBT's intraLATA toll pool revenue, and a
change in the federal income tax rate.
The Attorney General also argues that the Commission abused
its discretion in holding that Order Nos. 38 and 40 in the
Stipulation docket could "cure," or provide a credit for, the
revenue excess in the Audit docket. As discussed earlier, it was
incumbent upon the Commission to use the entire results of the
audit and the revenue requirement impact on SWBT of its orders in
the Stipulation docket in assessing the revenue excess. We find no
error on this point.
Nor do we agree with the Attorney General's contention that
comparing the figures for revenue excess in the Audit and Stipula-
tion dockets is "comparing apples to oranges" and that "fair-
minded" persons could not reach a conclusion that it was a
meaningful comparison. The Commission points out that the "$33
million was SWBT's revenue excess based on the test year ending
5/31/93 in [the Stipulation docket]. $28 million is the revenue
excess based on the same test year when adjusted for the deprecia-
tion rate expense, recommended disallowances, toll pool revenue
adjustment, and federal income tax rate change." We agree with the
Commission that comparing the $33 million revenue excess to the $28
million revenue excess is comparing the same bottom-line figure
with appropriate adjustments.
The Attorney General's argument in the preceding points
appears to be premised on the view that, by the agreement of the
parties, the value of the Stipulation automatically decreased by
the amount of increased depreciation rates ordered, thereby
effectively canceling the benefit of the increased depreciation
expenses. We do not agree with this argument. The Stipulation was
not conditioned on the approval of the new depreciation rates. The
Commission certainly had the option of approving or rejecting the
recommended rates, and, in Order Nos. 38 and 40, the Commission
clearly accepted the $33.6 million value placed on the Stipulation.
The parties and the Commission acknowledged in setting the
monitoring-report procedure that SWBT was entitled to credit for
the accelerated depreciation expense. The Attorney General
recognizes the finality of the two orders, and his arguments on
appeal about what the Commission could have done or should have
done in the Stipulation docket are without merit. Further, we find
no merit in the argument that the orders in the Audit docket
constitute an impermissible attack on the earlier orders in the
Stipulation docket, and we find no merit in the argument that the
orders are inconsistent.
It is worth noting that the Attorney General has taken
inconsistent positions in the course of this case. In his
objection to SWBT's motion to clarify Order No. 38 in the Stipula-
tion docket, the Attorney General clearly recognized that the
depreciation rate increase was not a part of the Stipulation. This
position is contrary to the position taken by the Attorney General
in the Audit docket and on appeal.
Having rejected the Attorney General's view that the value of
the Stipulation was reduced from $33 million to $19.3 million, we
conclude that the Commission's analysis in the Audit docket was
appropriate. The Commission determined that SWBT's excess earnings
were increased by the $8.8 million disallowed expense but decreased
by the $13.5 million in depreciation expense, resulting in excess
earnings of $28.3 million, or approximately $5 million less than
the approved excess earnings in the Stipulation docket (the value
of the Stipulation). Giving due deference to the expertise of the
Commission in rate matters, see Cullum v. Seagull Mid-South, Inc.,
322 Ark. 190, 194, 907 S.W.2d 741 (1995), we find that the
Commission did not err in its treatment of the depreciation expense
and the disallowed expense.
The Attorney General next contends that it was error for the
Commission not to adopt Copeland's approach to accounting for the
depreciation expenses. It is within the province of the Commis-
sion, as the trier of fact in rate cases, to decide on the
credibility of the witnesses, the reliability of their opinions,
and the weight to be given their evidence. The Commission is never
compelled to accept the opinion of any witness on any issue before
it, nor is the Commission bound to accept one or the other of any
conflicting views, opinions, or methodologies. See Bryant v.
Arkansas Pub. Serv. Comm'n, 46 Ark. App. 88, 101, 877 S.W.2d 594
(1994). We find no merit in the Attorney General's argument.
In a related point, the Attorney General argues that the
Commission should have adopted Copeland's recommendation on how the
deferred-account mechanism could be used to reduce rates by $8.5
million. In the alternative, the Attorney General argues that the
Commission should have fully merged or layered the two dockets and
amended Order Nos. 38 and 40 of the Stipulation docket to account
for the disallowed expenses. Despite the Attorney General's
erroneous assertion that Copeland recommended a change in the
deferred-account mechanism, the Attorney General never suggested in
testimony or argument that the Commission "fully layer" the two
dockets and amend Order Nos. 38 or 40 and never suggested prior to
the issuance of Order No. 14 in the Audit docket that the Commis-
sion revise the deferred-account monitoring reports. We have often
stated that we will not address issues on appeal that were not
raised below. See Keesee v. Keesee, 48 Ark. App. 113, 117, 891 S.W.2d 70 (1995); Arkansas State Highway Comm'n v. Lee Wilson and
Co., 43 Ark. App. 22, 27, 858 S.W.2d 137 (1993); Arkansas Elec.
Energy Consumers v. Arkansas Pub. Serv. Comm'n, 35 Ark. App. 47,
66, 813 S.W.2d 263 (1991). Moreover, the Attorney General failed
to satisfy Arkansas Code Annotated 23-2-422(b) (1987), which
requires that the application for rehearing set forth specifically
the grounds upon which the application is based. This argument is
not presented in the application.
The Attorney General also contends that the Commission's
orders must be reversed because SWBT's $28 million excess earnings
in the Audit docket are unreasonable and are prohibited by Arkansas
Code Annotated 23-4-103 (1987), which provides that all rates
must be just and reasonable. Order Nos. 38 and 40 of the Stipula-
tion docket assessed excess earnings at $33 million, approved the
Stipulation, and set the value of the Stipulation. The Attorney
General remained silent while that record was closed. Neverthe-
less, he now seeks to attack those orders.
The order or determination of an administrative
body, acting within its jurisidiction and under authority
of law, is not subject to collateral attack. This is so
in the absence of fraud or bad faith, or, under some
authority, even on the ground of fraud. In this connec-
tion, it has been considered that the only method of
attack available is by appeal as provided by statute.
73A C.J.S. Public Administrative Law and Procedure 154 (1983).
The Attorney General has failed to demonstrate that the orders are
subject to collateral attack, and we therefore find no merit in
this argument.
The Attorney General further argues that the Commission
abandoned the intent of the deferred account by giving SWBT credit
for all components of the Stipulation without further study of the
monitoring reports, which were not in evidence in the Audit docket.
It is his contention that the Commission failed to determine if the
ratepayers were receiving the appropriate value from the Stipula-
tion docket. This argument must fail for numerous reasons. Again,
we note that the Attorney General failed to appeal the orders
entered in the Stipulation docket that established the deferred-
account monitoring process. Second, this argument was not
presented to the Commission in the Audit docket prior to the
Commission's final order. The Attorney General introduced no
evidence or testimony regarding the reports, made no arguments
regarding the reports, and sought no accounting from the Commis-
sion. Finally, this argument was not made in his application for
rehearing.
The Attorney General's final point in this argument is that
Order No. 14 violates the requirements of Arkansas Code Annotated
23-2-421(a) (1987), which provides in pertinent part that "[t]he
Arkansas Public Service Commission's decision shall be in suffi-
cient detail to enable any court in which any action of the
commission is involved to determine the controverted question
presented by the proceeding." The Attorney General argues that the
order is defective because the Commission appeared to base its
decision both on the "excess value" theory and on a determination
that the disallowed expenses in the Audit docket were exceeded by
SWBT's increased depreciation expense. The Attorney General refers
this Court to Bryant v. Arkansas Public Service Commission, 45 Ark.
App. 56, 63, 871 S.W.2d 414 (1994), where we stated: "Courts
cannot perform the reviewing functions assigned to them in the
absence of adequate and complete findings by the Commission on all
essential elements pertinent to the determination." We have
reviewed the Commission's findings and hold that they satisfy the
requirements of Section 23-2-421(a) and the case cited above. It
is clear from the findings that the Commission relied on all
aspects of the test-year data in determining SWBT's financial
standing. In addition, it is clear that the Commission considered
all components of the Stipulation.
In order to establish an absence of substantial evidence to
support the Commission's order, the Attorney General had the burden
of showing that the proof before the Commission was so nearly
undisputed that fair-minded persons could not reach its conclusion,
see AT&T Communications of the Southwest, Inc. v. Arkansas Public
Service Commission, 40 Ark. App. 126, 131, 843 S.W.2d 855 (1992),
and we hold that he failed to meet that burden. The Commission's
decision is supported by substantial evidence and the total effect
of the order is not unjust, unreasonable, unlawful, or discrimina-
tory. We therefore affirm on the Attorney General's first
argument.
II.
Next, the Attorney General argues that the Commission erred in
failing to disallow $13 million in expenses charged to SWBT-
Arkansas (SWBTA) by SWB-General Headquarters (GHQ) because of a
lack of a sufficient audit trail to track these expenses to their
originating sources. These expenses were entered into the Cost
Distribution Process for Information Services (CDP), which is
utilized by GHQ to allocate cost for information technology
services to the state jurisdictions.
In its audit report, Staff stated that it had been unable to
trace any of the CDP charges on SWBTA's books to a specific
originating source document, which demonstrated that the CDP
process itself did not provide a comprehensive audit trail.
According to the report, however, Staff was able to review the
costs prior to entry into the CDP resource pools to determine
whether the expense was necessary for providing utility service.
Staff stated that, because the identity of the transaction was lost
upon entry into the resource pools, "there was no way to determine
the proportionate amount that SWBTA ultimately received of each
disallowable transaction flowing to CDP." However, it was further
stated that, by using the normal GHQ prorate factor to determine
the portion attributable to SWBTA, Staff calculated that SWBTA
apparently received through the CDP $236,485.00 less expense in the
test year than would have been allocated through the normal GHQ
prorate process. Staff concluded: "While the lack of a comprehen-
sive audit trail for almost one-third of the expenses flowing to
SWBTA from GHQ is very disconcerting, Staff believes that the
alternative steps taken were adequate to assess the appropriateness
of these expenses for ratemaking purposes."
Basil L. Copeland, Jr., the Attorney General's witness, relied
on the audit report in recommending disallowance of the $13 million
in expenses because they could not be "adequately verified owing to
the lack of a comprehensive audit trail."
Steve Usselmann, SWBT's district manager for financial
accounting and reporting, testified that the audit trail necessary
to trace costs flowing from the GHQ prorate process and recorded in
the Arkansas general ledger was adequate. He explained:
In accordance with generally accepted auditing standards,
an auditor must evaluate the system in determining audit
risk. Audit tests are performed through the system or
around the system to obtain sufficient, competent,
evidential matter as to the appropriateness of the
expenses. Auditing through the system constitutes the
actual trace of a document from its source to the general
ledger. Auditing around the system is a practice which
substantiates that a large group of transactions can be
traced from one process to the next and that the end
result is reasonable when compared to an acceptable
alternative. Thus, auditing around the system provides
assurance on the reliability of a process. It is quite
common to audit around the system in a complex or
complicated process.
Usselmann concluded that "the Staff performed audit procedures
which provided the ability to assess the appropriateness of these
expenses for ratemaking purposes. In other words, sufficient audit
tests were performed by auditing around the system which is an
acceptable method of auditing."
Marie James, audit supervisor for the Staff electric section,
disagreed with Copeland's suggestion that the costs should be
disallowed. She stated that although Staff was concerned about the
lack of a comprehensive audit trail, the alternative steps taken
were adequate to assess the appropriateness of the expenses for
ratemaking purposes. James testified:
Staff acknowledged in the [audit] report that, with
[SWBT's] assistance, Staff successfully traced a selected
sample of individual transactions from the special
reports to the prorate audit trail report and to the
original source documentation necessary to determine if
the costs were appropriate for providing utility service.
However, in Staff's opinion, the addition of grand totals
by originating source and a unique identifying character-
istic that flows from report to report would greatly
enhance the auditability of SWBT's GHQ expenses, thus
Staff's assessment that the audit trail is inadequate.
On November 3, 1994, SWBT and Staff entered into the Agreement
"designed to complete the St. Louis Audit and resolve all issues in
this Docket." It provided that "[t]he basis of the Agreement is
for SWBT and Staff to jointly select a consultant to address
Staff's concerns about the lack of an audit trail, the tracking of
research and development costs, allocations, and charging direc-
tions." It further provided that "[i]t is the intent that the
consultant be a firm with nationally recognized credentials and an
established reputation for professionalism." SWBT agreed to pay
the fee for the consultant. At trial, SWBT stated that it would
not attempt to recover the cost from ratepayers.
In rebuttal testimony, Copeland stated that the Agreement
served no useful purpose other than to protect SWBT. He stated:
"The public gets only what it had a right to expect as a minimum to
begin with, i.e. further investigation into the lack of audita-
bility of expenses that are being allocated to Arkansas rate-
payers." (Emphasis in original.) It was his conclusion that the
Agreement should be rejected.
In Order No. 14, the Commission approved the Agreement and
stated: "Clearly, ratepayers do benefit when Staff is able to more
quickly and thoroughly perform an audit of SWBT's financial
performance. Auditing costs incurred by both Staff and SWBT are
reduced, and Staff is able to complete its audit more quickly,
allowing it to pursue other regulatory obligations." Order No. 15
denied the Attorney General's application for rehearing.
The Attorney General makes three points in his second argument
for reversal: (1) the Commission was obligated to accept his
recommendation of disallowance of the $13 million in expenses
because the amount of charges SWBTA received from the CDP system
could not be traced to originating source documents; (2) Staff's
position on the treatment of CDP costs was inconsistent with its
position on research and development (R&D) costs; and (3) the
Commission's findings were inadequate because the Commission
refused to state its basis for rejecting the Attorney General's
recommendation.
We hold that there was sufficient evidence to support the
Commission's decision not to disallow the $13 million in expenses.
Both the audit report and Marie James' testimony support a finding
that Staff successfully traced a selected sample of individual
transactions from the special reports provided by SWBT to the
prorate audit trail report and then to the original source
documentation necessary to determine whether the costs were
appropriate for providing utility service. SWBTA witness Usselmann
testified that the approach adopted by Staff, which he referred to
as "auditing around a system," was an accepted auditing method.
Both James and Usselmann have accounting credentials and audit
experience. In contrast, the Attorney General presented the
testimony of a witness who lacked accounting credentials, had never
participated in a field audit, and did not examine SWBTA's books,
but relied entirely on Staff's documents and testimony.
The Attorney General further argues that it was impossible to
determine the proportionate amount that SWBTA received of each
expense that was disallowed by Staff. We conclude that sufficient
evidence was presented to the Commission from which it could
approve the amount of expenses that should not be allowed. Staff
explained in the audit report that the disallowed expense that
SWBTA actually received in the test year was $236,485.00 less using
the CDP process than it would have been using the average GHQ
prorate factor for Arkansas. Although we appreciate the Attorney
General's concerns regarding the lack of an audit trail, these
concerns were addressed in the Agreement, which is lengthy and
details specific goals to be met, and provides that SWBTA and Staff
jointly will select a consultant to address Staff's concerns about
the audit trail and other procedures. Further, it provides that
the consultant will operate under the supervision of Staff, with
consultation from SWBTA, that SWBTA will pay the fee for the action
plan which will be developed, and that the consultant's findings
and recommendations will be submitted to the Commission. In Order
No. 14, the Commission clearly found that ratepayers would benefit
from the consultant's services.
We conclude that the Attorney General has failed to provide
either factual or legal support for his argument and hold that the
Commission Order No. 14 is neither arbitrary nor capricious. We
affirm on this point.
We also find no merit in the Attorney General's contention
that Staff's position that SWBTA benefits from the CDP charges
contradicts Staff's position on R&D charges. The Commission
addressed this contention in Order No. 14:
Contrary to the [Attorney General's] claim, there is
no inconsistency in the treatment of CDP charges and the
complete disallowance of [R&D] costs. Staff faced
different situations in those areas and treated them
differently for legitimate reasons. The audit report
stated the R&D costs were not traceable to regulated or
nonregulated services. Ratepayers should not pay for
unregulated or competitive services. Staff was able to
determine that expenses entering the CDP were appropriate
for rate recovery.
The Attorney General's final point in this argument is that
the Commission erred in refusing to state its basis for rejecting
the Attorney General's recommendation. In Order No. 14, the
Commission adopted Staff's recommendations regarding the audit
report. The Commission also addressed at length the Agreement and
the Attorney General's argument that it would provide no benefits.
In the application for rehearing, the Attorney General argued that
the Commission had failed to rule on his proposed disallowance of
the CDP costs. It was his position that the Commission failed to
comply with Section 23-2-421(a), which requires a commission's
decision to be in sufficient detail to enable a court to determine
the controverted question presented by the proceeding.
To address this point, it is essential that we examine the
manner in which the Attorney General presented his opposition to
Staff's recommendation in regards to the audit trail and acceptance
of the $13 million in expenses. To support his recommendation that
the expenses be disallowed, the Attorney General relied on a Staff
draft audit report addressing a 1991 test year rather than the 1993
test year that the Commission ordered be used and an internal Staff
memorandum addressing the draft report. The Commission excluded
the documents and Copeland's conclusions regarding the documents as
not relevant to the issues presented in the Audit docket. As
discussed later in this opinion, we find no error in the Commis-
sion's exclusion of the evidence. As a result of the exclusion,
the Attorney General's recommendation was supported solely by
Copeland's opinion that: "Since there is no audit trail to track
these expenses to their originating source, they should be
disallowed and excluded from SWBTA's cost of service." In Order
No. 14, the Commission clearly found Copeland's opinions to be
unreliable because of his lack of auditing credentials. There was
no relevant supporting testimony or exhibit that required further
discussion by the Commission.
In Order No. 15, the Commission stated that there was "no
requirement that the Commission rule specifically on each and every
proposal made by a party or provide each party with a line-by-line
critique of its testimony." The Commission noted that the issue
was Staff's audit report and whether certain affiliate charges
allocated to SWBTA were appropriately charged to Arkansas. Also at
issue, the Commission stated, was the Agreement filed by Staff and
SWBTA. The Commission further stated: "These issues are fully
addressed and resolved in Order No. 14. The Commission addressed
the recommendations of the [Attorney General] as a whole and found
the recommendations without merit." In Order No. 14, the Commis-
sion adopted Staff's recommendations on the $13 million adjustment
and then discussed in some detail the proposed Agreement, including
the Attorney General's objections to it, and the expected benefits.
We hold that the Commission gave a considered and adequate
response to the evidence presented and the arguments advanced.
It is not required that an administrative agency make
findings of fact upon all items of evidence or issues,
nor even necessarily to answer each and every contention
raised by the parties, but the findings should be
sufficient to resolve the material issues, or those
raised by the evidence which are relevant to the deci-
sion.
73A C.J.S. Public Administrative Law and Procedure 144 (1983).
We conclude that the findings made by the Commission are sufficient
to inform the parties and this Court of the basis for the Commis-
sion's orders and indicate the reasoning by which the Commission
reached its decision.
For the foregoing reasons, we affirm as to the Attorney
General's second argument.
III.
For his final argument, the Attorney General makes two
separate points: (1) he contends that he was denied the opportuni-
ty to discover evidence and that Staff was allowed to determine the
relevancy of the evidence he sought to discover; and (2) that the
Commission refused to allow relevant evidence to be admitted or
used for impeachment purposes.
Before we address the merits of these arguments, we note that
the Commission and SWBT contend that the Attorney General has
failed to preserve these issues for appeal. Specifically, they
claim that the Attorney General's notice of appeal failed to
reference Order Nos. 5, 6, 11, and 12, as required by Arkansas Code
Annotated 23-2-423 (Supp. 1993), which provides that a party may
obtain review of an order in this Court by filing a notice of
appeal "stating the nature of the proceeding before the commission,
identifying the order complained of and the reasons why the order
is claimed to be unlawful, and praying that the order of the
commission be modified, remanded, or set aside in whole or in
part." They urge that strict compliance with the provisions of
this statute is necessary before any order of the Commission may be
reviewed by this Court. We hold that the Attorney General has
appropriately preserved the above issues for appellate review. In
his petition for rehearing of Order No. 14, the Attorney General
raised the issue of the Commission's failure to allow him discov-
ery, and this issue was addressed by the Commission in Order
No. 15, denying the rehearing petition.
As to the merits, we note that the Audit docket was initiated
by the Commission on May 24, 1994, in Order No. 1. In that order,
the Commission recognized that Staff had been "in the process of"
conducting an audit of Southwestern Bell Corporation (SBC) and that
completion of the audit had been pending "too long." The Commis-
sion directed Staff to complete the St. Louis audit using a test
year ending May 31, 1993. The Commission set a procedural schedule
and ordered Staff to file the audit results by September 24, 1994.
Prior to the filing of the audit report, the Attorney General had
submitted to SWBT requests for data and requests for production of
documents. The Attorney General sought, inter alia, to obtain
SWBT's and SBC's long-range planning documents, budgets, and
network transition plans. SWBT objected to these discovery
requests, stating in part that most of the information requested
had been provided to the Attorney General in the Stipulation
docket, that the Attorney General failed to specify what type of
plans or budgets he sought, and that the documents lacked relevance
because they did not address affiliate transactions or allocation
of costs which were the subject of the audit report. In Order
No. 5, issued July 19, the Commission found the Attorney General's
motion to compel discovery to be untimely and pointed out that the
only pending matter in the docket was the Commission's direction to
Staff to conduct an audit. The Commission stated:
Until such time as Staff completes its audit and files
its audit report there are no defined issues pending in
this Docket. Therefore, it is difficult to understand
why the [Attorney General] is conducting discovery at
this time or how the [Attorney General] can definitively
state what will or will not be relevant to the issues
which may be developed as a result of the Staff's audit
report.
In Order No. 6, the Commission denied the Attorney General's
petition for rehearing but stated that the Attorney General could
request additional time for discovery, if needed, after the audit
report was filed.
The audit report was filed on September 20, 1994. In a
pleading filed on October 20, SWBT objected individually to eleven
data requests and eight document requests, filed by the Attorney
General on October 12, 1994, contending that the information the
Attorney General sought was beyond the scope of the audit and
completely unrelated to any issue raised in Staff's audit:
SWBT objects to this Data Request seeking informa-
tion beyond the scope of this Docket which involves only
SWBT's affiliate transactions and corporate allocations.
The Information Network Transition Plan ("INTP") is not
relevant to those issues and contains no information
concerning or relating to such issues. The INTP does not
address the allocation of cost (i.e. expense) between
SBC, and it is not relevant to the review or audit of
affiliate transactions. The majority of this document
discusses SWBT's strategic plans and goals, and it
reveals SWBT's assessments of its technological deploy-
ment progress in relation to its goals for deployment....
In Order No. 11, the Commission found that, with the issues to
be addressed clearly identified for the first time, the scope of
the proceeding was established and limited to the specific issues
addressed in the audit report. Consequently, the Commission found
the Attorney General's motion to compel discovery to be ripe for
resolution, but denied the motion, finding that the information
sought was outside the scope of the docket. The Attorney General's
motion for partial rehearing was denied in Order No. 12:
The Commission defined the preliminary scope of this
Docket in Order No. 1 which directed the General Staff to
conduct the "St. Louis Audit" using a test year ending
May 31, 1993. The issues and the scope of this Docket
were further defined and narrowed by the filing of
General Staff's formal audit report on September 20,
1994, in compliance with Order No. 1. The Commission set
the scope of the Docket and the Commission determined
that the [Attorney General's] discovery exceeded that
scope. "Control of the ... extent of discovery rests in
the sound discretion of the Commission." Rule 13.02(a),
Commission's Rules of Practice and Procedure.
As the General Staff stated in its Response: "The
simple fact that the [Attorney General] wishes to address
issues the other parties do not consider relevant does
not mean that the Attorney General has been denied due
process. The Commission is the appropriate body to
determine the scope of issues in pending dockets,
especially when those dockets were initiated by the
Commission."
On appeal, the Attorney General contends that in limiting discovery
the Commission failed to follow its own rules, improperly delegated
its own function and responsibility, and deprived the Attorney
General of his right to due process.
We find no merit to the Attorney General's assertion that the
Commission "did not abide by Rule 13.04 of the Commission's Rules
of Practice and Procedure, which provides that `discovery may
commence by any party on assignment of a docket number by the
Secretary [of the Commission].'" Here, the Commission simply
delayed discovery until the audit report was filed and the scope of
the docket was set. The Attorney General was allowed to pursue
discovery after the filing of the audit report and had the same
opportunity to conduct discovery as any other party to the docket.
The Attorney General exercised his right to discovery and obviously
did not find it necessary to seek additional time to complete
discovery. In addition, the Attorney General has failed to demon-
strate that he suffered prejudice as a result of the Commission's
delay of discovery.
The Attorney General also argues that the Commission erred by
delegating to Staff the Commission's responsibility to determine
the scope of the docket. He argues that giving one party to the
proceeding the right to determine what is relevant, discoverable,
and admissible violated his right as the representative of Arkansas
ratepayers to be heard and present evidence in support of his
position and in rebuttal to the other parties' positions. He
argues:
A fundamental requirement of due process in matters
of public utility regulation is a full and fair hearing.
Arkansas Elec. Energy Consumers v. Arkansas Pub. Serv.
Commission, 35 Ark. App. 47, 64, 813 S.W.2d 263 (1991).
A full and fair hearing requires "that all whose rights
are involved have the opportunity to be heard, to submit
evidence and testimony, to examine witnesses, and to
present evidence or testimony in rebuttal to adverse
positions." Id., citing Federal Trade Commission v.
National Lead Co., 352 U.S. 419 (1957). Giving one party
to the proceeding the right to determine what is rele-
vant, discoverable and admissible violated the [Attorney
General's] right as the representative of ratepayers to
be heard and present evidence in support of its position
and in rebuttal to the other parties' positions.
The Commission denied that the Attorney General did not
receive a fair hearing but also defended its right to determine the
scope of its dockets, especially one it initiated:
The Commission did not, as the [Attorney General]
contends, delegate to a party the right to determine what
is relevant, discoverable, and admissible. The Commis-
sion has broad investigatory authority. Ark. Code Ann.
23-2-306 - 23-2-311 (1987). The [Attorney General]
lacks this authority. The witnesses presenting testimony
on behalf of Staff had auditing experience and expertise.
The [Attorney General's] witness had neither. Just as
this Court gives due regard to the expertise of the
Commission, Ark. Elec. Energy Consumers, 35 Ark. App. at
71, 813 S.W. at 277, citing Ark. Okla. Gas Corp. v. Ark.
Pub. Serv. Comm'n., 27 Ark. App. 277, 282, 770 S.W.2d 180
(1989), the Commission can give due regard to the
expertise of Staff.
The Attorney General acknowledges that the Commission has
authority to conduct audits of jurisdictional utilities in
accordance with Arkansas Code Annotated 23-2-310 (1987), and it
was the Commission's decision to define the parameters of the
docket by what Staff included in its audit report. We hold that
the Commission properly exercised its authority and discretion in
defining the scope of the docket.
The Attorney General's final point is that the Commission
abused its discretion by refusing to admit the following evidence
or to allow it to be used for impeachment purposes: a Staff draft
audit report addressing a 1991 test year, a memorandum related to
the draft audit report prepared by a Staff member and addressed to
another Staff member, and Attorney General witness Copeland's
testimony regarding the draft audit report and the memorandum.
The excluded draft audit report stated in part that absent an
adequate audit trail, "consideration should be given as to whether
any SWBTA expenses received through the GHQ prorate process should
be recovered through rates paid by Arkansas ratepayers." In the
excluded memorandum, a Staff member had stated that "there are
significant, serious areas of abuse and potential abuse by
Southwestern Bell and its affiliates." The Attorney General sought
to introduce these documents at the hearing to show that Staff had
changed its position concerning the GHQ costs and lack of an audit
trail.
Staff objected to admitting the documents, pointing out that
the report was not a final Staff product and had not been filed or
presented to the Commission. Staff witness James discussed the
draft audit report in her surrebuttal testimony as follows:
First, it is obviously not a completed work product, as
indicated by the designation of "draft". Second, the
purpose of "Staff's Draft Audit" indicated on page ii
indicates the "report is designed to provide a guide that
will assist Staff, on a going forward basis, in assessing
the operations of SWBT...." Third, the draft report
covers a different test period, 1991. Some of SWBT's
accounting procedures are different for the current test
year.
She further stated: "The memorandum in question is simply one
person's assessment of a draft audit report." (Emphasis in
original.)
The Commission granted Staff's motion, finding that the two
documents were not relevant to the proceedings before the Commis-
sion. The Commission then struck that portion of Attorney General
witness Copeland's testimony in which he pointed out that, in the
excluded audit report, Staff had considered the possibility of
disallowing the expenses and that a Staff member had stated in the
memorandum:
It would appear that the Commission is "at the mercy" of
[SWBT] with regard to these GHQ costs unless the Commis-
sion takes the position that: The burden of proof
regarding these costs rests clearly on the shoulders of
[SWBT], and, absent definitive proof regarding the
appropriateness of these costs, none will be allowed for
ratemaking in Arkansas.
On appeal, the Attorney General argues that the material
should have been admitted because the material demonstrates that
Staff had altered its positions on whether the costs should be
recovered from Arkansas ratepayers and the proper burden of proof
concerning the lack of an audit trail. The Attorney General
contends that the Commission's failure to allow this evidence
violated his right to due process of law because he was unable to
use it to impeach Staff witnesses or in support of his position.
In Order No. 15, the Commission addressed this argument of the
Attorney General:
The [Attorney General] now contends that it should
have been allowed to use the exhibits to impeach certain
Staff witnesses. This is a new allegation by the
[Attorney General] which was not raised during the
hearing. The [Attorney General] cross-examined the Staff
witnesses in the hearing but the [Attorney General] never
attempted to use the stricken exhibits or any portion
thereof during its cross-examination. The appropriate
time to have raised this issue would have been during the
hearing if the [Attorney General] had sought to use the
stricken exhibits for impeachment purposes. It did not
and it is too late to raise the issue after the hearing
is concluded and the order entered.
We are not persuaded that the Commission abused its discretion in
excluding the report and memorandum or that the Attorney General's
rights were violated. The testimony clearly showed that the audit
report addressed a test year not in issue in the proceedings; that
certain accounting changes had occurred since the report; that the
report was a draft report and was never adopted by Staff as its
position; and that the memorandum addressing the report simply was
one Staff member's opinion of the draft report. Furthermore, the
Attorney General never presented the burden-of-proof issue to the
Commission, nor did he attempt to impeach the witnesses with the
material. These issues and arguments were not timely made and are
not preserved for appeal. See In Re Estate of Spears, 314 Ark. 54,
61-62, 858 S.W.2d 93 (1993). In addition, the Attorney General's
cross-examination of Staff witnesses was not limited, and he
elicited testimony from Staff that it previously had considered
recommending a disallowance of the costs.
The Attorney General also argues that the Commission erred in
striking the portion of Copeland's testimony pertaining to the
excluded Staff draft audit report and Staff memorandum. He
contends that Copeland's testimony should have been allowed even if
the documents were not admissible. In making this argument, he
relies on Rule 703 of the Arkansas Rules of Evidence, which
provides:
The facts or data in the particular case upon which
an expert bases an opinion or inference may be those
perceived by or made known to him at or before the
hearing. If of a type reasonably relied upon by experts
in the particular field in forming opinions or inferences
upon the subject, the facts or data need not be admissi-
ble in evidence.
We reject this argument because we have sustained the Commission's
finding that the documents were not relevant to the issue in the
proceedings. In addition, the Attorney General failed to demon-
strate that a draft audit report based on a different test year and
an internal Staff memorandum were "of a type reasonably relied upon
by experts in the particular field in forming opinions or referenc-
es upon the subject," and the Attorney General failed to qualify
his witness, an economist, as an expert on the sufficiency of audit
trails.
For the reasons stated, we affirm the Commission's orders
relating to discovery and the admissibility of evidence.
We have examined the arguments made in Docket No. 94-169-U,
and, since we find no error on the points raised on appeal, we
affirm.
Affirmed.
Robbins, Pittman, and Stroud, JJ., agree.
Mayfield and Neal, JJ., dissent. *ADVREP*CA2-A* EN BANC
CA 95-448
June 26, 1996
WINSTON BRYANT, ATTORNEY GENERAL
APPELLANT
VS.
ARKANSAS PUBLIC SERVICE DISSENTING OPINION
COMMISSION
APPELLEE
Melvin Mayfield, Judge.
I would reverse the Commission's allowance of the $13 million
in CDP expense charged to SWBTA by GHQ because SWBTA failed to
demonstrate that the charges were just and reasonable as required
by Ark. Code Ann. 23-4-104 (1987). In the audit report, Staff
stated that its "primary objective in evaluating the GHQ prorate
process was to determine the nature of the costs flowing to SWBTA
from GHQ to gain assurance that these costs were appropriate and
necessary to provide utility service." Staff admitted in the
report that it could not trace any of the CDP charges to the
originating source documents and that it was impossible to
determine the amount of the CDP charges SWBTA actually received:
[D]ue to the lack of totals by source code in the FD98-
Prorate Audit Trail Report; and as demonstrated by
Staff's previous example of the manual calculation
necessary to ascertain a total; and due to time con-
straints, Staff could not verify the accuracy of the
information supplied by SWBT. In addition, Staff
requested copies of all internal and external audit
reports which included a review of the CDP Process.
[SWBT's] response to Staff ... states "A review of our
auditing reports (1988 through 1994) indicates that no
audits were performed on the Costs Distribution Charge-
back Process.
Notwithstanding the uncontroverted fact that Staff could not trace
the CDP costs to their originating sources, the Commission in Order
No. 14 failed to address the issue of whether these expenses should
be allowed and again refused to do so in Order No. 15.
In affirming this point, the majority relies on Staff's
statement in the audit report "that the alternative steps taken
were adequate to assess the appropriateness of these expenses for
ratemaking purposes," the testimony of Staff witness Marie James,
and the testimony of SWBT witness Steve Usselmann. Although the
report and James and Usselmann in their testimony conclude that the
charges are reasonable, no facts were testified to that demonstrate
the reasonableness of the charges for rate-making purposes.
Usselmann testified that "auditing around the system" provides
assurance on the reliability of the process and is an acceptable
method of auditing. He offered no evidence, however, to support
his opinion. Apparently, the Commission accepted the conclusions
of these witnesses without any supporting evidence because they
have "accounting credentials"; whereas, the Attorney General's
witness, who challenged the lack of evidence, was a mere economist
who specializes in energy and utility economics.
The majority states that the concerns of the Attorney General
regarding the lack of an audit trail were addressed in the
Agreement that was approved by the Commission in Order Nos. 14 and
15. That Agreement, however, which concerns steps to be taken in
the future to ensure the proper verification of such expenses, does
not abrogate this Court's duty to determine whether the Commis-
sion's findings are supported by substantial evidence and whether
the Commission has regularly pursued its authority. Bryant v.
Arkansas Pub. Serv. Comm'n, 50 Ark. App. 213, 219, 907 S.W.2d 140
(1995).
The Commission has wide discretion in choosing its approach to
rate regulation, and it is not the function of the appellate court
to advise the Commission as to how to make its findings or exercise
its discretion. See Bryant v. Arkansas Pub. Serv. Comm'n, 46 Ark.
App. 88, 101, 877 S.W.2d 594 (1994). Nevertheless, on review this
Court must determine whether the findings of the Commission are
supported by substantial evidence, not whether its conclusions are
supported by substantial evidence. See Bryant v. Arkansas Pub.
Serv. Comm'n, 45 Ark. App. 56, 63, 871 S.W.2d 414 (1994).
Here, the Commission made no finding that the CDP costs were
just and reasonable. Nor is there any evidence to support such a
finding. Accordingly, I would reverse.
Neal, J., joins in this dissent.
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